<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1998
REGISTRATION STATEMENT NO. 333-56661
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
CURTIS INTERNATIONAL LTD.
(Name of small business issuer as specified in its charter)
------------------------------
<TABLE>
<S> <C> <C>
ONTARIO 5064 98-0154299
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer I.D. No.)
incorporation or organization) Classification Code Number)
- --------------------------------------------------------------------------------------------------------------
7 KODIAK CRESCENT
DOWNSVIEW, ONTARIO M3J 3E5
(416) 636-5553
(Address and telephone number of principal executive offices and principal place of business)
- --------------------------------------------------------------------------------------------------------------
AARON HERZOG, PRESIDENT
CURTIS INTERNATIONAL LTD.
7 KODIAK CRESCENT
DOWNSVIEW, ONTARIO M3J 3E5
(416) 636-5553
(Name, address and telephone number of agent for service)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
COPIES TO:
<TABLE>
<S> <C>
JAY M. KAPLOWITZ, ESQ. DALE S. BERGMAN, P.A.
ARTHUR S. MARCUS, ESQ. LINDA C. FRAZIER, ESQ.
GERSTEN, SAVAGE, KAPLOWITZ BROAD AND CASSEL
& FREDERICKS, LLP 201 SOUTH BISCAYNE BOULEVARD
101 EAST 52ND STREET, 9TH FLOOR SUITE 3000
NEW YORK, NEW YORK 10022 MIAMI, FLORIDA 33131
(212) 752-9700 (305) 373-9400
(212) 752-9713 (FAX) (305) 373-9493 (FAX)
</TABLE>
------------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this registration statement.
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [X]
------------------------------
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 Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
------------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT BEING OFFERING PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES BEING REGISTERED REGISTERED PRICE PER SECURITY OFFERING PRICE REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------------
Common Stock, no par value..... 1,897,500(1) $5.00 $9,487,500 $2,798.81
- ----------------------------------------------------------------------------------------------------------------------------
Underwriters' Warrants......... 165,000 $.0001 $100.00 (2)
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Common Stock Issuable on
Exercise of Underwriters'
Warrant...................... 165,000 $8.25 $1,361,250 $401.57
- ----------------------------------------------------------------------------------------------------------------------------
Total Registration Fee......... $3,200.38
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Previously paid................ $3,200.38
</TABLE>
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- --------------------------------------------------------------------------------
(1) Includes up to 247,500 shares of Common Stock issuable upon exercise of the
Underwriters' over-allotment option.
(2) No fee due pursuant to Rule 457(g).
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- --------------------------------------------------------------------------------
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 23, 1998
PROSPECTUS
LOGO
CURTIS INTERNATIONAL LTD.
1,650,000 SHARES
This Prospectus relates to an offering (the "Offering") of 1,650,000 shares
(collectively, the "Shares") of common stock, no par value per share (the
"Common Stock"), of Curtis International Ltd., an Ontario corporation (the
"Company"), through Joseph Stevens & Company, Inc. (the "Representative"), the
representative of the underwriters (the "Underwriters"). Of such Shares,
1,498,000 Shares are being sold by the Company and 152,000 Shares (the "Selling
Stockholder Shares") are being sold by Ranch Limited (the "Selling
Stockholder"). The Company will not receive any of the proceeds from the sale of
the Selling Stockholder Shares.
Prior to the Offering, there has been no market for the Common Stock, and
there can be no assurance that a market will develop for the Company's
securities in the future or that, if developed, it will be sustained. The
Company is applying for quotation of the Common Stock on Nasdaq National Market
under the trading symbol "CURTF."
The public offering price of the Shares was determined by negotiation
between the Company and the Representative and does not necessarily bear any
direct relationship to the Company's assets, earnings, book value per share or
other generally accepted criteria of value. See "Underwriting."
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK
AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" COMMENCING ON PAGE 8
AND "DILUTION" ON PAGE 14.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE DISCOUNTS AND PROCEEDS TO SELLING
TO PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER
- --------------------------------------------------------------------------------------------------------------------------------
Per Share......................... $5.00 $.50 $4.50 $4.50
- --------------------------------------------------------------------------------------------------------------------------------
Total(3).......................... $8,250,000 $825,000 $6,741,000 $684,000
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes the value of warrants to be issued to the Underwriters (the
"Underwriters' Warrants") to purchase up to 165,000 shares of the Company's
Common Stock. In addition, the Company also agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting the Underwriters' non-accountable expense allowance,
financial consulting fee and other expenses of the Offering, estimated at
$607,200 and payable by the Company. See "Underwriting."
(3) The Company has granted the Underwriters an option, exercisable for 45 days
after the date the Securities and Exchange Commission declares the Company's
registration statement effective (the "Effective Date"), to purchase up to
an additional 247,500 shares of Common Stock solely for the purpose of
covering over-allotments, if any (the "Over-Allotment Option"). If the
Over-Allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to
Selling Stockholder will be $9,487,500, $948,750, $7,854,750 and $684,000,
respectively. See "Underwriting."
The Shares are being offered by the Underwriters on a "firm commitment"
basis, when, as and if delivered to and accepted by the Underwriters, subject to
prior sale, and other conditions and legal matters. The Underwriters reserve the
right to withdraw, cancel or modify the Offering and to reject orders, in whole
or in part, for the purchase of any of the securities offered notwithstanding
tender by check or otherwise. It is expected that delivery of the certificates
representing the Shares will be made against payment therefor at the offices of
Joseph Stevens & Company, Inc., 33 Maiden Lane, New York, New York 10038 on or
about October , 1998.
<TABLE>
<S> <C>
JOSEPH STEVENS & COMPANY, INC.
</TABLE>
, 1998
<PAGE> 3
[PICTURES OF THE COMPANY'S PRODUCTS]
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY, 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."
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN AND WILL NOT BE QUALIFIED FOR
SALE UNDER THE SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA.
THE SECURITIES ARE NOT BEING OFFERED FOR SALE AND MAY NOT BE OFFERED OR SOLD,
DIRECTLY OR INDIRECTLY, IN CANADA, OR TO ANY RESIDENT THEREOF, IN VIOLATION OF
THE SECURITIES LAWS OF CANADA OR ANY PROVINCE OR TERRITORY OF CANADA.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. Unless the
context otherwise requires, the term "Curtis" or "Company" refers to Curtis
International Ltd. as well as any predecessors. All information in this
Prospectus, unless otherwise noted, assumes no exercise of the Over-Allotment
Option or the Underwriters' Warrants. All references to dollar amounts in this
Prospectus, unless otherwise indicated, are in United States dollars.
THE COMPANY
Curtis International Ltd. designs, distributes and markets quality,
value-priced consumer electronics products. The Company offers a broad line of
telecommunication, audio, video and computer products including, telephones,
answering machines, caller ID systems, CD and cassette systems, portable
televisions and computer accessories. The Company's products are primarily sold
under the brand names "Curtis" and "CTP Worx," as well as private labels. The
Company's strategy has been to build a portfolio of diverse consumer electronics
products which offers retailers flexible merchandising programs. The Company's
products are available in approximately 2,300 stores throughout Canada and
10,000 stores in the United States through approximately 30 retail chains in
Canada and the United States. All of the Company's products are manufactured by
independent manufacturers.
The Company's customers include mass merchandisers such as Wal-Mart
(Canada), Ames, Bradlees, Dollar General and Bi-Way Stores; drug store chains
such as Rite-Aid, London Drugs, Thrifty Payless, Jean Coutu and Ker Drugs;
specialty marketers such as QVC, the Home Shopping Network and Amway; consumer
electronic retailers such as Future Shop, Fry's and ABC Warehouse; and appliance
and department stores such as Boscov and Fedco. The Company has operated
profitably and has recently undergone a period of rapid sales growth. For the
year ended May 31, 1998, the Company's sales increased by $12,557,471, or 84.2%,
to $27,471,613 from $14,914,142 for the year ended May 31, 1997. The Company
only entered the United States market in 1996 and has since opened accounts with
approximately 20 retail chains in the United States. The Company's sales in the
United States were $11,716,935 for the year ended May 31, 1998 as compared to
$2,217,058 for the year ended May 31, 1997, an increase of 428%. The Company
believes there is an opportunity to significantly increase its business in the
United States through both its current customers and potential new customers.
THE CONSUMER ELECTRONICS INDUSTRY
The consumer electronics industry is large and diverse, encompassing a wide
variety of technologies and products, including televisions, VCRs, audio
systems, CD players, cassette players and telephones. The Consumer Electronics
Manufacturers Association ("CEMA") estimates that total factory sales of
consumer electronics products in 1997 were approximately $72 billion, an
increase of 4.0% from 1996. CEMA estimates that factory sales will grow to
approximately $92 billion by the year 2001, an increase of 115% in ten years,
and believes that the consumer electronics industry is one of the fastest
growing sectors of the United States economy. It is estimated that in 1998 the
average United States household will spend $825 on consumer electronics
products.
GROWTH STRATEGY
Distributors have traditionally offered consumer electronics to retailers
using three principal branding strategies and corresponding price points: (i)
premium brands, such as Sony and Panasonic; (ii) mass-market brands, such as
General Electric and Magnavox; and (iii) value-priced brands, such as those of
the Company. The Company plans to continue to establish itself as a leading
supplier of quality, value-priced consumer electronics products. The Company
believes that its broad portfolio of products, superior design capabilities,
flexible and low-cost sourcing and superior service offered both prior to and
after-sale provide it with distinct competitive advantages. The Company plans to
grow its business using a strategy comprised of the following principal
elements:
- CONTINUE TO OFFER VALUE-PRICED, QUALITY PRODUCTS. The Company designs
and markets products which are value-priced, yet fill a market void
through their design and up-to-date style. The Company's
3
<PAGE> 5
packaging further distinguishes its products in the marketplace from those
of its competitors. The Company plans to continue to offer its customers
quality products at competitive prices.
- EXPAND CUSTOMER BASE. The Company believes that it has significant
opportunities to expand its customer base both in Canada and the United
States. The Company intends to use its existing relationships in Canada
with retailers such as Wal-Mart, Staples and Toys "R" Us, to penetrate
the United States market in such retailers' stores. In addition, the
Company continually seeks to expand its distribution channels through
various means. For example, the Company recently sold to the Home
Shopping Network its personal televisions as part of a special promotion.
The Home Shopping Network is planning additional promotions of certain of
the Company's products in the Fall of 1998.
- INCREASE PENETRATION AND SALES TO EXISTING UNITED STATES CUSTOMERS. In
the short period in which the Company has focused significant marketing
efforts in the United States, it has established relationships with
several major retailers. The Company plans to focus its efforts on
broadening its product selection being sold by these retailers and
substantially increasing the dollar volume of sales to these existing
customers.
- ACQUIRE AND LICENSE ADDITIONAL PRODUCTS. Discount retail chains and mass
merchants limit the number of vendors with which they deal, preferring to
deal with a limited number of vendors with a wide range of products. The
Company has an extensive line of products and strives to fill
substantially all of its customers' electronic requirements. The Company
believes it can add additional product lines, both through acquisition
and licensing, which will allow it to add to its already wide selection
of consumer electronics products.
- DEVELOP STRATEGIC ALLIANCES. The Company intends to develop strategic
alliances with large discount chain stores and mass merchants. Management
believes that many retailers whose primary business is not consumer
electronics look for a strategic alliance with a vendor who has the
experience, customer service and product selection to create a successful
consumer electronics program in their stores. Development of strategic
alliances whereby the Company provides these services in exchange for
commitments to stock and sell the Company's products will assist the
Company in the establishment of long-term relationships with such
discount chain stores and mass merchants.
Curtis International Ltd. was incorporated in the Province of Ontario on
December 12, 1990. The Company subsequently amalgamated (or merged) with Unique
Investments Limited and AEG Trading Limited on January 26, 1998 and Worldwide
Holdings Limited on May 31, 1998. The amalgamations were effectuated for the
purpose of transferring the Company's ownership from corporate entities to
individuals and to reduce the Company's outstanding shares to 4,000,000. In both
cases, the Company was the surviving entity. In August 1998, the two principal
stockholders returned an aggregate of 300,000 shares to the Company for
cancellation bringing the Company's outstanding shares to 3,700,000. The
Company's principal executive offices are located at 7 Kodiak Crescent,
Downsview, Ontario M3J 3E5 Canada and its telephone number is (416) 636-5553.
4
<PAGE> 6
EXCHANGE RATE DATA
The Company maintains its books of account in Canadian dollars, but has
provided the financial data in this Prospectus in United States dollars with its
audit conducted in accordance with generally accepted auditing standards in the
United States of America. All references to dollar amounts in this Prospectus,
unless otherwise indicated, are in United States dollars.
The following table sets forth, for the periods indicated, certain exchange
rates based on the noon buying rate in New York City for cable transfers in
Canadian dollars. Such rates are the number of United States dollars per one
Canadian dollar and are the inverse of rates quoted by the Federal Reserve Bank
of New York for Canadian dollars per US$1.00. The average exchange rate is based
on the average of the exchange rates on the last day of each month during such
periods. On May 31, 1998, the exchange rate was Cdn$1.00 per US $0.6863.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
RATE AT END OF PERIOD............................. $0.7143 $0.7353 $0.7299 $0.6991
AVERAGE RATE DURING PERIOD........................ 0.7299 0.7299 0.7353 0.7223
HIGH.............................................. 0.7092 0.7009 0.7212 0.6945
LOW............................................... 0.7642 0.7533 0.7526 0.7493
</TABLE>
The following discussion should be read in conjunction with the Summary
Combined Financial Information and the Company's Financial Statements and the
Notes thereto and the other financial data included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements regarding the
plans and objectives of management for future operations. The forward-looking
statements included herein are based on current expectations and assumptions
that involve numerous risks and uncertainties. Although management believes that
the assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could prove inaccurate and, therefore, there can be no assurance
that the forward-looking statements included herein will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
5
<PAGE> 7
THE OFFERING
Securities Offered:........ 1,498,000 Shares of Common Stock by the Company and
152,000 Shares of Common Stock by the Selling
Stockholder. See "Description of Securities" and
"Underwriting."
Common Stock Outstanding
Prior to the
Offering(1):............. 3,700,000
Common Stock Outstanding
After the
Offering(1)(2):.......... 5,198,000
Use of Proceeds:........... The Company intends to use the net proceeds of this
Offering to purchase inventory, repay indebtedness,
increase sales and marketing efforts, improve its
management information system, relocate its
existing facilities and for working capital and
general corporate purposes. See "Use of Proceeds."
Proposed Nasdaq National
Market Symbol(3):........ CURTF
- ------------------------------
(1) Does not include an aggregate of 400,000 shares of Common Stock reserved for
issuance upon the exercise of options available for future grant under the
Company's 1998 Stock Option Plan (the "Plan"), 100,000 of which were
granted. See "Management-Stock Option Plan."
(2) Assumes no exercise of the Over-Allotment Option or Underwriters' Warrants.
(3) The proposed symbol does not imply that a liquid and active market will
develop or be sustained for the Shares upon completion of the Offering.
6
<PAGE> 8
SUMMARY COMBINED FINANCIAL INFORMATION
The following summary financial information has been derived from the
financial statements of the Company. The summary financial information set forth
below is qualified by and should be read in conjunction with the financial
statements, including the notes thereto and other financial information included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
---------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Sales................................................ $14,627,378 $14,914,142 $27,471,613
Gross profit......................................... 2,714,451 2,740,394 5,121,646
Income before income taxes........................... 133,677 123,379 1,467,347
Net income........................................... 100,347 93,001 864,905
Earnings per share(1)................................ .03 .03 .23
</TABLE>
<TABLE>
<CAPTION>
AS OF MAY 31, 1998
----------------------------
ACTUAL AS ADJUSTED(2)
----------- --------------
<S> <C> <C>
BALANCE SHEET DATA
Working capital............................................. $ 1,416,422 $ 6,650,222
Total assets................................................ 13,685,372 18,919,172
Long-term debt.............................................. 241,768 241,768
Total liabilities........................................... 12,248,664 11,348,664
Shareholders' equity........................................ 1,436,708 7,570,508
</TABLE>
- ------------------------------
(1) Based on a weighted average number of shares outstanding of 3,700,000 shares
in each of the applicable periods.
(2) As adjusted to reflect the sale by the Company of the 1,498,000 Shares
offered hereby and the application of the net proceeds therefrom. See "Use
of Proceeds."
7
<PAGE> 9
RISK FACTORS
Prospective investors should carefully consider the following factors, in
addition to the other information contained in this Prospectus, in connection
with investments in the Shares offered hereby. This Prospectus contains certain
forward-looking statements which involve risks and uncertainties. The Company's
actual results could differ materially from those anticipated in the
forward-looking statements as a result of certain factors, including those set
forth below and elsewhere in this Prospectus. An investment in the Shares
offered hereby involves a high degree of risk.
DEPENDENCE ON NEW PRODUCT INTRODUCTIONS AND MARKET ACCEPTANCE. The
Company's continued success is dependent upon its ability to continue to
identify, obtain and develop products that can be successfully sold to retail
chains and other mass merchants at acceptable profit margins. There can be no
assurance that the Company will be able to successfully develop and introduce
new products under its own brand names, that any such products will meet with
consumer acceptance in the marketplace or that any such products will be sold at
acceptable profit margins.
DEPENDENCE ON KEY CUSTOMERS. During the year ended May 31, 1996 ("Fiscal
1996") and the year ended May 31, 1997 ("Fiscal 1997") approximately 57% of
revenues were derived from sales to the Company's three largest customers.
During the year ended May 31, 1998 ("Fiscal 1998") approximately 63% of revenues
were derived from sales to the Company's five largest customers. The Company
believes that it has good relationships with its customers. However, the Company
has no long-term contracts with any of its customers, all of which purchase
products from the Company pursuant to individually placed purchase orders. There
can be no assurance that the Company's customers, including any of its largest
customers, will continue to purchase merchandise from the Company. A loss of one
or more of these customers could have a material adverse effect on the Company's
business and results of operations. See "Business--Sales and Distribution" and
"Business--Marketing."
DEPENDENCE ON THIRD PARTY MANUFACTURERS AND SUPPLIERS. To date, most of
the merchandise sold by the Company has been purchased by the Company from
third-party manufacturers and distributors, primarily located in Asia. The
Company does not enter into long-term contracts with such third parties but
instead purchases merchandise pursuant to individually placed purchase orders.
There can be no assurance that the Company's manufacturers will dedicate
sufficient production capacity to meet the Company's scheduled delivery
requirements or that the Company's manufacturers will have sufficient production
capacity to satisfy the Company's requirements. Typically, the Company helps
develop the design of a particular product and the manufacturer meets such
specifications. Accordingly, the Company is dependent on the ability of its
manufacturers to, among other things, meet the Company's design, performance and
quality specifications, as well as the quality and delivery requirements of its
customers. Recently, the economies of many Asian countries have experienced
financial pressures, including the devaluation of their currencies and a
shortage of capital. In the event that the crisis were to cause one or more of
the Company's manufacturers to cease operations it could result in delays in
obtaining merchandise.
Although the Company believes that its relationships with its suppliers are
good and that it would be able to locate other sources of merchandise in the
event of the loss of one or more of such suppliers, there can be no assurance
that the Company will not experience delays or other difficulties in obtaining
merchandise. Such delays or difficulties would have a material adverse effect on
the Company's business and results of operations. See "Business--Manufacturing."
INVENTORY MANAGEMENT RISKS. The Company is subject to significant risks in
connection with its inventory management. In order to assure an adequate supply
of products to meet the relatively high demand during the third and fourth
quarters of each calendar year, the Company must commit to acquire products
three months in advance of delivery. If the Company underestimates its need for
inventory or experiences delays in production, the Company may have to pay a
significant premium to obtain the necessary contract-manufacturing capacity or
ship products by air rather than less expensive ground or sea transportation in
order to meet customer orders. In such event, profit margins, sales and/or
customer relationships could be materially adversely affected. Similarly, if the
Company overestimates its inventory needs, the Company will be required to
reduce prices in order to dispose of such inventory or increase borrowings to
finance the carrying costs of such inventory, thereby adversely affecting its
profitability and cash flows. There can be no assurance
8
<PAGE> 10
that the Company will be able to borrow such amounts on reasonable terms, if at
all. To the extent that the Company is unable to adequately plan, time and
budget its sourcing and manufacturing operations, incurs delays in delivery,
fails to adequately forecast prices and demand or reduce costs when necessary, a
material adverse effect on the Company's business, financial condition and
results of operations could result.
The Company incurs expenses as a result of product returns and warranty
claims. Such returns and warranty claims may result from defective goods,
inadequate performance relative to customer expectations, improper packaging,
liberal retailer return policies and other causes which may be outside the
Company's control. During Fiscal 1998, approximately 15% of the Company's gross
sales were made under net sale arrangements, whereby the Company's customers are
responsible for product returns, which cannot be returned to the Company. The
remainder of the sales are returnable only for defects. While the Company plans
to maintain or increase the percentage of sales that are on a net basis, there
can be no assurance that the Company will be successful in maintaining or
increasing such percentage. Any significant increase in product returns and
warranty claims could have a material adverse effect on the Company's business,
financial condition and results of operations.
COMPETITION. The Company's market segment is highly competitive. The mass
merchandise and discount retail market is divided among a large number of
foreign-based manufacturers and distributors. Many of the Company's competitors
have or may obtain significantly greater financial and marketing strength and
resources than the Company, enabling them to compete more effectively than the
Company. In addition, the Company's products compete at the retail store level
for shelf space, which has an impact on the Company's established and proposed
distribution channels. Competition, or failure of consumers to accept existing
or new products, may result in reduced sales, reduced profit margins, or both,
for the Company. There can be no assurance that the Company will not encounter
increased competition in the future, which could have a material adverse effect
on the ability of the Company to successfully market existing products, develop
new products or expand its business. See "Business--Competition."
DEPENDENCE ON KEY PERSONNEL. The Company's future success will depend to a
significant extent on the efforts of key management personnel, particularly
Aaron Herzog, the Company's President and Chief Executive Officer, and Jacob
Herzog, the Company's Chairman, Treasurer and Secretary. The loss of either of
these key employees could have a material adverse effect on the Company's
business. In addition, the Company believes that its future success will depend
in large part upon its continued ability to attract and retain highly qualified
management (including a Chief Financial Officer), as well as technical and sales
personnel. The Company maintains key-man life insurance policies in an amount of
Cdn $1 million on each of the lives of Aaron Herzog and Jacob Herzog, under
which the Company's bank, Canadian Imperial Bank of Commerce, is the
beneficiary. The Company intends to increase such insurance to Cdn $2 million on
each of Messrs. Aaron and Jacob Herzog prior to the Effective Date. Upon the
Effective Date the Company will enter into two-year employment agreements with
each of Aaron Herzog and Jacob Herzog. There can be no assurance that the
Company will be able to attract and retain the qualified personnel necessary for
its business. See "Management."
CONTROL BY EXISTING STOCKHOLDERS. Upon the completion of this Offering,
the Company's management will beneficially own 68.2% (65.1% if the
Over-Allotment Option is exercised in full) of the Company's outstanding Common
Stock. In addition, Aaron and Jacob Herzog are parties to a voting trust
agreement which provides that they will vote their shares together. As a result,
management will continue to elect a majority of the members of the Board of
Directors and decide matters requiring stockholder approval. See "Principal and
Selling Stockholders."
RETAIL INDUSTRY. The retail industry is significantly affected by many
factors, including changes in the national economy and in regional and local
economies, confidence in the overall economy, changes in consumer preferences
and increases in the number of retail operations. Factors such as inflation may
have a greater effect on the retail industry than on other industries. As a
result of these and other pressures, several retail firms have filed for
bankruptcy protection. Although, during the past three years, the Company has
written off only insignificant amounts as a result of such bankruptcies, the
loss of a significant number of the Company's customers could have a material
adverse effect on the business and results of operations of the
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<PAGE> 11
Company. The Company maintains a credit insurance policy whereby it is insured
against certain customers failure to pay their accounts receivable. Not all of
the Company's customers are covered by such policy.
PRODUCT LIABILITY. Any defects in the Company's products that result in
personal injury might result in consequences that could have a material adverse
effect on the Company's business, financial condition and results of operations.
The Company maintains insurance to cover such risks; however, the coverage in
certain events may not be adequate to insure against all product liability
claims.
RISK OF DOING BUSINESS IN FOREIGN COUNTRIES; RISK OF IMPORT
LIMITATIONS. The Company's products are principally manufactured by independent
manufacturers in China, Hong Kong, Indonesia, Malaysia, Thailand, the
Philippines and other Asian countries. The Company does not have long-term
contracts with any of its independent manufacturers. Manufacturing in Asian and
other foreign countries is subject to a number of risks including, but not
limited to, transportation delays and interruptions, political and economic
disruptions, the imposition of tariffs and import and export controls and
quotas, loss of property or revenue from expropriation or political demands, and
changes in governmental policies. While the Company to date has not experienced
any material adverse effects due to such risks, there can be no assurance that
such events will not occur in the future and possibly result in increases in
costs and delays of, or interference with, product deliveries resulting in
losses of sales and damage to customer relationships.
Generally, Asian and other countries in which the Company does business may
not offer legal mechanisms to redress an unfair trade practice, contract breach
or other problem requiring the enforcement of contractual provisions or other
redress. In particular, Asian countries generally do not have a well-developed,
consolidated body of law governing foreign investment enterprises, and the
administration of laws and regulations by government agencies may be subject to
considerable discretion and variation and administrative review and approval by
various national and local agencies of Asian governments. As a result, in the
event of any damage to the Company resulting from the breach of a contract, the
failure to fulfill manufacturing commitments, the taking of Company property, or
other similar event creating a loss for the Company or interruption of its
business, there may not be an adequate avenue of recourse against the parties
responsible for such damages.
MOST FAVORED NATION RISK. Presently, products imported into the United
States from Asian countries are subject to favorable duty rates based on the
"Most Favored Nation" status of such countries ("MFN Status"). MFN Status is
reviewed on an annual basis by the United States President and Congress and was
recently renewed for such countries.
If MFN Status for goods produced in Asian countries was removed, there
would be a substantial increase in tariffs imposed on goods of Asian origin
entering the United States, including those sold by the Company, which could
have a material adverse effect on the supply and cost of products manufactured
in such countries, and consequently on the Company's business, financial
condition and results of operations. Although the Company produces products in
other locations, at the present time, the Company plans to continue its
production primarily in Asia.
CURRENCY RISKS. Although the Company currently effects substantially all
of its transactions in United States dollars and approximately 50% of its sales
are made in the United States, in those situations in which transactions are in
foreign currencies, the Company is exposed to risks such as currency
instability, currency exchange losses and the ability to repatriate earnings
under existing exchange control laws. The Company does not currently engage in
hedging, and no assurance can be given that an effective currency hedging policy
could offset these currency risks.
GOVERNMENT REGULATION. Most of the Company's customers (as well as several
state and local authorities) require that the Company's products meet the
electrical safety standards of the Underwriters' Laboratories, Inc. Certain of
the Company's products sold for use in the United States must be registered with
and approved by the United States Federal Communications Commission (the "FCC").
Products sold in Canada must comply with the standards of the Canadian Standards
Association. In addition, the Company's products must meet the applicable safety
standards imposed by any other countries in which it intends to sell its
products. The Company is subject to numerous tariffs, duties, charges and
assessments on the import of its products. The Company retains import agencies
and expediters to facilitate the import of its products and the
10
<PAGE> 12
payment of these charges and duties. Although these duties and charges have not
substantially affected the Company's ability to market its products for delivery
in the United States and elsewhere, regulations affecting these charges and
duties are subject to change, which could have the effect of increasing the cost
of goods imported and sold by the Company. See "Business--Regulation."
SEASONALITY. The Company generally experiences stronger demand for its
products in the quarter ending November 30. Accordingly, to accommodate such
increased demand, the Company is generally required to place higher orders with
its vendors during the quarter ending August 31, thereby affecting the Company's
need for working capital during such period. On a corresponding basis, the
Company also is subject to increased returns during the quarters ending February
28 and May 31, which adversely affects the Company's collection activities
during such periods, also affecting its liquidity. Operating results may
fluctuate due to other factors such as the timing of the introduction of new
products, price reductions by the Company and its competitors, demand for the
Company's products, product mix, delay, available inventory levels, fluctuation
in foreign currency exchange rates relative to the United States dollar,
seasonal cost increases and general economic conditions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISKS INVOLVED WITH PRODUCT EXPANSION AND EXPANSION INTO UNITED STATES AND
OTHER MARKETS. As part of its business strategy, the Company intends to acquire
related and complementary businesses and product lines. There can be no
assurance that the Company will be able to acquire such businesses and/or
product lines or, if acquired, be able to manage the expanded operations
effectively. Moreover, failure to implement financial and other systems and to
add resources in connection with such acquisitions could have a material adverse
impact on the Company's results of operations and financial condition. The
Company's acquisitions, if any, could involve a number of risks including the
diversion of management's attention to the assimilation of the product lines to
be acquired, unforeseen difficulties in the acquired intangible assets and
dilution in the ownership interest of stockholders as a result of the issuance
of additional Common Stock or shares of preferred stock (the "Preferred Stock")
in connection with an acquisition. The Company has no present commitments,
understandings or agreements for any acquisitions, and there can be no assurance
that any such acquisitions will occur. See "Business--Growth Strategy."
FREIGHT AND TRANSPORTATION. The Company is dependent on independent
freight haulers to ship the Company's products to distribution facilities. The
ability of the Company to control its transportation and freight expenses is a
significant factor in the Company's gross profit margin. There is no assurance
that the Company will be able to maintain acceptable freight and transportation
pricing and arrangements. Furthermore, a labor slowdown, strike or other matters
beyond management's control may adversely affect the Company's ability to ship
its products on a timely basis or at all.
NO PRIOR PUBLIC MARKET. Prior to this Offering, there has been no public
market for the Common Stock. Accordingly, there can be no assurance that an
active trading market will develop and be sustained upon the completion of this
Offering. The initial public offering price of the Common Stock has been
determined by negotiations between the Company and the Representative and does
not necessarily bear any relation to the Company's asset value, earnings or
other objective criteria. See "Underwriting." The stock market has, from time to
time, experienced extreme price and volume fluctuations which often have been
unrelated to the operating performance of particular companies. Although it has
no obligation to do so, the Representative intends to engage in market-making
activities or solicited brokerage activities with respect to the purchase or
sale of the Common Stock on the Nasdaq National Market. However, no assurance
can be given that the Representative will continue to participate as a
market-maker in the securities of the Company or that other broker/dealers will
make a market in such securities which may adversely impact the liquidity of the
Common Stock. Regulatory developments and economic and other external factors,
as well as period-to-period fluctuations in financial results, may also have a
significant impact on the market price of the Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION. This Offering involves an immediate
and substantial dilution to investors. Purchasers of Shares in the Offering will
incur an immediate dilution of $3.54 per Share in the net tangible book value of
their investment from the initial public offering price, which dilution amounts
to approximately 71% of the initial public offering price per Share. Investors
in the Offering will pay $5.00 per Share, as compared to an average cash price
of $0.39 per share paid by existing stockholders. See "Dilution."
11
<PAGE> 13
BROAD DISCRETION IN APPLICATION OF PROCEEDS; UNSPECIFIED
ACQUISITIONS. Approximately 44% of the net proceeds of this Offering will be
applied to working capital and general corporate purposes. Accordingly,
management of the Company will have broad discretion over the use of the
proceeds. Although the Company may utilize a portion of the net proceeds for
potential acquisitions of complementary businesses and of product lines through
licensing or other arrangements, as of the date hereof, the Company has not
identified any particular acquisition targets. Stockholders of the Company may
have no opportunity to approve specified acquisitions or to review the financial
condition of any potential target. In addition, although as of the date hereof
the Company has no agreements, understandings or commitments and is not engaged
in any negotiations relating thereto, the Company may seek to acquire rights to
additional proprietary product lines through licensing or other arrangements,
and intends to use a portion of the proceeds of this Offering for one or more of
such acquisitions in the event opportunities become available on terms
acceptable to the Company. Moreover, there can be no assurance that any such
acquisition opportunities will become available, that the Company would be
successful in acquiring any such rights on favorable terms, or that the Company
would be successful in marketing and selling any product lines so acquired by
it. See "Use of Proceeds" and "Business--Growth Strategy."
NEED FOR ADDITIONAL FINANCING. The Company believes that the proceeds of
the Offering will, together with revenues from operations, be sufficient to
finance the Company's working capital requirements for a period of at least 12
months following the completion of this Offering. However, a part of the
Company's strategy is to acquire related and complementary businesses and/or
individual product lines, although the Company has not presently identified any
specific acquisitions. The Company's ability to make acquisitions may be
dependent upon its ability to obtain additional financing. There can be no
assurance that additional financing will be available on terms acceptable to the
Company, or at all. In the event that the Company is unable to obtain such
additional financing as it becomes necessary, the Company may not be able to
achieve all of its business plans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SHARES ELIGIBLE FOR FUTURE SALE. Of the 5,198,000 shares of Common Stock
of the Company to be outstanding upon completion of this Offering, 3,548,000
shares shall be "restricted securities," which are owned by "affiliates" of the
Company, as those terms are defined in Rule 144 promulgated under the Securities
Act. Absent registration under the Securities Act, the sale of such shares is
subject to Rule 144, as promulgated under the Securities Act. All of the
"restricted securities" will be eligible for resale under Rule 144. In general,
under Rule 144, subject to the satisfaction of certain other conditions, a
person, including an affiliate of the Company, who has beneficially owned
restricted shares of Common Stock for at least one year is permitted to sell in
a brokerage transaction, within any three-month period, a number of shares that
does not exceed the greater of 1% of the total number of outstanding shares of
the same class, or, if the Common Stock is quoted on The Nasdaq Stock Market or
a stock exchange, the average weekly trading volume during the four calendar
weeks preceding the sale. Rule 144 also permits a person who presently is not
and who has not been an affiliate of the Company for at least three months
immediately preceding the sale and who has beneficially owned the shares of
Common Stock for at least two years to sell such shares without regard to any of
the volume limitations described above. Holders of all of such shares of Common
Stock are affiliates of the Company. All of the Company's post-offering
stockholders who are affiliates have agreed not to sell or otherwise dispose of
any of their shares of Common Stock now owned or issuable upon the exercise of
any option for a period of 18 months from the Effective Date, without the prior
written consent of the Representative. For a period of 24 months from the
Effective Date such post-offering stockholders who are affiliates agree that all
sales of the Company's Common Stock owned by such affiliates shall be made
through the Representative in accordance with its customary brokerage policies.
No prediction can be made as to the effect, if any, that sales of shares of
Common Stock or the availability of such shares for sale will have on the market
prices of the Company's Common Stock prevailing from time to time. The
possibility that substantial amounts of Common Stock may be sold under Rule 144
into the public market may adversely affect prevailing market prices for the
Common Stock and could impair the Company's ability to raise capital in the
future through the sale of equity securities. See "Shares Eligible for Future
Sale."
NO DIVIDENDS AND NONE ANTICIPATED. To date, no dividends have been
declared or paid on the Common Stock, and the Company does not anticipate
declaring or paying any dividends in the foreseeable future, but
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<PAGE> 14
rather intends to reinvest profits, if any, in its business. Investors should,
therefore, be aware that it is unlikely that any dividends will be paid on the
Common Stock in the foreseeable future. See "Dividend Policy."
NASDAQ ELIGIBILITY AND MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING OF
COMMON STOCK FROM NASDAQ NATIONAL MARKET SYSTEM. Prior to this Offering, there
has been no established public trading market for the Company's Common Stock and
there is no assurance that a public trading market for the Company's Common
Stock will develop after the completion of this Offering. If a trading market
does in fact develop for the Common Stock offered hereby, there can be no
assurance that it will be sustained.
The Company has applied for listing of the Common Stock on the Nasdaq
National Market upon the Effective Date. The Commission has recently approved
new rules imposing criteria for listing of securities on the Nasdaq National
Market, including standards for maintenance of such listing. In order to qualify
for initial quotation of securities on the Nasdaq National Market, an issuer,
among other things, must have at least $6,000,000 in net tangible assets,
$8,000,000 in market value of the public float and a minimum bid price of $5.00
per share. For continued listing, an issuer, among other things, must have
$4,000,000 in net tangible assets, $5,000,000 in market value of securities in
the public float and a minimum bid price of $1.00 per share. If the Company is
unable to satisfy the Nasdaq National Market's maintenance criteria in the
future, its Common Stock may be delisted from the Nasdaq National Market. In
such event, the Company would seek to list its securities on The Nasdaq SmallCap
Market, however, if it was unsuccessful, trading, if any, in the Company's
Common Stock, would thereafter be conducted in the over-the-counter market in
the so-called "pink sheets" or the OTC Bulletin Board. As a consequence of such
delisting, an investor would likely find it more difficult to dispose of, or to
obtain quotations as to, the price of the Company's Common Stock.
PENNY STOCK REGULATION. In the event that the Company is unable to satisfy
the maintenance requirements for the Nasdaq National Market and its Common Stock
falls below the minimum bid price of $5.00 per share for the initial quotation,
the Company would seek to list its securities on The Nasdaq SmallCap Market. If
it was unsuccessful, trading would be conducted on the "pink sheets" or the OTC
Bulletin Board. In the absence of the Common Stock being quoted on Nasdaq, or
listed on an exchange, trading in the Common Stock would be covered by Rule
15g-9 promulgated under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), if the Common Stock is a "penny stock." Under such rule,
broker-dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. Securities are exempt from this rule if the market
price is at least $5.00 per share.
The Commission adopted regulations that generally define a penny stock to
be any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. Such exceptions include an equity security listed
on Nasdaq, and an equity security issued by an issuer that has (i) net tangible
assets of at least $2,000,000, if such issuer has been in continuous operation
for three years, (ii) net tangible assets of at least $5,000,000, if such issuer
has been in continuous operation for less than three years, or (iii) average
revenue of at least $6,000,000 for the preceding three years. Unless an
exception is available, the regulations require the delivery, prior to any
transaction involving a penny stock, of a disclosure schedule explaining the
penny stock market and the risks associated therewith.
If the Company's Common Stock were to become subject to the regulations
applicable to penny stocks, the ability of broker-dealers to sell the Common
Stock and the ability of purchasers in this Offering to sell their Common Stock
in the secondary market would be limited thereby severely affecting the market
liquidity of the Common Stock. There is no assurance that trading in the Common
Stock will not be subject to these or other regulations that would adversely
affect the market for such securities.
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<PAGE> 15
DILUTION
Dilution represents the difference between the initial public offering
price paid by the purchasers in the Offering and the net tangible book value per
share immediately after completion of the Offering. Net tangible book value per
share represents the amount of the Company's total assets minus the amount of
its liabilities and intangible assets divided by the number of shares
outstanding. As of May 31, 1998, the net tangible book value of the Company's
Common Stock was $1,436,708 or $0.39 per share. Immediately after the Offering,
the pro forma net tangible book value as of May 31, 1998 will increase to
$7,570,508 or $1.46 per share. Consequently, there will be an immediate increase
in net tangible book value of $1.07 per share to the existing stockholders and
an immediate substantial dilution (i.e., the difference between the offering
price of $5.00 and the pro forma net tangible book value per share after the
Offering) of $3.54 or 71% to new investors purchasing the Shares offered hereby.
The following table illustrates, as of May 31, 1998, this per share
dilution:
<TABLE>
<S> <C> <C>
Public offering price per Share............................ $5.00
Net tangible book value per share before Offering(1)....... 0.39
Increase per share attributable to new investors........... 1.07
-----
Pro forma net tangible book value per share after
Offering(1).............................................. 1.46
-----
Dilution per Share to new investors(1)..................... 3.54
=====
</TABLE>
The following table summarizes, as of May 31, 1998, the total number of
shares of Common Stock purchased from the Company, the total consideration paid,
and the average price per share paid by the existing stockholders and by new
investors who purchase shares of Common Stock pursuant to this Offering.
<TABLE>
<CAPTION>
SHARES PERCENTAGE AVERAGE
PURCHASED OF TOTAL AGGREGATE % OF TOTAL PRICE
(1) SHARES CONSIDERATION CONSIDERATION PER SHARE
------------ ---------- ------------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Existing
Stockholders........... 3,700,000 71.2% $1,436,708 16.1% $0.39
New Investors.......... 1,498,000 28.8% $7,490,000 83.9% $5.00
--------- ------ ---------- ------
Total.................. 5,198,000 100.0% $8,926,708 100.0%
</TABLE>
- ------------------------------
(1) This information does not include (i) 165,000 shares issuable upon the
exercise of the Underwriters' Warrants; (ii) 400,000 shares that may be
issued under the Plan; or (iii) 247,500 shares available pursuant to the
Over-Allotment Option.
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<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
31, 1998 and as adjusted to reflect the sale of 1,498,000 Shares offered hereby.
The information provided below should be read in conjunction with the other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MAY 31, 1998
------------------------
ACTUAL AS ADJUSTED
---------- -----------
<S> <C> <C>
Long-term debt, less current maturities............. $ 241,768 $ 241,768
---------- ----------
Stockholders' equity:
Common Stock, no par value, 15,000,000 shares
authorized: 3,700,000 issued and outstanding; and
5,198,000 issued and outstanding as adjusted(1)... 80 6,133,880
Foreign currency transaction adjustment............. (94,664) (94,664)
Retained earnings................................... 1,531,292 1,531,292
---------- ----------
Total stockholders' equity.......................... 1,436,708 7,570,508
---------- ----------
Total capitalization................................ 1,678,476 7,812,276
========== ==========
</TABLE>
- ------------------------------
(1) Reflects the issuance of 1,498,000 Shares offered hereby. Assumes no
exercise of the Underwriters' Warrants or the Over-Allotment Option.
15
<PAGE> 17
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Shares
offered by the Company at a public offering price of $5.00 per Share, after
deducting underwriting commissions, the financial advisory fee payable to the
Representative and other offering expenses to be paid by the Company, is
estimated to be $6,133,800. The Company expects to apply the net proceeds of the
Offering as follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE OF
APPLICATION OF PROCEEDS AMOUNT NET PROCEEDS
----------------------- ----------- -------------
<S> <C> <C>
Acquisition of Inventory.................................... $1,800,000 29.4%
Repayment of Indebtedness(1)................................ 900,000 14.7%
Sales and Marketing(2)...................................... 400,000 6.5%
Management Information System(3)............................ 250,000 4.1%
Relocation of Warehouse and Principal Executive
Offices(4)................................................ 100,000 1.6%
Working Capital and General Corporate Purposes(5)........... 2,683,800 43.7%
---------- ------
Total....................................................... $6,133,800 100.0%
</TABLE>
- ------------------------------
(1) The Company intends to repay a $900,000 loan which it secured from Jacob
Herzog's father-in-law, in July 1998 for interim financing. Such loan bears
interest at 7.5% and is payable on the earlier of demand or November 30,
1998.
(2) Includes costs associated with hiring a national sales manager, a regional
sales manager and opening a sales office in the United States.
(3) Represents the cost to upgrade the Company's current computer system.
(4) Includes moving costs and certain one time capital expenditures to be
incurred in preparing its new warehouse space. The Company believes that the
rental costs associated with the new warehouse will be commensurate with its
current rental costs.
(5) The net proceeds allocated to working capital include funds for general
corporate purposes including the financing of the Company's accounts
receivable and possible strategic acquisitions. The Company has not
currently identified any acquisition candidates.
The foregoing represents the Company's estimate of the allocation of the
net proceeds of the Offering based upon the current status of its operations and
anticipated business needs. It is possible, however, that the application of
funds will differ considerably from the estimates set forth herein due to
changes in the economic climate and/or the Company's planned business operations
or unanticipated complications, delays and expenses, as well as any potential
acquisitions that the Company may consummate, although no specific acquisition
has been identified. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Any reallocation of the net proceeds will
be at the discretion of the Board of Directors of the Company.
Any additional net proceeds realized from the exercise of the
Over-Allotment Option (up to approximately $1,076,625) will be added to the
Company's working capital.
Pending application, the net proceeds will be invested principally in
short-term certificates of deposit, money market funds or short-term treasury
bonds.
The Company estimates that the net proceeds from this Offering will be
sufficient to meet the Company's liquidity and working capital requirements for
a period of at least 12 months from the completion of this Offering. In the
event that the Company acquires any additional product lines, although no
specific acquisition has been identified, such funds will be derived from the
funds currently allocated to working capital or from revenues generated from the
Company's operations.
DIVIDEND POLICY
The Company has never paid or declared dividends on its Common Stock. The
payment of cash dividends, if any, in the future is within the discretion of the
Board of Directors and will depend upon the Company's earnings, its capital
requirements, financial condition and other relevant factors. The Company
intends, for the foreseeable future, to retain future earnings for use in the
Company's business.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Summary Combined Financial Data and the Company's Financial Statements and the
Notes thereto and the other financial data included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements regarding the
plans and objectives of management for future operations. The forward-looking
statements included herein are based on current expectations and assumptions
that involve numerous risks and uncertainties. Although management believes that
the assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could prove inaccurate and, therefore, there can be no assurance
that the forward-looking statements included herein will prove to be accurate.
In light of the significant uncertainties inherent in the forward-looking
statements included herein, the inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
GENERAL
The Company designs, distributes and markets quality, value-priced consumer
electronics products. The Company offers a broad line of telecommunication,
audio, video and computer products, including telephones, answering machines,
caller ID systems, CD and cassette systems, portable televisions and computer
accessories. The Company's products are primarily sold under the brand names
"Curtis" and "CTP Worx," as well as private labels. The Company's strategy has
been to build a portfolio of diverse consumer electronics products which offers
retailers flexible merchandising programs. The Company's products are available
in approximately 2,300 stores throughout Canada and 10,000 stores in the United
States through approximately 30 retail chains in Canada and the United States.
Curtis International Ltd. was incorporated in the Province of Ontario on
December 12, 1990. The Company subsequently amalgamated (or merged) with Unique
Investments Limited and AEG Trading Limited on January 26, 1998 and Worldwide
Holdings Limited on May 31, 1998. In both cases, the Company was the surviving
entity. The Company's principal executive officers are located at 7 Kodiak
Crescent, Downsview, Ontario M3J 3E5 Canada and its telephone number is (416)
626-5553.
RESULTS OF OPERATIONS
Fiscal Year Ended May 31, 1998 ("Fiscal 1998") Compared to Fiscal Year
Ended May 31, 1997 ("Fiscal 1997").
Sales for Fiscal 1998 were $27,471,613, an 84.2% increase over sales of
$14,914,142 for Fiscal 1997. This increase was primarily due to an increase of
428% in sales in the United States and to a lesser degree, a 24.1% increase in
sales in Canada. The Company's strategy is to continue to increase sales in the
United States, while maintaining and maximizing sales in Canada.
As a result of the 84.2% increase in sales, cost of sales for Fiscal 1998
were $22,349,967, an 83.6% increase over cost of sales of $12,173,748 for Fiscal
1997.
Gross profit margin for Fiscal 1998 was 18.6% of net revenues as compared
to 18.4% in Fiscal 1997. The Company's increased purchasing power which resulted
in slightly lower per item costs was largely offset by lower prices charged to
customers who purchased items in large quantities. The Company expects that its
increased buying power and broadened customer base will lead to a slight
increase in gross profit in the coming periods.
As a result of the Company's increased marketing efforts and certain
one-time charges, expenses increased from $2,617,015 in Fiscal 1997 to
$3,654,299 in Fiscal 1998. Selling expenses increased by $610,928 (93.3%) in
Fiscal 1998 over Fiscal 1997 as a result of increased sales efforts particularly
in the United States. These expenses include salaries and commissions, delivery
charges and advertising costs. The Company expects to further increase its
marketing efforts in the United States, but expects increased sales to offset
such costs. As a percentage of sales, selling expenses remained relatively
stable at approximately 4% of sales. Administrative expenses of $1,758,313 were
$27,721 higher than in Fiscal 1997. However, as a percentage of sales,
administrative expenses were significantly reduced (from 11.6% to 6.4%), as a
result of relatively stable expenses coupled with the Company's
17
<PAGE> 19
sales growth. The Company believes that it can continue to increase sales with
only a minor increase in administrative expenses. Financial expenses rose from
$231,445 to $474,154, a 105% increase which was the result of higher interest
expense, from $161,041 to $329,922 as a result of increased borrowing to sustain
the Company's growth and an increase of $73,828 in the Company's reserve for bad
debts. Management believes that the proceeds of the Offering will allow the
Company to increase sales without increasing borrowing expenses like the Company
has historically incurred in order to fund its growth. In Fiscal 1998, the
Company also incurred a one-time lease cancellation fee of $155,926.
Earnings before income taxes ("EBIT") increased $1,343,968 to $1,467,347
(1,089%) for Fiscal 1998 versus Fiscal 1997. As a percentage of sales, EBIT for
Fiscal 1998 was 5.3% compared to .9% in Fiscal 1997. As a result of the
Company's increased income, the provision for income taxes increased from
$30,378 to $602,442. Net income increased from $93,001 for Fiscal 1997 to
$864,905 for Fiscal 1998. This increase in net income is directly a result of
continued sales growth with stable administrative costs, which more than offset
the increase in selling expenses. Management believes, although there can be no
assurance, that the Company can continue this trend in the future.
Fiscal 1997 Compared to Fiscal Year Ended May 31, 1996 ("Fiscal 1996").
Sales for Fiscal 1997 were $14,914,142, a 2.0% increase over the prior year
sales of $14,627,378. Sales in the United States increased by $960,952 (76.5%)
as a result of increased sales efforts during the later part of Fiscal 1997.
This increase offset slightly lower sales in Canada.
Gross profit for Fiscal 1997 was 18.5% of sales, compared to 18.6% in the
prior year.
Expenses increased from $2,580,774 in Fiscal 1996 to $2,617,015 in Fiscal
1997. The primary difference in expenses was an increase of $416,615 (31.7%) in
administrative expenses which resulted from an increase in management fees and
bonus of $321,485 and an increase in insurance expenses of $52,478. These
increases in administrative expenses were partially offset by a decrease in
selling expenses of $246,242 which was a result of a decrease of $283,305 in
advertising, rebate and promotional expenses. Financial expense decreased by
$134,132 in Fiscal 1997, from $365,577 to $231,445. This change was a result of
the reduction in reserves for bad debts from $257,427 to $70,404 which were only
partially offset by a $52,891 increase in interest and bank charges.
Net income decreased $7,346 in Fiscal 1997, from $100,347 to $93,001. In
addition, income was fairly constant as a percentage of net sales.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations from cash flow, its
credit line with Canadian Imperial Bank of Commerce ("CIBC") and advances from
affiliates. The line of credit bears interest at .50% plus prime, has a limit of
$8,250,000 and is personally guaranteed by the Company's President and Chairman
and affiliated companies. The line of credit is secured by a first lien on
substantially all of the Company's assets. In addition, an affiliated company
has agreed to a postponement of the Company's indebtedness to it until the
amount due under the line of credit is paid. Moreover, CIBC is the beneficiary
of the key man life insurance policies maintained by the Company on the lives of
Aaron Herzog and Jacob Herzog. As of May 31, 1998, the line of credit had an
outstanding balance of $5,063,819. The $5,063,819 represents the actual bank
indebtedness ($8,465,000) less the cash balance maintained in the bank
($3,401,181). The Company's executive officers, either directly or through their
affiliated corporations, loaned the Company an aggregate of $725,303 in order to
finance the Company's expansion. These loans were memorialized into notes which
bear interest at 8% and are repayable quarterly over the 18 months following the
Offering, provided the Company is profitable on a post tax basis during each
quarter and CIBC gives its consent to such repayment. In July 1998, the Company
received a $900,000 loan from Jacob Herzog's father-in-law, which loan bears
interest at 7.5% and is due on the earlier of demand or November 30, 1998. The
Company used the proceeds of the loan for working capital. The Company intends
to repay the loan out of the net proceeds of the Offering. See "Use of Proceeds"
and "Certain Transactions."
The Company's cash flow is affected by a number of factors. During Fiscal
1998, the Company experienced a significant increase in its business which has
resulted in a strain on its cash flow. While net
18
<PAGE> 20
income increased from $93,001 for Fiscal 1997 to $864,905 for Fiscal 1998, the
Company's accounts receivable rose from $1,813,898 to $4,084,729 and inventory
increased by $4,512,244. The Company used $4,986,191 in its operating activities
as compared to generating $1,051,798 for Fiscal 1997. As a result of the
Company's increased business, the Company's bank indebtedness increased by
$7,183,701 for Fiscal 1998. The Company had cash on hand of $3,401,181 at May
31, 1998, as compared to $1,251,542 at May 31, 1997. The Company had current
assets of $13,423,318 at May 31, 1998, compared to $4,427,555 at May 31, 1997.
The Company had current liabilities of $12,006,896 at May 31, 1998, as compared
to current liabilities of $3,167,002 at May 31, 1997.
The Company will receive net proceeds from this Offering of approximately
$6,133,800. The Company believes that the net proceeds of the Offering, coupled
with income from operations, will fulfill the Company's working capital needs
for at least the next 12 months. There can be no assurance that the Company will
realize cash flow from operations or that such cash flow will be sufficient, in
which case the Company may require additional financing. In addition, the
Company may seek to acquire rights to additional proprietary product lines
through licensing or other arrangements or make acquisitions of other companies.
Thus, the Company may seek to raise funds through subsequent equity or debt
financings, or through other sources. No assurances can be given that additional
funds will be available to the Company to finance its development. Moreover, the
line of credit places restrictions on the Company's ability to obtain financing
through the issuance of additional debt. Additional financings may result in
dilution to existing stockholders. If funds are needed but are not available in
adequate amounts from additional financing sources or from operations, the
Company's business may be adversely affected. See "Use of Proceeds."
YEAR 2000 PREPARATION
Many computer systems and software products worldwide and throughout all
industries will not function properly as the year 2000 approaches unless
changed, due to a once-common programming standard that represents years using
two-digits. This is the "Year 2000 problem" that has received considerable media
coverage. The Company is in the process of upgrading its management information
systems. As part of this program, the Company will identify those systems and
applications that require modification, redevelopment or replacement. The
Company expects to be Year 2000 compliant by December 31, 1998 with respect to
its internal systems. Management of the Company does not believe that failure of
the Company's vendors or other third-party providers' systems to be Year 2000
compliant will have a material adverse effect upon the Company.
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<PAGE> 21
BUSINESS
SUMMARY
Curtis International Ltd. designs, distributes and markets quality,
value-priced consumer electronics products. The Company offers a broad line of
telecommunication, audio, video and computer products including, telephones,
answering machines, caller ID systems, CD and cassette systems, portable
televisions and computer accessories. The Company's products are primarily sold
under the brand names "Curtis" and "CTP Worx," as well as private labels. The
Company's strategy has been to build a portfolio of diverse consumer electronics
products which offers retailers flexible merchandising programs. The Company's
products are available in approximately 2,300 stores throughout Canada and
10,000 stores in the United States through approximately 30 retail chains in
Canada and the United States. All of the Company's products are manufactured by
independent manufacturers.
The Company's customers include mass merchandisers such as Wal-Mart
(Canada), Ames, Bradlees, Dollar General and Bi-Way Stores; drug store chains
such as Rite-Aid, London Drugs, Thrifty Payless, Jean Coutu and Ker Drugs;
specialty marketers such as QVC, the Home Shopping Network and Amway; consumer
electronic retailers such as Future Shop, Fry's and ABC Warehouse; and appliance
and department stores such as Boscov and Fedco. The Company has operated
profitably and has recently undergone a period of rapid sales growth. In Fiscal
1998, the Company's sales increased by $12,557,471, or 84.2%, to $27,471,613
from $14,914,142 in Fiscal 1997. The Company only entered the United States
market in 1996 and has since opened accounts with approximately 20 retail chains
in the United States. The Company's sales in the United States were $11,716,935
in Fiscal 1998 as compared to $2,217,058 in Fiscal 1997, an increase of 428%.
The Company believes there is an opportunity to significantly increase its
business in the United States through both its current customers and potential
new customers.
THE CONSUMER ELECTRONICS INDUSTRY
The consumer electronics industry is large and diverse, encompassing a wide
variety of technologies and products, including televisions, VCRs, audio
systems, CD players, cassette players and telephones. The Consumer Electronics
Manufacturers Association ("CEMA") estimates that total factory sales of
consumer electronics products in 1997 were approximately $72 billion, an
increase of 4.0% from 1996. CEMA estimates that factory sales will grow to
approximately $92 billion by the year 2001, an increase of 115% in ten years,
and believes that the consumer electronics industry is one of the fastest
growing sectors of the United States economy. It is estimated that in 1998 the
average United States household will spend $825 on consumer electronics
products.
GROWTH STRATEGY
The Company plans to establish itself as a leading supplier of quality,
value-priced consumer electronics products. The Company believes that its broad
portfolio of products, superior design capabilities, flexible and low-cost
sourcing and superior service offered both prior to and after-sale provide it
with distinct competitive advantages. The Company plans to continue to grow its
business using a strategy comprised of the following principal elements:
- CONTINUE TO OFFER VALUE-PRICED, QUALITY PRODUCTS. The Company designs
and markets products which are value-priced, yet fill a market void
through their design and up-to-date style. The Company's packaging
further distinguishes its products in the marketplace from those of its
competitors. In addition to increasing its product offering (as described
below), the Company plans to continue to offer its customers quality
products at competitive prices.
- EXPAND CUSTOMER BASE. The Company believes that it has significant
opportunities to expand its customer base both in Canada and the United
States. The Company intends to use its existing relationships in Canada
with retailers such as Wal-Mart, Staples and Toys "R" Us, to penetrate
the United States market in such retailers' stores. The Company recently
shipped its first order to Wal-Mart (Canada) and intends to use the
relationship to move into Wal-Mart stores in the United States. In
addition, the Company continually seeks to expand its distribution
channels through various means. For example, the Company recently sold to
the Home Shopping Network its personal
20
<PAGE> 22
televisions as part of a special promotion. The Home Shopping Network is
planning additional promotions of certain of the Company's products in the
Fall of 1998. In addition, the Company will attempt to enter selected
international markets in Mexico, South America and Central America in the
year 2000. Management believes there are significant opportunities in such
markets. To date, the Company has not entered such markets due to limited
financial and human resources. With the increased growth of the middle
class in such countries, the Company believes that there are significant
opportunities in such markets. To gain entrance in such markets, the
Company intends to hire additional sales representatives to focus on such
markets and to utilize its contacts with existing customers who already
have a presence in such areas.
- INCREASE PENETRATION AND SALES TO EXISTING UNITED STATES CUSTOMERS. In
the short period in which the Company has focused significant marketing
efforts in the United States, it has established relationships with
several major retailers. The Company plans to focus its efforts on
broadening its product selection being sold by these retailers and
substantially increasing the dollar volume of sales to these existing
customers.
- ACQUIRE AND LICENSE ADDITIONAL PRODUCTS. Discount retail chains and mass
merchants limit the number of vendors with which they deal, preferring to
deal with a limited number of vendors with a wide range of products.
However, the Company has an extensive line of products and strives to
fill substantially all of its customers' electronic requirements. The
Company believes that there are a number of companies which have a
superior niche type product, but have a limited line of customer
electronics products, which makes it difficult to sell their product to
mass merchants and discount chain stores because of their reluctance to
deal with a supplier with a limited number of products. By entering into
arrangements with or acquiring these small companies, the Company can add
to its already wide selection of consumer electronic products.
- DEVELOP STRATEGIC ALLIANCES. The Company intends to develop strategic
alliances with large discount chain stores and mass merchants. Management
believes that many retailers whose primary business is not consumer
electronics look for a strategic alliance with a vendor who has the
experience, customer service and product selection to create a successful
consumer electronics program in their stores. Development of strategic
alliances whereby the Company provides these services in exchange for
commitments to stock and sell the Company's products will assist the
Company in the establishment of long-term relationships with such
discount chain stores and mass merchants.
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<PAGE> 23
PRODUCTS
The Company designs, distributes and markets quality value-priced consumer
electronics products, including telephones, audio equipment, personal
televisions, radios and computer accessories, to a wide variety of customers.
The Company currently offers over 150 models of consumer electronic products.
The Company's core business currently consists of the following consumer
electronic products:
<TABLE>
<S> <C>
TVS HOME AND PORTABLE AUDIO PRODUCTS
- - Portable black and white TVs - Home audio systems with single CD player
- - Portable combination TV/Audio products - Home audio systems with CD changer systems
- Portable AM/FM cassette systems
TELEPHONE PRODUCTS - Portable CD systems with detachable
- - Corded and cordless telephones speakers
- - "Feature" telephones - Portable CD stereo systems
- - Answering machines - Portable CD changer stereo systems
- - Combination telephone/answering machines - Personal CD players
- - Telephone clock radios - Personal cassette players
- - Caller ID systems
- Personal sports electronics products
COMPUTER ACCESSORIES designed for use when exercising or
- - Ergonomically designed keyboards traveling
- - Mouse attachments - Portable radios
- Electronic clock radios
- Electronic clock radios with CD players
- Electronic clock radios with cassette
players
- Hand-held micro cassette recorders
</TABLE>
PRODUCT DESIGN AND DEVELOPMENT
Value-priced consumer electronic products typically do not have unique or
innovative technical features. Competition in this segment is therefore more
dependent on product design, visual appeal and price. As such, the Company
recognizes that superior product design provides an important competitive
advantage. The Company believes that the superior design and style of its
products distinguish them from those of its competitors in the value-priced
category and help drive consumer purchasing decisions.
Management believes that the enhancement and extension of the Company's
existing products and the development of new product categories have contributed
significantly to the Company's growth to date and are necessary for the
Company's continued success and growth. The Company's product design and
engineering team, along with its outside graphic and design artists, evaluate
new ideas and seek to develop new products and improvements to existing products
to satisfy industry requirements and changing consumer preferences. The Company
selects design and manufacturing specifications that adapt and implement
available technology features to satisfy its customers' requirements for
quality, product mix and pricing. Company employees work closely with both
retailers and suppliers to identify trends in consumer preferences and to
generate new product ideas.
In addition, the Company highlights the design and style features of its
products with detailed descriptions and illustrations on packaging, which the
Company believes further distinguishes its products from those of its
competitors. The Company believes that this packaging strategy makes its
products more attractive to consumers and facilitates an understanding of the
product features in retail locations where salespersons may not be available to
provide detailed explanations and demonstrations.
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<PAGE> 24
SALES AND DISTRIBUTION
The Company sells its products in Canada and the United States to mass
merchandisers such as Wal-Mart (Canada), Ames and Bradlees; drug store chains
such as Rite-Aid and London Drugs; and specialty marketers such as QVC and the
Home Shopping Network. The Company does not have long-term contracts with any of
its customers, but rather receives orders on an ongoing basis. Products imported
by the Company are shipped by ocean freight and stored in the Company's
warehouse or contracted public warehouse facilities, for shipment to customers.
All merchandise received by the Company is automatically updated into the
Company's inventory system.
The Company has implemented an integrated system to coordinate purchasing,
sales and distribution segments of its operations. The Company is equipped to
receive orders from its major accounts electronically or by the conventional
modes of facsimile, telephone or mail. The Company is in the process of
upgrading its management information system ("MIS"), which management believes
will increase the efficiency of the Company's distribution efforts. The
Company's new MIS will allow the Company to track its customers inventory levels
and help its customers identify their more popular and profitable items. This
added service will allow the Company to take a more active role in its
customers' electronics business and will help them maintain sufficient inventory
levels. See "Use of Proceeds."
The Company also makes available to its customers a direct import program,
pursuant to which products are imported directly by the Company's customers. To
date, sales in such manner have been limited. Sales under such plan are made at
a reduced cost but also result in savings to the Company. These savings result
from the customer opening its line of credit directly to the manufacturer,
allowing the manufacturer to ship the goods directly to the customer. Under such
arrangement the Company does not incur any interest cost under its line of
credit or for any shipping costs.
MARKETING
The Company's strategy is to initially gain entrance to new accounts with
one or two of its products, and thereafter develop such account. The Company's
goal is to ultimately become its customers' primary consumer electronics
supplier.
The Company does not undertake any direct advertising. However, the
Company's retail customers place advertisements that generally promote the
Company's brand names in newspapers and other publications, catalogs, flyers and
by displaying point-of-purchase advertising. Under such co-op advertising
arrangements, the Company generally pays the customer a small percentage of
sales by the retailer of the Company's products featured in such advertising.
The Company markets its products to retailers at trade shows, including the
Consumer Electronics Show held in Las Vegas, Nevada in January of each year.
Aaron Herzog, the Company's President, has established significant contacts
and is directly responsible for handling the accounts of the Company's primary
customers. The Company intends to utilize a portion of the Offering proceeds to
retain additional in-house sales personnel who can expand upon Mr. Herzog's
existing relationships.
A portion of the Company's sales are made through independent sales
representatives, which receive sales commissions and work closely with Company
sales personnel. The Company has 11 independent sales representatives based in
Canada and the United States. The outside sales representatives also sell, in
addition to the Company's products, allied, but generally non-competitive
products. In most instances, either party may terminate a sales representative
relationship on 30 days prior notice in accordance with customary industry
practice.
MANUFACTURING
The Company is responsible for the final design and specifications of all
of its products. Actual assembly is performed by one of its independent
manufacturers in accordance with specifications mandated by the Company.
During Fiscal 1998 and Fiscal 1997, the Company's three largest independent
manufacturers, which are located in China, supplied approximately 17.0% of the
Company's total products. The Company changes
23
<PAGE> 25
suppliers from time to time as market conditions require. Substantially all of
these suppliers assemble products with components that they purchase from third
parties who manufacture these types of components. The Company has no agreement
with the component suppliers. The Company believes that this is the standard
method of operating and contracting for the manufacture of products in the
consumer electronics industry. During production, the Company's employees
coordinate with the independent manufacturers' facilities to monitor and
facilitate timely manufacture and delivery of products produced to the Company's
specifications.
The Company considers its relationships with its independent manufacturers
and component suppliers to be good and believes that, absent extreme
circumstances affecting the supply of materials or the demand on manufacturing
time, the supply of products will be available when needed. The Company does not
maintain long-term purchase contracts with manufacturers and operates
principally on a purchase order basis. The Company believes that it is not
currently dependent on any single manufacturer for any of its products, and that
the loss of any one manufacturer would not have a long-term material adverse
effect on the Company because other independent manufacturers with which the
Company does business would be able to increase production to fulfill the
Company's requirements. However, the loss of a significant supplier could, in
the short-term, materially and adversely affect the Company's business until
alternative supply arrangements could be secured. See "Risk Factors--Dependence
on Third Party Manufacturers and Suppliers."
QUALITY CONTROL
The Company employs a quality control inspector who inspects the Company's
products before each shipment is sent from its manufacturers to ensure that such
products meet both the Company's quality standards and industry standards.
Additionally, the Company's quality control team does a second quality control
inspection when its products arrive in either the United States or Canada. If
the Company's quality control team feels that the tested products do not meet
both the Company's standards and industry standards, such products are not
accepted by the Company for shipment to its customers and are returned to the
manufacturer, without any expense to the Company.
PRODUCT RETURNS AND WARRANTY CLAIMS
The Company offers its customers limited warranties comparable to those
offered to retailers by its competitors and accepts returns from its customers
in accordance with customary industry practices, on most of its products. If a
low priced item is returned, the Company generally does not repair the item, but
will generally return it to the manufacturer for either credit or exchange.
Higher priced items returned to the Company are generally repaired with parts
supplied by the manufacturer. The Company generally has the ability to return
all defective products to the manufacturer for either credit or exchange.
BACKLOG
From time-to-time, the Company has substantial orders from customers on
hand. Management believes, however, that backlog is not a significant factor in
its operations. As of August 6, 1998, the Company had a backlog of approximately
$6,800,000. Backlog consists of purchase orders and commitments which are to be
filled within the next two months. However, since orders and commitments may be
rescheduled or canceled, management believes that backlog is an inconclusive
indicator of future financial performance. Notwithstanding the foregoing, the
ability of management to correctly anticipate and provide for inventory
requirements is essential to the successful operation of the Company's business.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Certain Transactions."
TRADEMARKS
The Company has trademarked the names "Curtis" and "CTP Worx" in Canada and
has applied for such trademarks in the United States and other countries. The
Company intends to renew all such trademarks before their expiration. The
Company does not consider the "Curtis" and "CTP Worx" trademarks to be of
material importance to its business.
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<PAGE> 26
REGULATION
Most of the Company's customers (as well as several state and local
authorities) require that the Company's products meet the electrical safety
standards of the Underwriters Laboratories, Inc. The Company ensures that all of
its products sold in Canada and the United States which require electrical
safety approval are registered with either the Underwriters Laboratories, Inc.,
Canadian Standards Association or Warnock Hersey. Certain of the Company's
products sold for use in the United States must be registered with and approved
by the FCC. Products sold in Canada must comply with the standards of the
Canadian Standards Association. The Company has not experienced difficulty in
satisfying such standards.
COMPETITION
The consumer electronics industry is extremely competitive and is dominated
by large well-capitalized companies. The Company competes with the entire
electronics industry for consumer dollars, shelf space and promotional displays
for products and sales support. The Company's competitors may not rely on
external financing or relationships with independent manufacturers to the same
extent as the Company. Furthermore, the Company's competitors may have cost
advantages depending on labor costs, currency exchange rates and other factors
in the countries where their manufacturing operations take place, relative to
the countries where the Company's products are manufactured. The Company has
adopted a marketing strategy that targets the value-priced segment of the
consumer electronics market, which is particularly price sensitive. There is
competition among a number of brands in this market, including Emerson, Newtech
and GPX, as well as foreign-based manufacturers and distributors. In addition,
although General Electric, Sony, Aiwa and Panasonic brand products are not
currently emphasized in the value-priced segment of the market, they do compete
with the Company's products for consumer dollars, shelf space and sales support.
To the extent that these brands compete directly with the Company's brands on
the basis of price, or their product prices were otherwise reduced, the
Company's ability to market and sell competitive products could be severely
affected, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
EMPLOYEES
As of July 31, 1998, the Company employs 37 persons, which include two
senior executives, four administrative personnel, 17 support staff, and 14
full-time non-unionized hourly laborers. One of the Company's employees is
located in Asia. The Company believes that its relationships with its employees
are good. The Company is not party to any collective bargaining agreement, nor
is the Company aware of any effort to organize employees of the Company into any
union or similar organization.
25
<PAGE> 27
PROPERTIES
The Company leases the following premises:
<TABLE>
<CAPTION>
CURRENT
LOCATION ADDRESS EXPIRATION DATE SQUARE FEET ANNUAL RENT
-------- ----------------------------------- ---------------- ----------- -----------
<S> <C> <C> <C> <C>
Toronto, Ontario 7 Kodiak Crescent (Principal March 31, 1999 38,500 Cdn$148,225
Executive Offices and Warehouse)
Toronto, 300 Steeprock Drive (Warehouse) April 30, 1999 20,000 Cdn$110,000
Ontario.......
Montreal, Quebec 8170 Montview (Sales and Marketing) October 31, 1998 2,500 Cdn$ 20,375
</TABLE>
All of the premises the Company presently occupies are leased. Management
believes its current facilities are adequate and suitable for its present
business, but is seeking larger space to consolidate its warehouses and
principal executive office into one facility in Toronto, Canada, to facilitate
its expected growth. Although no facility has yet been identified, the Company
intends to use a portion of the net proceeds of this Offering to pay the
expenses associated with such relocation. See "Use of Proceeds."
The Company also receives shipment of its products from its manufacturers
at 100 Sonwil Drive, Buffalo, New York, an independently operated distribution
center which ships the Company's products to certain of the Company's customers.
The Company does not lease or own such facility but rather pays a usage charge
for each case of product shipped to such location. The Company owns a
condominium in Florida which it is actively seeking to sell. Management
anticipates selling the condominium within 90 days from the date of this
Prospectus, although there can be no assurance thereof.
LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
26
<PAGE> 28
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Directors
and Executive Officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Aaron Herzog............................. 37 President, Chief Executive Officer and Director
Jacob Herzog............................. 46 Chairman, Treasurer, Secretary and Director
Louis Drazin............................. 62 Director
David Ben David.......................... 36 Director
</TABLE>
Set forth below is a biographical description of each director and
executive officer of the Company based on information supplied by each of them.
AARON HERZOG is a co-founder of Curtis International Ltd., and has served
as the Company's President, Chief Executive Officer and Director since its
formation in 1990. Mr. Herzog also acts as sales director of the Company. Mr.
Herzog earned a degree in Management from McGill College in 1981.
JACOB HERZOG is a co-founder of Curtis International Ltd., and has served
as the Company's Chairman, Treasurer, Secretary and Director since its formation
in 1990. Mr. Herzog has been in the consumer electronics business since the
early 1970's.
LOUIS DRAZIN has been a Director of the Company since August 1998. From
1961 - present, Mr. Drazin has been a Senior Partner at Drazin, Ouaknine &
Friedman, Notaries. From 1990 - present he has been a senior executive at Shutam
Canada Inc., a real estate acquisition, investment and development company. Mr.
Drazin graduated from McGill University in 1957 with a B.A. with honors in
economics and political science. Mr. Drazin earned a Bachelor of Civil Law from
McGill University in 1960.
DAVID BEN DAVID has been a Director of the Company since August 1998. From
July 1990 - June 1997, Mr. David served as Vice President and Chief Financial
Officer of NSI Communications, Inc. From June 1997 - present, Mr. David has
served as President and Chief Operating Officer of NSI Communications, Inc. NSI
Communications, Inc. is a manufacturer of communications products. Mr. David
earned a B.A. in Economics in 1983 from Bar Ilan University in Israel, an M.B.A.
in 1987 from McGill University and a Public Accountant degree in 1989 from
McGill University.
Aaron Herzog and Jacob Herzog are brothers. There are no other family
relationships among the Company's directors and executive officers.
The term of office of each Director is until the next annual meeting of
stockholders and until a successor is elected and qualified or until the
Director's earlier death, resignation or removal from office. Executive officers
hold office until their successors are chosen and qualified, subject to earlier
removal by the Board of Directors.
For the period of five years after the Effective Date, the Representative
shall have the right to designate a nominee to the Company's Board of Directors.
See "Underwriting."
Following the Offering, the Company intends to retain a Chief Financial
Officer with public company experience and a Vice President of Marketing. The
Company is actively seeking to fill such positions.
COMMITTEES OF THE BOARD
The Company's Board of Directors will have an Audit Committee, comprised of
Jacob Herzog, Louis Drazin and David Ben David, and a Compensation Committee,
comprised of Aaron Herzog, Louis Drazin and David Ben David.
COMPENSATION OF DIRECTORS
The Company has not paid compensation to any director for acting in such
capacity. The Company is currently reviewing its policy on compensation of
outside directors and may pay outside directors in the future.
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<PAGE> 29
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding compensation
paid by the Company during each of the last three fiscal years to the Company's
Chief Executive Officer and to each of the Company's executive officers who
earned in excess of $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1)
- --------------------------- ---- ------ ----- ---------------
<S> <C> <C> <C> <C>
Aaron Herzog(2), President,.............................. 1998 $28,000 $0 $177,192
Chief Executive Officer................................ 1997 28,000 0 213,962
and Director........................................... 1996 30,000 0 53,220
Jacob Herzog(3), Chairman,............................... 1998 $34,000 $0 $177,192
Treasurer, Secretary and............................... 1997 33,000 0 213,963
Director............................................... 1996 36,000 0 53,220
</TABLE>
- ------------------------------
(1) Represents compensation paid to corporations (AEG Trading Limited and
Worldwide Holdings Limited) controlled by such persons solely for providing
the full time services of Messrs. Aaron and Jacob Herzog. See "Certain
Transactions."
(2) In addition, Aaron Herzog's wife received annual compensation of $35,000 in
each of the years 1996, 1997 and 1998 in her capacity as an administrative
assistant at the Company.
(3) In addition, Jacob Herzog's wife received annual compensation of $35,000 in
each of the years 1996, 1997 and 1998 in her capacity as an administrative
assistant at the Company.
EMPLOYMENT AGREEMENTS
Effective June 1, 1998, the Company entered into two year employment
agreements with each of Aaron Herzog and Jacob Herzog. Such employment
agreements provide for annual salaries of $175,000 with an annual bonus of
$25,000 if the Company achieves gross revenues of $32,430,000 and $1,657,000 in
net income for the year ended May 31, 1999 and gross revenues of $45,120,000 and
$2,354,000 in net income for the year ended May 31, 2000. In addition, each is
entitled to a $1,000 per month car allowance.
STOCK OPTION PLAN
The Plan will be administered by the compensation committee or the Board of
Directors, who determine among other things, those individuals who shall receive
options, the time period during which the options may be partially or fully
exercised, the number of shares of Common Stock issuable upon the exercise of
the options and the option exercise price.
The Plan is effective for a period for ten years, expiring in 2008. Options
may be granted to officers, directors, consultants, key employees, advisors and
similar parties who provide their skills and expertise to the Company. The Plan
is designed to enable management to attract and retain qualified and competent
directors, employees, consultants and independent contractors. Options granted
under the Plan may be exercisable for up to ten years, require a minimum two
year vesting period, and shall be at an exercise price all as determined by the
Board. Options are non-transferable except by the laws of descent and
distribution or a change in control of the Company, as defined in the Plan, and
are exercisable only by the participant during his or her lifetime. Change in
control includes (i) the sale of substantially all of the assets of the Company
and merger or consolidation with another Company, or (ii) a majority of the
Board changes other than by election by the stockholders pursuant to Board
solicitation or by vacancies filled by the Board caused by death or resignation
of such person.
If a participant ceases affiliation with the Company by reason of death,
permanent disability or retirement at or after age 70, the option remains
exercisable for one year from such occurrence but not beyond the
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option's expiration date. Other types of termination allow the participant three
months to exercise, except for termination for cause which results in immediate
termination of the option.
The exercise price of an option may not be less than the fair market value
per share of Common Stock on the date that the option is granted in order to
receive certain tax benefits under the Income Tax Act of Canada (the "ITA"). The
ITA requires that the exercise price of all future options will be at least 85%
of the fair market value of the Common Stock on the date of grant of the
options. A benefit equal to the amount by which the fair market value of the
shares at the time the employee acquires them exceeds the total of the amount
paid for the shares or the amount paid for the right to acquire the shares shall
be deemed to be received by the employee in the year the shares are acquired
pursuant to paragraph 7(1) of the ITA. Where the exercise price of the option is
equal to the fair market value of the shares at the time the option is granted,
paragraph 110(1)(d) of the ITA allows a deduction from income equal to one
quarter of the benefit as calculated above. If the exercise price of the option
is less than the fair market value at the time it is granted, no deduction under
paragraph 110(1)(d) is permitted. Options granted to any non-employees, whether
directors or consultants or otherwise will confer a tax benefit in contemplation
of the person becoming a stockholder pursuant to subsection 15(1) of the ITA.
The Company, however, has agreed not to grant any options under the Plan at less
than 100% of the fair market value of the Common Stock. Additionally, the
Company has agreed to limit the amount of options granted pursuant to the Plan
to Aaron Herzog and Jacob Herzog to an aggregate of 100,000 options, 50,000 of
which options have been granted and vest over a two-year period but are not
exercisable for at least six months after the Effective Date. The options are
exercisable at $5.00 per share.
Options may not be transferred by an optionee other than by will or the
laws of descent and distribution, and, during the lifetime of an optionee, the
option will be exercisable only the optionee.
Options under the Plan must be issued within ten years from the effective
date of the Plan.
Any unexercised options that expire or that terminate upon an employee's
ceasing to be employed by the Company become available again for issuance under
the Plan.
The Plan may be terminated or amended at any time by the Board of
Directors, except that the number of shares of Common Stock reserved for
issuance upon the exercise of options granted under the Plan may not be
increased without the consent of the stockholders of the Company.
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<PAGE> 31
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information, as of the date hereof,
and as adjusted to give effect to the Offering and the transactions contemplated
thereby, with respect to the beneficial ownership of the Common Stock by (i)
each person known to the Company to beneficially own more than 5% of the
outstanding shares of Common Stock, (ii) each executive officer and director of
the Company and (iii) all executive officers and directors of the Company as a
group:
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY OWNED
NUMBER OF SHARES OF --------------------
NAME AND ADDRESS OF COMMON STOCK BEFORE AFTER
BENEFICIAL OWNER(1) BENEFICIALLY OWNED OFFERING OFFERING
------------------- ------------------- -------- --------
<S> <C> <C> <C>
Aaron Herzog(2)(5)...................................... 1,774,000 47.9% 34.1%
Jacob Herzog(3)(5)...................................... 1,774,000 47.9% 34.1%
Ranch Limited(4)........................................ 152,000 4.1% 0.0%
Louis Drazin............................................ 0 -- --
David Ben David......................................... 0 -- --
All Executive Officers and Directors as a Group (4
persons).............................................. 3,548,000 95.8% 68.2%
</TABLE>
- ------------------------------
(1) Unless otherwise indicated, the address is c/o Curtis International Ltd, 7
Kodiak Crescent, Downsview, Ontario M3J 3E5.
(2) Consists of 1,689,208 shares of Common Stock owned directly by Aaron Herzog
and 84,792 shares of Common Stock owned by the A&E Herzog Family Trust of
which Aaron Herzog and Evelyn Fisher Herzog are the Trustees.
(3) Consists of 1,663,882 shares of Common Stock owned by Jacob Herzog and
110,118 shares of Common Stock owned by the Herzog Family Trust of which
Jacob Herzog, Beatrice Herzog and Aaron Grubner are the Trustees.
(4) The beneficial owner of Ranch Limited, the Selling Stockholder, is Tzvi
Ralbag, the son-in-law of Jacob Herzog, and is not an employee of the
Company. Ranch Limited will sell 152,000 shares of its Common Stock in this
Offering, which represents all of the shares of Common Stock owned by Ranch
Limited.
(5) Aaron and Jacob Herzog are parties to a voting trust agreement which
provides that they will vote their shares together.
CERTAIN TRANSACTIONS
Aaron Herzog and Jacob Herzog advanced monies to the Company, which
advances are evidenced by promissory notes which are non-interest bearing to May
31, 1998. Had such advances been valued at the current value of cash flows at
the Company's current rate of borrowing, the advances would have been valued at
$725,303 in 1998, $832,295 in 1997 and $761,575 in 1996. As of June 1, 1998 the
advances bear interest at the rate of 8% per annum and are repayable in six
quarterly installments in the 18 month period after the Offering. The repayment
of such loans on a quarterly basis is contingent on the Company reporting
profitability for such quarter on a post-tax basis and the Company obtaining the
consent of CIBC to such repayment. The loans were utilized for working capital
to fund the Company's expansion.
During Fiscal 1998, Fiscal 1997 and Fiscal 1996, the Company paid an
aggregate of $354,384, $427,925 and $106,440, respectively, to companies
controlled by Aaron Herzog and Jacob Herzog. These fees were in consideration
solely for such companies providing the Company with the services of Messrs.
Aaron and Jacob Herzog. See "Management--Executive Compensation."
During 1996 and 1997, the Company occupied office and warehouse space which
was owned by Worldwide Holdings Limited ("Worldwide"), a company owned by Jacob
Herzog. The Company paid rent of $140,000 during 1996, $140,000 during 1997 and
$11,667 for the month of January 1998, to Worldwide. Additionally, the Company
guaranteed the mortgage payments due from Worldwide to a mortgage corporation in
the principal amount of $1,305,000. The guarantee was also secured by the issue
of a collateral
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debenture containing a fixed charge and a floating charge on the assets of the
Company. On January 30, 1998, Worldwide sold the office and warehouse space to
an independent third party. The Company paid Worldwide a lease cancellation fee
of $155,926. Thus, Worldwide no longer acts as landlord to the Company. In
addition, on May 31, 1998, Worldwide was amalgamated with and into the Company.
The Company has secured a line of credit facility with Canadian Imperial
Bank of Commerce bank, which bears interest at the bank's prime lending rate
plus 0.50% per annum. As security, the Company has provided a general assignment
of accounts receivable, a general security agreement and an assignment of fire
insurance on the business assets, with personal guarantees by Aaron Herzog and
Jacob Herzog and companies they control. The Company's line of credit extends to
$8,250,000.
In July 1998, Jacob Herzog's father-in-law loaned the Company $900,000 at
7.5% per annum. Such loan is payable on the earlier of demand or November 30,
1998.
In August 1998, Aaron and Jacob Herzog and their affiliates returned an
aggregate of 300,000 shares of Common Stock to the Company for cancellation, for
which they received no consideration.
Aaron Grubner, a former director, is a partner with the law firm of
Grubner, Krauss, which serves as counsel to the Company. The Company has paid
legal fees to Grubner, Krauss for services rendered. See "Legal Matters."
All future transactions between the Company and its officers, directors or
5% stockholders, and their affiliates, will be on terms no less favorable than
could be obtained from unaffiliated third parties.
DESCRIPTION OF SECURITIES
The total authorized capital stock of the Company consists of 15,000,000
shares of Common Stock, with no par value, and 1,000,000 shares of Preferred
Stock, with no par value per share. The following descriptions contain all
material terms and features of the Securities of the Company, are qualified in
all respects by reference to the Articles of Incorporation and Bylaws of the
Company, copies of which are filed as Exhibits to the Registration Statement of
which this Prospectus is a part.
COMMON STOCK
The Company is authorized to issue up to 15,000,000 of shares of Common
Stock, no par value per share, of which as of the date of this Prospectus,
3,700,000 shares of Common Stock are outstanding, not including the Shares
offered herein. All outstanding Shares of common stock are, and all shares of
Common Stock to be outstanding upon the closing of this Offering will be validly
authorized and issued, fully paid, and non-assessable.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Holders of Common
Stock are entitled to receive ratably dividends as may be declared by the Board
of Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock are entitled to share ratably in all assets remaining, if any, after
payment of liabilities. Holders of Common Stock have no preemptive rights and
have no rights to convert their Common Stock into any other securities.
Pursuant to the Business Corporation Act, Ontario ("BCA"), a stockholder of
an Ontario Corporation has the right to have the corporation pay the stockholder
the fair market value for his shares of the corporation in the event such
stockholder dissents to certain actions taken by the corporation such as
amalgamation or the sale of all or substantially all of the assets of the
corporation and such stockholder follows the procedures set forth in the BCA.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of up to
1,000,000 shares of Preferred Stock with designations, rights and preferences
determined from time to time by its Board of Directors. Accordingly, the
Company's Board of Directors is empowered, without stockholder approval, to
issue Preferred Stock with dividend, liquidation, conversion, or other rights
that could adversely affect the rights of the holders of the Common Stock.
Although the Company has no present intention to issue any shares of its
Preferred Stock, there can be no assurance that it will not do so in the future.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of this Offering, the Company will have 5,198,000
shares of Common Stock outstanding. In addition, the Company has reserved for
issuance 400,000 shares upon the exercise of options eligible for grant under
the Plan, 50,000 of which have been granted. Of the shares to be issued and
outstanding after this Offering, the 1,650,000 Shares offered hereby (plus any
additional Shares sold upon exercise of the Over-Allotment Option) will be
freely tradeable without restriction or further registration under the Act,
except for any shares purchased or held by an "affiliate" of the Company (in
general, a person who has a control relationship with the Company) which will be
subject to the limitations of Rule 144 adopted under the Act ("Rule 144"). The
remaining 3,548,000 shares of Common Stock are "restricted securities" as that
term is defined under Rule 144, and may not be sold unless registered under the
Act or exempted therefrom. All of the 3,548,000 restricted shares are currently
eligible to be sold in accordance with the exemptive provisions and the volume
limitations of Rule 144, however, the owners of such shares have agreed with the
Representative not to offer, sell or otherwise dispose of their shares until 18
months from the Effective Date without the consent of the Representative, except
pursuant to gifts or pledges in which the donee or pledgee agrees to be bound by
such restrictions. For a period of 24 months from the Effective Date such owners
agree that all sales of the Company's Common Stock by such individuals shall be
made through the Representative in accordance with its customary brokerage
policies. These agreements are enforceable only by the parties thereto, and are
subject to rescission or amendment at any time without approval of other
stockholders.
Sales of the Company's Common Stock by certain of the present stockholders
in the future, under Rule 144, may have a depressive effect on the price of the
Company's Common Stock.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following describes the principal United States federal income tax
consequences of the purchase, ownership and disposition of the Common Stock by a
stockholder, that is a citizen or resident of the United States or a United
States domestic corporation or that otherwise will be subject to United States
federal income tax (a "U.S. Holder"). This summary is based on the United States
Internal Revenue Code of 1986, as amended (the "Code"), administrative
pronouncements, judicial decisions and existing and proposed Treasury
Regulations, changes to any of which subsequent to the date of this Prospectus
may affect the tax consequences described herein. This summary discusses only
the principal United States federal income tax consequences to those beneficial
owners holding the securities as capital assets within the meaning of Section
1221 of the Code and does not address the tax treatment of a beneficial owner
that owns 10% or more of the Common Stock. It is for general guidance only and
does not address the consequences applicable to certain specialized classes of
taxpayers such as certain financial institutions, insurance companies, dealers
in securities or foreign currencies, or United States persons whose functional
currency (as defined in Section 985 of the Code) is not the United States
dollar. Persons considering the purchase of these securities should consult
their tax advisors with regard to the application of the United States and other
income tax laws to their particular situations. In particular, a U.S. Holder
should consult his tax advisor with regard to the application of the United
States federal income tax laws to his situation.
COMMON STOCK
A U.S. Holder generally will realize, to the extent of the Company's
current and accumulated earnings and profits, foreign source ordinary income on
the receipt of cash dividends, if any, on the Common Stock equal to the United
States dollar value of such dividends determined by reference to the exchange
rate in effect on the day they are received by the U.S. Holder (with the value
of such dividends computed before any reduction for any Canadian withholding
tax). U.S. Holders should consult their own tax advisors regarding the treatment
of foreign currency gain or loss, if any, on any dividends received which are
converted into United States dollars on a date subsequent to receipt. Subject to
the requirements and limitations imposed by
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<PAGE> 34
the Code. a U.S. Holder may elect to claim Canadian tax withheld or paid with
respect to dividends on the Common Stock as a foreign credit against the United
States federal income tax liability of such holder. Dividends on the Common
Stock generally will constitute "passive income" or, in the case of certain U.S.
Holders, "financial services income" for United States foreign tax credit
purposes. U.S. Holders who do not elect to claim any foreign tax credits may
claim a deduction for Canadian income tax withheld. Dividends paid on the Common
Stock will not be eligible for the dividends received deduction available in
certain cases to United States corporations.
Upon a sale or exchange of a share of Common Stock, a U.S. Holder will
recognize gain or loss equal to the difference between the amount realized on
such sale or exchange and the tax basis of such Common Stock.
Generally, any gain or loss recognized as a result of the foregoing will be
a capital gain or loss and will either be long-term or short-term depending upon
the period of time the Common Stock sold or exchanged, as the case may be, was
held.
THIS SUMMARY IS OF GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND
SHOULD NOT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PROSPECTIVE INVESTOR
AND NO REPRESENTATION WITH RESPECT TO THE TAX CONSEQUENCES TO ANY PARTICULAR
INVESTOR IS MADE.
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<PAGE> 35
INVESTMENT CANADA ACT
The Investment Canada Act is a Federal Canadian statute which regulates the
acquisition of control of existing Canadian businesses and the establishment of
new Canadian businesses by an entity that is a "non-Canadian" as that term is
defined in the Investment Canada Act.
The Company believes that it is not currently a "non-Canadian" for purposes
of the Investment Canada Act. If the Company were to become a "non-Canadian" in
the future, acquisitions of control of Canadian businesses by the Company would
become subject to the Investment Canadian Act. Generally, the direct acquisition
by a "non-Canadian" of an existing Canadian business with gross assets of
Cdn$5,000,000 or more is reviewable under the Investment Canada Act, with a
threshold of Cdn$168 million for 1996 for "NAFTA investors" as defined under the
Investment Canada Act.
Indirect acquisitions of existing Canadian businesses (with gross assets
over certain threshold levels) as well as acquisitions of businesses related to
Canada's cultural heritage or national identity (regardless of the value of
assets involved) may also be reviewable under the Investment Canada Act. In
addition, acquisitions of control of existing investments to establish new,
unrelated businesses are not generally reviewable but do require that a notice
of the investment be given under the Investment Canada Act. An investment in a
new business that is related to the non-Canadian's existing business in Canada
is not notifiable under the Investment Canada Act unless such investment relates
to Canada's cultural heritage or national identity.
Investments which are reviewable under the Investment Canada Act are
reviewed by the Minister, designated as being responsible for the administration
of the Investment Canada Act. Reviewable investments may not be implemented
prior to the Minister determining that the investment is likely to be of "net
benefit to Canada" based on the criteria set out in the Investment Canada Act.
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<PAGE> 36
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting
Agreement, each of the Underwriters named below, for whom Joseph Stevens &
Company, Inc. is acting as Representative, has severally agreed to purchase from
the Company and the Selling Stockholder, and the Company and the Selling
Stockholder have agreed to sell to the Underwriters, on a firm commitment basis,
the respective number of shares of Common Stock set forth below opposite each
such Underwriter's name:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Joseph Stevens & Company, Inc...............................
Total....................................................... 1,650,000
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to certain conditions precedent, including
the absence of any material adverse change in the Company's business and the
receipt of certain certificates, opinions and letters from the Company and
certain certificates from the Selling Stockholder. The nature of the
Underwriters' obligation is such that they are committed to purchase and pay for
all the Shares if any are purchased.
The Underwriters have advised the Company that they propose to offer the
Shares to the public at the public offering price set forth on the cover page of
this Prospectus and that they may allow to selected dealers who are members of
the NASD, concessions of not in excess of $ per Share, of which not more
than $. per Share may be re-allowed to certain other dealers who are
members of the NASD. After the initial public offering, the public offering
prices, concessions and reallowances may be changed.
The Underwriting Agreement further provides that the Underwriters will
receive a non-accountable expense allowance of 3% of the aggregate public
offering price of the Shares sold hereunder (including any Shares sold pursuant
to the Over-Allotment Option), which allowance amounts to $247,500 (or $284,625
if the Over-Allotment Option is exercised in full), of which $25,000 was paid to
the previous underwriter and $15,000 of which has been paid to the
Representative.
The Company has granted to the Underwriters the Over-Allotment Option,
which is exercisable for a period of 45 days after the Closing, to purchase up
to an aggregate 247,500 additional shares of Common Stock (up to 15% of the
shares being offered hereby) at the public offering price, less underwriting
discounts and commissions, on the same terms and conditions of this offering
solely to cover over-allotments, if any.
The Company has agreed to sell to the Underwriters for a nominal
consideration, the Underwriters' Warrants to purchase up to 165,000 Shares,
exclusive of the Over-Allotment Option. The Underwriters' Warrants will be
nonexercisable for one year after the date of this Prospectus. Thereafter, for a
period of four years, the Underwriters' Warrants will be exercisable at $8.25
per Share of Common Stock (165% of the initial public offering price). The
shares of Common Stock issuable upon exercise of the Underwriter's Warrants are
identical to those offered to the public. The Underwriter's Warrants contain
anti-dilution provisions providing for adjustment of the number of warrants and
exercise price under certain circumstances. The Underwriter's Warrants grant to
the holders thereof and to the holders of the underlying securities certain
rights for registration of the securities underlying the Underwriter's Warrants.
For the life of the Underwriters' Warrants, the holders thereof are given,
at nominal costs, the opportunity to profit from a rise in the market price of
the Company's securities with a resulting dilution in the interest of other
stockholders. Further, the holders may be expected to exercise the Underwriters'
Warrants at a time when the Company would in all likelihood be able to obtain
equity capital on terms more favorable than those provided in the Underwriters'
Warrants.
The Company has agreed that upon closing of this Offering, that the
Representative shall have the right to designate a nominee to the Company's
Board of Directors for a period of five years from the Effective Date (the
"Designation Right"). In addition, management of the Company will obtain
agreements from each of the pre-offering stockholders to vote all shares of the
Company's securities owned by him or her, whether directly or indirectly, in
favor of such nominee. The Company has agreed to reimburse the Representative's
designee
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<PAGE> 37
for all out-of-pocket expenses incurred in connection with the designee's
attendance at meetings of the Board of Directors. In the event the
Representative elects not to exercise its Designation Right, then it may
designate one person to attend all meetings of the Company's Board of Directors
for a period of five years.
The Company has agreed to retain the Representative, as the Company's
financial consultant for a period of two years to commence on the closing of
this Offering, at a monthly fee of $3,437.50, an aggregate of $82,500 (1% of the
gross proceeds of the Offering), all of which shall be payable in advance on the
closing of the Offering. Pursuant to this agreement, the Representative shall
provide advisory services related to merger and acquisition activity, corporate
finance and other matters. The Representative will be paid a fee in the event a
merger, acquisition or similar activity is undertaken by the Company.
Prior to this Offering, there has been no public market for the Common
Stock. Accordingly, the public offering price of the Shares offered hereby has
been determined by negotiation between the Company and the Representative.
Factors considered in determining the offering price of the Shares offered
hereby included the business in which the Company is engaged, the Company's
financial condition, an assessment of the Company's management, the prospects of
the Company, its capital structure, the general condition of the securities
markets and such other factors that were deemed relevant. The offering price
does not necessarily bear any relationship to the assets, results of operations
or net worth of the Company.
In connection with this Offering, the Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
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 for the purpose of stabilizing their respective market
prices. The Underwriters also may create a short position for the account of the
Underwriters by selling more shares of Common Stock in connection with the
Offering than they are committed to purchase from the Company, and in such case
may purchase shares of Common Stock in the open market following completion of
the Offering to cover all or a portion of such short position. The Underwriters
may also cover all or a portion of such short position by exercising the
Over-Allotment Option. In addition, the Underwriters may impose "penalty bids"
under contractual arrangements with the Underwriters whereby it may reclaim from
an Underwriter (or dealer participating in the Offering) for the account of
other Underwriters, the selling concession with respect to shares of Common
Stock that are distributed in the Offering but subsequently purchased for the
account of the Underwriters in the open market. Any of the transactions
described in this paragraph may result in the maintenance of the price of the
Common Stock at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph is required, and,
if they are undertaken they may be discontinued at any time.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
this Offering, including liabilities under the Securities Act.
The foregoing is a summary of the material terms of the Underwriting
Agreement, the Underwriters' Warrant and the Financial Consulting Agreement.
Reference is made to the copies of the Underwriting Agreement, the Underwriters'
Warrant and the Financial Consulting Agreement, which are filed as exhibits to
the Registration Statement of which this Prospectus forms a part.
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<PAGE> 38
LEGAL MATTERS
Certain legal matters relating to Canadian law, including the validity of
the issuance of the Common Stock offered herein, will be passed upon for the
Company by Grubner, Krauss, 5140 Yonge Street, Suite 1540, North York, Ontario,
Canada M2N 6L7. Aaron Grubner, a partner of Grubner, Krauss, is a director of
the Company. Certain legal matters in connection with the Offering will be
passed upon for the Company by its United States counsel, Gersten, Savage,
Kaplowitz & Fredericks, LLP, 101 East 52nd Street, New York, New York 10022.
Certain legal matters will be passed upon for the Underwriters by Broad and
Cassel, a general partnership including professional associations, 201 South
Biscayne Boulevard, Suite 3000, Miami, Florida 33131.
EXPERTS
The financial statements of the Company for each of the two fiscal years in
the periods ended May 31, 1997 and 1998, appearing in this Prospectus and
Registration Statement have been audited by Schwartz Levitsky Feldman, Chartered
Accountants, as set forth in their report thereon appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under
the Act with respect to the Common Stock offered hereby. This Prospectus omits
certain information contained in the Registration Statement and the exhibits
thereto, and references are made to the Registration Statement and the exhibits
thereto for further information with respect to the Company and the Common Stock
offered hereby. Statements contained herein concerning the provisions of any
documents are not necessarily complete, and in each instance reference is made
to the copy of such document filed as an exhibit to the Registration Statement.
Each such statement is qualified in itsentirety by such reference. The
Registration Statement, including exhibits and schedules filed therewith, may be
inspected without charge at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at the regional offices of the Commission located at 7 World
Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials may be obtained from the Public Reference Section of the
Commission, Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549, and its public reference facilities in New York, New York and Chicago,
Illinois upon payment of the prescribed fees. Electronic registration statements
filed through the Electronic Data Gathering, Analysis, and Retrieval System are
publicly available through the Commission's Website (http://www.sec.gov). At the
date hereof, the Company was not a reporting company under the Exchange Act.
THE COMPANY INTENDS TO FURNISH ITS STOCKHOLDERS WITH ANNUAL REPORTS
CONTAINING AUDITED FINANCIAL STATEMENTS AND TO MAKE AVAILABLE QUARTERLY REPORTS
FOR THE FIRST THREE QUARTERS OF EACH FISCAL YEAR CONTAINING UNAUDITED INTERIM
FINANCIAL STATEMENTS.
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INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
The Bylaws of the Company provide that the Company shall indemnify to the
fullest extent permitted by Canadian law directors and officers (and former
officers and directors) of the Company. Such indemnification includes all costs
and expenses and charges reasonably incurred in connection with the defense of
any civil, criminal or administrative action or proceeding to which such person
is made a party by reason of being or having been an officer or director of the
Company if such person was substantially successful on the merits in his or her
defense of the action and he or she acted honestly and in good faith with a view
to the best interests of the Company, and if a criminal or administrative action
that is enforced by a monetary penalty, such person had reasonable grounds to
believe his or her conduct was lawful.
The Underwriting Agreement provides for reciprocal indemnification between
the Company and the Underwriters against certain liabilities in connection with
this Offering, including liabilities under the Securities Act.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
and the Underwriters pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses,
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person or by the Underwriters in connection
with the securities being registered, the Company will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
ENFORCEABILITY OF CIVIL LIABILITIES AGAINST FOREIGN PERSONS
The Company and its officers, directors and auditors are residents of
Canada and consequently all of the assets of the Company are or may be located
outside the United States. As a result, service of process may be effected upon
the Company through the offices of Gersten, Savage, Kaplowitz & Fredericks, LLP
in New York, but it may be difficult for investors to effect service of process
within the United States upon non-resident officers and directors, or to enforce
against them judgments obtained in the United States courts predicated upon the
civil liability provision of the Securities Act or state securities laws. The
Company believes that a judgment of a United States court predicated solely upon
civil liability under the Securities Act would probably be enforceable in Canada
if the United States court in which the judgment was obtained had a basis for
jurisdiction in the matter that was recognized by a Canadian court for such
purposes. However, there is substantial doubt whether an action could be brought
in Canada in the first instance on the basis of liability predicated solely upon
such laws. If investors have questions with regard to these issues, they should
seek the advice of their individual counsel. The Company has also been informed
by its Canadian legal counsel Grubner, Krauss that, pursuant to the Currency Act
(Canada), a judgment by a court in any Province of Canada may only be awarded in
Canadian currency. Pursuant to the provision of the Courts of Justice Act
(Ontario), however, a court in the Province of Ontario shall give effect to the
manner of conversion to Canadian currency of an amount in a foreign currency,
where such manner of conversion is provided for in an obligation enforceable in
Ontario.
38
<PAGE> 40
CURTIS INTERNATIONAL LTD.
FINANCIAL STATEMENTS
AS OF MAY 31, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
TABLE OF CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Balance Sheets.............................................. F-3
Statements of Income........................................ F-4
Statements of Cash Flows.................................... F-5
Statements of Stockholders' Equity.......................... F-6
Notes to Financial Statements............................... F-7 to F-11
</TABLE>
F-1
<PAGE> 41
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Curtis International Ltd.
We have audited the accompanying balance sheets of Curtis International
Ltd. (incorporated in Canada) as of May 31, 1998, and 1997 and the related
statements of income, cash flows and changes in stockholders' equity for the
years ended May 31, 1998, and 1997. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Curtis International Ltd. as
of May 31, 1998, and 1997 and the results of its operations and its cash flows
for the years ended May 31, 1998, and 1997, in conformity with generally
accepted accounting principles in the United States of America.
Toronto, Ontario /s/ Schwartz Levitsky Feldman
July 24, 1998 Chartered Accountants
F-2
<PAGE> 42
CURTIS INTERNATIONAL LTD.
BALANCE SHEETS
AS AT MAY 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1997
$ $
---------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... 3,401,181 1,251,542
Accounts receivable (note 3).............................. 4,084,729 1,813,898
Inventory (note 4)........................................ 5,853,118 1,340,874
Prepaid expenses and sundry assets........................ 8,737 8,699
Current portion of mortgage receivable (note 5)........... 75,553 852
Income taxes recoverable.................................. -- 11,690
---------- ---------
13,423,318 4,427,555
DEFERRED ISSUE COSTS........................................ 89,845 --
MORTGAGE RECEIVABLE (note 5)................................ -- 75,552
PROPERTY, PLANT AND EQUIPMENT (note 6)...................... 172,209 176,573
---------- ---------
13,685,372 4,679,680
========== =========
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness (note 7)................................ 8,729,357 1,545,656
Accounts payable (note 8)................................. 2,259,681 1,621,346
Income taxes payable...................................... 534,323 --
Current portion of advances from affiliated parties (note
9)..................................................... 483,535 --
---------- ---------
12,006,896 3,167,002
ADVANCES FROM AFFILIATED PARTIES (note 9)................... 241,768 861,425
---------- ---------
12,248,664 4,028,427
---------- ---------
SHAREHOLDERS' EQUITY
CAPITAL STOCK (note 10)..................................... 80 81
CUMULATIVE TRANSLATION ADJUSTMENT........................... (94,664) (15,215)
RETAINED EARNINGS........................................... 1,531,292 666,387
---------- ---------
1,436,708 651,253
---------- ---------
13,685,372 4,679,680
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 43
CURTIS INTERNATIONAL LTD.
STATEMENTS OF INCOME
FOR THE YEARS ENDED MAY 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
---------- ---------- ----------
<S> <C> <C> <C>
SALES (note 16)............................................ 27,471,613 14,914,142 14,627,378
Cost of sales............................................ 22,349,967 12,173,748 11,912,927
---------- ---------- ----------
GROSS PROFIT............................................... 5,121,646 2,740,394 2,714,451
---------- ---------- ----------
EXPENSES
Administrative........................................... 1,758,313 1,730,592 1,313,977
Selling.................................................. 1,265,906 654,978 901,220
Financial................................................ 474,154 231,445 365,577
Lease cancellation fee................................... 155,926 -- --
---------- ---------- ----------
3,654,299 2,617,015 2,580,774
---------- ---------- ----------
INCOME BEFORE INCOME TAXES................................. 1,467,347 123,379 133,677
Income taxes (note 11)................................... 602,442 30,378 33,330
---------- ---------- ----------
NET INCOME................................................. 864,905 93,001 100,347
========== ========== ==========
NET INCOME PER WEIGHTED AVERAGE SHARE...................... 0.22 0.02 0.02
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (note
10 and note 17).......................................... 4,000,000 4,000,000 4,000,000
========== ========== ==========
NET INCOME PER FULLY DILUTED SHARE......................... 0.22 0.02 0.02
========== ========== ==========
FULLY DILUTED NUMBER OF COMMON SHARES OUTSTANDING (note 10
and note 17)............................................. 4,000,000 4,000,000 4,000,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 44
CURTIS INTERNATIONAL LTD.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
---------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................... 864,905 93,001 100,347
---------- ---------- ----------
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Amortization.......................................... 17,172 17,346 20,225
Decrease (increase) in accounts receivable............ (2,446,164) 113,840 392,022
Decrease (increase) in inventory...................... (4,734,388) 10,675 105,463
Decrease (increase) in income taxes recoverable....... 11,419 (7,113) (4,577)
Decrease (increase) in prepaid expenses and sundry
assets.............................................. (524) (2,182) 1,481
Increase (decrease) in accounts payable and accrued
expenses............................................ 749,617 826,231 (53,397)
Increase (decrease) in income taxes payable........... 551,772 -- 4,843
---------- ---------- ----------
Net cash generated by operating activities............... (4,986,191) 1,051,798 556,721
---------- ---------- ----------
Cash flows from investing activities:
Purchases of property, plant and equipment............... (35,730) -- (2,162)
Payment of mortgage receivable........................... (3,389) 872 615
---------- ---------- ----------
Net cash used in investing activities.................... (39,119) 872 (1,547)
---------- ---------- ----------
Cash flows from financing activities:
Increase (decrease) in bank indebtedness................. 7,504,507 (463,749) 7,353
Increase (decrease) in advances from affiliated
parties............................................... (92,517) 16,271 89,113
Deferred issuance costs.................................. (92,779) -- --
Redemption of Class B share.............................. (1) -- --
---------- ---------- ----------
Net cash from financing activities....................... 7,319,210 (447,478) 96,466
---------- ---------- ----------
Effect of foreign currency exchange rate changes........... (144,261) 1,260 (6,550)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents....... 2,149,639 606,452 645,090
Cash and cash equivalents
--Beginning of year...................................... 1,251,542 645,090 --
---------- ---------- ----------
--End of year............................................ 3,401,181 1,251,542 645,090
========== ========== ==========
Interest paid............................................ 408,649 142,792 202,080
========== ========== ==========
Income taxes paid........................................ 50,670 44,221 42,284
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 45
CURTIS INTERNATIONAL LTD.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MAY 31
(AMOUNTS EXPRESSED IN US DOLLARS)
<TABLE>
<CAPTION>
COMMON CUMULATIVE
STOCK RETAINED TRANSLATION
NUMBER OF AMOUNTS EARNINGS ADJUSTMENTS
SHARES $ $ $
----------- ------- ----------- -----------
<S> <C> <C> <C> <C>
Balance as of May 31, 1995......................... 4,000,000 80 473,039 (9,923)
Foreign currency translation....................... -- -- -- (19,492)
Net income for the year............................ -- -- 99,673 --
----------- --- ----------- -------
Balance as of May 31, 1996......................... 4,000,000 80 572,712 (29,415)
Foreign currency translation....................... -- -- -- 14,874
Net income for the year............................ -- -- 93,001 --
----------- --- ----------- -------
Balance as of May 31, 1997......................... 4,000,000 80 665,713 (14,541)
Foreign currency translation....................... -- -- -- (79,449)
Net income for the year............................ -- -- 864,905 --
----------- --- ----------- -------
Balance as of May 31, 1998......................... 4,000,000 80 1,530,618 (93,990)
=========== === =========== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 46
CURTIS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1998, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)
1. BASIS OF PRESENTATION
On January 26, 1998 Curtis International Ltd. amalgamated with Unique
Investments Ltd. and AEG Trading Ltd. to form Curtis International Ltd.
On May 31, 1998, the company amalgamated with Worldwide Holdings Ltd. to
form Curtis International Ltd.
At the time of the amalgamations the only assets of the holding companies
were shares of Curtis International Ltd. These financial statements reflect the
operations of Curtis International Ltd. for the years ended May 31, 1998, 1997
and 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
I) PRINCIPAL ACTIVITIES
The company was incorporated in Canada on December 12, 1990. The company is
principally engaged in the distribution and sales of electronics, audio visual
products and computer accessories in Canada and the United States of America.
II) CASH, CASH EQUIVALENTS AND BANK INDEBTEDNESS
Cash, cash equivalents and bank indebtedness includes cash in bank, amounts
due to banks, and any other highly liquid investments purchased with a maturity
of three months or less. The carrying amount approximates fair value because of
the short maturity of those instruments.
III) OTHER FINANCIAL INSTRUMENTS
The carrying amount of the company's other financial instruments
approximate fair value because of the short maturity of these instruments or the
current nature of interest rates borne by these instruments.
IV) LONG-TERM FINANCIAL INSTRUMENTS
The fair value of each of the company's long-term financial assets and debt
instruments is based on the amount of future cash flows associated with each
instrument discounted using an estimate of what the company's current borrowing
rate for similar instruments of comparable maturity would be.
V) INVENTORY
Inventory is valued at the lower of cost and net realizable value. Cost is
determined on the average cost basis.
VI) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost and are depreciated on
the declining balance basis over their estimated useful lives.
Leasehold improvements are amortized on the straight-line basis over the
term of the lease.
VII) SALES
Sales represent the invoiced value of goods supplied to customers. Sales
are recognized upon delivery of goods and passage of title to customers.
F-7
<PAGE> 47
CURTIS INTERNATIONAL LTD.
NOTES TO FINANCIAL STATEMENTS
MAY 31, 1998, 1997 AND 1996
(AMOUNTS EXPRESSED IN US DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
VIII) FOREIGN CURRENCY TRANSLATION
The translation of the financial statements from Canadian dollars ("CDN $")
into United States dollars is performed for the convenience of the reader.
Balance sheet accounts are translated using closing exchange rates in effect at
the balance sheet date and income and expense accounts are translated using an
average exchange rate prevailing during each reporting period. No representation
is made that the Canadian dollar amounts could have been, or could be, converted
into United States dollars at the rates on the respective dates and or at any
other certain rates. Adjustments resulting from the translation are included in
the cumulative translation adjustments in stockholders' equity.
IX) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principals in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
3. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1998 1997
$ $
--------- ---------
<S> <C> <C>
Accounts receivable......................................... 4,514,714 2,748,696
Less: Allowance for doubtful accounts....................... 429,985 934,798
--------- ---------
Accounts receivable, net.................................... 4,084,729 1,813,898
========= =========
</TABLE>
4. INVENTORY
Inventory is comprised entirely of finished goods.
5. MORTGAGE RECEIVABLE
The company sold land and a building owned by it on February 10, 1994. The
Company agreed to finance a portion of the purchase price and, as a result, took
back a mortgage. The details of this transaction are described below:
<TABLE>
<CAPTION>
1998 1997
$ $
------ ------
<S> <C> <C>
First mortgage, secured by land and building, due in 9
remaining monthly instalments of $577 including interest
at the rate of 8% per annum plus a final payment of
$74,945 due on February 10, 1999.......................... 75,553 76,404
Current portion............................................. 75,553 852
------ ------
Long-term portion........................................... -- 75,552
====== ======
</TABLE>
F-8
<PAGE> 48
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1998
-------------------------------- 1997
ACCUMULATED -------
COST AMORTIZATION NET NET
$ $ $ $
------- ------------ ------- -------
<S> <C> <C> <C> <C>
Land............................................... 29,920 -- 29,920 34,253
Condominium........................................ 119,682 29,389 90,293 108,808
Furniture and equipment............................ 56,946 41,108 15,838 22,666
Automobile......................................... 34,368 30,931 3,437 5,621
Computer equipment................................. 56,612 24,834 31,778 3,873
Leasehold improvements............................. 8,170 7,227 943 1,352
------- ------- ------- -------
305,698 133,489 172,209 176,573
======= ======= ======= =======
</TABLE>
Amortization for the year amounted to $17,172 ($17,346 in 1997 and $20,225
in 1996).
7. BANK INDEBTEDNESS
The bank indebtedness bears interest at the bank's prime lending rate plus
0.50% per annum. As security, the company has provided a general assignment of
accounts receivable, a general security agreement and an assignment of fire
insurance on the business assets, with guarantees by the directors and
affiliated companies. An affiliated company has provided a postponement of its
loan to the company. The company's line of credit extends to $8,250,000 and is
limited based on a formula which relates to receivables and cashable instalments
held by the company. The company must meet certain covenants imposed by the
bank.
8. ACCOUNTS PAYABLE
<TABLE>
<CAPTION>
1998 1997
$ $
--------- ---------
<S> <C> <C>
Trade payables.............................................. 322,327 700,098
Accrued expenses............................................ 1,937,354 921,248
--------- ---------
2,259,681 1,621,346
========= =========
</TABLE>
9. ADVANCES FROM AFFILIATED PARTIES
The advances from affiliated parties bear interest at 8% per annum
commencing June 1, 1998. The principal sums shall be repaid in six equal quarter
yearly installments on the last day of the month in which each quarter-year
occurs, the first payment commencing 90 days from the effective date of the
registration statement on Form SB-2. Had the advances been valued at the current
value of cash flows at the company's current rate of borrowing the advances
would have been valued at $725,303 in 1998 and $832,295 in 1997. Interest of
$50,603 would have been imputed for 1998 and interest of $54,448 would have been
imputed for 1997.
10. CAPITAL STOCK
AUTHORIZED
15,000,000 Common Shares.
ISSUED
<TABLE>
<CAPTION>
1998 1997
$ $
---- ----
<S> <C> <C>
100 Common shares (old)..................................... -- 80
1 Class B share (old)....................................... -- 1
4,000,000 Common shares..................................... 80 --
-- --
80 81
== ==
</TABLE>
F-9
<PAGE> 49
Curtis International Ltd. amalgamated with Unique Investments Ltd. and AEG
Trading Ltd. on January 26, 1998, and with Worldwide Holdings Limited on May 31,
1998. There was no substantive effect to the amalgamations which reorganized
companies under common control. The outstanding shares of 4,000,000 issued on
the amalgamations are treated as stock splits and therefore the shares have been
retroactively restated as of May 31, 1995.
Subsequent to May 31, 1998, the company redeemed 300,000 common shares at
no consideration. As a result 3,700,000 common shares (new) are outstanding. The
net income per weighted average common share is $0.23 in 1998 and $0.03 in 1997
based on a weighted average number of common shares outstanding of 3,700,000.
The Board of Directors have adopted a stock option plan pursuant to which
400,000 shares of common stock are provided for issuance.
11. INCOMES TAXES
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
------- ------- -------
<S> <C> <C> <C>
a) Current.............................................. 602,442 30,378 33,330
======= ======= =======
b) Current income taxes consist of:
Amount calculated at basic Federal and Provincial
rates................................................ 611,490 28,179 30,532
Permanent and other differences...................... -- 2,199 2,798
Timing differences................................... (9,048) -- --
------- ------- -------
602,442 30,378 33,330
======= ======= =======
</TABLE>
12. LEASE COMMITMENT
Minimum payments under the company's operating leases for premises,
exclusive of certain operating costs for which the company is responsible for
1999 is $51,958. The lease expires November 30, 1998.
13. TRANSACTION WITH AFFILIATED COMPANIES
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
------- ------- -------
<S> <C> <C> <C>
Management fees......................................... 354,384 427,925 106,440
Rent expense............................................ 66,154 102,587 102,767
Occupancy costs......................................... 51,114 71,132 78,203
</TABLE>
14. CONTINGENT LIABILITIES
The company's products are purchased overseas. The payment arrangement is
done through letters of credit. Once the product leaves the country of origin,
the liability is recognized by the company and results in an accepted letter of
credit. The company was contingently liable to the bank for unaccepted letters
of credit of approximately $2,997,000 as at May 31, 1998.
15. COMPARATIVE FIGURES
Certain figures in the 1997 financial statements have been reclassified to
conform with the basis of presentation used in 1998.
F-10
<PAGE> 50
16. SEGMENTED INFORMATION
A) SALES TO MAJOR CUSTOMERS
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
---------- ---------- ----------
<S> <C> <C> <C>
Company A........................................ 8,769,276 4,216,435 3,698,720
Company B........................................ 3,421,958 2,848,573 2,610,476
Company C*....................................... -- 1,467,330 1,973,312
---------- ---------- ----------
12,191,234 8,532,338 8,282,508
========== ========== ==========
Percentage of total sales........................ 44% 57% 57%
Accounts receivable due from major customers..... $2,814,165 $1,448,283 $1,354,947
Percentage of total accounts receivable.......... 69% 80% 70%
</TABLE>
Ongoing credit evaluations of each customer's financial condition are
performed and, generally, no collateral is required. The company maintains
reserves for potential credit losses and such losses, in the aggregate, have not
exceeded management's expectations.
* In 1998, sales to such customer were less than 10% of the Company's
revenues.
B) SALES BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
---------- ---------- ----------
<S> <C> <C> <C>
Canada........................................... 15,754,678 12,697,084 13,371,272
United States of America......................... 11,716,935 2,217,058 1,256,106
---------- ---------- ----------
27,471,613 14,914,142 14,627,378
========== ========== ==========
</TABLE>
C) NET INCOME BY GEOGRAPHIC AREA
The company's accounting records do not readily provide information on net
income by geographic area. Management is of the opinion that the proportion of
net income based principally on sales, presented below, would fairly present the
results of operations by geographic area.
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
------- ------ -------
<S> <C> <C> <C>
Canada................................................... 495,782 80,860 91,730
United States of America................................. 369,123 12,141 8,617
------- ------ -------
864,905 93,001 100,347
======= ====== =======
</TABLE>
D) IDENTIFIABLE ASSETS BY GEOGRAPHIC AREA
All identifiable assets were located in Canada for 1998, 1997 and 1996.
E) PURCHASES FROM MAJOR SUPPLIERS
<TABLE>
<CAPTION>
1998 1997 1996
$ $ $
---------- ---------- ----------
<S> <C> <C> <C>
Purchases from major suppliers................... 3,754,794 2,093,884 2,275,563
Percentage of total purchases.................... 17% 17% 19%
Accounts payable due to major suppliers.......... 368,141 288,629 128,809
Percentage of total accounts payable............. 16% 18% 16%
</TABLE>
17. SUBSEQUENT EVENTS
Subsequent to year end, the Company redeemed 300,000 common shares at no
consideration. See note 10 for details.
F-11
<PAGE> 51
[PICTURE OF COMPANY'S PRODUCTS]
<PAGE> 52
No underwriter, dealer,
salesman 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 representation
must not be relied upon as having
been authorized by the Company. This
Prospectus does not constitute an
offer or solicitation to any person
in any jurisdiction where such offer
or solicitation would be unlawful.
Neither delivery of this Prospectus
nor any Common Stock sale hereunder
shall, under any circumstances,
create any implication that there
has been no change in the affairs of
the Company since the date hereof.
- --------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
The Offering........................... 6
Summary Combined Financial
Information.......................... 7
Risk Factors........................... 8
Dilution............................... 14
Capitalization......................... 15
Use of Proceeds........................ 16
Dividend Policy........................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 17
Business............................... 20
Management............................. 27
Principal and Selling Stockholder...... 30
Certain Transactions................... 30
Description of Securities.............. 31
Shares Eligible for Future Sale........ 32
Certain United States Federal Income
Tax Considerations................... 32
Investment Canada Act.................. 34
Underwriting........................... 35
Legal Matters.......................... 37
Experts................................ 37
Additional Information................. 37
Indemnification for Securities Act Liabilities... 38
Enforceability of Civil Liabilities
Against Foreign Persons.............. 38
Financial Statements................... F-1
- -----------------------------------------------
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE
DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN
THE COMPANY'S 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 WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
LOGO
CURTIS INTERNATIONAL LTD.
1,650,000 SHARES OF COMMON STOCK
----------------------------------------------------------------
PROSPECTUS
----------------------------------------------------------------
JOSEPH STEVENS & COMPANY, INC.
, 1998
<PAGE> 53
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws of the Company provide that the Company shall indemnify
directors and officers of the Company. The pertinent section of Canadian law is
set forth below in full. In addition, upon effectiveness of this registration
statement, management intends to obtain officers and directors liability
insurance.
See the second and third paragraphs of Item 28 below for information
regarding the position of the Securities and Exchange Commission (the
"Commission") with respect to the effect of any indemnification for liabilities
arising under the Securities Act of 1933, as amended (the "Securities Act").
Section 136 of the Ontario Business Corporation Act provides as follows:
(1) INDEMNIFICATION OF DIRECTORS--A corporation may indemnify a
director or officer of the corporation, a former director or officer of the
corporation or a person who acts or acted at the corporation's request as a
director or officer of a body corporate of which the corporation is or was
a stockholder or creditor, and his or her heirs and legal representatives,
against all costs, charges and expenses, including an amount paid to settle
an action or satisfy a judgment, reasonably incurred by him or her in
respect of any civil, criminal or administrative action or proceeding to
which he or she is a party by reason of being or having been a director or
officer of such corporation or body corporate, if,
(a) he or she acted honestly and in good faith with a view to the
best interests of the corporation; and
(b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he or she has
reasonable grounds for believing that his or her conduct was lawful.
(2) INDEMNIFICATION--A corporation may, with the approval of the
court, indemnify a person referred to in subsection (1) in respect of an
action by or behalf of the corporation or body corporate to procure a
judgment in its favor, to which the person is made a party by reason of
being or having been a director or an officer of the corporation or body
corporate, against all costs, charges and expenses reasonably incurred by
the person in connection with such action if he or she fulfills the
conditions set out in clauses (1)(a) and (b).
(3) INDEMNIFICATION--Despite anything in this section, a person
referred to in subsection (1) is entitled to indemnity from the corporation
in respect of all costs, charges and expenses reasonably incurred by him in
connection with the defense of any civil, criminal or administrative action
or proceeding to which he or she is made a party by reason of being or
having been a director or officer of the corporation or body corporate, if
the person seeking indemnity;
(a) was substantially successful on the merits in his or her
defense of the action or proceeding; and
(b) fulfills the conditions set out in clauses (1)(a) and (b).
(4) LIABILITY INSURANCE--A corporation may purchase and maintain
insurance for the benefit of any person referred to in subsection (1)
against any liability incurred by the person,
(a) in his or her capacity as a director or officer of the
corporation, except where the liability relates to the person's failure
to act honestly and in good faith with a view to the best interests of
the corporation; or
(b) in his or her capacity as a director or officer of another body
corporate where the person acts or acted in that capacity at the
corporation's request, except where the liability relates to the
person's failure to act honestly and in good faith with a view to the
best interests of the body corporate.
II-1
<PAGE> 54
(5) APPLICATION TO COURT--A Corporation or a person referred to in
subsection 91 may apply to the court for an order approving an indemnity
under this section and the court may so order and make any further order it
thinks fit.
(6) INDEMNIFICATION--Upon application under subsection (5), the court
may order notice to be given to any interested person and such person is
entitled to appear and be heard in person or by counsel.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of the estimated expenses to be paid by the
Company in connection with the issuance and distribution of the securities being
registered:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 3,200.88
NASD Filing Fee............................................. 1,325.00
Nasdaq Listing Fees*........................................ 15,000.00
Printing Engraving Expenses*................................ 75,000.00
Legal Fees and Expenses*.................................... 85,000.00
Accounting Fees and Expenses*............................... 70,000.00
Blue Sky Fees and Expenses*................................. 17,500.00
Transfer Agent and Registrar Fees and Expenses*............. 3,500.00
Miscellaneous*.............................................. 29,474.12
-----------
Total.................................................. $300,000.00
</TABLE>
- ------------------------------
* estimate
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
In the past three years the Company has not sold any of its securities.
ITEM 27. INDEX TO EXHIBITS
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement
**3.1 Bylaws of Registrant
**3.2 Articles of Amalgamation dated January 23, 1998
**3.3 Articles of Amalgamation dated May 29, 1998
*4.1 Form of Underwriters' Warrant
**4.3 Specimen Common Stock Certificate
**5.1 Opinion of Gersten, Savage, Kaplowitz & Fredericks, LLP
*10.1 Form of Financial Consulting Agreement
**10.2 1998 Stock Option Plan
Lease of Company's Facility at 7 Kodiak Crescent, Downsview,
**10.3 Ontario
Lease of Company's Facility at 300 Steeprock Drive, Toronto,
**10.3.1 Ontario
**10.4 Employment Agreement with Aaron Herzog
**10.5 Employment Agreement with Jacob Herzog
**10.6 Credit Facility with Canadian Imperial Bank of Commerce
**10.7 Promissory note dated July 15, 1998
**10.8 Promissory notes dated June 1, 1998
*23.1 Consent of Schwartz Levitsky Feldman, independent auditors
Consent of Gersten, Savage, Kaplowitz & Fredericks, LLP
**23.2 (incorporated into Exhibit 5.1)
</TABLE>
- ------------------------------
*Filed herewith.
**Previously filed.
II-2
<PAGE> 55
ITEM 28. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to any charter provision, by-law, contract arrangements,
statute, or otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the small business issuer in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the small business issuer
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned small business issuer hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) To include any
Prospectus required by section 10(a)(3) of the Act; (ii) To reflect in the
Prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the registration statement; (iii) To
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the Offering of
such securities at that time shall be deemed to be the initial bona fide
Offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the Offering.
(4) For determining any liability under the Act, treat the information
omitted from the form of Prospectus filed as part of this registration
Statement in reliance upon Rule 430A and contained in a form of Prospectus
filed by the small business issuer under Rule 424(b)(1), or (4) or 497(h),
under the Act as part of this registration statement as of the time the
Commission declared it effective.
(5) For determining any liability under the Act, treat each
post-effective amendment that contains a form of Prospectus as a new
registration statement at that time as the initial bona fide Offering of
those securities.
II-3
<PAGE> 56
SIGNATURES
Pursuant to the requirements of the Act, the Registrant certifies that it
has reasonable grounds to believe that it meets all of the requirement for
filing on Form SB-2 and has duly caused this Amendment No. 3 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Province of Ontario, Canada on September 18, 1998.
CURTIS INTERNATIONAL LTD.
By: /s/ AARON HERZOG
-----------------------
AARON HERZOG
President and Chief Executive
Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ AARON HERZOG President, Chief Executive September 18, 1998
- ----------------------------------------------------- Officer and Director
Aaron Herzog
/s/ JACOB HERZOG Chairman, Treasurer, Secretary, September 18, 1998
- ----------------------------------------------------- Principal Accounting Officer and
Jacob Herzog Director
Director September 18, 1998
- -----------------------------------------------------
Louis Drazin
/s/ DAVID BEN DAVID Director September 18, 1998
- -----------------------------------------------------
David Ben David
</TABLE>
II-4
<PAGE> 57
INDEX TO EXHIBITS
<TABLE>
<C> <S>
*1.1 Form of Underwriting Agreement
**3.1 Bylaws of Registrant
**3.2 Articles of Amalgamation dated January 23, 1998
**3.3 Articles of Amalgamation dated May 29, 1998
*4.1 Form of Underwriters' Warrant
**4.3 Specimen Common Stock Certificate
**5.1 Opinion of Gersten, Savage, Kaplowitz & Fredericks, LLP
*10.1 Form of Financial Consulting Agreement
**10.2 1998 Stock Option Plan
Lease of Company's Facility at 7 Kodiak Crescent, Downsview,
**10.3 Ontario
Lease of Company's Facility at 300 Steeprock Drive, Toronto,
**10.3.1 Ontario
**10.4 Employment Agreement with Aaron Herzog
**10.5 Employment Agreement with Jacob Herzog
**10.6 Credit Facility with Canadian Imperial Bank of Commerce
**10.7 Promissory note dated July 15, 1998
**10.8 Promissory notes dated June 1, 1998
*23.1 Consent of Schwartz Levitsky Feldman, independent auditors
Consent of Gersten, Savage, Kaplowitz & Fredericks, LLP
**23.2 (incorporated into Exhibit 5.1)
</TABLE>
- ------------------------------
*Filed herewith.
**Previously filed.
II-5
<PAGE> 1
EXHIBIT 1.1
CURTIS INTERNATIONAL LTD.
1,650,000 SHARES
OF COMMON STOCK, NO PAR VALUE PER SHARE
UNDERWRITING AGREEMENT
As of , 1998
Joseph Stevens & Company, Inc.
33 Maiden Lane, 8th Floor
New York, New York 10038
Ladies and Gentlemen:
Curtis International Ltd., an Ontario corporation (the "Company"), and
Ranch Limited, an Ontario corporation (the "Selling Stockholder"), propose to
sell to Joseph Stevens & Company, Inc., a corporation (the
"Representative"), and the several other underwriters named on Schedule 1
attached hereto (collectively, the "Underwriters"), and the Underwriters
severally propose to purchase from the Company and the Selling Stockholder, an
aggregate of 1,650,000 shares (the "Firm Shares") of the Company's common stock,
no par value per share (the "Common Stock"), 1,498,000 of which shall be issued
by the Company and 152,000 of which shall be transferred by the Selling
Stockholder, as more fully described in Section 1 hereinbelow.
In addition, the Company shall grant to the Underwriters the option to
purchase up to an additional 247,500 shares of Common Stock (the "Optional
Shares"), solely for the purpose of covering over-allotments (the
"Over-Allotment Option"), if any, in connection with the sale of the Firm Shares
and the Optional Shares (collectively, the "Securities").
1. PURCHASE, SALE, AND DELIVERY OF THE SECURITIES AND UNDERWRITERS' WARRANTS.
(a) PURCHASE AND SALE OF THE FIRM SHARES. On the basis of the
representations, warranties, covenants, and agreements of the Company
and the Selling Stockholder herein contained, and subject to the terms
and conditions herein set forth, the Company agrees to sell to the
several Underwriters, and the Underwriters, severally and not jointly,
agree to purchase from the Company, the Firm Shares at a purchase price
of $5.00 per share.
The Underwriters plan to offer the Firm Shares for sale to the public at
the price (the "Public Offering Price") and upon the terms set forth in
the Prospectus (as defined below) (the "Public Offering") as soon as
practicable after the date the Registration Statement (as defined below)
is declared effective (the "Effective Date") by the U.S. Securities and
Exchange Commission (the "Commission"). The Company and the Selling
Stockholder acknowledge that the Representative shall have the right to
select and form a syndicate of selected dealers and other Underwriters,
reasonably acceptable to the Company, to assist the Representative in
the Public Offering.
(b) PURCHASE AND SALE OF THE OPTIONAL SHARES. The Company hereby grants
to the Underwriters an option to purchase from the Company solely for
the purpose of covering over-allotments in connection with the sale of
the Securities, all or any portion of the Optional Shares for a period
of 45 days from the Effective Date at the same purchase price per
security payable by the Underwriters for each security as provided in
Subsection 1(a) above.
The option to purchase Optional Shares granted in Subsection 1(b) hereof
may be exercised on such number of occasions as is determined by the
Representative during the term thereof by written notice to the Company
from the Representative. Such notice shall set forth the aggregate
number of Optional Shares as to which the option is being exercised and
the time and date of payment and delivery therefor. Such time and date
of delivery shall not be later than either the Closing Date (as
<PAGE> 2
defined below) or the second business day after the day on which the
option shall have been exercised (the "Option Closing Date"). The Option
Closing Date shall also refer to any subsequent Option Closing Date in
the event such option is exercised in part on more than one occasion.
Delivery and payment for such Optional Shares shall be at the offices
set forth below for delivery and payment for the Firm Shares.
The obligation of the Underwriters to purchase and pay for any of the
Optional Shares is subject (as of the date hereof and as of the Closing
Date and/or the Option Closing Date) to the accuracy and completeness of
and compliance in all material respects with the representations and
warranties of the Company and the Selling Stockholder herein, to the
accuracy and completeness of the statements of the Company or its
officers made in any certificate or other documents to be delivered by
the Company and/or the Selling Stockholder pursuant to this Agreement,
to the performance in all material respects by the Company and/or the
Selling Stockholder of their respective obligations hereunder, to the
satisfaction by the Company and/or the Selling Stockholder of the
conditions as of the date hereof and as of the Closing Date and/or
Option Closing Date, set forth in Subsection 1(c) hereof, and to the
delivery to the Representative of opinions, certificates and letters
dated the Closing Date and/or Option Closing Date substantially similar
in scope to those specified in Section 7, but with each reference to the
"Firm Shares" and the "Closing Date" being deemed to be the "Optional
Shares" and "Option Closing Date."
(c) DELIVERY OF AND PAYMENT FOR THE SECURITIES. Delivery of the
certificates representing the Firm Shares shall be made to the
Underwriters at the offices of the Representative, or such other
location as the Representative shall determine and advise the Company
upon at least two full business days' notice in writing, against payment
therefor by federal wire transfer to the Company as appropriate at
A.M., Eastern Time, on , 1998,
or at such other time and business day (Saturdays, Sundays, and legal
holidays in New York, New York not being considered business days for
the purposes of this Agreement), not later than the third business day
following the date the Underwriters began trading the Firm Shares, as
shall be agreed upon by the Representative and the Company, which time
and date are herein called the "Closing Date." If the Underwriters
purchase any Optional Shares pursuant to the Over-Allotment Option,
delivery and payment for the certificates representing the Optional
Shares shall be made in the same manner described herein on the Option
Closing Date.
Delivery of the certificates representing the Securities shall be made
in registered form in such name or names and in such denominations as
the Representative shall specify to the Company upon at least two full
business days' notice in writing prior to the Closing Date or the Option
Closing Date, as the case may be. The Company will make the certificates
available to the Representative for examination at the offices of the
Representative or at such other location as the Representative shall
specify to the Company, not later than 2:00 P.M., Eastern Time, on the
business day immediately preceding the Closing Date or the Option
Closing Date, as the case may be.
(d) DELIVERY AND PAYMENT OF THE UNDERWRITERS' WARRANTS. On the Closing
Date, the Company will sell to the Representative or its designee, and
the Representative or its designee shall purchase, the Underwriters'
Warrants, as more fully described in Section 6(a) herein. The
Underwriters' Warrants will be in the form of, and in accordance with,
the provisions of the Underwriters' Warrants attached as an exhibit to
the amendment to the Registration Statement (as defined below). Payment
for the Underwriters' Warrants will be made to the Company by check or
checks payable to its order on the Closing Date against delivery of the
certificates representing the Underwriters' Warrants. The certificates
representing the Underwriters' Warrants will be in such denominations
and in such names as the Representative may request at least two
business days prior to the Closing Date.
(e) USE OF PROSPECTUS. The Company and the Selling Stockholder hereby
confirm their authorization to the Underwriters to use, and to make
available for use by dealers, the Preliminary Prospectus and Prospectus
(as defined below), and the Company and the Selling Stockholder hereby
authorize
2
<PAGE> 3
the Underwriters, all selected dealers, and all other dealers to whom
any of the Securities may be sold by the Underwriters or selected
dealers, to use the Preliminary Prospectus and Prospectus, as from time
to time amended or supplemented, in connection with the sale of the
Securities in accordance with the applicable provisions of the
Securities Act of 1933, as amended (the "Securities Act"), the rules and
regulations of the Commission thereunder (the "Regulations"), and
applicable state law until completion of the Public Offering and for
such longer period as the Underwriters may request if the Prospectus is
required to be delivered in connection with sales of the Securities by
the Underwriters or a dealer.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING STOCKHOLDER.
(a) REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to, and agrees with the Underwriters, that:
(1) REGISTRATION STATEMENT ON FORM SB-2. The Company has prepared in
conformity with the requirements under the Securities Act and the
Regulations, and has filed with the Commission under the Securities
Act, a registration statement on Form SB-2, File No. 333-56661 (the
"Registration Statement"), including the related Prospectus, for
the registration of the sale of the Securities and the
Underwriters' Warrants and the shares of Common Stock underlying
the Underwriters' Warrants (the "Warrant Shares"). The conditions
for the use of a registration statement on Form SB-2 set forth in
the General Instructions thereto have been satisfied with respect
to the Company, the transactions contemplated herein, and the
Registration Statement. As used in this Agreement, the term
"Registration Statement" means such registration statement of the
Company, as amended (pre- or post-effectiveness), on file with the
Commission at the time the registration statement or any
post-effective amendment thereto becomes effective under the
Securities Act (including all financial statements and financial
schedules, exhibits, all other documents filed as a part thereof or
incorporated by reference therein, and all the information
contained in any final Prospectus filed with the Commission
pursuant to Rule 424(b) under the Securities Act or deemed by
virtue of Rule 430A under the Securities Act to be part of the
Registration Statement). The term "Prospectus" as used herein means
the final Prospectus included as part of the Registration
Statement, including, if applicable, the information contained in
any final Prospectus filed with the Commission pursuant to Rule
424(b) under the Securities Act or deemed by virtue of Rule 430A
under the Securities Act to be part of the Registration Statement.
The term "Preliminary Prospectus" refers to and means any
prospectus included in the Registration Statement or any amendment
thereto prior to the Registration Statement becoming effective
under the Securities Act.
(2) USE AND ACCURACY OF PROSPECTUS. Neither the Commission nor any
state regulatory authority has issued any order preventing or
suspending the use of any Prospectus or any part thereof, and no
proceedings for that purpose have been instituted or, to the
Company's knowledge, are pending, threatened or contemplated. Each
Prospectus delivered to the Underwriters for dissemination in
connection with the Public Offering, at the time of filing thereof
and delivery to the Underwriters for such dissemination, did not
contain any untrue statement of a material fact, or omit to state a
material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under
which they were made, not misleading; the foregoing shall not
apply, however, to statements in, or omissions from, any Prospectus
that are based upon and conform to written information furnished to
the Company with respect to any Underwriter (or any affiliate or
associate thereof) by or on behalf of the Underwriters or such
Underwriter specifically for use in the preparation thereof.
(3) EFFECTIVENESS AND ACCURACY OF REGISTRATION STATEMENT. The
Registration Statement has or will become effective under the
Securities Act as of the Effective Date. The Registration Statement
and the Prospectus, from the Effective Date through the Closing
Date and, if Optional Shares are purchased, up to and including the
Option Closing Date (and if there are multiple Option Closing
Dates, up to and including the last Option Closing Date), will
3
<PAGE> 4
comply in all respects with the applicable requirements of the
Securities Act and the Regulations, and neither the Registration
Statement nor the Prospectus will, on such dates, contain any
untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading, and, on such dates, no event will have
occurred that should have been set forth in an amendment or
supplement to the Registration Statement or the Prospectus that has
not then been set forth in such an amendment or supplement; the
foregoing shall not apply, however, to statements in, or omissions
from, the Registration Statement or the Prospectus that are based
upon and conform to written information furnished to the Company
with respect to any Underwriter (or any affiliate or associate
thereof) by or on behalf of the Underwriters or such Underwriter
specifically for use in the preparation thereof. The descriptions
in the Registration Statement and the Prospectus of contracts and
other documents of the Company are accurate and present fairly the
information required to be disclosed, and there are no contracts or
other documents required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement under the Securities Act or the Regulations
which have not been so described or filed as required. The Company
has complied with all requests of the Commission and any state
securities commission in a state designated by the Representative
pursuant to Subsection 3(e) hereof for additional information to be
included in the Registration Statement and Prospectus or otherwise.
(4) INDEPENDENT PUBLIC ACCOUNTANTS. Schwartz Levitsky Feldman, the
accountants whose reports on the financial statements of the
Company are filed with the Commission as a part of the Registration
Statement, are, and were during the periods covered by their
respective reports, independent public accountants as required by
the Securities Act and the Regulations.
(5) ORGANIZATION, QUALIFICATION, ETC. The Company does not have any
subsidiaries and the Company does not own, and at the Closing Date
and any Option Closing Date will not own, directly or indirectly,
any stock or other equity interest in, or control, directly or
indirectly, any other corporation, partnership or other entity. The
Company is (i) a corporation duly organized, validly existing and
its status is active under the laws of the jurisdiction of its
incorporation, with full power and authority to own or lease all of
the assets owned or leased by it and to conduct its business as
described in the Registration Statement and the Prospectus and (ii)
duly qualified to do business and in good standing as a foreign
corporation in all jurisdictions in which the nature of the
activities conducted by it or the character of the assets owned or
leased by it makes such qualification necessary, except where the
failure to so qualify would not have a material adverse effect on
the condition (financial or otherwise), earnings, business, assets,
properties, results of operations or prospects (financial or
otherwise) of the Company (hereinafter a "Material Adverse
Effect"). Complete and correct copies of the articles of
incorporation and the by-laws of the Company in effect on the date
hereof have been delivered to the Representative, and no changes
therein will be made on or subsequent to the date hereof and prior
to the Closing Date and/or any Option Closing Date. The minute
books of the Company have been made available to the Underwriters,
contain a complete summary of all meetings and actions of the
directors and stockholders of the Company since the time of its
incorporation, and reflect all transactions referred to in such
minutes accurately in all respects.
(6) PERMITS AND LICENSES. The Company has all requisite power and
authority (corporate and other), and has obtained all approvals,
licenses, franchises, authorizations orders, certificates and
permits (collectively, "Permits") necessary under all applicable
statutes, codes, rules, regulations, orders and decrees of
governments or governmental bodies (collectively, "Laws") to own,
lease or use its assets and to conduct its business as described in
the Prospectus, except where the failure to have any such Permits,
singly or in the aggregate, will not have a Material Adverse
Effect. The Company has not received notice of any proceedings
4
<PAGE> 5
relating to the revocation or modification of any such Permits and
the Company is in all respects in compliance with all of its
Permits, except where the failure to comply, either singly or in
the aggregate, will not have a Material Adverse Effect. The Company
is not aware of any breach, violation or default with respect to
such Permits.
(7) CAPITALIZATION AND LEGALITY OF SECURITIES. The authorized, issued
and outstanding capital stock of the Company is as set forth in the
Prospectus under the caption "Capitalization." The Company will
have the adjusted capitalization set forth therein on the Closing
Date and each Option Closing Date, if any, based on the assumptions
set forth therein. There are no preemptive rights or anti-dilution
rights with respect to any outstanding securities of the Company.
The authorized capital stock of the Company conforms to the
descriptions thereof contained in the Prospectus under the caption
"Description of Securities," and consists of 15,000,000 shares of
Common Stock and 1,000,000 shares of preferred stock, no par value
per share ("Preferred Stock"). As of the date hereof, there are
3,700,000 shares of Common Stock issued and outstanding. There are
no shares of Preferred Stock outstanding. In addition, the Company
does not have any outstanding options or warrants to purchase
shares of Common Stock. The Company has sufficient authorized (and
neither issued nor outstanding) Common Stock to be offered and sold
as contemplated herein, and to be issued upon exercise of the
Underwriters' Warrants. Except as otherwise set forth in the
Prospectus, there are no outstanding options, warrants, or other
rights to purchase any shares of Common Stock or other capital
stock of the Company, or to purchase any other securities
convertible into or exchangeable for Common Stock or any other
capital stock of the Company. The outstanding securities of the
Company have been duly authorized and validly issued and are fully
paid and nonassessable. All the shares of Common Stock to be
offered by the Prospectus have been duly authorized and, when
issued and delivered against payment therefor as provided in this
Agreement, the Prospectus, and the Underwriters' Warrants, as
applicable, will be validly issued, fully paid and nonassessable.
The Underwriters' Warrants will constitute, when sold and delivered
as contemplated, a valid and binding obligation of the Company
enforceable in accordance with its terms, except to the extent that
enforcement thereof may be limited by (i) bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance, and similar laws
and court decisions now or hereafter in effect relating to or
affecting creditors' rights and remedies generally and (ii) general
principles of equity (regardless of whether such enforcement is
considered in a proceeding at law or in equity). A sufficient
number of shares of Common Stock have been reserved for issuance
upon sale and exercise of the Underwriters' Warrants.
(8) CONSENTS AND APPROVALS. No consent, approval, authorization or
order of, and no filing with, any arbitrator, court, regulatory
body, administrative agency, government agency or other body,
domestic or foreign, is required for the issuance of the Securities
pursuant to the Prospectus and the Registration Statement, this
Agreement and the Underwriters' Warrants, the performance of this
Agreement, the Underwriters' Warrants and the Consulting Agreement
and the transactions contemplated hereby and thereby, except such
as have been obtained under the Securities Act, state securities
laws, The Nasdaq Stock Market and the rules of the National
Association of Securities Dealers, Inc. (the "NASD") in connection
with the Underwriters' purchase and distribution of the Securities.
(9) REGISTRATION OF SECURITIES, UNDERWRITERS' WARRANTS AND WARRANT
SECURITIES. Upon the effectiveness of the Registration Statement,
the Securities shall have been listed on the Nasdaq National Market
System(TM). The Company has taken no action designed, or likely, to
have the effect of terminating the registration of the Securities
under Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), nor has the Company received any
notification that the Commission is contemplating terminating such
registration. The registration of the Securities, Underwriters'
Warrants and Warrant Shares under the Exchange Act was declared
effective on the Effective Date, and the Company has not received
any notification that the Commission is contemplating terminating
such registration.
5
<PAGE> 6
(10) EXCHANGE ACT FILINGS. As of the filing date, each report or
statement filed by the Company with the Commission pursuant to the
Exchange Act complied as to form in all respects with the
requirements of the Exchange Act and did not contain any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements made therein, in the
light of the circumstances under which they were made, not
misleading. From the Effective Date thereafter, the Company shall
comply with all periodic reporting and proxy solicitation
requirements imposed by the Commission pursuant to the Exchange
Act, and shall promptly furnish the Representative for a period of
five years from the Effective Date with copies of all material
filed with the Commission pursuant to the Exchange Act or otherwise
furnished to the shareholders of the Company.
(11) TAXES. No transfer tax, stamp duty or other similar tax is payable
by or on behalf of the Underwriters in connection with (i) the
issuance by the Company of the Securities, including the Warrant
Shares, (ii) the purchase by the Underwriters of the Securities
from the Company or the Selling Stockholder and the purchase by the
Representative of the Underwriters' Warrants from the Company,
(iii) the consummation by the Company of any of its obligations
under this Agreement, or (iv) resales of the Securities in
connection with the distribution contemplated hereby.
(12) FINANCIAL STATEMENTS. The financial statements (audited and
unaudited), and related financial schedules and notes
(collectively, the "Financial Statements"), filed with and as part
of the Registration Statement, comply in all respects with the
applicable accounting requirements of the Securities Act and the
Regulations and present fairly the financial position of the
Company as of the dates thereof and results of operations and
changes in cash flows of the Company for the periods to which they
apply, and such Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods involved. All adjustments
that, in the opinion of management, are necessary for a fair
presentation of the results for all such periods have been made.
The Financial Statements included in the Registration Statement and
the Prospectus are the only financial statements required under the
Securities Act or the Regulations to be included in the
Registration Statement and the Prospectus. The other financial and
statistical information included in the Prospectus, including,
without limitation, "Prospectus Summary," "Summary Consolidated
Financial and Operating Data" and "Selected Consolidated Financial
Data" presents fairly the information shown therein, and has been
compiled on a basis consistent with that of the audited financial
statements included in the Registration Statement and the books and
records of the Company.
(13) MATERIAL LOSS. The Company has not, since the date of the latest
financial statements included in the Prospectus or the Registration
Statement, sustained any material loss or interference with its
business from fire, explosion, flood, or other calamity, whether or
not covered by insurance, or from any labor dispute or court or
governmental action, order, or decree, other than as set forth in
the Prospectus. Since the respective dates as of which information
is set forth in the Prospectus, and except as otherwise set forth
therein: (i) there has not been any change in the capital stock, or
material increase in the short term or long-term debt, of the
Company; (ii) there has not been any material adverse change or any
prospective material adverse change in the condition (financial or
otherwise), business, prospects (financial or otherwise), results
of operations, general affairs, or management of the Company,
whether or not arising in the ordinary course of business; (iii) no
event has occurred that would result in a material write-down of
assets of the Company; (iv) the Company has not incurred any
material liability or obligation, direct or contingent, or entered
into any material transaction, other than those in the ordinary
course of business; (v) the Company has not purchased any of the
Company's outstanding securities; (vi) there has been no dividend
or distribution of any kind declared, paid, or made by the Company
in respect of the Common Stock; and (vii) there has not been any
execution or imposition of
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any material lien, charge, or encumbrance upon the respective
property or assets of the Company.
(14) INSURANCE. The Company maintains such insurance, including, but
not limited to, general liability, personal and product liability
and property insurance, as are necessary to insure the Company and
its respective employees, against such losses and risks generally
insured against by comparable businesses. The Company has (i) not
failed to give notice or present any insurance claim with respect
to any matter, including but not limited to such entity's business,
property or employees, under any insurance policy or surety bond in
a due and timely manner, (ii) no disputes or claims against any
underwriter of such insurance policies or surety bonds nor has it
failed to pay any premiums due and payable thereunder, and (iii)
not failed to comply with all conditions contained in such
insurance policies and surety bonds. There are no facts or
circumstances under any such insurance policy or surety bond which
would relieve any insurer of its obligation to satisfy in full any
valid claim of the Company.
(15) COMPLIANCE WITH DOCUMENTS AND LAWS. The Company is not in
violation of its articles of incorporation, by-laws, or other
governing documents. Except as set forth in the Registration
Statement, the Company is not in default in the due performance of
any lease or other contract, indenture, mortgage, deed of trust,
note, loan, or other agreement or instrument to which the Company
is a party or it or any of its properties or business is subject,
or any applicable license, franchise, certificate, permit,
authorization, statute, rule or regulation of or from any public,
regulatory, or governmental agency or authority having jurisdiction
over the Company or any of its properties or assets, or any
approval, consent, order, judgment or decree. The Company is in
compliance with all laws, rules and regulations applicable to its
business. The execution and performance of this Agreement by the
Company will not conflict with or result in a breach or violation
of, or default under, any lease or other material contract,
indenture, mortgage, deed of trust, note, loan, or other material
agreement or instrument to which the Company is a party or by it or
any of its properties or business is subject and no consent,
approval, authorization, or order of any court or governmental
authority or agency having jurisdiction over the Company or any of
its properties or assets is required to be obtained by the Company
for the consummation by the Company of the transactions
contemplated herein, except such as have been obtained or may be
required under the Securities Act or the Regulations or under state
securities laws or the applicable rules and regulations promulgated
thereunder.
(16) AUTHORIZATION OF AGREEMENTS. Each of this Agreement, the
Underwriters' Warrants and the Financial Consulting Agreement (as
described herein and in the Prospectus), has been duly authorized,
executed, and delivered by the Company and constitutes a valid and
binding obligation of the Company, enforceable in accordance with
its terms. The execution, delivery and performance of this
Agreement, the Underwriters' Warrants and the Financial Consulting
Agreement by the Company, the consummation by the Company of the
transactions herein and therein contemplated, and the compliance by
the Company with the terms of this Agreement, the Underwriters'
Warrants and the Financial Consulting Agreement have been duly
authorized by all necessary corporate action and do not and will
not, with or without the giving of notice or the lapse of time, or
both, (i) result in any violation of the articles of incorporation
or by-laws of the Company, (ii) result in a breach of or conflict
with any of the terms or provisions of, or constitute a default
under, or result in the modification or termination of, or result
in the creation or imposition of any lien, security interest,
charge or encumbrance upon any of the properties or assets of the
Company pursuant to any indenture, mortgage, note, contract,
commitment or other agreement or instrument to which the Company is
a party or under which the Company or any of its properties or
assets is or may be bound or affected, (iii) violate any existing
applicable law, rule, regulation, judgment, order or decree of any
governmental agency or court, domestic or foreign, having
jurisdiction over the Company, or any of its properties or
business, or
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(iv) violate any Permits of the Company except for any Permits, the
violation of which will not cause a Material Adverse Effect. The
Agreement, the Underwriters' Warrants and the Financial Consulting
Agreement conform to the descriptions thereof in the Prospectus.
(17) TITLE TO PROPERTY. The Company has good and marketable title to,
and valid and enforceable leasehold estates in, all items of
property described in the Registration Statement or the Prospectus
as owned or leased by it, as the case may be, or that are material
to the conduct of their businesses free and clear of all liens,
encumbrances, claims, security interests, and other restrictions,
other than those described in the Registration Statement or
Prospectus. The leases, licenses or other contracts or instruments
under which the Company leases, holds or is entitled to use any
property, real or personal, are valid, subsisting and enforceable,
and the Company is not in material default thereunder and no event
has occurred which, with the passage of time or the giving of
notice, or both, would constitute a default thereunder. The Company
has not received notice of any violation of any applicable law,
ordinance, regulation, order or requirement relating to its owned
or leased properties. The Company has insured its properties
against loss or damage by fire or other casualty and maintains such
other insurance as management of the Company believes is adequate
for the Company's present business operations.
(18) INTELLECTUAL PROPERTY. Except as set forth in the Prospectus, the
Company owns or possesses the requisite licenses, registrations or
other evidences of adequate and full rights to use all copyrights,
patents, trademarks, service marks, trade names, trade dress,
logos, know-how, trade secrets, licenses, Internet domain names and
rights in any way thereof (collectively, the "Intellectual
Property") presently used in or necessary to conduct its business
as described in the Prospectus and the Registration Statement. The
Company has not knowingly infringed the rights of another with
respect to any item of Intellectual Property, and there is no
outstanding claim of or notice from others alleging any such
infringement. The Company is not obligated or under any liability
whatsoever to make any payments by way of royalties, fees or
otherwise to any owner or licensee of, or other claimant to, any
trademark, trade name, service mark, service name, copyright,
patent or patent application except as set forth in the
Registration Statement or the Prospectus. There is no suit,
proceeding, inquiry, arbitration, investigation, claim, notice or
action by any person pertaining to, or proceeding, domestic or
foreign, pending or, to the Company's knowledge, threatened, which
challenges the exclusive rights of the Company with respect to any
Intellectual Property used in the conduct of its business.
(19) LITIGATION. There is no litigation or governmental or other
proceeding or investigation before any court or before or by any
public, regulatory, or governmental agency or authority (or any
judgment, decree, or order of such court, agency, or authority)
pending or, to the best knowledge of the Company, threatened to
which the Company is a party or to which its business or properties
are subject which is not disclosed in the Prospectus or
Registration Statement as required by the Securities Act or the
Regulations. There are no outstanding orders, judgments or decrees
of any court, governmental agency or other tribunal naming the
Company or enjoining the Company from taking, or requiring the
Company to take, any action, or to which it or its properties or
business are bound or subject. There are no claims, pending or
threatened against or involving the Company, or any of its
properties (i) that are required to be disclosed, or (ii) which if
adversely determined, would have a Material Adverse Effect.
(20) RELATED PARTY TRANSACTIONS. Except as set forth in the Prospectus,
no officer, director, shareholder or partner of the Company or any
"affiliate" or "associate" (as these terms are defined in Rule 405
of the Regulations) of any of the foregoing persons or entities has
or has had, either directly or indirectly, (i) an interest in any
person or entity which (A) furnishes or sells services or products
which are furnished or sold or are proposed to be furnished or sold
by the Company, or (B) purchases from or sells or furnishes to the
Company any goods
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or services, or (ii) a beneficial interest in any contract or
agreement to which the Company is a party or by which it may be
bound or affected. Except as set forth in the Prospectus under
"Certain Relationships and Related Transactions," there are no
existing agreements, arrangements, understandings or transactions,
or proposed agreements, arrangements, understandings or
transactions, between or among the Company and any officer,
director or 5% or greater securityholder of the Company, or any
partner, affiliate or associate of any of the foregoing persons or
entities.
(21) PROHIBITED PAYMENTS. Neither the Company nor any of its directors
or officers acting in any capacity on its behalf, has used any
corporate funds for unlawful contributions, gifts, entertainment,
or other unlawful expenses relating to political activity; made any
unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns
from corporate funds; violated any provision of the Foreign Corrupt
Practices Act of 1977, as amended; or made any bribe, rebate,
payoff, influence payment, kickback, or other unlawful payment.
(22) INTERNAL ACCOUNTING CONTROLS. The Company maintains a system of
internal accounting controls which, taken as a whole, is sufficient
to cause it to comply with the Foreign Corrupt Practices Act of
1977, as amended, and to meet the broad objectives of preventing
and detecting errors or irregularities in amounts that would be
material to the Company's financial statements. Except as
specifically disclosed in the Prospectus, neither the Company, nor
any employee or agent of the Company, has made any payment or
transfer of any funds or assets of the Company, conferred any
personal benefit by the use of the assets of the Company, or
received any funds, assets, or personal benefit in each case in
violation of any law, rule, or regulation, which is required to be
disclosed in the Prospectus or necessary to make the statements
therein not misleading.
(23) TAX RETURNS. The Company (i) has paid all federal, state, local
and foreign taxes which are due and payable and has furnished all
information returns it is required to furnish pursuant to the
Income Tax Act of Canada and/or other applicable law, (ii) has
established adequate reserves for such taxes which are not yet due
and payable and (iii) does not have any tax deficiency or claims
outstanding, proposed or assessed against it. The Company has not
executed or filed with any taxing authority, foreign or domestic,
any agreement extending the period for assessment or collection of
any income taxes, nor is it a party to any pending action or
proceeding by any foreign or domestic governmental agency for
assessment or collection of taxes; and no claims for assessment or
collection of taxes have been asserted against either of it. The
Company has not been, nor is currently being, audited by any taxing
authority, nor has the Company entered into any agreement to toll
any applicable statute of limitations with respect to the payment
of any taxes.
(24) EMPLOYEE PLANS. Except as set forth in the Registration Statement
or the Prospectus, the Company does not have any employee benefit
plans (including, without limitation, pension, profit sharing, and
welfare benefit plans) or deferred compensation arrangements. In
the event the Company establishes an employee stock option plan in
the future, such plan shall reserve not more than 400,000 shares of
Common Stock for issuance upon exercise of options granted
thereunder, and options granted thereunder shall have a vesting
period of not less than two years. Additionally, the Company has
agreed to limit the amount of options granted pursuant to the plan
to Aaron Herzog and Jacob Herzog to an aggregate of 100,000
options.
(25) LABOR DISPUTES. The Company has generally enjoyed satisfactory
employer-employee relationships with its employees and is in
compliance with all federal, state, local, and foreign laws and
regulations respecting employment and employment practices, terms
and conditions of employment and wages and hours. There are no
pending investigations involving the Company by the Department of
Labor or comparable agency, or any other governmental agency
responsible for the enforcement of such federal, state, local, or
foreign laws and regulations. To the knowledge of the Company,
there is no unfair labor practice charge or
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complaint against the Company pending before the National Labor
Relations Board or comparable agency or any lockout, strike,
picketing, boycott, dispute, slowdown or stoppage pending or
threatened against or involving the Company, or any predecessor
entity, and none has ever occurred. No representation question
exists respecting the employees of the Company, no collective
bargaining agreement or modification thereof is currently being
negotiated by the Company nor is the Company a party to any such
agreement. No grievance or arbitration proceeding is pending under
any expired or existing collective bargaining agreements of the
Company. No labor dispute exists or, to the knowledge of the
Company, is imminent with the employees of the Company.
(26) REGISTRATION RIGHTS. No person, firm, or entity of any nature
whatsoever has any right to require the Company to register or
attempt to register under the Securities Act or any other
securities law any shares of capital stock, including Common Stock
or securities convertible into or exchangeable or exercisable for
any shares of capital stock including Common Stock, by reason of
the filing of the Registration Statement with the Commission or
otherwise.
(27) STABILIZATION. Neither the Company, nor any person that controls,
is controlled by or is under common control with, the Company has
taken or will take, directly or indirectly, any action designed to,
or that might reasonably be expected to, cause or result in
stabilization or manipulation under the Exchange Act of the price
of any security in order to facilitate the sale or resale of any of
the Securities.
(28) INVESTMENT COMPANY. The Company is not, and upon the issuance and
sale of the Securities as herein contemplated and the application
of the net proceeds therefrom as described in the Prospectus under
the caption "Use of Proceeds" will not be, an "investment company"
or an entity "controlled" by an "investment company" as such terms
are defined in the Investment Company Act of 1940, as amended (the
"1940 Act").
(29) FINDER OR BROKER. The Company has not retained or dealt with any
broker or finder with respect to the transactions contemplated
hereby, and the Company knows of no outstanding claims for services
in the nature of a finder's fee or origination fee with respect to
the sale of the Securities hereunder. The Company hereby agrees to
indemnify and hold harmless the Underwriters with respect to any
claim for a finder's fee by any party claiming to be owed such fee
based on contacts, conversations, or arrangements with the Company.
(30) CONTRACTS. Each contract or other instrument to which the Company
is a party or by its properties or business are or may be bound or
affected and to which reference is made in the Registration
Statement or Prospectus has been duly and validly executed by the
Company, is in full force and effect in all material respects and,
based on the fact that each other party has full power, corporate
or otherwise, to execute, deliver and perform such contracts, is
enforceable against the parties thereto in accordance with its
terms, except to the extent that enforcement thereof may be limited
by (i) bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and similar laws and court decisions now or
hereafter in effect relating to or affecting creditors' rights and
remedies generally and (ii) general principles of equity
(regardless of whether such enforcement is considered in a
proceeding at law or in equity). None of such contracts or
instruments has been assigned by the Company, nor is the Company in
default thereunder and, no event has occurred which, with the lapse
of time or the giving of notice, or both, would constitute a
default thereunder which individually or in the aggregate could
reasonably be expected to have a Material Adverse Effect.
Additionally, none of the material provisions of such contracts or
instruments violates any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court
having jurisdiction over the Company or any of its assets or
business.
(31) NASD INFORMATION. All information provided by the Company to the
Representative or its counsel in connection with any filings made
with the National Association of Securities Dealers, Inc. ("NASD")
with respect to the Public Offering is true and correct.
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(32) COMPLIANCE WITH ENVIRONMENTAL LAWS AND REGULATIONS. The Company is
in compliance in all material respects with all applicable federal,
state and local environmental laws and regulations, including,
without limitation, those applicable to emissions to the
environment, waste management and waste disposal (collectively, the
"Environmental Laws"), except for any such noncompliance as may be
described in the Registration Statement or Prospectus and, to the
Company's knowledge, there are no circumstances that would prevent,
interfere with, or materially increase the cost of such compliance
in the future. Except as set forth in the Registration Statement or
Prospectus, there is no claim under any Environmental Laws
("Environmental Claim"), pending or threatened against or affecting
the Company and, there are no past or present actions, activities,
circumstances, events or incidents, including, without limitation,
releases of any material into the environment that could form the
basis of any Environmental Claim against or affecting the Company.
(33) BUSINESS WITH CUBA. The Company is not doing business with the
government of Cuba or with any person or affiliate located in Cuba.
(34) INDEBTEDNESS. There are no outstanding loans, advances (except
normal advances for business expenses in the ordinary course of
business) or guarantees of indebtedness by the Company to or for
the benefit of any of the officers or directors of the Company or
any of the members of the families of any of them, except as
disclosed in the Registration Statement and the Prospectus.
(35) ACQUISITIONS OR DISPOSITIONS. Except as set forth in the
Registration Statement and Prospectus, the Company has not
consummated the acquisition or disposition of any business or
property which is "significant" to them within the meaning of
Regulation S-X under the Securities Act, and no such acquisition or
disposition is probable.
(36) LOCK-UP. The holders of all of the shares of Common Stock of the
Company, including each director, officer and shareholder of the
Company, have executed an agreement (collectively, the "Lock-Up
Agreements") pursuant to which he, she or it has agreed, for a
period extending eighteen (18) months following the effective date
of the Registration Statement (the "Lock-Up Period"), not to
directly or indirectly, offer, offer to sell, sell, grant an option
for the purchase or sale of, transfer, pledge, assign, hypothecate
or otherwise encumber (whether pursuant to Rule 144 of the Rules
and Regulations or otherwise) any securities issued or issuable by
the Company, whether or not owned by or registered in the name of
such persons, or dispose of any interest therein, without the prior
written consent of the Underwriter. Such persons have all further
agreed in the Lock-Up Agreements that, for a period extending
twenty-four (24) months following the effective date of the
Registration Statement, all sales of such securities of the Company
shall be made through the Representative in accordance with its
customary brokerage policies. The Company will cause its transfer
agent to mark an appropriate legend on the face of stock
certificates representing all of such securities and to place "stop
transfer" orders on the Company's stock ledgers.
(37) CHANGES. At any time during the period of five years from the
Effective Date, if there is any change in the information referred
to in this Subsection 2(a), the Company will immediately notify
Representative of such change.
(38) REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDER. The
Company is not aware, and has no reason to believe, that any
representation or warranty of the Selling Stockholder set forth in
Subsection 2(b) below is untrue or inaccurate in any material
respect.
(39) ADDITIONAL REPRESENTATIONS. To the Company's knowledge, no
director, officer, or key employee of the Company has been arrested
or convicted of any felony, experienced a personal bankruptcy, or
been an officer, director, or key employee of any company that
during their tenure with such company experienced any bankruptcy,
or had any trustee, receiver, or conservator appointed with respect
to its business or assets.
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(b) REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDER. The
Selling Stockholder represents and warrants to and agrees with each
Underwriter that:
(1) ORGANIZATION, QUALIFICATION, ETC. The Selling Stockholder is an
Ontario corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its organization,
with full power and authority to conduct its business.
(2) AUTHORIZATION OF AGREEMENTS. This Agreement has been duly
authorized, executed, and delivered by the Selling Stockholder and
constitutes a valid and binding obligation of the Selling
Stockholder, enforceable in accordance with its terms. The
execution, delivery and performance of this Agreement by the
Selling Stockholder, the consummation by the Selling Stockholder of
the transactions herein contemplated, and the compliance by the
Selling Stockholder with the terms of this Agreement have been duly
authorized by all necessary action and do not and will not, with or
without the giving of notice or the lapse of time, or both, (i)
result in a breach of or conflict with any of the terms or
provisions of, or constitute a default under, or result in the
modification or termination of, or result in the creation or
imposition of any lien, security interest, change or encumbrance
upon any of the shares of Common Stock owned by the Selling
Stockholder pursuant to any indenture, mortgage, note, contract,
commitment or other agreement or instrument to which the Selling
Stockholder is a party or under which the Selling Stockholder or
its properties or assets are or may be bound or affected, or (ii)
violate any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court, domestic or
foreign, having jurisdiction over the Selling Stockholder, or its
properties or business.
(3) TRANSACTIONS. No transaction has occurred between the Selling
Stockholder and the Company that is required to be described in and
is not described in the Registration Statement and the Prospectus.
(4) OWNERSHIP. The Selling Stockholder is the lawful owner of the
Securities to be sold by such Selling Stockholder pursuant to this
Agreement and has, and on any Option Closing Date will have, good
and clear title to such Securities, free of all restrictions on
transfer, liens, encumbrances, security interests and claims
whatsoever and has legal right and full power to sell, transfer and
deliver the Securities and will transfer such title to the
Underwriters.
(5) TITLE TO SECURITIES. Upon delivery of and payment for such
Securities pursuant to this Agreement, good and clear title to such
Securities will pass to the Underwriters, free of all restrictions
on transfer, liens, encumbrances, security interests and claims
whatsoever.
(6) DELIVERY OF CERTIFICATES. Certificates in negotiable form for the
Selling Stockholder's shares of Common Stock to be transferred
pursuant to Subsection 1(b) of this Agreement have been delivered
to the transfer agent for delivery pursuant to the terms of this
Agreement; the shares of Common Stock represented by the
certificates so held in custody for such Selling Stockholder are
subject to the interests hereunder of the Underwriters; the
arrangements for custody and delivery of such certificates made by
such Selling Stockholder hereunder are not subject to termination
by any acts of such Selling Stockholder, or by operation of law,
and if any such event shall occur before the delivery of such
shares of Common Stock hereunder, certificates for the shares of
Common Stock will be delivered in accordance with the terms and
conditions of this Agreement as if such event had not occurred,
regardless of whether or not the custodian shall have received
notice of such event.
(7) STABILIZATION. The Selling Stockholder has not taken, and will not
take, directly or indirectly, any action designed to, or which
might reasonably be expected to, cause or result in stabilization
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the shares of Common Stock
pursuant to the distribution contemplated by this Agreement, and
other than as permitted by the Securities Act, the Selling
Stockholder has not distributed and will not distribute any
prospectus or other offering material in connection with the
offering and sale of the Securities.
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(8) ABSENCE OF CONFLICTS WITH AGREEMENTS. The execution, delivery and
performance of this Agreement by the Selling Stockholder,
compliance by the Selling Stockholder with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not require any consent, approval, authorization or other
order of any court, regulatory body, administrative agency or other
governmental body (except as such may be required under the
Securities Act or state securities laws) and will not conflict with
or constitute a breach of any of the terms or provisions of any
agreement, indenture or other instrument to which the Selling
Stockholder is a party or by which the Selling Stockholder or
property of the Selling Stockholder is bound, or violate or
conflict with any law, administrative regulation or ruling or court
decree applicable to either the Selling Stockholder or property of
the Selling Stockholder.
(9) ACCURACY OF INFORMATION. All information furnished to the Company
by or on behalf of the Selling Stockholder with respect to the
Selling Stockholder for use in connection with the preparation of
the Registration Statement is true, correct and complete in all
material respects as of the stated date of such information and the
date hereof; the Selling Stockholder has read the information
appearing in the Prospectus and, as it pertains to the Selling
Stockholder, such information does not contain an untrue statement
of a material fact or omit to state a material fact necessary to
make the statements therein, in the light of circumstances under
which they were made, not misleading.
(10) FINDER OR BROKER. The Selling Stockholder has not retained or
dealt with any broker or finder with respect to the transaction
contemplated hereby, and the Selling Stockholder does not know of
any outstanding claims for services in the nature of a finder's fee
or origination fee with respect to the sale of Securities by such
Selling Stockholder hereunder. The Selling Stockholder hereby
agrees to indemnify and hold harmless the Underwriters with respect
to any claims for a finder's fee by any party claiming to be owed
such fee based on contacts, conversations, or arrangements with the
Company or the Selling Stockholder.
(11) REASON FOR SALE. The sale of Securities by the Selling Stockholder
pursuant to this Agreement is not prompted by any information
concerning the Company which is not set forth in the Registration
Statement.
3. COVENANTS OF THE COMPANY. The Company covenants to and agrees with
the Underwriters that:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. If the Effective Date is
not prior to the execution and delivery of this Agreement, the
Company will use its best efforts to cause the Registration
Statement and any subsequent amendments thereto to become effective
as promptly as possible. The Company will notify the Underwriters
promptly (i) when the Registration Statement or any subsequent
amendment thereto has become effective or any supplement to the
Prospectus has been filed and (ii) of the receipt of any requests,
and the nature and substance thereof, by the Commission for any
amendment or supplement to the Registration Statement or Prospectus
or for any other additional information. The Company will prepare
and file with the Commission, promptly upon the Representative's
reasonable request, any amendment or supplement to the Registration
Statement or Prospectus that may be necessary or advisable in
connection with the sale or distribution of the Securities, any of
the Underwriters' Warrants or the Warrant Shares to comply with the
Regulations. The Company will file no amendment or supplement to
the Registration Statement or Prospectus (other than any document
required to be filed under the Exchange Act that upon filing is
deemed to be incorporated by reference therein) to which the
Representative shall reasonably object by notice to the Company
after having been furnished a copy within a reasonable time, but no
later than five business days, prior to the proposed filing
thereof, except in instances when the Company's counsel advises
such amendment or supplement is necessary pursuant to the
Regulations or the rules and regulations of the Exchange Act. The
Company will furnish to the Representative at or prior to the
filing thereof with the
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Commission a copy of any document that upon filing is deemed to be
incorporated by reference in whole or in part in the Registration
Statement or the Prospectus.
(b) NOTICE OF STOP ORDER. The Company will advise the Underwriters
promptly, and confirm in writing, when and if it receives notice or
obtains knowledge of (i) the issuance by the Commission or any
state securities commission in a state designated by the
Representative pursuant to Subsection 3(e) hereof of any stop order
or other order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or the effectiveness of the
Registration Statement or (ii) the suspension of the qualification
of any of the Securities, the Underwriters' Warrants or the Warrant
Shares for offering or sale in any jurisdiction in which they were
previously qualified, or (iii) the initiation or threat of any
proceeding for that purpose. The Company will promptly use its
reasonable best efforts to prevent the issuance, and to obtain the
withdrawal if such issuance is not prevented, of any such stop
order or other suspension.
(c) COMPLIANCE WITH THE SECURITIES ACT AND THE EXCHANGE ACT. Within
the time during which a Prospectus relating to the Securities, the
Underwriters' Warrants, or the Warrant Shares is required to be
delivered under the Securities Act, the Company will use its best
efforts to comply with all requirements imposed upon it by the
Securities Act and the Exchange Act, as now in effect and as
hereafter amended, and by the Regulations, as from time to time in
force, to permit the continuance of sales of or dealings in the
distribution of the Securities or the Underwriters' Warrants or the
Warrant Shares, as contemplated by the provisions therein, herein,
and in the Registration Statement or Prospectus. If during such
period any event as to which the Company has knowledge occurs as a
result of which the Registration Statement or the Prospectus as
then amended or supplemented includes an untrue statement of a
material fact or omits to state a material fact necessary to make
the statements therein, in the light of the circumstances then
existing, not misleading, or if during such period it is necessary
to amend the Registration Statement or supplement the Prospectus to
comply with the Securities Act, the Company will notify the
Representative promptly, will amend the Registration Statement or
supplement the Prospectus so as to correct such statement or
omission or otherwise to effect such compliance, and will furnish
without charge to the Underwriters and to any dealer in securities
as many copies of such amended or supplemented Prospectus as the
Underwriters may from time to time reasonably request. Furthermore,
the Company will prepare and file with the Commission, promptly
upon the request of the Representative, any amendments or
supplements to the Registration Statement or the Prospectus, which
in the opinion of the Representative may be reasonably necessary to
enable the Underwriters to continue the distribution of the
Securities, and will use its best efforts to cause the same to
become effective as promptly as possible.
(d) COPIES OF SECURITIES ACT DOCUMENTS. The Company will deliver to
the Representative and the Selling Stockholder, from time to time
without charge, such number of copies of the Registration Statement
(two of which delivered to the Representative shall be manually
signed and will include all exhibits), each Preliminary Prospectus,
the Prospectus, and all amendments and supplements thereto, in each
case as soon as available and in such quantities and to such
persons as reasonably requested by the Underwriters. The Company
consents to the use of any Preliminary Prospectus as originally
filed, any amended Preliminary Prospectus, the Prospectus and any
amendments or supplements thereto by the Underwriters and by any
dealer for the purpose contemplated by the Securities Act and the
Regulations.
(e) STATE SECURITIES LAWS QUALIFICATIONS. The Company will use its
best efforts, in cooperation with the Representative and the
Representative's counsel, to register or qualify the Securities,
the Underwriters' Warrants and the Warrant Shares for offer and
sale under the securities laws of such jurisdictions as the
Representative may reasonably designate, and will continue
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such qualifications in effect for so long as may be necessary to
complete the distribution and sale of such securities.
(f) SECTION 11(A) EARNINGS STATEMENT. As soon as practicable, but in
any event not later than 45 days after the end of the 12-month
period beginning on the day after the end of the fiscal quarter of
the Company during which the effective date of the Registration
Statement occurs (90 days in the event that the end of such fiscal
quarter is the end of the Company's fiscal year), the Company will
make generally available to its security holders (within the
meaning of Section 11(a) of the Securities Act) and deliver to the
Representative as soon as practicable an earnings statement that
shall satisfy the requirements of Section 11(a) and Rule 158 under
the Securities Act, covering a period of at least 12 consecutive
months after the Effective Date.
(g) INFORMATION PROVIDED TO THE REPRESENTATIVE. After the Closing Date
and for a period of four years thereafter, the Company will furnish
or cause to be furnished to the Representative and the
Representative's counsel, with reasonable promptness, copies of (i)
quarterly balance sheets, statements of operations of the Company
(which need not be audited) and all other reports prepared and
issued to the public; (ii) annual reports, including a balance
sheet as at the end of the preceding fiscal year, together with
statements of operations, shareholders' equity and cash flows,
accompanied by a report thereon of the Company's independent
certified public accountant; (iii) all reports, if any, to its
shareholders, (iv) all reports filed by the Company with the
Commission, any securities exchange and/or the NASD; (v) every
press release and every material news item or article of interest
to the financial community in respect of the Company, or its
respective affairs which was released or prepared by or on behalf
of the Company; and (vi) such other material documents and
information with respect to the Company and its affairs as the
Representative may from time to time reasonably request and the
Company can produce at reasonable cost. The Company shall cause the
Board of Directors to meet, at least quarterly, upon proper notice,
and shall also cause the agenda and minutes of the last meeting to
be mailed to each Director prior to each meeting and a copy of such
report to be sent to the Representative. For a period of three
years from the Closing Date, the Company shall cause its transfer
agent to provide the Representative with copies of the Company's
monthly transfer sheets and Depository Trust Company transfer
sheets. For a period of three years from the Closing Date, upon
request, the Company shall also provide the Representative with
current lists of its shareholders and warrant holders, if any. The
Representative will maintain the confidentiality of any documents
or information provided to it pursuant to this Subsection 3(h) and
will comply fully with federal and state securities laws regarding
the use of such documents or information.
(h) LISTING IN SECURITIES MANUAL; AFTER-MARKET TRADING MEMORANDUM;
NON-ISSUER TRANSACTION. In the event the Common Stock is not listed
for quotation on Nasdaq National Market or the American Stock
Exchange, the Company shall have become listed at or prior to the
Effective Date, and shall use its best efforts to maintain such
listing, for at least five years after the Effective Date in
Standard and Poor's Corporation Records Service and/or Moody's OTC
Guide. For a period of five years from the Effective Date, at the
Company's sole expense, the Company shall cause its counsel to
provide to the Representative a list of those states in which the
Company's securities may be traded in non-issuer transactions under
the securities laws of the 50 states.
(i) LISTING ON NASDAQ NATIONAL MARKET OR EXCHANGES. Prior to the
Effective Date, the Company, at its cost, shall use its best
efforts to have caused the Securities, and the Warrant Shares to be
listed for trading on Nasdaq National Market or the American Stock
Exchange and, if possible, on the Toronto Stock Exchange under
symbols which are acceptable to the Representative, and the Company
shall use its best efforts to have the Securities and the Warrant
Shares remain listed for at least five years from the Effective
Date, and to ensure
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that the Company otherwise complies with the prevailing
requirements of The Nasdaq Stock Market, Inc. or the American Stock
Exchange, as the case may be, and the requirements of the Toronto
Stock Exchange if the Common Stock is listed with such Exchange.
(j) SECTION 12(G) REGISTRATION. Upon the Effective Date, the Common
Stock will be registered with the Commission under the provisions
of Section 12(g) of the Exchange Act. The Company shall comply with
the Securities Act, the Regulations, the Exchange Act and the rules
and regulations promulgated thereunder, the applicable rules and
regulations of the NASD, and applicable state securities laws so as
to permit the continuance of sales of and dealings in the
Securities and the exercise of the Underwriters' Warrants and the
issuance and sale of the Warrant Shares upon such exercise in
compliance with applicable provisions of such laws, rules, and
regulations, including the filing with the Commission, NASD
Regulation, Inc. and state securities commissions in all states
where the Securities, including the Warrant Shares, have been
issued or sold, all reports required to be so filed, and the
Company will deliver to the holders of the Securities and/or
Warrant Shares all reports required to be provided to such holders
pursuant to such laws, rules, or regulations. The Company shall
timely file with the Commission and deliver to the Representative,
from time to time as required to make the same reasonably current,
such statements and reports as are required to be filed by a
company registered under Section 12(g) of the Exchange Act, as if
the Company were a company incorporated in the United States.
(k) USE OF PROCEEDS. The Company shall apply the net proceeds received
from the sale of the Securities and the exercise of the
Underwriters' Warrants in substantially the manner set forth under
the caption "Use of Proceeds" in the Registration Statement and
Prospectus, which shall state that the primary application of the
proceeds to be realized by the Company will be for expansion of
existing operations and for working capital.
(l) BOARD MEETINGS AND MEMBERSHIP. For a period of five years
commencing on the Effective Date, the Representative shall have the
right to designate one nominee for election to the Company's Board
of Directors, which member shall be reasonably acceptable to the
Company. The Company shall, prior to the Effective Date, obtain
from the officers, directors and holders of 5% or more of the
outstanding Common Stock of the Company, agreements in writing to
vote the shares of Common Stock respectively owned by them, whether
directly or indirectly, during such five-year period in favor of
the election of such nominee. Following the election of such
nominee as director, such person shall receive the same
compensation paid to other non-officer directors of the Company for
attendance at meetings of the Board of Directors of the Company and
shall be entitled to receive reimbursement for all reasonable costs
incurred in attending such meetings to the extent permitted under
applicable law, and on the same basis as all other directors of the
Company. The Company agrees to indemnify and hold such director
harmless, to the maximum extent permitted by law, against any and
all claims, actions, awards and judgments arising out of his or her
service as director and, in the event the Company maintains a
liability insurance policy affording coverage for the acts of its
officers and directors, to include such director as insured under
such policy. The rights and benefits of such indemnification and
the benefits of such insurance shall, to the extent possible,
extend to the Representative insofar as it may be or may be alleged
to be responsible for such director, provided that the extension of
such rights and benefits to the Representative may be done without
additional cost to the Company.
In the event that the Representative does not elect to designate
one member to the Company's Board of Directors, the Representative
shall have the right during such five-year period to have one
representative attend all meetings of the Board of Directors of the
Company, which meetings shall be held at least quarterly, including
any meetings of any committees of the Board of Directors. All
information received by such representative at such meetings shall
be kept confidential, shall not be disclosed by the representative
to any third party, and shall be dealt with in full compliance with
federal and state securities laws.
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Additionally, the Company shall elect or cause to be elected, a
minimum of two (2) "outside" persons (i.e., excluding affiliates of
the Company and family members of the Company's existing directors,
officers and shareholders) to the Company's Board of Directors
within 90 days after the Effective Date, and shall designate an
audit committee consisting of a majority of such "outside"
directors, which will generally supervise the financial affairs of
the Company, including, but not limited to, the application of the
proceeds of the Public Offering. The Company shall maintain (or
establish if necessary) any other such committees of the Board of
Directors as are necessary to comply with the corporate governance
requirements imposed by the exchange(s) or other organizations
wherein the Common Stock is listed.
(m) FUTURE SALES. The Company will not, during the period of the Public
Offering and for a period of 18 months from the Effective Date,
without the Representative's prior written consent, offer, sell,
contract to sell, or otherwise dispose of, any securities of the
Company, except for the issuance of shares of Common Stock to be
issued pursuant to the exercise of options or options currently
reserved for future grant and disclosed in the Registration
Statement and Prospectus, provided that the exercise price of any
options issued after the date hereof is no less than the greater of
the fair market value on the date of grant or issuance, as the case
may be, and the initial public offering price per share of common
stock.
(n) UNDERTAKINGS. The Company will comply with the provisions of all
undertakings contained in the Registration Statement or made in
connection with any application to register or qualify any of the
Securities, including the Warrant Securities, under state
securities laws.
(o) CERTAIN DELIVERIES TO THE REPRESENTATIVE. The Company shall obtain
from its officers, counsel, and accountants those certificates,
opinions, and letters referred to in Section 7. The Company shall,
upon request of the Representative, furnish to the Representative
as early as practicable prior to each of the date hereof, the
Closing Date and any Option Closing Date, but not later than two
full business days prior thereto, a copy of the latest available
unaudited interim financial statements of the Company (which in no
event shall be as of a date more than 30 days prior to the date of
the Registration Statement) which have been read by the Company's
independent public accountants, as stated in the accountants'
letter to be furnished pursuant to Subsection 7(k) hereof.
(p) REDEMPTION AND DIVIDENDS. For a period of three years from the
Effective Date, the Company shall not redeem any of its securities
and shall not pay any dividends or make any other cash distribution
in respect of its securities in excess of the amount of the
Company's current and retained earnings after the Closing Date,
without obtaining the Representative's prior written consent. The
Representative shall either approve or disapprove such contemplated
redemption of securities or dividend payment or distribution within
five business days from the date the Representative receives
written notice of the Company's proposal with respect thereto; a
failure of the Representative to respond within such period of five
business days shall be deemed consent to the transaction.
(q) RESTRICTIONS ON SALES, OPTIONS AND VOTING BY AFFILIATES. Except as
provided in the Registration Statement or upon prior written
consent of the Representative, all directors, officers, and holders
of the Company's capital stock issued and outstanding as of the
Effective Date, as well as options, warrants or rights thereto,
shall agree not to sell any shares of any class of capital stock
owned by them, privately or publicly (either pursuant to Rule 144
of the Regulations or otherwise) for a period of not less than 18
months following the Effective Date (the "Lock-up Period"), except
in a private transaction where the transferee agrees to the
restrictions described above. Such persons shall further agree
that, for a period commencing on the date hereof and ending 24
months following the Effective Date, all sales of securities issued
by the Company shall be made through the Representative in
accordance with its customary brokerage policies. An appropriate
restrictive legend shall be placed on the face of all stock
certificates representing such share of capital stock prior to the
Effective
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Date. The Company will cause its transfer agent to note such
restriction on the transfer books and records of the Company and
will obtain "lock-up agreements" from such directors, officers, and
shareholders prior to the Effective Date. This Subsection 3(q)
shall not apply to the Selling Stockholder.
(r) OUTSTANDING WARRANTS, OPTIONS AND OTHER RIGHTS. There shall not be
outstanding on the Closing Date any warrants, options, or other
rights to purchase any shares of Common Stock, except as otherwise
set forth in the Registration Statement or Prospectus.
(s) ACCOUNTING FIRM. The Company shall retain a nationally recognized,
reputable independent public accounting firm reasonably acceptable
to the Representative for a period of five years from the Effective
Date. The Representative acknowledges that the accounting firm of
Schwartz Levitsky Feldman is acceptable.
(t) BUSINESS WITH CUBA. The Company will inform the Florida Department
of Banking and Finance (the "Department") if at any time it
commences engaging in business with the government of Cuba or with
any person or affiliate located in Cuba after the Effective Date.
Such information will be provided to the Department within 90 days
after the commencement of business in Cuba or within 90 days after
the change occurs with respect to previously reported information.
(u) CLOSING BINDERS. The Company shall, at its sole cost and expense,
supply and deliver to the Representative and the Representative's
counsel, within a reasonable period not to exceed 180 days after
the Closing Date, three sets of hard-bound transaction binders,
each of which shall include the Registration Statement, as amended
or supplemented, all exhibits to the Registration Statement, each
Preliminary Prospectus, the Prospectus, the Preliminary Blue Sky
Memorandum and any supplement thereto, correspondence filed with or
received from the Commission or the NASD and all underwriting and
other closing documents.
(v) ANNUAL REPORTS. Until the third anniversary of the Effective Date,
the Company shall distribute an annual report to all shareholders
setting forth clearly the financial position of the Company.
(w) REPAYMENT OF INDEBTEDNESS. Prior to the Closing Date, and except
as may be set forth in the Registration Statement, the Company
shall not repay (or agree to repay) any indebtedness to any of its
shareholders (or incur any indebtedness to any of its shareholders)
unless the terms thereof are approved in advance by the
Representative. The loan made by certain insiders of the Company to
the Company in the approximate sum of $760,000 shall be repaid in
quarterly installments over an 18-month period following the
Closing Date, provided that the Company is profitable for the
particular quarter in which a quarterly installment is paid, and
the Company will have sufficient cash flow after any such payment
is made to operate its business in the ordinary course.
(x) TRANSFER AGENT. The Company will appoint a transfer agent for the
Common Stock reasonably acceptable to the Representative.
(y) INSURANCE. The Company shall have, within 30 days from the Closing
Date, obtained directors and officers insurance and "key man" life
insurance in the amount of U.S. $2,000,000 on the life or lives of
its key officers, directors and employees as deemed necessary by
the mutual agreement of the Company and the Representative and on
terms acceptable to both the Company and the Representative. The
Company shall pay the premiums for such insurance and maintain such
insurance in force for a period of not less than five years from
the Effective Date; the Company shall be the named beneficiary on
all such insurance policies.
(z) EMPLOYMENT AGREEMENTS. The Company shall have entered into
employment agreements with Aaron Herzog, Jacob Herzog and other key
employees on terms approved by the Representative. The annual
salary provided in such employment agreements with Aaron
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Herzog and Jacob Herzog shall be $175,000 with $25,000 annual
bonuses payable if the Company achieves specified projected
revenues and post-tax earnings.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE REPRESENTATIVE. The
Representative represents and warrants to, and agrees with, the Company
and the Selling Stockholder that:
(a) REGISTRATION AS BROKER-DEALER AND MEMBER OF NASD. The
Representative is registered as a broker-dealer with the Commission
and in all states in which it shall offer the Securities, and is a
member in good standing of the NASD. Additionally, any firm with
which the Representative associates to act as an Underwriter shall
also be registered as a broker-dealer with the Commission and a
member in good standing of the NASD or shall be a foreign
broker-dealer and a member of the national stock exchange of its
country of residency.
(b) NO PENDING PROCEEDINGS. There is not now pending or threatened
against the Representative any action or proceeding of which it has
been advised, either in any court of competent jurisdiction or
before the Commission, or before any state securities commission or
the NASD, concerning its activities as a broker or dealer, that
could have a material adverse effect upon its ability to perform
its obligations under this Agreement.
(c) NO UNTRUE STATEMENTS. No information furnished to the Company in
writing by or on behalf of the Representative for the express
purpose of use in or for preparation of the Registration Statement
or the Prospectus contains any untrue statement of a material fact
or omits to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. For all
purposes under this Agreement, the only information which shall be
deemed to have been provided by or on behalf of the Representative
for the express purpose of use in or for preparation of the
Registration Statement or the Prospectus shall be the information
contained in the "Underwriting" section of the Prospectus.
(d) FINDER OR BROKER. Except as contemplated by this Agreement, the
Representative (i) has not retained or dealt with any broker or
finder or financial consultant with respect to the transactions
contemplated hereby, and (ii) does not know of any outstanding
claims for services in the nature of a finder's fee or origination
fee with respect to transactions contemplated hereby. The
Representative agrees to indemnify and hold harmless the Company
with respect to any claims for a finder's fee by any party claiming
to be owed such fee based on contacts, conversations, or
arrangements with the Representative or any Underwriter.
5. OFFERING EXPENSES AND RELATED MATTERS.
(a) GENERAL. The Company agrees to pay or reimburse the
Representative, if paid by the Representative, whether or not the
transactions contemplated hereby are consummated or this Agreement
is terminated, all costs and expenses incident to the issuance,
sale and delivery of the Securities, the Underwriters' Warrants and
the Warrant Shares and the performance of the obligations of the
Company hereunder, including without limiting the generality of the
foregoing, (i) the preparation, printing, filing, and copying of
the Registration Statement, Preliminary Prospectus, Prospectus,
this Agreement, Blue Sky memoranda, the Agreement Among
Underwriters, if any, the Selected Dealers Agreement, and other
underwriting documents, if any, and any drafts, amendments or
supplements thereto, including the cost of all copies thereof
supplied to the Underwriter in such quantities as reasonably
requested by the Representative, the costs of mailing Preliminary
and Final Prospectuses to offerees and purchasers of the
Securities, excluding costs of mailing by the Representative or any
Underwriter; (ii) the printing, engraving, issuance and delivery of
certificates representing the Securities, including any transfer or
other taxes payable thereon; (iii) the registration or
qualification of the Securities, including the Underwriters'
Warrants and the Warrant Shares, under state securities laws,
including the reasonable fees and disbursements of counsel
(regardless of whether such counsel is also counsel to the
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Representative, subject to the limitation set forth in Subsection
5(d) below) and filing fees in connection therewith; (iv) all fees
and expenses of the Company's counsel, accountants and all transfer
or warrant agent fees; (v) all costs, expenses and filing fees in
connection with review of the terms of the Public Offering by the
NASD; (vi) all costs and expenses and filing fees, including legal
fees of the Company, of any listing of the Securities on Nasdaq
National Market and/or on a stock exchange and/or in Standard and
Poor's Corporate Reports and/or in any other securities manuals;
(vii) all costs and expenses of three bound volumes provided to the
Representative of all closing documents as set forth in Section
3(v) hereof; (viii) the reasonable costs and expenses, including
travel expenses, of all pre-closing and post-closing advertisements
relating to the Public Offering (such as tombstone advertisements)
(ix) all costs of holding informational meetings and "road shows";
and (x) all other costs and expenses incurred or to be incurred by
the Company in connection with the transactions contemplated by
this Agreement. The parties hereto acknowledge that the
Registration Statement and the exhibits thereto have been prepared
by counsel for the Company, and that the various state securities
and Blue Sky law applications and the survey distributed by the
Representative in connection therewith have been prepared by the
Representative's counsel, Broad and Cassel, whose costs and
expenses in connection with such state applications and survey up
to a maximum of $35,000 shall have been paid for by the Company at
the Closing, provided that if the Common Stock is listed on the
Nasdaq National Market or the American Stock Exchange, such costs
and expenses payable by the Company shall not be more than $15,000.
The obligations of the Company under this Subsection 5(a) shall
survive any termination or cancellation of this Agreement.
(b) REPRESENTATIVE'S DISCOUNT. The Representative shall be entitled
to, and the Company agrees to pay to Representative, an
underwriting discount equal to 10% of the Public Offering Price
paid on each sale of Securities in the Public Offering, payable at
the Closing Date and any Option Closing Date.
(c) NON-ACCOUNTABLE EXPENSE ALLOWANCE. In addition to the Company's
payment of the foregoing expenses and Representative's discount,
upon the consummation of the Public Offering herein contemplated,
the Company shall pay to the Representative a non-accountable
expense allowance equal to 3% of the gross proceeds of the Public
Offering, including in the computation of such amount the proceeds
from any sale of Optional Securities, of which $25,000 was paid to
the previous representative and $15,000 was paid to the
Representative. The balance of the non-accountable expense
allowance due shall be paid on the Closing Date and on each Option
Closing Date, as applicable.
(d) EXPENSES IF THE PUBLIC OFFERING IS NOT COMPLETED. The
Representative hereby acknowledges the payment by the Company of
$40,000, which amount shall be applied to the non-accountable
expense allowance. It shall be the Company's obligation, whether or
not the offering is consummated, to bear all expenses in connection
with the proposed offering, including, but not limited to the
following: filing fees; printing costs; experts; expense of
tombstone advertisements; advertising costs and expenses, including
but not limited to costs and expenses in connection with "road
shows"; informational meetings and presentations; registrar and
transfer agent fees; postage and mailing expenses with respect to
the transmission of the prospectuses; Company counsel and
accounting fees, due diligence fees, issue and transfer taxes, if
any; and blue sky counsel fees and expenses. If this Agreement is
terminated by the Representative in accordance with the provisions
of Section 7 or 10 hereof, the Company shall reimburse and
indemnify the Representative for all of its actual out-of-pocket
expenses, including the fees and disbursements of the
Representative's counsel, less any amounts already paid. It is
understood and agreed by the parties hereto that any expenses
incurred by the Representative will be deemed to be reasonable and
unobjectionable upon demonstration by the Representative that such
expenses were incurred directly or indirectly in connection with
the proposed transaction and/or relationship of the parties hereto,
as described herein.
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(e) COMPLIANCE WITH STATE SECURITIES LAWS. The Representative shall
determine in which states or jurisdictions the Securities,
including the Underwriters' Warrants and the Warrant Shares (as
described below), shall be registered or qualified for sale. Copies
of all applications and related documents for the registration or
qualification of securities (except for the Registration Statement
and Prospectus) filed with the various states shall be supplied to
the Company's counsel as soon as possible following their
transmission to the various states, and copies of all comments and
orders received from the various states shall be made available
promptly to the Company's counsel. Immediately prior to the
Effective Date, counsel for the Representative shall advise counsel
for the Company in writing of all states in which the offering has
been registered or qualified for sale or has been cancelled,
withdrawn, or denied, the date of each such event, and the number
of Securities, including the Underwriters' Warrants and the Warrant
Shares, registered or qualified for sale in each such state.
Pursuant to Section 5(a) hereof, the Company shall be responsible
for the cost of state registration or qualification filing fees and
the legal fees of the Representative's counsel in connection with
such filings, which filing fees are payable to the Representative's
counsel in advance of such filings.
6. UNDERWRITERS' WARRANTS; OTHER FINANCIAL ARRANGEMENTS.
(a) UNDERWRITERS' WARRANTS. On the Closing Date, the Company will sell
to the Underwriters the Underwriters' Warrants, for an aggregate of
$100, evidencing the Underwriter's right to purchase in the
aggregate the equivalent of 10% of the Securities sold in the
Public Offering, at an exercise price of $8.25 per share of Common
Stock (165% of the Public Offering Price per share of Common
Stock). The Underwriters' Warrants will be in the form of EXHIBIT A
attached hereto. The Underwriters' Warrants shall be
non-exercisable and non-transferable (other than to officers,
consultants, partners or directors of and members of the
underwriting or selling group) for a period of 12 months following
the Effective Date. The Underwriters' Warrants shall be
exercisable, in whole or in part, commencing 12 months after the
Effective Date and for a period of five years thereafter (the
"Term"). If the Underwriters' Warrants are not exercised during the
Term, they shall, by their terms, automatically expire. The
Underwriters' Warrants shall contain customary anti-dilutive
provisions relating to any recapitalization, stock split, stock
dividend or similar event involving the Company. The Underwriters'
Warrants shall also contain provisions providing for demand and
"piggyback" registration rights with respect to the Underwriters'
Warrants and the Warrant Shares, and shall not be redeemable. The
Underwriters' Warrants shall otherwise be transferable after one
year from the Effective Date pursuant to available exemptions from
registration under the Securities Act.
(b) FINANCIAL CONSULTING AGREEMENT. On the Closing Date, the Company
shall enter into a financial consulting agreement with the
Representative in the form of EXHIBIT B attached hereto, pursuant
to which the Representative will provide financial consulting
services to the Company for a two-year period beginning on the
Closing Date (the "Financial Consulting Agreement"). The Company
shall pay to the Representative a consulting fee equal to 1% of the
gross proceeds generated from the Public Offering, which will be
payable in full on the Closing Date.
7. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE
UNDERWRITERS. Notwithstanding the execution and delivery of this
Agreement or the performance of any part hereof, the Underwriters'
obligations to consummate the transactions contemplated by this
Agreement shall be subject to the satisfaction of each of the conditions
set forth in this Section 7, except to the extent that such satisfaction
is waived in writing by the Representative.
(a) EFFECTIVENESS OF REGISTRATION STATEMENT.
(1) The Registration Statement shall have been declared effective
by the Commission not later than , Eastern
Time, on December 18, 1998, or such later time or date as shall
have been consented to by the Representative in writing.
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(2) On the Closing Date, no stop order suspending the
effectiveness of the Registration Statement or the
qualification or registration of the Securities, the
Underwriters' Warrants and the Warrant Shares, under the
securities laws of any jurisdiction (whether or not a
jurisdiction specified by the Representative) shall have been
issued, and no proceeding for that purpose shall have been
initiated or shall be threatened or contemplated by the
Commission or the authorities of any such jurisdiction to the
best of the Company's or the Underwriter's knowledge.
(3) Any request of the Commission or any such authorities for
additional information to be included in the Registration
Statement or Prospectus or otherwise shall have been complied
with to the reasonable satisfaction of counsel for the
Representative.
(b) REPRESENTATIONS; COMPLIANCE WITH AGREEMENT. The representations
and warranties of the Company in this Agreement shall be true and
correct on and as of the Closing Date, with the same effect as if
made on the Closing Date, and the Company shall have complied with
all the agreements and satisfied all the obligations required to be
performed or satisfied by it at or prior to the Closing Date.
(c) SUFFICIENT AUTHORIZED COMMON STOCK; STOCK SPLIT. The Company shall
have, as of the Effective Date, sufficient authorized (and neither
issued nor outstanding) Common Stock to be offered and sold in the
Public Offering, and to be issued and sold upon exercise of the
Underwriters' Warrants and the Warrant Shares. The Company shall
have effectuated a split of its outstanding securities such that,
as of the Effective Date, the Company shall have, on a fully
diluted basis, 3,700,000 shares of Common Stock outstanding and no
shares of preferred stock outstanding. Neither the offer nor the
sale of the Shares shall be subject to any preemptive right of any
kind.
(d) NO UNTRUE STATEMENTS. The Registration Statement and the
Prospectus shall not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and, since
the Effective Date, there shall not have occurred any event
required to be set forth in an amended or supplemented Prospectus
that has not been so set forth (except any such statement or
omission based upon information furnished in writing by or on
behalf of the Underwriters for inclusion in the Registration
Statement).
(e) NO MATERIAL CHANGE. Subsequent to the respective dates as of which
information is given in the Registration Statement and the
Prospectus, and except as set forth or contemplated in the
Prospectus, (i) there shall have been no Material Adverse Effect,
actual or threatened, for whatever reason, with respect to the
properties, operations, business, financial condition, results of
operations or prospects of the Company, (ii) the Company shall not
have entered into any material transaction not in the ordinary
course of business, (iii) the Company shall not have paid or
declared any dividends or other distributions on its capital stock,
(iv) the conduct of the business and operations of the Company
shall not have been materially interfered with by strike, fire,
flood, hurricane, accident or other calamity (whether or not
insured), or by any court or governmental action, order or decree,
and the properties of the Company shall not have sustained any
material loss or damage (whether or not insured) as a result of any
such occurrence.
(f) NASD. The Representative shall have the obligation to satisfy the
requirements set forth by the rules and regulations of the NASD as
to the amount of compensation allowable or payable by the
Representative and, accordingly, by the Effective Date the
Representative will have received clearance from the NASD as to the
amount of compensation allowable or payable to the Underwriters, as
described in the Registration Statement and this Agreement. The
NASD shall have indicated that it has no objection (i) to the
underwriting arrangements pertaining to the sale of the Securities
by the Underwriters and (ii) the participation by the Underwriters
in the sale of the Securities. No action shall have been taken by
the
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<PAGE> 23
Commission or the NASD the effect of which would make it improper,
at any time prior to the Closing Date, for any member firm of the
NASD to execute transactions (as principal or as agent) in the
Common Stock and no proceedings for the purpose of taking such
action shall have been instituted or shall be pending, or, to the
Underwriters' or the Company's knowledge, shall be contemplated by
the Commission or the NASD. The Company and the Representative each
represent at the date hereof, and shall represent as of the Closing
Date or Option Closing Date, as the case may be, that neither has
any knowledge that any such action is in fact contemplated by the
Commission or the NASD.
(g) OFFICERS' CERTIFICATE. The Company shall have furnished to the
Underwriters a certificate of the President and of the Company's
principal accounting officer, dated as of the Closing Date, to the
effect that, among other things, each signer of such certificate
has examined the Registration Statement, the Prospectus, and this
Agreement, and the conditions set forth in Subsections 7(a) through
7(d) have been satisfied.
(h) OPINION OF COMPANY COUNSEL. At the time this Agreement is executed
and as of the Closing Date and the Option Closing Date, as
applicable, the Company shall have furnished to the Underwriters
the opinion of counsel for the Company, dated the Closing Date, in
form and substance reasonably satisfactory to counsel for the
Representative and substantially in the form of EXHIBIT C attached
hereto.
(i) ADDITIONAL DOCUMENTS. On or prior to each of the Closing Date and
the Option Closing Date, if any, counsel for the Representative
shall have been furnished such documents, certificates and opinions
as they may reasonably require for the purpose of enabling them to
review or pass upon matters referred to in Subsection 7(h), or in
order to evidence the accuracy, completeness or satisfaction of any
of the representations, warranties or conditions of the Company, as
herein contained.
(j) CERTIFICATES, BYLAWS AND PROCEEDINGS. The Company's Certificate
of Incorporation and By-Laws, and all proceedings taken in
connection with the authorization, issuance, or sale of the
Securities, the Underwriters' Warrants and the Warrant Shares, as
herein contemplated, shall be reasonably satisfactory in form and
substance to counsel for the Representative.
(k) ACCOUNTANTS' LETTER. At the time this Agreement is executed and as
of the Closing Date and each Option Closing Date, as applicable,
Schwartz Levitsky Feldman, the current independent public
accountants for the Company, shall have furnished to the
Underwriters a letter addressed to the Underwriters and dated the
date of this Agreement and/or the Closing Date, and each Option
Closing Date, as applicable, to within five business days of such
dates, in form and substance satisfactory to the Representative and
counsel to the Representative, confirming that it is the
independent public accountant with respect to the Company within
the meaning of the Securities Act and the Regulations and published
instructions, and stating to the effect that:
(1) In its opinion, the audited financial statements included in
the Registration Statement and Prospectus covered by its report
included therein, comply as to form in all material respects
with the applicable requirements of the Securities Act and the
Regulations and published instructions.
(2) On the basis of a reading of the minutes of the shareholders'
and directors' meetings of the Company since their respective
inceptions, inquiries of officials of the Company responsible
for financial and accounting matters, and other specified
procedures and inquiries, nothing came to its attention causing
it to believe that:
(A) the unaudited financial information set forth in the
Prospectus does not comply as to form in all material
respects with the applicable requirements of the
Securities Act and the related published instructions and
Regulations and is not fairly presented in accordance
with generally accepted accounting principles
23
<PAGE> 24
applied on a basis consistent with the audited financial
statements set forth in the Prospectus, or
(B) with respect to the period subsequent to March 31, 1998,
there were, at a specified date not more than three
business days prior to the date of such letter, any
changes in the capital stock or long-term debt
obligations of the Company, or any changes or decreases
in shareholders' equity, net assets, or current net
assets of the Company, each as compared with the amounts
shown in the most recent balance sheet of the Company
included in the Registration Statement or disclosed in
such Registration Statement, except as otherwise
disclosed in the letter,
(C) during the period from May 31, 998, to a specified date not
more than three days prior to the effective date of the
Registration Statement, there was no decrease in net
revenues, net earnings or net earnings per share of
Common Stock, in each case as compared with the
corresponding period beginning May 31, 1998, other than
as set forth in or contemplated by the Registration
Statement, or, if there was any such decrease, setting
forth the amount of such decrease.
(3) It has compared specific dollar amounts, numbers of shares of
securities, percentages of revenues and earnings, and
statements about other financial or statistical information
pertaining to the Company set forth in the Prospectus, in each
case to the extent that such amounts, numbers, percentages,
statements, and information may be derived from the general
accounting records, which are subject to the system of internal
accounting controls, including worksheets, of the Company (and
excluding any questions requiring an interpretation by legal
counsel), with the results obtained from the application of
specific readings, inquiries, and other appropriate procedures
(which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set
forth in the letter, and found them to be in agreement.
(4) Such other statements as to such other matters incident to the
transaction contemplated hereby as the Representative may
request.
(l) CHANGE IN CAPITALIZATION. Subsequent to the respective dates as
of which information is given in the Registration Statement and the
Prospectus, there shall not have been any Material Adverse Effect
on or decrease in the capitalization of the Company that makes it
impractical or inadvisable in the reasonable judgment of the
Representative to proceed with the Public Offering or the delivery
of the Securities, as the case may be, as contemplated in the
Prospectus.
(m) NASDAQ NATIONAL MARKET. On or before the Closing Date, the
Securities shall have been approved for listing on the Nasdaq
National Market or the American Stock Exchange.
(n) "MARKET-OUT" PROVISION. The Representative's obligations hereunder
shall be subject to, among other things, there being, in its
opinion: (i) no material adverse change in the conditions or
obligations of the Company or its present or proposed business and
affairs; and (ii) no market conditions which might render the offer
and sale of the Securities herein contemplated inadvisable.
(o) CERTIFICATE OF SELLING STOCKHOLDER. The Selling Stockholder shall
have furnished to the Underwriters a certificate, signed by the
duly Selling Stockholder, dated as of the Closing Date, to the
effect that the signer of such certificate has carefully examined
the Registration Statement, the Prospectus, any supplement to the
Prospectus and this Agreement and that the representations and
warranties of the Selling Stockholder in this Agreement are true
and correct in all material respects on and as of the Closing Date
to the same effect as if made on the Closing Date.
24
<PAGE> 25
(p) LETTER AGREEMENTS. The Company will obtain letter agreements
executed by each of its officers, directors and principal
shareholders with respect to those matters referred to in
Subsection 3(m).
(q) INTERIM FINANCIAL STATEMENTS. At least two full business days
prior to the date hereof, the Closing Date and each Option Closing
Date, if any, the Company shall have delivered to the
Representative unaudited interim financial statements of the
Company (which in no event shall be as of a date more than 30 days
prior to the date hereof, the Closing Date or the relevant Option
Closing Date, as the case may be) which have been read by the
Company's independent public accountants.
(r) OTHER INFORMATION. Prior to the Closing Date, the Company and the
Selling Stockholder shall have furnished to the Representative such
further information, certificates, and documents in connection with
the Company's and the Selling Stockholder's obligations set forth
herein as the Representative may reasonably request.
If any of the conditions specified in this Section 7 shall not have
been fulfilled when and as required by this Agreement or expressly
waived in writing by the Representative, this Agreement and all
obligations of the Representative hereunder may be terminated by
the Representative at, or at any time prior to, the Closing Date.
Notice of such termination shall be given to the Company and the
Selling Stockholder in writing, or by telegraph, facsimile
transmission or telephone and confirmed in writing. In such event,
the Company, the Selling Stockholder and the Representative shall
not be under any obligation to each other except to the extent
provided in Sections 5 and 8 hereof.
8. INDEMNIFICATION.
(a) INDEMNIFICATION BY COMPANY. The Company agrees to indemnify and
hold harmless the Representative, each of the other Underwriters
and each person, if any, who controls any of the foregoing within
the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, and each of them, from and against any and all
loss, liability, claim, damage, expense or action, joint or several
(including, but not limited to, any and all reasonable expenses
incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever and
any amount paid in settlement of any litigation), commenced or
threatened, or of any claim whatsoever, to which they or any of
them may become subject under the Securities Act, the Exchange Act
or other federal or state statutory law or regulation, at common
law or otherwise, insofar as such loss, liability, claim, damage,
expense or action arises out of or is based upon (i) any untrue
statement or alleged untrue statement or breach of any
representation, warranty or covenant made by the Company in this
Agreement, (ii) any untrue statement or alleged untrue statement of
a material fact contained in the Registration Statement (or any
amendment thereto), or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, (iii) any
untrue statement or alleged untrue statement of a material fact
contained in a Preliminary Prospectus or the Prospectus (or any
amendment or supplement thereto), or any omission or alleged
omission therefrom of a material fact required to be stated therein
or necessary in order to make the statements therein not
misleading, or (iv) any untrue statement or alleged untrue
statement of a material fact contained in any application or other
document executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction
in order to qualify all or any of the Securities, the Underwriters'
Warrants or the Warrant Shares under the securities laws thereof or
filed with the Commission, the NASD or any securities exchange, or
any omission or alleged omission therefrom of a material fact
required to be stated therein or necessary in order to make the
statements therein not misleading; provided, however, that the
Company shall not be liable in any such case to the extent that
such untrue statement or omission or such alleged untrue statement
or omission was made in reliance upon and in conformity with
information furnished in writing by or on behalf of any
25
<PAGE> 26
of the Underwriters to the Company expressly for use in the
Registration Statement (or any amendment thereto), any such
Preliminary Prospectus or the Prospectus (or any amendment or
supplement thereto) or any such application or document. The
Company acknowledges that the statements under the caption
"Underwriting" contained in any Preliminary Prospectus and the
Prospectus constitute the only information furnished in writing by
the Underwriters expressly for inclusion in the Registration
Statement, any Preliminary Prospectus or the Prospectus. The
indemnity agreement contained in this Subsection 8(a) is in
addition to any liability which the Company may otherwise have to
the Underwriters or any controlling person of the Underwriters. The
Company agrees to pay any legal and other expenses for which it is
liable under this subsection (a) from time to time (but not more
frequently than monthly) within 30 days after its receipt of a bill
therefor.
(b) INDEMNIFICATION BY THE REPRESENTATIVE. The Representative agrees
that it will indemnify and hold harmless the Company, the Selling
Stockholder, each of the Company's officers who signs the
Registration Statement, each of its directors, and each person who
controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act against any and
all loss, liability, claim, damage, expense or action, joint or
several, to the same extent as the foregoing indemnity from the
Company and the Selling Stockholder to the Underwriters in
Subsection 8(a), but only with respect to statements or omissions
made in the Registration Statement (or any amendment thereto) or a
Preliminary Prospectus or the Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with
information furnished in writing by the Representative to the
Company expressly for use in the Registration Statement (or any
amendment thereto). The indemnity agreement contained in this
Subsection 8(b) is in addition to any liability which the
Representative may otherwise have to the Company and the Selling
Stockholder or any of the Company's directors, officers, or
controlling persons. The Company and the Selling Stockholder
acknowledges that the statements in any Preliminary Prospectus and
in the Prospectus made under the caption "Underwriting" constitute
the only information furnished in writing by the Representative or
its counsel on behalf of the Representative expressly for inclusion
in the Registration Statement, any Preliminary Prospectus or the
Prospectus. The Representative agrees to pay any legal and other
expenses for which it is liable under this Subsection 8(b) from
time to time (but not more frequently than monthly) within 30 days
of receipt of a bill therefor.
(c) INDEMNIFICATION BY THE SELLING STOCKHOLDER. The Selling
Stockholder agrees to indemnify and hold harmless the Company, the
Representative, each of the other Underwriters and each person, if
any, who controls any of the foregoing within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act,
other than the indemnifying party, and each of them, to the same
extent as the foregoing indemnity from the Company to the
Underwriters in Section 8(a) above but only with respect to (i)
statements or omissions of a material fact, if any, made in any
Preliminary Prospectus, any Rule 430A Prospectus, the Registration
Statement or the Prospectus (as from time to time amended and
supplemented), or any amendment or supplement thereto, or in any
application in reliance upon and in conformity with written
information furnished to the Company by or on behalf of the Selling
Stockholder expressly for use in any Preliminary Prospectus, any
Rule 430A Prospectus, the Registration Statement or the Prospectus,
or any amendment or supplement thereto, or in any application, as
the case may be, or (ii) any breach of any representation,
warranty, covenant or agreement of the Selling Stockholder
contained in this Agreement. In case any action shall be brought
against the Company, any Underwriter or any other person so
indemnified based on any Preliminary Prospectus, any Rule 430A
Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or in any application, or with
respect to any such breach, and in respect of which indemnity may
be sought against any of the Selling Stockholder, the Selling
Stockholder shall have the rights and duties given to the
indemnifying parties, and the Company, the Underwriters and each
26
<PAGE> 27
other person so indemnified shall have the rights and duties given
to the indemnified parties under the provisions of this Section 8.
(d) CLAIMS. Promptly after receipt by an indemnified party under this
Section 8 of notice of any claim, threatened claim or the
commencement of any action, the indemnified party shall, if a claim
in respect thereof is to be made against an indemnifying party
under this Section 8, notify the indemnifying party in writing of
the claim, threatened claim or the commencement of that action;
provided, however, that the failure to notify an indemnifying party
shall not relieve such indemnifying party from any liability which
it may have to an indemnified party otherwise than under this
Section 8. If any such claim or action shall be brought against an
indemnified party, and it shall notify the indemnifying party
thereof, the indemnifying party shall be entitled to participate
therein, and, to the extent that it wishes, jointly with any other
similarly notified indemnifying party, to assume the defense
thereof with its counsel, who shall be reasonably satisfactory to
the indemnified party. After notice from the indemnifying party to
the indemnified party of its election to assume the defense of such
claim, threatened claim or action, the indemnifying party shall not
be liable to the indemnified party under this Section 8 for any
legal or other expenses subsequently incurred by the indemnified
party in connection with the defense thereof other than reasonable
costs of investigation; provided, however, that the Representative
shall have the right to employ counsel to represent it and its
controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the
Representative against the Company and/or the Selling Stockholder
under this Section 8 if, in the Representative's reasonable
judgment, it is necessary for the Representative and its
controlling persons to be represented by separate counsel in order
to avoid an actual or potential conflict of interest or if the
Representative shall have reasonably concluded that there may be
defenses available to the Representative and its controlling
persons different from or in addition to those available to the
Company or the Selling Stockholder, and in either such event the
reasonable fees and expenses of such separate counsel shall be paid
by the Company and the Selling Stockholder. An indemnifying party
shall not be liable for any settlement of any action or claims
effected without its written consent (which consent shall not
unreasonably be withheld).
Anything herein to the contrary notwithstanding, the indemnity
agreement of the Company in Subsection 8(a) hereof, the
representations and warranties in this Agreement and any
representation or warranty as to the accuracy of the Registration
Statement or the Prospectus contained in any certificate furnished
by the Company pursuant to Section 7 hereof, insofar as they may
constitute a basis for indemnification for liabilities (other than
payment by the Company of expenses incurred or paid in the
successful defense of any action, suit or proceeding) arising under
the Securities Act, shall not extend to the extent of any interest
therein of a controlling person or partner of the Representative
who is a director, officer or controlling person of the Company
when the Registration Statement has become effective, except in
each case to the extent that an interest of such person shall have
been determined by a court of appropriate jurisdiction as not
against public policy as expressed in the Securities Act. Unless in
the opinion of counsel for the Company the matter has been settled
by a controlling precedent, the Company will, if a claim for such
indemnification is asserted, submit to a court of appropriate
jurisdiction the question whether such interest is against public
policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(e) CONTRIBUTION. In order to provide for just and equitable
contribution in circumstances in which indemnification provided for
in Subsection 8(a), 8(b) or 8(c) is unavailable, the Company, the
Underwriters or the Selling Stockholder shall contribute to the
aggregate loss, claim, damage, expense and liability to which the
Company, the Underwriters or the Selling Stockholder may be subject
(and, in any case where the Company is seeking contribution, after
seeking contribution from persons who control the Company within
the meaning of the Securities Act, officers of the Company who
signed the Registration Statement and directors
27
<PAGE> 28
of the Company, who may be liable for contribution and after
deducting from such loss, claim, damage, expense and liability the
amount of contribution obtained from such persons) in such
proportions as are applicable to reflect the relative benefits
received by the Company, the Underwriters and the Selling
Stockholder from the offering of the Securities; provided, however,
that if such allocation is not permitted by applicable law or if
the indemnified party failed to give the notice required under
Subsection 8(d), then the relative fault of the Company, the
Underwriters or the Selling Stockholder, in connection with the
statements or omissions which resulted in such losses, claims,
damages and liabilities and other relevant equitable considerations
will be considered together with such relative benefits. The
relative benefits received by the Company and the Selling
Stockholder, on the one hand, and the Underwriters, on the other
hand, shall be deemed to be in the same proportion as the total net
proceeds from the Public Offering (before deducting expenses)
received by the Company and the Selling Stockholder bear to the
total underwriting discounts and commissions received by the
Underwriters (the "Underwriters Portion"), in each case appearing
on the cover page of the Prospectus; provided, however, that (i)
the provisions of the Agreement Among Underwriters, if any, shall
govern the contribution among Underwriters, (ii) in no case shall
the Underwriters (except as may be provided in the Agreement Among
Underwriters, if any) be responsible for any amount in excess of
their respective pro rata shares, based on the number of Securities
purchased by each of them, of the amount of the Underwriters
Portion, and (iii) no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be
entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The relative fault of the Company and
the Selling Stockholder, on the one hand, and of the Underwriters,
on the other hand, shall be determined by reference to, among other
things, whether in the case of an untrue statement or alleged
untrue statement of a material fact or the omission or alleged
omission to state a material fact, such statement or omission
relates to information supplied by the Company or the Selling
Stockholder, on the one hand, or by the Underwriters, on the other
hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue
statements or omission. The Company, the Selling Stockholder and
the Underwriters agree that it would not be just and equitable if
contribution pursuant to this Subsection 8(e) were determined by
pro-rata allocation (even if the Underwriters are treated as one
entity for such purpose) or by any other method of allocation that
does not take account of the equitable considerations referred to
in this Subsection 8(e). The amount paid or payable by the
indemnified party as a result of the losses, claims, damages or
liabilities referred to above in this Subsection 8(e) shall be
deemed to include any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or
defending against or appearing as a third-party witness in any such
action or claim. For purposes of this Subsection 8(e), each person,
if any, who controls any of the Underwriters within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act
shall have the same rights to contribution as such Underwriter and
each person, if any, who controls the Company within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act,
each officer who shall have signed the Registration Statement and
each director of the Company shall have the same rights to
contribution as the Company, subject in each case to clause (iii)
of this Subsection 8(e). Each party entitled to contribution agrees
that upon the service of a summons or other initial legal process
upon it in any action instituted against it in respect of which
contribution may be sought, it will promptly give written notice of
such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any
such service shall not relieve the party from whom contribution may
be sought from any obligations it may have hereunder or otherwise
(except as specifically provided in Subsection 8(d)). No party
shall be liable for contribution with respect to any action or
claim settled without its consent (which consent shall not
unreasonably be withheld).
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<PAGE> 29
(f) SURVIVAL. The respective indemnity and contribution agreements by
the Underwriters, the Selling Stockholder and the Company contained
in this Section 8, and the covenants, representations and
warranties of the Selling Stockholder and the Company set forth
herein, shall remain operative and in full force and effect
regardless of (i) any investigation made by the Underwriters or on
their behalf or by or on behalf of any person who controls the
Underwriters, by the Company or any controlling person of the
Company or any director or any officer of the Company, (ii)
acceptance and delivery of the Securities, the Underwriters'
Warrants and Warrant Shares and payment therefor, or (iii) any
termination of this Agreement, and any successor to the Company or
to the Underwriters or any person who controls any of Underwriters
or the Company, as the case may be, shall be entitled to the
benefit of such respective indemnity and contribution agreements.
9. EFFECTIVENESS. This Agreement shall become effective
contemporaneously with the effectiveness of the Registration Statement;
provided, however, that the provisions of Sections 5, 8, and 9 hereof
shall at all times be in full force and effect from the date first
written above.
10. TERMINATION. This Agreement may be terminated, in the
Representative's sole and absolute discretion, by notice given to the
Selling Stockholder and the Company prior to the Closing Date if the
Company or the Selling Stockholder shall have failed, refused, or been
unable, prior to the Closing Date, to perform any material agreement
required to be performed by it hereunder, or if any other condition
precedent to the Underwriters' obligations hereunder determined to be
material by the Representative required to be fulfilled by the Company
is not fulfilled. In addition, this Agreement may be terminated, as set
forth above, if, prior to the Closing Date, any of the following shall
have occurred: (i) material governmental restrictions (not in force and
effect on the date hereof) have been imposed on trading in securities on
The Nasdaq National Market System? (or the American Stock Exchange if
the Common Stock is listed thereon) or in the over-the-counter market;
(ii) a material adverse change, beyond normal fluctuations, in general
financial market or economic conditions from such conditions on the date
hereof; (iii) a material interruption in mail or telecommunications
service or other general means of communications within the United
States after the execution and delivery of this Agreement; (iv) a
banking moratorium has been declared by federal or New York or Florida
state authorities; (v) an outbreak of major international hostilities or
other national or international calamity has occurred; (vi) the passage
by the Congress of the United States or by any state legislative body of
any act or measure, or the adoption of any orders, rules, or regulations
by any governmental body or executive or any authoritative accounting
institute or board, that the Underwriters believe will have a material
adverse effect on the business, financial condition, or financial
statements of the Company or the distribution of the Securities or
market for the Securities; or (vii) any Material Adverse Effect has
occurred, since the respective dates of which information is given in
the Registration Statement and Prospectus, in the condition of the
Company, financial or otherwise, whether or not arising in the ordinary
course of business. Any such termination shall be without liability of
any party to any other party, except as provided in Section 8 herein and
except that the Company shall remain obligated to pay costs and expenses
pursuant to Section 5 herein. If the Representative elects to prevent
this Agreement from becoming effective, or to terminate this Agreement,
as provided in this Section 10, the Representative shall promptly notify
the Company and the Selling Stockholder by telegram or telephone, and
confirm by letter, and the Representative shall not be under any
liability to the Company or the Selling Stockholder.
11. DEFAULT BY THE UNDERWRITERS. If the Underwriters shall fail at the
Closing Date to purchase the Securities that they are respectively
obligated to purchase pursuant to this Agreement (the "Defaulted
Securities"), the Underwriters shall have the right, within 24 hours
thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriter, to purchase all, but not less
than all, of the Defaulted Securities in such amounts as may be agreed
upon and upon the terms herein set forth; if, however, the Underwriters
shall not have completed such arrangements within such 24-hour period,
then:
29
<PAGE> 30
(a) if the number of Defaulted Securities does not exceed 10% of the
total number of Securities, the non-defaulting Underwriters shall
be obligated to purchase the full amount thereof in the proportions
that their respective underwriting obligations bear to the
underwriting obligations of the non-defaulting Underwriters; and
(b) if the number of Defaulted Securities exceeds 10% of the total
number of Securities, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriters.
In the event of any such default that does not result in a
termination of this Agreement, either the Underwriters or the
Company shall have the right to postpone the Closing Date for a
period not exceeding seven days in order to effect any required
changes in the Registration Statement or Prospectus or in any other
documents or arrangements. Nothing contained herein shall relieve a
defaulting Underwriter of any liability it may have for damages
caused by its default.
12. SURVIVAL OF REPRESENTATIONS, WARRANTIES, AND INDEMNITIES. The
respective agreements, representations, warranties, and indemnities
contained in this Agreement will remain in full force and effect
regardless of any investigation made by or on behalf of the Company or
the Underwriters or their respective officers or directors or
controlling persons, and will survive delivery of and payment for the
Securities and the Underwriters' Warrants and the Warrant Shares.
13. NOTICES. All notices and other communications hereunder (unless
otherwise expressly provided for herein) shall be in writing and shall
be deemed given when delivered in person, on the business day (before
5:00 P.M.) sent by facsimile transmission with confirmation of receipt,
or on the date indicated on the return receipt if sent by registered or
certified mail (return receipt requested) to the party to receive the
same at the following addresses (or at such other address for a party as
shall be specified by like notice):
<TABLE>
<S> <C>
If to the Company: Curtis International, Ltd.
7 Kodiak Crescent
Downsview, Ontario M3J 3E5
Attention: Mr. Aaron Herzog
with a copy to: Gersten, Savage, Kaplowitz & Fredericks LLP
101 East 52nd Street
New York, New York 10022
Attention: Arthur Marcus, Esquire
If to the Selling Stockholder: Ranch Limited
[insert address and contact person]
If to the Representative: Joseph Stevens & Company, Inc.
33 Maiden Lane
New York, New York 10038
Attention:
In each case, with a copy to: Broad and Cassel
201 South Biscayne Boulevard
Suite 3000
Miami, Florida 33131
Attention: Linda C. Frazier, Esquire
</TABLE>
14. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors. Except
as only to the extent stated in Section 8 herein with respect to the
officers, directors and controlling persons referred to in such Section
8, no person other than the parties hereto and their respective
successors will have any right or obligation hereunder. The terms
"successor" and "successors and assigns" as used in this Agreement shall
not include any buyer, as such, of any of the Securities from the
Underwriters.
30
<PAGE> 31
15. CONSENTS AND PRIOR APPROVALS. Any consent or approval by the
Underwriters required hereunder to any corporate action of the Company
shall not be unreasonably withheld, and, notwithstanding any other
provision hereof, any such consent or approval to any corporate action
of the Company after the Closing Date, shall not be required if the
Company obtains an opinion from an AV-rated law firm that the
requirement of such consent or approval constitutes an abrogation of the
Board of Directors' duties under the corporate law of such jurisdiction.
16. ENTIRE UNDERSTANDING; INCORPORATION BY REFERENCE. This Agreement,
together with the Financial Consulting Agreement, the Underwriters'
Warrant, and the other documents, exhibits and schedules referred to
herein, contains the entire understanding between the parties hereto and
supersedes any prior understandings or oral or written agreements
between them respecting the subject matter hereof. The documents,
exhibits and schedules referred to in this Agreement are incorporated
herein by reference.
17. COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be an original but all of which taken
together shall constitute one and same agreement.
18. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of New York, without
giving effect to choice of law or conflict of laws principles thereof,
and any proceeding arising between the parties in any manner pertaining
or related to this Agreement shall, to the extent permitted by law, be
held in New York, New York.
[THIS SPACE INTENTIONALLY LEFT BLANK]
31
<PAGE> 32
Please confirm, by signing and returning to the Company counterparts of
this Underwriting Agreement, that the foregoing correctly sets forth the
understanding between the Company, the Selling Stockholder and the
Representative, whereupon this Agreement will constitute a binding agreement
among us.
Very truly yours,
COMPANY:
CURTIS INTERNATIONAL, LTD., an Ontario
corporation
By:
Aaron Herzog, President
SELLING STOCKHOLDER:
RANCH LIMITED, an Ontario corporation
By:
Name:
Title:
Confirmed and Accepted as of the
date
first above-written:
REPRESENTATIVE:
JOSEPH STEVENS & COMPANY, INC.,
a _________ corporation
By:
Steve Markowitz, Chairman and
President
32
<PAGE> 33
SCHEDULE 1
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ----------
<S> <C>
Joseph Stevens & Company, Inc...............................
----------
Total.................................................. 1,650,000
</TABLE>
I-1
<PAGE> 1
EXHIBIT 4.1
CURTIS INTERNATIONAL LTD.
7 KODIAK CRESCENT
PAWNSVIEW, ONTARIO M3J 3E5
UNDERWRITERS' WARRANT
WARRANT NO. 'CERT NO'
Date of Issuance: As of , 1998 RIGHT to Purchase Shares
FOR VALUE RECEIVED, Curtis International Ltd., an Ontario corporation (the
"Company"), promises to issue in the name of, and sell and deliver to, 'Holder'
(the "Holder") a certificate or certificates for an aggregate of SHARES (the
"Warrant Shares") of the Company's common stock, no par value per share (the
"Common Stock"), upon payment by the Holder of the exercise price of $8.25 per
share for the Warrant Shares (the "Exercise Price") in lawful funds of the
United States of America, with the Exercise Price being subject to adjustment in
the circumstances set forth hereinbelow. This Warrant expires in its entirety at
5:00 p.m. Eastern Time on , 2003 (the "Expiration Date"). This Warrant
is one of a series of Underwriters' Warrants dated , 1998 issued
pursuant to the Underwriting Agreement dated as of , 1998 between the
Company and Joseph Stevens & Company, Inc., as representative (the
"Representative") of the several underwriters named in the Underwriting
Agreement (the "Underwriters"). This Warrant may not be sold, transferred,
assigned or hypothecated until , 1999, except that it may be
transferred, in whole or in part, to one or more officers or partners of the
Holder (or the officers or partners of such partner); any other Underwriter or
member of the selling group which participated in the Company's public offering
which commenced on , 1998; a successor to the Holder, or other
officers or partners of such Holder; or by operation of law. The terms and
conditions of the Underwriters' Warrants shall be identical in all material
respects except that the number of Warrant Shares to which the Holder is
entitled to purchase may differ.
SECTION 1.
CERTAIN DEFINITIONS
As used in this Warrant, the following terms have the meanings set forth
below:
"COMMON STOCK DEEMED OUTSTANDING" means, at any given time, the number of
shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to Section 4 of this
Warrant.
"DATE OF ISSUANCE" is the date set forth on the front page of this Warrant,
and the terms "date hereof," "date of this Warrant," and similar expressions
shall be deemed to refer to the Date of Issuance, as specified in Section 10 of
this Warrant.
"EFFECTIVE DATE" means the date the Company's Registration Statement (as
defined below) is declared effective by the U.S. Securities and Exchange
Commission (THE "COMMISSION").
"EXERCISE PERIOD" means the period of time commencing at 12:01 A.M.,
Eastern Time, on the first anniversary of the Effective Date and ending at 5:00
p.m., Eastern Time, on the fifth anniversary of the Effective Date.
"MARKET PRICE" means, as to any security, the average of the closing prices
of such security's sales on the principal domestic securities exchange on which
such security may at the time be listed, or, if there have been no sales on any
such exchange on any day, the average of the highest bid and lowest asked prices
on all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the representative bid and asked prices listed on
the Nasdaq NMS as of the close of trading in New York City on such day, or, if
on any day such security is not listed on the Nasdaq NMS, the average of the
high and low bid and asked prices on such day in the domestic over-the-counter
market as reported by the National Quotation
1
<PAGE> 2
Bureau, Incorporated, or any similar successor organization, in each such case
averaged over a period of 20 consecutive business days consisting of the
business day immediately preceding the day as of which "Market Price" is being
determined and the 19 consecutive business days prior to such day; provided that
if such security is listed on any domestic securities exchange or listed on the
Nasdaq NMS, the term "business day" or "business days" as used in this sentence
means a day or days, as applicable, on which such exchange or the Nasdaq NMS is
open for trading or quotation, as the case may be. If at any time such security
is not listed on any domestic securities exchange or listed on the Nasdaq NMS or
the domestic over-the-counter market, the "Market Price" will be the fair value
thereof determined jointly by the Company and the Holders of Warrants
representing at least 50% of the Common Stock purchasable upon the exercise of
all the Warrants then outstanding; provided that if such parties are unable to
reach agreement, such fair value will be determined by an appraiser jointly
selected by the Company and the Holders of Warrants representing at least 25% of
the Common Stock purchasable upon the exercise of all the Warrants then
outstanding.
"NASDAQ NMS" means the Nasdaq National Market System or such other similar
quotation system as may in the future be used generally by members of the Nasdaq
Stock Market, Inc. for transactions in securities.
"PERSON" means an individual, a partnership, a corporation, a limited
liability company, a trust, a joint venture, an unincorporated organization, or
a government or any department or agency thereof.
"REGISTRATION STATEMENT" means the Company's Registration Statement on Form
SB-2, File No. 333-56661.
"WARRANTS" mean this Warrant and all other Warrants issued in exchange or
substitution for this Warrant or any such other Warrants issued pursuant to the
terms hereof or thereof, as the case may be.
SECTION 2.
EXERCISE OF WARRANT
2.1 EXERCISE PERIOD. The Holder may exercise this Warrant, in whole or
in part (but not as to a fractional share), at any time and from time to
time, during the Exercise Period.
2.2 EXERCISE PROCEDURE.
(a) This Warrant will be deemed to have been exercised at such time as
the Company has received all of the following items (the "Exercise
Date"):
(i) a completed Exercise Agreement, in the form set forth as
Exhibit I hereto, executed by the Person exercising all or part
of the purchase rights represented by this Warrant (the
"Purchaser");
(ii) this Warrant (subject to delivery by the Company of a new
Warrant with respect to any unexercised portion, as provided in
Subsection 2.2(b));
(iii) if this Warrant is not registered in the name of the
Purchaser, an Assignment or Assignments in the form set forth
as Exhibit II hereto, evidencing the assignment of this Warrant
to the Purchaser; and
(iv) a cashier's or official bank check or other immediately
available funds payable to the Company in an amount equal to
the sum of the product of the Exercise Price multiplied by the
number of Warrant Shares being purchased upon such exercise.
Notwithstanding anything contained herein to the contrary, the
Exercise Price for the Warrant may be satisfied by the delivery
of an unexercised portion of this Warrant to the Company or the
Transfer Agent for cancellation having a market value, as
determined by the spread as of the date of surrender equal to
the difference between the then Exercise Price and the market
price of the shares of Common Stock underlying this Warrant,
equal to the aggregate Exercise Price of the portion of this
Warrant desired to be then exercised.
2
<PAGE> 3
(b) Certificates for Warrant Shares purchased upon exercise of this
Warrant will be delivered by the Company to the Purchaser within
five calendar days after the Exercise Date. Unless this Warrant has
expired or all of the purchase rights represented hereby have been
exercised, the Company will prepare a new Warrant representing the
rights formerly represented by this Warrant that have not expired
or been exercised. The Company will, within such five-day period,
deliver such new Warrant to the Person designated for delivery in
the Exercise Agreement.
(c) The Warrant Shares issuable upon the exercise of this Warrant will
be deemed to have been transferred to the Purchaser on the Exercise
Date, and the Purchaser will be deemed for all purposes to have
become the record holder of such Common Stock on the Exercise Date.
(d) The issuance of certificates for Warrant Shares upon exercise of
this Warrant will be made without charge to the Holder or the
Purchaser for any issuance tax in respect thereof or any other cost
incurred by the Company in connection with such exercise and the
related transfer; provided, however, that the Company shall not be
required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any certificate
or instrument in a name other than that of the Holder of this
Warrant, and the Company shall not be required to issue or deliver
any such certificate or instrument unless and until the Person or
Persons requesting the issue thereof shall have paid to the Company
the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
(e) The Company will not close its books for the transfer of this
Warrant or of any of the Warrant Shares in any manner that
interferes with the timely exercise of this Warrant. The Company
will from time to time take all such action as may be necessary to
assure that the par value per share of the unissued Common Stock
acquirable upon exercise of this Warrant is at all times equal to
or less than the Warrant Share Exercise Price then in effect.
2.3 EXERCISE AGREEMENT. The Exercise Agreement will be substantially in
the form set forth as Exhibit I hereto, except that if the Warrant
Shares are not to be issued in the name of the Holder of this Warrant,
the Exercise Agreement will also state the name of the Person to whom
the certificates or instrument for the Warrant Shares are to be issued,
and if the number of Warrant Shares purchasable does not include all of
such securities purchasable hereunder, it will also state the name of
the Person to whom a new Warrant for the unexercised portion of the
rights hereunder is to be delivered.
2.4 FRACTIONAL SHARES. If a fractional share of Common Stock would, but
for the provisions of Subsection 2.1, be issuable upon exercise of the
rights represented by this Warrant, the Company will, within 20 days
after the Exercise Date, deliver to the Purchaser a check payable to the
Purchaser, in lieu of such fractional share, in an amount equal to the
Market Price of such fractional share as of the close of business on the
Exercise Date.
SECTION 3.
EXERCISE PRICE
3.1 GENERAL. The Holder of this Warrant shall be entitled to purchase
such numbers of Warrant Shares at the Exercise Price.
3.2 SUBDIVISION OR COMBINATION OF COMMON STOCK AND STOCK DIVIDENDS. If
the Company shall at any time after the date hereof (a) issue any shares
of Common Stock or Convertible Securities, or any rights to purchase
Common Stock or Convertible Securities, as a dividend upon Common Stock,
(b) issue any shares of Common Stock, in subdivision of outstanding
shares of Common Stock by reclassification or otherwise, or (c) combine
outstanding shares of Common Stock, by reclassification or otherwise,
then the Exercise Price that would apply if purchase rights hereunder
were being exercised immediately prior to such action by the Company
shall be adjusted by
3
<PAGE> 4
multiplying it by a fraction, the numerator of which shall be the number
of shares of Common Stock Deemed Outstanding immediately prior to such
dividend, subdivision, or combination and the denominator of which shall
be the number of shares of Common Stock Deemed Outstanding immediately
after such dividend, subdivision, or combination.
3.3 CERTAIN DIVIDENDS OR DISTRIBUTIONS. If the Company shall declare a
dividend or distribution upon the Common Stock payable otherwise than
out of earnings or earned surplus and otherwise than in Common Stock,
Rights or Convertible Securities, the Exercise Price that would apply if
purchase rights hereunder were being exercised immediately prior to the
declaration of such dividend or distribution shall be reduced by an
amount equal, in the case of a dividend or distribution in cash, to the
amount thereof payable per share of the Common Stock or, in the case of
any other dividend or distribution, to the fair value of such dividend
or distribution per share of the Common Stock as determined in good
faith by the Board of Directors of the Company. For purposes of the
foregoing, a dividend or distribution other than in cash shall be
considered payable out of earnings or earned surplus only to the extent
that such earnings or earned surplus are charged an amount equal to the
fair value of such dividend or distribution as determined in good faith
by the Board of Directors of the Company. Such reductions shall take
effect as of the date on which a record is taken for the purpose of such
dividend or distribution or, if a record is not taken, the date as of
which the holders of Common Stock of record entitled to such dividend or
distribution are to be determined.
3.4 NO DE MINIMIS ADJUSTMENTS. No adjustment of the Exercise Price shall
be made if the amount of such adjustment would be less than one cent per
share, but in such case any adjustment that otherwise would be required
to be made shall be carried forward and shall be made at the time and
together with the next subsequent adjustment that, together with any
adjustment or adjustments so carried forward, shall amount to not less
than one cent per share.
SECTION 4.
ADJUSTMENT OF NUMBER OF
SHARES ISSUABLE UPON EXERCISE
Upon each adjustment of the Exercise Price pursuant to Section 3, the
Holder of this Warrant shall thereafter (until another such adjustment) be
entitled to purchase, (i) at the adjusted Exercise Price in effect on the date
purchase rights for Warrant Shares under this Warrant are exercised, the number
of Warrant Shares, calculated to the nearest whole number, determined by (a)
multiplying the number of Warrant Shares purchasable hereunder immediately prior
to the adjustment of the Exercise Price by the Exercise Price in effect
immediately prior to such adjustment, and (b) dividing the product so obtained
by the adjusted Exercise Price in effect on the date of such exercise. The
provisions of Subsection 2.4 shall apply, however, so that no fractional Warrant
Share shall be issued upon exercise of this Warrant.
SECTION 5.
EFFECT OF REORGANIZATION,
RECLASSIFICATION, CONSOLIDATION, MERGER, OR SALE
If at any time while this Warrant is outstanding there shall be any
reorganization or reclassification of the capital stock of the Company (other
than a subdivision or combination of shares provided for in Subsection 3.3
hereof), any consolidation or merger of the Company with another corporation
(other than a consolidation or merger in which the Company is the surviving
entity and which does not result in any change in the Common Stock), or any sale
or other disposition by the Company of all or substantially all of its assets to
any other corporation, then the Holder of this Warrant shall thereafter upon
exercise of this Warrant be entitled to receive the number of Warrant Shares or
other securities or property of the Company, or of the successor corporation
resulting from such consolidation or merger, as the case may be, to which the
Holders of the Warrant Shares (and any other securities and property) of the
Company, deliverable upon the exercise of this Warrant, would have been entitled
upon such reorganization, reclassification of capital stock, consolidation,
merger, sale, or other disposition if this Warrant had been exercised
immediately prior to such
4
<PAGE> 5
reorganization, reclassification of capital stock, consolidation, merger, sale,
or other disposition. In any such case, appropriate adjustment (as determined in
good faith by the Board of Directors of the Company) shall be made in the
application of the provisions set forth in this Warrant with respect to the
rights and interests thereafter of the Holder of this Warrant to the end that
the provisions set forth in this Warrant (including those relating to
adjustments of the Exercise Price and the number of Warrant Shares issuable upon
the exercise of this Warrant) shall thereafter be applicable, as near as
reasonably may be, in relation to any shares or other property thereafter
deliverable upon the exercise hereof as if this Warrant had been exercised
immediately prior to such reorganization, reclassification of capital stock,
consolidation, merger, sale, or other disposition and the Holder hereof had
carried out the terms of the exchange as provided for by such reorganization,
reclassification of capital stock, consolidation, or merger. The Company shall
not effect any such reorganization, consolidation, or merger unless, upon or
prior to the consummation thereof, the successor corporation shall assume by
written instrument the obligation to deliver to the Holder hereof such shares of
stock or other securities, cash, or property as such Holder shall be entitled to
purchase in accordance with the foregoing provisions. Notwithstanding any other
provisions of this Warrant, in the event of sale or other disposition of all or
substantially all of the assets of the Company as a part of a plan for
liquidation of the Company, all rights to exercise the Warrant shall terminate
upon the earlier of the expiration of the Exercise Period and 60 days after the
Company gives written notice to the Holder of this Warrant that such sale or
other disposition has been consummated.
SECTION 6.
NOTICE OF ADJUSTMENT
Immediately upon any adjustment of the Exercise Price or increase or
decrease in the number of Warrant Shares, the Company will send written notice
thereof to all Holders, stating the adjusted Exercise Price, and the increased
or decreased number of Warrant Shares and setting forth in reasonable detail the
method of calculation for such adjustment and increase or decrease. When
appropriate, such notice may be given in advance and included as part of any
notice required to be given pursuant to Section 7 below. Notwithstanding
anything herein to the contrary, if any adjustment under this Warrant of the
Exercise Price or the number of shares of Common Stock issuable upon exercise of
this Warrant, shall be determined by NASD Regulation, Inc. (the "NASD") to
violate the Rules of Fair Practice of the NASD, and such determination shall not
be subject to further appeal or review, the violative provisions shall be deemed
to be amended to the minimum extent necessary to cause each such provision to
comply with the applicable violated section of the NASD Rules of Fair Practice.
SECTION 7.
PRIOR NOTICE OF CERTAIN EVENTS
If at any time:
(a) the Company shall pay any dividend payable in stock upon its Common
Stock or make any distribution (other than cash dividends) to the
holders of its Common Stock;
(b) the Company shall offer for subscription pro rata to the holders of
its Common Stock any additional shares of stock of any class or any
other rights;
(c) there shall be any reorganization or reclassification of the
capital stock of the Company, any consolidation or merger of the
Company with another corporation, or a sale or disposition of all
or substantially all its assets; or
(d) there shall be a voluntary or involuntary dissolution, liquidation,
or winding up of the Company,
then, in each such case, the Company shall give prior written notice, by hand
delivery or by certified mail, postage prepaid, addressed to the Holder of this
Warrant at the address of such holder as shown on the books of the Company, of
the date on which (i) the books of the Company shall close or a record shall be
taken for such stock dividend, distribution, or subscription rights or (ii) such
reorganization, reclassification,
5
<PAGE> 6
consolidation, merger, sale, dissolution, liquidation, or winding up shall take
place, as the case may be. A copy of each such notice shall be sent
simultaneously to each transfer agent of the Company's Common Stock. Such notice
shall also specify the date as of which the holders of Common Stock of record
shall participate in said dividend, distribution, or subscription rights or
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation, or winding up, as the case may be. Such
written notice shall be given at least 30 days prior to the record date or the
effective date, whichever is earlier, of the subject action or other event.
If any other event (not listed above) would require adjustment to the
Exercise Price, then the Company shall give prior written notice thereof (in
substance as set forth above) to the Holders, at their addresses and in the
manner provided in Subsection 13.3. Notwithstanding the foregoing, the Company
shall not be required to give prior written notice where it is not reasonably
possible.
SECTION 8.
RESERVATION OF COMMON STOCK
The Company will at all times reserve and keep available such number of
shares of Common Stock as will be sufficient to permit the exercise in full of
all outstanding Warrants. Upon exercise of this Warrant, the Holder will acquire
fully paid and non-assessable ownership rights of the Common Stock, free and
clear of any liens, claims or encumbrances. AS LONG AS THE WARRANTS SHALL BE
OUTSTANDING, THE COMPANY SHALL USE ITS BEST EFFORTS TO CAUSE ALL SHARES OF
COMMON STOCK ISSUABLE UPON THE EXERCISE OF THE WARRANTS TO BE LISTED (SUBJECT TO
OFFICIAL NOTICE OF ISSUANCE) ON ALL SECURITIES EXCHANGES ON WHICH THE COMMON
STOCK ISSUED TO THE PUBLIC IN CONNECTION HEREWITH MAY THEN BE LISTED AND/OR
QUOTED ON NASDAQ NATIONAL MARKET OR NASDAQ SMALLCAP MARKET.
SECTION 9.
NO SHAREHOLDER RIGHTS OR OBLIGATION
This Warrant will not entitle the holder hereof to any voting rights or
other rights as a shareholder of the Company. Until the shares of Common Stock
issuable upon exercise of this Warrant are recorded as issued on the books and
records of the Company's transfer agent, the Holder shall not be entitled to any
voting rights or other rights as a shareholder; provided, however, the Company
uses its best efforts to ensure that, upon receipt of an Exercise Agreement, the
appropriate documentation necessary to effectuate the exercise of the Warrant
and issuance of the Common Stock is accomplished as expeditiously as possible.
No provision of this Warrant, in the absence of affirmative action by the Holder
to purchase Common Stock, and no enumeration in this Warrant of the rights or
privileges of the Holder, will give rise to any obligation of such Holder for
the Exercise Price of the Warrant Shares acquirable by exercise hereof or as a
shareholder of the Company.
SECTION 10.
EXCHANGEABLE FOR DIFFERENT DENOMINATIONS
This Warrant is exchangeable, upon the surrender hereof by the Holder at
the principal office of the Company, for new Warrants of like tenor representing
in the aggregate the purchase rights hereunder, and each of such new Warrants,
as set forth on the front page hereof, will represent such portion of such
rights as is designated by the Holder at the time of such surrender. The date
the Company initially issued this Warrant, which is set forth on the front page
hereof, will be deemed to be the "Date of Issuance" of this Warrant and any
purchase warrant exchanged or substituted herefor, regardless of the number of
times (and dates on which) new certificates representing the unexpired and
unexercised rights formerly represented by this Warrant are issued.
6
<PAGE> 7
SECTION 11.
TRANSFERABILITY
Subject to the transfer conditions referred to in Section 2 or in the
remaining provisions or this Section 11, this Warrant and all rights hereunder
are transferable, in whole or in part, without charge to the Holder, upon
surrender of this Warrant with a properly executed Assignment (in the form of
Exhibit II hereto) at the principal office of the Company. This Warrant and the
Warrant Shares may not be offered, sold, or transferred except in compliance
with the Securities Act of 1933, as amended (the "Act"), and any applicable
state securities laws; and then only against receipt of an agreement of the
Person to whom such offer or sale is made to comply with the provisions of this
Section 11 with respect to any resale or other disposition of such securities;
provided that no such agreement shall be required from any Person purchasing
this Warrant or any Warrant Shares pursuant to a registration statement
effective under the Act. The Holder of this Warrant agrees that, prior to the
disposition of any security purchased on the exercise hereof under circumstances
that might require registration of such security under the Act, or any similar
statute then in effect, the Holder shall give written notice to the Company,
expressing his intention as to such disposition. Promptly upon receiving such
notice, the Company shall present a copy thereof to its securities counsel. If,
in the opinion of such counsel, the proposed disposition does not require
registration of such security under the Act, or any similar statute then in
effect, the Company shall, as promptly as practicable, notify the Holder of such
opinion, whereupon the Holder shall be entitled to dispose of such security in
accordance with the terms of the notice delivered by the Holder to the Company.
The above agreement by the Holder of this Warrant shall not be deemed to limit
or restrict in any respect the exercise of rights set forth in Section 12
hereof.
SECTION 12.
REGISTRATION RIGHTS
12.1 DEMAND REGISTRATION RIGHT. At any time during the Exercise Period,
the Holders of Warrants whose holdings thereof comprise a majority of
the Warrant Shares issuable upon exercise of said Warrants shall have
the right to require the Company (a) to prepare and file with the
Commission up to one new registration statement under the Act (or, in
lieu thereof, a post-effective amendment or amendments to the
Registration Statement, if then permitted under the Act), covering all
or any portion of the Warrant Shares and to use its best efforts to
obtain promptly and maintain the effectiveness thereof for at least NINE
CONSECUTIVE MONTHS and (b) to register or qualify the subject Warrant
Shares for sale in up to ten states identified by such holders. The
Company COVENANTS AND AGREES TO GIVE WRITTEN NOTICE OF ANY REGISTRATION
REQUEST UNDER THIS SECTION 12.1 BY ANY HOLDER OR HOLDERS TO ALL OTHER
REGISTERED HOLDERS OF THE WARRANTS AND THE WARRANT SHARES WITHIN TEN
DAYS FROM THE DATE OF THE RECEIPT OF ANY SUCH REGISTRATION REQUEST.
NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, IF THE
COMPANY SHALL NOT HAVE FILED A REGISTRATION STATEMENT FOR THE WARRANT
SHARES WITHIN THE TIME PERIOD SPECIFIED IN SECTION 12.3(A) HEREOF
PURSUANT TO THE WRITTEN NOTICE SPECIFIED IN SECTION 12.1 OF A MAJORITY
OF THE HOLDERS OF THE WARRANTS AND/OR WARRANT SHARES, THE COMPANY SHALL
HAVE THE OPTION, UPON THE WRITTEN NOTICE OF ELECTION OF A MAJORITY OF
THE HOLDERS OF THE WARRANTS AND/OR WARRANT SHARES TO REPURCHASE (I) ANY
AND ALL WARRANT SHARES AT THE HIGHER OF THE MARKET PRICE PER SHARE OF
COMMON STOCK ON (X) THE DATE OF NOTICE SENT PURSUANT TO SECTION 12.1 OR
(Y) THE EXPIRATION OF THE PERIOD SPECIFIED IN SECTION 12.3(A) AND (II)
ANY AND ALL WARRANTS AT SUCH MARKET PRICE LESS THE EXERCISE PRICE OF
SUCH WARRANT. SUCH REPURCHASE SHALL BE IN IMMEDIATELY AVAILABLE FUNDS
AND SHALL CLOSE WITHIN TWO DAYS AFTER THE LATER OF (I) THE EXPIRATION OF
THE PERIOD SPECIFIED IN SECTION 12.3(A) OR (II) THE DELIVERY OF THE
WRITTEN NOTICE OF ELECTION SPECIFIED IN THIS SECTION 12.1.
12.2 PIGGY BACK REGISTRATION RIGHTS. In addition, if at any time
commencing after the date hereof and expiring seven years after the date
hereof, the Company shall prepare and file one or more registration
statements under the Act (OTHER THAN PURSUANT TO FORM S-8, S-4 OR A
COMPARABLE REGISTRATION STATEMENT), the Company will include in any such
registration statement such information as is required, and such number
of shares of Common Stock held by, or shares of
7
<PAGE> 8
Common Stock underlying outstanding Warrants held by, the Holders hereof
or their respective designees or transferees as may be requested by
them, to permit a public offering of the WARRANT SHARES SO REQUESTED. In
the event of such a proposed registration, the Company shall furnish the
then Holders with not less than 30 days' written notice prior to the
proposed date of filing of such registration statement. The Company
shall use its best efforts to ensure that such registration statement is
declared effective and remains effective until such time as all of the
shares have been registered or may be sold without registration under
the Act or applicable state securities laws and regulations, and without
limitation as to volume, pursuant to Rule 144 of the Act. The Holders
shall be entitled to exercise the rights provided for in this SECTION
12.2 by giving written notice to the Company, within 20 days of receipt
of the Company's notice of its intention to file a registration
statement. NOTWITHSTANDING THE PROVISIONS OF THIS SECTION 12.2, THE
COMPANY SHALL HAVE THE RIGHT AT ANY TIME AFTER IT SHALL HAVE GIVEN
WRITTEN NOTICE PURSUANT TO THIS SECTION 12.2 (IRRESPECTIVE OF WHETHER A
WRITTEN REQUEST FOR INCLUSION OF ANY SUCH SECURITIES SHALL HAVE BEEN
MADE) TO ELECT NOT TO FILE ANY SUCH PROPOSED REGISTRATION STATEMENT, OR
TO WITHDRAW THE SAME AFTER THE FILING BUT PRIOR TO THE EFFECTIVE DATE
THEREOF.
12.3 COVENANTS OF THE COMPANY WITH RESPECT TO REGISTRATION. IN CONNECTION
WITH ANY REGISTRATION UNDER SECTION 12.1 OR 12.2 HEREOF, THE COMPANY
COVENANTS AND AGREES AS FOLLOWS:
(A) THE COMPANY SHALL USE ITS BEST EFFORTS TO FILE A REGISTRATION
STATEMENT WITHIN 30 DAYS OF RECEIPT OF ANY DEMAND THEREFOR, SHALL
USE ITS BEST EFFORTS TO HAVE ANY REGISTRATION STATEMENT DECLARED
EFFECTIVE AT THE EARLIEST POSSIBLE TIME, AND SHALL FURNISH EACH
HOLDER DESIRING TO SELL WARRANT SHARES SUCH NUMBER OF PROSPECTUSES
AS SHALL REASONABLY BE REQUESTED.
(B) THE COMPANY SHALL PAY ALL COSTS (EXCLUDING FEES AND EXPENSES OF
HOLDER(S)' COUNSEL AND ANY UNDERWRITING OR SELLING COMMISSIONS),
FEES AND EXPENSES IN CONNECTION WITH ALL REGISTRATION STATEMENTS
FILED PURSUANT TO SECTIONS 12.1 AND 12.2 HEREOF INCLUDING, WITHOUT
LIMITATION, THE COMPANY'S LEGAL AND ACCOUNTING FEES, PRINTING
EXPENSES, BLUE SKY FEES AND EXPENSES. IF THE COMPANY SHALL FAIL TO
COMPLY WITH THE PROVISIONS OF SECTION 12.1, THE COMPANY SHALL, IN
ADDITION TO ANY OTHER EQUITABLE OR OTHER RELIEF AVAILABLE TO THE
HOLDER(S), BE LIABLE FOR ANY OR ALL INCIDENTAL OR SPECIAL DAMAGES
SUSTAINED BY THE HOLDER(S) REQUESTING REGISTRATION OF THEIR WARRANT
SHARES, EXCLUDING CONSEQUENTIAL DAMAGES.
(C) THE COMPANY WILL TAKE ALL NECESSARY ACTION WHICH MAY BE REQUIRED IN
QUALIFYING OR REGISTERING THE WARRANT SHARES INCLUDED IN A
REGISTRATION STATEMENT FOR OFFERING AND SALE UNDER THE SECURITIES
OR BLUE SKY LAWS OF SUCH STATES AS REASONABLY ARE REQUESTED BY THE
HOLDER(S), PROVIDED THAT THE COMPANY SHALL NOT BE OBLIGATED TO
EXECUTE OR FILE ANY GENERAL CONSENT TO SERVICE OF PROCESS OR TO
QUALIFY AS A FOREIGN CORPORATION TO DO BUSINESS UNDER THE LAWS OF
ANY SUCH JURISDICTION.
(D) THE COMPANY SHALL INDEMNIFY THE HOLDER(S) OF THE WARRANT SHARES TO
BE SOLD PURSUANT TO ANY REGISTRATION STATEMENT AND EACH PERSON, IF
ANY, WHO CONTROLS SUCH HOLDERS WITHIN THE MEANING OF SECTION 15 OF
THE ACT OR SECTION 20(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED ("EXCHANGE ACT"), AGAINST ALL LOSS, CLAIM, DAMAGE, EXPENSE
OR LIABILITY (INCLUDING ALL EXPENSES REASONABLY INCURRED IN
INVESTIGATING, PREPARING OR DEFENDING AGAINST ANY CLAIM WHATSOEVER)
TO WHICH ANY OF THEM MAY BECOME SUBJECT UNDER THE ACT, THE EXCHANGE
ACT OR OTHERWISE, ARISING FROM SUCH REGISTRATION STATEMENT BUT ONLY
TO THE SAME EXTENT AND WITH THE SAME EFFECT AS THE PROVISIONS
PURSUANT TO WHICH THE COMPANY HAS AGREED TO INDEMNIFY THE
UNDERWRITERS CONTAINED IN SECTION 8 OF THE UNDERWRITING AGREEMENT.
THE COMPANY FURTHER AGREE(S) THAT UPON DEMAND BY AN INDEMNIFIED
PERSON, AT ANY TIME OR FROM TIME TO TIME, IT WILL PROMPTLY
REIMBURSE SUCH INDEMNIFIED PERSON FOR ANY LOSS, CLAIM, DAMAGE,
LIABILITY, COST OR EXPENSE ACTUALLY AND REASONABLY PAID BY THE
INDEMNIFIED PERSON AS TO WHICH THE COMPANY HAS INDEMNIFIED SUCH
PERSON PURSUANT HERETO. NOTWITHSTANDING THE FOREGOING PROVISIONS OF
THIS SECTION 12.3 ANY SUCH PAYMENT OR REIMBURSEMENT BY THE COMPANY
OF FEES, EXPENSES OR DISBURSEMENTS INCURRED BY AN INDEMNIFIED
PERSON IN ANY PROCEEDING IN WHICH A FINAL JUDGMENT BY A COURT OF
COMPETENT JURISDICTION (AFTER ALL APPEALS
8
<PAGE> 9
OR THE EXPIRATION OF TIME TO APPEAL) IS ENTERED AGAINST THE COMPANY
OR SUCH INDEMNIFIED PERSON AS A DIRECT RESULT OF THE HOLDER(S) OR
SUCH PERSON'S GROSS NEGLIGENCE OR WILLFUL MISFEASANCE WILL BE
PROMPTLY REPAID TO THE COMPANY.
(E) THE HOLDER(S) OF THE WARRANT SHARES TO BE SOLD PURSUANT TO A
REGISTRATION STATEMENT, AND THEIR SUCCESSORS AND ASSIGNS, SHALL
SEVERALLY, AND NOT JOINTLY, INDEMNIFY THE COMPANY, ITS OFFICERS AND
DIRECTORS AND EACH PERSON, IF ANY, WHO CONTROLS THE COMPANY WITHIN
THE MEANING OF SECTION 15 OF THE ACT OR SECTION 20(A) OF THE
EXCHANGE ACT, AGAINST ALL LOSS, CLAIM, DAMAGE, EXPENSE OR LIABILITY
(INCLUDING ALL EXPENSES REASONABLY INCURRED IN INVESTIGATING,
PREPARING OR DEFENDING AGAINST ANY CLAIM WHATSOEVER) TO WHICH THEY
MAY BECOME SUBJECT UNDER THE ACT, THE EXCHANGE ACT OR OTHERWISE,
ARISING FROM INFORMATION FURNISHED BY OR ON BEHALF OF SUCH HOLDERS,
OR THEIR SUCCESSORS OR ASSIGNS, FOR SPECIFIC INCLUSION IN SUCH
REGISTRATION STATEMENT TO THE SAME EXTENT AND WITH THE SAME EFFECT
AS THE PROVISIONS CONTAINED IN SECTION 8 OF THE UNDERWRITING
AGREEMENT PURSUANT TO WHICH THE UNDERWRITERS HAVE AGREED TO
INDEMNIFY THE COMPANY. THE HOLDER(S) FURTHER AGREE(S) THAT UPON
DEMAND BY AN INDEMNIFIED PERSON, AT ANY TIME OR FROM TIME TO TIME,
THEY WILL PROMPTLY REIMBURSE SUCH INDEMNIFIED PERSON FOR ANY LOSS,
CLAIM, DAMAGE, LIABILITY, COST OR EXPENSE ACTUALLY AND REASONABLY
PAID BY THE INDEMNIFIED PERSON AS TO WHICH THE HOLDER(S) HAVE
INDEMNIFIED SUCH PERSON PURSUANT HERETO. NOTWITHSTANDING THE
FOREGOING PROVISIONS OF THIS SECTION 12.3 ANY SUCH PAYMENT OR
REIMBURSEMENT BY THE HOLDER(S) OF FEES, EXPENSES OR DISBURSEMENTS
INCURRED BY AN INDEMNIFIED PERSON IN ANY PROCEEDING IN WHICH A
FINAL JUDGMENT BY A COURT OF COMPETENT JURISDICTION (AFTER ALL
APPEALS OR THE EXPIRATION OF TIME TO APPEAL) IS ENTERED AGAINST THE
COMPANY OR SUCH INDEMNIFIED PERSON AS A DIRECT RESULT OF THE
COMPANY OR SUCH PERSON'S GROSS NEGLIGENCE OR WILLFUL MISFEASANCE
WILL BE PROMPTLY REPAID TO THE HOLDER(S).
(F) NOTHING CONTAINED IN THIS AGREEMENT SHALL BE CONSTRUED AS REQUIRING
THE HOLDER(S) TO EXERCISE THEIR WARRANTS PRIOR TO THE INITIAL
FILING OF ANY REGISTRATION STATEMENT OR THE EFFECTIVENESS THEREOF.
(G) THE COMPANY SHALL NOT PERMIT THE INCLUSION OF ANY SECURITIES OTHER
THAN THE WARRANT SHARES TO BE INCLUDED IN ANY REGISTRATION
STATEMENT FILED PURSUANT TO SECTION 12.1 HEREOF, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE HOLDERS OF THE WARRANTS AND WARRANT SHARES
REPRESENTING A MAJORITY OF SUCH SECURITIES (ASSUMING THE EXERCISE
OF ALL OF THE WARRANTS).
(H) THE COMPANY SHALL FURNISH TO EACH HOLDER PARTICIPATING IN THE
OFFERING AND TO EACH UNDERWRITER, IF ANY, A SIGNED COUNTERPART,
ADDRESSED TO SUCH HOLDER OR UNDERWRITER, OF (I) AN OPINION OF
COUNSEL TO THE COMPANY, DATED THE EFFECTIVE DATE OF SUCH
REGISTRATION STATEMENT (AND, IF SUCH REGISTRATION INCLUDES AN
UNDERWRITTEN PUBLIC OFFERING, AN OPINION DATED THE DATE OF THE
CLOSING UNDER THE UNDERWRITING AGREEMENT), AND (II) A "COLD
COMFORT" LETTER DATED THE EFFECTIVE DATE OF SUCH REGISTRATION
STATEMENT (AND, IF SUCH REGISTRATION INCLUDES AN UNDERWRITTEN
PUBLIC OFFERING, A LETTER DATED THE DATE OF THE CLOSING UNDER THE
UNDERWRITING AGREEMENT) SIGNED BY THE INDEPENDENT PUBLIC
ACCOUNTANTS WHO HAVE ISSUED A REPORT ON THE COMPANY'S FINANCIAL
STATEMENTS INCLUDED IN SUCH REGISTRATION STATEMENT, IN EACH CASE
COVERING SUBSTANTIALLY THE SAME MATTERS WITH RESPECT TO SUCH
REGISTRATION STATEMENT (AND THE PROSPECTUS INCLUDED THEREIN) AND,
IN THE CASE OF SUCH ACCOUNTANTS' LETTER, WITH RESPECT TO EVENTS
SUBSEQUENT TO THE DATE OF SUCH FINANCIAL STATEMENTS, AS ARE
CUSTOMARILY COVERED IN OPINIONS OF ISSUER'S COUNSEL AND IN
ACCOUNTANTS' LETTERS DELIVERED TO UNDERWRITERS IN UNDERWRITTEN
PUBLIC OFFERINGS OF SECURITIES.
(I) THE COMPANY SHALL AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE
OF THE REGISTRATION STATEMENT, AND IN ANY EVENT WITHIN 15 MONTHS
THEREAFTER, MAKE "GENERALLY AVAILABLE TO ITS SECURITY HOLDERS"
(WITHIN THE MEANING OF RULE 158 UNDER THE ACT) AN EARNINGS
STATEMENT (WHICH NEED NOT TO BE AUDITED) COMPLYING WITH SECTION
11(A) OF THE ACT AND COVERING A PERIOD OF AT LEAST 12 CONSECUTIVE
MONTHS BEGINNING AFTER THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT.
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<PAGE> 10
(J) THE COMPANY SHALL DELIVER PROMPTLY TO EACH HOLDER PARTICIPATING IN
THE OFFERING REQUESTING THE CORRESPONDENCE AND MEMORANDA DESCRIBED
BELOW AND TO THE MANAGING UNDERWRITER, IF ANY, COPIES OF ALL
CORRESPONDENCE BETWEEN THE COMMISSION AND THE COMPANY, ITS COUNSEL
OR AUDITORS AND ALL MEMORANDA RELATING TO DISCUSSIONS WITH THE
COMMISSION OR ITS STAFF WITH RESPECT TO THE REGISTRATION STATEMENT
AND PERMIT EACH HOLDER AND UNDERWRITER TO DO SUCH INVESTIGATION,
UPON REASONABLE ADVANCE NOTICE, WITH RESPECT TO INFORMATION
CONTAINED IN OR OMITTED FROM THE REGISTRATION STATEMENT AS IT DEEMS
REASONABLY NECESSARY TO COMPLY WITH APPLICABLE SECURITIES LAW OR
RULES OF THE NASD. SUCH INVESTIGATION SHALL INCLUDE ACCESS TO
BOOKS, RECORDS AND PROPERTIES AND OPPORTUNITIES TO DISCUSS THE
BUSINESS OF THE COMPANY WITH ITS OFFICERS AND INDEPENDENT AUDITORS,
ALL TO SUCH REASONABLE EXTENT AND AT SUCH REASONABLE TIMES AND AS
OFTEN AS SUCH HOLDER OR UNDERWRITER SHALL REASONABLY REQUEST.
(K) THE COMPANY SHALL ENTER INTO AN UNDERWRITING AGREEMENT WITH THE
MANAGING UNDERWRITER SELECTED FOR SUCH UNDERWRITING BY HOLDERS
HOLDING A MAJORITY OF THE WARRANT SHARES REQUESTED TO BE INCLUDED
IN SUCH UNDERWRITING, WHICH MAY BE THE UNDERWRITER. SUCH AGREEMENT
SHALL BE SATISFACTORY IN FORM AND SUBSTANCE TO THE COMPANY, EACH
HOLDER AND SUCH MANAGING UNDERWRITER, AND SHALL CONTAIN SUCH
REPRESENTATIONS, WARRANTIES AND COVENANTS BY THE COMPANY AND SUCH
OTHER TERMS AS ARE CUSTOMARILY CONTAINED IN AGREEMENTS OF THAT TYPE
USED BY THE MANAGING UNDERWRITER. THE HOLDERS SHALL BE PARTIES TO
ANY UNDERWRITING AGREEMENT RELATING TO AN UNDERWRITTEN SALE OF
THEIR WARRANT SHARES AND MAY, AT THEIR OPTION, REQUIRE THAT ANY OR
ALL OF THE REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
TO OR FOR THE BENEFIT OF SUCH HOLDERS. SUCH HOLDERS SHALL NOT BE
REQUIRED TO MAKE ANY REPRESENTATIONS OR WARRANTIES TO OR
ARRANGEMENTS WITH THE COMPANY OR THE UNDERWRITERS EXCEPT AS THEY
MAY RELATE TO SUCH HOLDERS AND THEIR INTENDED METHODS OF
DISTRIBUTION.
(L) IN ADDITION TO THE WARRANT SHARES, UPON THE WRITTEN REQUEST
THEREFOR BY AN HOLDER(S), THE COMPANY SHALL INCLUDE IN THE
REGISTRATION STATEMENT ANY OTHER SECURITIES OF THE COMPANY HELD BY
SUCH HOLDER(S) AS OF THE DATE OF FILING OF SUCH REGISTRATION
STATEMENT, INCLUDING WITHOUT LIMITATION, RESTRICTED SHARES OF
COMMON STOCK, OPTIONS, WARRANTS OR ANY OTHER SECURITIES CONVERTIBLE
INTO SHARES OF COMMON STOCK.
(M) FOR PURPOSES OF THIS AGREEMENT, THE TERM "MAJORITY" IN REFERENCE TO
THE HOLDERS OF WARRANTS OR WARRANT SHARES SHALL MEAN IN EXCESS OF
50% OF THE THEN OUTSTANDING WARRANTS OR WARRANT SHARES THAT (I) ARE
NOT HELD BY THE COMPANY, AN AFFILIATE, OFFICER, CREDITOR, EMPLOYEE
OR AGENT THEREOF OR ANY OF THEIR RESPECTIVE AFFILIATES, MEMBERS OF
THEIR FAMILY, PERSONS ACTING AS NOMINEES OR IN CONJUNCTION
THEREWITH AND (II) HAVE NOT BEEN RESOLD TO THE PUBLIC PURSUANT TO A
REGISTRATION STATEMENT FILED WITH THE COMMISSION UNDER THE ACT.
SECTION 13.
MISCELLANEOUS
13.1 ORIGINAL ISSUE TAXES. The Company will pay all United States, state
and local (but not foreign) original issue taxes, if any, upon the
issuance of this Warrant and the Warrant Shares.
13.2 AMENDMENT AND WAIVER. Except as otherwise provided herein, the
provisions of this Warrant may be amended, and the Company may take any
action herein prohibited or omit to perform any act herein required to
be performed by it, only if the Company has obtained the written consent
of the Holders of the Warrants representing at least 50% of the shares
of Common Stock obtainable upon the exercise of the Warrants outstanding
at the time of such consent.
13.3 NOTICES. Any notices required to be sent to a Holder of this Warrant
or of any Warrant Shares purchased upon the exercise hereof will be
delivered to the address of such Holder shown on the books of the
Company. All notices referred to herein will be delivered in person or
sent by registered or certified mail, postage prepaid, and will be
deemed to have been given when so delivered in person or on the third
business day following the date so sent by mail.
10
<PAGE> 11
<TABLE>
<S> <C>
If to the Holder: JOSEPH STEVENS & COMPANY, INC.
33 MAIDEN LANE
8TH FLOOR
NEW YORK, NEW YORK 10038
ATTENTION: JOSEPH SORBARA
With a copy to: Broad and Cassel
Miami Center
201 S. Biscayne Boulevard
Suite 3000
Miami, Florida 33131
Attention: Linda C. Frazier, Esquire
If to the Company: Curtis International Ltd.
7 Kodiak Crescent
Pawnsview, Ontario M3J 3E5
Attention: Aaron Herzog, President
With a copy to: Gersten, Savage, Kaplowitz & Fredericks LLP
101 East 52nd Street
New York, New York 10022
Attention: Arthur S. Marcus, Esquire
</TABLE>
13.4 DESCRIPTIVE HEADINGS. The descriptive headings of the sections and
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
13.5 GOVERNING LAW; ARBITRATION. This Warrant is governed by, interpreted
under and construed in all respects in accordance with the substantive
laws of the State of NEW YORK, without regard to the conflicts of law
provisions thereof, and irrespective of the place of domicile or
residence of the party. In the event of a controversy arising out of the
interpretation, construction, performance or breach of this Warrant, the
parties hereby agree and consent to the jurisdiction and venue of the
courts of the State of NEW YORK; and further agree and consent that
personal service of process in any such action or proceeding outside the
State of NEW YORK shall be tantamount to service in person in NEW YORK.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed and
attested by its duly authorized officer.
CURTIS INTERNATIONAL LTD., an Ontario
corporation
By:
------------------------------------
Aaron Herzog, President
Attest:
- ------------------------------------------------------
JACOB HERZOG, SECRETARY
11
<PAGE> 12
EXHIBIT I
EXERCISE AGREEMENT
To: Dated:
The undersigned Record Holder, pursuant to the provisions set forth in the
within Warrant, hereby subscribes for and purchases Warrant Shares
covered by such Warrant and herewith makes full cash payment of
$ for such Warrant Shares at the Exercise Price provided by
such Warrant.
(Signature)
(Print or type name)
(Address)
NOTICE: The signature on this Exercise Agreement must correspond with the
name as written upon the face of the within Warrant, or upon the Assignment
thereof if applicable, in every particular, without alteration, enlargement, or
any change whatsoever, and must be medallion guaranteed by a bank, other than a
saving bank, having an office or correspondent in New York, New York, or Fort
Lauderdale or Miami, Florida, or by a firm having membership on a registered
national securities exchange and an office in New York, New York, or Fort
Lauderdale or Miami, Florida.
MEDALLION SIGNATURE GUARANTEE
Authorized Signature:
Name of Bank or Firm:
Dated:
12
<PAGE> 13
EXHIBIT II
ASSIGNMENT
FOR VALUE RECEIVED,
-----------------------------------------------, the undersigned Holder
hereby sells, assigns, and transfers all of the rights of the undersigned under
the within Warrant with respect to the number of Warrant Shares covered thereby
set forth below, unto the Assignee identified below, and does hereby irrevocably
constitute and APPOINT to effect such transfer of rights on the books
of the Company, with full power of substitution:
<TABLE>
<S> <C> <C>
Name of Assignee Address of Assignee No. of Warrant Shares
- ------------------------------- -------------------------------------------- -------------------------------
Dated: _______________________________
(Signature of Holder)
(Print or type name)
</TABLE>
NOTICE: The signature on this Assignment must correspond with the name as
written upon the face of the within Warrant, in every particular, without
alteration, enlargement, or any change whatsoever, and must be medallion
guaranteed by a bank, other than a savings bank, having an office or
correspondent in New York, New York, or Fort Lauderdale or Miami, Florida, or by
a firm having membership on a registered national securities exchange and an
office in New York, New York, or Fort Lauderdale or Miami, Florida.
MEDALLION SIGNATURE GUARANTEE
Authorized Signature:
Name of Bank or Firm:
Dated:
13
<PAGE> 1
EXHIBIT 10.1
FINANCIAL CONSULTING AGREEMENT
This FINANCIAL CONSULTING AGREEMENT (this "Agreement") made as of
the day of , 1998, is by and between Curtis International, Ltd., an
Ontario corporation, with its principal place of business at 7 Kodiak Crescent,
Downsview, Ontario M3J 3E5 (the "Company"), and Joseph Stevens & Company, Inc.,
a corporation, having its principal place of business at 33 Maiden Lane, 8th
Floor, New York, New York 10038 (the "Consultant").
RECITALS:
A. The Company is a public company with a class of equity securities
publicly traded, and desires to retain Consultant to provide certain
financial consulting services.
B. Consultant desires to provide certain financial consulting services to
the Company in accordance with the terms and conditions contained
hereinafter.
NOW, THEREFORE, in consideration of the mutual promises set forth
herein, the parties hereto hereby agree as follows:
1. CONSULTING SERVICES. During the term of this Agreement, the
Consultant will provide the Company with such regular and customary
consulting advice as is reasonably requested by the Company, provided
that the Consultant shall not be required to undertake duties not
reasonably within the scope of the consulting advisory service
contemplated by this Agreement. In performance of these duties, the
Consultant shall provide the Company with the benefits of its best
judgment and efforts. It is understood and acknowledged by the parties
that the value of the Consultant's advice is not measurable in any
quantitative manner, and that the Consultant shall be obligated to
render advice, upon the request of the Company, in good faith, but shall
not be obligated to spend any specific amount of time in doing so. The
Consultant's duties may include, but will not necessarily be limited to:
A. Providing sponsorship and exposure in connection with the
dissemination of corporate information regarding the Company to the
investment community at large under a systematic planned approach;
B. Rendering advice and assistance in connection with the preparation of
annual and interim reports and press releases;
C. Arranging, on behalf of the Company and its representatives, at
appropriate times, meetings with securities analysts of major regional
investment banking firms;
D. Assisting in the Company's financial public relations, including
discussions between the Company and the financial community;
E. Rendering advice with regard to internal operations, including:
(i) advice regarding formation of corporate goals and their
implementation;
(ii) advice regarding the financial structure of the Company and its
divisions or subsidiaries or any programs and projects of such
entities;
(iii) advice concerning the securing, when necessary and if possible, of
additional financing through banks, insurance companies and/or
other institutions;
(iv) advice regarding corporate organization and personnel;
F. Rendering advice with respect to any acquisition program of the
Company; and
G. Rendering advice regarding a future public or private offering of
securities of the Company or of any subsidiary.
1
<PAGE> 2
2. RELATIONSHIPS WITH OTHERS. The Company acknowledges that the
Consultant and its affiliates are in the business of providing financial
services and consulting advice (of all types contemplated by this
Agreement) to others. Nothing herein contained shall be construed to
limit or restrict the Consultant or its affiliates from rendering such
services or advice to others.
3. TERM. The term of this Agreement shall be for two years commencing
as of the date first written above and terminating one day prior to the
second anniversary hereof; provided, however, that this Agreement shall
be automatically renewable for subsequent one year terms upon mutual
agreement of the parties.
4. COMPENSATION. In consideration for the performance of services
hereunder, the Company hereby agrees to pay Consultant the aggregate sum
of $ , representing full payment due, which will be paid as of the
date first written above. The Company further hereby agrees to pay the
reasonable out-of-pocket expenses incurred by Consultant in connection
with such services to be rendered hereunder. Consultant may, from time
to time, deem it to be in the best interests of the Company to retain an
outside consultant in connection with certain specific acquisitions or
proposed transactions. Consultant agrees to obtain the written consent
of the Company prior to retaining such Consultant. In such event, the
Company hereby agrees to pay any and all fees and expenses of such
consultant.
5. FINDER'S FEE. In addition to the duties set out in Section 1 hereof,
the Consultant agrees to furnish advice to the Company in connection
with the acquisition of and/or merger with other companies, joint
ventures with any third parties, and any other financing (other than the
private or public sale of the Company's securities for cash), including,
but not limited to, the sale of the Company itself (or any significant
percentage, subsidiaries or affiliates thereof). In the event that any
such transactions are directly or indirectly originated by the
Consultant for a period of five years from the date hereof, the Company
shall pay fees to the Consultant as follows:
<TABLE>
<S> <C>
$ -0- - $ 3,000,000 5% of legal consideration
Amount calculated pursuant to line 1 of this
$ 3,000,001 - $ 4,000,000 computation, plus 4% of excess over $3,000,000
Amount calculated pursuant to lines 1 and 2 of this
$ 4,000,001 - $ 5,000,000 computation, plus 3% of excess over $4,000,000
Amount calculated pursuant to lines 1, 2 and 3 of this
above $5,000,000 computation, plus 2% of excess over $5,000,000.
</TABLE>
Legal consideration is defined, for purposes of this Agreement, as the
total of stock (valued at market on the day of closing, or if there is no public
market, valued as set forth herein for other property), cash and assets and
property or other benefits exchanged by the Company or received by the Company
or its shareholders (all valued at fair market value as agreed or, if not, by
any independent appraiser), irrespective of period of payment or terms.
6. SALES OR DISTRIBUTIONS OF SECURITIES. If the Consultant assists the
Company in the sale or distribution of securities to the public or in a
private transaction, the Consultant shall receive fees in the amount and
form to be arranged separately at the time of such transaction.
7. FORM OF PAYMENT. All fees due to the Consultant pursuant to Section
5 hereof are due and payable to the Consultant, in cash or by certified
check, at the closing or closings of a transaction specified in such
Section 5 or as otherwise agreed between the parties hereto. In the
event that this Agreement shall not be renewed for a period of at least
12 months at the end of the two year period referred to in Section 3
hereof or if terminated for any reason prior to the end of such two year
period then, notwithstanding any such non-renewal or termination, the
Consultant shall be entitled to the full fee for any transaction
contemplated under Section 5 hereof which closes within 12 months after
such non-renewal or termination.
2
<PAGE> 3
8. LIMITATION UPON THE USE OF ADVICE AND SERVICES.
A. No person or entity, other than the Company or any of its
subsidiaries, shall be entitled to make use of or rely upon the advice
of the Consultant to be given hereunder, and the Company shall not
transmit such advice to others, or encourage or facilitate the use of or
reliance upon such advice by others, without the prior written consent
of the Consultant.
B. It is clearly understood that the Consultant, for services rendered
under this Agreement, makes no commitment whatsoever as to making a
market in the securities of the Company or to recommend or advise its
clients to purchase the securities of the Company. Research reports or
corporate finance reports that may be prepared by the Consultant will,
when and if prepared, be done solely on the merits or judgment of
analysts of the Consultant or senior corporate finance personnel of the
Consultant.
C. The use of the Consultant's name in any annual report or other report
of the Company, or any release or similar document prepared by or on
behalf of the Company, must have the prior written approval of the
Consultant unless the Company is required by law to include the
Consultant's name in such annual report, other report or release, in
which event the Consultant will be furnished with a copy of such annual
report, other report or release using Consultant's name in advance of
publication by or on behalf of the Company.
D. Should any purchases of securities be requested to be effected through
the Consultant by the Company, its officers, directors, employees or
other affiliates, or by any person on behalf of any profit sharing,
pension or similar plan of the Company, for the account of the Company
or the individuals or entities involved, such orders shall be taken by a
registered account executive of the Consultant, shall not be subject to
the terms of this Agreement, and the normal brokerage commission as
charged by the Consultant will apply in conformity with all rules and
regulations of the New York Stock Exchange, the National Association of
Securities Dealers, Inc. or other regulatory bodies. Where no regulatory
body sets the fee, the normal established fee as used by the Consultant
shall apply.
E. The Consultant shall not disclose confidential information which it
learns about the Company as a result of its engagement hereunder, except
as such disclosure as may be required for Consultant to perform its
duties hereunder.
9. REPRESENTATIONS OF THE COMPANY. The Company hereby represents and
warrants that any and all information supplied hereunder to Consultant
in connection with any and all services to be performed hereunder by
Consultant for and on behalf of the Company shall be true, complete and
correct as of the date of such dissemination and shall not fail to state
a material fact necessary to make any of such information not
misleading. The Company hereby acknowledges that the ability of
Consultant to adequately provide financial consulting services hereunder
and/or to initiate and/or effectuate introductions on behalf of the
Company with respect to potential acquisitions is dependent upon the
prompt dissemination of accurate, correct and complete information to
Consultant. In addition, and notwithstanding anything contained herein
to the contrary, nothing hereunder shall obligate Consultant to make any
minimum number of introductions hereunder or to initiate any merger or
acquisitions involving or relating to the Company. The Company further
represents and warrants hereunder that this Agreement and the
transactions contemplated hereunder, including the issuance of the
warrants hereunder, have been duly and validly authorized by all
requisite corporate action; that the Company has the full right, power
and capacity to execute, deliver and perform its obligations hereunder;
and that this Agreement, upon execution and delivery of the same by the
Company, will represent the valid and binding obligation of the Company
enforceable in accordance with its terms. The representations and
warranties set forth herein shall survive the termination of this
Agreement.
10. INDEMNIFICATION. Since the Consultant will be acting on behalf of
the Company in connection with its engagement hereunder, the Company and
Consultant have entered into a separate indemnification agreement
substantially in the form attached hereto as Exhibit A and dated the
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date hereof, providing for the indemnification of Consultant by the
Company. The Consultant has entered into this Agreement in reliance on
the indemnities set forth in such indemnification agreement.
11. INDEPENDENT CONTRACTOR. It is expressly understood and agreed that
the Consultant shall, at all times, act as an independent contractor
with respect to the Company and not as an employee or agent of the
Company, and nothing contained in the Agreement shall be construed to
create a joint venture, partnership, association or other affiliation,
or like relationship, between the parties. It is specifically agreed
that the relationship is and shall remain that of independent parties to
a contractual relationship and that the Consultant shall have no right
to bind the Company in any manner. In no event shall either party be
liable for the debts or obligations of the other except as otherwise
specifically provided in the Agreement.
12. AMENDMENT. No modification, waiver, amendment, discharge or change
of this Agreement shall be valid unless the same is evidenced by a
written instrument, executed by the party against which such
modification, waiver, amendment, discharge, or change is sought.
13. NOTICES. All notices, demands or other communications given
hereunder shall be in writing and shall be deemed to have been duly
given when delivered in person or transmitted by facsimile transmission
or the third calendar day after being mailed by United States registered
or certified mail, return receipt requested, postage prepaid, to the
addresses herein above first mentioned or to such other address as any
party hereto shall designate to the other for such purpose in the manner
hereinafter set forth.
14. ENTIRE AGREEMENT. This Agreement contains all of the understandings
and agreements of the parties with respect to the subject matter
discussed herein. All prior agreements, whether written or oral, are
merged herein and shall be of no force or effect.
15. SEVERABILITY. The invalidity, illegality or unenforceability of any
provision or provisions of this Agreement will not affect any other
provision of this Agreement, which will remain in full force and effect,
nor will the invalidity, illegality or unenforceability of a portion of
any provision of this Agreement affect the balance of such provision. In
the event that any one or more of the provisions contained in this
Agreement or any portion thereof shall for any reason be held to be
invalid, illegal or unenforceable in any respect, this Agreement shall
be reformed, construed and enforced as if such invalid, illegal or
unenforceable provision had never been contained herein.
16. CONSTRUCTION AND ENFORCEMENT. This Agreement shall be construed in
accordance with the laws of the State of New York, without application
of the principles of conflicts of laws. If it becomes necessary for any
party to institute legal action to enforce the terms and conditions of
this Agreement, the successful party will be awarded reasonable
attorneys' fees at all trial and appellate levels, expenses and costs.
17. BINDING NATURE. The terms and provisions of this Agreement shall be
binding upon and inure to the benefit of the parties, and their
respective successors and assigns.
18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, including facsimile signatures which shall be deemed as
original signatures. All executed counterparts shall constitute one
Agreement, notwithstanding that all signatories are not signatories to
the original or the same counterpart.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
CURTIS INTERNATIONAL, LTD.,
an Ontario corporation
By:
Aaron Herzog, President
JOSEPH STEVENS & COMPANY, INC.,
a________corporation
By:
Name:
Title:
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EXHIBIT A
LADIES AND GENTLEMEN:
In connection with our engagement of JOSEPH STEVENS & COMPANY, INC. (the
"Consultant") as our financial advisor and investment banker, we hereby agree to
indemnify and hold the Consultant and its affiliates, and the directors,
officers, partners, shareholders, agents and employees of the Consultant
(collectively the "Indemnified Persons"), harmless from and against any and all
claims, actions, suits, proceedings (including those of shareholders), damages,
liabilities and expenses incurred by any of them (including , but not limited
to, fees and expenses of counsel) which are (A) related to or arise out of (i)
any actions taken or omitted to be taken (including any untrue statements made
or any statements omitted to be made) by us, or (ii) any actions taken or
omitted to be taken by any Indemnified Person in connection with our engagement
of the Consultant pursuant to the Financial Consulting Agreement, of even date
herewith, between the Consultant and us (the "Consulting Agreement"), or (B)
otherwise related to or arising out of the Consultant's activities on our behalf
pursuant to the Consultant's engagement under the Consulting Agreement, and we
shall reimburse any Indemnified Person for all expenses (including, but not
limited to, fees and expenses of counsel) incurred by such Indemnified Person in
connection with investigating, preparing or defending any such claim, action,
suit or proceeding (collectively a "Claim"), whether or not in connection with
pending or threatened litigation in which any Indemnified Person is a party. We
will not, however, be responsible for any Claim which is finally judicially
determined to have resulted exclusively from the gross negligence or willful
misconduct of any person seeking indemnification hereunder. We further agree
that no Indemnified Person shall have any liability to us for or in connection
with the Consultant's engagement under the Consulting Agreement except for any
Claim incurred by us solely as a direct result of any Indemnified Person's gross
negligence or willful misconduct.
We further agree that we will not, without the prior written consent of the
Consultant settle, compromise or consent to the entry of any judgment in any
pending or threatened Claim in respect of which indemnification may be sought
hereunder (whether or not any Indemnified Person is an actual or potential party
to such Claim), unless such settlement, compromise or consent includes a legally
binding, unconditional, and irrevocable release of each Indemnified Person
hereunder from any and all liability arising out of such Claim.
Promptly upon receipt by an Indemnified Person of notice of any complaint
or the assertion or institution of any Claim with respect to which
indemnification is being sought hereunder, such Indemnified Person shall notify
us in writing of such complaint or of such assertion or institution, but failure
to so notify us shall not relieve us from any obligation we may have hereunder,
unless, and only to the extent that, such failure results in the forfeiture by
us of substantial rights and defenses, and such failure to so notify us will not
in any event relieve us from any other obligation or liability we may have to
any Indemnified Person otherwise than under this Agreement. If we so elect or
are requested by such Indemnified Person, we will assume the defense of such
Claim, including the employment of counsel reasonably satisfactory to such
Indemnified Person and the payment of the fees and expenses of such counsel. In
the event, however, that such Indemnified Person reasonably determines in its
sole judgment that having common counsel would present such counsel with a
conflict of interest or such Indemnified Person concludes that there may be
legal defenses available to it or other Indemnified Persons different from or in
addition to those available to us, then such Indemnified Person may employ its
own separate counsel to represent or defend it in any such Claim and we shall
pay the reasonable fees and expenses of such counsel. Notwithstanding anything
herein to the contrary, if we fail timely or diligently to defend, contest, or
otherwise protect against any Claim, the relevant Indemnified Party shall have
the right, but not the obligation, to defend, contest, compromise, settle,
assert crossclaims or counterclaims, or otherwise protect against the same, and
shall be fully indemnified by us therefor, including, but not limited to, for
the fees and expenses of its counsel and all amounts paid as a result of such
Claim or the compromise or settlement thereof. In any Claim in which we assume
the defense, the Indemnified Person shall have the right to participate in such
defense and to retain its own counsel therefor at its own expense.
We agree that if any indemnity sought by an Indemnified Person hereunder is
held by a court to be unavailable for any reason, then (whether or not the
Consultant is the Indemnified Person) we and the Consultant shall contribute to
the Claim for which such indemnity is held unavailable in such proportion as is
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appropriate to reflect the relative benefits to us, on the one hand, and the
Consultant, on the other, in connection with the Consultant's engagement by us
under the Consulting Agreement, subject to the limitation that in no event shall
the amount of the Consultant's contribution to such Claim exceed the amount of
fees actually received by the Consultant from us pursuant to the Consultant's
engagement under the Consulting Agreement. We hereby agree that the relative
benefits to us, on the one hand, and the Consultant, on the other hand, with
respect to the Consultant's engagement under the Consulting Agreement shall be
deemed to be in the same proportion as (a) the total value paid or proposed to
be paid or received by us or our shareholders as the case may be, pursuant to
the transaction (whether or not consummated) for which the Consultant is engaged
to render services bears to (b) the fee paid or proposed to be paid to the
Consultant in connection with such engagement.
Our indemnity, reimbursement and contribution obligations under this
Agreement shall be in addition to, and shall in no way limit or otherwise
adversely affect any rights that an Indemnified Party may have at law or at
equity.
Should the Consultant, or any of its directors, officers, partners,
shareholders, agents or employees, be required to be requested by us to provide
documentary evidence or testimony in connection with any proceeding arising from
or relating to the Consultant's engagement under the Consulting Agreement, we
agree to pay all reasonable expenses (including but not limited to fees and
expenses of counsel) in complying therewith and one thousand dollars ($1,000)
per day for any sworn testimony or preparation therefor, payable in advance.
We hereby consent to personal jurisdiction and service of process and venue
in any court in which any claim for indemnity is brought by any Indemnified
Person.
It is understood that, in connection with the Consultant's engagement under
the Consulting Agreement, the Consultant may be engaged to act in one or more
additional capacities and that the terms of the original engagement or any such
additional engagement may be embodied in one or more separate written
agreements. The provisions of this Agreement shall apply to the original effect
following the completion or termination of the Consultant's engagement(s).
Very truly yours,
CURTIS INTERNATIONAL, LTD.
By:
Aaron Herzog, President
CONFIRMED AND AGREED TO:
JOSEPH STEVENS & COMPANY, INC.
By:
Name:
Title:
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EXHIBIT 23.1
CONSENT OF SCHWARTZ LEVITSKY FELDMAN
The Undersigned, Schwartz Levitsky Feldman, Chartered Accountants hereby
consents to the use of our name and the use of our opinion dated July 24, 1998
for Curtis International Ltd. (the "Company") as filed with its Registration
Statement on Form SB-2 being filed by the Company.
Date: September 22, 1998
SCHWARTZ LEVITSKY FELDMAN,
Chartered Accountants
/s/ Schwartz Levitsky Feldman
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