<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 6, 1999.
REGISTRATION NO. 333-48701
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTERNATIONAL SMART SOURCING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3089 11-3423157
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
</TABLE>
INTERNATIONAL SMART SOURCING, INC.
320 BROAD HOLLOW ROAD
FARMINGDALE, NEW YORK 11735
(516) 293-0750
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES)
------------------------
ANDREW FRANZONE, CHIEF EXECUTIVE OFFICER
INTERNATIONAL SMART SOURCING, INC.
320 BROAD HOLLOW ROAD
FARMINGDALE, NEW YORK 11735
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
CARL SELDIN KOERNER, ESQ. ROBERT H. COHEN, ESQ.
GUIDO A. PANZERA, ESQ. PHILIP MAGRI, ESQ.
KOERNER SILBERBERG & WEINER, LLP MORRISON COHEN SINGER & WEINSTEIN, LLP
112 MADISON AVENUE 750 LEXINGTON AVENUE
NEW YORK, NEW YORK 10016 NEW YORK, NEW YORK 10022
TELEPHONE: (212) 689-4400 TELEPHONE:(212) 735-8600
FACSIMILE: (212) 689-3077 FACSIMILE:(212) 735-8708
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement is declared effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration 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(d) under the Securities Act, check the following box and list the
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. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with
the Securities and Exchange Commission. These securities may not be sold
nor may offers to buy be accepted prior to the time the registration
statement becomes effective. This prospectus shall not constitute an
offer to sell or the solicitation of offer to buy nor shall there be
any sale of these securities in any State in which such offer,
solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
SUBJECT TO COMPLETION DATED JANUARY 6, 1999
PROSPECTUS
International Smart Sourcing, Inc.
1,250,000 SHARES OF COMMON STOCK [LOGO]
1,250,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
------------------------
This Prospectus relates to an offering (the "Offering") by International
Smart Sourcing, Inc., a Delaware corporation (the "Company"), of 1,250,000
shares of common stock of the Company, par value $.001 per share (the "Common
Stock"), and 1,250,000 Redeemable Common Stock Purchase Warrants (the
"Warrants") (collectively, the "Securities"). The shares of Common Stock and the
Warrants may be purchased separately. Each Warrant entitles the registered
holder thereof to purchase one share of Common Stock at a price of $5.00,
subject to adjustment under certain circumstances, for a five-year period
commencing 12 months from the date of this Prospectus. The Warrants are
redeemable by the Company at any time, commencing 12 months from the date of the
Prospectus, upon notice of not less than 30 days, at a price of $.10 per
Warrant, provided that the average closing bid quotation of the Common Stock as
reported on the Nasdaq SmallCap Market ("Nasdaq SmallCap") or the Boston Stock
Exchange ("BSE"), if traded thereon, or if not traded thereon, the average
closing sale price if listed on a national or regional securities exchange, for
any 20 trading days within a period of 30 consecutive trading days ending on the
15th day prior to the day on which the Company gives notice equals or exceeds
150% of the then current Warrant exercise price, subject to the right of the
holder to exercise such Warrants prior to redemption. See "Description of
Securities."
Prior to the Offering, there has been no public market for the Common Stock
or Warrants and there can be no assurance that any such market will develop, or
if developed, be sustained. It is anticipated that the Common Stock and Warrants
will be quoted on Nasdaq SmallCap under the symbols "ISMT" and "ISMTW,"
respectively, and on the BSE as "SMT" and "SMTW," respectively. The respective
offering prices of the Common Stock and Warrants, and the exercise price of the
Warrants, were determined pursuant to negotiations between the Company and
Network 1 Financial Securities, Inc. (the "Underwriter") and do not necessarily
relate to the Company's book value or any other established criteria of value.
For a discussion of the factors considered in determining the Offering prices,
see "Underwriting."
------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS
WHO CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK
FACTORS" COMMENCING ON PAGE 8.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS
PRICE TO PUBLIC AND COMMISSIONS(1) PROCEEDS TO COMPANY(2)
<S> <C> <C> <C>
Per Share......................................... $4.50 $.45 $4.05
Per Warrant....................................... $.10 $.01 $.09
Total(3).......................................... $5,750,000 $575,000 $5,175,000
</TABLE>
(1) In addition, the Company has agreed to pay to the Underwriter a 3%
nonaccountable expense allowance and to sell to the Underwriter, for nominal
consideration, warrants to purchase up to 125,000 shares of Common Stock
and/or up to 125,000 Warrants. The Company has agreed to indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses, estimated at $1,350,000, payable by the Company,
including the Underwriter's nonaccountable expense allowance.
(3) The Company has granted the Underwriter an option, exercisable within
45 days from the date of this Prospectus, to purchase up to 187,500
additional shares of Common Stock and/or 187,500 additional Warrants on the
same terms and conditions as set forth above, solely for the purpose of
covering over-allotments, if any. If such option is exercised in full, the
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $6,612,500, $661,250 and $5,951,250, respectively.
------------------------
The Common Stock and Warrants are being offered, subject to prior sale,
when, as and if delivered and accepted by the Underwriter and subject to the
approval of certain legal matters by counsel and to certain other conditions.
The Underwriter reserves the right to withdraw, cancel or modify the Offering
and to reject any order in whole or in part. It is expected that delivery of
certificates representing the Common Stock and Warrants contained therein, will
be made against payment therefor at the offices of Network 1 Financial
Securities, Inc. on or about , 1999.
NETWORK 1 FINANCIAL
SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1999
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
---------------------------------------------------------------------------
[LOGO]
The Company intends to expand its operations through (i) the
acquisition and development of injection molded plastic products and
assemblies manufactured in the United States having niche markets, (ii)
the redesigning of such products and assemblies, if necessary, to
improve their function and appearance and (iii) the manufacturing of
such products and assembles in the The People's Republic of China
("China") at lower prices and improved profit margins. Through a
consultant who is also a director of the Company (the "Consultant"), the
Company has established direct contact with manufacturers in China and
has inititated pilot overseas manufacturing projects in China of
small-scale production runs of various products, including separate
projects through an affiliated company, Allen Field Co., Inc. ("AFC").
Currently, the Company has purchase orders with eight different
suppliers in China. There can be no assurance that the Company will be
able to consummate any acquisitions, maintain or establish additional
manufacturing relationships in China or achieve any of its growth
strategies. See "Prospectus Summary" and "Risk Factors--Risks Relating
to Manufacturing in China."
While small businesses comparable in size to the Company often
encounter major difficulties in securing manufacturing projects in China
due to prohibitive broker commissions and agency fees incurred both
domestically and abroad, which, based upon the Company's experience,
could account for up to 25% of the entire manufacturing project, the
Company, through the Consultant, has established direct contact with
certain manufacturers in China, allowing the Company to avoid such
commissions and fees and realize the benefit from lower costs of raw
materials and labor. For example, two of EHC's principal raw materials
at this time, ABS and polycarbonate, cost up to 50% less in China and
the cost of labor for factory workers in China was approximately $.33
per hour for the year ended 1997. To date, the Company has no written
contracts or arrangements with any manufacturer located in China and
there can be no assurance that the Company will be able to enter into
any such contracts or arrangements on favorable terms, if at all. Based
on its assessment of pilot manufacturing projects in China through AFC,
the Company believes that it can reduce its overall domestic
manufacturing costs, including shipping and tariffs, by more than 25%.
See "Prospectus Summary", "Risk Factors--Risks Relating to Manufacturing
in China" and "Certain Transactions."
INTERNATIONAL SMART SOURCING, INC.
320 Broad Hollow Road, Farmingdale, NY 11735
1.516.293.0750 Fax 516.752.1971
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS
(IF ANY) MAY ENGAGE IN PASSIVE MARKET-MAKING TRANSACTIONS IN THE COMMON STOCK
AND WARRANTS ON THE NASDAQ SMALLCAP MARKET IN ACCORDANCE WITH RULE 103 OF
REGULATION M. SEE "UNDERWRITING."
<PAGE>
CALIFORNIA RESIDENTS:
(1) This offering was approved by the State of California on the basis of a
limited offering qualification where offers and sales can only be made to
proposed investors based on their meeting certain suitability standards as
described below and the Company did not have to demonstrate compliance with
some or all of the merit regulations of the Department of Corporations as
found in Title 10, California Code of Regulations, Rules 260.140 et seq.
(2) The exemptions provided by Section 25104(h) of the Corporate Securities Law
of 1968, as amended, will be withheld but there may be other exemptions
available.
(3) The securities of the Company will be sold to California residents pursuant
to a limited offering qualification under a suitability standard of a liquid
net worth of not less than $250,000 (a net worth exclusive of home, home
furnishings and automobiles) plus a gross annual income of $65,000 or a
liquid net worth of $500,000; OR a net worth (inclusive) of $1,000,000 or a
gross annual income of $200,000.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
(including the notes thereto) appearing elsewhere in this prospectus (the
"Prospectus"). References to the "Company" include International Smart Sourcing,
Inc., a Delaware corporation, and its wholly owned subsidiaries as of the
reorganization defined below, Electronic Hardware Corp., a New York corporation
("EHC") and Compact Disc Packaging Corp., a Delaware corporation ("CDP"), unless
otherwise indicated. Unless the context otherwise requires, this Prospectus
assumes (i) the reorganization of the Company effective as of December 24, 1998
(the "Reorganization") described more fully in "Certain Transactions,"
(ii) that the Underwriter's over-allotment option will not be exercised,
(iii) that the 125,000 shares of Common Stock and 125,000 Warrants issuable upon
the exercise of the warrant granted to the Underwriter in connection with this
Offering will not be outstanding ("Underwriter's Warrants") and (iv) that the
Redeemable Common Stock Purchase Warrants ("Warrants") will not be exercised,
unless otherwise indicated. This Prospectus contains forward-looking statements
involving risk and uncertainties. The Company's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such differences include, but are not limited to, those
discussed in "Risk Factors."
THE COMPANY
The Company, through its principal subsidiary, EHC, has over 28 years of
experience in the design, marketing and manufacture of injection molded plastic
components and assemblies, including consumer, industrial and military knobs and
custom and mechanical assemblies, including micro verniers, push or pull-to-
turn clutch knobs and detent knobs. EHC also produces hardware items, including
shaft locks, mounting brackets, test jack covers, cabinet bumpers and captive
screws. The Company believes that EHC's long-term success is due to the average
29-year experience of its management team, strategic acquisitions of
complementary companies, products and product lines and its ability to adapt new
technologies and advanced manufacturing concepts to produce high-quality
products at competitive prices.
GROWTH STRATEGY
The Company intends to expand its operations through (i) the acquisition
and development of injection molded plastic products and assemblies manufactured
in the United States having niche markets, (ii) the redesigning of such products
and assemblies, if necessary, to improve their function and appearance and
(iii) the manufacturing of such products and assemblies in the People's Republic
of China ("China") at lower prices and improved profit margins. Through a
consultant who is also a director of the Company (the "Consultant"), the Company
has established direct contact with manufacturers in China and has initiated
pilot overseas manufacturing projects in China of small-scale production runs of
various products, including separate projects through an affiliated company,
Allen Field Co., Inc. ("AFC"). Currently, the Company has purchase orders with
eight different suppliers in China. There can be no assurance, however, that the
Company will be able to consummate any acquisitions, maintain or establish
additional manufacturing relationships in China or achieve any of its growth
strategies. See "Risk Factors--Risks Relating to Manufacturing in China."
While small businesses comparable in size to the Company often encounter
major difficulties in securing manufacturing projects in China due to
prohibitive broker commissions and agency fees incurred both domestically and
abroad, which, based upon the Company's experience, could account for up to 25%
of the entire manufacturing project, the Company, through the Consultant, has
established direct contact with certain manufacturers in China, allowing the
Company to avoid such commissions and fees and realize the benefit from lower
costs of raw materials and labor. For example, two of EHC's principal raw
materials at this time, AcrylonitirleButadiene Styrene ("ABS") and
polycarbonate, cost up to 50% less in China and the cost of labor for factory
workers in China was approximately $.33 per hour for the year ended 1997. To
date, however, the Company has no written contracts or arrangements with any
manufacturer located in China and there can be no assurance that the Company
will be able to enter into any such contracts or arrangements on favorable
terms, if at all. Based on its assessment of pilot manufacturing projects in
China through AFC, the Company believes that it
3
<PAGE>
can reduce its overall domestic manufacturing costs, including shipping and
tariffs, by more than 25%. See "Risk Factors--Risks Relating to Manufacturing in
China" and "Certain Transactions."
PRODUCTS
Control Knobs and Assemblies
The Company, through its wholly-owned subsidiary EHC, manufactures a full
line of instrument control knobs, handles, value-added custom molding, dials and
similar devices for consumer, industrial and military electronics equipment.
EHC's knobs are used for precise setting of switches, on/off switches, volume
controls and critical setting of instrumentation switches. EHC manufactures a
standard line of knobs and knobs based on customers' exacting specifications.
Customers of EHC order the knobs by specifying particular descriptions and
features, including the shaft diameter, outer diameter, overall size, height,
color, illumination, dials and markings, such as lines, dots or numbers.
The Pull Pack(Trademark)
In March 1998, the Company, through CDP, a wholly-owned subsidiary, entered
into a five-year exclusive worldwide licensing agreement to manufacture, market,
sell and sub-license the Pull Pack(Trademark), a proprietary Disc packaging
system. The Pull Pack(Trademark) is a redesigned "Jewel Box," the packaging used
currently for Compact Discs, CD ROMs and Digital Video Discs ("DVD"), and which
in 1993 won the International Design Magazine Award for Packaging. The Pull
Pack(Trademark) utilizes a drawer-like mechanism, avoiding the problems often
associated with currently available Disc packaging involving fragile hinges,
difficulty in opening and the removal of Discs and descriptive literature. See
"Business--Patents, Trademarks, Licenses and Royalty Rights."
The Company is currently negotiating with offshore manufacturers in China
to produce the Pull Pack(Trademark) and plans, although there can be no
assurance, to market the product as a specialty packaging system to a targeted
niche market, including CD ROM, special production, retail replacement packaging
and rental and institutional markets such as video stores, lending libraries and
technical research facilities. For the year ended December 31, 1997, the market
for Jewel Boxes sold in the music industry in the United States was
approximately $82,000,000 and the Company believes that the target niche market
for the Pull Pack(Trademark) is approximately $50,000,000. See "Risk
Factors--Developmental Stage Product; No Assurance of Market Acceptance."
The Company was formed in 1970 as EHC, a New York corporation, and was
reorganized as of December 24, 1998 as a Delaware holding company for its two
wholly-owned subsidiaries, EHC and CDP. The Company changed its name from
International Plastic Technologies, Inc. to International Smart Sourcing, Inc.
on December 7, 1998. The Company maintains its principal executive offices at
320 Broad Hollow Road, Farmingdale, New York 11735. The Company's telephone
number is (516) 293-0750 and its internet address is http://www.ehcknobs.com.
See "Certain Transactions."
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
SECURITIES OFFERED................... 1,250,000 shares of Common Stock and 1,250,000 Warrants, each Warrant
entitling the holder to purchase one share of Common Stock at an exercise
price of $5.00 per share. The shares of Common Stock and the Warrants may
be purchased separately. See "Risk Factors--Possible Redemption of
Warrants and Effect on Common Stock" and "Description of Securities."
COMMON STOCK OUTSTANDING PRIOR TO THE
OFFERING(1)........................ 1,945,000
COMMON STOCK TO BE OUTSTANDING AFTER
THE OFFERING(2).................... 3,195,000
WARRANTS TO BE OUTSTANDING AFTER THE
OFFERING(3)........................ 1,250,000
TERMS OF THE PUBLIC WARRANTS......... Each Warrant is exercisable for a five-year period, commencing one year
from the date of this Prospectus, and entitles the holder thereof to
purchase one share of Common Stock at an exercise price of $5.00 per
share, subject to adjustment in certain circumstances. The Warrants are
redeemable by the Company at any time commencing one year after the date
of this Prospectus, at a price of $.10 per Warrant, upon not less than 30
days prior written notice to the registered holders of the Warrants,
provided that the average closing bid quotation of the Common Stock as
reported on Nasdaq or BSE, if traded thereon, or if not traded thereon,
the average closing sale price if listed on a national or regional
securities exchange, equals or exceeds 150% of the Offering price per
share of Common Stock for any 20 trading days within a period of 30
consecutive trading days ending on the 15th day prior to the day on which
the Company gives notice of redemption. See "Description of
Securities--Warrants."
USE OF PROCEEDS...................... The Company intends to use the net proceeds of the Offering for inventory
purchases and staffing, potential acquisitions, tooling, sales and
marketing, facilities and equipment, research and development, repayment
of debt, dividends to existing stockholders and working capital. See "Use
of Proceeds."
RISK FACTORS......................... The Securities offered hereby are speculative and involve a high degree of
risk and immediate substantial dilution and should not be purchased by
investors who cannot afford the loss of their entire investment. See "Risk
Factors" and "Dilution."
PROPOSED NASDAQ SMALLCAP MARKET
SYMBOLS(4)......................... Common Stock: ISMT
Warrants: ISMTW
PROPOSED BOSTON STOCK EXCHANGE
SYMBOLS(4)......................... Common Stock: SMT
Warrants: SMTW
</TABLE>
- ------------------
(1) Does not include 300,000 shares of Common Stock or options which may be
granted pursuant to the Company's Stock Option and Grant Plan. See
"Management--Stock Option and Grant Plan."
(2) Does not include (i) 1,250,000 shares of Common Stock reserved for issuance
upon exercise of the Warrants; (ii) 187,500 shares of Common Stock issuable
upon exercise of the Underwriter's over-allotment option; (iii) 187,500
shares of Common Stock issuable upon exercise of the Warrants underlying the
Underwriter's over-allotment option; (iv) 125,000 shares of Common Stock
reserved for issuance upon exercise of the Underwriter's Warrants;
(v) 125,000 shares of Common Stock issuable upon exercise of the Warrants
underlying the Underwriter's Warrants and (vi) 300,000 shares of Common
Stock or options which may be granted pursuant to the Company's Stock Option
and Grant Plan. See "Management--Stock Option and Grant Plan," "Description
of Securities" and "Underwriting."
(3) Does not include (i) 125,000 Warrants issuable to the Underwriter upon
exercise of the Underwriter's Warrants and (ii) 187,500 Warrants issuable
upon exercise of the Underwriter's over-allotment option.
(4) The Nasdaq SmallCap Market and Boston Stock Exchange trading symbols do not
imply that a liquid and active market will be developed or sustained for the
Common Stock or Warrants upon completion of the Offering.
5
<PAGE>
SUMMARY OF FINANCIAL INFORMATION
The summary financial information as of December 27, 1997 and for each of
the years in the two years in the period ended December 27, 1997 has been
abstracted from the financial statements of the Company included elsewhere
herein (audited, with the exception of the pro-forma information). The summary
financial information as of September 26, 1998 and for the nine months ended
September 26, 1998 and September 27, 1997 have been derived from the Company's
unaudited financial statements. In the opinion of management, these interim
financial statements have been prepared on the same basis as the Company's
audited financial statements and include all adjustments necessary for the fair
presentation of the Company's financial position and results of operations.
These interim results are not necessarily indicative of results that can be
expected for the year ended December 27, 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Consolidated
Financial Statements."
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL PRO-FORMA(1)
---------------------------- -------------------------------- ----------------------------
NINE MONTHS ENDED YEAR ENDED NINE MONTHS ENDED
---------------------------- -------------------------------- ----------------------------
SEPTEMBER 26, SEPTEMBER 27, DECEMBER 27, DECEMBER 28, SEPTEMBER 26, SEPTEMBER 27,
1998 1997 1997 1996 1998 1997
------------- ------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net Sales.............. $ 4,506,995 $ 4,607,360 $ 6,054,747 $ 5,398,041 $ 4,506,995 $ 4,607,360
Cost of Sales.......... 2,909,076 3,181,721 3,831,599 3,668,420 2,909,076 3,181,727
Operating Expenses:
Selling and
shipping........... 472,961 352,370 472,096 427,400 472,961 352,370
General and
administrative..... 844,177 698,900 1,298,797 1,045,038 885,552 772,429
Non-cash research and
development
expense............ -- -- -- -- 2,325,965 (2) --
Total operating
expenses........... 1,317,138 1,051,270 1,770,893 1,472,438 3,684,478 1,124,799
Net Income (loss)
Before Pro-forma
Income Taxes(2)...... 127,572 203,884 245,355 64,045 (2,239,768) 130,355
Provision/Pro-forma
Income Taxes......... 80,000 82,000 98,000 26,000 80,000 82,000
Net Income/Pro-forma
Net Income
(Loss)(2)............ 47,572 121,884 147,355 38,045 (2,319,768) 48,355
Net Income/Pro-forma
Net Income (Loss)
Per Share(2)......... 0.03 0.08 0.10 0.03 (1.19) 0.02
Number of Shares....... 1,500,000 1,500,000 1,500,000 1,500,000 1,945,000 1,945,000
BALANCE SHEET DATA:
<CAPTION>
PRO-FORMA(1)
----------------
YEAR ENDED
----------------
DECEMBER 27,
1997
----------------
<S> <C>
STATEMENT OF OPERATIONS
DATA:
Net Sales.............. $6,054,747
Cost of Sales.......... 3,831,599
Operating Expenses:
Selling and
shipping........... 472,096
General and
administrative..... 1,388,527
Non-cash research and
development
expense............ --
Total operating
expenses........... 1,860,623
Net Income (loss)
Before Pro-forma
Income Taxes(2)...... 155,625
Provision/Pro-forma
Income Taxes......... 98,000
Net Income/Pro-forma
Net Income
(Loss)(2)............ 57,625
Net Income/Pro-forma
Net Income (Loss)
Per Share(2)......... 0.03
Number of Shares....... 1,945,000
BALANCE SHEET DATA:
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 27, 1997 SEPTEMBER 26, 1998
----------------- --------------------------------------------
ACTUAL ACTUAL PRO-FORMA(1) AS ADJUSTED(3)
----------------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Current Assets...................................... $ 2,172,248 $2,158,806 $2,136,876 $6,179,376
Total Assets........................................ 2,907,820 3,320,323 3,298,393 7,340,893
Current Liabilities................................. 1,447,192 2,194,684 2,377,888 2,020,388
Long Term Debt...................................... 1,009,784 672,223 740,929 740,929
Stockholders' Equity................................ 450,844 453,416 179,576 4,579,576
</TABLE>
(Footnotes on next page)
6
<PAGE>
(Footnotes from previous page)
- ------------------
(1) Reflects the anticipated payment of a $100,000 stockholder dividend to
Andrew Franzone, David L. Kassel and Harry Goodman, executive officers of
the Company, subsequent to September 26, 1998 and the acquisition of CDP by
the Company on December 24, 1998.
(2) Includes for the nine months ended September 26, 1998 a non-cash charge of
$1,875,965 to research and development expenses and a corresponding credit
to additional paid in capital reflecting purchased research and development
costs paid by the Company for CDP. Also includes a $450,000 non-cash charge
for purchased research and development expenses representing the purchase of
the 45% ownership interest of one shareholder of CDP by another shareholder
which has been treated as a purchase of a minority interest by CDP in
accordance with the purchase method of accounting.
(3) The pro forma provisions for income taxes have been included to show, for
comparative purposes, the Company's results of operations for the nine month
periods ended September 26, 1998 and September 27, 1997 and for the years
ended December 27, 1997 and December 28, 1996, as if EHC had been subject to
Federal income tax as a C corporation under the Internal Revenue Code of
1986, as amended (the "Code"). For the years ended December 27, 1997 and
December 28, 1996 and for the period beginning December 28, 1997 up to
December 24, 1998, EHC had been treated for federal income tax purposes as a
closely-held corporation under Subchapter S of the Code. Effective December
25, 1998, EHC's S corporation election was terminated and thereafter the
Company will be taxed as a C Corporation under the Code. EHC has agreed to
distribute, through a dividend to its existing shareholders of record as of
December 24, 1998, 38% of the earnings of the Company for the period from
December 28, 1997 through December 24, 1998, which amounts approximate the
amounts such shareholders would be expected to pay personally for income
taxes based on such earnings. Although it is impossible to determine the
exact amounts of the distributions at this time, based on the financial
results for the first nine months of 1998, the Company estimates that it
will distribute approximately $25,000 to the stockholders in proportion to
their stockholdings plus an additional $75,000 representing the balance of
taxes paid by the stockholders for the year ended December 27, 1997. The pro
forma stockholders equity at September 26, 1998 has been reduced by the
amount of an estimated $100,000 dividend subsequent to September 26, 1998,
which includes the aforementioned $25,000 distribution and $75,000
representing the balance of taxes paid by the stockholders for the year
ended December 27, 1997.
(4) Adjusted to reflect the sale of 1,250,000 shares of Common Stock and
1,250,000 Warrants offered hereby and use of proceeds thereof. Assumes no
exercise of the Underwriters over-allotment option.
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RISK FACTORS
The purchase of the Securities is speculative and involves a high degree of
risk including, but not necessarily limited to, the Risk Factors described
below. The Securities should not be purchased by investors who cannot afford the
loss of their entire investment. Prospective investors should carefully review
and consider the following risks as well as the other information contained in
this Prospectus.
RISKS RELATING TO MANUFACTURING IN CHINA
Dependence on Single Consultant. The Company relies on the Consultant, who
is also a director of the Company, to serve as its agent in connection with its
dealings with manufacturers in China. There can be no assurance that the
Consultant will continue working with the Company in the Consultant's present or
any capacity. The Company has a non-exclusive agreement with the Consultant's
company, B.C. China Business Consulting, Inc., whereby the Consultant is to
provide such consulting services until March 1, 2008. The Consultant is entitled
to receive $50 per hour plus 1.5% of the net cost of products manufactured in
China up to $5,000,000 per year and 1% of net costs exceeding $5,000,000. Such
fee arrangement is subject to review after the first year of the agreement by
the Company's Board of Directors. The Consultant shall also be entitled to
shares of Common Stock and options to purchase Common Stock pursuant to the
Company's Stock Option and Grant Plan. Various factors may sever the
non-exclusive consultancy agreement between the Consultant and the Company,
including termination by either party for cause or otherwise, the death or
incapacity of the Consultant or the overseas manufacturers' unwillingness to
work with the Consultant on current terms, if at all. In addition, there can be
no assurance that the remuneration of the Consultant and related costs will not
become prohibitive in the future. In the event of the termination of the
Company's consulting agreement with the Consultant, there can be no assurance
that the Company will be able to find a comparable consultant, if any, or be
able to establish direct manufacturing relationships in China. Such loss or
inability to find a new consultant would have a material adverse effect on the
financial prospects and international operations of the Company. See
"Management--Stock Option and Grant Plan" and "Certain Transactions."
Internal Political and Other Risks. The Company intends, although with no
assurance, to arrange for the manufacture of a significant number of products in
China, including the Pull Pack(Trademark), if possible, and other products which
have yet to be determined. As a result, the Company's operations and assets are
subject to significant political, economic, legal and other uncertainties.
Changes in policies by the Chinese government resulting in changes in laws,
regulations, or the interpretation thereof, confiscatory taxation, restrictions
on imports and exports and sources of supply, currency devaluations or the
expropriation of private enterprise could materially adversely affect the
Company. Under its current leadership, the Chinese government has been pursuing
economic reform policies, including the encouragement of private economic
activity and greater economic decentralization. There can be no assurance,
however, that the Chinese government will continue to pursue such policies, that
such policies will be successful if pursued, that such policies will not be
significantly altered from time to time or that business operations in China
would not become subject to the risk of nationalization, which could result in
the total loss of investments. Economic development may be limited as well by
the imposition of austerity measures intended to reduce inflation, the
inadequate development of an infrastructure and the potential unavailability of
adequate power and water supplies, transportation, satisfactory roads,
communications, raw materials and parts. If for any reason the Company is unable
to establish its proposed manufacturing relationships in China, the Company's
profitability could be impaired substantially, its competitiveness and market
position could be jeopardized materially and there can be no assurance that the
Company could continue its operations.
Uncertain Legal System and Application of Laws. The legal system of China
relating to foreign outsourcing is both new and continually evolving, and
currently there can be no certainty as to the application of its laws and
regulations in particular instances. China does not have a comprehensive system
of laws. Enforcement of existing laws or agreements may be sporadic and
implementation and interpretation of laws inconsistent. The Chinese judiciary is
relatively inexperienced in enforcing the laws that exist, leading to a higher
than usual degree of uncertainty as to the outcome of any litigation. Even where
adequate laws exist in China, it may not be possible to obtain swift and
equitable enforcement of such laws.
Lack of United States Jurisdiction. There is no international treaty
governing nor is there an acknowledgment of recognition regarding enforcement of
judgments or jurisdiction between the United States and China. Due to such lack
of United States' jurisdiction in China, the Company might not be able to bring
legal
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actions or enforce judgments against manufacturers or other business entities
situated in China. In the event of a dispute with a manufacturer or other
business entity in China, the Company could be precluded from relief, including
damages and equitable remedies, which could have a material adverse effect on
the Company's business and operations.
Inflation and China's Rapid Economic Growth. China's economy has been
growing rapidly, creating problems such as inflation. The Chinese government has
imposed measures attempting to check inflation but to date, these methods have
not been effective. There could be an adverse impact on the Company's business
if widespread social or political unrest results from the economic climate.
Dependence on China Factories. Many of the Company's newly acquired or
developed products will be manufactured at factories located in China.
Firefighting and disaster relief or assistance in some parts of China are
primitive by Western standards. The Company does not maintain insurance for its
products manufactured in Chinese factory buildings. Any material damage to, or
the loss of, any of the Company's manufacturers in China due to fire, severe
weather, flood, or other act of God or cause, could have a material adverse
effect on the Company's financial condition, business and prospects. The Company
does not maintain any business interruption insurance.
Possible Changes and Uncertainties in Economic Policies. As part of its
economic reform, China has designated certain areas, including areas where the
Company intends to maintain certain of its manufacturing relationships, as
Special Economic Zones. Foreign enterprises in these areas benefit from greater
economic autonomy and more favorable tax treatment than enterprises in other
parts of China. Changes in the policies or laws governing Special Economic Zones
could have a material adverse effect on the Company.
Recent Turbulent Relations with the United States; Entry into the World
Trade Organization. The United States has in the past considered revocation of
China's most favored nation ("MFN") trade status, which provides China with the
trading privileges available generally to trading partners of the United States,
and the United States and China have recently been involved in controversy over
the protection of intellectual property rights that threatened a trade war
between the countries. In 1996, President Clinton extended China's MFN status
and the United States and China reached an agreement that averted a trade war.
However, there can be no assurance that future controversies will not arise that
again threaten the status quo involving trade between the United States and
China, or that the United States will not revoke or refuse to extend China's MFN
status. In either of such eventualities, the businesses of the Company could be
adversely affected. In addition, while the United States has announced a change
in policy that may make it easier for China to join the World Trade Organization
(the "WTO"), the successor to the General Agreement on Tariffs and Trade, if
China does not join the WTO, the Company and its manufacturers located in China
may not benefit from the lower tariffs and other privileges enjoyed by
competitors located in countries which are members of the world trade system
and, as a result, the Company's business could be adversely affected.
International Business Risks. The Company intends to increase revenue
through an international manufacturing strategy. The Company's operations will
be subject to the wide range of general business risks associated with
international operations, including unexpected changes in legal and regulatory
requirements; changes in tariffs, exchange rates and other barriers; political
and economic instability; inability to repatriate net income from foreign
markets; difficulty in protecting the Company's intellectual property; and
potentially adverse tax consequences. Additionally, the Company has had
relatively few pilot overseas manufacturing projects. Such inexperience combined
with various other international manufacturing risks could cause the Company's
attempted international growth strategy to fail, causing a material adverse
affect to the operations of the Company. See "Business."
FOREIGN CURRENCY AND FOREIGN EXCHANGE REGULATION
The Company intends, although there can be no assurance, to arrange for the
manufacture of a significant number of products in China, including the Pull
Pack(Trademark), if possible, and other products which have yet to be
determined. The Company may be required to accomplish such transactions through
the use of foreign currencies, directly or indirectly. The Company does not
currently engage in currency exchange rate hedging transactions. To the extent,
however, that the Company may engage in any such hedging transactions in the
future, there can be no assurance that any currency hedging policies implemented
by the Company in the future will be successful. As a
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result, fluctuations in exchange rates of the U.S. dollar against foreign
currencies could adversely affect the Company's results of operations.
RISKS RELATING TO THE USE OF FOREIGN SUPPLIERS
The Company intends, although there can be no assurance, to arrange for the
manufacture of certain products overseas. Such overseas manufacturers will be
dependent upon foreign suppliers. Although the Company currently has purchase
orders with eight different suppliers in China, it does not have contractual
agreements with any suppliers. The Company will not have contractual agreements
with suppliers, and the overseas manufacturers may not have contractual
agreements with such suppliers. Prices for and supply of those products may be
adversely affected by changing international economic conditions. The Company
may also be subject to other risks associated with its international
relationships, including tariff regulations and requirements for export
licenses, unexpected changes in regulatory requirements, potentially adverse tax
consequences, economic and political instability, restrictions on repatriation
of earnings and the burdens of complying with a wide variety of foreign laws. In
addition, the laws of certain countries may not protect the Company's products
and intellectual property rights to the same extent as the laws of the United
States. There can be no assurance that such factors will not have a material
adverse effect on the Company's future sales or licenses and, consequently, on
the Company's business, prospects, results of operations or financial condition
as a whole. See "Business."
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be largely dependent on the personal
efforts of Andrew Franzone, age 61, Chief Executive Officer and President, David
L. Kassel, age 63, Chairman, Harry Goodman, age 72, Vice President, and other
key personnel. Although the Company has entered into 10-year employment
agreements with Messrs. Franzone, Kassel and Goodman, each dated as of
March 15, 1998, such employment agreements are terminable by the employee at any
time, subject only to noncompetition provisions. All other key personnel are
"at-will" employees. The employment of each such key employee may be terminated
by the individual officer or the Company at any time, for any reason, if at all.
While the Company maintains "key man" life insurance in the amount of $500,000
on the life of Andrew Franzone, the loss of the services of Messrs. Franzone,
Kassel, Goodman or certain other key employees could have a material adverse
effect on the Company's business and prospects. Furthermore, pursuant to the
Stockholders' Agreement (the "Stockholders' Agreement") between the Company and
Messrs. Franzone, Kassel and Goodman (collectively, the "Stockholders"), upon
the death of any Stockholder, his estate may cause the Company to redeem 250,000
shares of Common Stock for an aggregate purchase price of $500,000; provided,
however, only to the extent that the Company receives proceeds from life
insurance policies on the life of such Stockholder. As of the date of this
Prospectus, only Mr. Franzone has "key man" life insurance. If Mr. Franzone's
estate exercises such redemption rights, the Company will have to use the
proceeds from Mr. Franzone's "key man" life insurance to satisfy such
obligation, and, therefore, such proceeds otherwise allocated to the Company
will be expended. Such expenditure may be at a time when the Company is in need
of the insurance proceeds. The success of the Company is also dependent upon its
ability to hire and retain qualified operational, financial, technical,
marketing, sales and other personnel. There can be no assurance that the Company
will be able to hire or retain such necessary personnel. See "--Dependence on
Single Consultant; --Offering Proceeds to Benefit Officers, Directors and
Principal Stockholders," "Management--Employment Agreements" and "Certain
Transactions."
DEPENDENCE ON UNION EMPLOYEES
Of the Company's 81 employees, 38 employees are factory workers and factory
supervisors represented in a collective bargaining agreement by Local 531,
International Brotherhood of Teamsters, AFL-CIO. The current collective
bargaining agreement was amended by means of a Memorandum of Agreement dated as
of May 10, 1998 and was extended until May 9, 2001. While the Company has never
experienced a work stoppage, there can be no assurance that a work stoppage will
not result in the future. The collective bargaining agreement regulates various
employment issues between the Company and the union employees, including pay,
overtime, working conditions, vacations and benefits. No assurance can be given
that the Company will enter into future collective bargaining agreements on
favorable terms to the Company, if at all, or that it will negotiate
successfully any future extension to the collective bargaining agreement. In the
event conflicts with the union arise, including strikes or work stoppages, or
the Company fails to negotiate a future extension to the current collective
bargaining agreement or future extensions, the Company could incur higher
ongoing labor costs and could
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experience a significant disruption of its operations, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
BROAD UNSPECIFIED DISCRETION OF MANAGEMENT IN APPLICATION OF PROCEEDS OF THE
OFFERING
Approximately 22.6% of the net proceeds of the Offering will not be
allocated for a specific use, but rather for working capital (13.5%) and future
potential product acquisitions (9.1%). In addition, management may from time to
time reallocate funds among the uses discussed in "Use of Proceeds" or to new
uses if it believes such reallocation to be in the Company's best interests.
Accordingly, management of the Company will have broad discretion in allocating
the Offering proceeds. See "Use of Proceeds" and "Certain Transactions."
CONTROL BY CURRENT OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
Upon consummation of the Offering, the officers, directors and existing
stockholders of the Company will beneficially own approximately 59.5% of the
Company's outstanding Common Stock (56.2% if the Underwriter's over-allotment
option is exercised in full). While no individual will be a beneficial owner of
a majority of the outstanding shares of Common Stock of the Company, such
persons collectively may be able to effectively control the decisions on matters
including election of the Company's directors, increasing the authorized capital
stock, dissolution, merger or sale of the assets of the Company and generally
may be able to direct the affairs of the Company. This concentration of
ownership may also have the effect of delaying, deferring or preventing a change
in control of the Company and making certain transactions more difficult or
impossible absent the support of such stockholders, including proxy contests,
mergers involving the Company, tender offers, open-market purchase programs or
other purchases of Common Stock that could give public, minority stockholders of
the Company the opportunity to realize a premium over the then-prevailing market
price for shares of Common Stock. See "Principal Stockholders."
OFFERING PROCEEDS TO BENEFIT OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
The Company intends to distribute an estimated aggregate amount of $100,000
to its three principal stockholders and executive officers, Andrew Franzone,
David Kassel and Harry Goodman, which will be taken from the proceeds of the
Offering, in the form of cash for federal and state taxes incurred by such
individuals for the year ended December 27, 1997 and the period ended December
24, 1998 due to the Company's Subchapter S corporation status. Additionally, the
Company has various bank credit facilities which are personally guaranteed by
Messrs. Franzone, Kassel and Goodman. The Company has received a letter
agreement from Republic National Bank of New York to release such personal
guarantees upon the successful completion of the Offering. The Long Island
Development Corporation will not release the personal guarantees of Messrs.
Franzone, Kassel and Goodman. Therefore, such officers, directors and principal
stockholders may have various interests differing from those of the investors of
the Offering.
Also, pursuant to the Stockholders' Agreement, the estates of Messrs.
Franzone, Kassel and Goodman are each entitled, to the extent that the Company
receives proceeds from insurance on the lives of the deceased, to redeem up to
250,000 shares of the Company for $500,000 and may sell the remaining shares
pursuant to Rule 144 under the Securities Act, even though at such time the
Common Stock of the Company may have a fair market value at less than $2.00 per
share, resulting in dilution to stockholders and an expenditure of the Company's
capital even if such expenditures would adversely affect the Company's liquidity
and financial resources. At the date of this Prospectus, only Mr. Franzone has
"key man" life insurance in the amount of $500,000. Such amount, if
Mr. Franzone's estate exercises its redemption rights, would be used to redeem
Mr. Franzone's shares of Common Stock at a time when the Company might otherwise
need the proceeds. See "--Dependence on Key Personnel" and "Certain
Transactions."
Furthermore, pursuant to the Company's respective employment agreements
with each of Messrs. Franzone, Kassel and Goodman, if any one of such executives
dies during the term or is unable to competently and continuously perform the
duties assigned to him because of ill health or other disability (as defined in
the employment agreements), the executive or the executive's estate or
beneficiaries shall be entitled to full compensation for three years following
the date thereof. If the executive is terminated without cause, the executive
shall be entitled to full compensation for the remainder of the term. Such
expenditure of the Company's capital at such time could adversely effect the
Company's liquidity and financial resources. During 1997, David L. Kassel
rendered services to the Company in consideration for the sum of $150,000. At
the request of the Company, in lieu of a lump sum payment, Mr. Kassel accepted a
promissory note due on January 1, 1999,
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with interest at 6% per annum which was subsequently amended on December 8, 1998
extending the maturity date to not later than 30 days after the effective date
of the Registration Statement to which this Prospectus is a part (the "Effective
Date"). The Company will pay the principal amount and accrued interest on such
note with the proceeds of this Offering. In January 1998, CDP issued a
promissory note to Mr. Kassel for the principal amount of $107,500 bearing
interest of 10% per annum and maturing on January 1, 1999 for repayment of loans
advanced to CDP by Mr. Kassel which was subsequently amended on December 8, 1998
extending the maturity date to not later than 30 days after the Effective Date.
The Company has guaranteed the repayment of such promissory note. The Company
intends to repay the principal amount and accrued interest on the note when due
from the proceeds of this Offering. See "--Dependence on Key Personnel,"
"Dividend Policy," "Use of Proceeds," "Management--Employment Agreements,"
"Certain Transactions" and "Underwriting."
RELATED PARTY TRANSACTIONS
Certain officers, directors and affiliates of the Company have engaged in
business transactions with the Company which, by nature, could not have been the
result of arms'-length negotiations between independent parties, thereby
providing benefit to certain officers, directors and affiliates of the Company,
without providing the same benefits, if any, to the Company or its stockholders.
Notwithstanding, the Company believes that the terms of these transactions were
as favorable to the Company as those that could have been obtained from
unaffiliated parties under similar circumstances at the time. Additionally, the
Company has made sales to AFC, an affiliated company, which resulted in gross
profit margins materially less than the Company's overall margins for the
respective periods. While such sales are materially less advantageous to the
Company than those made to non-affiliates, the Company attributes such
difference to the type of products manufactured on behalf of the affiliate,
which does not require any additional assembly or marking. However, all future
transactions between the Company and its officers, directors and affiliates must
be approved by a majority of disinterested, independent members of the board of
directors of the Company and will be on terms no less favorable than could be
obtained from unaffiliated third parties. In the event such transactions are not
approved by such disinterested directors, thereby precluding the Company from
entering into such transactions, and the Company is unable to enter into any
transactions with unaffiliated third parties on equal or more favorable terms,
the operations of the Company may be adversely affected. See "Certain
Relationships and Related Transactions" and "Notes to Consolidated Financial
Statements."
RISKS RELATING TO PROPOSED EXPANSION
The Company intends, although with no assurance, to use the proceeds of the
Offering to seek to expand its current level of operations through acquisitions
of products and product lines and international manufacturing. Successful
expansion of the Company's operations will be dependent, among other things, on
the Company's ability to achieve significant market acceptance for its new
products, enter into satisfactory marketing arrangements, secure adequate
sources of supply on a timely basis and on commercially reasonable terms, if at
all, and successfully manage growth, including monitoring operations,
controlling costs and maintaining effective quality controls. Failure of the
Company to expand successfully could have a material adverse effect on its
business. See "Use of Proceeds" and "Business."
RISKS RELATING TO GROWTH THROUGH UNSPECIFIED ACQUISITIONS
An element of the Company's strategy for the future is expansion through
the acquisition of products or product lines. The Company expects to allocate
approximately $400,000, or 9.1%, of the net proceeds of this Offering to such
acquisitions. As a result, the Company will evaluate potential acquisition
opportunities, some of which may be material in size or scope. Pursuant to the
Certificate of Incorporation and By-laws of the Company, the directors have the
discretion to effect any acquisition made in good faith, thereby precluding the
Company's stockholders from voting on such matters. Acquisitions generally
involve a number of special risks, including (i) the time associated with
identifying and evaluating product acquisition candidates, (ii) the
incorporation of acquired or licensed products or services into the Company's
current products and services, (iii) possible adverse short-term effects on the
Company's operating results, (iv) the inability to maintain uniform standards,
controls, procedures and policies, and (v) the realization of acquired
intangible assets. There can be no assurance that the Company would be
successful in overcoming these risks or any other problems encountered with any
future acquisitions, investments, strategic alliances or related efforts. The
Company may issue equity securities and other forms of consideration in
connection with future acquisitions, which could cause dilution to investors
purchasing Common Stock of the Company. There can be no assurance that the
Company will be able to identify
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additional suitable acquisition candidates, that it will be able to consummate
or finance any such acquisitions on favorable terms, if at all, or that it will
be able to integrate any such acquisitions successfully into its operations. See
"Use of Proceeds," "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
INITIAL MANUFACTURING PHASE OF THE PULL PACK(TRADEMARK); NO ASSURANCE OF MARKET
ACCEPTANCE
One of the Company's wholly-owned subsidiaries, CDP, intends to market and
manufacture a newly produced product, the Pull Pack(Trademark). Although the
Company has completed market-study surveys, the Company has not commenced
marketing activities or generated revenues from the sale of the Pull
Pack(Trademark). The Pull Pack(Trademark) may require additional development,
marketing and investment prior to commercialization. The Company may also enter
into agreements with investors and entrepreneurs, and may be dependent upon
those individuals and their subsequent success in performing their
responsibilities. In addition, the Company's product is subject to the risks of
failure inherent in the development of products based on innovative
technologies. Accordingly, there can be no assurance that the Company's research
and development efforts will be successful, that the sale of the product will
generate revenue or that others will not develop competitive or superior
products. As a result of the early stage of the product, the Company cannot
predict with certainty when it will be able to market the product profitably, if
at all. The Company's failure to market and profitably sell the Pull
Pack(Trademark) and other commercially viable products could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Business."
DIFFICULTIES IN INTEGRATING CDP INTO THE COMPANY
The Company entered into an agreement to acquire CDP as of December 24,
1998. CDP has entered into a five-year exclusive worldwide licensing agreement
dated March 1, 1998 to arrange for the manufacture, marketing, sale and
sublicensing of the Pull Pack(Trademark), a proprietary Disc packaging system.
The Company has no experience in Disc packaging and such industry may involve
risks and uncertainties which are unknown to the Company and which could have a
material adverse effect on the Company's financial condition and results of
operations. In addition, the Company faces various difficulties in integrating
CDP into the Company's present business, including diversion of management's
attention, increased burdens on the Company's management and financial controls,
increased marketing demands and possible adverse effects to the Company's
operating results. As a result, the integration of CDP into the Company could
have a material adverse effect on the Company's results of operations and
financial performance. See "Business--Products--The Pull Pack(Trademark)."
RISKS RELATING TO LICENSING AGREEMENT
The Company, through its wholly-owned subsidiary, CDP, entered into an
exclusive worldwide license agreement with Inch, Inc. dated as of March 1, 1998
whereby the Company obtained the right and license to manufacture, use, sell and
sublicense a Disc packaging system. CDP holds the exclusive license for a
minimum of five years and a maximum of the life of the patent. The Company
applied for a new trademark under the name "Pull Pack(Trademark)" in March 1998.
The agreement generally requires the Company to pay royalties on sales of
products developed from the licensed technologies and fees on revenues from
sublicensees, where applicable. The agreement also requires that CDP obtain an
unspecified $1,000,000 capital investment by February 28, 2000, which provision
shall be satisfied from the proceeds of this Offering, and provides that Inch,
Inc. will act as a consultant to CDP for the design and manufacture of the Pull
Pack(Trademark) at certain hourly rates based on the number of units sold.
Should the Company default on its obligations to Inch, Inc. under the license
agreement, its license could terminate or become non-exclusive and could have a
material adverse effect on the Company's operations and prospects. See
"Business--Patents, Trademarks, Licenses and Royalty Rights."
UNCERTAINTY REGARDING PATENTS AND PROPRIETARY INFORMATION
The Company's ability to effectively compete may in part depend on its
success in protecting its proprietary technology in the United States and
abroad. The Company owns or licenses the technology to two patents and has filed
one additional patent application with the United States Patent and Trademark
Office (the "PTO"). There can be no assurance that the PTO or any foreign
jurisdiction will grant the Company's patent applications or that the Company
will obtain any patents or other protection for which application for patent
protection has been made. No assurance can be given that patents issued to or
licensed by the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will provide any competitive advantage or
that the Company will have the resources to pursue any litigation against any
party the Company believes to be an infringer. The Company will also rely on
trade secrets, know-how and continuing technological advancement in
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seeking to achieve a competitive position. No assurance can be given that the
Company will be able to protect its rights to its unpatented trade secrets or
that others will not independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to the Company's trade
secrets. See "Business--Patents, Trademarks, Licenses and Royalty Rights."
In addition to protecting its proprietary technology and trade secrets, the
Company may be required to obtain additional licenses to patents or other
proprietary rights from third parties. No assurance can be given that any
additional licenses required under any patents or proprietary rights would be
made available on acceptable terms, if at all. If the Company does not obtain
required licenses, it could encounter delays in product development while it
attempts to design around blocking patents, or it could find that the
development, manufacture or sale of products requiring such licenses could be
foreclosed.
The Company could also incur substantial costs in defending any patent
infringement suits or in asserting any patent rights, including those granted by
third parties. The PTO could institute interference proceedings against the
Company in connection with one or more of the Company's patents or patent
applications, and such proceedings could result in an adverse decision as to
priority of invention. The PTO or others could also institute reexamination
proceedings with the PTO against the Company in connection with one or more of
the Company's patents or patent applications and such proceedings could result
in an adverse decision as to the validity or scope of any patents that the
Company may obtain or have the right to use.
DEPENDENCE UPON SUPPLIERS AND RAW MATERIALS
Although the Company currently has purchase orders with eight different
suppliers in China, the Company does not have any oral or written contracts or
agreements with suppliers of its raw materials. In the event that a relationship
with a supplier upon which the Company depends is terminated, there can be no
guarantee that the Company would be able to locate other satisfactory suppliers,
or even if other suppliers could be located, that the Company would be able to
establish commercial relationships with any such suppliers on favorable terms,
if at all. If the Company is unable to establish commercial relationships with
other suppliers, it may be required to suspend or curtail some of its current
services and product lines. In addition, the Company's principal raw materials
are currently readily available, but there can be no guarantee that a general
shortage of such raw materials will not occur. Such a shortage could also
suspend or curtail some of the Company's services. In the event the Company
cannot secure such raw materials or any other raw materials on reasonable
commercial terms, it may have to go to other sources and may not be able to
secure similar quality or prices. Any suspension or curtailment of raw materials
could have a material adverse effect on the Company. See "Business."
DEPENDENCE UPON DISTRIBUTORS
Approximately 20% of the products manufactured by EHC, one of the Company's
wholly-owned subsidiaries, are sold through distributors. The Company does not
have any oral or written contracts or agreements with any of its distributors.
In the event that a relationship with a distributor upon which the Company
depends is terminated, there can be no guarantee that the Company would be able
to locate other satisfactory distributors, or even if other distributors could
be located, that the Company would be able to establish commercial relationships
with any such distributors on favorable terms, if at all. In such case, the
Company would be forced to distribute 100% of its manufactured products on its
own, which may force the Company to suspend or curtail some of its product lines
or hire additional workforce to handle such additional distribution, which in
either event could have a material adverse effect on the Company's results of
operations. See "Business--Distribution Methods."
GOVERNMENT REGULATION OF TECHNOLOGY
Expansion into foreign markets may require the Company to comply with
certain regulatory requirements of the U.S. or foreign governments. The
technology contained in the Company's products may be subject to U.S. export
controls. There can be no assurance that such export controls, either in their
current form or as may be subsequently enacted, will not delay introduction of
new products or limit the Company's ability to distribute products outside of
the U.S. Further, various countries may regulate the import of certain
technologies contained in the Company's products. Any such export or import
restrictions, future legislation or regulation or government enforcement could
have a material adverse effect on the Company's business, operating results and
financial condition. In addition, the Company must qualify certain of its
products on government-regulated Qualified Product Lists in order to sell such
products to the U.S. Military. Failure to qualify products on such lists would
have adverse effects on the Company's ability to sell products to the U.S.
Military. Any such export or import
14
<PAGE>
restrictions, new legislation or regulation or government enforcement of
existing regulations could have a material adverse effect on the Company's
business, operating results and financial condition. There can be no assurance
that the Company will be able to comply with additional applicable laws and
regulations without excessive cost or business interruption, if at all, and
failure to comply could have a material adverse effect on the Company. See
"Business--Government Approval."
LEGAL RESTRICTIONS ON SALES OF SHARES UNDERLYING THE WARRANTS
The Warrants are not exercisable unless, at the time of the exercise, the
Company has an effective Registration Statement covering the shares of Common
Stock issuable upon exercise of the Warrants, and such shares have been
registered, qualified or deemed to be exempt under the securities laws of the
state of residence of the exercising holder of the Warrants. Although the
Company has agreed to maintain the effectiveness of the Registration Statement
of which this Prospectus is a part, covering the shares of Common Stock issuable
upon the exercise of the Warrants effective for the term of the Warrants, the
Company's failure to do so would deprive the Warrants of any value. See
"Description of Securities--Warrants."
The Common Stock and Warrants may be purchased separately. Purchasers may
buy Warrants in the aftermarket in, or may move to, jurisdictions in which the
shares underlying the Warrants are not so registered or qualified during the
period that the Warrants are exercisable. In this event, the Company would be
unable to issue shares to those persons desiring to exercise their Warrants, and
holders of Warrants would have no choice but to attempt to sell the Warrants in
a jurisdiction where such sale is permissible or allow them to expire
unexercised. See "Description of Securities--Warrants."
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SMALLCAP OR BSE
Upon approval, the Securities will be listed on Nasdaq SmallCap and BSE.
There can be no assurance, however, that the Company will satisfy the
maintenance criteria for continued listing on either Nasdaq SmallCap or BSE. In
order to remain quoted on Nasdaq SmallCap, under recently amended maintenance
criteria, a company must have net tangible assets (total assets, excluding
goodwill, minus total liabilities) of $2 million (or alternatively, net income
of $500,000 in two of the three most recent fiscal years, or a market
capitalization of $35 million). In addition, continued inclusion requires that
the listed security have a minimum bid price of $1.00 per share, public float
(shares not held directly or indirectly by any officer or director or any person
who is the beneficial owner of more than 10% of the total outstanding shares) of
at least 500,000 shares and the market value of such shares be at least
$4,000,000. There must also be 300 registered holders of the Common Stock.
The Securities will also be listed on the BSE, if approved. There can be no
assurance that the Company will satisfy the criteria for continued listing. In
order to remain quoted on BSE, a company must have total assets of $1,000,000,
public float of 150,000 shares with a market value of $500,000, 250 beneficial
holders and Stockholders' Equity of $500,000.
If the Company is unable to satisfy Nasdaq SmallCap's or BSE's listing
standards, its securities may be delisted from Nasdaq SmallCap or BSE. In such
event, trading, if any, in the Securities would thereafter be conducted in the
over-the-counter market on the so-called "pink sheets" or the NASD's "Electronic
Bulletin Board." As a consequence of such delisting, an investor could find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the Securities. Consequently, the liquidity of the Securities could be
impaired, not only in the number of securities which could be bought and sold,
but also through delays in the timing of transactions, reduction in security
analyst and news media coverage of the Company and lower prices for the
Securities than might otherwise be attained.
"PENNY STOCK" RESTRICTIONS
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a "penny stock." Regulations of the Securities
and Exchange Commission (the "Commission") define a "penny stock" to be any
non-Nasdaq equity security that has a market price (as therein defined) of less
than $5.00 per share or with an exercise price of less than $5.00 per share,
subject to certain exceptions. For any transaction involving a penny stock,
unless exempt, the rules require delivery, prior to any transaction in a penny
stock, of a disclosure schedule prepared by the Commission relating to the penny
stock market. Disclosure is also required to be made about commissions payable
to both the broker-dealer and the registered underwriter and current quotations
for the securities. Finally, monthly statements are required to be sent
disclosing recent price information for the penny stock held in the account and
information on the limited market in penny stocks.
15
<PAGE>
The foregoing required penny stock restrictions will not apply to the
Securities if such Securities are listed on Nasdaq and have certain price and
volume information provided on a current and continuing basis or meet certain
minimum net tangible assets or average revenue criteria. However, there can be
no assurance that the Securities will qualify for exemption from these
restrictions. In any event, even if the Securities are exempt from such
restrictions, the Company would remain subject to Section 15(b)(6) of the
Securities Exchange Act of 1934 , as amended (the "Exchange Act"), which gives
the Commission the authority to prohibit any person that is engaged in unlawful
conduct while participating in a distribution of a penny stock from associating
with a broker-dealer or participating in a distribution of a penny stock, if the
Commission finds that such a restriction would be in the public interest. If the
Securities were subject to the rules on penny stocks, the market liquidity for
the Securities could be severely adversely affected. See "Risk Factors--Possible
Delisting of Securities from Nasdaq SmallCap or BSE."
RISKS OF LOW-PRICED STOCK
If the Securities are delisted from Nasdaq SmallCap or BSE, they will
become subject to Rule 15g-9 under the Exchange Act, which imposes additional
sales practice requirements on broker-dealers selling such securities to persons
other than established customers and "accredited investors" (generally,
individuals with net worth in excess of $1,000,000 or annual incomes exceeding
$200,000, or $300,000 together with their spouses, for the last two years). For
transactions covered by this rule, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchaser's
written consent to the transaction prior to sale. Consequently, such rule may
adversely affect the ability of broker-dealers to sell the Securities and may
adversely affect the ability of purchasers in the Offering to sell in the
secondary market any of the Securities acquired hereby. See "Risk
Factors--Possible Delisting of Securities from Nasdaq SmallCap or BSE."
NO PRIOR PUBLIC MARKET
Prior to the Offering, there has been no public market for the Securities.
Accordingly, there can be no assurance that an active trading market will
develop or, if developed, be sustained subsequent to the Offering.
ARBITRARY DETERMINATION OF OFFERING PRICE
The Offering price of the Securities and the exercise price and terms of
the Warrants have been determined arbitrarily by negotiations between the
Company and the Underwriter. Factors considered in such negotiations, in
addition to prevailing market conditions, included the history and prospects for
the industry in which the Company competes, an assessment of the Company's
management, the prospects of the Company, its capital structure and certain
other factors deemed relevant. Therefore, the Offering price of the Common Stock
and the exercise price and terms of the Warrants do not necessarily bear any
relationship to established valuation criteria and may not be indicative of
prices that may prevail at any time or from time to time in the public market
for the Common Stock. See "Underwriting."
POSSIBLE REDEMPTION OF WARRANTS AND EFFECT ON COMMON STOCK
The Warrants are redeemable by the Company at any time commencing one year
from the date of this Prospectus, for $.10 per Warrant upon 30 days prior
written notice, provided that the average closing price or bid price of the
Common Stock as reported on Nasdaq SmallCap or BSE, if traded thereon, or if not
traded thereon, the average closing sale price if listed on a national or
regional securities exchange has been in excess of 150% of the then current
Warrant exercise price for any 20 trading days within the 30 consecutive trading
days ending on the 15th day prior to notice of redemption. Redemption of the
Warrants by the Company could force the holders to (i) exercise the Warrants and
pay the exercise price at a time when it may be disadvantageous for the holders
to do so, (ii) sell the Warrants at the then current market price when they
might otherwise wish to hold the Warrants or (iii) accept the redemption price,
which is likely to be substantially less than the market value of the Warrants
at the time of redemption. In the event of the exercise of a substantial number
of Warrants within a reasonably short period of time after the right to exercise
commences, the resulting increase in the amount of Common Stock of the Company
in the trading market could substantially affect the market price of the Common
Stock. See "Description of Securities--Warrants."
POSSIBLE VOLATILITY OF STOCK PRICE
The stock market generally has experienced and is likely in the future to
experience significant price and volume fluctuations which could adversely
affect the market price of the Common Stock without regard to the significant
fluctuations in response to variations in quarterly operating results,
shortfalls in sales or earnings
16
<PAGE>
below analyst estimates, stock market conditions and other factors. There can be
no assurance that the market price of the Securities will not experience
significant fluctuations or decline below the Offering price.
LACK OF DIVIDENDS
The Company has not paid any dividends, except distributions by EHC as a
Subchapter S corporation, and does not contemplate paying dividends in the
foreseeable future. It is currently anticipated that earnings, if any, will be
retained by the Company to finance the development and expansion of the
Company's business. See "Dividend Policy."
ANTITAKEOVER EFFECT OF CERTIFICATE OF INCORPORATION
The Company's Certificate of Incorporation authorizes the Board of
Directors to determine the rights, preferences, privileges and restrictions of
unissued series of preferred stock, $.001 par value per share (the "Preferred
Stock"), and to fix the number of shares of any series of Preferred Stock and
the designation of any such series, without any vote or action by the Company's
stockholders. Thus, the Board of Directors can authorize and issue up to
1,000,000 shares of Preferred Stock with voting or conversion rights that could
adversely affect the voting or other rights of holders of the Company's Common
Stock. In addition, the issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change of control of the Company, since the
terms of the Preferred Stock that might be issued could potentially prohibit the
Company's consummation of any merger, reorganization, sale of substantially all
of its assets, liquidation or other extraordinary corporate transaction without
the approval of the holders of the outstanding shares of the Common Stock. The
Company, however, has no intention of adopting a stockholder rights plan
("poison pill") in the foreseeable future. See "Description of
Securities--Preferred Stock."
IMMEDIATE AND SUBSTANTIAL DILUTION
The Offering will result in an immediate and substantial dilution of $3.07
(68.2%) per share between the Offering price and the pro forma net tangible book
value per share of Common Stock. See "Dilution."
UNDERWRITER'S INFLUENCE ON THE COMPANY
Upon consummation of the Offering, the Underwriter has been granted, for a
period of five years, the right to designate one individual to serve on the
Board of Directors of the Company. If the Underwriter were to exercise such
right, it could be deemed under certain circumstances to be in a position to
assert influence over the Company. See "Underwriting."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon the consummation of the Offering, the Company will have 3,195,000
shares of Common Stock outstanding (3,382,500 shares if the Underwriter's
over-allotment option is exercised in full and assuming no exercise of Warrants
or the Underwriter's Warrants). Of these shares, the 1,250,000 shares sold in
the Offering (1,437,500 shares if the Underwriter's over-allotment option is
exercised in full) will be freely tradeable. The remaining 1,945,000 shares are
deemed to be "restricted securities," as that term is defined under Rule 144
("Rule 144") promulgated under the Securities Act of 1933, as amended (the
"Securities Act"), in that such shares were issued and sold by the Company in
private transactions not involving a public offering and are not covered
currently by an effective registration. Except for an aggregate of 1,945,000
shares of Common Stock beneficially owned by the officers, directors and
principal stockholders of the Company subject to "lock-up" agreements between
such persons and the Underwriter, whereby such persons agree not to directly or
indirectly, sell, offer, pledge, contract to sell, hypothecate, grant any option
to purchase or otherwise dispose for a period of two years, subject to certain
exceptions, such shares are subject to the resale restrictions of Rule 144 and
will become so eligible at various times. In addition, the Company has granted
the Underwriter demand and piggyback registration rights with respect to the
securities issuable upon exercise of the Underwriter's Warrants.
Under Rule 144, a stockholder who has beneficially owned restricted shares
for at least one year (including persons who may be deemed to be "affiliates" of
the Company under Rule 144) may sell within any three month period a number of
shares that does not exceed the greater of: (i) 1% of the then outstanding
shares of a particular class of the Company's Common Stock as reported on its
10-Q filing, or (ii) the average weekly volume on Nasdaq during the four
calendar weeks preceding such sale and may only sell such shares through
unsolicited brokers' transactions. A stockholder who is not deemed to have been
an "affiliate" of the Company for at least 90 days and who has beneficially
owned his shares for at least two years would be entitled to sell such shares
under Rule 144 without regard to the volume limitations described above.
17
<PAGE>
Prior to the Offering, there has been no public market for the Company's
Securities. Sales of substantial amounts of shares of the Company's Common
Stock, pursuant to Rule 144 or otherwise, could have a depressive effect on the
market price of the Securities, and consequently make it more difficult for the
Company to raise capital through the sale of equity securities in the future at
a time and price which the Company deems appropriate.
In addition, pursuant to the Stockholders' Agreement, each of
Messrs. Kassel, Goodman and Franzone (the "Selling Stockholders"), holders of an
aggregate of 1,900,000 shares of Common Stock (the "Registrable Shares") at the
date of this Prospectus, are entitled to certain demand and "piggyback"
registration rights with respect to such Registrable Shares. Pursuant to the
Stockholders' Agreement, any Selling Stockholder holding an aggregate of 7% of
the outstanding shares of Common Stock may request that the Company file a
registration statement under the Securities Act, and subject to certain
conditions, the Company generally will be required to use its best efforts to
effect any such registration. In addition, if the Company proposes to register
any of its securities, either for its own account or for the account of other
stockholders, the Company is required, with certain exceptions, to notify the
Selling Stockholders and, subject to certain limitations, to include in such
registration statement all the Registrable Shares requested to be included by
such Selling Stockholders. The Company is generally obligated to bear the
expenses, other than underwriting discounts and sales commissions, of these
registrations. Each of the Selling Stockholders has waived his "piggyback" and
demand registration rights for a two-year period, commencing upon the completion
of this Offering, and has entered into an agreement with the Underwriter whereby
he agrees not to effect any disposition of his shares of Common Stock for a
two-year period, commencing upon the completion of this Offering, without the
prior written consent of the Underwriter. Notwithstanding, the exercise by one
or more of these registration rights may involve a substantial expense to the
Company and may adversely affect the terms upon which the Company may obtain
additional financing. See "Risk Factors--Shares Eligible for Future Sale;
Registration Rights," "Management--Employment Agreements" and "Shares Eligible
for Future Sale."
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the General Corporation Law of the State of Delaware
contains provisions entitling directors and officers of the Company to
indemnification from judgments, fines, amounts paid in settlement and reasonable
expenses, including attorney's fees, as the result of an action or proceeding in
which they may be involved by reason of being or having been a director or
officer of the Company provided said officers or directors acted in good faith.
The Company's Certificate of Incorporation contains provisions indemnifying
officers and directors of the Company to the fullest extent permitted by
Delaware law. These provisions provide, among other things, that a director of
the Company shall not be liable either to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director. These provisions
may limit the ability of the Company's stockholders to collect any monetary
liability damages owed to them by an officer or director of the Company.
RELATIONSHIP OF UNDERWRITER TO TRADING
The Underwriter may act as a broker or dealer with respect to the purchase
or sale of the Securities in the over-the-counter market where each is expected
to trade. The Underwriter may engage in transactions that stabilize, maintain or
otherwise affect the market price of the Securities in accordance with Rule 103
of Regulation M, pursuant to which such persons may bid for or purchase
securities for the purpose of stabilizing their market prices. The Underwriter
also has the right to act as the Company's exclusive agent in connection with
any future solicitation of Warrant holders to exercise their Warrants. Unless
granted an exemption by the Commission from Rule 10b-6 under the Exchange Act,
the Underwriter will be prohibited from engaging in any market-making activities
or solicited brokerage activities with regard to the Company's Securities during
a period beginning five business days prior to the commencement of any such
solicitation and ending on the later of the termination of such solicitation
activity or the termination (by waiver or otherwise) of any right the
Underwriter may have to receive a fee for the exercise of the Warrants following
such solicitation. As a result, the Underwriter and soliciting broker/dealers
may be unable to continue to make a market in the Company's securities during
certain periods while the exercise of the Warrants is being solicited. Such a
limitation could impair the liquidity and market price of the Securities.
18
<PAGE>
USE OF PROCEEDS
Assuming the sale of the Securities offered hereby, the net proceeds to the
Company, after deducting estimated underwriting discounts and commissions and
expenses payable by the Company in connection with the Offering, are estimated
to be approximately $4,400,000 (approximately $5,200,000 if the Underwriter's
over-allotment option is exercised in full). The Company expects to use such
proceeds as follows:
<TABLE>
<CAPTION>
APPROXIMATE AMOUNT % OF NET
INTENDED APPLICATION OF NET PROCEEDS OF NET PROCEEDS PROCEEDS
- ------------------------------------ ------------------ ------------
<S> <C> <C>
Inventory Purchases and Staffing(1) ...................... $1,215,000 27.6%
Tooling(2) ............................................... $ 485,000 11.0%
Sales and Marketing(3) ................................... $ 455,000 10.3%
Facilities and Equipment(4) .............................. $ 412,000 9.4%
Potential Product Acquisitions............................ $ 400,000 9.1%
Research and Development.................................. $ 382,000 8.7%
Repayment of Debt(5) ..................................... $ 357,500 8.1%
Dividends to Existing Stockholders(6) .................... $ 100,000 2.3%
Working Capital(7)........................................ $ 593,500 13.5%
---------- ------
Total................................................ $4,400,000 100.0%
---------- ------
---------- ------
</TABLE>
- ------------------
(1) Includes the hiring of nine additional engineering and procurement personnel
and additional inventory manufactured in China.
(2) Consists of molds, castings and dies for the products under development.
(3) This amount will be used for trade journal advertisements, mailings, sales
literature and public relations.
(4) Includes engineering, computer and mold-making programs, improved
communications equipment and additional warehouse and office space within
the Company's existing facility.
(5) In repayment of the following promissory notes: (i) a promissory note, dated
December 31, 1997, issued by the Company to David L. Kassel in the principal
amount of $150,000, bearing interest at a rate equal to 6% per annum and
maturing not later than 30 days after the Effective Date; (ii) a promissory
note, dated January 1, 1998, issued by CDP to Mr. Kassel in the principal
amount of $107,500, bearing interest at a rate equal to 10% per annum and
maturing not later than 30 days after the Effective Date; (iii) a demand
negotiable promissory note, dated October 27, 1998, issued by EHC to
Mr. Kassel in the principal amount of $25,000, bearing interest at a rate
equal to 10% per annum and maturing upon demand; (iv) a demand negotiable
promissory note, dated October 28, 1998, issued by EHC to Harry Goodman in
the principal amount of $25,000, bearing interest at a rate equal to 10% per
annum and maturing upon demand; and (v) a demand negotiable promissory note,
dated December 7, 1998, issued by the Company to Mr. Goodman in the
principal amount of $50,000, bearing interest at a rate equal to 10% per
annum and maturing upon demand.
(6) This amount approximates the amount of income taxes existing stockholders
would have to pay personally based upon earnings for the year ended December
27, 1997 and from December 28, 1997 through December 24, 1998. See "Dividend
Policy."
(7) Includes the interest payable on the promissory notes referenced in footnote
(5) above. See "Risk Factors--Offering Proceeds to Benefit Officers,
Directors and Principal Stockholders" and "Certain Transactions--Officer
Loans."
In the event that the Company's plans change or its assumptions change or
prove to be inaccurate or if the proceeds of the Offering prove insufficient to
fund operations (due to unanticipated expenses or difficulties or otherwise),
the Company may find it necessary or advisable to reallocate some of the
proceeds within the above-described categories or to use portions thereof for
other purposes or may be required to seek additional financing or curtail its
operations. Future events, including changes in economic or industry conditions
or the Company's planned operations, may require the Company to reallocate
proceeds among the various intended uses if it is determined at a later date
that an increase in any expenditures or reallocation of proceeds is necessary or
desirable. Any such determination would be based on, among other things, whether
and to what extent revenue from sales is sufficient to offset operating expenses
and the capital requirements associated with expanding its operations.
19
<PAGE>
The Company may, if and when the opportunity arises, use a portion of the
proceeds of the Offering, possibly including a portion of the proceeds allocated
to working capital, together with the issuance of debt or equity securities, to
acquire rights to products. Any decision to make such an acquisition will be
based upon a variety of factors, including, among others, the purchase price and
other financial terms of the transaction. Potential acquisition candidates may
include products that are compatible with the Company's products, or that the
Company believes would provide the Company with additional distribution
channels. As of the date of this Prospectus, the Company has no agreements,
understandings or arrangements with respect to any such product acquisition and
is not in the process of reviewing specific acquisition opportunities or engaged
in negotiations with any potential acquisition candidates. There can be no
assurance that the Company will be able to successfully consummate any
acquisition or successfully integrate any acquired product into its operations.
Investors in the Offering will not have an opportunity to evaluate the specific
merits or risks of any acquisition.
Proceeds not immediately required for the purposes set forth above will be
invested in short-term, investment-grade, interest-bearing securities.
20
<PAGE>
DIVIDEND POLICY
The Company intends for the foreseeable future to retain future earnings,
if any, to provide funds for the development and expansion of the Company's
operations. Except as discussed below, any payment of dividends after the
completion of the Offering, as determined at the discretion of the Board of
Directors, will be dependent upon the financial condition, capital requirements
and earnings of the Company, and other factors the Board of Directors may deem
relevant.
From its inception until December 24, 1998, EHC was treated as a
closely-held corporation under Subchapter S of the Code and, therefore, did not
pay federal or state income taxes on amounts earned during such periods. EHC
distributed dividends to its stockholders for the years ended December 30, 1995
and December 28, 1996 in the aggregate amounts of $207,243 and $133,379,
respectively. The Company will distribute $75,000 to its stockholders for the
balance of taxes paid by such stockholders for the year ended December 27, 1997
from the proceeds of this Offering. Additionally, EHC has agreed to distribute,
through a dividend to its existing stockholders upon the Effective Date of the
Offering, a minimum of 38% of the earnings of EHC from December 28, 1997 until
December 24, 1998, which amount approximates the amount such stockholders would
be expected to pay personally for income taxes based on such earnings. Although
it is impossible to determine the exact amounts of the distributions at this
time, based on the Company's financial results for the first nine months of
1998, the Company estimates that it will distribute approximately $25,000 to
such stockholders in proportion to their respective holdings. See "Use of
Proceeds."
21
<PAGE>
DILUTION
At September 26, 1998, the pro forma net tangible book value of the Company
after giving effect to the acquisition of CDP and an anticipated $100,000
stockholder dividend subsequent to September 26, 1998 was $179,526, or $0.09 per
share of Common Stock, based on 1,945,000 shares of Common Stock outstanding.
The net tangible book value per share represents the amount of the Company's
total assets less total liabilities, divided by the number of shares of Common
Stock outstanding. After giving effect to the receipt of the net proceeds
(estimated to be approximately $4,400,000) from the sale of 1,250,000 shares of
Common Stock offered hereby at an assumed Offering price of $4.50 per share and
1,250,000 Warrants at $.10 per Warrant, the pro forma net tangible book value of
the Company at September 26, 1998 would be $4,529,576 or $1.43 per share of
Common Stock. This would result in dilution to the public investors (i.e., the
difference between the estimated Offering price per share of Common Stock and
the net tangible book value thereof after giving effect to the Offering) of
approximately $3.07 per share, or 68.2% of the Offering price per share. The
following table illustrates the per share dilution:
<TABLE>
<CAPTION>
PER SHARE OF
COMMON STOCK
------------
<S> <C> <C>
Assumed Offering price (1)........................................................ $ 4.50
Net tangible book value at September 26, 1998................................... $0.09
Increase in net tangible book value attributable to new investors............... 1.34
-----
Pro forma net tangible book value after the Offering.............................. 1.43
------
Pro forma dilution of net tangible book value to the new investors................ $ 3.07
------
------
</TABLE>
- ------------------
(1) Offering price before deduction of estimated expenses of the Offering and
underwriting discounts and exclusive of the purchase price of $.10 per
Warrant.
The following table summarizes as of September 26, 1998, the number and
percentage of shares of Common Stock purchased from the Company, the percentage
and amount of total consideration paid and the average price per share paid by
existing stockholders and by new investors pursuant to the Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................................ 1,945,000 60.9 $ 319,441 5.4 $0.16
New investors........................................ 1,250,000 39.1 5,625,000 94.6 $4.50
--------- ----- ---------- -----
Total......................................... 3,195,000 100% $5,944,441 100%
--------- ----- ---------- -----
--------- ----- ---------- -----
</TABLE>
The above table assumes no exercise of the Underwriter's over-allotment
option. If the Underwriter's over-allotment option is exercised in full, the new
investors will have paid $6,468,750 for 1,437,500 shares of Common Stock,
representing approximately 95.3% of the total consideration, for 42.5% of the
total number of shares of Common Stock outstanding.
22
<PAGE>
CAPITALIZATION
The following table sets forth as of September 26, 1998: (i) the actual
capitalization of the Company and (ii) the capitalization of the Company as
adjusted to reflect (a) the issuance and sale of the 1,250,000 shares of Common
Stock and 1,250,000 Warrants offered hereby; (b) the acquisition of CDP; and
(c) receipt of the net proceeds therefrom, after deducting underwriting
discounts and commissions and estimated offering expenses. This table should be
read in conjunction with the Company's consolidated financial statements and the
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 26, 1998
--------------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
---------- ------------ --------------
<S> <C> <C> <C>
Debt.................................................................. $2,095,561 $2,271,767 $1,914,267
---------- ---------- ----------
Stockholders' Equity:
Common Stock, $.001 par value, 10,000,000 shares authorized,
1,945,000 issued and outstanding, actual; 10,000,000 shares
authorized, 3,195,000 issued and outstanding, as adjusted(1)..... 1,500 1,945 3,195
Additional paid-in capital.......................................... 317,941 2,133,596 6,532,346
Retained earnings................................................... 133,975 (1,955,965) (1,955,965)
---------- ---------- ----------
Total stockholders' equity....................................... 453,416 179,576 4,579,576
---------- ---------- ----------
Total capitalization............................................. $2,548,977 $2,451,343 $6,493,843
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------
(1) Reflects the merger of the Company and CDP and an anticipated stockholder
dividend of $100,000 subsequent to September 26, 1998.
(2) Assumes no exercise of the (i) Warrants; (ii) Underwriter's over-allotment
option; and (iii) Underwriter's Warrants.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was formed for the purpose of developing or acquiring
domestically manufactured injection molded plastic products or assemblies,
redesigning the products to improve function and appearance and, by using its
relationships with vendors in China, to manufacture the products offshore in
order to deliver them at lower prices and improved profit margins. EHC, the
Company's principal subsidiary, has over 28 years of experience in the design,
marketing and manufacture of injection molded plastic components used in
industrial, consumer and military products. The Company believes that its
long-term experience in the manufacture and assembly of injection molded plastic
components, coupled with direct access to manufacturing facilities in China,
will enable the Company to provide improved products at lower prices with
improved profit margins.
RESULTS OF OPERATIONS
For the nine months ended September 26, 1998 compared to the nine months
ended September 27, 1997:
NET SALES
Net sales decreased $100,365, or 2%, to $4,506,995 for the nine months
ended September 26, 1998 from $4,607,360 for the nine months ended
September 27, 1997. This decrease was attributable to the redesigning of a key
customer's product and generally slower industry bookings.
GROSS PROFITS
The Company realized an overall gross profit margin percentage for the nine
months ended September 26, 1998 of 35% which represents an increase from the 31%
experienced during the nine months ended September 27, 1997. This increase can
be attributed to the continuous effort to improve manufacturing process, quality
and purchasing controls.
Improved manufacturing processes, including the use of cellular
manufacturing, "Just-in-Time" systems and the Kanban method of inventory
control, which allows representatives of each department stage of the
manufacturing process to directly reorder inventory and factors of production,
continue to reduce the cost of manufacturing. Products are being produced in
small lots with short lead times. Small lot production in the manufacturing
cells combined with ongoing operator training, statistical process control and
certified suppliers has continued the overall improvement in the Company's gross
profit. Continued improvement has also come from the new purchasing software
that is linked to the Company's inventory control system.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $265,868 or 25%, to
$1,317,138 for the nine months ended September 26, 1998 from $1,051,270 for the
nine months ended September 27, 1997. Such increase can be attributed to
increases in consulting fees, accounting fees, freight and shipping supplies,
design and printing of advertising literature and Research and Development
costs.
RESEARCH AND DEVELOPMENT
Research and Development expenses consisted of design and consulting fees
related to the development of various new products and the development of
manufacturing processes with eight manufacturers in China.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from working capital requirements,
capital expenditures and principal and interest payments. Historically, the
Company's primary source of liquidity has been cash flow generated internally
from operations, supplemented by bank borrowings and long term equipment
financing. The Company's cash decreased to $21,930 on September 26, 1998 from
$351,740 on December 27, 1997 as a result of deferred expenses due to the
Offering. Cash flow provided by operating activities was $13,441 for the nine
months ended September 26, 1998 on net income of $47,572. The increase in
accounts receivable and accounts payable was attributable to the start up of the
Company's new business in China. The increase in accounts payable was also a
result of additional expenses due to the Offering.
Cash used in investing activities for the nine months ended September 26,
1998 and September 27, 1997 was $157,774 and $156,471, respectively, which
consisted of cash for purchase of tooling, molds and machinery
24
<PAGE>
and equipment. As of the date of this Prospectus, the Company does not plan on
any material commitments for capital expenditures.
Net cash used in financing activities for the nine months ended
September 26, 1998 was $185,477. Cash of $269,000 was provided from borrowings
on available credit lines, which was offset by principal payments on loans of
$237,718 and payment of deferred Offering costs of $321,759.
RESULTS OF OPERATIONS
For the year ended December 27, 1997 compared to the year ended
December 28, 1996:
NET SALES
Net sales increased $656,706, or 12%, to $6,054,747 for the year ended
December 27, 1997 from $5,398,041 for the year ended December 28, 1996. This
increase was attributable to changes in marketing and increased expenditures for
advertising, new catalogs, web sites and database marketing. The Company
restructured its marketing budget to implement a trade publication advertising
campaign taking advantage of new catalogs and mailing literature developed
within the last two years. Such advertising material includes trade
publications, catalogs, post cards, faxback mailers and an Internet web site.
Funds for the new advertising campaign were derived from the reorganization of
the Company's field sales force. The Company believes that it has found
progressive ways of selling its products without incurring the overhead costs
associated with a large field sales force.
For example, through the use of the Company's new contact management
software and database marketing techniques, the Company systematically
identifies and maintains information concerning existing and potential
customers, including names of engineers and purchasing agents and the Company's
sales history with such entities, enabling the Company to efficiently highlight
its manufacturing capabilities. Through this process, the Company believes that
it is generating additional business from existing customers who are not aware
of its complete capabilities, while also attracting new customers.
The Company's on-time deliveries (97%) and excellent quality (less than 1%
rejection) were also factors in the increased sales volume. A substantial
portion of the Company's business comes from large established customers who
certify their suppliers based on delivery performance and quality rating. The
Company believes that improvements in these areas have helped with repeat
business. A substantial portion of the Company's sales are made to large
publicly owned customers, generally on an open account basis.
GROSS PROFITS
The Company realized an overall gross margin percentage for the year ended
December 27, 1997 of 37% which represents an increase from the 32% experienced
during the year ended December 28, 1996. This increase can be attributed to
improved manufacturing processes, quality and purchasing controls, as well as
price increases on certain products.
Improved manufacturing processes, including the use of cellular
manufacturing, "Just-in-Time" systems and the Kanban method of inventory
control, which allows representatives of each departmental stage of the
manufacturing process to directly reorder inventory and factors of production,
have contributed to the reduced cost of manufacturing. Products are being
produced in small lots with short lead times, allowing the Company to carry less
inventory and produce the desired quantity of products at a faster rate than in
the Company's prior history. Small lot production in the manufacturing cells
combined with operator training, statistical process control and certified
suppliers has led to an overall improvement in the Company's gross profit.
Additional improvements have come from new purchasing software that is linked to
the inventory control system. See "Business--The Company."
The Company recently performed market research to determine which product
prices could be increased. The result was that prices on product lines requiring
many operations and having limited competition were increased to meet the
Company's targeted revenues. At the same time, standard products, such as the
Mil-spec line and the regent series, were adjusted to cover increased material
and labor costs.
25
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses increased $298,455, or 20%, to
$1,770,893 for the year ended December 27, 1997 from $1,472,438 for the year
ended December 28, 1996. Such increase can be attributed to increases in
consulting, advertising and officers' compensation. In addition, there were
approximately $101,000 of expenses incurred for product development.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity needs arise from working capital requirements,
capital expenditures and principal and interest payments on debt. Historically,
the Company's primary source of liquidity has been cash flow generated
internally from operations, supplemented by bank borrowings and long-term
equipment financing. The Company's cash increased to $351,740 on December 27,
1997 from $67,910 at December 28, 1996. Cash flow provided by operating
activities was $424,244 for the year ended December 27, 1997 on net income of
$245,355. Increases in inventory were a result of an increase in production
levels to meet anticipated sales. The increases in accounts receivable and
accounts payable were the result of the increase in volume of business.
Cash used in investing activities for the years ended December 27, 1997 and
December 28, 1996 was $190,089 and $122,944, respectively, which consisted of
cash for purchase of tooling, molds and machinery and equipment. As of the date
of this Prospectus, the Company does not plan on any material commitments for
capital expenditures.
Net cash used in financing activities for the year ended December 27, 1997
was $196,000. Cash of $357,000 was provided from borrowings on available credit
lines, which was offset by $348,000 principal repayment on loans, $133,000 in
distributions to shareholders and $71,000 in payments to officers and affiliated
companies. For the year ended December 28, 1996, cash that was provided by
financing activities was primarily due to a new financing facility with Republic
National Bank. Cash used in financing activities for the year ended
December 28, 1996 was due to the Company's repayment of a financing facility
with Citibank with the funds received from Republic National Bank and repayment
of various long-term equipment loans. The Company currently has no plans or
agreements to seek loan financing. The Company may choose to seek additional
financing to provide additional working capital for expansion at some time in
the future. Such financing may include further bank financing or long-term
equipment loans. See "Certain Transactions--Credit Facilities."
The Company believes that the proceeds of the Offering combined with its
cash balances and cash generated from operations will satisfy the Company's
working capital, business development and capital expenditures for at least the
next 12 months. The Company may require additional sources of liquidity to fund
future growth, including additional equity offerings or debt financings. The
Company routinely evaluates potential acquisitions of businesses, products and
technologies that complement its business. As of the date of this Prospectus,
the Company has no agreements with respect to such transactions. Increased costs
or expenses, acquisition prospects and opportunities for growth or expansion may
increase the demand for working capital, necessitating additional capital
infusions.
NEW ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"), which prescribes a method of accounting for
stock-based compensation that determines compensation expenses based on fair
market value measured at grant date. SFAS No. 123 gives companies that grant
stock options or other equity instruments to employees, the option of either
adopting the new rules or continuing current accounting; however, disclosure
would be required of the pro forma amounts as if the new rules had been adopted.
SFAS No. 123 is effective for transactions entered into in fiscal years that
begin after December 15, 1995.
In 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and display of comprehensive income and its components,
and Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"), which establishes standards for the way public
business enterprises are to report information about operating segments in
annual financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
stockholders. SFAS 131 also establishes standards for related disclosure about
products and services, geographic areas and major customers. SFAS No. 130 and
No. 131 are effective for years beginning after December 15, 1997.
26
<PAGE>
BUSINESS
THE COMPANY
The Company, through its principal subsidiary, EHC, has over 28 years of
experience in the design, marketing and manufacture of injection molded plastic
components and assemblies, including consumer, industrial and military knobs and
custom and mechanical assemblies, including micro verniers, push or pull-to-
turn clutch knobs and detent knobs. EHC also produces hardware items, including
shaft locks, mounting brackets, test jack covers, cabinet bumpers and captive
screws. The Company believes that EHC's long-term success is due to the average
29-year experience of its management team, strategic acquisitions of
complementary companies, products and product lines and its ability to adapt new
technologies and advanced manufacturing concepts to produce high-quality
products at competitive prices.
The management team at EHC is comprised of molding, mechanical, industrial
and design engineers, enabling EHC to provide early and total involvement with
customers in the design and development of products. The Company believes that
such concurrent engineering results in reduced costs and shorter lead times
while improving quality. The technical staff at EHC has improved efficiency by
64% since 1995, due in large part to the use of Computer Aided Design
technology, cellular manufacturing and the Kanban manufacturing system. Computer
Aided Design technology utilizes computer generated graphic models during the
prototype phase and aids in optimal method planning for manufacturing. The
Kanban manufacturing system is a method of inventory control which allows
representatives of each departmental stage of the manufacturing process to
directly reorder inventory, as needed, thereby reducing overhead costs
associated with material control functions. EHC's products and technical
strengths are promoted by an aggressive, customer-focused internal sales force.
EHC meets a full range of its clients' needs by maintaining early and total
involvement, from the design and development to the ultimate manufacture and
packaging of the product. When a custom-made product is initially requested,
experienced EHC application engineers assist the customer during the concept
design stage, which the Company considers critical to the success of the
manufacturing process. During this stage, EHC application engineers draw upon
the Company's experience, expertise and technological innovation to assist
clients in reducing costs, meet accelerated market schedules and ensure high
quality workmanship.
Once EHC has successfully assisted the client in creating an efficient
design, such design is converted into a model. EHC currently has a relationship
with a local university whereby EHC utilizes such university's Computer Assisted
Manufacturing three dimensional computer graphics database, which is compatible
with EHC's system, to generate a drawing used to manufacture tooling, a Computer
Aided Design ("CAD"). The CAD is then used in conjunction with a Rapid Prototype
Machine to produce a design model for aesthetic evaluations.
The Company incorporates many other technological innovations and advanced
manufacturing practices to consolidate the Company's workplace. Through such
innovations, the Company is able to achieve state-of-the-art quality control
procedures and consistently produce high quality products. For the fiscal year
ended December 27, 1997, 97% of EHC's manufacturing projects were delivered on
time and less than 1% of its products were returned due to unsatisfactory
quality.
The Company is currently having its facility certified for International
Quality Standard ("ISO") 9001, a manufacturing certification required by
European companies and looked upon favorably throughout the world. ISO 9001
requires the Company to meet certain stringent requirements established in
Europe to ensure that the facility's manufacturing processes, equipment and
associated quality control systems will satisfy specific customer requirements.
The Company believes that obtaining ISO 9001 certification will benefit the
Company in the plastic manufacturing market, both nationally and
internationally.
The Company's factory is divided into manufacturing cells, which the
Company believes accounts for a more efficient workplace and improved quality.
Each cell is responsible for a complete manufacturing process, from machining to
assembly and from indicia marking to the ultimate packaging of the product. The
cells are operated by teams of cross-trained employees knowledgeable of both the
product and the manufacturing process. The cell teams meet regularly to solve
problems and develop more efficient manufacturing methods. The
27
<PAGE>
Company believes that this consolidated manufacturing approach results in high
quality, on-time delivery, competitive pricing and a loyal customer base.
Additionally, the Company believes that it has created a cost-effective
workplace by decreasing inventory costs. The Company's "pull" (also known as
"JIT," which stands for Just-in-Time) system is designed to introduce raw
materials and components at the time necessary to fulfill customer orders. This
system eliminates costs associated with the storage and handling of large
amounts of inventory. The Company believes that it also accounts for a more
timely rate of delivery. The "pull" system depends on long-term relationships
with suppliers. The Company believes that due to its strong relationships with
suppliers and its well-trained workforce, the system will continue to provide
efficient and prompt delivery.
The Company offers secondary operations on its molded products. Services
such as hand painting, pad printing, hot stamping and engraving are provided at
a customer's request. These marking systems can be used on most materials and
varying contours. The Company believes that these extra manufacturing services
allow for greater flexibility and increased customer satisfaction.
The Company was originally formed in 1970 as EHC, a New York corporation,
and was reorganized as of December 24, 1998 as a Delaware holding company for
its two wholly-owned subsidiaries, EHC and CDP. The Company changed its name
from International Plastic Technologies, Inc. to International Smart Sourcing,
Inc. on December 7, 1998. As part of the Reorganization, the stockholders of
each of the subsidiaries will exchange the following percentage ownership in the
respective subsidiaries for the percentage of shares of the Company: David
Kassel will exchange 33% of EHC and 90% of CDP for 46.3% of the Company; Andrew
Franzone will exchange 33% of EHC for 25.7% of the Company; Harry Goodman will
exchange 33% of EHC for 25.7% of the Company; and David Cowan will exchange 10%
of CDP for 2.3% of the Company.
GROWTH STRATEGY
The Company intends to expand its operations through (i) the acquisition
and development of injection molded plastic products and assemblies manufactured
in the United States having niche markets, (ii) the redesigning of such products
and assemblies, if necessary, to improve their function and appearance and
(iii) the manufacturing of such products and assemblies in China at lower prices
and improved profit margins. Through a Consultant who is also an independent
director of the Company, the Company has established direct contact with
manufacturers in China and has initiated pilot overseas manufacturing projects
in China of small-scale production runs of various products, including separate
projects through an affiliated company, AFC. Currently, the Company has purchase
orders with eight different suppliers in China. There can be no assurance that
the Company will be able to consummate any acquisitions, maintain or establish
additional manufacturing relationships in China or achieve any of its growth
strategies. See "Risk Factors--Risks Relating to Manufacturing in China."
While small businesses comparable in size to the Company often encounter
major difficulties in securing manufacturing projects in China due to
prohibitive broker commissions and agency fees incurred both domestically and
abroad, which, based upon the Company's experience could account for up to 25%
of the entire manufacturing project, the Company, through the Consultant, has
established direct contact with certain manufacturers in China, allowing the
Company to avoid such commissions and fees and realize the benefit from lower
costs of raw materials and labor. For example, EHC's principal raw materials at
this time, ABS and polycarbonate, cost up to 50% less in China and the cost of
labor for factory workers in China was approximately $.33 per hour for the year
ended 1997. To date, the Company has no written contracts or arrangements with
any manufacturer located in China and there can be no assurance that the Company
will be able to enter into any such contracts or arrangements on favorable
terms, if at all. Based on its assessment of pilot manufacturing projects in
China through AFC, the Company believes that it can reduce its overall domestic
manufacturing costs, including shipping and tariffs, by more than 25%. See "Risk
Factors--Risks Relating to Manufacturing in China" and "Certain Transactions."
28
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PRODUCTS
Control Knobs and Assemblies
The Company, through EHC, a wholly-owned subsidiary, manufactures a full
line of instrument control knobs, handles, value-added custom molding, dials and
similar devices for consumer, industrial and military electronics equipment.
EHC's knobs are used for precise setting of switches, on/off switches, volume
controls and critical setting of instrumentation switches. EHC manufactures many
of the knobs to order based on the customers' exacting specifications as well as
its standard line. Customers of EHC order the knobs by specifying particular
descriptions and features, including the shaft diameter, outer diameter, overall
size, height, color, illumination, dials and markings, such as lines, dots or
numbers. EHC also has a standard product line of consumer, industrial and
military knobs available for sale through catalogs.
Overall, the number of different types of knobs EHC has manufactured in its
history is in the order of tens of thousands. Some knobs are manufactured with
mechanical devices built into the knob. For example, one of the Company's
locking knobs turns freely and sets upon depression, resisting shock, vibration
or accidental movement. A clutch knob is one that continues to turn even after
the device has reached a pre-set limit so that the pressure of the turning knob
does not damage the equipment. Most knobs are resin-based and injection molded.
Some knobs are painted and some are delivered "as molded." Certain knobs are
made with aluminum inlays, caps, dials or skirts and may have fittings of
screws, bushings, springs or set screws.
The knobs and assemblies can be sold in lots of as few as one knob or as
large as 500,000 units or more. EHC requires a $150 per order minimum charge.
Knob prices to the customer range from as low as $.09 per unit to as much as
$150 per unit.
The Pull Pack(Trademark)
The Company, through CDP, a wholly-owned subsidiary, has entered into an
exclusive international licensing agreement to manufacture, market, sell and
sub-license the Pull Pack(Trademark), a proprietary Disc packaging system. The
Pull Pack(Trademark) is a redesigned "Jewel Box," the packaging used currently
for Compact Discs, CD ROMs and DVD, and won the International Design Magazine
Award for Packaging in 1993. The Pull Pack(Trademark) implements a drawer-like
mechanism, avoiding the problems associated with currently available Disc
packaging involving fragile hinges, difficulty in opening and the removal of
Discs and descriptive literature. The drawer carries the Disc, and a tray above
the drawer holds the descriptive booklet. When the drawer is opened, the tray is
pushed forward one-half inch beyond the outer housing, providing the user with
the option of removing the Disc or the booklet or both. The drawer also holds an
inlay card, which provides the graphics for the spine and the bottom of the
package. See "Business--Patents, Trademarks, Licenses and Royalty Rights."
While no contracts or agreements are in place, the Company is currently
negotiating with manufacturers in China to produce the Pull Pack(Trademark) and
plans, with no assurance, to market the product as a specialty packaging system
to a targeted niche market, including CD ROM, special production, retail
replacement packaging and rental and institutional markets such as video stores,
lending libraries and technical research facilities. The Pull Pack(Trademark)
won the International Design Magazine Award for Packaging in 1993. For the year
ended 1997, the market for Jewel Boxes sold in the music industry in the United
States was approximately $82,000,000 and the Company believes that the target
niche market for the Pull Pack(Trademark) is approximately $50,000,000. See
"Risk Factors--Risks Relating to Manufacturing in China" and "--Developmental
Stage Product; No Assurance of Market Acceptance."
The Company believes that the Pull Pack(Trademark) is well positioned to be
sold in specialty niche markets. The Company believes that the Pull
Pack(Trademark) receives favorable reviews because it complements what has made
the Compact Disc the preferred format in both the entertainment and educational
industries, ease of use and durability.
The Company intentionally relies upon current technologies and materials
used for the Pull Pack(Trademark) so that it can be interchangeable with current
Jewel Boxes. The Pull Pack(Trademark) is the same size as the standard Jewel Box
and is made from the same clear plastic. It also uses the same graphic inserts
as Jewel Boxes, a booklet and inlay card, which allows Compact Disc distributors
to use Jewel Boxes or the Pull Pack(Trademark) interchangeably without
29
<PAGE>
requiring special graphics to be printed. The Company believes that this
complete compatibility will also allow the Pull Pack(Trademark) to be sold
directly to consumers who want to replace their broken Jewel Boxes with a more
durable and convenient package.
The Company developed a pre-production model of the Pull Pack(Trademark) in
June 1998 for market research and small production runs. Concurrently, the
production tooling of the Pull Pack(Trademark) is complete and the product has
been produced in limited quantities. The Company believes, with no assurance,
that it will commence commercial production of the Pull Pack(Trademark) in the
first quarter of 1999. However, due to the early manufacturing stage of the
product, there are currently no contracts or agreements with potential
suppliers, distributors, manufacturers or customers concerning production of the
Pull Pack(Trademark). The Company will initially target market opportunities
such as replacement packaging, CD ROM packaging, rental and institutional
markets, such as video stores, lending libraries and technical research
facilities, special production markets and newly developed discs. As consumers
become familiar with the Pull Pack(Trademark), the Company intends to sell
directly to the OEMs, who are the original content providers in both the music
and CD ROM industries.
Replacement Market. The Company will target several key distribution
avenues in the replacement market, including mass merchandisers, office supply,
computer, music chains and catalogs. The Company believes that it is important
to sell the Pull Pack(Trademark) in all of the above channels, and not just in
music stores. The Company estimates that approximately 100 million replacement
units are sold per year at an average price of $0.15 per unit, or an aggregate
of $15,000,000.
Computer stores and music retailers sell replacement Jewel Boxes so that
consumers can replace broken packages. Compact Discs distributed in paperboard
sleeves also fuel the replacement market as consumers replace such packaging
with Jewel Boxes. The Company believes that individual retail chains sell
approximately 30,000 replacement packages per month. Chain stores, office supply
stores, computer chains, mail order companies and music stores all sell
replacement Jewel Boxes, usually in packs of three, five or ten.
CD Rom Market. CD ROMs are frequently housed in Jewel Box packaging. CD
ROM volume in the United States is estimated to have reached 278 million units
in 1995. Computer and CD ROM use continues to increase, as consumer retail store
purchases supplement software sold with computers by OEMs.
Industrial Market. Many businesses prepare demonstration or promotional
discs for music, software, and product promotion, including such retailer
catalogs as L.L. Bean, Williams-Sonoma and Tiffany. Although those Compact Discs
or CD ROMs which are distributed free of charge are not included in statistical
data bases, the Company estimates that approximately 20 million of these units
were distributed in the year ended December 31, 1997. Consequently, the Company
believes that the market available for the Pull Pack(Trademark) is statistically
understated.
Special Production Market. Special packaging is frequently created to meet
the demands of major recording artists or provide a uniquely distinctive package
for special promotions. Such packaging is assembled by hand because automated
insertion machines cannot accommodate non-standard packaging. The Company
believes it has the ability to provide such packaging at reasonable costs. The
Company estimates that approximately five to ten million units are packaged in
this manner each year.
Newly Developed Discs. The Company believes that new disc formats that
have recently reached the market or are expected to do so in the near future
will also expand market opportunities. These formats include the Photo Compact
Disc and the DVD, both of which can be packaged using a variation of the Pull
Pack(Trademark) concept. DVDs are the same size as the compact discs now in use,
but will be sold in packages two inches larger than a Jewel Box to fit into
current retail video racks. The Company believes that the laser packaging may
provide an opportunity for the Pull Pack(Trademark) to become the package of
choice. Other entertainment formats--Digital Compact Cassettes and Digital Audio
Tape--are also available and can be packaged using a variation of the Pull
Pack(Trademark) concept.
OEM Market. The OEM market is the largest user of Compact Disc packaging.
The Company estimates that OEMs used approximately one billion units in the
United States for the year ended December 31, 1997. Once the Pull
Pack(Trademark) has become visible in the replacement market, the Company
believes that it is likely to be requested by consumers for new title releases.
The Company will attempt to capitalize on this demand by marketing directly to
the OEM market. The six major OEMs for music are: Warner/Elektra/Atlantic, Sony,
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PolyGram, Capitol/EMI, MCA and BMG. These OEMs generally have their Jewel Boxes
manufactured by outside sources. Jewel Boxes are delivered partially assembled,
and the OEM uses automated equipment to insert the Discs and graphic components
and to shrink wrap the packages. If sales volume in the OEM market exceeds the
Company's ability to increase production, the Company will consider licensing
the right to produce the Pull Pack(Trademark) to the OEM or its supplier.
The Company also plans, although with no assurance, to introduce a more
durable version of the Pull Pack(Trademark) which will utilize the same tooling
as the standard Pull Pack(Trademark), but will be made out of a tough, clear
plastic called zylar. These zylar packages will be marketed to rental and
institutional markets such as video stores, lending libraries and technical
research facilities, so that the Company will have access to different market
segments simply by substituting one raw material for another.
COMPETITION
Knob and Assembly Manufacturing/Injection Molding
The Company believes that its segment of the plastic injection molding
industry is highly fragmented and that no one participant is dominant in the
industry. The Company believes that the most important competitive factor in
this industry is investment in tooling, as the high cost of tooling relative to
the low revenue of individual products is a barrier to entry in this market. The
Company currently owns approximately 1,500 tools, which gives it the ability to
manufacture over 10,000 products and assemblies. Other key competitive factors
in this industry include quality of products, depth of industry knowledge, a
sizable customer base, ability to provide products on a timely basis, level of
experience, breadth of products and services offered, responsiveness to customer
requests and ability to produce a wide variety of projects in a timely manner
and at a competitive price.
The Company believes that its main competitors in the control knobs and
components segment of the injection molding industry are the following: Rogan
Corporation, which produces instrument and consumer knobs; Philips Plastic
Manufacturing Corporation, which produces consumer knobs; Davies Molding
Company, which produces instrument knobs; and Aerospace Knob Company, which
produces military avionic knobs. With its range of consumer, instrument and
military knobs, EHC strives to provide the broadest and most extensive line of
knobs and assemblies in order to maintain an advantage over its competitors.
Pull Pack(Trademark)
The Company believes that the primary competition for the Pull
Pack(Trademark) is the current Jewel Box manufactured by Atlanta Precision
Molding, Auriga and International Packaging Corp. Other companies have developed
alternative Compact Disc packaging, but the Company believes that none have
proved to be a challenge at this time because production costs are prohibitive
or the designs have not been accepted by the general public or OEMs. Three of
these packages are the Laserfile, from Laserfile Inc., the Utmost Rotary CD
Case, from Co-Joint Corp. and the Alpha Pak, from Alpha Enterprise, Inc.
SUPPLIERS AND RAW MATERIALS
EHC's principal raw materials consist of Lexan (polycarbonate), nylon, ABS
and polypropylene. Such materials are generally available commodities sold to
the injection molding industry by a variety of suppliers. Although the Company
has purchase orders with eight suppliers in China, the Company does not have any
oral or written contracts or agreements with any suppliers. While a shortage of
a particular supplier would not affect the Company, a general shortage of raw
materials could adversely impact the Company. The Company has never experienced
a shortage in raw materials and does not anticipate any shortages to occur in
the reasonably foreseeable future, however, there can be no assurance that there
will not be a shortage of raw materials. See "Risk Factors--Dependence Upon
Suppliers and Raw Materials."
If and when the Company begins to contract for the manufacturing of
products in China, including the Pull Pack(Trademark), the Chinese manufacturers
will arrange for all raw materials from local suppliers. While the Company
believes that there will be no shortage of such materials overseas and that
prices will remain comparatively low, there can be no assurance that no
shortages will occur. In addition, the Company is subject to the risk of
political or economic dislocation in China which could affect the availability
or cost of raw materials. The Company
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<PAGE>
anticipates that the raw materials used for the Pull Pack(Trademark) will
consist of either crystal styrene, general purpose styrene, polypropylene or
zylar.
DISTRIBUTION METHODS
EHC sells its products solely to industrial customers either directly or
through major distributors. EHC never sells directly to retail consumers.
Approximately 20% of EHC's products are principally sold through the following
distributors: Newark Electronics, Allied Electronics, Inc., Bisco Industries,
Inc., Alatec Electronics, Inc. and Peerless Electronics, Inc. The Company does
not have oral or written contracts or agreements with such distributors.
GOVERNMENT APPROVAL
The Company is subject to certain regulations in connection with its sale
of products to the U.S. Military. In order to sell many of its products to the
U.S. Military, a product must be listed on one of the Qualified Product Lists
("QPL"). Certain of the Company's products have been approved for inclusion on
QPLs, so that they may be sold to the U.S. Military. The Company's products have
been listed on the QPLs each year since 1970. Should the Company lose such QPL
approval, it would lose its ability to sell products to the U.S. Military.
Expansion into foreign markets may require the Company to comply with additional
regulatory requirements. Various countries may regulate the import of the
Company's products. Any such export or import restrictions, new legislation or
regulation or government enforcement of existing regulations could have a
material adverse effect on the Company's business, operating results and
financial condition. There can be no assurance that the Company will be able to
comply with additional applicable laws and regulations without excessive cost or
business interruption and failure to comply could have a material adverse effect
on the Company. See "Risk Factors--Government Regulation of Technology."
RESEARCH AND DEVELOPMENT
The Company believes that its commitment to research and development has
distinguished the Company among its competitors. The Company estimates that it
may spend approximately $225,000 on research and development in 1998, including
expenditures on new knob designs, Pull Pack(Trademark) development, computer
aided design technology and engineering feasibility studies on potential new
product lines. The Company, through EHC, spent approximately $150,000 in 1997 on
both new tooling for new knob designs and product development, and $75,000 in
1996 on new tooling for new knob designs. The Company, through CDP, has spent
approximately $46,000 for research and development on the Pull Pack(Trademark)
since 1995. The Company has secured various federal government and New York
State monies for product development, including a $150,000 federal
assistance/match funds grant. The Company's customers do not bear research and
development costs, as all research and development is funded solely by the
Company, some of which is through federal or state funding.
PATENTS, TRADEMARKS, LICENSES AND ROYALTY RIGHTS
The Company, through CDP, a wholly-owned subsidiary, entered into a minimum
five-year license agreement dated as of March 1, 1998 with Inch, Inc., to obtain
the exclusive worldwide licensing rights to make, use, sell and sublicense the
Pull Pack(Trademark). In consideration of the exclusive license, the Company
agreed to pay Inch, Inc. royalties of (i) 2% of the annual gross sales of Pull
Pack(Trademark) less any returns, credits and allowances; (ii) 25% of any
royalties or fees from sublicensees payable within 30 days of receipt; and
(iii) a $30,000 reimbursement payment for expenses incurred in obtaining a
patent. The Company is entitled to exclusive license rights of Pull
Pack(Trademark) for a minimum of five years and a maximum of the United States
life of the patent, which expires in 2012. If royalties paid to Inch, Inc. do
not equal or exceed a minimum total of $30,000 from February 1, 1999 to
February 1, 2000, $40,000 for the next 12 month period and $50,000 for each 12
month period thereafter, or if CDP does not obtain a cash capital investment of
$1,000,000 by February 28, 2000, Inch, Inc. shall have the right to terminate
the exclusive license agreement upon 30 days' notice. The Company intends to
obtain the $1,000,000 necessary for the cash capital investment through the
proceeds of this Offering. In the event that the exclusive license is
terminated, CDP shall continue to hold a non-exclusive license at the above
referenced royalty rate. Inch, Inc. has also agreed to provide consulting
services to CDP at the rate of $50 per hour prior to the sale of 10,000 units
and $110 per hour after the sale of 10,000 units. CDP has agreed to
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<PAGE>
indemnify and hold harmless Inch, Inc. against all damages and liabilities
arising out of the manufacture of the Pull Pack(Trademark).
In 1995, Pull Pack(Trademark) was issued Patent No. 5,383,544, which
expires in January 2012. On June 16, 1998, EHC was issued Patent No. 5,765,449,
which expires on June 16, 2015. EHC has submitted a patent application on a
tactile detent knob. However, there can be no assurance that such patent will
issue.
The Company may apply for additional patents relating to other aspects of
its production. There can be no assurance as to the degree of protection which
existing or future patents, if any, may afford the Company, or that competitors
will not develop similar or superior methods or products outside the protection
of any patent issued to the Company. See "Risk Factors--Risks Relating to
Licensing Agreements" and "Risk Factors--Uncertainty Regarding Patents and
Proprietary Information."
EMPLOYEES
As of July 1, 1998, the Company had a total of 81 employees. 13 of these
employees work on a part-time basis. 38 of the Company's employees are
represented in collective bargaining agreements by Local 531, International
Brotherhood of Teamsters, AFL-CIO. 15 employees work in Sales and Administration
while 66 employees are factory workers.
The Company believes it has a satisfactory relationship with its unionized
labor and has never experienced a work stoppage. The current collective
bargaining agreement was amended by means of a Memorandum of Agreement dated as
of May 10, 1998 and was extended until May 9, 2001. Union employees are covered
by the Sick & Welfare Fund, Local 531, to which the Company contributes a
specified amount each year.
PROPERTY
The Company operates from an approximately 20,000 square foot facility
located in Farmingdale, New York. The facility is owned and operated by K&G
Realty Associates, a partnership owned by David L. Kassel, the Company's
Chairman, and Harry Goodman, the Company's Vice President. The mortgage on the
facility is guaranteed by EHC. The Company's lease, currently under a 10-year
extension, expires in December 2005. The annual rent is currently $138,000 per
year, and provides for annual adjustments equal to the greater of the increase
in the Consumer Price Index or 5%. Pursuant to a rider to the lease agreement
dated as of March 1, 1998, EHC shall pay as additional rent, any and all real
property taxes for the demised premises in excess of $26,000 per annum. In 1998,
the real estate taxes were approximately $32,000. The Company believes that the
property is suitable for its presently foreseen use. See "Certain Transactions."
LEGAL PROCEEDINGS
The Company is not aware of any legal proceedings to which it is a party.
Additionally, the Company is not aware of any legal proceedings contemplated by
government authorities.
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<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information concerning the executive
officers, directors and significant employees of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Andrew Franzone...................................... 61 Chief Executive Officer and President, Director
David L. Kassel...................................... 63 Chairman of the Board of Directors
Harry Goodman........................................ 72 Vice President and Secretary, Director
Steven Sgammato...................................... 39 Chief Financial Officer
Frank Pellegrino..................................... 52 Vice President of Engineering
Bao-Wen Chen......................................... 30 Director
Carl Seldin Koerner.................................. 49 Director
Mitchell Solomon..................................... 39 Director
</TABLE>
Andrew Franzone has served as President of EHC since 1987. Mr. Franzone has
also served as president of AFC since 1984. Mr. Franzone served as Chairman of
the Board of Directors and President of Ackerman Bodnar Corp., a manufacturer of
interior aircraft lighting, from 1974 through 1983. See "Certain Transactions."
David L. Kassel founded EHC in 1970. Mr. Kassel has served as Chairman of
EHC since 1975 and President of CDP since 1995. From 1983 until 1995, he was
Chairman of the Board of Directors of American Safety Closure Corp., a company
engaged in the manufacturing of bottle caps. Mr. Kassel has been the Chairman
and principal stockholder of AFC since 1984. Mr. Kassel has been the Chairman of
Memory Protection Devices, Inc., a company engaged in the manufacturing of
devices for the protection of computer memory, since 1987. Mr. Kassel has been a
partner in K&G Realty Associates, a privately-held real estate company, since
1978. See "Certain Transactions."
Harry Goodman served as Vice President of EHC since 1986. Mr. Goodman
served as President of EHC from 1976 to 1986 and began working as an officer of
EHC in 1970. Mr. Goodman has been a partner at K&G Realty Associates since 1978.
Mr. Goodman has served as an officer of AFC since 1984. Mr. Goodman has served
as an officer of Memory Protection Devices, Inc. since 1987. See "Certain
Transactions."
Steven Sgammato has served as Chief Financial Officer of EHC since 1987.
Mr. Sgammato served as a manager in accounting for Gimbel's Corp. from 1982 to
1986, and a manager in accounting of Conran's Habitat from 1986 to 1987.
Mr. Sgammato earned an MBA in Management from Dowling College, located in
Oakdale, New York, in 1997.
Frank Pellegrino has served as the Vice President of Engineering of EHC
since 1974.
Bao-Wen Chen joined the Company in 1998 as a director. Ms. Chen currently
serves as the president of B.C. China Business Consulting, Inc., a partner of
China Trade Limited and Secretary General of the U.S.-China Economics and Trade
Promotion Council. In 1995, Ms. Chen formed B.C. China Business Consulting,
Inc., a provider of advisory and consulting services to clients engaging in
transactions between U.S. and Chinese companies, and currently serves as its
president. In January 1998, Ms. Chen became a partner of China Trade Limited, a
company comprised of U.S. businessmen, international attorneys and U.S. resident
Chinese nationals formed to assist clients in representation and trade, sales
and distribution and strategic service in transactions between U.S. and Chinese
companies. Since 1992, Ms. Chen has served as General Secretary of the
U.S.-China Economics and Trade Promotion Council, a non-profit government trade
organization providing a forum to promote economic exchange and trade between
Chinese and U.S. companies. See "Certain Transactions."
Carl Seldin Koerner, Esq. joined the Company in 1998 as a director.
Mr. Koerner has been a practicing attorney since 1976 and is a managing partner
in the law firm of Koerner Silberberg & Weiner, LLP. Mr. Koerner established
Koerner Silberberg & Weiner, LLP, in 1986 and has served as counsel to the
Company since 1976. Mr. Koerner has served as a principal of Koerner Kronenfeld
Partners, LLC, a conceptual capital development company, since 1996 and has
served on the board of directors of ASI Solutions Incorporated (NASDAQ: ASIS), a
human resources outsourcing firm, since 1997. See "Certain Transactions" and
"Legal Matters."
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<PAGE>
Mitchell Solomon joined the Company in 1998 as a director. Mr. Solomon has
served as President and director of Eby Electro Inc., a privately held
corporation, since 1993 and serves as President and director of Aspro Technology
Inc. and ECAM Technology Inc., both privately held corporations.
BOARD COMMITTEES
The Board of Directors of the Company has established a compensation
committee (the "Compensation Committee") and an audit committee (the "Audit
Committee"). The Compensation Committee, which will consist of David L. Kassel
and two directors, Carl Seldin Koerner and Mitchell Solomon, determines the
salaries and bonuses of the Company's executive officers. The Compensation
Committee also administers the Company's 1998 Stock Option and Grant Plan.
Mr. Kassel, Mr. Koerner and Mr. Solomon will serve as members of the Audit
Committee. The Audit Committee recommends the appointment of auditors and
oversees the accounting and audit functions of the Company.
DIRECTOR COMPENSATION
Directors receive a fee of $300 per month for serving on the Board of
Directors and reimbursement of reasonable expenses incurred in attending
meetings. All directors hold office until the next annual meeting of the
stockholders and the election and qualification of their successors. Executive
officers are elected by the Board of Directors annually and serve at the
discretion of the Board.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid or accrued by the
Company to the Company's Chief Executive Officer and the Company's other
executive officer whose compensation exceeded $100,000 for the fiscal year ended
December 27, 1997. No other officer received cash compensation in excess of
$100,000 in 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
FOR YEAR ENDED
DECEMBER 27, 1997
-------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION
- --------------------------- ----------- ----- ------------
<S> <C> <C> <C>
Andrew Franzone
Chief Executive Officer and President..................................... $ 96,585 $ 0 $ 7,800
David L. Kassel
Chairman of the Board..................................................... $ 226,588(1) $ 0 $ 10,400
</TABLE>
- ------------------
(1) Includes $150,000 in consideration for consulting services provided by
Mr. Kassel to the Company, which payment was postponed in exchange for the
issuance to Mr. Kassel of a promissory note bearing interest at a rate equal
to 6% per annum due January 1, 1999 which was subsequently amended on
December 8, 1998 extending the maturity date to not later than 30 days after
the Effective Date. See "Certain Transactions."
EMPLOYMENT AGREEMENTS
The Company entered into executive employment agreements as of March 15,
1998 with Andrew Franzone, David L. Kassel and Harry Goodman, each an
"Executive." The term of each of the employment agreements lasts until March 2,
2008 (the "Term"). The annual base salaries of Messrs. Franzone, Kassel and
Goodman under their employment agreements are $125,000, $100,000 and $100,000,
respectively, with annual salary adjustments equal to the greater of 5% or an
increase equal to the Consumer Price Index. Each Executive is entitled to fringe
benefits and an annual bonus to be determined by the Compensation Committee of
the Board of Directors. Each Executive can be terminated for cause (as defined
in the employment agreements) with all future compensation ceasing. If the
Executive dies during the Term or is unable to competently and continuously
perform the duties assigned to him because of ill health or other disability (as
defined in the employment agreements), the Executive or the Executive's estate
or beneficiaries shall be entitled to full compensation for three years
following the date thereof. If the Executive is terminated without cause, the
Executive shall be
35
<PAGE>
entitled to full compensation for the remainder of the Term. If the Executive
resigns, his compensation ceases as of the date of his resignation. During the
period of employment and for a period of two years thereafter, the Executives
are prohibited from competing with the Company; provided, however, that the
Executives may provide services to other noncompeting businesses. In order for a
restrictive covenant to be enforceable under applicable state law, the covenant
must be limited in terms of scope and duration. While the Company believes that
the covenants in the employment contracts are enforceable, there can be no
assurance that a court will declare them to be enforceable under particular
circumstances.
CASH GAIN SHARING PROGRAM
EHC has a Cash Gain Sharing Program (the "Program"), which entitles all
full-time, non-union employees (including supervisory union employees) and other
key EHC employees (excluding officers), as determined by the Company, to extra
compensation based on the cash profits of EHC. The distributions are based on a
schedule of Company objectives determined each year by the Company. If positive
cash flow averages less than $2,000 per week in a quarter, the Company will not
make any distributions. The Company considers a full-time employee to work at
least 30 hours per week. Employees must complete a 90-day probationary period
before they are eligible to participate in the Program. For the year ended
December 27, 1997, the Company distributed $87,000 pursuant to the Program.
STOCK OPTION AND GRANT PLAN
The Stock Option and Grant Plan (the "Grant Plan") was adopted by the
Company's Board of Directors as of March 17, 1998 and approved by its
stockholders as of March 17, 1998. Officers, directors, employees, consultants
and key persons of the Company are eligible to participate in the Grant Plan.
The Grant Plan is designed to provide employees and such other individuals with
a performance incentive, a direct stake in the Company's future welfare and an
incentive to remain with the Company. The Company believes that the Grant Plan
will encourage qualified persons to seek employment with the Company.
The Grant Plan provides for grants of an aggregate of 300,000 shares of
Common Stock or options to purchase shares of Common Stock intended to qualify
as incentive stock options ("Incentive Options"), under Section 422 of the Code
as well as options that do not so qualify ("Non-Qualified Options"). The
Incentive Options shall be granted only to employees or employee-directors of
the Company. Such Incentive Options shall be exercisable for shares of Common
Stock at an exercise price no less than the fair market value of the shares of
Common Stock on the date of grant and are not exercisable after the tenth
anniversary of the date of grant. Notwithstanding the foregoing, pursuant to
Section 422 of the Code, optionees who beneficially own in excess of 10% of the
Company's voting stock are not entitled to receive Incentive Options unless the
exercise price of such options is no less than 110% of the fair market value of
the Common Stock on the date of grant and such options are not exercisable more
than five years from the date of grant. Additionally, to the extent that the
aggregate fair market value of the Common Stock with respect to which the
Incentive Options are exercisable for the first time during any calendar year
exceeds $100,000, the options attributable to the excess over $100,000 shall be
treated as Nonqualified Options under the Code. Non-Qualified Options shall be
exercisable for shares of Common Stock at an exercise price of no less than 85%
of the fair market value of the Common Stock on the date of grant and are not
exercisable after the tenth anniversary of the date of grant.
The Grant Plan provides that it will be administered by the Compensation
Committee. The Compensation Committee determines which officers, directors,
employees, consultants and key persons shall receive shares or options, whether
the individual shall receive shares or options and if options, the terms and
conditions of the options, including the exercise price of each option, the term
of each option, the number of shares of Common Stock to be covered by each
option and any performance objectives or vesting standards applicable to each
option. Subject to the requirements of the Code, the Compensation Committee will
also designate whether the options granted shall be Incentive Options or
Non-Qualified Options. Pursuant to an agreement between the Company and the
Underwriter, no grants of options or shares which are not covered under the
Grant Plan can be made for 24 months after the Effective Date, without the
approval of the Underwriter. The Company intends to register all or a portion of
the shares under the Grant Plan with the Securities and Exchange Commission
within three months after the Offering. See "Underwriting."
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<PAGE>
401(K) PLAN
The Company sponsors, through EHC and an affiliated company, AFC, a
401(k) Plan (the "Plan") available for all non-union employees and union
supervisors who have attained the age of 21 and have completed three months of
service with the Company. The Plan was adopted effective August 1, 1993 and was
amended effective August 1, 1997. Under the Plan's qualified cash or deferred
arrangement, a participant may, under an arrangement with the Company, elect to
contribute 1% to 15% of his or her annual compensation to the Plan on behalf of
the participant, in lieu of the participant's current receipt of such
compensation. In addition to the employee's contribution, the Company may, but
need not, make discretionary contributions to the Plan in such amounts as it
determines. As of the date of this Prospectus, the Company has not contributed
to the Plan. A participant's contributions made under the qualified cash or
deferred arrangement are 100% vested at all times. Discretionary contributions
become vested thereafter at the rate of 20% for each additional full year of
service, until 100% vested. Benefits are payable upon a participant's
termination of employment for any reason, in the form of one lump sum payment or
in installments extending over a fixed period of years, depending upon the
employee's election.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of the Effective Date and as
adjusted to reflect the sale of 1,250,000 shares of Common Stock by the Company,
with respect to the beneficial ownership of shares of Common Stock by (i) each
person or a group of persons known by the Company to be the owner of more than
5% of the outstanding shares of Common Stock, (ii) each director, (iii) each
executive officer named in the Summary Compensation Table under the caption
"Management," and (iv) all officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF OUTSTANDING
AMOUNT AND SHARES OWNED
NATURE OF -------------------------
BENEFICIAL PRIOR TO AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNERSHIP(2) OFFERING OFFERING(3)
- --------------------------------------- ------------ -------- -----------
<S> <C> <C> <C>
David L. Kassel........................................................... 900,000 46.3% 28.2%
Andrew Franzone........................................................... 500,000 25.7% 15.6%
Harry Goodman............................................................. 500,000 25.7% 15.6%
All Directors and Officers as a Group..................................... 1,900,000 97.7% 59.5%
</TABLE>
- ------------------
(1) Unless otherwise indicated, the address of each individual is c/o the
Company, 320 Broad Hollow Road, Farmingdale, New York 11735.
(2) For purposes of the above table, a person or group of persons is deemed to
have "beneficial ownership" of any shares that such person or group has the
right to acquire within 60 days after such date; and for purposes of
computing the percentage of outstanding shares held by each person or group
on a given date, such shares are deemed to be outstanding, but are not
deemed to be outstanding for the purpose of computing the percentage
ownership of any other person.
Beneficial ownership is determined in accordance with Rule 13d-3 under the
Exchange Act and is generally determined by voting power or investment power
with respect to securities. Except as indicated by footnote, and subject to
community property laws where applicable, the Company believes that the
persons named in the table above have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
(3) Does not include (i) 1,250,000 shares of Common Stock reserved for issuance
upon exercise of the Warrants; (ii) 187,500 shares of Common Stock reserved
for issuance upon exercise of the Underwriter's over-allotment option;
(iii) 187,500 shares of Common Stock issuable upon exercise of the Warrants
underlying the Underwriter's over-allotment option; (iv) 125,000 shares of
Common Stock reserved for issuance upon exercise of the Underwriter's
Warrants; (v) 125,000 shares of Common Stock issuable upon exercise of the
Warrants underlying the Underwriter's Warrants and (vi) 300,000 shares of
Common Stock or options which may be granted pursuant to the Company's Stock
Option and Grant Plan.
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<PAGE>
CERTAIN TRANSACTIONS
REORGANIZATION
The Company was founded in 1970 as EHC, a New York corporation, and was
reorganized as a Delaware holding company with two wholly-owned subsidiaries,
EHC and CDP, as of December 24, 1998. The Company changed its name from
International Plastic Technologies, Inc. to International Smart Sourcing, Inc.
on December 7, 1998. As part of the Reorganization, the Company acquired, solely
in exchange for 1,945,000 shares of Common Stock of the Company, all of the
outstanding capital stock of EHC (three shares) and CDP (500 shares). The value
and number of the Company's Common Stock issued to former holders of the
outstanding capital stock of CDP and EHC was determined by negotiations between
the Company and Andrew Franzone, David L. Kassel, Harry Goodman, Robert Gillings
and David Cowan. Mr. Gillings subsequently transferred his shares of CDP to
David L. Kassel in an arms'-length transaction effected on May 29, 1998 in
return for a nonrecourse promissory note (the "Note") from Mr. Kassel in favor
of Mr. Gillings in the principal amount of $450,000 bearing interest at the rate
of 6% per annum, payable in full on August 1, 2000 (the "Maturity Date") or
earlier as provided in the Note. None of the principal amount of the Note has
been paid to date and no principal or interest payments are due before the
Maturity Date. Mr. Gillings will not have any voting rights with respect to the
transferred shares prior to the Maturity Date. However, in the event that
Mr. Kassel defaults on the Note by failing to fully pay the principal and
interest due within 30 days after the Maturity Date, Mr. Gillings retains the
right to demand return of the shares and either hold such shares, in which case
he will retain all voting rights thereto, or to sell such shares in a public or
private sale in accordance with all applicable rules and regulations under the
Securities Act.
The Reorganization exchange is an arm's-length transaction acceptable to
each of the parties based upon the above-referenced negotiations. The amount of
shares issued is based on a ratio of shares held in CDP and EHC to a percentage
of shares of the Company.
LEASES
EHC leases its facility in Farmingdale, New York from K&G Realty Associates
("K&G"), a partnership owned by David L. Kassel and Harry Goodman, both officers
and directors of the Company. The lease agreement has been extended until
December 31, 2005. The annual rent is currently $138,000, with increases equal
to the greater of the increase in the Consumer Price Index or 5%. Pursuant to a
rider of the lease agreement dated as of March 1, 1998, EHC shall pay as
additional rent, any and all real property taxes for the demised premises in
excess of $26,000 per annum. In 1998, the real estate taxes were approximately
$32,000. The mortgage agreement between Long Island Commercial Bank and K&G
dated November 28, 1995 is a 15 year self-liquidating adjustable mortgage
currently bearing 9 1/2% interest in the original principal amount of $610,000.
The mortgage is guaranteed by EHC. By agreement dated November 28, 1995, K&G has
assigned all rents due from EHC to the Long Island Commercial Bank. The Company
believes that the terms and consideration of this lease are no less favorable to
the Company than a lease from a third party. See "Certain Transactions."
CREDIT FACILITIES
On July 29, 1996, EHC entered into a term loan agreement (the "Term Loan")
with Republic National Bank of New York for the principal amount of $500,000, of
which $300,000 remains outstanding as of September 26, 1998. The Term Loan bears
interest at 1% above the annual interest rate established by Republic National
Bank as its reference rate for domestic commercial loans and is payable in 11
quarterly installments, commencing on October 31, 1996 with a final payment of
the remaining balance due and payable on July 31, 1999. EHC may prepay the loan
without penalty. The Term Loan is guaranteed by David L. Kassel, Harry Goodman,
Andrew Franzone and AFC, an affiliate of the Company. The guarantee provisions
which are part of the Term Loan provide that upon any default under the Term
Loan, the bank may immediately cause the related note to be due and payable by
the guarantors. See "Certain Transactions."
On July 29, 1996, EHC entered into a demand loan agreement (the "Demand
Loan") with Republic National Bank for the principal amount of $1,000,000, of
which $973,000 remains outstanding as of September 26, 1998. The Demand Loan
bears interest at 1/2% above the interest rate established by Republic National
Bank.
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<PAGE>
EHC entered into a loan agreement (the "Loan" and together with the Term
Loan and Demand Loan, the "Indebtedness") with Long Island Development
Corporation ("LIDC") for the principal amount of $250,000 on February 21, 1997,
of which $221,067 remains outstanding as of September 26, 1998, and granted LIDC
a security interest in all of its personal property. The Loan is payable in 120
monthly installments with interest at 7% per annum, commencing on March 1, 1997
and continuing until February 1, 2007. The loan is guaranteed by AFC, Andrew
Franzone, David L. Kassel and Harry Goodman. The guarantors jointly and
severally represent and agree to identical provisions of the Loan as EHC,
including guarantee provisions which provide that in the event of default of the
Loan, the bank may declare the related promissory note due and payable.
Additionally, AFC guaranteed a security agreement between EHC and LIDC relating
to the Loan. Under the security agreement, both EHC and AFC grant and convey a
security interest in all of their property, goods and chattels and promise to
retain possession of their collateral, keep collateral in its location, in good
repair and fully insured and defend title of the collateral. Upon any default of
the Loan, the obligations of the security agreement become immediately due and
payable by sale of the collateral of EHC and AFC.
The Company has received a letter agreement from Republic National Bank of
New York stating that it will release the personal guarantees of Messrs.
Franzone, Kassel and Goodman under the Term Loan upon the successful completion
of the Offering. LIDC has stated that it will not release the personal
guarantees of Messrs. Franzone, Kassel and Goodman under the Loan.
OFFICER LOANS
Messrs. Kassel and Goodman have advanced funds to the Company for working
capital. The loans advanced by Mr. Kassel are represented by the following five
notes: (i) a promissory note, dated September 13, 1994, from EHC in favor of
David Kassel Defined Benefit for the principal amount of $125,000, bearing
interest at a rate of 10% per annum, payable in monthly installments of
approximately $2,656 per month, and maturing on September 13, 1999, (ii) a
promissory note, dated August 1, 1996, from EHC in favor of Kassel MGT Defined
Benefit for the principal amount of $219,483, bearing interest at a rate of 10%
per annum, payable in 60 monthly installments of approximately $4,633 per month,
(iii) a promissory note, dated December 31, 1997, from EHC in favor of
Mr. Kassel for the principal amount of $150,000, bearing interest at a rate of
6% per annum and maturing on January 1, 1999 (the "$150,000 Note"), (iv) a
promissory note, dated January 1, 1998, from CDP in favor of Mr. Kassel for the
principal amount of $107,500, bearing interest at a rate of 10% per annum and
maturing on January 1, 1999 (the "$107,500 Note") and (v) a demand negotiable
promissory note, dated October 27, 1998, from EHC in favor of Mr. Kassel for the
principal amount of $25,000 bearing interest at 10% per annum, payable in
monthly installments of $208.34 and maturing upon demand. The Company will pay
the principal amount and accrued interest of the $150,000 Note with the proceeds
of this Offering. The Company has guaranteed the repayment of the $107,500 Note.
The Company has entered into agreements with Mr. Kassel, dated December 8, 1998,
whereby the Company shall be required to pay the principal amount and accrued
interest of the $150,000 Note and the $107,500 Note within 30 days after the
Effective Date. See "Risk Factors--Offering Proceeds to Benefit Officers,
Directors and Principal Stockholders," "Use of Proceeds" and "Certain
Transactions."
The loans advanced by Mr. Goodman are represented by the following four
notes: (i) a demand negotiable promissory note, dated September 1, 1994, from
EHC in favor of Mr. Goodman for the principal amount of $125,000, bearing
interest at a rate of 10% per annum and payable over five years, (ii) a demand
negotiable promissory note, dated August 1, 1996, from EHC in favor of Mr.
Goodman, for the principal amount of $175,000 bearing interest at a rate of 10%
per annum and payable over five years, (iii) a demand negotiable promissory
note, dated October 22, 1998, from EHC in favor of Mr. Goodman for the principal
amount of $25,000, bearing interest at a rate of 10% per annum, payable in
interest-only installments of $208.34 per month and maturing upon demand and
(iv) a demand negotiable promissory note, dated December 7, 1998, from EHC in
favor of Mr. Goodman for the principal amount of $50,000, bearing interest at a
rate of 10% per annum, payable in interest-only installments of $416.67 per
month and maturing upon demand. See "Certain Transactions."
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AFFILIATED TRANSACTIONS
EHC is a guarantor of two loan agreements between AFC, an affiliate of the
Company, and Republic National Bank for the aggregate principal amount of
$1,000,000, of which $757,000 has been borrowed and remains outstanding as of
September 26, 1998. Each of the directors of EHC are also stockholders,
directors and officers of AFC, a New York corporation incorporated in 1985. The
Vice President and General Manager of AFC, Andrew Franzone, Jr., is the son of
the President and Chief Executive Officer of the Company. Additionally, EHC and
AFC have entered into an engineering consulting and services agreement on a
fee-for-services basis. Under such agreement, (a) EHC will have the exclusive
right to manufacture or contract for the manufacturing of certain AFC products
on a time and materials basis, and (b) EHC will not develop products in the
following lines other than for AFC: (i) point of sale display items;
(ii) cabinet and furniture plastic hardware; and (iii) endcaps on cylinders or
mailing tubes. The Company believes the terms and consideration of this
agreement are no less favorable to the Company than agreements with similar
unrelated third party companies.
The Company recorded sales to AFC in the approximate amount of $763,000 for
the nine months ended September 26, 1998. The Company's net profits on such
sales was $200,000. The Company realized a gross profit margin of 33% on such
sales, compared with an overall gross profit margin of 35% for the same period.
EHC recorded sales to AFC in the approximate amounts of $151,000 for the
nine months ended September 26, 1998 and $296,000 for the nine months ended
September 27, 1997. The Company's net profit on such sales was $19,000 for the
nine months ended September 26, 1998 and $63,000 for the nine months ended
September 27, 1997. EHC realized an overall gross profit margin of 35% for the
nine months ended September 26, 1998 and 31% for the nine months ended
September 27, 1997, compared with a gross profit margin for AFC products of 18%
for the nine months ended September 26, 1998 and 25% for the nine months ended
September 27, 1997. EHC recorded sales to AFC in the approximate amounts of
$371,000 for the year ended December 27, 1997 and $320,000 for the year ended
December 28, 1996. EHC's net profit on such sales was $30,000 for the year ended
December 27, 1997 and $20,000 for the year ended December 28, 1996. EHC realized
an overall gross profit margin of 37% for the year ended December 27, 1997 and
32% for the year ended December 28, 1996, compared with a gross profit margin
for AFC products of 16% for the year ended December 27, 1997 and 13% for the
year ended December 28, 1996. The products sold to AFC during these periods
consisted of custom molded products, which do not require any secondary
operations such as machining, painting, printing and finishing. As a result,
manufacturing operations for such products are reduced or eliminated and the
Company earns a lower gross profit margin.
Ms. Bao-Wen Chen, a director of the Company, also provides consulting
services to the Company on behalf of her company, B.C. China Business
Consulting, Inc. ("BCI"), in connection with the Company's manufacturing in
China. The agreement between the Company and BCI provides that BCI will provide
such consulting services until March 1, 2008 at the minimum hourly rate of $50
per hour and an amount equivalent to 1.5% of the net cost of products
manufactured in China up to $5,000,000 per year and 1% of net costs exceeding
$5,000,000. In consideration for her services to the Company, Ms. Chen shall
receive on the Effective Date an aggregate amount of (i) 25,000 shares of
unregistered Common Stock to be issued annually in 5,000 share increments,
commencing on the Effective Date and (ii) 25,000 options granted pursuant to the
Grant Plan, vesting annually in 5,000 option increments, exercisable at $4.50
per share, commencing on the Effective Date and terminating on the tenth
anniversary of the Effective Date. The Company intends to register all or a
portion of the shares under its Stock Option and Grant Plan with the Securities
and Exchange Commission within three months after the Offering. The Company
believes that consulting fees paid to Ms. Chen and grants of Common Stock and
options are no less favorable to the Company than consideration it would pay to
other third party consultants, as the Consultant's consideration was determined
through arms' length transactions between the Consultant and the Company at a
time when the Consultant was not affiliated in any way with the Company. See
"Management--Stock Option and Grant Plan."
Carl Seldin Koerner, a director of the Company, is a managing partner of
the law firm of Koerner Silberberg & Weiner, LLP. Mr. Koerner has been general
counsel to the Company since 1976 and is acting as counsel to the Company in
connection with this Offering. The Company believes that the fees paid to
Koerner Silberberg & Weiner, LLP are comparable to those fees that would have
been paid to an unrelated third party law firm. Mr. Koerner is entitled to
receive a fee of $300 per month and reimbursement of reasonable expenses in
attending meetings in connection with his serving as a member of the Board of
Directors. See "Legal Matters."
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In order to obtain the benefit of better purchasing opportunities, some
goods or services, including insurance, are purchased jointly by one or more of
EHC, AFC, K&G and Memory Protection Devices, Inc. and the cost of such goods or
services are shared by the parties.
All future transactions and loans between the Company and its officers,
directors, affiliates and five percent shareholders will be made or entered into
on terms no less favorable than could be obtained from unaffiliated third
parties and such transactions and loans, including the forgiveness of any loans,
must be approved by a majority of disinterested, independent members of the
board of directors of the Company.
STOCKHOLDERS' AGREEMENT
The Company intends to enter into the Stockholders' Agreement with David
Kassel, Harry Goodman and Andrew Franzone (collectively, the "Stockholders") the
day immediately preceding the Effective Date. Pursuant to the Stockholders'
Agreement, each Stockholder covenants that he will not, directly or indirectly,
sell, transfer, assign, pledge, option, mortgage, hypothecate or otherwise
dispose of or encumber his respective shares of the Company's Common Stock other
than (i) to a permitted transferee, including the Stockholder's estate,
immediate family or trust established for the benefit thereof, and such
transferee agrees to be bound by the Stockholders' Agreement, (ii) pursuant to
an effective registration statement under the Securities Act or (iii) pursuant
to an exemption from registration afforded by the Securities Act. Upon the death
of any Stockholder, the estate of such deceased Stockholder has the right
(i) to cause the Company to redeem 250,000 shares of Common Stock of the
deceased Stockholder for an aggregate of $500,000 only to the extent that the
Company receives proceeds from life insurance policies on the life of such
Stockholder and (ii) to sell a number of shares of Common Stock of the deceased
Stockholder in accordance with Rule 144 promulgated under the Securities Act;
provided, however, that in no event shall the estate of a deceased Stockholder
be permitted to sell more than 25,000 shares of Common Stock of the Stockholder
within any three-month period. Also, the Stockholders have been granted certain
"piggyback" and demand registration rights with respect to their shares of
Common Stock. Notwithstanding, the Stockholders have entered into a letter
agreement with the Company and Underwriter thereby waiving their registration
rights for a two-year period, commencing upon the completion of this Offering.
See "Risk Factors--Dependence on Key Personnel; --Offering Proceeds to Benefit
Officers, Directors and Principal Stockholders; --Shares Eligible for Future
Sale; Registration Rights" and "Description of Securities--Registration Rights."
KEY MAN LIFE INSURANCE
EHC is the beneficiary of a key man life insurance policy on behalf of
Andrew Franzone, the Chief Executive Officer of the Company. In the event of Mr.
Franzone's death or disability the Company will receive $500,000. See "Risk
Factors--Dependence on Key Personnel;" and "--Offering Proceeds to Benefit
Officers, Directors and Principal Stockholders."
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DESCRIPTION OF SECURITIES
The authorized capital stock of the Company upon completion of the Offering
will consist of 10,000,000 shares of Common Stock, of which 3,195,000 shares
will be issued and outstanding, and 1,000,000 shares of undesignated Preferred
Stock issuable in series by the Board of Directors, of which no shares will be
issued and outstanding. The following summary description of the capital stock
of the Company is qualified in its entirety by reference to the Company's
Certificate of Incorporation (the "Certificate") and By-laws (the "By-laws"),
copies of which are filed as exhibits to the Registration Statement of which
this Prospectus is a part. The Certificate and By-laws have been duly adopted by
the stockholders and the Board of Directors of the Company.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders. The holders of Common Stock are not
entitled to cumulative voting rights. Therefore, the holders of a majority of
the shares voted in the election of directors can elect all of the directors
then standing for election, subject to the rights of the holders of Preferred
Stock, if and when issued. The holders of Common Stock have no preemptive or
other subscription rights.
The holders of Common Stock are entitled to receive such dividends, if any,
as may be declared from time to time by the Board of Directors from funds
legally available therefor, with each share of Common Stock sharing equally in
such dividends. The possible issuance of Preferred Stock with a preference over
Common Stock as to dividends could impact the dividend rights of holders of
Common Stock.
There are no redemption provisions with respect to the Common Stock. All
outstanding shares of Common Stock, including the shares offered hereby, are, or
will be upon completion of the Offering, fully paid and non-assessable.
The By-laws provide that the number of directors shall be fixed by the
Board of Directors. Any director of the Company may be removed from office only
for cause by the holders of two-thirds of the outstanding shares of the Company
entitled to vote at an election of directors.
UNDESIGNATED PREFERRED STOCK
The Board of Directors of the Company is authorized, without further action
of the stockholders of the Company, to issue up to 1,000,000 shares of Preferred
Stock in one or more classes or series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, and the
number of shares constituting any series or the designation of such series.
However, pursuant to the Certificate, the holders of Preferred Stock would not
have cumulative voting rights with respect to the election of directors. Any
such Preferred Stock issued by the Company may rank prior to the Common Stock as
to dividend rights, liquidation preference or both, may have full or limited
voting rights and may be convertible into shares of Common Stock.
The purpose of authorizing the Board of Directors to issue Preferred Stock
is, in part, to eliminate delays associated with a stockholder vote on specific
issuances. The issuance of Preferred Stock could adversely affect the voting
power of the holders of Common Stock and could have the effect of delaying,
deferring, or preventing a change in control of the Company.
WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects by
reference to the actual text of the warrant agreement (the "Warrant Agreement")
among the Company, the Underwriter, and Continental Stock Transfer and Trust
Company (the "Warrant Agent"). A copy of the Warrant Agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part. As
of the date hereof, there are no Warrants outstanding. See "Additional
Information."
Exercise Price and Terms. Each Warrant entitles the registered holder
thereof to purchase, at any time over a five year period, commencing one year
after the Effective Date, one share of Common Stock at $5.00 per share, subject
to adjustment in accordance with the anti-dilution provisions and other
provisions referred to below. The holder of any Warrant may exercise such
Warrant by surrendering the certificate representing the Warrant to the Warrant
Agent, with the subscription form thereon properly completed and executed,
together
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with payment of the exercise price. The Warrants may be exercised at any time in
whole or in part at the applicable exercise price until expiration of the
Warrants. No fractional shares will be issued upon the exercise of the Warrants.
The exercise price of the Warrants bears no relationship to any objective
criteria of value and should in no event be regarded as an indication of any
future market price of the securities offered hereby.
Adjustments. The holders of the Warrants are protected against dilution of
their interests by adjustments, as set forth in the Warrant Agreement, of the
exercise price and the number of shares of Common Stock purchasable upon the
exercise of the Warrants upon the occurrence of certain events, including stock
dividends, stock splits, combinations or reclassification of the Common Stock,
or sale by the Company of shares of its Common Stock or other securities
convertible into Common Stock at a price below the then-applicable exercise
price of the Warrants. Additionally, an adjustment would be made in the case of
a reclassification or exchange of Common Stock, consolidation or merger of the
Company with or into another corporation (other than a consolidation or merger
in which the Company is the surviving corporation) or sale of all or
substantially all of the assets of the Company in order to enable warrantholders
to acquire the kind and number of shares of stock or other securities or
property receivable in such event by a holder of the number of shares of Common
Stock that might otherwise have been purchased upon the exercise of the Warrant.
Redemption Provisions. Commencing one year after the date of this
Prospectus, all, but not less than all, of the Warrants are subject to
redemption at $0.10 per Warrant on not less than 30 days' prior written notice
to the holders of the Warrants provided the per share closing price or bid
quotation of the Common Stock as reported on Nasdaq SmallCap or BSE, if traded
thereon, or if not traded thereon, the average closing sale price if listed on a
national or regional securities exchange equals or exceeds 150% of the then
current exercise price (subject to adjustment) for any 20 trading days within a
period of 30 consecutive trading days ending on the 15th day prior to the date
on which the Company gives notice of redemption. The Warrants will be
exercisable until the close of business on the day immediately preceding the
date fixed for redemption in such notice. If any Warrant called for redemption
is not exercised by such time, it will cease to be exercisable and the holder
will be entitled only to the redemption price.
Transfer, Exchange and Exercise. The Warrants are in registered form and
may be presented to the Warrant Agent for transfer, exchange or exercise at any
time commencing one year after the Effective Date and prior to their expiration
date five years from the date of this Prospectus, at which time the Warrants
become wholly void and of no value. If a market for the Warrants develops, the
holder may sell the Warrants instead of exercising them. There can be no
assurance, however, that a market for the Warrants will develop or continue.
The Warrants are not exercisable unless, at the time of the exercise, the
Company has an effective Registration Statement including the shares of Common
Stock issuable upon exercise of the Warrants, and such shares have been
registered, qualified or deemed to be exempt under the securities laws of the
state of residence of the exercising holder of the Warrants. Although the
Company will use its best efforts to have all the shares of Common Stock
issuable upon exercise of the Warrants registered or qualified on or before the
exercise date and to maintain a current prospectus relating thereto until the
expiration of the Warrants, there can be no assurance that it will be able to do
so.
The Warrants are separately transferable immediately upon issuance.
Although the Warrants will not knowingly be sold to purchasers in jurisdictions
in which the Warrants are not registered or otherwise qualified for sale or
exemption, purchasers may buy Warrants in the after-market in, or may move to,
jurisdictions in which Warrants and the Common Stock underlying the Warrants are
not so registered or qualified or exempt. In this event, the Company would be
unable lawfully to issue Common Stock to those persons desiring to exercise
their Warrants (and the Warrants would not be exercisable by those persons)
unless and until the Warrants and the underlying Common Stock are registered, or
qualified for sale in jurisdictions in which such purchasers reside, or any
exemption from registration or qualification exists in such jurisdiction.
Warrantholder Not a Stockholder. The Warrants do not confer upon holders
any voting, dividend or other rights as stockholders of the Company.
Modification of Warrants. The Company and the Warrant Agent may make such
modifications to the Warrants as they deem necessary and desirable that do not
adversely affect the interests of the warrantholders. No modifications may be
made to the Warrants without the consent of two-thirds of the warrantholders.
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UNDERWRITER'S WARRANTS
In connection with the Offering, the Company has agreed to issue to the
Underwriter the Underwriter's Warrants, which consist of up to 125,000 shares of
Common Stock and 125,000 Warrants, initially exercisable at 160% of the Offering
price as of the Effective Date. The Underwriter's Warrants will be exercisable
for a period of four years commencing one year after the closing of the
Offering. The Underwriter is entitled to certain registration rights under the
Securities Act relating to the shares of Common Stock received upon the exercise
of the Underwriter's Warrants. The Underwriter's Warrants may not be sold,
transferred, assigned, pledged or hypothecated during the first year after
issuance, except to the Underwriter and persons who are officers and partners
thereof. The exercise price and the number of shares of Common Stock that may be
purchased are subject to adjustment pursuant to anti-dilution provisions of the
Underwriter's Warrants. See "Underwriting."
REGISTRATION RIGHTS
Pursuant to the Stockholders' Agreement between the Company and Messrs.
Kassel, Goodman and Franzone (the "Selling Stockholders"), holders of an
aggregate of 1,900,000 shares of Common Stock (the "Registrable Shares"), the
Selling Stockholders have certain "piggyback" and demand registration rights. If
the Company at any time proposes to register any shares of Common Stock under
the Securities Act by registration on Form S-1, SB-2 or any successor or similar
form(s), whether or not for sale for its own account (other than registration of
securities in connection with an employee benefit plan, Company stock option or
dividend reinvestment plan or in connection with the acquisition of assets or
shares of or merger or consolidation with another corporation), and the
registration form to be used may also be used for the registration of the
Registrable Shares, the Company shall notify the Selling Stockholders and permit
such stockholders to include their Registrable Shares in such registration
statement. If the registration statement is an underwritten offering, only the
Registrable Shares which are to be distributed by the underwriters may be
included in the registration statement, subject to the managing underwriter's
consent. If the underwriter advises the Company that such inclusion would be
disadvantageous to its underwriting effort, the Company will include in such
registration statement (i) first, the shares of Common Stock of any other
holders of shares of Common Stock or options, warrants or other securities
convertible into Common Stock who are entitled to "piggyback" registration
rights prior to those which the Selling Stockholders propose to register,
allocated among the Company and such stockholders in accordance with any
agreement among the Company and such stockholders; and (ii) second, the
Registrable Shares which the Selling Stockholders propose to register and shares
of Common Stock or options, warrants or other securities convertible into Common
Stock of any other holders who are entitled to "piggyback" registration rights
in proportion to the number of shares of Common Stock which the Selling
Stockholders propose to register.
The Selling Stockholders also have demand registration rights pursuant to
the Stockholders' Agreement. Pursuant to such agreement, at any time subsequent
to this Offering and any time which the Company is not restricted from effecting
a second registration pursuant to any applicable law, any one of the Selling
Stockholders holding an aggregate of 7% of the outstanding shares of Common
Stock may request that the Company effect a registration statement including
such stockholder's Registrable Shares. Upon request, the Company must notify the
other Selling Stockholders of the exercising stockholder's request, and use its
best efforts to effect the registration of: (i) the Registrable Shares which the
Company has been so requested to register by the Selling Stockholder and (ii)
all other Registrable Shares owned by Selling Stockholders, the others of which
shall have made a written request to the Company for registration thereof. Each
of the Selling Stockholders has waived his "piggyback" and demand registration
rights for a two-year period, commencing upon the completion of this Offering,
and has entered into an agreement with the Underwriter whereby he agrees not to
effect any disposition of his Registrable Shares for a two-year period,
commencing upon the completion of this Offering, without the prior written
consent of the Underwriter. Notwithstanding, the exercise by one or more of
these registration rights may involve a substantial expense to the Company and
may adversely affect the terms upon which the Company may obtain additional
financing. See "Management--Employment Agreements," "Description of Securities--
Registration Rights" and "Shares Eligible for Future Sale."
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DELAWARE LAW WITH RESPECT TO BUSINESS COMBINATIONS
As of the date of this Prospectus, the Company will be subject to the State
of Delaware's "business combination" statute, Section 203 of the Delaware
General Corporation Law. In general, such statute prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with a person who
is an "interested stockholder" for a period of three years after the date of the
transaction in which that person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder. An "interested stockholder" is
a person who, together with affiliates, owns (or, within three years prior to
the proposed business combination, did own) 15% or more of the Delaware
corporation's voting stock. The statute could prohibit or delay mergers or other
takeovers or change in control attempts with respect to the Company and,
accordingly, may discourage attempts to acquire the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, the Company has
included in its Certificate a provision to eliminate the personal liability of
its directors for monetary damages for breach or alleged breach of their
fiduciary duties as directors, except for liability for breaches of duty of
loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, violations under Section 174 of the
Delaware General Corporation Law or for any transaction from which a director
derives an improper personal benefit. This provision does not alter a director's
liability under the federal securities laws and does not affect the availability
of equitable remedies, such as an injunction or recission, for breach of
fiduciary duty. In addition, the By-laws of the Company provide that the Company
is required to indemnify its officers and directors, employees and agents under
certain circumstances, including those circumstances in which indemnification
would otherwise be discretionary, and the Company is required to advance
expenses to its officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. The By-laws provide
that the Company, among other things, will indemnify such officers and
directors, employees and agents against certain liabilities that may arise by
reason of their status or service as directors, officers, or employees (other
than liabilities arising from willful misconduct of a culpable nature), and to
advance their expenses incurred as a result of any proceeding against them as to
which they could be indemnified. At present, the Company is not aware of any
pending or threatened litigation or proceeding involving a director, officer,
employee or agent of the Company in which indemnification would be required or
permitted. The Company believes that its charter provisions and indemnification
agreements are necessary to attract and retain qualified persons as directors
and officers.
Insofar as indemnification for liabilities arising under the Securities 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 Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer
or controlling person of the Company on the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the Securities, 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 Securities Act and will be
governed by the final adjudication of such issue.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer and Trust Company.
REPORTS TO STOCKHOLDERS
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
As of the Effective Date, the Company has registered its Common Stock and
Warrants under the provisions of Section 12(g) of the Exchange Act, and the
Company has agreed that it will use its best efforts to continue to maintain
such registration for a minimum of five years from the Effective Date. Such
registration will require the Company to comply with periodic reporting, proxy
solicitation and certain other requirements of the Exchange Act.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offering, the Company will have 3,195,000
shares of Common Stock outstanding (3,382,500 shares if the Underwriter's
over-allotment option is exercised in full and assuming no exercise of Warrants
or the Underwriter's Warrants). Of these shares, the 1,250,000 shares sold in
the Offering (1,437,500 shares if the Underwriter's over-allotment option is
exercised in full) will be freely tradeable. The remaining 1,945,000 shares are
deemed to be "restricted securities," as that term is defined under Rule 144, in
that such shares were issued and sold by the Company in private transactions not
involving a public offering and are not currently part of an effective
registration. Except for the "lock-up" agreements described below, such shares
are eligible for sale under Rule 144, or will become so eligible at various
times. In addition, the Company has granted the Underwriter demand and piggyback
registration rights with respect to the securities issuable upon exercise of the
Underwriter's Warrants. No prediction can be made as to the effect, if any, that
sales of shares of Common Stock or even the availability of such shares for sale
will have on the market prices prevailing from time to time. If the holders of
the shares, eligible for registration so choose, they could require the Company
to register all of said shares at anytime. See "Underwriting."
In general, under Rule 144 as currently in effect, subject to the
satisfaction of certain other conditions, a person, including an affiliate of
the Company (or other persons whose shares are aggregated), who has owned
restricted shares of Common Stock beneficially for at least one year is entitled
to sell, within any three month period, a number of shares that does not exceed
the greater of 1% of the total number of outstanding shares of the same class
or, if the Common Stock is quoted on Nasdaq, the average weekly trading volume
during the four calendar weeks preceding the sale. A person who has not been an
affiliate of the Company for at least the three months immediately preceding the
sale and who has beneficially owned shares of Common Stock for at least two
years is entitled to sell such shares under Rule 144 without regard to any of
the limitations described above.
Except upon the consent of the Underwriter, all executive officers, all
directors and holders of substantially all of the outstanding stock of the
Company have agreed not to, directly or indirectly, issue, offer, agree or offer
to sell, sell, transfer, assign, encumber, grant an option for the purchase or
sale of, pledge, hypothecate or otherwise dispose of any beneficial interest in
such securities for a period of 24 months following the Effective Date.
Notwithstanding, pursuant to the Stockholders' Agreement, if either of Messrs.
Franzone, Kassel or Goodman dies during the lock-up period, each estate of the
deceased may, to the extent that the Company receives proceeds from insurance on
the life of the deceased, cause the Company to redeem up to 250,000 shares for
$500,000 and may sell the remaining shares pursuant to Rule 144, provided that
the estate does not sell more than 25,000 shares within any three-month period.
For a period of two years from the date of this Prospectus, the Company has also
agreed not to file any registration statement relating to the offering or sale
of the Company's securities (not including a registration statement on Form S-8
on behalf of employees and the Consultant) without the consent of the
Underwriter. See "Risk Factors--Dependence on Key Personnel; --Offering Proceeds
to Benefit Officers, Directors and Principal Stockholders" and "Certain
Transactions."
Pursuant to the Stockholders' Agreement, each of the Selling Stockholders,
holders of an aggregate of 1,900,000 shares of Common Stock (the "Registrable
Shares") at the date of this Prospectus, is entitled to certain demand and
"piggyback" registration rights with respect to such Registrable Shares pursuant
to the Stockholders' Agreement. Any Selling Stockholder holding an aggregate of
7% of the outstanding shares of Common Stock may request that the Company file a
registration statement under the Securities Act, and subject to certain
conditions, the Company generally will be required to use its best efforts to
effect any such registration. In addition, if the Company proposes to register
any of its securities, either for its own account or for the account of other
stockholders, the Company is required, with certain exceptions, to notify the
Selling Stockholders and, subject to certain limitations, to include in such
registration statement all the Registrable Shares requested to be included by
such Selling Stockholders. The Company is generally obligated to bear the
expenses, other than underwriting discounts and sales commissions of these
registrations. Each of the Selling Stockholders has waived his "piggyback" and
demand registration rights for a two-year period, commencing upon the completion
of this Offering, and has entered into an agreement with the Underwriter whereby
he agrees not to effect any disposition of his shares of Common Stock for a
two-year period, commencing upon the completion of this Offering, without the
prior written consent of the Underwriter. Notwithstanding, the exercise by one
or more of these registration rights may involve a substantial expense to the
Company and may adversely affect the terms upon which the Company may obtain
additional financing. See "Risk Factors--Shares Eligible for Future Sale;
Registration Rights," "Management--Employment Agreements" and "Description of
Securities."
47
<PAGE>
Prior to the Offering, there has been no market for the Securities and no
prediction can be made as to the effect, if any, that market sales of shares of
the Securities or the availability of such shares for sale will have on the
market prices prevailing from time to time. Nevertheless, the possibility that
substantial amounts of Common Stock may be sold in the public market may
adversely affect prevailing market prices for the Common Stock and could impair
the Company's ability to raise capital through the sale of its equity
securities.
UNDERWRITING
The Underwriter has agreed, subject to the terms and conditions of the
Underwriting Agreement (the "Underwriting Agreement") to purchase from the
Company and the Company has agreed to sell to the Underwriter on a firm
commitment basis, 1,250,000 shares of Common Stock and 1,250,000 Warrants.
The Underwriter is committed to purchase all the shares of Common Stock and
Warrants offered hereby, if any of such Securities are purchased. The
Underwriting Agreement provides that the obligations of the Underwriter are
subject to conditions precedent specified therein.
The Company has been advised by the Underwriter that the Underwriter
proposes initially to offer the Securities to the public at the initial public
offering prices set forth on the cover page of this Prospectus and to certain
dealers at such prices less concessions not in excess of $ per share of Common
Stock and $ per Warrant. Such dealers may reallow a concession not in excess
of $ per share of Common Stock and $ per Warrant to certain other dealers.
After the commencement of the Offering, the public offering prices, concession
and reallowance may be changed by the Underwriter.
The Underwriter has informed the Company that it does not expect sales to
discretionary accounts.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act that arise out of or
are in connection with the Registration Statement, Prospectus and related
Exhibits filed with the Commission. The Company has also agreed to pay to the
Underwriter a non-accountable expense allowance equal to 3% of the gross
proceeds derived from the sale of the Securities underwritten hereby, provided
that the underwriting is successfully completed.
The Company has granted to the Underwriter an over-allotment option,
exercisable during the 45-day period from the Effective Date, to purchase up to
an additional 187,500 shares of Common Stock and/or 187,500 Warrants at the
Offering price per share of Common Stock and Warrants, respectively, offered
hereby, less underwriting discounts and the non-accountable expense allowance.
Such option may be exercised only for the purpose of covering over-allotments,
if any, incurred in the sale of the Securities offered hereby. To the extent
such option is exercised in whole or in part, the Underwriter will have a firm
commitment, subject to certain conditions, to purchase the number of the
additional securities proportionate to its initial commitment.
In connection with the Offering, the Company agreed to sell to the
Underwriter, for nominal consideration, warrants to purchase from the Company up
to 125,000 shares of Common Stock and 125,000 Warrants (the "Underwriter's
Warrants"). The Underwriter's Warrants are initially exercisable at 160% of the
Offering price as of the Effective Date, for a period of four years, commencing
one year after the Effective Date. The Underwriter's Warrants are restricted
from sale, transfer, assignment or hypothecation for a period of 12 months from
the date hereof, except to officers of the Underwriter. The Underwriter's
Warrants provide for adjustment in the number of shares of Common Stock and
Warrants issuable upon the exercise thereof and in the exercise price of the
Underwriter's Warrants as a result of certain events, including subdivisions and
combinations of the Common Stock. The Underwriter's Warrants grant to the
holders thereof certain rights of registration for the securities issuable upon
exercise thereof.
Except upon the consent of the Underwriter, all executive officers, all
directors and holders of substantially all of the outstanding stock of the
Company have agreed not to, directly or indirectly, issue, offer, agree or offer
to sell, sell, transfer, assign, encumber, grant an option for the purchase or
sale of, pledge, hypothecate or otherwise dispose of any beneficial interest in
such securities for a period of 24 months following the Effective Date.
Provided, however, that if either of Messrs. Franzone, Kassel or Goodman dies
during the lock-up period, the estate of the deceased may, to the extent that
the Company receives proceeds from insurance on the life of the deceased, cause
the Company to redeem up to 250,000 shares for $500,000 and may sell the
remaining shares pursuant to Rule 144, provided that the estate does not sell
more than 25,000 shares within any three month period, even though at such time
the Common Stock of the Company may have a fair market value at less than
48
<PAGE>
$2.00 per share, resulting in dilution to stockholders and an expenditure of the
Company's capital even if such expenditures would adversely affect the Company's
liquidity and financial resources. If any such transaction is entered into or
any such lock-ups are waived or shortened, to the extent that the Company is
aware of any such transaction or early release and is required to disclose the
same, such information will be disclosed in a timely manner. In addition,
without the consent of the Underwriter and except pursuant to the exercise of
the Warrants and the Underwriter's Warrants, the Company has agreed that it, its
subsidiaries and affiliates shall not sell or offer for sale any of their equity
securities commencing the Effective Date for a period of 24 months thereafter.
The Company has further agreed for a period of 24 months following the Effective
Date not to file a registration statement covering any of its securities without
the prior written consent of the Underwriter, except a registration statement on
Form S-8 relating to the Company's employees and Ms. Bao-Wen Chen, a consultant
and independent director of the Company who is entitled to receive an aggregate
of 25,000 registered shares of Common Stock pursuant to the Grant Plan, issuable
in annual increments of 5,000 shares commencing on the Effective Date.
Upon the exercise of any Warrants more than one year after the date of this
Prospectus, which exercise was solicited by the Underwriter, and to the extent
not inconsistent with the guidelines of the NASD and the Rules and Regulations
of the Commission, the Company has agreed to pay the Underwriter a commission
which shall not exceed 5% of the aggregate exercise price of such Warrants in
connection with bona fide services provided by the Underwriter relating to any
warrant solicitation. In addition, the individual must designate the firm
entitled to payment of such warrant solicitation fee. However, no compensation
will be paid to the Underwriter in connection with the exercise of the Warrants
if (a) the market price of the Common Stock is lower than the exercise price,
(b) the Warrants were held in a discretionary account or (c) the Warrants are
exercised in an unsolicited transaction. Unless granted an exemption by the
Commission from Rule 10b-6 under the Exchange Act, the Underwriter will be
prohibited from engaging in any market-making activities with regard to the
Company's securities for the period from five business days (or other such
applicable periods as Rule 10b-6 may provide) prior to any solicitation of the
exercise of the Warrants until the later of their termination of such
solicitation activity or the termination (by waiver or otherwise) of any right
the Underwriter may have to receive a fee. As a result, the Underwriter may be
unable to continue to provide a market for the Company's securities during
certain periods while the Warrants are exercisable. If the Underwriter has
engaged in any of the activities prohibited by Rule 10b-6 during the periods
described above, the Underwriter undertakes to waive unconditionally its right
to receive a commission on the exercise of such Warrants.
In connection with the Offering, the Underwriter and its affiliates may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the Common Stock and Warrants. Such transactions may include
stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid for or purchase Common
Stock or Warrants for the purpose of stabilizing their respective market prices.
The Underwriter also may create a short position for the account of such
Underwriter by selling more shares of Common Stock or Warrants in connection
with the Offering than it is committed to purchase from the Company, and in such
case may purchase shares of Common Stock or Warrants in the open market
following completion of the Offering to cover all or a portion of such short
position. The Underwriter may also cover all or a portion of such short position
by exercising the Underwriter's over-allotment option. In addition, the
Underwriter may impose "penalty bids" under contractual arrangements whereby it
may reclaim from a dealer participating in the Offering the selling concession
with respect to shares of Common Stock and Warrants that are distributed in the
Offering but subsequently purchased for the account of the Underwriter in the
open market. Any of the transactions described in this paragraph may result in
the maintenance of the price of the Common Stock and Warrants at a level above
that which might otherwise prevail in the open market. None of the transactions
described in this paragraph is required, and if they are undertaken they may be
discounted at any time.
The Company has agreed that the Underwriter may nominate for election one
person to the Company's Board of Directors (which person shall be reasonably
acceptable to the Company) for a period of three years from the Effective Date.
In the event the Underwriter elects not to exercise the right, then the
Underwriter may designate one person to attend meetings of the Company's Board
of Directors as a non-voting advisor (which person shall be reasonably
acceptable to the Company). Such designee shall be entitled to attend all such
meetings of the Company's Board of Directors and to receive all notices and
other correspondence and communications sent by the Company to members of its
Board of Directors. The Company has agreed to
49
<PAGE>
reimburse designees of the Underwriter for their out-of-pocket expenses incurred
in connection with their attendance of meetings of the Company's Board of
Directors.
Prior to the Offering, there has been no public market for the Common Stock
or the Warrants. Consequently, the Offering prices of the Securities has been
determined by negotiation between the Company and the Underwriter and does not
necessarily bear any relationship to the Company's asset value, net worth or
other established criteria of value. The factors considered in such
negotiations, in addition to prevailing market conditions, included the history
of and prospects for the industry in which the Company competes, an assessment
of the Company's management, the prospects of the Company, its capital
structure, the market for initial public offerings and certain other factors as
were deemed relevant.
The Company has agreed to retain the Underwriter as a financial consultant
to the Company for a period of 24 months after the Offering for an aggregate fee
of $120,000 payable in full upon consummation of the Offering. As the Company's
financial consultant, the Underwriter will provide investment banking services
to the Company as well as seek out strategic transactions on behalf of the
Company and furnish advice to the Company in connection with any such
transactions.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a copy
of each such agreement which are filed as exhibits to the Registration
Statement. See "Additional Information."
LEGAL MATTERS
The legality of the Securities offered hereby will be passed upon for the
Company by Koerner Silberberg & Weiner, LLP, New York, New York. Morrison Cohen
Singer & Weinstein, LLP, New York, New York, has acted as counsel for the
Underwriter in connection with the Offering. Carl Seldin Koerner, Esq., a
managing partner of the law firm of Koerner Silberberg & Weiner, LLP, is one of
the directors of the Company. See "Management" and "Certain Transactions."
EXPERTS
The consolidated financial statements of the Company and its subsidiary,
EHC, and the financial statements of CDP appearing in this Prospectus and
elsewhere in the Registration Statement, have been audited by Feldman Sherb
Ehrlich & Co., P.C. (formerly Feldman Radin & Co., P.C.), independent auditors,
as set forth in their report and appearing elsewhere herein, and are included in
reliance upon the authority of such firm as experts in accounting and auditing
in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on
Form SB-2 (the "Registration Statement") under the Securities Act and the rules
and regulations promulgated thereunder, with respect to the Common Stock and
Warrants offered hereby. This Prospectus does not contain all of the information
set forth in the Registration Statement and the exhibits and schedules thereto.
For further information regarding the Company and the Common Stock offered
hereby, reference is made to the Registration Statement and the exhibits and
schedules filed as part of the Registration Statement. Statements contained in
the Prospectus concerning the provisions or contents of any contract, agreement
or other document referred to herein are not necessarily complete with respect
to each such contract, agreement or document filed as an exhibit to the
Registration Statement. Reference is made to such exhibits for a more complete
description of the matters involved, and each statement shall be deemed
qualified in its entirety by such reference.
The Registration Statement, including the exhibits and schedules thereto,
may be inspected and copied at the public reference facilities maintained at the
Commission at Room 1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Company is
required to file electronic versions of these documents with the Commission
through the Commission's Electronic Data Gathering, Analysis and Retrieval
(EDGAR) System. The electronically filed documents, including reports, proxy
statements and other information, are maintained by the Commission and may be
found at the World Wide Web site http://www.sec.gov.
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
INTERNATIONAL SMART SOURCING, INC.
Independent Accountants' Report................................................................... F-2
Consolidated Balance Sheets....................................................................... F-3
Consolidated Statements of Operations............................................................. F-4
Consolidated Statement of Changes in Stockholders' Equity......................................... F-5
Consolidated Statements of Cash Flows............................................................. F-6
Notes to Consolidated Financial Statements........................................................ F-7 to F-11
COMPACT DISC PACKAGING CORP. (A DEVELOPMENT STAGE ENTERPRISE)
Independent Accountants' Report................................................................... F-12
Balance Sheets.................................................................................... F-13
Statements of Operations.......................................................................... F-14
Statements of Stockholders Equity................................................................. F-15
Statements of Cash Flows.......................................................................... F-16
Notes to Financial Statements..................................................................... F-17
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Description of Unaudited Pro Forma Consolidated Financial Statements.............................. F-18
Unaudited Pro Forma Consolidated Balance Sheet.................................................... F-19
Unaudited Pro Forma Consolidated Statements of Operations--Nine Months Ended September 26, 1998... F-20
Notes to Unaudited Pro Forma Consolidated Financial Statements--Nine Months Ended September 26,
1998............................................................................................ F-21
Unaudited Pro Forma Consolidated Statements of Operations--Nine Months Ended September 26, 1998
and Year Ended December 27, 1997................................................................ F-22 to F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors of
International Smart Sourcing, Inc.
Farmingdale, New York
We have audited the accompanying consolidated balance sheet of International
Smart Sourcing, Inc. and its subsidiary, Electronic Hardware Corp., as of
December 27, 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended December 27, 1997 and
December 28, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements referred to above present
fairly, the financial position of International Smart Sourcing, Inc. and its
subsidiary, Electronic Hardware Corp., as of December 27, 1997 and the results
of their operations and their cash flows for each of the years ended
December 27, 1997 and December 28, 1996 in conformity with generally accepted
accounting principles.
/s/ Feldman Sherb Ehrlich & Co., P.C.
FELDMAN SHERB EHRLICH & CO., P.C.
Certified Public Accountants
(Formerly Feldman Radin & Co., P.C.)
New York, New York
March 6, 1998
(except Note 1 to which
the date is December 24, 1998)
F-2
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 26, 1998
SEPTEMBER 26, 1998 PRO FORMA(1) DECEMBER 27, 1997
------------------ ------------------ -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 21,930 $ -- $ 351,740
Accounts Receivable (net of allowance for doubtful
accounts of $14,000).............................. 932,733 932,733 681,471
Inventory............................................ 1,080,864 1,080,864 1,043,011
Prepaid expenses..................................... 123,279 123,279 96,026
---------- ---------- -----------
Total current assets.............................. 2,158,806 2,136,876 2,172,248
Property and equipment--net............................ 581,930 581,930 623,215
Other assets........................................... 162,828 162,828 112,357
Deferred offering costs................................ 416,759 416,759 --
---------- ---------- -----------
$3,320,323 $3,298,393 $ 2,907,820
---------- ---------- -----------
---------- ---------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................ $ 771,346 $ 849,416 $ 392,696
Due to officer/shareholder........................... 150,000 150,000 --
Current portion of long term debt (including $138,868
to officer/stockholders).......................... 1,211,859 1,211,859 1,001,181
Current portion of obligations under capital lease... 61,479 61,479 53,315
---------- ---------- -----------
Total current liabilities......................... 2,194,684 2,272,754 1,447,192
---------- ---------- -----------
Long term debt (including $178,152 to
officer/stockholders)................................ 579,228 579,228 771,244
Due to officer/shareholder............................. -- -- 150,000
Obligations under capital leases....................... 92,995 92,995 88,540
---------- ---------- -----------
Total liabilities................................. 2,866,907 2,944,977 2,456,976
---------- ---------- -----------
Stockholders' equity:
Common Stock--par value .001 authorized, issued and
outstanding 1,500,000 shares...................... 1,500 1,500 1,500
Paid in Capital...................................... 317,941 317,941 317,941
Retained Earnings.................................... 133,975 33,975 131,403
---------- ---------- -----------
Total stockholders' equity........................ 453,416 353,416 450,844
---------- ---------- -----------
$3,320,323 $3,298,393 $ 2,907,820
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
- ------------------
(1) Reflects an anticipated $100,000 stockholder dividend subsequent to
September 26, 1998.
See notes to Consolidated Financial Statements
F-3
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
------------------------------------ ----------------------------------
SEPTEMBER 26, SEPTEMBER 27, DECEMBER 27, DECEMBER 28,
1998 1997 1997 1996
---------------- ---------------- --------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................................. $4,506,995 $4,607,360 $ 6,054,747 $ 5,398,041
Cost of goods sold.................................... 2,909,076 3,181,727 3,831,599 3,668,420
---------- ---------- ----------- -----------
Gross profit........................................ 1,597,919 1,425,633 2,223,148 1,729,621
---------- ---------- ----------- -----------
Operating expenses:
Selling and shipping................................ 472,961 352,370 472,096 427,400
General and administrative.......................... 844,177 698,900 1,298,797 1,045,038
---------- ---------- ----------- -----------
Total operating expenses............................ 1,317,138 1,051,270 1,770,893 1,472,438
---------- ---------- ----------- -----------
Income from operations................................ 280,781 374,363 452,255 257,183
Interest expense...................................... 153,209 170,479 206,900 193,138
---------- ---------- ----------- -----------
Net income before taxes............................. 127,572 203,884 245,355 64,045
Provision for income taxes............................ 80,000 -- -- --
Pro-forma income taxes................................ -- 82,000 98,000 26,000
---------- ---------- ----------- -----------
Net income/Pro-forma net income..................... $ 47,572 $ 121,884 $ 147,355 $ 38,045
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
Earnings/Pro-forma earnings per share--basic.......... $ 0.03 $ 0.08 $ 0.10 $ 0.03
---------- ---------- ----------- -----------
Weighted average common shares used................... 1,500,000 1,500,000 1,500,000 1,500,000
---------- ---------- ----------- -----------
---------- ---------- ----------- -----------
</TABLE>
See notes to Consolidated Financial Statements
F-4
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
--------- ------ ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance December 30, 1995............................ 1,500,000 $1,500 $317,941 $ 162,625 $ 482,066
Net Income........................................... 64,045 64,045
Distributions........................................ (207,243) (207,243)
--------- ------ -------- --------- ---------
Balance December 28, 1996............................ 1,500,000 1,500 317,941 19,427 338,868
Net Income........................................... 245,355 245,355
Distributions........................................ (133,379) (133,379)
--------- ------ -------- --------- ---------
Balance December 27, 1997............................ 1,500,000 1,500 317,941 131,403 450,844
Net Income........................................... 47,572 47,572
Distributions........................................ (45,000) (45,000)
--------- ------ -------- --------- ---------
Balance September 26, 1998 (unaudited)............... 1,500,000 $1,500 $317,941 $ 133,975 $ 453,416
--------- ------ -------- --------- ---------
--------- ------ -------- --------- ---------
</TABLE>
See notes to Consolidated Financial Statements
F-5
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
------------------------------ ----------------------------
SEPTEMBER 26, SEPTEMBER 27, DECEMBER 27, DECEMBER 28,
1998 1997 1997 1996
------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income......................................... $ 47,572 $ 203,884 $ 245,355 $ 64,045
--------- --------- ---------- ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization...................... 199,059 255,322 346,990 365,931
Gain on sale of equipment.......................... -- -- (10,000) --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable......... (251,262) 36,956 (41,919) 88,305
Increase in inventory.............................. (37,853) (24,953) (141,311) (45,381)
Increase in prepaid expenses....................... (27,253) (39,699) (1,400) (34,823)
(Increase) decrease in other assets................ (50,471) 34,051 41,308 (109,797)
Increase (decrease) in accounts payable and accrued
expenses........................................ 133,649 116,071 80,576 (96,466)
Increase in consulting fee payable................. -- -- 150,000 --
--------- --------- ---------- ------------
Total Adjustments........................ (34,131) 377,748 424,244 167,769
--------- --------- ---------- ------------
Net cash provided by operating activities............ 13,441 581,632 669,599 231,814
--------- --------- ---------- ------------
Cash flows from investing activities:
Proceeds from sale of equipment.................... -- -- 10,000 --
Expenditures for property and equipment............ (157,774) (156,471) (200,089) (122,944)
--------- --------- ---------- ------------
Net cash used in investing activities................ (157,774) (156,471) (190,089) (122,944)
--------- --------- ---------- ------------
Cash flows from financing activities:
Increase (decrease) in due to officers and
affiliated companies ........................... 150,000 (146,212) (71,352) (156,184)
Deferred offering costs............................ (321,759) -- -- --
Distributions...................................... (45,000) -- (133,379) (207,243)
Proceeds from loans................................ 269,000 494,726 357,100 1,647,483
Payments on loans.................................. (237,718) (406,004) (348,049) (1,413,942)
--------- --------- ---------- ------------
Net cash used in financing activities................ (185,477) (57,490) (195,680) (129,886)
--------- --------- ---------- ------------
Net increase (decrease) in cash...................... (329,810) 367,671 283,830 (21,016)
Cash, beginning of period............................ 351,740 67,910 67,910 88,926
--------- --------- ---------- ------------
Cash, end of period.................................. $ 21,930 $ 435,581 $ 351,740 $ 67,910
--------- --------- ---------- ------------
--------- --------- ---------- ------------
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest............................. $ 129,650 $ 125,562 $ 175,521 $ 168,515
--------- --------- ---------- ------------
--------- --------- ---------- ------------
Cash paid for taxes................................ $ 5,709 -- -- --
--------- --------- ---------- ------------
--------- --------- ---------- ------------
Non-cash financing activity--
unpaid deferred offering costs..................... $ 95,000
---------
---------
</TABLE>
See notes to Consolidated Financial Statements
F-6
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
International Smart Sourcing, Inc. ("International") was incorporated in
February 1998 in Delaware as a holding company for the purpose of acquiring the
common stock of Electronic Hardware Corporation ("EHC") and Compact Disc
Packaging Corp. ("CDP") in contemplation of an initial public offering of
International's stock (the "Offering") (see note 17).
Under an agreement and plan of reorganization, dated December 24, 1998,
International issued 1,500,000 shares of its stock for the stock of EHC. After
the reorganization, the shareholders of EHC own the same proportionate interest
of International as EHC. EHC, a company located in Farmingdale, New York,
manufactures injection molded plastic components used in consumer, industrial
and military products sold in the United States. Accordingly, the reorganization
has been accounted for as a combination of commonly controlled entities and the
accompanying financial statements presented herein present the financial
position and results of operations and cash flows of International and EHC as if
they had been combined for all periods presented.
Under another agreement and plan of reorganization, dated December 24,
1998, International issued 445,000 shares of its stock for the stock of CDP, a
development stage enterprise. CDP is owned by one of the shareholders of EHC and
one other shareholder. Such transaction will be accounted under the purchase
method of accounting commencing on the date of the transaction.
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Fiscal Year--The Company operates on a "52-53 week" reporting year
ending the last Saturday preceding December 31.
(b) Use of Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that effect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
(c) Recognition of Revenue--Revenue is recognized upon completion of the
sale which is when the goods are shipped to the customer.
(d) Inventories--Inventories are stated at the lower of cost or market.
Cost is determined principally by the use of the first-in, first-out
method.
(e) Depreciation and Amortization--Fixed assets are depreciated on the
straight line basis over the estimated useful lives of the related
assets. Leasehold improvements are being amortized on the straight line
basis over the shorter of the estimated useful life of the
improvements, which is 10 years, or the life of the lease.
(f) Income Taxes--EHC has made an election to be treated as an
S Corporation. Accordingly, under such election, any income taxes due
or tax benefits derived are the responsibilities of the stockholders.
(g) Net Income and Pro Forma Per Share Net Income--Net income per share is
computed based on the weighted average of number of common shares
outstanding during the period. Pro forma income and pro forma income
per share have been calculated as if the EHC was a C corporation for
federal and state income tax purposes.
(h) Accounting for Long-Lived Assets--The Company reviews long-lived assets
for impairment whenever circumstances and situations change such that
there is an indication that the carrying amounts may not be recovered.
At December 27, 1997, the Company believes that there has been no
impairment of its long-lived assets.
F-7
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INVENTORY
Inventories consist of the following at December 27, 1997:
<TABLE>
<S> <C>
Raw Materials............................................... $ 69,409
Work in Process............................................. 116,002
Finished Goods.............................................. 347,000
Components.................................................. 510,600
----------
$1,043,011
----------
----------
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment are comprised of the following at December 27, 1997:
<TABLE>
<CAPTION>
LIFE
----------
<S> <C> <C>
Machinery and Equipment........................................... 5-10 Years $3,064,825
Tools, Dies and Molds............................................. 5-10 Years 1,193,333
Leasehold Improvements............................................ 10 Years 217,836
Office Furniture and Fixtures..................................... 5 Years 148,975
----------
4,624,969
Less: accumulated depreciation and amortization................... 4,001,754
----------
$ 623,215
----------
----------
</TABLE>
5. OBLIGATIONS UNDER CAPITAL LEASES
The Company leases certain equipment under various capital lease
arrangements expiring in April 1998 through February 2002:
<TABLE>
<CAPTION>
CURRENT LONG-TERM
PORTION PORTION TOTAL
------- --------- --------
<S> <C> <C> <C>
Total minimum lease payments........................................ $63,262 $105,058 $168,320
Less: Amounts representing interest................................. 9,947 16,518 26,465
------- --------- --------
$53,315 $ 88,540 $141,855
------- --------- --------
------- --------- --------
</TABLE>
F-8
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LOANS PAYABLE
Loans payable are comprised of the following at December 27, 1997:
<TABLE>
<S> <C> <C>
(1) Term loan payable, bank, due August 1999, payable in quarterly installments of $25,000
of principal plus interest at prime plus 1% (9.5% at December 27, 1997). The loan is
guaranteed by the Companys three officers/stockholders and requires the Company to
comply with certain covenants......................................................... 375,000
(2) Line of credit, bank (available up to $1,000,000), payable upon demand, bearing
interest at prime plus 1/2% (9% at December 27, 1997)................................. 753,000
(3) Loan agreement payable in monthly installments of $2,903 of principal and interest at
7% per annum due February 2007. The loan is guaranteed by the Company's three
officers/stockholders................................................................. 235,171
(4) Various loans payable to officer/stockholders, all bearing interest at 10% per annum,
payable in monthly installments ranging from $2,656 to $4,664 plus interest. The loans
are due in dates ranging from September 1999 through February 2007.................... 409,254
----------
1,772,425
Less: current portion................................................................. 1,001,181
----------
Long term portion..................................................................... 771,244
----------
----------
Long term debt mature as follows:
1999............................................................................. 424,715
2000............................................................................. 111,356
2001............................................................................. 84,519
2002............................................................................. 25,082
2003............................................................................. 26,895
Thereafter....................................................................... 98,677
----------
$ 771,244
----------
----------
</TABLE>
The loans are secured by substantially all the assets of the Company. The
Company estimates that the fair value of the above loans approximates their
carrying value.
7. RETIREMENT PLAN
The Company sponsors a 401(k) savings plan covering all non-union employees
who have attained the age of 21 and have completed 3 months of service.
Participants may contribute up to 15% of their annual compensation, subject to
certain limitations. In addition, the Company may make contributions to the
plan. During the years ended December 27, 1997 and December 28, 1996, the
Company did not make any contributions to the plan.
8. CASH GAIN SHARING PROGRAM
The Company's full time, non-union employees and other key company
employees receive additional compensation as determined by cash profits, as
defined, under the Cash Gain Sharing Program. For the year ended December 27,
1997 employees earned approximately $87,000 under the program. No additional
compensation was earned in 1996.
9. STOCK OPTION AND GRANT PLAN
In March 1998, the Company adopted the Stock Option and Grant Plan (the
"Plan") which provides for the aggregate grant of 300,000 shares of the
Company's common stock or options to purchase shares of common stock.
F-9
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. KEY MAN LIFE INSURANCE
The Company is the beneficiary of a $500,000 life insurance policy on the
life of the President of the Company.
11. COLLECTIVE BARGAINING AGREEMENT
The Company's factory employees and factory supervisors are represented by
a collective bargaining agreement between Local 531, International Brotherhood
of Teamsters, AFL-CIO and the Company. Such agreement expires in May 2001.
12. RELATED PARTY TRANSACTIONS
a. Sales during the years ended December 27, 1997 and December 28, 1996
included $371,000 and $320,000, respectively to another company owned by
the three officer/stockholders of the Company. Profit on such sales was
approximately $30,000 and $20,000 for the years ended December 27, 1997
and December 28, 1996, respectively.
b. The Company leases its premises from a company owned by two of the
officer/stockholders of the Company at an annual rental of $138,000.
Such lease expires in December 2005. The mortgage on the premises in the
amount of $567,514 at December 27, 1997 is guaranteed by the Company.
c. During the year ended December 27, 1997, the Company entered into a
consulting agreement with one of its officer/stockholders for consulting
services provided in 1997. The Company executed a $150,000 promissory
note due January 1, 1999 with interest at 6% per annum for such
services.
d. The Company subleases part of its premises to another company owned by
two of the officers/stockholders for an annual rent of $3,000.
e. In March 1998, the Company entered into employment agreements with its
three officer/stockholders for a period of 10 years at an aggregate
annual base salary of $325,000. Such agreement provides for increases at
the greater of 5% or the consumer price index and an annual bonus to be
determined by the Board of Directors.
f. In March 1998, the Company and an affiliate entered into an engineering
consulting and services agreement on a fee for services basis under
which the Company will have the right to manufacture certain of the
affiliates products.
g. The Company is a guarantor of two loans aggregating $132,000 made to CDP
by two of its stockholders.
h. The Company is a guarantor on two loans made to an entity owned by the
three officer/stockholders of the Company. At December 27, 1997 the
outstanding aggregate balance on such loans was $738,000. The loans are
secured by an assignment of the affiliates fixed assets, accounts
receivable, inventories and all other assets. The unaudited figures of
the affiliate as of December 31,1997 are as follows:
<TABLE>
<S> <C>
Cash........................................................ $ 346,962
Accounts Receivable (Net)................................... 507,806
Inventories................................................. 601,644
Prepaid Expenses............................................ 95,313
Fixed Assets (Net).......................................... 542,417
Prepaid and Other Assets.................................... 200,044
----------
Total Assets................................................ $2,294,186
----------
----------
Total Liabilities........................................... $1,706,695
Stockholders' Equity........................................ 587,491
----------
Total Liabilities and Stockholders' Equity.................. $2,294,186
----------
----------
</TABLE>
F-10
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. LEGAL PROCEEDINGS
The Company is involved in one legal proceeding involving a complaint
against the Company alleging sexual harassment. The Company is vigorously
defending this action and in the opinion of management, the ultimate disposition
of this case will not have a material effect on its financial condition or
results of operations.
14. CONSULTING AGREEMENT
In March 1998, the Company entered into a ten year consulting agreement in
connection with the Company's plans to develop manufacturing resources in the
People's Republic of China ("China"). The Consultant will be paid at the rate of
$50 per hour and 1.5% of the net cost, as defined, of all products manufactured
in China up to $5,000,000 per year and 1% of net costs in excess of $5,000,000.
The Consultant will also receive over a five year period 25,000 shares of
unregistered common stock of the Company and 25,000 options to purchase shares
of common stock.
15. PREFERRED STOCK
The Board of Directors of the Company is authorized, without further action
of the stockholders of the Company, to issue up to 1,000,000 shares of Preferred
Stock in one or more classes or series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, and the
number of shares constituting any series or the designation of such series.
16. PROPOSED PUBLIC OFFERING
In February 1998, the Company entered into a letter of intent with an
underwriter for the sale of 1,250,000 shares of common stock at $4.50 per share
and 1,250,000 redeemable warrants at $.10 per warrant to purchase one share of
common stock at $5 per share. The Company has agreed to retain the underwriter
as a consultant for a period of two years after the offering for a fee of
$120,000 payable upon the consummation of the offering.
17. STOCKHOLDERS' AGREEMENTS
In March 1998, the Company entered into an agreement with each of its three
officer/stockholders which provides that in the event of the death of the
stockholder within 24 months after the consummation of a public offering of the
Company's stock, the estate of the stockholder can require the Company to
repurchase 250,000 shares of the stockholder's stock for $500,000. The
repurchase of stock can only be made through the use of insurance proceeds
payable to the Company upon the death of the stockholder.
F-11
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of
Compact Disc Packaging Corp.
Farmingdale, New York
We have audited the accompanying balance sheet of Compact Disc Packaging Corp.
as of December 31, 1997 and the related statements of operations, stockholders'
equity and cash flows for the years ended December 31, 1997 and 1996 and for the
period January 31, 1995 (inception) through 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 audit.
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 financial statements referred to above present fairly, in
all material respects the financial position of Compact Disc Packaging Corp. as
of December 31, 1997 and the results of its operations and its cash flows for
each of the years ended December 31, 1997 and 1996 and for the period from
January 31, 1995 (inception) through December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ Feldman Sherb Ehrlich & Co., P.C.
FELDMAN SHERB EHRLICH & CO., P.C.
Certified Public Accountants
(Formerly Feldman Radin & Co., P.C.)
New York, New York
March 18, 1998
(except note 5 as to
which the date is May 29, 1998
and note 6 as to which the
date is December 24, 1998)
F-12
<PAGE>
COMPACT DISC PACKAGING CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 26, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash................................................................................ $ 2,366 $ 445
--------- ----------
--------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses.................................................................... -- 325
Due to stockholders................................................................. 132,466 132,585
Due to affiliated companies......................................................... 43,740 --
--------- ----------
Total liabilities................................................................. 176,206 132,910
--------- ----------
Stockholders equity:
Common stock and capital in excess of .01 par value (authorized 10,000 shares,
issued and outstanding 500 shares)............................................. 25,000 25,000
Additional paid-in capital........................................................ 450,000 --
Deficit accumulated during development stage...................................... (648,840) (157,465)
--------- ----------
Total stockholders equity......................................................... (173,840) (132,465)
--------- ----------
$ 2,366 $ 445
--------- ----------
--------- ----------
</TABLE>
See notes to financial statements
F-13
<PAGE>
COMPACT DISC PACKAGING CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
CUMULATIVE CUMULATIVE
NINE MONTHS ENDED JANUARY 31, 1995 YEAR ENDED JANUARY 31, 1995
----------------------------- (INCEPTION) THROUGH --------------------------- (INCEPTION) THROUGH
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1996 1997
------------- ------------- ------------------- ------------ ------------ -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net revenue............ $ -- $ -- $ -- $ -- $ -- $ --
Costs and expenses:
Salaries............. 15,500 15,000 41,500 26,000 -- 26,000
Professional and
consulting fees... 3,871 26,121 54,737 21,821 28,310 50,866
Research and
development....... 450,000 495,594 20,010 5,500 45,594
Other general &
administrative
expenses.......... 22,004 32,408 57,009 21,899 10,692 35,005
--------- --------- --------- -------- -------- ---------
Total costs and
expenses (net loss).. $(491,375) $ (73,529) $(648,840) $(89,730) $(44,502) $(157,465)
--------- --------- --------- -------- -------- ---------
--------- --------- --------- -------- -------- ---------
</TABLE>
See notes to financial statements
F-14
<PAGE>
COMPACT DISC PACKAGING CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
PAR VALUE ADDITIONAL DEFICIT
NUMBER OF AND CAPITAL IN PAID IN ACCUMULATED DURING TOTAL STOCKHOLDERS'
SHARES EXCESS OF PAR CAPITAL DEVELOPMENT STAGE EQUITY (DEFICIENCY)
--------- -------------- ---------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
Balance--January 31, 1995
(inception).......................... -- $ -- $ $ -- $ --
Issuance of Common Stock............... 500 25,000 -- 25,000
Net Loss............................... (23,233) (23,233)
--- -------- ---------- -----------
Balance--December 31, 1995............. 500 25,000 (23,233) 1,767
Net Loss............................... (44,502) (44,502)
--- -------- ---------- -----------
Balance--December 31, 1996............. 500 25,000 (67,735) (42,735)
Net Loss............................... (89,730) (89,730)
--- -------- ---------- -----------
Balance--December 31, 1997............. 500 $ 25,000 $ (157,465) $ (132,465)
Purchase of minority interest by
shareholder.......................... 450,000 -- 450,000
Net Loss............................... (491,375) (491,375)
--- -------- -------- ---------- -----------
Balance--September 26, 1998
(unaudited).......................... 500 $ 25,000 $450,000 $ (648,840) $ (173,840)
--- -------- -------- ---------- -----------
--- -------- -------- ---------- -----------
</TABLE>
See notes to financial statements
F-15
<PAGE>
COMPACT DISC PACKAGING CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
CUMULATIVE CUMULATIVE
JANUARY 31, 1995 JANUARY 31, 1995
NINE MONTHS ENDED (INCEPTION) YEAR ENDED (INCEPTION)
----------------------------- THROUGH --------------------------- THROUGH
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997 1996 1997
------------- ------------- ---------------- ------------ ------------ ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................. $ (491,375) $ (10,110) $ (648,840) $(89,730) $(44,502) $ (157,465)
----------- --------- ---------- -------- -------- ----------
Adjustment to reconcile
net loss to cash used
in operating
activities--Non-cash
research and
development charge..... 450,000 450,000
Changes in assets and
liabilities:
Increase (decrease) in
accrued expenses..... (325) (3,642) -- (3,316) 3,293 325
----------- --------- ---------- -------- -------- ----------
Net cash used in
operating activities... (41,700) (13,752) (198,840) (93,046) (41,209) (157,140)
----------- --------- ---------- -------- -------- ----------
Cash flows from financing
activities:
Loans payable to
stockholders......... (119) 2,833 132,466 82,236 27,464 132,585
Due to Affiliate....... 43,740 43,740
Issuance of capital
stock................ -- -- 25,000 -- 25,000 25,000
----------- --------- ---------- -------- -------- ----------
Net cash provided by
financing activities... 43,621 2,833 176,206 82,236 52,464 157,585
----------- --------- ---------- -------- -------- ----------
Net increase (decrease)
in cash................ 1,921 (10,919) 2,366 (10,810) 11,255 445
Cash, beginning of
period................. 445 11,255 -- 11,255 -- --
----------- --------- ---------- -------- -------- ----------
Cash, end of period...... $ 2,366 $ 336 $ 2,366 $ 445 $ 11,255 $ 445
----------- --------- ---------- -------- -------- ----------
----------- --------- ---------- -------- -------- ----------
</TABLE>
See notes to financial statements
F-16
<PAGE>
COMPACT DISC PACKAGING CORP.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS OF THE COMPANY
Compact Disc Packaging Corp. (the "Company") was incorporated in Delaware
on January 31, 1995 to manufacture and market a proprietary compact disc
packaging system. As of December 31, 1997 the Company has not generated any
revenue.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Use of Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that effect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
b. Research and Development--Research and development expenditures are
charged to operations as incurred.
3. DUE TO STOCKHOLDERS
On January 1, 1998 the Company executed promissory notes for $107,500 and
$25,000, respectively, to two of its stockholders bearing interest at 10% per
annum due on January 1, 1999. Such amounts were for monies advanced to the
Company by the stockholders to fund company expenses. The notes are guaranteed
by an affiliate, International Plastic Technologies, Inc. (note 5).
4. LICENSE AGREEMENT
In March 1998 the Company entered into an exclusive license agreement with
a corporation which grants the Company the rights to manufacture, market and
sell a compact disc packaging system. The Company shall pay such a corporation
annual royalties of 2% of net sales and 25% of other fees, as defined, plus an
initial fee of $30,000. The exclusive provisions of the license agreement are
subject to termination if certain minimum royalty levels are not obtained or if
the Company does not obtain a $1,000,000 cash investment within 24 months of the
agreement.
5. STOCK TRANSACTION
On May 29, 1998 one of the Company's stockholders with a 45% ownership
interest purchased the 45% ownership interest of another shareholder. The
purchase of the 45% interest has been treated as a purchase of a minority
interest by CDP in accordance with the purchase method of accounting.
Accordingly, the $450,000 paid has been treated as an expense related to
purchased research and development costs and a capital contribution as no viable
product has yet to be developed by CDP.
6. PROPOSED PUBLIC OFFERING
In February 1998, a Delaware holding company, International Smart Sourcing
Inc. ("International") was incorporated for the purpose of acquiring the stock
of the Company and one other affiliated company. As part of the acquisition,
which occurred as of December 24, 1998, International issued 445,000 shares of
its stock for the stock of CDP in a transaction accounted for as a purchase
commencing on the date of the transaction.
F-17
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated balance sheet as of
September 26, 1998 presents the pro forma financial position of International
Smart Sourcing, Inc. ("International") and its subsidiary, Electronic Hardware
Corp. ("EHC," and together with International, the "Company") and Compact Disc
Packaging Corp. ("CDP") at September 26, 1998 as if the proposed merger of the
two companies had been consummated at such date. Included are adjustments to
reflect the acquisition of CDP by the Company and an anticipated $100,000
stockholder dividend subsequent to September 26, 1998.
The unaudited pro forma consolidated statements of operations for the nine
months ended September 26, 1998 and for the year ended December 27, 1997 reflect
the combined results of the Company and CDP as if the transaction summarized in
the preceding paragraph had occurred as of December 29, 1996.
The unaudited pro forma consolidated statements of operations do not
necessarily represent actual results that would have been achieved had the
companies been together at the beginning of each respective period, nor are they
necessarily indicative of future results. These unaudited pro forma consolidated
financial statements should be read in conjunction with the companies'
respective historical financial statements and notes thereto.
F-18
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
SEPTEMBER 26, 1998
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------
INTERNATIONAL PRO FORMA ADJUSTMENTS
SMART SOURCING, COMPACT DISC ------------------------
INC. PACKAGING CORP. DR CR TOTAL
------------------- --------------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.......................... $ 21,930 $ 2,366 (1) 24,296 $ --
Accounts receivable (net of
allowance for doubtful
accounts of $14,000)....... 932,733 932,733
Inventory..................... 1,080,864 1,080,864
Prepaid expenses.............. 123,279 123,279
----------- --------- ---------- ---------- ----------
Total current assets............ 2,158,806 2,366 24,296 2,136,876
Property and equipment--net..... 581,930 581,930
Other assets.................... 162,828 162,828
Deferred offering costs......... 416,759 416,759
----------- --------- ---------- ---------- ----------
$ 3,320,323 $ 2,366 24,296 $3,298,393
----------- --------- ---------- ---------- ----------
----------- --------- ---------- ---------- ----------
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable and accrued
expenses................... $ 771,346 $ -- (1) 75,704 $ 847,050
Due to officer/shareholder.... 150,000 107,500 257,500
Current portion of long term
debt....................... 1,211,859 1,211,859
Current portion of obligations
under capital leases....... 61,479 61,479
----------- --------- ---------- ---------- ----------
Total current liabilities....... 2,194,684 107,500 75,704 2,377,888
----------- --------- ---------- ---------- ----------
Long term debt................ 579,228 68,706 647,934
Obligations under capital
leases..................... 92,995 92,995
----------- --------- ---------- ---------- ----------
Total liabilities............... 2,866,907 176,206 75,704 3,118,817
----------- --------- ---------- ---------- ----------
Stockholders' equity:
Common Stock--par value
.001 authorized issued and
outstanding 1,945,000
shares..................... 1,500 25,000(3) 25,000(3) 445 1,945
Deficit accumulated during
development stage.......... -- (648,840) (3) 648,840 --
Paid in capital............... 317,941 450,000 (2) 113,975 2,133,596
(3) 1,251,680
Retained earnings (Deficit)..... 133,975 (1) 100,000 (1,955,965)
(2) 113,975
(3) 1,875,965
----------- --------- ---------- ---------- ----------
Total stockholders' equity...... 453,416 (173,840) 2,114,940 2,014,940 179,576
----------- --------- ---------- ---------- ----------
$ 3,320,323 $ 2,366 $2,114,940 $2,090,644 $3,298,393
----------- --------- ---------- ---------- ----------
----------- --------- ---------- ---------- ----------
</TABLE>
See notes to proforma financial statements.
F-19
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 26, 1998
<TABLE>
<CAPTION>
HISTORICAL
-------------------------------------- PRO-FORMA
INTERNATIONAL SMART COMPACT DISC PRO-FORMA -----------
SOURCING, INC. PACKAGING CORP. ADJUSTMENTS TOTAL
------------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales..................................... $ 4,506,995 $ -- $ 4,506,995
Cost of goods sold............................ 2,909,076 -- 2,909,076
----------- --------- -----------
Gross profit.................................. 1,597,919 -- 1,597,919
----------- --------- -----------
Operating expenses:
Selling and shipping........................ 472,961 -- 472,961
General and administrative.................. 844,177 41,375 885,552
Non-cash research and development expenses.... -- 450,000 1,875,965 2,325,965
----------- --------- ----------- -----------
Total operating expenses...................... 1,317,138 491,375 1,875,965 3,684,478
----------- --------- ----------- -----------
Income (loss) from operations................. 280,781 (491,375) (1,875,965) (2,086,559)
Interest expense.............................. 153,209 -- 153,209
----------- --------- ----------- -----------
Net income (loss)............................. 127,572 (491,375) (1,875,965) (2,239,768)
Provision for income taxes.................... -- -- 80,000
Pro-forma income taxes........................ 80,000 -- --
----------- --------- ----------- -----------
Pro-forma net income.......................... $ 47,572 $(491,375) $(1,875,965) $(2,319,768)
----------- --------- ----------- -----------
----------- --------- ----------- -----------
Pro-forma earnings (loss)
per share--Basic............................ $ 0.03 $ -- $ -- $ (1.19)
----------- --------- ----------- -----------
----------- --------- ----------- -----------
Weighted average common shares used........... 1,500,000 -- -- 1,945,000
----------- --------- ----------- -----------
----------- --------- ----------- -----------
</TABLE>
See notes to proforma financial statements.
F-20
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
NOTES TO UNAUDITED PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 26, 1998
1. The unaudited pro forma consolidated financial statements as of and for
the nine months ended September 26, 1998 presents the pro forma
financial position of International Smart Sourcing, Inc. and its
subsidiary, Electronic Hardware Corp. ("EHC" and together with
International, the "Company") and Compact Disc Packaging Corp. ("CDP")
at September 26, 1998 as if the proposed merger of the two companies had
been consummated at such date. The explanation of such adjustments are
as follows: (1) Anticipated $100,000 stockholder dividend subsequent to
September 26, 1998. (2) Reclassification of retained earnings of EHC to
paid in capital due to the termination of EHC's S corporation status.
(3) Reflects the acquisition of CDP by the Company as if the transaction
occurred as of September 26, 1998. Includes a $1,875,965 non-cash charge
to research and development expense and a corresponding credit to paid
in capital reflecting purchased research and development costs paid by
the Company
for CDP.
F-21
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 27, 1997
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------- PRO-FORMA
INTERNATIONAL COMPACT DISC ----------
SMART SOURCING, INC. PACKAGING CORP. TOTAL
-------------------- --------------- ----------
<S> <C> <C> <C>
Net sales..................................................... $4,607,360 -- $4,607,360
Cost of goods sold............................................ 3,181,727 -- 3,181,727
---------- --------- ----------
Gross profit.................................................. 1,425,633 -- 1,425,633
---------- --------- ----------
OPERATING EXPENSES:
Selling and shipping........................................ 352,370 -- 352,370
General and administrative.................................. 698,900 73,529 772,429
---------- --------- ----------
Total operating expenses...................................... 1,051,270 73,529 1,124,799
---------- --------- ----------
Income (loss) from operations................................. 374,363 (73,529) 300,834
Interest expense.............................................. 170,479 -- 170,479
---------- --------- ----------
Net income (loss)............................................. 203,884 (73,529) 130,355
Pro-forma income taxes........................................ 82,000 -- 82,000
---------- --------- ----------
Pro-forma net income.......................................... $ 121,884 $ (73,529) $ 48,355
---------- --------- ----------
---------- --------- ----------
Pro-forma earnings per share--Basic........................... $ 0.08 $ -- $ 0.02
---------- --------- ----------
---------- --------- ----------
Weighted average common shares used........................... 1,500,000 -- 1,945,000
---------- --------- ----------
---------- --------- ----------
</TABLE>
F-22
<PAGE>
INTERNATIONAL SMART SOURCING, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 27, 1997
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------------- PRO-FORMA
INTERNATIONAL COMPACT DISC ----------
SMART SOURCING, INC. PACKAGING CORP. TOTAL
-------------------- --------------- ----------
<S> <C> <C> <C>
Net sales..................................................... $6,054,747 -- $6,054,747
Cost of goods sold............................................ 3,831,599 -- 3,831,599
---------- --------- ----------
Gross profit.................................................. 2,223,148 -- 2,223,148
---------- --------- ----------
Operating expenses:
Selling and shipping........................................ 472,096 -- 472,096
General and administrative.................................. 1,298,797 89,730 1,388,527
---------- --------- ----------
Total operating expenses...................................... 1,770,893 89,730 1,860,623
---------- --------- ----------
Income from operations........................................ 452,255 (89,730) 362,525
Interest expense.............................................. (206,900) -- (206,900)
---------- --------- ----------
Net income (loss)............................................. 245,355 (89,730) 155,625
Pro-forma income taxes........................................ 98,000 -- 98,000
---------- --------- ----------
Pro-forma net income.......................................... $ 147,355 $ (89,730) $ 57,625
---------- --------- ----------
---------- --------- ----------
Pro-forma earnings per share--Basic........................... $ 0.10 $ -- $ 0.03
---------- --------- ----------
---------- --------- ----------
Weighted average common shares used........................... $1,500,000 $ -- $1,945,000
---------- --------- ----------
---------- --------- ----------
</TABLE>
F-23
<PAGE>
COMPACT DISK PACKAGING CORP. a wholly-owned subsidiary of
International Smart Sourcing, Inc.
---------------------------------------------------------------------------
The Pull Pack Plastic CD ROM Tray
Two photographs, each of the prototype model of the Pull Pack(Trademark).
The photograph on the far left shows two hands opening the prototype Pull
Pack(Trademark) packaging. The second photograph shows two hands removing a
Compact Disc from the Pull Pack(Trademark) packaging system.
Convenient and reliable, the Pull Pack (TM) offers a simple and
effective solution to problems associated with conventional disc
packaging.
The Pull Pack (TM) is a redesigned "Jewel Box", the packaging currently
used for Compact Discs, CD ROMs and Digital Video Discs ("DVD").
The patented Pull Pack (TM) employs a drawer-like mechanism, avoiding
the problems associated with Disc packaging that is currently available,
involving fragile hinges, difficulty in opening and the removal of Discs
and descriptive literature.
ELECTRONIC HARDWARE CORP. a wholly-owned subsidiary of
International Smart Sourcing, Inc. website: http://www.ehcknobs.com
---------------------------------------------------------------------------
EHC
KNOBS
MECHANAICAL DEVICES
CUSTOM MOLDING
Photograph of various knobs and assemblies manufactured by EHC interspersed
throughout the page.
Electronic Hardware Corporation is a customer-focused supplier of molded
plastic components and assemblies. Our product line provides the
marketplace with many innovative solutions. Our mission is to exceed
customer expectations for service, quality and value through continuous
improvement of people, processes and products.
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER 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 BY THE COMPANY OR THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER
TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY BY ANY PERSON IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, IMPLY THAT THE INFORMATION IN THIS PROSPECTUS IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 8
Use of Proceeds................................. 19
Dividend Policy................................. 21
Dilution........................................ 22
Capitalization.................................. 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 24
Business........................................ 27
Management...................................... 34
Principal Stockholders.......................... 38
Certain Transactions............................ 39
Description of Securities....................... 43
Shares Eligible for Future Sale................. 47
Underwriting.................................... 48
Legal Matters................................... 50
Experts......................................... 50
Additional Information.......................... 50
Index to Financial Statements................... F-1
</TABLE>
------------------------
UNTIL , 1999 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1,250,000 SHARES
OF COMMON STOCK
AND
1,250,000 REDEEMABLE
COMMON STOCK
PURCHASE WARRANTS
[LOGO]
------------------------
PROSPECTUS
------------------------
NETWORK 1 FINANCIAL
SECURITIES, INC.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is a Delaware corporation, subject to the applicable
indemnification provisions of the General Corporation Law of the State of
Delaware. Section 145 of the General Corporation Law of the State of Delaware
empowers a Delaware corporation to indemnify, subject to the standards therein
prescribed, any person in connection with any action, suit or proceeding brought
or threatened by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation or was serving as such with
respect to another corporation or other entity at the request of such
corporation.
The Company's Certificate provides that each person who was or is made a
party to (or is threatened to be made a party to) or is otherwise involved in
any civil or criminal action, suit or proceeding by reason of the fact that such
person is or was a director or officer of the Company shall be indemnified and
held harmless by the Company to the fullest extent authorized by Section 145 of
the General Corporation Law of the State of Delaware against all expense,
liability and loss (including without limitation attorneys' fees) incurred by
such person in connection therewith.
Nothing contained in the Company's Certificate shall eliminate or limit the
liability of directors (i) for any breach of the director's duty of loyalty to
the Company or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law;
(iii) under Section 174 of the General Corporation Law of the State of Delaware;
or (iv) for any transaction from which the director derived an improper personal
benefit.
The Company maintains directors and officers liability insurance covering
all directors and officers of the Company against claims arising out of the
performance of their duties.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the fees and expenses payable by the
Company in connection with the issuance and distribution of the Common Stock.
<TABLE>
<S> <C>
SEC Registration............................................................... $ 4,675.00
NASD Filing Fee................................................................ 2,079.00
Nasdaq Listing Fee............................................................. 9,500.00
Boston Stock Exchange Listing Fee.............................................. 14,750.00
Transfer Agent Fee............................................................. 2,500.00
Printing and Engraving Costs................................................... 100,000.00
Legal Fees and Expenses........................................................ 250,000.00
Accounting Fees and Expenses................................................... 160,000.00
Blue Sky Fees and Expenses..................................................... 11,000.00
Miscellaneous.................................................................. 45,496.00
-----------
Total........................................................................ $600,000.00
-----------
-----------
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following shares of Common Stock were issued by the Company during the
past three years without registering the securities under the Securities Act.
There were no underwriting discounts or commissions paid in connection with the
issuance of any of the securities set forth below.
The sales of the securities described in the following table were made in
reliance upon Section 4(2) of the Securities Act, which provides certain
exemptions for transactions not involving a public offering. The purchasers of
securities in each transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof. All purchasers of securities in each such
transaction had adequate information concerning the Company.
II-1
<PAGE>
As part of a reorganization, the Company acquired solely in exchange for
Common Stock of the Company, all of the outstanding capital stock of EHC and
CDP, effective as of December 24, 1998. The value and number of shares to be
issued to former holders of the outstanding capital stock of CDP and EHC was
determined by negotiations between the Company and Andrew Franzone, David L.
Kassel, Harry Goodman, Robert Gillings and David Cowan. Mr. Gillings
subsequently transferred his shares of CDP to David L. Kassel in an arms'-length
transaction dated May 29, 1998 in return for a nonrecourse promissory note from
Mr. Kassel in favor of Mr. Gillings in the principal amount of $450,000 bearing
interest at the rate of 6% per annum, payable in full on August 1, 2000 or
earlier as provided in such promissory note. The reorganization exchange is an
arm's-length transaction acceptable to each of the parties based upon such
negotiations. The amount of shares to be issued is based on a ratio of shares
held in CDP and EHC to a percentage of shares of the Company. Following the
reorganization, each of the following individuals will hold the amount of shares
of the Company's common stock set forth below:
<TABLE>
<S> <C>
David L. Kassel.................................................................... 900,000
Harry Goodman...................................................................... 500,000
Andrew Franzone.................................................................... 500,000
David Cowan........................................................................ 45,000
</TABLE>
ITEM 27. LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------
<S> <C>
*1 Form of Underwriting Agreement
2.1 Agreement and Plan of Reorganization between International Plastic Technologies, Inc. and CDP and
Amendment No. 1 effective as of December 24, 1998
2.2 Agreement and Plan of Reorganization between International Plastic Technologies, Inc. and EHC and
Amendment No. 1 effective as of December 24, 1998
3.1 Certificate of Incorporation of International Plastic Technologies, Inc. and Amendment to the
Certificate of Incorporation dated December 7, 1998
*3.2 By-Laws of International Plastic Technologies, Inc., as amended
4.1 Form of Common Stock Certificate
4.2 Form of Warrant Certificate
*4.3 Form of Warrant Agreement between the Company and Continental Stock Transfer and Trust Company
*4.4 Form of Underwriter's Warrant Agreement
*5 Opinion of Koerner Silberberg & Weiner, LLP
*10.1 Employment Agreement between the Company and Andrew Franzone
*10.2 Employment Agreement between the Company and David L. Kassel
*10.3 Employment Agreement between the Company and Harry Goodman
*10.4 Consulting Agreement between the Company and B.C. China Business Consulting, Inc. and Letter Agreement
between the Company and Bao-Wen Chen dated March 1, 1998, as amended
*10.5 Consulting Agreement between the Company and Network 1 Financial Securities, Inc.
*10.6 Lease Agreement between the Company and K&G Realty Associates dated December 19, 1989, Rider to Lease
Agreement dated January 1, 1990, Letter Agreement between the Company and K&G Realty Associates dated
March 16, 1995 and Riders to Lease Agreement dated March 1, 1998 and May 14, 1998
*10.7 Licensing Agreement between CDP and Inch, Inc.
*10.8 Promissory Notes payable to David L. Kassel dated September 13, 1994, August 1, 1996, December 31,
1997 and January 1, 1998, and Guarantee of CDP Promissory Note dated January 1, 1998 by International
Plastic Technologies, Inc.
*10.9 Promissory Notes payable to Harry Goodman dated September 1, 1994 and August 1, 1996
*10.10 Demand Grid Note between AFC and Republic National Bank of New York dated December 1, 1997, Term Loan
Agreement Promissory Note between AFC and Republic National Bank of New York dated July 29, 1996 and
Guaranty and Security Agreement by EHC dated July 25, 1996
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ---------- -----------
<S> <C>
*10.11 Term Loan Agreement between EHC and Republic National Bank of New York dated July 29, 1996 and Term
Loan Agreement Promissory Note dated July 29, 1996
*10.12 Demand Grid Note between Republic National Bank of New York and EHC dated July 29, 1996
*10.13 Loan Agreement between EHC and Long Island Development Corporation dated February 21, 1997, Loan
Promissory Note dated February 21, 1997, Security Agreement dated February 21, 1997 and Waiver Letter
dated July 13, 1998
*10.14 Mortgage between K&G Realty Associates and Long Island Commercial Bank dated November 28, 1995, Rider
to Mortgage dated November 28, 1995, Mortgage Note, Guaranty of Mortgage Note by EHC and Assignment of
Leases and Rent
10.15 Collective Bargaining Agreement between EHC and Local 531, International Brotherhood of Teamsters,
AFL-CIO and Memorandum of Agreement dated as of May 10, 1998
*10.16 Stockholders' Agreement between the Company, Andrew Franzone, David L. Kassel and Harry Goodman and
Amendment No. 1 to the Stockholders' Agreement
*10.17 International Plastic Technologies, Inc., 1998 Stock Option and Grant Plan
*10.18 Agreement between AFC and EHC to engineer, manufacture and import products
*10.19 Letter agreement between EHC and Republic National Bank of New York to release the personal guarantees
of Andrew Franzone, David Kassel and Harry Goodman dated May 14, 1998
10.20 Demand Negotiable Promissory Note payable to David L. Kassel dated October 27, 1998
10.21 Demand Negotiable Promissory Notes payable to Harry Goodman dated October 22, 1998 and December 7,
1998
10.22 Agreement between EHC and David L. Kassel to extend maturity date of January 1, 1998 Promissory Note,
dated December 8, 1998
10.23 Agreement between CDP and David L. Kassel to extend maturity date of January 1, 1998 Promissory Note,
dated December 8, 1998
21 List of Subsidiaries of the Company
*23.1 Consent of Koerner Silberberg & Weiner, LLP (contained in its opinion filed as Exhibit 5 hereto).
23.2 Consent of Feldman Sherb Ehrlich & Co., P.C. (formerly Feldman Radin & Co., P.C.)
*24 Power of Attorney (included on the signature page)
27.1 Financial Data Schedule for International Smart Sourcing, Inc.
27.2 Financial Data Schedule for Compact Disc Packaging Corp.
</TABLE>
- ------------------
* Previously filed
ITEM 28. UNDERTAKINGS
A. Certificates
The undersigned registrant (the "Registrant") hereby undertakes to provide
to the Underwriter at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriter to permit prompt delivery to each purchaser.
B. Rule 415 Offering
The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement to: (i) include any
prospectus required by Section 10(a)(3) of the Securities Act; (ii) reflect in
the prospectus any facts or events which, individually or together, represent a
fundamental change in the information in the Registration Statement and;
(iii) include any additional or changed material information on the plan of
distribution.
(2) For determining liability under the Securities Act, 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.
II-3
<PAGE>
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
C. Request for Acceleration of Effective Date
The Company may elect to request acceleration of the Effective Date of the
Registration Statement under Rule 461 of the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant 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 Securities 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 Registrant 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
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
D. Rule 430A Offering
If the Company relies on Rule 430A under the Securities Act, the Company
hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A of the Securities
Act and contained in a form of Prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets all requirements of filing on Form SB-2 and authorizes this Amendment
to the Registration Statement to be signed on its behalf by the undersigned, in
the City of New York, State of New York on January 6, 1999.
INTERNATIONAL SMART SOURCING, INC.
By: /s/ ANDREW FRANZONE
----------------------------------
Andrew Franzone
Chief Executive Officer and
President
In accordance with the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement was signed by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chief Executive Officer, President and January 6, 1999
- ------------------------------------------ Director
Andrew Franzone
* Chairman of the Board January 6, 1999
- ------------------------------------------
David L. Kassel
* Vice President and Director January 6, 1999
- ------------------------------------------
Harry Goodman
* Chief Financial Officer and Controller January 6, 1999
- ------------------------------------------
Steven Sgammato
* Director January 6, 1999
- ------------------------------------------
Carl Seldin Koerner
/s/ BAO-WEN CHEN Director January 6, 1999
- ------------------------------------------
Bao-Wen Chen
/s/ MITCHELL SOLOMON Director January 6, 1999
- ------------------------------------------
Mitchell Solomon
*By: /s/ ANDREW FRANZONE
-------------------------------------
Andrew Franzone, Attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ----------- ------
<S> <C> <C>
*1 Form of Underwriting Agreement
2.1 Agreement and Plan of Reorganization between International Plastic Technologies, Inc. and
CDP and Amendment No. 1 effective as of December 24, 1998
2.2 Agreement and Plan of Reorganization between International Plastic Technologies, Inc. and
EHC and Amendment No. 1 effective as of December 24, 1998
3.1 Certificate of Incorporation of International Plastic Technologies, Inc. and Amendment to
the Certificate of Incorporation dated December 7, 1998
*3.2 By-Laws of International Plastic Technologies, Inc., as amended
4.1 Form of Common Stock Certificate
4.2 Form of Warrant Certificate
*4.3 Form of Warrant Agreement between the Company and Continental Stock Transfer and Trust
Company
*4.4 Form of Underwriter's Warrant Agreement
*5 Opinion of Koerner Silberberg & Weiner, LLP
*10.1 Employment Agreement between the Company and Andrew Franzone
*10.2 Employment Agreement between the Company and David L. Kassel
*10.3 Employment Agreement between the Company and Harry Goodman
*10.4 Consulting Agreement between the Company and B.C. China Business Consulting, Inc. and
Letter Agreement between the Company and Bao-Wen Chen dated March 1, 1998, as amended
*10.5 Consulting Agreement between the Company and Network 1 Financial Securities, Inc.
*10.6 Lease Agreement between the Company and K&G Realty Associates dated December 19, 1989,
Rider to Lease Agreement dated January 1, 1990, Letter Agreement between the Company and
K&G Realty Associates dated March 16, 1995 and Riders to Lease Agreement dated March 1,
1998 and May 14, 1998
*10.7 Licensing Agreement between CDP and Inch, Inc.
*10.8 Promissory Notes payable to David L. Kassel dated September 13, 1994, August 1, 1996,
December 31, 1997 and Janaury 1, 1998, and Guarantee of CDP Promissory Note dated
January 1, 1998 by International Plastic Technologies, Inc.
*10.9 Promissory Notes payable to Harry Goodman dated September 1, 1994 and August 1, 1996
*10.10 Demand Grid Note between AFC and Republic National Bank of New York dated December 1, 1997,
Term Loan Agreement Promissory Note between AFC and Republic National Bank of New York
dated July 29, 1996 and Guaranty and Security Agreement by EHC dated July 25, 1996
*10.11 Term Loan Agreement between EHC and Republic National Bank of New York dated July 29, 1996
and Term Loan Agreement Promissory Note dated July 29, 1996
*10.12 Demand Grid Note between Republic National Bank of New York and EHC dated July 29, 1996
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ---------- ----------- ------
<S> <C> <C>
*10.13 Loan Agreement between EHC and Long Island Development Corporation dated February 21, 1997,
Loan Promissory Note dated February 21, 1997, Security Agreement dated February 21, 1997
and Waiver Letter dated July 13, 1998
*10.14 Mortgage between K&G Realty Associates and Long Island Commercial Bank dated November 28,
1995, Rider to Mortgage dated November 28, 1995, Mortgage Note, Guaranty of Mortgage Note
by EHC and Assignment of Leases and Rent
10.15 Collective Bargaining Agreement between EHC and Local 531, International Brotherhood of
Teamsters, AFL-CIO and Memorandum of Agreement dated as of May 10, 1998
*10.16 Stockholders' Agreement between the Company, Andrew Franzone, David L. Kassel and Harry
Goodman and Amendment No. 1 to the Stockholders' Agreement
*10.17 International Plastic Technologies, Inc., 1998 Stock Option and Grant Plan
*10.18 Agreement between AFC and EHC to engineer, manufacture and import products
*10.19 Letter agreement between EHC and Republic National Bank of New York to release the personal
guarantees of Andrew Franzone, David Kassel and Harry Goodman dated May 14, 1998
10.20 Demand Negotiable Promissory Note payable to David L. Kassel dated October 27, 1998
10.21 Demand Negotiable Promissory Notes payable to Harry Goodman dated October 22, 1998 and
December 7, 1998
10.22 Agreement between EHC and David L. Kassel to extend maturity date of January 1, 1998
Promissory Note, dated December 8, 1998
10.23 Agreement between CDP and David L. Kassel to extend maturity date of January 1, 1998
Promissory Note, dated December 8, 1998
21 List of Subsidiaries of the Company
*23.1 Consent of Koerner Silberberg & Weiner, LLP (contained in its opinion filed as Exhibit 5
hereto).
23.2 Consent of Feldman Sherb Ehrlich & Co., P.C. (formerly Feldman Radin & Co., P.C.)
*24 Power of Attorney (included on the signature page)
27.1 Financial Data Schedule for International Smart Sourcing, Inc.
27.2 Financial Data Schedule for Compact Disc Packaging Corp.
</TABLE>
- ------------------
* Previously filed.
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of the day immediately
preceding the effective date of the initial public offering of securities of
International Plastic Technologies, Inc. (the "Effective Date"), among
International Plastic Technologies, Inc., a Delaware corporation ("IPT"),
Compact Disc Packaging Corp., a Delaware corporation ("Compact Disc"), and David
Kassel, Robert Gillings and David Cowan (collectively the "Shareholders").
1. PLAN OF REORGANIZATION
Kassel, Gillings and Cowan are the owners of one hundred (100%) percent
of the issued and outstanding shares of stock of Compact Disc, which consists of
five hundred (500) shares of common stock with a par value of $.01 per share. It
is the intention of Kassel, Gillings and Cowan that each of the shareholders
signing at the foot of this agreement (provided such signing shareholders
represent eighty (80%) percent or more of the total shares of Compact Disc)
shall exchange with IPT shares of Compact Disc for common shares of IPT (the
"Reorganization").
2. EXCHANGE OF SHARES
Each of the shareholders signing at the foot of this agreement
(provided such signing shareholders represent eighty (80%) percent or more of
the voting shares of Compact Disc) shall exchange with IPT shares of Compact
Disc for common shares of IPT. The following number of shares of IPT will, on
the closing date, as hereinafter defined, be delivered to the individual
Shareholders in exchange for their Compact Disc shares as set forth below:
Shareholder No. of Shares of No. of Shares of IPT
Compact Disc to be Issued
Kassel 225 200,000
Gillings 225 200,000
Cowan 50 45,000
<PAGE>
Such shares shall be issued in certificates of such denominations, amounts, and
names as may be requested by the respective Shareholders. The Shareholders
represent and warrant that they will hold such common shares of IPT for
investment purpose only.
3. DELIVERY OF SHARES
On the closing date, the Shareholders will deliver certificates for the
shares of Compact Disc duly endorsed so as to make IPT the sole owner thereof,
free and clear of all claims and encumbrances; and on such closing date,
delivery of the common shares of IPT, on which documentary stamp taxes will have
been paid by IPT, will be made to the Shareholders as above set forth.
4. CLOSING
The closing of the reorganization shall take place at the offices of
Koerner Silberberg & Weiner, LLP, 112 Madison Avenue, New York, New York 10016
on the Effective Date (the "Closing").
5. REPRESENTATIONS OF SHAREHOLDERS
The Shareholders represent and warrant as follows:
(a) As of the closing date they will be the sole owners of the shares
appearing of record in their names; such shares will be free from claims, liens,
or other encumbrances; and they will have the unqualified right to transfer such
shares.
(b) The shares constitute validly issued shares of Compact Disc, fully
paid and nonassessable.
(c) As of the closing date, Compact Disc will be in good standing as a
Delaware corporation.
(d) The Shareholders represent and warrant (i) that the shares to be
acquired pursuant to this Agreement will be acquired for his or her own account
and not with a view to, or present intention of, distribution thereof in
violation of the Securities Act of 1933, as amended (the "Securities Act"), and
will not be disposed of in contravention of the Securities Act or this
2
<PAGE>
Agreement; (ii) that he or she is able to bear the economic risk of an
investment in the shares for an indefinite period of time inasmuch as the shares
have not been registered under the Securities Act and, therefore, cannot be sold
unless subsequently registered under the Securities Act or an exemption from
such registration is available; and (iii) that he or she has had an opportunity
to ask questions and receive answers concerning the terms and conditions of the
offering of the shares and has had full access to such other information
concerning IPT and its subsidiaries as he or she has requested.
6. REPRESENTATIONS OF ACQUIRING CORPORATION
IPT represents and warrants as follows:
(a) As of the closing date, the IPT shares to be delivered to the
Shareholders will constitute the valid and legally issued shares of IPT, fully
paid and nonassessable, and will be legally equivalent in all respects to the
common share of stock of IPT issued and outstanding as of the date of the
closing.
(b) The officers of IPT are duly authorized to execute this agreement.
(c) There are no substantial liabilities, either fixed or contingent of
IPT other than contracts or obligations in the usual course of business; and no
such contracts or obligations in the usual course of business are liens or other
liabilities which, if disclosed, would alter substantially the financial
condition of IPT as of the closing date.
(d) IPT is not involved in any pending litigation or governmental
investigation or proceeding.
(e) As of the closing date, IPT will be in good standing as a Delaware
corporation.
(f) The shares of Compact Disc are being acquired by IPT as an
investment, and there is no present intention on the part of IPT to dispose of
such shares.
7. PROHIBITED ACTS
Compact Disc agrees not to do any of the following things prior to the
closing date, and the Shareholders agree that prior to the closing date they
will not request or permit Compact Disc to do any of the following things:
3
<PAGE>
(a) Declare or pay any dividends or other distributions on its
stock or purchase or redeem any of its shares;
(b) Issue any shares or other securities, including any right
or option to purchase or otherwise acquire any of its shares, or issue any notes
or other evidences of indebtedness not in the usual course of business;
8. DELIVERY OF RECORDS
The Shareholders agree that on or before the closing date they will
cause to be delivered to IPT such corporate records or other documents of
Compact Disc as IPT may request.
9. INVESTIGATIONS; SURVIVAL OF WARRANTIES
The respective representations and warranties of Compact Disc and IPT
contained herein or in any certificates or other documents delivered prior to or
at the Closing shall not be deemed waived or otherwise affected by any
investigation made by any party to the agreement. Each and every such
representation and warranty shall expire and be terminated and extinguished on
the first anniversary of the Reorganization.
10. NOTICES
All notices and other communications shall be in writing and shall be
deemed given if delivered personally or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice; provided that
notices of a change of address shall be effective only upon receipt thereof):
(a) if to IPT to:
International Plastic Technologies, Inc.
320 Broadhollow Road
Farmingdale, New York 11735
4
<PAGE>
with a copy to:
Koerner Silberberg & Weiner, LLP
112 Madison Avenue, 3rd Floor
New York, New York 10016
(b) if to Compact Disc to:
Compact Disc Packaging
320 Broadhollow Road
Farmingdale, New York 11735
(c) if to Kassel to:
David Kassel
145 West 67th Street, Apt. 40D
New York, New York 10023
(d) if to Gillings to;
Robert Gillings
7423 Ridge Boulevard
Brooklyn, New York 11209
(e) if to Cowan to:
David Cowan
553 8th Street, Apt. 3L
Brooklyn, New York 11215
12. ASSIGNMENT; PARTIES IN INTEREST
This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, but neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto without the prior written consent of the other parties. This Agreement is
not intended to confer upon any other person except the parties any rights or
remedies hereunder.
5
<PAGE>
13. GOVERNING LAW
This Agreement shall be governed by the laws of the State of New York
(regardless of the laws that might otherwise govern under applicable principles
of conflicts of law) as to all matters, including but not limited to matters of
validity, construction, effect, performance and remedies.
14. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
15. INTERPRETATION
The article and section headings contained in this Agreement are solely
for the purpose of reference, are not part of the agreement of the parties and
shall not in any way affect the meaning or interpretation of this Agreement.
16. ENTIRE AGREEMENT
This Agreement, including the documents and instruments referred to
herein, embodies the entire agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, representations, warranties, covenants or undertakings, other than
those expressly set forth or referred to herein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter.
6
<PAGE>
IN WITNESS WHEREOF, Compact Disc, IPT and the Shareholders have caused
this agreement to be signed by their respective duly authorized officers as of
the date first above written.
Compact Disc Packaging Corp.
By: /s/ David L. Kassel
-------------------------------
David Kassel, President
International Plastic Technologies, Inc.
By: /s/ Andrew Franzone
-------------------------------
Andrew Franzone, President
/s/ David L. Kassel
------------------------------------
David Kassel
/s/ Robert Gillings
------------------------------------
Robert Gillings
/s/ David Cowan
------------------------------------
David Cowan
7
<PAGE>
AMENDMENT NO. 1 TO THE AGREEMENT AND
PLAN OF REORGANIZATION AMONG INTERNATIONAL
PLASTIC TECHNOLOGIES, INC. AND
COMPACT DISC PACKAGING CORP.
This Amendment, effective as of December 24, 1998, by and among
International Plastic Technologies, Inc., now known as International Smart
Sourcing, Inc. ("ISS"), Compact Disc Packaging Corp. ("CDP"), David Kassel and
David Cowan.
WHEREAS, ISS, CDP, David Kassel, Robert Gillings and David Cowan
entered into an Agreement and Plan of Reorganization dated as of the day
immediately preceding the effective date of the initial public offering of ISS
(the "Agreement"); and
WHEREAS, Robert Gillings is no longer a shareholder of ISS; and
WHEREAS, it is the desire of the parties hereto to amend the
Agreement to change the effective date of the Agreement and remove Robert
Gillings from the Agreement.
NOW THEREFORE, in consideration of the premises and the mutual
covenants and the terms and conditions set forth in this Amendment, the
parties hereto agree as follows:
1. Capitalized terms herein shall have the meaning ascribed to them
in the Agreement.
2. The Agreement is amended to change the effective date of the
Agreement to December 24, 1998.
3. The Agreement is further amended to remove all references to
Robert Gillings from the Agreement and change the chart "Exchange of Shares"
set forth in Paragraph 2 to substitute the following:
No. of Shares of No. of Shares of IPT
Shareholder Compact Disc to be Issued
Kassel 500 400,000
Cowan 50 45,000
<PAGE>
4. The Agreement is further amended to change the name of
International Plastic Technologies, Inc. to International Smart Sourcing, Inc.
5. Except as specifically amended above, the terms and conditions of
the Agreement are hereby ratified and confirmed and remain in full force and
effect.
6. This Amendment may be executed in any number of counterparts, each
of which shall be an original, but all of which together shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
duly executed and delivered on the date first above written.
Compact Disc Packaging Corp.
By: /s/ David Kassel
---------------------------
David Kassel, President
International Smart Sourcing, Inc.
By: /s/ Andrew Franzone
---------------------------
Andrew Franzone, President
/s/ David Kassel
------------------------------
David L. Kassel
/s/ David Cowan
------------------------------
David Cowan
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
AGREEMENT AND PLAN OF REORGANIZATION, dated as of the day immediately
preceding the effective date of the initial public offering of securities of
International Plastic Technologies, Inc. (the "Effective Date"), among
International Plastic Technologies, Inc., a Delaware corporation ("IPT"),
Electronic Hardware Corp., a New York corporation ("Electronic Hardware"), and
David Kassel, Harry Goodman and Andrew Franzone (collectively the
"Shareholders").
1. PLAN OF REORGANIZATION
Kassel, Goodman and Franzone are the owners of one hundred (100%)
percent of the issued and outstanding shares of stock of Electronic Hardware,
which consists of three (3) shares of common stock with no par value. It is the
intention of Kassel, Goodman and Franzone that each of the shareholders signing
at the foot of this agreement (provided such signing shareholders represent
eighty (80%) percent or more of the total shares of Electronic Hardware) shall
exchange with IPT shares of Electronic Hardware for common shares of IPT (the
"Reorganization").
2. EXCHANGE OF SHARES
Each of the shareholders signing at the foot of this agreement
(provided such signing shareholders represent eighty (80%) percent or more of
the voting shares of Electronic Hardware) shall exchange with IPT shares of
Electronic Hardware for common shares of IPT. The following number of shares of
IPT will, on the closing date, as hereinafter defined, be delivered to the
individual Shareholders in exchange for their Electronic Hardware shares as set
forth below:
Shareholder No. of Shares of No. of Shares of IPT
Electronic Hardware to be Issued
Kassel 1 500,000
Goodman 1 500,000
Franzone 1 500,000
<PAGE>
Such shares shall be issued in certificates of such denominations, amounts, and
names as may be requested by the respective Shareholders. The Shareholders
represent and warrant that they will hold such common shares of IPT for
investment purpose only.
3. DELIVERY OF SHARES
On the closing date, the Shareholders will deliver certificates for the
shares of Electronic Hardware duly endorsed so as to make IPT the sole owner
thereof, free and clear of all claims and encumbrances; and on such closing
date, delivery of the common shares of IPT, on which documentary stamp taxes
will have been paid by IPT, will be made to the Shareholders as above set forth.
4. CLOSING
The closing of the reorganization shall take place at the offices of
Koerner Silberberg & Weiner, LLP, 112 Madison Avenue, New York, New York 10016
on the Effective Date (the "Closing").
5. REPRESENTATIONS OF SHAREHOLDERS
The Shareholders represent and warrant as follows:
(a) As of the closing date they will be the sole owners of the shares
appearing of record in their names; such shares will be free from claims, liens,
or other encumbrances; and they will have the unqualified right to transfer such
shares.
(b) The shares constitute validly issued shares of Electronic Hardware,
fully paid and nonassessable.
(c) As of the closing date, Electronic Hardware will be in good
standing as a New York corporation.
(d) The Shareholders represent and warrant (i) that the shares to be
acquired pursuant to this Agreement will be acquired for his or her own account
and not with a view to, or present intention of, distribution thereof in
violation of the Securities Act of 1933, as amended (the "Securities Act"), and
will not be disposed of in contravention of the Securities Act or this
2
<PAGE>
Agreement; (ii) that he or she is able to bear the economic risk of an
investment in the shares for an indefinite period of time inasmuch as the shares
have not been registered under the Securities Act and, therefore, cannot be sold
unless subsequently registered under the Securities Act or an exemption from
such registration is available; and (iii) that he or she has had an opportunity
to ask questions and receive answers concerning the terms and conditions of the
offering of the shares and has had full access to such other information
concerning IPT and its subsidiaries as he or she has requested.
6. REPRESENTATIONS OF ACQUIRING CORPORATION
IPT represents and warrants as follows:
(a) As of the closing date, the IPT shares to be delivered to the
Shareholders will constitute the valid and legally issued shares of IPT, fully
paid and nonassessable, and will be legally equivalent in all respects to the
common share of stock of IPT issued and outstanding as of the date of the
closing.
(b) The officers of IPT are duly authorized to execute this agreement.
(c) There are no substantial liabilities, either fixed or contingent of
IPT other than contracts or obligations in the usual course of business; and no
such contracts or obligations in the usual course of business are liens or other
liabilities which, if disclosed, would alter substantially the financial
condition of IPT as of the closing date.
(d) IPT is not involved in any pending litigation or governmental
investigation or proceeding.
(e) As of the closing date, IPT will be in good standing as a Delaware
corporation.
(f) The shares of Electronic Hardware are being acquired by IPT as an
investment, and there is no present intention on the part of IPT to dispose of
such shares.
7. PROHIBITED ACTS
Electronic Hardware agrees not to do any of the following things prior
to the closing date, and the Shareholders agree that prior to the closing date
they will not request or permit Electronic Hardware to do any of the following
things:
3
<PAGE>
(a) Declare or pay any dividends or other distributions
on its stock or purchase or redeem any of its shares;
(b) Issue any shares or other securities, including any
right or option to purchase or otherwise acquire any of its shares, or issue any
notes or other evidences of indebtedness not in the usual course of business;
8. DELIVERY OF RECORDS
The Shareholders agree that on or before the closing date they will
cause to be delivered to IPT such corporate records or other documents of
Electronic Hardware as IPT may request.
9. INVESTIGATIONS; SURVIVAL OF WARRANTIES
The respective representations and warranties of Electronic Hardware
and IPT contained herein or in any certificates or other documents delivered
prior to or at the Closing shall not be deemed waived or otherwise affected by
any investigation made by any party to the agreement. Each and every such
representation and warranty shall expire and be terminated and extinguished on
the first anniversary of the Reorganization.
10. NOTICES
All notices and other communications shall be in writing and shall be
deemed given if delivered personally or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice; provided that
notices of a change of address shall be effective only upon receipt thereof):
(a) if to IPT to:
International Plastic Technologies, Inc.
320 Broadhollow Road
Farmingdale, New York 11735
4
<PAGE>
with a copy to:
Koerner Silberberg & Weiner, LLP
112 Madison Avenue, 3rd Floor
New York, New York 10016
(b) if to Electronic Hardware to:
Electronic Hardware Corp.
320 Broadhollow Road
Farmingdale, New York 11735
(c) if to Kassel to:
David Kassel
145 West 67th Street, Apt. 40D
New York, New York 10023
(d) if to Goodman to;
Harry Goodman
24 Ardsley Place
Rockville Centre, New York 11570
(e) if to Franzone to:
Andrew Franzone
Box 651, Strathmore Street
Remsenburg, New York 11906
12. ASSIGNMENT; PARTIES IN INTEREST
This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, but neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto without the prior written consent of the other parties. This Agreement is
not intended to confer upon any other person except the parties any rights or
remedies hereunder.
5
<PAGE>
13. GOVERNING LAW
This Agreement shall be governed by the laws of the State of New York
(regardless of the laws that might otherwise govern under applicable principles
of conflicts of law) as to all matters, including but not limited to matters of
validity, construction, effect, performance and remedies.
14. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
15. INTERPRETATION
The article and section headings contained in this Agreement are solely
for the purpose of reference, are not part of the agreement of the parties and
shall not in any way affect the meaning or interpretation of this Agreement.
16. ENTIRE AGREEMENT
This Agreement, including the documents and instruments referred to
herein, embodies the entire agreement and understanding of the parties hereto in
respect of the subject matter contained herein. There are no restrictions,
promises, representations, warranties, covenants or undertakings, other than
those expressly set forth or referred to herein. This Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter.
6
<PAGE>
IN WITNESS WHEREOF, Electronic Hardware, IPT and the Shareholders have
caused this agreement to be signed by their respective duly authorized officers
as of the date first above written.
Electronic Hardware Corp.
By: /s/ Andrew Franzone
--------------------------
Andrew Franzone, President
International Plastic Technologies, Inc.
By: /s/ Andrew Franzone
----------------------------
Andrew Franzone, President
/s/ David L. Kassel
----------------------------
David Kassel
/s/ Harry Goodman
----------------------------
Harry Goodman
/s/ Andrew Franzone
----------------------------
Andrew Franzone
7
<PAGE>
AMENDMENT NO. 1 TO THE AGREEMENT AND
PLAN OF REORGANIZATION AMONG INTERNATIONAL
PLASTIC TECHNOLOGIES, INC. AND
ELECTRONIC HARDWARE CORP.
This Amendment, effective as of December 24, 1998, by and among
International Plastic Technologies, Inc., now known as International Smart
Sourcing, Inc. ("ISS"), Electronic Hardware Corp. ("EHC"), David Kassel, Harry
Goodman and Andrew Franzone.
WHEREAS, ISS, EHC, David Kassel, Harry Goodman and Andrew Franzone
entered into an Agreement and Plan of Reorganization dated as of the day
immediately preceding the effective date of the initial public offering of ISS
(the "Agreement"); and
WHEREAS, it is the desire of the parties hereto to amend the
Agreement to change the effective date of the Agreement.
NOW THEREFORE, in consideration of the premises and the mutual
covenants and the terms and conditions set forth in this Amendment, the
parties hereto agree as follows:
1. Capitalized terms herein shall have the meaning ascribed to them
in the Agreement.
2. The Agreement is amended to change the effective date of the
Agreement to December 24, 1998.
3. The Agreement is further amended to change the name of
International Plastic Technologies, Inc. to International Smart Sourcing, Inc.
4. Except as specifically amended above, the terms and conditions of
the Agreement are hereby ratified and confirmed and remain in full force and
effect.
5. This Amendment may be executed in any number of counterparts, each
of which shall be an original, but all of which together shall constitute one
and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
duly executed and delivered on the date first above written.
Electronic Hardware Corp.
By: /s/ David L. Kassel
---------------------------
David Kassel, President
International Smart Sourcing, Inc.
By: /s/ Andrew Franzone
---------------------------
Andrew Franzone, President
/s/ David L. Kassel
------------------------------
David L. Kassel
/s/ Harry Goodman
------------------------------
Harry Goodman
/s/ Andrew Franzone
------------------------------
Andrew Franzone
<PAGE>
STATE OF DELAWARE
SECRETARY OF STATE
DIVISION OF CORPORATIONS
FILED 04:00 PM 03/04/1998
981084156 - 2867176
CERTIFICATE OF INCORPORATION
OF
INTERNATIONAL PLASTIC TECHNOLOGIES, INC.
The undersigned, being of legal age, in order to form a corporation
under and pursuant to the laws of the State of Delaware, do hereby set forth as
follows:
FIRST: The name of the Corporation is:
International Plastic Technologies, Inc.
SECOND: The address of the registered office of the Corporation in the
State of Delaware and the name of the registered agent at such
address are as follows: National Corporate Research, Ltd., 9
East Loockerman Street, City of Dover, County of Kent, Delaware
19901.
THIRD: The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law
of Delaware (the "DGCL").
FOURTH:
Capitalization.
(a) The aggregate number of shares that the Corporation shall
have the authority to issue is 11,000,000 shares of capital
stock of which: (i) 10,000,000 shares shall be of a class of
voting common stock, par value $.001 per share (the "Common
Stock"); and (ii) 1,000,000 shares shall be of a class of
Preferred Stock, par value $.001 per share (the "Preferred
Stock"), for which the Board of Directors (the "Board") is
authorized hereby, subject to the limitations prescribed by law
and the provisions of this Article, to provide for the issuance
of shares of Preferred Stock in series, and by filing a
certificate pursuant to the DGCL to establish from time to time
the number of shares to be included in each such series, and to
fix the designation, powers, preferences and rights of the
shares of each such series of Preferred Stock and the
qualifications, limitations or restrictions thereof. The
authority of the Board with respect to each series of Preferred
Stock, not heretofore designated, shall include, but not be
limited to, determination of the following:
(i) the number of shares constituting that series (which may be
1
<PAGE>
increased or decreased by the Board) and the distinctive
designation of that series (provided that the aggregate number
of shares constituting all series of Preferred Stock shall not
exceed 1,000,000);
(ii) the dividend rate on the shares of that series,
whether dividends shall be cumulative, and if so, from which
date or dates, and the relative rights of priority, if any, of
payment of dividends on shares of that series;
(iii) whether that series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the
terms of such voting rights;
(iv) whether that series shall have conversion
privileges, and, if so, the terms and conditions of such
conversion, including provision for adjustment of the conversion
rate in such events as the Board shall determine;
(v) whether or not the shares of that series shall be
redeemable, and if so, the terms and conditions of such
redemption, including the date or dates upon or after which they
shall be redeemable, and the amount per share payable in case of
redemption, which amount may vary under different conditions and
at different redemption dates;
(vi) whether that series shall have sinking fund for
redemption or purchase of shares of that series, and, if so, the
terms and amount of such sinking fund;
(vii) the rights of the shares of that series in the
event of voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, and the relative
rights of priority, if any, of payment of shares of that series;
and
(viii) any other relative rights, powers, preferences,
qualifications, limitations or restrictions relating to such
series which may be authorized under the DGCL.
FIFTH: The name and address of the incorporator are as follows:
Name Address
---- -------
John F. Storz Koerner Silberberg & Weiner
112 Madison Avenue, 3rd Floor
New York, New York 10016
SIXTH: The following provisions are inserted for the management
of the
2
<PAGE>
business and for the conduct of the affairs of the Corporation,
and for further definition, limitation and regulation of the
powers of the Corporation and its directors and stockholders:
(1) The number of directors of the corporation shall be such
as from time to time shall be fixed by, or in the manner
provided in the by-laws. Election of directors need not
be by ballot unless the by-laws so provide.
(2) The Board of Directors shall have power without the
assent or vote of the Stockholders:
(a) To make, alter, amend, change, add to or repeal
the ByLaws of the Corporation; to fix and vary
the amount to be reserved for any proper
purpose; to authorize and cause to be executed
mortgages and liens upon all or any part of the
property of the Corporation; to determine the
use and disposition of any surplus or net
profits; and to fix the times for the
declaration and payment of dividends.
(b) To determine from time to time whether, and to
what times and places, and under what conditions
the accounts and books of the Corporation (other
than the stock ledger) or any of them, shall be
open to the inspection of the stockholders.
(3) The directors in their discretion may submit any
contract or act for approval or ratification at any
annual meeting of the stockholders or at any meeting of
the stockholders called for the purpose of considering
any such act or contract, and any contract or act that
shall be approved or be ratified by the vote of the
holders of a majority of the stock of the Corporation
which is represented in person or by proxy at such
meeting and entitled to vote thereat (provided that a
lawful quorum of stockholders be there represented in
person or by proxy) shall be as valid and as binding
upon the Corporation and upon all the stockholders as
though it had been approved or ratified by every
stockholder of the Corporation, whether or not the
contract of act would otherwise be open to legal attack
because of directors' interest, or for any other reason.
(4) In addition to the powers and authorities hereinbefore
or by statute expressly conferred upon them, the
directors are hereby
3
<PAGE>
empowered to exercise all such powers and do all such
acts and things as may be exercised or done by the
Corporation; subject, nevertheless, to the provisions of
the statutes of Delaware, of this certificate, and to
any by-laws from time to time made by the stockholders;
provided, however, that no by-laws so made shall
invalidate any prior act of the directors which would
have been valid if such by-laws had not been made.
SEVENTH: A director of this Corporation shall not be
personally liable to the Corporation shall not be
personally liable to the Corporation or its
stockholders for damages for any breach of duty in
his/her capacity as a director, provided that such
provision shall not eliminate or limit the liability of
a director: (i) for any breach of the director's duty
of loyalty to the Corporation or its stockholders; (ii)
for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation
of law; (iii) under Section 174 of the DGCL; or (iv)
for any transaction from which the director derived an
improper personal benefit.
EIGHTH: The Corporation shall, to the fullest extent
permitted by the DGCL (including, without limitation,
Section 145 thereof), as the same may be amended and
supplemented from time to time, indemnify any and all
persons whom it shall have power to indemnify under the
DGCL. The indemnification provided for herein shall not
be deemed exclusive of any other rights to which those
seeking indemnification may be entitled whether as a
matter of law, under any By-law of the Corporation, by
agreement, by vote of stockholders or disinterested
directors of the Corporation or otherwise.
NINTH: Whenever a compromise or arrangement is proposed
between this Corporation and its creditors or any class
of them and/or between this Corporation and its
stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware,
may, on the application in a summary way of the
Corporation or of any creditor or stockholder thereof
or on the application of any receiver or receivers
appointed for this Corporation under the provisions of
Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any
receiver or receivers appointed for this Corporation
under the provisions of Section 279 Title 8 of the
Delaware Code order a meeting of the creditors or class
of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be,
to be summoned in such manner as the said court
directs. If a majority in number representing
three-fourths (3/4) in value of the creditors or class
of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be,
agree to any compromise or arrangement and to any
reorganization of this corporation as consequence of
such compromise or arrangement, the said compromise or
arrangement and the said reorganization shall, if
sanctioned by the court to which the said application
has
4
<PAGE>
been made, be binding on all the creditors or class of
creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be,
and also on this Corporation.
IN WITNESS WHEREOF, I, the undersigned, being the
incorporator hereinabove named, for the purpose of forming a corporation
pursuant to the DGCL, do make and file this Certificate, hereby declaring
and certifying that the facts herein stated are true under penalty of
perjury, and accordingly have hereunto set my hand this 4th day of March,
1998.
/s/ John F. Storz
-----------------------------
John F. Storz, Incorporator
STATE OF NEW YORK )
SS.:
COUNTY OF NEW YORK )
BE IT REMEMBERED that on the 4th day of March, 1998 personally
appeared before me, Maryann Peronti, a notary public for the State of New
York, John F. Storz, the party to the foregoing Certificate of
Incorporation, known to me personally to be such, and acknowledged the
said Certificate of his act and deed and that the facts therein stated
are true.
GIVEN under my hand and seal of office the day and year
aforesaid.
/s/ Maryann Peronti
---------------------
Notary Public
MARYANN PERONTI
Notary Public, State of New York
No. 31-4923738
Qualified in New York County
Commission Expires Feb. 16, 2000
5
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
INTERNATIONAL PLASTIC TECHNOLOGIES, INC.
International Plastic Technologies, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation, by the
unanimous written consent of its members filed with the minutes of the Board,
adopted a resolution proposing and declaring advisable the following amendment
to the Certificate of Incorporation of the Corporation:
RESOLVED, that the Certificate of
Incorporation of International Plastic
Technologies, Inc. be amended by changing
the First Article thereof so that, as
amended, said Article shall be and read as
follows:
"The Name of the Corporation is:
International Smart Sourcing, Inc."
SECOND: That in lieu of a meeting and vote of stockholders, the
stockholders have given unanimous written consent to said amendment in
accordance with the provisions of Section 228 of the General Corporation Law
of the State of Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance
with the applicable provisions of Sections 242 and 228 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said Corporation has caused this certificate to
be signed by Andrew Franzone, its President and Chief Executive Officer, this
4th day of December, 1998.
By: /s/ Andrew Franzone
------------------------------------
Andrew Franzone
<PAGE>
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
NUMBER SHARES
- ------ ------
CUSIP 46017R 10 4
INTERNATIONAL SMART SOURCING, INC.
10,000,000 SHARES PAR VALUE $.001 EACH
See Reverse for
Certain Definitions
VOTING COMMON STOCK
THIS IS TO CERTIFY THAT ____________________________________________ IS THE
OWNER OF ____________________________________________________________ fully paid
and non-assessable shares of the above Corporation transferable only on the
books of the Corporation by the holder hereof in person or by duly authorized
Attorney upon surrender of this Certificate properly endorsed.
This Certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS, the seal of the Corporation and the signatures of its duly authorized
officers.
DATED
/s/ Harry Goodman /s/ Andrew Franzone
- ------------------------------------- --------------------------------------
VICE PRESIDENT AND SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER
<PAGE>
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - - as tenants in common
TEN ENT - - as tenants by the entireties
JT TEN - - as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- ____________________ Custodian __________________
(Cust) (Minor)
under Uniform Gifts to Minors Act ____________________________________
(State)
For value received, _______________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING
POSTAL ZIP CODE OF ASSIGNEE)
- -------------------------------------------------------------------------------
_________________________________________________________________________Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
______________________________________________________________________ Attorney
to transfer the said Shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated ___________________________ 19___ ______________________________
In presence of
- ----------------------------------------
NOTICE: The signature to this assignment
must correspond with the name as
written upon the face of the certificate
in every particular without alteration
or enlargement or any change whatever.
<PAGE>
No. W _______________________ VOID AFTER _______, 2004
______ WARRANTS
REDEEMABLE COMMON STOCK PURCHASE WARRANT
CERTIFICATE TO PURCHASE ONE SHARE OF COMMON STOCK
INTERNATIONAL SMART SOURCING, INC.
EXERCISABLE FROM ___________, 2000
UNTIL 5:00 P.M. (EST) _________, 2004
CUSIP 46017R 11 2
THIS WARRANT CERTIFICATE CERTIFIES THAT, FOR VALUE RECEIVED
___________ or registered assigns (the "Registered Holder") is the owner of
the number of Redeemable Common Stock Purchase Warrants (the "Warrants")
specified above. Each Warrant initially entitles the Registered Holder to
purchase, subject to the terms and conditions set forth in this Certificate and
the Warrant Agreement (as hereinafter defined), one fully paid and nonassessable
share of Common Stock, $.001 par value (the "Common Stock"), of International
Smart Sourcing, Inc., a Delaware corporation (the "Company"), at any time
from _______, 2000 (the "Initial Warrant Exercise Date") and prior to the
Expiration Date (as hereinafter defined) upon the presentation and surrender of
this Warrant Certificate with the Exercise Form on the reverse hereof duly
executed, at the corporate office of Continental Stock Transfer & Trust Company,
2 Broadway, New York, New York 10004, as Warrant Agent, or its successor (the
"Warrant Agent"), accompanied by payment of $5.00, subject to adjustment (the
"Exercise Price"), in lawful money of the United States of America in cash or by
certified or bank check made payable to the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement, dated as of _______, 1999, among the Company,
Network 1 Financial Securities, Inc. (the "Representative") and the Warrant
Agent (the "Warrant Agreement").
In the event of certain contingencies provided for in the Warrant
Agreement, the Exercise Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
<PAGE>
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares will be issued. In the case of the
exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (New York City time) on
________, 2004; provided, that if such date is not a business day, it shall mean
5:00 p.m., New York City time, on the next following business day. For purposes
hereof, the term "business day" shall mean any day other than a Saturday, Sunday
or a day on which banking institutions in New York City, New York, are
authorized or obligated by law to be closed.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of the Warrants represented hereby unless at the time of exercise
the Company has filed with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933, as amended (the "Act"), covering the
securities issuable upon exercise of the Warrants represented hereby and such
registration statement has been declared and shall remain effective and shall be
current, and such securities have been registered or qualified or be exempt
under the securities laws of the state or other jurisdiction of residence of the
Registered Holder and the exercise of the Warrants represented hereby in any
such state or other jurisdiction shall not otherwise be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon the presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder, as such, shall not be entitled to any rights of a stockholder of the
Company, including, without limitation, the right to vote or to receive
dividends or other distributions, and shall not be entitled to receive any
notice of any proceedings of the Company, except as provided in the Warrant
Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company, at a redemption price of $.10 per
Warrant, at any time commencing _______, 2000, provided that the closing bid
quotations of the Common Stock as reported on The NASDAQ SmallCap Market or the
Boston Stock Exchange, if traded thereon, or if not traded thereon, the closing
sale price if listed on a national or regional securities exchange (or other
reporting system that provides last sale prices), shall have for a period of any
20 trading
2
<PAGE>
days within a period of 30 consecutive trading days ending on the 15th day prior
to the date on which the Company gives the Notice of Redemption (as defined
below) exceeds 150% of the then Exercise Price, subject to the right of the
Registered Holder to exercise such Warrants prior to redemption. Notice of
redemption (the "Notice of Redemption") shall be given by the Company no less
than 30 days before the date fixed for redemption, all as provided in the
Warrant Agreement. On and after the date fixed for redemption, the Registered
Holder shall have no right with respect to this Warrant except to receive the
$.10 per Warrant upon surrender of this Certificate.
Under certain circumstances described in the Warrant Agreement, the
Representative shall be entitled to receive as a solicitation fee an aggregate
of 5% of the Exercise Price of the Warrants represented hereby.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York without regard to the conflicts of law
principles thereof.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated ______________
SEAL INTERNATIONAL SMART SOURCING, INC.
By: /s/ Andrew Franzone
----------------------------------
Andrew Franzone
President and Chief Executive Officer
By: /s/ Harry Goodman
----------------------------------
Harry Goodman
Vice President and Secretary
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY,
as Warrant Agent
By:_____________________________
Authorized Officer
4
<PAGE>
EXERCISE FORM
To Be Executed by the Registered Holder
in order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably elects to exercise
___________ Warrants represented by this Warrant Certificate, and to purchase
the securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
--------------------------------------
--------------------------------------
--------------------------------------
(please print or type name and address)
and be delivered to
--------------------------------------
--------------------------------------
--------------------------------------
(please print or type name and address)
and if such number of exercised Warrants shall not be all the Warrants evidenced
by this Warrant Certificate, that a new Warrant Certificate for the balance of
such Warrants be registered in the name of, and delivered to, the Registered
Holder at the address stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. If the exercise of this Warrant was solicited by Network 1 Financial
Securities, Inc., please check the following box. |_|
2. The exercise of this Warrant was solicited by
------------------------------------------------------------------------
<PAGE>
3. If the exercise of this Warrant was not solicited, please check the
following box. |_|
Dated: ___________________________ X______________________________
- ----------------------------------
- ----------------------------------
Address
- ----------------------------------
Social Security or Taxpayer
Identification Number
- ----------------------------------
Signature Guaranteed
2
<PAGE>
ASSIGNMENT
To be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, __________________, hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
--------------------------------------
--------------------------------------
--------------------------------------
(please print or type name and address)
______________________ of the Warrants represented by this Warrant Certificate,
and hereby irrevocably constitutes and appoints ________________________________
as its/his/her attorney-in-fact to transfer this Warrant Certificate on the
books of the Company, with full power of substitution in the premises.
Dated: _____________________ x______________________________
Signature Guaranteed
THE SIGNATURE TO THE ASSIGNMENT OR THE EXERCISE FORM MUST CORRESPOND TO THE NAME
AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY A BANK, BROKER, DEALER, CREDIT UNION, SAVINGS ASSOCIATION OR OTHER
ENTITY WHICH IS A MEMBER IN GOOD STANDING OF THE SECURITIES TRANSFER AGENTS
MEDALLION PROGRAM.
<PAGE>
COLLECTIVE BARGAINING AGREEMENT
By and Between
LOCAL 531, INTERNATIONAL BROTHERHOOD OF
TEAMSTERS, AFL-CI0
-and-
ELECTRIC HARDWARE CORPORATION
May 10, 1995 -through- May 9, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ARTICLE PAGE
------- ----
<S> <C> <C>
ASSIGNABILITY ....................................... 34 ...................... 17
BULLETIN BOARD ...................................... 30 ...................... 16
CHECK-OFF ........................................... 4 ...................... 2-3
COLLECTIVE BARGAINING ............................... 27 ...................... 15
DEATH-IN-FAMILY ..................................... 31 ...................... 16
DISCHARGE ........................................... 13 ...................... 10-11
DISCOVERY ........................................... 29 ...................... 16
DURATION ............................................ 36 ...................... 17
DRUG TESTING ........................................ 44 ...................... 21
EFFECTIVE DATE ...................................... 35 ...................... 17
EXISTING PRACTICES .................................. 18 ...................... 13
GOOD FAITH .......................................... 1 ...................... 1
GRIEVANCE PROCEDURES ................................ 14 ...................... 11-12
GUARANTEED WORK ..................................... 21 ...................... 14
HOLIDAYS ............................................ 8 ...................... 4-5
HOURS OF WORK ....................................... 5 ...................... 3
JURY DUTY ........................................... 32 ...................... 16
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
LEAVE-OF-ABSENCE .................................... 20 ...................... 14
LIABILITY ........................................... 25 ...................... 15
LIE DETECTOR TEST ................................... 23 ...................... 14
NON-DISCRIMINATION .................................. 16 ...................... 13
NO STRIKE, NO LOCKOUT................................ 12 ...................... 10
NOTICE TO UNION ..................................... 9 ...................... 5-6
OVERTIME ............................................ 6 ...................... 3-4
PART-TIME EMPLOYEES ................................. 43 ...................... 20-21
PRE-HIRING REQUIREMENTS ............................. 38 ...................... 17-18
PROMOTIONS .......................................... 28 ...................... 15
PROTECTION OF RIGHTS ................................ 33 ...................... 16-17
RECOGNITION.......................................... 2 ...................... 1
REHIRE OF EMPLOYEES ................................. 24 ...................... 15
SAFETY & SANITARY CONDITIONS ........................ 17 ...................... 13
SENIORITY ........................................... 15 ...................... 12-13
SEPARABILITY ........................................ 26 ...................... 15
SICK & MATERNITY LEAVE .............................. 42 ...................... 20
SUB-CONTRACTING ..................................... 37 ...................... 17
TRIAL PERIOD ........................................ 22 ...................... 14
UNIFORMS ............................................ 39 ...................... 18
UNION AS THE PARTY AT INTEREST ...................... 10 ...................... 7
UNION RIGHTS ........................................ 7 ...................... 4
UNION SECURITY ...................................... 3 ...................... 1-2
VACATIONS ........................................... 41 ...................... 19
VISITATIONS ......................................... 19 ...................... 14
WAGE & WAGE INCREASES ............................... 40 ...................... 18
WELFARE FUND (MEDICAL COVERAGE) ..................... 11 ...................... 7-9
</TABLE>
[END PAGE]
<PAGE>
THIS AGREEMENT, made and entered into this day of 1995,
by and between ELECTRONIC HARDWARE CORPORATION located at 320 Broad Hollow
Road., Farmingdale, New York 11735, herein designated as the EMPLOYER or
COMPANY, and LOCAL 531 INTERNATIONAL BROTHERHOOD OF TEAMSTERS, A.F.L. - C.I.O.,
located at 372 McLean Avenue, Yonkers, New York 10705, herein designated as the
UNION.
WHEREAS the Union represents the majority of the employees of the
Employer.
NOW, THEREFORE, in consideration of mutual promises herein assumed and
made, the parties hereby agree as follows:
GOOD FAITH:
ART. 1. The Employer and the Union hereby agree that they will in good
faith live up to the provisions of this Agreement, and that this Agreement is
entered into by the Union and the Employer on behalf of the employees of the
Employer, now employed, or hereafter to be employed, in the bargaining unit as
defined in ARTICLE 2.
RECOGNITION:
ART. 2. a) The Employer agrees to and does hereby recognize the Union
as sole and exclusive bargaining agent for all employees, excluding office
employees guards, professional employees and supervisors as defined in the
National Labor Relations Act of 1947 as amended, and agrees that no unit work
shall be performed by employees who are not among the included classification
herein.
b) This Agreement shall cover all future plants which the
Employer may operate during the term of this Agreement or any extension thereof,
including all plants operated as the result of expansion or change within 225
miles of the Employer's current location.
UNION SECURITY:
ART. 3. a) All employees who are members of the Union on the effective
date of this subsection or on the date of execution of this Agreement, whichever
is the later, shall remain members of the Union in good standing as a condition
of employment. All
- 1 -
<PAGE>
present employees who are not members of the Union and all employees who
are hired hereafter shall become and remain members in good standing of
the Union as a condition of employment, by the 31st day following the
effective date of this subsection or by the 31st day following the date of their
employment, whichever is the later. This provision shall be made and become
effective as of such time as it may be made and become effective under the
provision of the National Labor Relations Act of 1947 as amended, but not
retroactively.
b) The failure of any person to become a member of the Union as
required shall obligate the Employer, upon written notice from the Union to such
effect, and to the further effect that Union membership was available to such
person on the same terms and conditions generally available to other members, to
forthwith discharge such person. Further, the failure of any person to maintain
his Union membership in good standing as required herein shall, upon written
notice to the Employer by the Union to such effect, obligate the Employer to
discharge such person.
c) In the event of any change in the law during the term
of this Agreement, the Employer agrees that the Union will be entitled to
receive the maximum Union security which may be lawfully permissible.
d) No provision of this Article shall apply in any state to
the extent that it may be prohibited by State Law. If, under applicable State
Law, additional requirements must be met, before any such provision may become
effective such additional, requirements shall first be met.
e) If any provisions of this Article are invalid under the law
of any state wherein this Agreement is executed, such provisions shall be
modified to comply with the requirements of State Law or shall be renegotiated
for the purpose of adequate replacement. If such negotiations shall not result
in a mutually satisfactory agreement, the Union shall be permitted all legal or
economic recourse.
CHECK-OFF:
ART. 4. a) The Employer agrees to deduct, on the 1st payday of each
month, from the salary or wages of the employees covered by this Agreement, such
union dues and initiation fees as the Union, by written notice, advises the
Employer and regularly due as such from the employees, and will turn such monies
over to the Union on or before the
- 2 -
<PAGE>
tenth (10th) day of each month, covering such month in advance, together with a
listing of employees and amounts from whom such monies have been deducted,
provided, however, that the Employer will make such deductions only
from the wages of those employees who submit individual written
authorization to the Employer directing and authorizing the Employer to
make such deductions.
b) Any monies deducted from the employees are to remain the
property of the Union and in no event shall the Employer be permitted to
use said monies for any other purpose.
HOURS OF WORK:
ART. 5. a) Each regular shift shall consist of not more than eight (8)
hours per day, and shall constitute a regular work day, excluding a real period.
b) The regular work week shall consist of five (5)
consecutive days,
MONDAY THROUGH FRIDAY
c) The Employer my not require employees hired prior to July,
15, 1992, to work a 2nd or 3rd shift. In the event of a lay-off, a 1st shift
employee shall be given the option to work the 2nd or 3rd shift or accept a
lay-off.
OVERTIME:
ART. 6. a) Work performed in excess of eight (8) hours per day and/or
forty (40) hours per week shall be considered as overtime work and shall be paid
for at the rate of time-and-one-half (1-1/2) the regular rate of pay. Work
performed on the 7th working day shall be paid for at the rate of twice their
regular rate of pay.
b) In any week during which a holiday occurs, the holiday shall
be regarded as a regular day worked and overtime shall commence after thirty-two
(32) hours of work for that week.
c) All overtime shall be voluntary, and no employee shall be
discharged or discriminated against for refusing to work overtime.
d) The Employer will make every reasonable effort to distribute
overtime equally among its employees in their respective classifications.
- 3 -
<PAGE>
e) The Employer agrees to rake available to the Union, a record
of such overtime work for examination by the Union Representative.
UNION RIGHTS:
ART. 7. a) If any money owed by the Employer to the Union and/or
any Fringe Benefit Fund is in arrears thirty (30) days or more from the
1st day of the month when due, the Union shall notify the Employer of his
delinquency in writing, by certified mail. In the event the Employer does
not pay said money to the Union and/or any Fringe Benefit Fund within ten
(10) days of receipt of notice, the Union shall have the right to take
economic action. In such event, the Employer shall pay each employee or
employees on strike, or work stoppage, his regular rate of pay for such
time not worked.
b) If the Employer disputes the delinquency claimed by the
Union, the Employer may advise the Union of such dispute in writing, by
certified mail, within five (5) days of receipt of the delinquency notice and
agree to deposit the amount in dispute in escrow with the Union's Counsel. Upon
the receipt and collection of such deposit in escrow, the Union is precluded
from taking any economic action arising from said dispute.
HOLIDAYS:
ART. 8. a) The Employer shall not require its employees to work on the
following holidays:
NEW YEAR'S DAY LABOR DAY
GOOD FRIDAY THANKSGIVING DAY
MEMORIAL DAY CHRISTMAS DAY
JULY 4TH EMPLOYEE'S BIRTHDAY
Work performed on WASHINGTON'S BIRTHDAY and MARTIN LUTHER KING'S
BIRTHDAY, shall be paid at time-and-one-half (1-1/2) the
employee's regular rate of pay.
FOUR (4) PERSONAL DAYS AND/OR FLOATING HOLIDAYS: Employees shall
receive four (4) Personal Days and/or Floating-Holidays, pro-rated,
per Contract Year. Personal Days may be taken with Employer's
consent, and the Employer shall not unreasonably withhold
consent. Employees must give the Employer at least 48 hours'
prior notice of intention to take a Personal Day. If the
Employer wishes to designate a Floating Holiday, he must give at
least 48 hours' prior notice to the Union and to the employees.
All unused, pro-rated, Personal Days and/or Floating Holidays
shall be payable at the end of the Contract Year.
- 4 -
<PAGE>
b) To be eligible for holiday pay, the employee must work the
employee's scheduled day before and the employee's scheduled day after the said
holiday, unless that employee is absent due to illness or absent with the
Employer's consent and such absence does not exceed six (6) continuous weeks.
c) Employees who do not work on the aforementioned holidays
shall be paid for eight (8) hours at their regular rate of pay for such
holiday.
d) Employees who do work on the aforementioned holidays shall
be paid at the regular rate of pay for work performed and shall be paid at their
regular rate of pay for the holiday.
e) If any of the said holidays shall fall on a Saturday, at the
Employer's option, the Friday before may be designated as the holiday or the
Employer may elect to pay the employees for eight (8) hours at their regular
rate of pay for such holidays and such payment is to be included in the
employee's next paycheck.
f) If any of the said holidays fall on a Sunday, the Monday
following shall be designated as the holiday, and even though no work shall have
been performed by the employee or employees, they shall be paid for that day at
their regular rate of pay.
g) If any governmental agency changes the day of observance of
any of the aforementioned holidays, then the changed date shall become the
holidays. If there is any controversy as to the governmental change, then in
such event, the Employer can pick the day of observance.
h) If any of the above holidays shall fall within the
employee's vacation period, the Employer must include such holiday pay in the
first paycheck received after the employee's return to work.
i) Employees absent because of a compensable illness or injury
shall be entitled to full holiday pay at their regular rate of pay, less
what they receive in compensation, provided illness is temporary and does
not exceed six (6) continuous weeks.
NOTICE TO UNION:
ART. 9. a) Effective MAY 10, 1995 all Employers located in New York
State shall transmit, upon written request, to the Union, copies of the
following documents within ten (10) days of the receipt of such request:
(1) FORM #IA5 (New York State Unemployment Insurance Report); and
- 5 -
<PAGE>
(2) FORM #WT-4-B (New York State Wage Reporting System Return)
b) All Employers shall transmit, upon written request, to the
Union, FORM #941 (Employees' Quarterly Federal Tax Rate) within ten (10)
days of the receipt of such request.
c) Remittance Sheets, including ranges, new employees, starting
dates, employees' termination dates, gross wages earned for the preceding month,
for each employee the amounts of dues and initiation checked-off, contributions
to Fringe Benefit Funds and for what monthly periods, shall be remitted
once-a-month, within ten (10) days after the 1st day of each month, together
with checks made payable to the proper Fringe Benefit Fund and Dues and
Initiation to Local Union 531.
d) All necessary cards to the Fringe Benefit Funds, properly
signed from a new employee, must be submitted with the remittance sheet.
e) For failure to submit the remittance sheet within ten (10)
days after it is due, the Union, at their option, may take economic action until
it is submitted, and the Employer shall pay to employees for all time on strike
or work stoppage their regular rate of pay.
f) Should the Employer fail to notify the Union of the hiring
of a new employee and/or the rehiring of an employee, the Employer shall be
responsible from the 1st day due, for all monies as if he collected same, to the
Union for Dues, Initiations, and contributions to all Fringe Benefit Funds as
described herein.
g) For failure to remit monies due to the Union for dues,
initiations, contributions to any Fringe Benefit Fund together with the
remittance sheet on/or before the 30th day of accrual, the Union shall
charge a bookkeeping fee of two (2%) percent per month or any part
thereof until it is submitted and/or collected.
h) Should the Employer fail for any reason to notify the Union
of the termination of an employee, the Employer shall be responsible for
all monies as if he collected same, to the Union for dues, initiations
and contributions to all Fringe Benefit Funds, if any, as described
herein.
i) The Employer must sign all remittance sheets sent to the
Union.
-6-
<PAGE>
UNION AS THE PARTY AT INTEREST:
ART. 10. a) The Union shall require the employees to comply with the
terms of this Agreement. The parties agree that the maintenance of a peaceable
and constructive relationship between the Employer and the employees requires
the establishment and cooperative use of the machinery provided in the
discussion and determination of grievances and disputes and that it could
detract from this relationship if individual employees or a group of employees
would, either as such individuals or groups, seek to interpret or enforce the
Contract on their initiative or responsibility. It is therefore agreed that this
Contract shall not vest or create in any employee or group of employees covered
thereby, any rights or remedies which they, or any of them, can enforce either
at law, equity, or otherwise it being understood and agreed, on the contrary,
that all of the rights and privileges created or implied from this shall be
enforceable only by the parties hereto and only in the manner established by
this Contract, and at law.
b) The Employer shall show no discrimination against or
favoritism among its employees for Union activities or otherwise. This
Agreement may not be modified by the Employer or group of employees without
the joint written consent of the Union and the Employer.
c) The Employer shall, at all times, adhere to any governmental
agency rules regarding working conditions, facilities and equipment as it
respects all aspects of the Employer's operations.
WELFARE FUND:
ART. 11. In order to protect and promote the health and welfare of
employees, the Union has formed the SICK & WELFARE FUND, LOCAL 531 which is
administrated under a Declaration of Trust adopted by its members.
a) 1. The Employer, effective as of JUNE 1, 1995 shall pay, in advance
monthly or any part thereof, to the Sick & Welfare Fund the sum of $160.00 for
each employee covered by this Agreement. (CLASS I - FAMILY OR INDIVIDUAL PLAN)
2. The Employer, effective as of DECEMBER 1, 1995 shall pay, in
advance monthly or any part thereof, to the Sick & Welfare Fund the sum of
$175.00 for each employee covered by this Agreement. (CLASS I - FAMILY OR
INDIVIDUAL PLAN)
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3. The Employer, effective as of JUNE 1, 1996 shall pay, in advance
monthly or any part thereof, to the sick & Welfare Fund the sum of $190.00 for
each employee covered by this Agreement. (CLASS I - FAMILY OR INDIVIDUAL PLAN)
4. The Employer, effective as of JUNE 1, 1997 shall pay, in advance
monthly or any part thereof, to the Sick & Welfare Fund the sum of $210.00 for
each employee covered by this Agreement. (CLASS I - FAMILY OR INDIVIDUAL PLAN)
b) The monies so contributed shall be used for the purpose of
obtaining benefits that the Trustees deem necessary for such employees,
employees of the Union and the employees of all Fringe Benefit Funds in
accordance with the Trust Agreement covering such Fund.
c) Such payments shall not be in lieu of any other payments required
to be made by the Employer, such as New York Disability payments, New York
Unemployment Insurance, Social Security, Workmen's Compensation, etc.
d) The Employer shall continue to contribute to the Welfare Fund
for a period, not to exceed two (2) months, for each employee who is absent due
to sickness, injury, leave-of-absence, or termination of employment except for
just cause.
e) The Employer shall forfeit all rights under this Agreement and the
employee my cease to work if the Employer fails to pay its contributions after
the 60th day as provided above and/or the matter may be treated as a grievance
hereunder, except as may be otherwise provided for herein.
f) With its monthly remittance, the Employer will forward to the
Sick & Welfare Fund, Local 531, the names of the employees covered and such
information and signed cards as may be required by the Trustees of
the Fund for the administration of the Fund.
g) The Arbitrator may schedule a Hearing for any date on or
after the expiration of twenty-four (24) hours' notice sent by the Union to the
Employer and the Arbitrator shall render an award as quickly as possible. If the
Employer fails to appear, the Arbitrator shall proceed without the Employer
being present. In the absence of proof by the Employer, who shall bring to such
Hearing all books and records pertaining to the matter to be heard, the
Arbitrator shall determine the amount to the Fund on the petition of the Union
or the Fund, as to the amounts due and payable. In
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the absence of other proof by the Employer, all Welfare Fund payments due shall
be based on two (2) times the greatest number of employees as reflected in the
reports thereof submitted by the Employer to the Union during the two (2) year
period preceding.
h) In the event of default by the Employer in the payment of
contributions to the Funds mentioned in this Agreement, the Trustees may take
legal action to obtain payment, including, but not limited to, the commencement
of Arbitration Proceedings for such purposes before an Arbitrator, such
Arbitrator being Mr. George Sabatella. All expenses thereof, including, but not
limited to, the fee and expenses of the Arbitrator and any filing or other
administrative fees plus reasonable attorney's fees fixed at twenty (20%)
percent of the indebtedness, together with interest at a reasonable rate on any
monies determined to be due, shall be chargeable to and an obligation of the
contributing Employer against whom such suit is brought or such Arbitration
Proceedings is commenced. The Arbitrator may schedule a Hearing on twenty-four
(24) hours notice by certified mail.
i) The Union may elect not to proceed before the Arbitrator and
may proceed in any other manner provided for by law, as if the provisions of
ARTICLE 14 were not contained in this Agreement. In such event, the amounts due
and payable shall be determined in such other proceedings in the same manner as
is provided for above in determining such amounts before the Arbitrator, in the
absence of the Employer from such Hearing.
j) The "Welfare Fund" may audit the Employer's payroll books and
records after giving reasonable notice to the Employer, and if contributions are
significantly incorrect, the Employer shall pay the cost of such audit.
k) During the life of this Agreement, the Employer shall increase his
contributions above the effective increases as stated above, to the exact amount
that the insurance carrier will increase the premium to the Welfare Fund. The
increases in premium shall be based on the Family Plan. The Welfare Fund shall
furnish proof of such increase.
l) For failure to remit contributions to the Fund before the 30th day
after accrual, there shall be a one (1%) percent charge for every month, or any
part thereof, until such contributions are collected.
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NO STRIKE - NO LOCKOUT:
ART. 12. a) During the term of this Agreement, the Employer agrees
that they will not declare or authorize a lockout unless the Union fails
to comply with an arbitration award within forty-eight (48) hours after
the award has been made, and the Union agrees that no strike shall take
place except as otherwise provided herein unless the Employer fails to
comply with an arbitration award within forty-eight (48) hours after the
award has been made on the grievance procedure. Neither the Union nor its
Officers, Agents, or Representatives shall be liable for any acts of
person or any workers participating in any strike or work stoppage unless
such act or strike or work stoppage has been expressly authorized by the
Union and in conformance with the provisions of the Constitution of the
Union and the provisions of the International Union Constitution. The
parties further agree that any strike, slow-down, or work stoppage not
authorized as herein specified shall not be deemed a violation of this
Agreement.
b) In the event of an unauthorized slow-down or work stoppage,
the Union agrees within twenty-four (24) hours after receipt of notice thereof
from the Employer solely to endeavor in good faith to bring about a return to
work of its members who stopped work. Upon failure of the employees to return to
work within the said twenty-four (24) hours, the Employer may take appropriate
action with respect to such employee or employees. Compliance by the Union in
good faith herewith shall be deemed full compliance with the Union's obligation
hereunder.
DISCHARGE:
ART. 13. a) No employee shall be discharged or disciplined without just
and sufficient cause.
b) The Employer may, at his discretion, take action short of
discharge without prejudice to his right to discharge, provided, however, that
any disciplinary procedure shall be subject to the grievance procedures hereof.
c) If the Employer is found wrong in the discharge or
disciplinary suspension of an employee, the Arbitrator may award, but is not
obligated to award, compensation for lost time.
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d) Whenever the Union disputes and/or disagrees with the
justification for the discharge or discipline of any employee, the dispute
and/or disagreement shall thereupon be adjusted between the parties in the
manner provided for in ARTICLE 14 of this Agreement; provided, however, it shall
not be necessary to commence with steps (a) or (b) but institution of
arbitration may be accomplished by immediate recourse to Section (1) of said
article, and any employee who has been discharged and subsequently reinstated as
a result of arbitration shall be entitled to all remedies prescribed by the
Arbitrator.
e) The Employer must notify the Shop Steward and the Union in
writing, within three (3) working days of a discharge and/or disciplinary
action of an employee covered hereunder.
GRIEVANCE PROCEDURES:
ART. 14. SECTION 1.
A grievance is hereby jointly defined to be any controversy,
complaint, misunderstanding, or dispute.
Any grievance arising between the Employer and the Union or an
employee represented by the Union shall be settled in the following manner:
a) The aggrieved employee or employees must present the
grievance to the Shop Steward within five (5) working days after the
reason for the grievance has occurred, except that no time limit shall
apply in case of violation of wage provisions of this Agreement. If a
satisfactory settlement is not affected with the foreman within five (5)
days, the Shop Steward and employee shall submit such grievance to the
Union's Business Representative.
b) The Business Representative shall then take the matter up
with a representative of the Employer with authority to act upon such
grievance. A decision must be made within five (5) working days.
c) Saturday, Sunday, and holidays shall not be considered working days
for the purposes hereof.
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SECTION 2.
Any Shop Steward shall be permitted to leave his work for a
reasonable time to investigate and adjust the grievance of any employee
within his or her jurisdiction after notification to his or her Supervisor.
Employees shall have the Shop Steward or a Representative of the Union present
during discussion of any grievance with a representative of the Employer.
SECTION 3.
a) The parties agree that all disputes shall be arbitrated hereunder
by the Arbitrator selected by the Welfare Fund, in accordance with ARTICLE 11,
paragraph (h), except that within five (5) days of the receipt of notice of
intention to conduct an arbitration, should either party object to the dispute
being heard by said Arbitrator, then in such event, the matter shall be
submitted to a panel member of the New York State Mediation Board.
b) Expense of the Arbitrator selected or appointed shall be borne
equally by the Employer and the Union unless determined otherwise by the
Arbitrator.
c) If the Employer fails to comply with any settlement of the
grievance or fails to comply with the procedures of this Article, the Union
has the right to take all legal and economic action to enforce its demands.
d) Both parties agree to accept the decision of the Arbitrator
as final and binding.
SECTION 4.
The Arbitrator shall not have the authority to amend or modify this
Agreement or establish new terms and conditions under this Agreement. The
Arbitrator shall determine any question of arbitrability.
SENIORITY:
ART. 15. a) The Employer recognizes the principle of seniority.
Seniority for the purpose of lay-off shall be by department (molding, finishing,
fabrication). Employees, however, who are capable, shall have seniority in other
departments, in that the last employee hired shall be the first employee
laid-off, and the last employee laid- off shall be the first employee rehired.
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b) It is agreed by the Employer and the Union, that all Shop Stewards
and Officers of the Union have seniority over all employees in the plant,
provided they can do the work that is to be done.
c) Any employee who is absent due to lay-off, sickness, and/or
injury for six (6) consecutive months shall lose his seniority.
d) The rights of seniority in re-employment shall be accorded to a
laid-off employee prior to a new employee being hired, provided such laid-off
employee, within two (2) working days after notice to return to work has been
received by such employee, advises the Employer of the employee's availability
and willingness to return to work within seven (7) working days of the date said
notice to return to work was received by the employee. For the purpose of this
Article, such notice will be deemed received three (3) days after such notice is
sent to the employee by certified mail, return receipt requested, to the
employee's last known address.
e) Preference in assignment to shift work and choice of new jobs shall
be given to employees having higher seniority, providing they can do the work.
NON-DISCRIMINATION:
ART. 16. No employee or employees shall be discriminated against,
directly or indirectly because of their membership in or activity on behalf of
the Union nor will the Employer, directly or indirectly, discourage membership
in the Union, and the provisions of this Agreement shall apply to all employees
without discrimination as to sex, color, race, creed or national origin.
SAFETY & SANITARY CONDITIONS:
ART. 17. The Employer shall furnish and maintain safe and healthful
sanitary conditions.
EXISTING PRACTICES:
ART. 18. All benefits of employment in existence at the effective
date of this Agreement and not modified by the Agreement, shall be continued
without modification.
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VISITATIONS:
ART. 19. Union Representatives shall be given the right to enter
the plant premises at all reasonable times for the purpose of investigating
grievances and to secure the enforcement of the Contract and for such other
purposes as may be necessary; provided, however, that prior to entering the
plant property they shall first advise the front office of their presence and
intentions to enter the plant property.
LEAVE-OF-ABSENCE:
ART. 20. Any employee, upon application in writing, shall be granted
a leave-of-absence without pay, not to exceed one (1) month because of official
Union business, except that the Employer's consent is required for such leaves
other than official Union business and such consent will not be unreasonably
withheld. The Employer has the right to request verification of
leave-of-absence.
GUARANTEED WORK:
ART. 21. Employees regularly scheduled for full shift work shall
be given four (4) hours work or the monetary equivalent thereof unless notified
on the previous day not to report, except in cases of a utility company power
failure, Acts-of-God, or other such circumstances beyond the Employer's control.
TRIAL PERIOD:
ART. 22. All employees hired after MAY 10, 1995 shall be deemed
probationary employees on a trial period for the first sixty (60) days following
the 1st day of employment. A probationary employee may be discharged by the
Employer for any reason without such discharge being subject to the grievance
machinery as described in ARTICLE 14. After the completion of the employee's
trial period, the probationary employee shall be considered a regular employee
and his seniority shall date back to the date of original hiring. The Employer
may request, in writing, an additional thirty (30) days prior to the expiration
of the original sixty (60) days.
LIE DETECTOR TEST:
ART. 23. The Employer shall not require, request, or suggest that a
covered employee take a polygraph or any other form of lie detector test.
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REHIRE OF EMPLOYEES:
ART. 24. a) An employee rehired within one (1) year after last
termination of employment shall not have a trial period.
b) The Employer must contribute to all Fringe Benefit Funds from
the 1st day of the month following rehiring.
c) All periods of employment shall be dovetailed for the purpose
of seniority.
LIABILITY:
ART. 25. The Employer, by his Executive Officers, shall deduct the
regular monthly Dues and Initiation fees, and shall hold the same personally in
trust for the Union. These fees, together with all the contributions of all
Fringe Benefit Funds, shall become the personal responsibility, jointly and
severally, of each of the Executive officers and/or persons responsible for
making such deductions and contributions, and did not make same.
SEPARABILITY:
ART. 26. It is understood and agreed that if any provision of this
Agreement, or the application of such provision to any person or circumstances
shall be held invalid, the remainder of this Agreement or the application of
such provision to other persons or circumstances shall not be affected thereby.
COLLECTIVE BARGAINING:
ART. 27. The Employer agrees that it will negotiate with the Union
during the term of this Agreement concerning any matter involving the wages,
hours, and working conditions of the employees, which is not specifically
provided for in this Agreement and which is not the subject of any grievance.
PROMOTIONS:
ART. 28. An employee shall have the right to refuse a promotion out of
the bargaining unit.
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DISCOVERY:
ART. 29. a) In the event the Employer raises any grievance against an
employee, upon written request from the Union, the Employer shall disclose to
the Union any and all facts and material relevant to such grievance. The
Employer's failure to comply herewith shall preclude the introduction of any
such non-disclosed data at any and all future Arbitrations, Hearings,
Proceedings or Trials, and such failure to disclose are grounds for the
dismissal of such grievance.
b) In the event of any grievance raised by the Employer against an
employee, matters which have arisen within one (1) year immediately preceding
such grievance may be introduced in support of such grievance.
BULLETIN BOARD:
ART. 30. The Employer shall place a bulletin board in a conspicuous
and convenient place in order to post Union notices and Union literature.
DEATH-IN-FAMILY:
ART. 31. a) Each employee shall be entitled to THREE (3) working
days off, with pay, at his regular rate of pay, in the event of a death in his
immediate family (legal child, grandchild, legal guardian, mother, father,
sister, brother, or legal spouse).
b) The Employer has the right to ask for proof of death.
JURY DUTY:
ART. 32. In the event an employee is required to serve on Jury Duty,
the Employer shall pay the employee's regular rate of pay less what he receives
as a juror, not to exceed ten (10) working days, and only once during the life
of this Agreement.
PROTECTION OF RIGHTS:
ART. 33. a) Picket Line: It shall not be a violation of this Agreement,
and shall not be cause for discharge or disciplinary action, in the event an
employee: refuses to enter upon any property of his Employer or others involved
in a lawful primary picket line at his Employer's place of business, including
picket lines of union parties to this Agreement.
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b) Struck Goods: It shall not be a violation of this Agreement and it
shall not be a cause for discharge or disciplinary action if any employees:
refuse to perform any service which his Employer undertakes to perform as an
ally of an Employer or person whose employees are on strike, and which service,
but for such strikes, would be performed by the employees of the Employer or
person on strike.
ASSIGNABILITY:
ART. 34. This Agreement shall be binding upon the parties hereto,
their successors and assigns.
EFFECTIVE DATE:
ART. 35. All the terms and conditions of this Agreement shall be
effective as of MAY 10, 1995 except as otherwise indicated.
DURATION:
ART. 36. This AGREEMENT shall be effective as of the 10th DAY OF
MAY, 1995, and shall remain and continue in full force and effect until midnight
MAY 9, 1998, and from year to year thereafter unless either party gives written
notice to the other by certified mail, return receipt requested, at least sixty
(60) days prior to the date of expiration of this AGREEMENT or annual renewal
thereof that they desire to modify or amend or renegotiate same.
SUB-CONTRACTING:
ART. 37. The Employer shall not sub-contract work without first
offering such work to bargaining unit employees.
PRE-HIRING REQUIREMENTS:
ART. 38. a) The Employer shall require of each individual before they
are hired that they produce bona fide evidence of such individual's citizenship
status. In the event such individual is an alien, he must be required to produce
satisfactory proof of both his legal alien status and of his right to work.
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b) The Employer shall not employ any individual who cannot produce
either proof of U.S. Citizenship or of his right to work as an alien. The Union
may take economic action, despite any provision contrary hereof, should the
Employer not comply herewith.
UNIFORMS:
ART. 39. Each covered employee shall receive a Uniform Maintenance
Allowance of $8.00 per month.
WAGE & WAGE INCREASE:
ART. 40. a) Effective as of MAY 10, 1995 there shall be a general wage
increase of .30(cent) per hour based on a forty (40) hour week for all employees
covered by this Agreement.
b) Effective as of MAY 10, 1996 there shall he a general wage increase
of .25(cent) per hour based on a forty (40) hour week for all employees covered
by this Agreement.
c) Effective as of MAY 10, 1997 there shall be a general wage increase
of .20(cent) per hour based on a forty (40) hour week for all employees covered
by this Agreement.
d) The Employer agrees to establish a committee of Union employees and
management to address how to initiate incentive programs in departments that do
not participate in incentive programs currently.
e) Employees who shall not actually be working as of or on the
effective date of the wage increase provided herein shall be entitled to receive
such increases on their return or recall to work.
f) Should the Employer pay a newly hired employee after thirty
(30) days of employment, a rate which is above the then-scheduled rate for such
employee's category, then in such event, all other employees in the same
category shall receive an increase equivalent to their difference of pay
immediately. All other scheduled raises shall be granted in addition to such
increases.
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VACATIONS:
ART. 41. a) The Employer shall grant vacation, with pay, at their
regular rate of pay, for all its employees in accordance with the provisions of
this paragraph as set forth below.
All employees shall receive not less than their pro-rated vacation
provided they have the following eligibility:
AFTER 1 YEAR OF EMPLOYMENT BUT LESS THAN 2 YEARS............... 1 WEEK
AFTER 2 YEARS OF EMPLOYMENT BUT LESS THAN 5 YEARS.............. 2 WEEKS
AFTER 5 YEARS OF EMPLOYMENT BUT LESS THAN 6 YEARS--2 WEEKS PLUS 3 DAYS
AFTER 6 YEARS OF EMPLOYMENT BUT LESS THAN 7 YEARS--2 WEEKS PLUS 4 DAYS
AFTER 7 YEARS OF EMPLOYMENT.................................... 3 WEEKS
Employees hired August 1, 1992 and after shall receive a maximum of
two (2) weeks vacation.
EMPLOYEES MUST NOTIFY THEIR EMPLOYER, BY MAY 1ST, OF THEIR INTENTION
TO TAKE VACATION TIME. THE EMPLOYER SHALL CONFIRM, IN WRITING, THAT
SUCH VACATION TIME IS GRANTED TO SUCH EMPLOYEE NO LATER THAN MAY 10TH.
IN THE EVENT OF A DISPUTE, SENIORITY SHALL, PREVAIL. THE EMPLOYER HAS
THE RIGHT TO REFUSE GRANTING VACATION TIME TO AN EMPLOYEE SHOULD IT
CAUSE A SHORTAGE IN A PARTICULAR DEPARTMENT.
b) Vacation period to fall between JANUARY 1ST -AND- DECEMBER 31ST.
c) The Employer shall pay, to each employee, his vacation pay at his
regular rate of pay prior to the employee's going on his or her vacation.
d) Employees who have been employed for one (1) year or more and are
laid-off or discharged for any reason at any time during the term of this
Agreement, shall be paid a pro-rated vacation at the time of their job
severance. Such pro-rated vacation shall be based upon the vacation provisions
above set forth. Employees who voluntarily terminate (QUIT) their employment
must give the Employer at least two (2) weeks' prior notice in order to receive
their pro-rated vacation pay.
e) In order to compute vacation credit, THE DATE OF HIRE shall be the
credit date.
f) Employees enjoying a vacation that is more than two (2) weeks may,
at the Employer's option, split said vacation time (i.e. part summer and part
winter), but each such vacation period cannot be for less than one (1) week.
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SICK & MATERNITY LEAVE:
ART. 42. a) Sick Leave for the purpose of various privileges and benefits
of this Agreement, including leaves granted by the Employer, including Maternity
Leaves, shall be deemed periods of employment. Leaves shall not exceed a total
of four (4) months. No later than three (3) months after a leave begins,
employees must give the Employer notice of when they are returning to work. The
Employer shall give an employee suitable work available in accordance with their
condition.
b) Each employee covered by this Agreement shall receive, on a
pro-rated basis THREE (3) days per contract year as Sick Leave.
c) Beginning with the 3rd year of the employee's employment, he shall
receive one (1) additional Sick Leave day for each additional year employed, not
to exceed SEVEN (7) Sick Leave days.
d) At the end of the contract year, each employee covered by this
Agreement shall receive pay, at their regular rate of pay, for all unused Sick
Leave days.
e) Upon termination of an employee's employment by the Employer
for any reason, such an employee shall receive his regular rate of pay for all
earned unused Sick Leave days. Employees who voluntarily terminate (QUIT) their
employment, must give their Employer at least two (2) weeks' prior notice in
order to receive their pro-rated Sick Leave pay.
f) An employee shall notify his Employer, where practicable and
within a reasonable time, should such an employee require Sick Leave.
Employees shall notify their Employer, where practicable, when he or she
will be able to return to work.
g) If an employee is out sick more than TWO (2) days, then in such
event, the employer may request a medical certificate. The Employer, at his cost
and upon notice may send a doctor to examine the employee on Sick Leave and such
an employee must allow such an examination.
PART-TIME EMPLOYEES:
ART. 43. a) For purposes of this Agreement, a part-time employee shall
be defined as an employee who is regularly scheduled to work thirty-nine (39)
hours or less in a work week. Employees who work twenty (20) hours or less per
week shall not be entitled to receive vacation days, sick days, holidays and
personal days.
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b) Part-time employees, who are regularly scheduled to work more than
twenty (20) but less than forty (40) hours per week, shall receive pro-rated
vacation days, sick days, holidays and personal days.
c) Dues and initiation fees shall be deducted for part-time
employees in accordance with ARTICLE 4 hereof.
d) The Employer shall not contribute to the LOCAL 531 SICK &
WELFARE FUND for part-time employees who are regularly scheduled to work
twenty (20) hours or less per week.
e) No regularly full-time employee shall be laid-off while part-time
employees are employed.
f) Part-time employees cannot exceed 15% of the Employer's employees.
g) Employees who are regularly scheduled to work more than twenty (20)
hours per week but less than forty (40) hours shall receive pro-rated vacation
days, sick days, holidays and personal days.
h) The Employer shall contribute to the LOCAL 531 SICK & WELFARE FUND
for employees who are scheduled to work more than twenty (20) hours per week.
DRUG TESTING:
ART. 44. The Employer shall have the right to require prospective
employees to submit to a Drug Test.
LOCAL 531, INTERNATIONAL BROTHERHOOD ELECTRONIC HARDWARE CORPORATION
OF TEAMSTERS, A.F.L.-C.I.O.
By: /s/ Kevin Watts By: /s/ S. Franzone
-------------------------------- --------------------------
Kevin Watts, Secretary-Treasurer Andrew Franzone, President
Dated: /s/ 8/23/95 Dated: /s/ 10-24-95
----------------------------- -----------------------
NEGOTIATING COMMITTEE
illegible illegible
- ------------------------------------ ---------------------------------
illegible illegible
- ------------------------------------ ---------------------------------
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MEMORANDUM OF AGREEMENT
THIS AGREEMENT made and entered into by and between LOCAL 531,
INTERNATIONAL BROTHERHOOD OF TEAMSTERS, AFL-CIO, (hereinafter referred to as
the "Union"), located at 372 McLean Avenue, Yonkers, NY 10705, and ELECTRONIC
HARDWARE CORP. (hereinafter referred to as the "Employer"), located at 320
Broad Hollow Rd., Farmingdale, New York 11735.
WHEREAS, the terms and conditions of the Collective Bargaining
Agreement entered into by and between the Union and the Employer remain
unchanged except for the following terms and conditions:
1. DURATION:
May 10, 1998 -through- May 9, 2001
2. VACATIONS:
Employees hired 8/1/92 and after, shall receive:
At TEN (10) years of employment......... ELEVEN (11) DAYS
At ELEVEN (11) years of employment...... TWELVE (12) DAYS
At TWELVE (12) years of employment.... THIRTEEN (13) DAYS
3. SICK & WELFARE FUND:
The Employer agrees to make the following contributions per
month per employee:
Composite
---------
Effective 9/1/98: $225.00
Effective 1/1/99: 245.00
Effective 1/1/00: 275.00
Effective 1/1/01: 290.00
4. WAGES:
A. Effective 9/1/98 the Employer shall institute an "efficiency
bonus system" which shall be attached to the Collective
Bargaining Agreement as an Addendum. If the Employer chooses
to discontinue the "efficiency bonus system", then, such
decision must be made in writing with notice to the union, no
later than 6/1/99, or 6/1/2000. In such event, the Employer
shall grant an additional .05 per hour increase, no later
than 8/1/99 or 8/1/00.
B. There shall be a general wage increase of .25 per hour on the
following dates: 5/10/98, 5/10/99, 5/10/00.
<PAGE>
FOR THE UNION: FOR THE EMPLOYER:
/s/ Kevin Watts /s/ Andrew Franzone
- ------------------------- ------------------------------
Kevin Watts, President Andrew Franzone, President
NEGOTIATING COMMITTEE:
-------------------------------
/s/ Illegible
- ------------------ -------------------------------
/s/ Illegible
- ------------------ -------------------------------
<PAGE>
$25,000.00
DEMAND NEGOTIABLE PROMISSORY NOTE
The undersigned ELECTRONIC HARDWARE CORPORATION of 320 Broad Hollow Road,
Farmingdale, New York 11735 in consideration for a loan of $25,000.00 made by
David Kassel (the receipt of which is hereby acknowledged), hereby promises to
pay David Kassel the sum of Twenty-five Thousand ($25,000.00) dollars on Demand
at 61 West 62nd Street New York or such address as David Kassel may specify in
writing.
Interest shall accrue at 10% per annum. Interest of $208.34 shall be paid
monthly.
This note and its enforceability shall be governed by the laws of the state of
New York.
October 27, 1998
ELECTRONIC HARDWARE CORPORATION
Andrew Franzone /s/ Andrew Franzone
-------------------
David Kassel /s/ David Kassel
----------------
Witnesses by:
/s/ illegible
- -----------------------
- -----------------------
<PAGE>
$25,000.00
DEMAND NEGOTIABLE PROMISSORY NOTE
The undersigned ELECTRONIC HARDWARE CORPORATION of 320 Broad Hollow Road,
Farmingdale, New York 11735 in consideration for a loan of $25,000.00 made by
HARRY GOODMAN (the receipt of which is hereby acknowledged), hereby promises to
pay HARRY GOODMAN the sum of Twenty-five Thousand ($25,000.00) dollars on Demand
at 25 Ardsley Place, Rockville Center, New York or such address as Harry Goodman
may specify in writing.
Interest shall accrue at 10% per annum. Interest of $208.34 shall be paid
monthly.
This note and its enforceability shall be governed by the laws of the state of
New York.
October 22, 1998
ELECTRONIC HARDWARE CORPORATION
Andrew Franzone /s/ Andrew Franzone
-------------------
Harry Goodman /s/ Harry Goodman
-----------------
Witnesses by:
/s/ illegible
- -----------------------
- -----------------------
<PAGE>
$50,000.00
DEMAND NEGOTIABLE PROMISSORY NOTE
The undersigned International Plastic Technologies Inc of 320 Broad Hollow Road,
Farmingdale, New York 11735 in consideration for a loan of $50,000.00 made by
HARRY GOODMAN (the receipt of which is hereby acknowledged), hereby promises to
pay HARRY GOODMAN the sum of Fifty Thousand ($50,000.00) dollars on Demand at 25
Ardsley Place, Rockville Center, New York or such address as Harry Goodman may
specify in writing.
Interest shall accrue at 10% per annum. Interest of $416.67 shall be paid
monthly.
This note and its enforceability shall be governed by the laws of the state of
New York.
December 7, 1998
International Plastic Technologies Inc.
International Smart Sourcing Inc.
Electronic Hardware Corporation
Andrew Franzone /s/ Andrew Franzone
-------------------
Harry Goodman /s/ Harry Goodman
-----------------
Witnesses by:
/s/ illegible
- -----------------------
- -----------------------
<PAGE>
AGREEMENT
Agreement dated December 8, 1998, between Electronic Hardware
Corporation ("EHC") and David Kassel.
WHEREAS, EHC delivered to David Kassel a Promissory Note dated
January 1, 1998 in the amount of one hundred fifty thousand dollars ($150,000)
payable in a lump sum payment of principal plus accrued interest on January 1,
1999 (the "Note"); and
WHEREAS, it is the desire of the parties hereto to change the date
upon which payment shall be due.
NOW THEREFORE, in consideration of the premises and the mutual
covenants and the terms and conditions set forth in this Agreement, the
parties hereto agree as follows:
1. Capitalized terms herein shall have the meaning ascribed to them
in the Note.
2. Payment of principal plus accrued interest on the Note shall be
due and payable not later than thirty (30) days after the effective date of
the initial public offering of International Smart Sourcing, Inc.
3. This Amendment may be executed in any number of counterparts, each
of which shall be an original, but all of which together shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
duly executed and delivered on the date first above written.
Electronic Hardware Corporation
By: /s/ Andrew Franzone
---------------------------
Andrew Franzone, President
/s/ David L. Kassel
------------------------------
David L. Kassel
<PAGE>
AGREEMENT
Agreement dated December 8, 1998, between Compact Disc Packaging
Corp. ("CDP") and David Kassel.
WHEREAS, CDP delivered to David Kassel a Promissory Note dated
January 1, 1998 in the amount of one hundred seven thousand five hundred
dollars ($107,500) payable in a lump sum payment of principal plus accrued
interest on January 1, 1999 (the "Note"); and
WHEREAS, it is the desire of the parties hereto to change the date
upon which payment shall be due.
NOW THEREFORE, in consideration of the premises and the mutual
covenants and the terms and conditions set forth in this Agreement, the
parties hereto agree as follows:
1. Capitalized terms herein shall have the meaning ascribed to them
in the Note.
2. Payment of principal plus accrued interest on the Note shall be
due and payable not later than thirty (30) days after the effective date of
the initial public offering of International Smart Sourcing, Inc.
3. This Amendment may be executed in any number of counterparts, each
of which shall be an original, but all of which together shall constitute one
and the same instrument.
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
duly executed and delivered on the date first above written.
Compact Disc Packaging Corp.
By: /s/ David L. Kassel
---------------------------
David L. Kassel, President
/s/ David L. Kassel
------------------------------
David L. Kassel
<PAGE>
List of Subsidiaries of International Smart Sourcing, Inc.
Compact Disc Packaging Corp.
Incorporated in Delaware on January 31, 1995
Duralogic Technologies, Inc.
Incorporated in New York on November 7, 1997. The Company has commenced
dissolution proceedings for this subsidiary in the State of New York
and the Company expects that the subsidiary will be completely
dissolved by the Secretary of State of the State of New York in the
first quarter of 1999.
Electronic Hardware Corp.
Incorporated in New York on January 28, 1970
<PAGE>
EXH 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 6, 1998 (except Note 1 to which the date is
December 24, 1998) of International Smart Sourcing, Inc. and subsidiary,
Electronic Hardware Corp., and of our report dated March 18, 1998 (except Note 5
as to which the date is May 29, 1998 and Note 6 as to which the date is December
24, 1998) of Compact Disc Packaging Corp. in the Registration Statement on Form
SB-2, Amendment No. 3 and the related Prospectus of International Smart
Sourcing, Inc.
/s/ Feldman Sherb Ehrlich & Co., P.C.
-------------------------------------
FELDMAN SHERB EHRLICH & CO., P.C.
Certified Public Accountants
(formerly Feldman Radin & Co., P.C.)
New York, New York
January 6, 1999
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