<PAGE> 1
As filed with the Securities and Exchange Commission on ____________,
2000. Registration No. ___________
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Exhaust Technologies, Inc.
(Name of small business issuer in its charter)
Washington 336300 91-1970433
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(State or Other (Primary Standard (IRS Employer
Jurisdiction of Industrial Identification Number)
Organization) Classification Code)
EXHAUST TECHNOLOGIES, INC. Conrad C. Lysiak, Esq.
230 North Division 601 West First Avenue, Suite 503
Spokane, Washington 99202 Spokane, Washington 99201
(509) 838-4401 (509) 624-1475
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(Address and telephone of (Name, address and telephone
registrant's executive office) number of agent for service)
APPROXIMATE DATE OF COMMENCEMENT 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 common stock for an
offering pursuant to Rule 462(b) under the Securities Act, please check
the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [ ]
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<PAGE> 2
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CALCULATION OF REGISTRATION FEE
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Securities Offering Aggregate
to be Amount to be Price Offering Registration
registered Registered Per Share Price Fee (1)
Units each
consisting of: 1,000,000 $ 5.10 $ 5,100,000 $ 1,346.40
One share of
common stock 1,000,000
and one
redeemable
warrant 1,000,000
Shares of
common stock
issuable upon
exercise of
redeemable
warrants 1,000,000 $ 9.00 $ 9,000,000 $ 2,376.00
Additional
redeemable
warrants 1,000,000 $ 0.10 $ 100,000 $ 26.40
Shares of
common stock
issuable upon
exercise of
additional
redeemable
warrants 1,000,000 $ 9.00 $ 9,000,000 $ 2,376.00
Underwriter
Units each
consisting of: 100,000 $ 0.0001 $ 10 $ 0.01
One share of
common stock 100,000
and one
underwriter
warrant 100,000
Shares of
common stock
issuable upon
exercise of
underwriter
warrants 100,000 $ 6.12 $ 612,000 $ 161.57
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TOTAL REGISTRATION FEE $ 23,812,010 $ 6,286.38
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[1] Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c).
<PAGE> 3
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES
THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN
ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, OR UNTIL
THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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.
The following language will be included on the front cover page of the
prospectus:
The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, FEBRUARY 22, 2000
<PAGE> 4
PROSPECTUS
EXHAUST TECHNOLOGIES, INC.
1,000,000 UNITS
CONSISTING OF ONE SHARE OF COMMON STOCK
AND ONE REDEEMABLE WARRANT, AND
1,000,000 ADDITIONAL REDEEMABLE WARRANTS
NO MINIMUM
Each unit consists of one share of common stock and one warrant.
Each warrant entitles the holder to purchase one share of common stock at
a price of $7.00 provided the same is exercised from _____________ to
__________ and at a price of $9.00 if the warrant is exercised from
___________ to __________. If the redeemable warrants are not exercised
by ___________ they will expire and cannot be exercised thereafter.
In addition, we are selling 1,000,000 redeemable warrants for $0.10
per warrant. Each warrant is exercisable under the same terms as set
forth above.
Prior to this offering, there has been no public market for the
units, common stock or redeemable warrants.
Investing in the units and redeemable warrants involves certain
risks. See "Risk Factors" starting at page 6.
Price to Underwriting Proceeds to
Public Commission Us [1]
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Per Unit $ 5.10 $ 0.51 $ 4.59
Per Warrant $ 0.10 $ 0.01 $ 0.09
Total $5,200,000 $520,000 $4,680,000
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[1] Before deducting expenses related to the offering by the Company,
estimated at $260,000, which does not include the Underwriting
Commission set forth above.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation
to the contrary is a criminal offense.
The offering price has been arbitrarily determined by the
Underwriter and us.
Our underwriter is Castle Securities Corp., 45 Church Street, Suite
25, Freeport, New York 11520. Their telephone number is (516) 868-2000.
They will be using their best efforts to sell our securities. They have
no obligation to purchase any of our securities and they are not
guarantying they will be able to sell any of our securities.
We and Castle Securities have the right to accept or reject
subscriptions in whole or in part, for any reason or for no reason. All
monies from rejected subscriptions will be returned immediately by Castle
Securities to you, without interest or deductions. Subscriptions for
securities will be accepted or rejected within 48 hours after we receive
them.
CASTLE SECURITIES CORP.
45 Church Street, Suite 25
Freeport, New York 11520
Tel: (516) 868-2000
The date of this prospectus is _______________, 2000
<PAGE> 5
TABLE OF CONTENTS
Page No.
SUMMARY OF PROSPECTUS . . . . . . . 6
RISK FACTORS . . . . . . . . . 7
USE OF PROCEEDS . . . . . . . . 12
DETERMINATION OF OFFERING PRICE . . . . . 13
DILUTION OF THE PRICE YOU PAY FOR YOUR SHARES . . 13
PLAN OF DISTRIBUTION; UNDERWRITING;
TERMS OF THE OFFERING . . . . . . . 14
BUSINESS . . . . . . . . . . 17
MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION . . . . . 20
MANAGEMENT . . . . . . . . . 24
EXECUTIVE COMPENSATION . . . . . . . 25
PRINCIPAL SHAREHOLDERS . . . . . . . 26
DESCRIPTION OF SECURITIES . . . . . . 28
CERTAIN TRANSACTIONS . . . . . . . 30
LITIGATION . . . . . . . . . 30
EXPERTS . . . . . . . . . . 31
LEGAL MATTERS . . . . . . . . . 31
FINANCIAL STATEMENTS . . . . . . . 31
<PAGE> 6
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SUMMARY OF PROSPECTUS
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This summary provides an overview of selected information contained
in this prospectus. It does not contain all the information you should
consider before making a decision to purchase the shares we are offering.
You should very carefully and thoroughly read the more detailed
information in this prospectus, particularly the Risk Factors section,
review our financial statements and review all other information that is
incorporated by reference in this prospectus.
Summary Information about Our Company
We incorporated in the State of Washington on July 21, 1998 and we
have not generated any revenues from operations. See the "Business"
section for a more detailed description of our business operations.
In July 1998, we issued, 4,500,000 shares of common stock to our
officers and our President's son for a licensing agreement and services.
In 1999, we sold 192,750 shares of our common stock to 41 people for
$38,548 before deducting offering costs of $12,256. Upon effectiveness of
this registration statement, Robert Sterling will return 1,692,750 shares
to the Company for cancellation as a predetermined condition for Castle
Securities Corp. entering into an underwriting agreement with us to sell
our securities.
Our office is located at 230 North Division Street, Spokane,
Washington 99202. Our telephone number is (509) 838-4401.
The Offering
Following is a brief summary of this offering. Please see the "Plan
of Distribution; Terms of the Offering" in this prospectus for a more
detailed description of the terms of the offering.
Securities Being Offered . . Up to 1,000,000 units and up to
1,000,000 redeemable warrants
Offering Price per Unit . . $ 5.10
Offering Price per
Redeemable Warrant . . $ 0.10
Offering Period . . . The units consisting of common stock
and redeemable warrants and
additional redeemable warrants are
being offered for a period not to
exceed 90 days, unless extended by
our board of directors and
underwriter for an additional 90
days.
Net Proceeds to Our Company . Approximately $4,680,000, before
deducting $260,000 in expenses
associated with this offering, but
after deduction for the underwriting
commission. See "Use of Proceeds."
This assumes all units are sold.
Use of Proceeds . . . We will use the proceeds to pay for
production of inventory and working
capital. See "Use of Proceeds."
<PAGE> 7
Number of Shares Outstanding
Before the Offering . . 4,692,750. See "Description of
Securities."
Number of Shares Outstanding
after the Offering . . . 4,000,000 See "Description of
Securities." Includes the effect of
the 1,692,750 shares which will be
given back to the Company by the
President and Chief Executive Officer
upon effectiveness of the
registration of this statement.
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RISK FACTORS
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AN INVESTMENT IN THESE SECURITIES INVOLVES AN EXCEPTIONALLY HIGH
DEGREE OF RISK AND IS EXTREMELY SPECULATIVE. IN ADDITION TO THE OTHER
INFORMATION REGARDING OUR COMPANY CONTAINED IN THIS PROSPECTUS, YOU
SHOULD CONSIDER MANY IMPORTANT FACTORS IN DETERMINING WHETHER TO PURCHASE
THE SHARES BEING OFFERED. THE FOLLOWING RISK FACTORS ARE SOME OF THE
POTENTIAL AND SUBSTANTIAL RISKS WHICH COULD BE INVOLVED IF YOU DECIDE TO
PURCHASE SHARES IN THIS OFFERING.
1. We Have No Operating History; Going Concern.
We are recently formed and have no operating history. We cannot
assure you that we will be successful in our plans. Therefore our
independent certified public accountants have modified their report to
include a paragraph wherein they expressed substantial doubt about the
Company's ability to continue in business as a going concern. We face
all of the risks and uncertainties encountered by a new business. Because
we have no operating history we cannot reliably forecast our future
operations. See "Business."
2. We Have No Market Research.
We have not conducted nor engaged other entities to conduct market
research for our products. Accordingly, there is no assurance that market
demand exists for our products. See "Business."
3. No Independent Valuation of the Company or Fairness Opinion
obtained.
We have not obtained an independent valuation of the price of the
units and/or warrants or obtained an opinion of the fairness of the price
of the units and/or warrants.
<PAGE> 8
4. Year 2000.
We were aware of the issues associated with the programming code in
computer systems as the millennium (year 2000) approached. The "Year
2000" problem was pervasive and complex as virtually every computer
operation was affected in some way by the rollover of the two digit year
value to 00. The issue was whether computer systems would be able to
properly recognize date sensitive information when the year changed to
2000. Systems that did not properly recognize such information could
generate erroneous data or cause a system to fail. Since we did not
acquired additional hardware or software technology in support of our
services at present, the year 2000 problem did not have a significant
impact on our operations. However, it may have a significant impact on
key suppliers and customers with whom we may do business in the future.
Even though this prospectus is being filed after January 1, 2000, year
2000 compliance issues could continue into the future as software
manufactured prior to January 1, 2000 is sold into the marketplace.
5. We Do Not Have Key Personnel Insurance.
We do not maintain any life insurance on the lives of any of our
officers and directors. If one or all of our officers or directors die
of otherwise become incapacitated, our operations could be interrupted or
terminate. In the event that our underwriter successfully completes the
sale of any securities, we will be obligated, pursuant to the
underwriting agreement, to acquire insurance on the life of our
President, Robert Sterling and his son, Matt Sterling. See "Management."
6. No Liability Insurance Coverage.
We do not have any liability insurance. We have potential liability
if our products injure a user. If that happens and we are held liable,
we could be sued for a large sum of money. Further, we could be placed
in a situation whereby we could be forced to defend a frivolous lawsuit.
If we cannot pay the judgment and become insolvent, or do not have the
funds to defend a frivolous lawsuit, we could be forced to stop doing
business.
7. Uninsured Risks.
We may not maintain insurance against all losses we suffer or
liabilities we incur because of our operations. This could be because
insurance is unavailable, we do not have the financial resources to
acquire the insurance, or because we have elected not to purchase
insurance.
8. We Need to Complete This Offering.
We need to raise additional capital. If this offering is
unsuccessful, we may have to discontinue our operations. See "Business."
9. We Need Additional Key Personnel.
We have no full time employees. Our success will depend in part,
upon our ability to attract and retain qualified employees. There is no
assurance we will be able to obtain or retain qualified employees. If we
are unable to engage and retain the necessary personnel, our business
would be materially and adversely affected. See "Business."
<PAGE> 9
10. Reliance Upon Our Directors and Officers.
We are wholly dependent upon the personal efforts and abilities of
our officers who will exercise control over the day-to-day affairs of the
Company, and upon our Directors, most of whom are engaged in other
activities. Our officers will devote approximately 80% of their time to
our day-to-day operation. As such, while we will solicit business
through our officers, there can be no assurance as to the volume of
business, if any, which we may succeed in obtaining. Further we can't be
sure that our proposed operations will be profitable. See "Business" and
"Management."
11. Issuance of Additional Shares.
As of January 4, 2000, approximately 95,307,250 shares of common
stock or 95.31% of our 100,000,000 authorized shares remain unissued.
Mr. Sterling, our President, has agreed to return 1,692,750 of his shares
to the Company for cancellation upon this registration statement being
declared effective by the SEC. Our Board of Directors has the power to
issue more shares without shareholder approval. Although we presently
have no commitments, contracts or intentions to issue any additional
shares to other persons, we may in the future attempt to issue more
shares to acquire products, equipment or properties, or for other
corporate purposes. See "Description of Securities Shares Eligible for
Future Sale."
12. Non-Arms' Length Transaction.
The number of shares issued to present shareholders of the Company
for property and services was arbitrarily determined by us and should not
be considered the product of arm's length transactions. See "Principal
Shareholders."
13. Indemnification of Officers and Directors for Securities
Liabilities.
Our Articles of Incorporation provide that we may indemnify any
Director, Officer, agent and/or employee for liabilities as are specified
in the Washington Business Corporation Act. Further, we may purchase and
maintain insurance on behalf of any such persons whether or not we have
the power to indemnify such person against the liability insured against.
The foregoing could result in substantial expenditures by us and prevent
us from recovering from such Officers, Directors, agents and employees
for losses incurred by us as a result of their actions. Further, we have
been advised that in the opinion of the Securities and Exchange
Commission, indemnification is against public policy as expressed in the
Securities Act of 1933, as amended, and is, therefore, unenforceable.
14. Competition.
We have competitors and potential competitors, many of whom have
considerably greater financial and other resources than we do. Further,
if our products are successful, others will enter the market which may
draw our customers away from us. See "Business - Competition."
<PAGE> 10
15. Patents May Not Give Adequate Protection.
We have obtained patents for our products. There is no assurance,
however, that third parties may not infringe on our patents. In order to
protect our patent rights, we may have to file lawsuits and obtain
injunctions. If we do that, we will have to spend large sums of money for
attorney's fees in order to obtain the injunctions. Even if we obtain the
injunctions, there is no assurance that those infringing on our patents
will comply with the injunctions. Further, we may not have adequate
funds available to prosecute actions to protect our patents, in which
case those infringing on our patents could continue to do so in the
future.
16. Cumulative Voting, Preemptive Rights and Control.
There are no preemptive rights in connection with the shares.
Cumulative voting in the election of directors is not provided for.
Accordingly, even if all of the units are sold, the holders of a majority
of the shares will be able to elect all of the directors.
17. No Dividends Anticipated.
We do not anticipate paying dividends, cash or otherwise, on the
shares in the foreseeable future. Future dividends will depend on our
earnings, financial requirements and other factors. If you believe you
will have a need for immediate income from this investment in the units,
shares or redeemable warrants, you should not purchase our securities.
See "Dividend Policy."
18. Further Dilution of Your Investment
Further dilution is likely if we issue additional shares at a lower
price than the current offering price and either no trading market exists
for our stock or the trading is at a price substantially lower than this
offering price. See "Dilution of the Price You Pay for Your Shares."
19. No Public Trading Market for the Shares.
There is currently no trading in our common stock. We cannot
guarantee you that an active trading market in our shares will develop in
the near future, even if this offering is successfully completed. Even if
a trading market is developed, we cannot guarantee that it will be
sustained for any period of time. See "Plan of Distribution; Terms of the
Offering."
20. No Minimum Number of Units or Warrants Must Be Sold.
There is no minimum number of units or warrants that must be sold in
this offering. Your purchase price will be immediately transmitted to us
for our use.
<PAGE> 11
21. Additional Sales Practices Imposed on Brokers.
The units, common stock and redeemable warrants are covered by
Section 15(g) of the Securities Exchange Act of 1934 which imposes
additional sales practice requirements on broker/dealers who sell our
securities in this offering or in the aftermarket. For sales of our
securities, the broker/dealer must make a special suitability
determination and receive from you a written agreement prior to making a
sale to you. Because of the imposition of the foregoing additional sales
practices, it is possible that lending institutions will not accept our
securities as collateral for loans.
22. No Firm Commitment to Purchase the Units or Redeemable Warrants.
Our underwriter is offering the units and redeemable warrants on a
best-efforts basis, no minimum, $5,200,000 maximum. Funds received from
the purchase of the securities will be immediately available to us after
deduction of the underwriter's compensation and expenses of the offering.
No commitment exists by anyone to buy our securities.
23. We Have To Maintain A Current Registration Statement.
In order for the redeemable warrants to be exercised, we must
maintain a current registration statement on file with the SEC. If a
current registration statement is not on file, the redeemable warrants
cannot be exercised. Further, the redeemable warrants may only be
exercised in states where we have a current effective state registration
statement filed. If you move from your current state of residence, you
may not be able to exercise your redeemable warrants in the future and
accordingly, they will be of no value to you.
24. Our Warrants are Callable.
Our warrants are callable upon thirty (30) days written notice to
you. As such, if you do not exercise your warrants during the thirty day
call period, they terminate and have no value. You may not exercise your
warrants after the expiration of thirty day call period.
25. The Underwriter May Have To Cease Operations.
The Underwriter is subject to a pending civil action by the
Securities and Exchange Commission. An adverse decision in the action
could cause the underwriter to cease all operations. In the event that
occurs, the underwriter would have to terminate its sale of our
securities. See "Plan of Distribution; Underwriting; and, Terms of the
Offering."
26. You Will Incur Immediate and Substantial Dilution.
Our existing stockholders acquired their shares at a cost
substantially less than that which you will pay for the shares you
purchase in this offering. Accordingly, any investment you make in these
shares will result in the immediate and substantial dilution of the net
tangible book value of those shares. See "Dilution of the Price you Pay
for Your Shares."
<PAGE> 12
27. Impact of Potential Future Sales of our Common Stock.
A total of 4,500,000 shares of stock were issued to our three
officers and directors and one additional person of which, Robert
Sterling will return 1,692,750 shares to the Company for cancellation
upon this registration statement being declared effective by the SEC.
They paid an average price of $0.01 per share. The underwriter believes
that they will likely sell a portion of their stock if the market price
goes above $10.00. If they do sell their stock into the market, the sales
may cause the market price of the common stock to drop. See "Principal
Stockholders."
28. Lock-Up.
Pursuant to our agreement with the underwriter, our officers and
directors have agreed not to sell transfer or convey by registration or
otherwise, without the prior consent of the underwriter, any of our
securities owned by them, directly or indirectly, for a period of two
years from the effective date of this offering. However, Robert
Sterling, our President and Matthew Sterling his son, may resell up to a
maximum of 200,000 shares provided the bid price for the common stock is
at least $10.00 after one year from the effective date. Further, all
sales of such stock must be made through the underwriter, should a market
exist therefore.
29. Escrow of President's Shares.
Robert Sterling, our President, has agreed to escrow 1,000,000
shares of his common stock with our attorney, Conrad C. Lysiak, In the
event that we do not achieve sales of $35,000,000 and pre-tax income in
excess of $7,500,000 by January 31, 2004, the 1,000,000 shares will be
delivered by Mr. Lysiak to us and canceled. If the foregoing thresholds
are achieved by us, the 1,000,000 shares will be delivered by Mr. Lysiak
to Mr. Sterling. The $7,500,000 shall be computed based on pretax income
before any effect created by the stock held in escrow.
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USE OF PROCEEDS
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This offering is being made on a "best efforts basis." The net
proceeds, after deducting $780,000 for estimated expenses associated with
this offering, will be $4,420,000 assuming all the units and redeemable
warrants are sold. We will use the proceeds as follows:
<TABLE>
<CAPTION>
Net Proceeds to Us
25% 50% 75% 100%
<S> <C> <C> <C> <C>
Inventory $ 275,000 $ 550,000 $ 825,000 $ 1,100,000
Working Capital $ 830,000 $ 1,660,000 $ 2,490,000 $ 3,320,000
----------- ----------- ----------- -----------
$ 1,105,000 $ 2,210,000 $ 3,315,000 $ 4,420,000
=========== =========== =========== ===========
</TABLE>
While we currently intend to use the proceeds of this offering
substantially in the manner set forth above, we reserve the right to
reassess and reassign such use if, in the judgement of our board of
directors, such changes are necessary or advisable. At present, no
material changes are contemplated. Should there be any material changes
in the above projected use of proceeds in connection with this offering,
we will issue an amended prospectus reflecting the same.
<PAGE> 13
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DETERMINATION OF OFFERING PRICE
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The price of the units and the exercise price of the redeemable
warrants we are offering was arbitrarily determined by us and the
underwriter in order for us to raise up to a total of $5,200,000 in this
offering. The offering price bears no relationship whatsoever to our
assets, earnings, book value or other criteria of value. Among the
factors considered were
* our lack of operating history
* the proceeds to be raised by the offering
* the recommendations and demands of the underwriter
* the amount of capital to be contributed by purchasers in this
offering in proportion to the amount of stock to be retained by
our existing Stockholders, and
* our relative cash requirements. See "Plan of Distribution;
Terms of the Offering."
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DILUTION OF THE PRICE YOU PAY FOR YOUR SHARES
- -------------------------------------------------------------------
Assuming the maximum number of units and warrants are sold,
investors in our offering will collectively own 1,000,000 shares of our
common stock, or approximately 25% of the outstanding shares, for which
they will have paid $5,100,000 or $5.00 per share and redeemable warrants
to purchase 1,000,000 shares, for which they will have paid $0.10 per
warrant (assuming that $0.10 attributed to each warrant included in the
Units offered hereby and no exercise of the Underwriter' stock purchase
warrant option). As a group, our existing shareholders after this
offering will own 3,000,000 shares of our common stock (and after giving
effect to the 1,692,750 shares which Robert Sterling, President will
return when this document becomes effective), or 75% of the outstanding
shares. Our pro forma net tangible book value applicable to common stock
(defined as our tangible assets less the amount of our liabilities) on
October 31, 1999 was $(91,000), or $(0.02) per share immediately prior to
this offering. After giving effect only to the sale of the 1,000,000
units and the 1,000,000 additional redeemable stock purchase warrants
offered hereby and the application of the proceeds therefrom and after
deducting the underwriter commission and associated estimated offering
expenses, our net tangible book value would be approximately $4,354,000,
or $1.09 per share. This represents an immediate increase in the net
tangible book value of $1.11 per share to existing shareholders and an
immediate dilution of approximately $3.91 per share to new shareholders.
The following table illustrates this per-share dilution:
Assumed initial public offering price per share $ 5.00
Pro forma net tangible book value per share before
this offering $ (0.02)
Increase per share attributable to new shareholders $ 1.11
Pro forma net tangible book value per share after
this offering $ 1.09
The following table sets forth as of October 31, 1999, the number of
shares of common stock purchased or to be purchased from us, the total
effective cash consideration to be paid to us, and the average price per
share paid by existing stockholders and by new investors purchasing
shares sold by us in the offering at an assumed initial offering price of
$5.10 per unit and $0.10 per additional redeemable stock purchase
warrant.
<PAGE> 14
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
Average
Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Existing stockholders 3,000,000 25% $ 72,135 1.4% $ 0.10
New investors 1,000,000 75% 5,100,000 98.6% $ 5.10
--------- ---- ----------- ------
Total 4,000,000 100% $ 5,172,135 100.0%
========= ==== =========== ======
</TABLE>
Does not include: (i) 1,000,000 shares of common stock issuable upon the
exercise of the redeemable warrants included in each unit; (ii) 1,000,000
shares of common stock underlying the redeemable warrants; (iii) 100,000
shares of Common Stock included in the units issuable upon exercise of
the underwriter's warrant; and (iv) 100,000 shares of common stock
underlying the redeemable warrants included in the units subject to the
underwriter's warrant. Assumes the return of 1,692,750 shares of common
stock to us for cancellation by Robert Sterling upon this offering being
declared effective by the SEC.
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PLAN OF DISTRIBUTION; UNDERWRITING; AND, TERMS OF THE OFFERING
- ---------------------------------------------------------------------
We have hired Castle Securities Corp. as our exclusive agent to sell
our units and redeemable warrants. Castle Securities is a broker/dealer
registered with the Securities and Exchange Commission and is a member of
the National Association of Securities Dealers, Inc. There is no minimum
number of units or redeemable warrants that Castle Securities is
committed to sell. As such, any money received by Castle Securities for
us will be immediately delivered to us.
Castle Securities has agreed to act as our agent in selling the
units and redeemable warrants. They have no obligation to buy our
securities and may not be able to sell any of the units or redeemable
warrants. We have no legal recourse against Castle Securities for their
inability to sell our securities.
We have agreed to pay Castle Securities the following for their
services:
1. A commission 10% of all money raised in this offering.
2. A non-accountable expense allowance of $0.153 for each unit sold.
3. A non-accountable expense allowance of $0.003 for each warrant sold.
4. One underwriter warrant for each 10 units sold at a purchase price
of $0.0001 per warrant.
5. 2% of the gross proceeds of the offering for future consulting
services.
Each underwriter warrant allows Castle Securities to purchase one
unit at a purchase price of $6.12. The exercise price of the underwriter
warrant will be from 12 months to 60 months after this offering is
declared effective by the SEC. The underwriter warrants are being
registered in this offering. In the event the registration statement
becomes stale, we have agreed to register the underwriter warrants on one
additional occasion upon the happening of certain events. The events
include:
<PAGE> 15
1. Written request by holders of 40% of the underwriter warrants
and/or underlying securities. This request must be made not earlier than
12 months after this offering is declared effective by the SEC, but not
later than 7 years after the offering is declared effective.
2. Filing a registration statement with the Securities and Exchange
Commission (the "SEC") or seek an exemption from registration pursuant to
Regulation A of the Securities Act of 1933.
Castle may engage other broker/dealers to sell our securities and
may pay all or a portion of the foregoing fees to other broker/dealers
who sell our securities, but not greater than 10% of the offering price.
The amount to be paid to other broker/dealers will be determined by
Castle.
We have already advanced Castle Securities $25,000 to engage them as
our underwriter.
Offering Period and Expiration Date
This offering will commence on the date of this prospectus and
continue for a period of 90 days. The Underwriter and our board of
directors may extend the offering period for an additional 90 days, or
unless the offering is completed or otherwise terminated.
All checks subscriptions must be made payable to "Exhaust
Technologies, Inc ."
Right to Reject Subscriptions
We and Castle Securities have the right to accept or reject
subscriptions in whole or in part, for any reason or for no reason. All
monies from rejected subscriptions will be returned immediately by Castle
Securities to you, without interest or deductions. Subscriptions for
securities will be accepted or rejected within 48 hours after we receive
them.
Indemnification
We and Castle Securities have agreed to indemnify each other against
certain liabilities arising under the Securities Act of 1933. We have
been informed by the Securities and Exchange Commission is against public
policy and is unenforceable. We and the Underwriter, however, intend to
seek to enforce the contractual indemnification provisions if the
occasion to do so arises.
The Redeemable Warrants
We must maintain an effective current registration statement on file
with the SEC in order for you to exercise your redeemable warrants. If we
do not, you will not be able to exercise your redeemable warrants.
Further, we must maintain a current effective registration statement in
the state of your residence in order for you to exercise your redeemable
warrants. If we do not maintain an effective registration statement, you
will not be able to exercise your redeemable warrants. Finally, if you
move to a state where we have no state registration statement filed, you
will not be able to exercise your redeemable warrants. See "Risk Factors
- - We Have To Maintain A Current Registration Statement."
<PAGE> 16
Underwriter's Disciplinary History
Our underwriter is appealing a decision of the Market Surveillance
Committee of the National Association of Securities Dealers, Inc. (the
"Committee"), which was affirmed by the SEC, to the United States Court
of Appeals for the Second Circuit wherein it was found that our
underwriter: (1) used manipulative, deceptive and other fraudulent
devices to create actual or apparent active trading in securities and
arbitrarily or artificially established and maintained the price of
securities; (2) charged excessive mark-ups; and, (3) provided inadequate
supervision. It was also determined that Michael T. Studar, the
underwriter's president failed to provide adequate supervision regarding
the aforementioned activity. Our underwriter and Studar were jointly and
severally fined $25,000; Our underwriter and Studar were jointly and
severally required to make restitution in the amount of $19,373.56 plus
interest to certain customers; Studar was suspended for thirty (30) days
in all capacities and required to requalify as a general securities
principal within ninety (90) days of the decision. All sanctions are
stayed pending the determination of the appeal. An adverse decision in
this matter will not have any material impact upon the underwriter's
operations.
There is currently pending against the underwriter, Michael Studar
and others in the United States District Court for the Southern District
of New York an action by the Securities and Exchange Commission alleging
market manipulation and failure to supervise by the underwriter. The SEC
is seeking injunctive relief and disgorgement of gains realized in
connection with the initial public offering of U.S. Environmental f/k/a
as Windfall Capital. An adverse decision against the underwriter could
result in the underwriter ceasing operations and immediate termination of
this offering. See "Risk Factors - Underwriter May Have To Cease
Operation."
Section 15(g) of the Exchange Act
Our units, common stock and redeemable warrants are subject to
Section 15(g) of the Securities Exchange Act of 1934 which imposes
additional sales practice requirements on broker/dealers who sell our
securities in this offering or in the aftermarket. For sales of our
securities, the broker/dealer must make a special suitability
determination and receive from you a written agreement prior to making a
sale to you.
<PAGE> 17
- ---------------------------------------------------------------------
BUSINESS
- ---------------------------------------------------------------------
General
We are a development stage business formed under the laws of the
state of Washington on July 21, 1998, to develop, manufacture and market
two automotive devices.
The Devices
The two automotive devices we intend to develop, manufacture and
market are the Turbolator and the Pneumatic Hand Tool Exhaust Muffler.
Both devices are expected to be available for sale by March 2000.
The Turbolator
The Turbolator was invented by Robert Sterling, our President and a
member of the Board of Directors, and his son, Matthew R. Sterling in
1990. A patent was issued on October 18, 1994 (No. 5,355,673). During the
period that the patent was pending, the Turbolator was marketed and
generated gross revenues of $160,364. The revenue was earned prior to our
formation and was not recognized as revenue to us. In addition to
obtaining a patent for the Turbolator, Robert Sterling obtained a
trademark with the United States Trademark office on the name
"Turbolator." Messrs. Sterling and Sterling have issued an exclusive
license to us to manufacture, develop and market the Turbolator in the
United States, provided we generate sales from the Turbolator of $-0-
through 2001 and $500,000 per year, thereafter. The license granted to us
for the Turbolator require that Robert Sterling and Matthew Sterling
approve any license transfer from us by either a merger or sale of
assets.
The Turbolator is designed for installation on all vehicles, with
the exception of turbo-charged vehicles. It is composed of a spring
butterfly valve mounted in a tube housing. The butterfly valve is
regulated by a pre-loaded torsion spring. The tube housing or tip housing
is installed directly behind the catalytic converter or directly behind
the muffler. The Turbolator comes in five sizes which are six inches long
with an outside diameter varying from 2 7/8 inches to 4 1/8 inches
depending on the exhaust pipe size. Two Turbolators are installed for a
vehicle equipped with dual exhausts.
The purpose of the Turbolator is to regulate exhaust flow from the
engine. By regulating exhaust flow, the device creates a more efficient
fuel burning engine, thus creating more horsepower and torque without
other modifications to the engine.
The Turbolator operates in conjunction with the exhaust system "OEM"
computer controlled electronic port fuel injection and emission control
systems already certified with the stock engine. Installation of the
Turbolator does not alter the OEM location of the oxygen sensor and the
converter. The tune-up specifications for a vehicle remain the same. In
lab tests the Turbolator reduced certain emissions and improved fuel
mileage.
<PAGE> 18
Pneumatic Hand Tool Exhaust Muffler
The Pneumatic Hand Tool Exhaust Muffler (the "PHTEM") was invented
by Robert E. Sterling, in 1997. Mr. Sterling applied for a patent on
January 13, 1998 and the patent has been approved. The PHTEM is currently
being test marketed. No sales have been made to date and we have not
decided if the PHTEM will be economically successful. Mr. Sterling has
granted us an exclusive license to manufacture and market the PHTEM, in
the United States, provided the Company generates sales of $-0- through
2001 and $500,000 each year thereafter.
The PHTEM is a tool with a noise muffling system that can reduce
sound levels and remove entrained solid and oil contaminates from the
exhaust air before it is discharged into the atmosphere. The PHTEM is
used in air powered tools. The PHTEM has a handle with an exhaust
passage where the contaminates pass. The PHTEM includes a number of
washers positioned longitudinally about the inner tube. The combination
of the inner tube and washers are located within the handle exhaust
passage. An end cap is provided in closing off the inner tube distal end.
During use, exhaust air enters the inner tube, flows out the inner tube
airflow openings into the washers, and out the end cap. The handle
muffles the sound the tool and retains the contaminates therein.
We have registered the trademark "AirCat" to market a line of air
powered tools which we have designed that uses the PHTEM. The tools
include a patent pending handle design which has been ergonomically
engineered to better position and balance the tool during use. Several
tools have been field tested during the past year. The tools
incorporating the PHTEM are substantially quieter with essentially no
loss of power.
Testing
We have conducted independent performance tests of the Turbolator
through an EPA approved California testing facility. Based upon the
tests, we received a California CARB certificate (CARB #D-226). The
California CARB Certificate certifies that the Turbolator meets, or
exceeds, the air quality and vehicle performance guidelines set forth in
California. Because California's air quality standards are the most
stringent in the United States, such certification establishes that the
Turbolator meets or exceeds the air qualification standards in all other
states. The tests further established that the Turbolator improves fuel
economy and reduces carbon monoxide and hydrocarbon emissions.
Manufacturing
We believe there are a number of manufacturers who are capable of
producing the Turbolator and the PHTEM. Raw materials for the Turbolator
and PHTEM are readily available from numerous sources. Our founders have
spent in excess of $50,000 during the two years prior to our
incorporation in the development of the Turbolator and PHTEM.
<PAGE> 19
In August 1999, we entered into a purchase agreement with Apex
Industries, Inc. ("Apex"), whereby Apex agreed to manufacture, and we
agreed to purchase, 10,000 Turbolator assemblies. We have an
unconditional obligation to purchase the 10,000 Turbolator assemblies and
we have no right to return any unsold Turbolator assemblies. The total
cost of the 10,000 Turbolator assemblies is estimated to be approximately
$200,000, of which $28,500 relates to tooling cost that will become our
property. In conjunction with the purchase agreement, our president
secured an irrevocable standby letter of credit with a bank for $80,000
on our behalf and for the benefit of Apex. Drawings under the letter of
credit will bear interest payable monthly at the bank's prime rate plus
two percent (2%) and matured on November 23, 1999.
Distribution
We intend to distribute the Turbolator and the PHTEM by direct
shipment from the manufacturer.
Marketing
We intend to market the Turbolator and the PHTEM through automotive
suppliers. As of the date hereof, we have not contacted any automotive
suppliers and there is no assurance that any other automotive suppliers
will ever sell Turbolators or PHTEMs.
We have terminated a previous agreement with Clarkston International
Corporation to market our products.
Competition
With respect to the Turbolator, we are not aware of any competitors
within the industry that manufacture a similar product. With respect to
the PHTEM, we are aware of a number of competitors within the industry
that manufacture a similar, but not an identical product. Some of the
foregoing manufacturers have considerably greater financial and other
resources than us.
Governmental Regulation
There are no governmental regulations which effect the manufacture,
development or sale of the Turbolator or PHTEM.
Company's Office
Our offices are located at 230 North Division, Spokane, Washington
99202. These are the offices of Robert Sterling, our President and major
shareholder. We use the offices on a rent free basis. If we move to a
new office location, we will have to pay rent. At this time we have not
made any plans to change office locations.
Employees
We have no full-time employees. Upon the completion of this
offering, our three officers will devote 80% of their time to our
operations. See "Management."
Legal Proceeding
We are not involved in any pending legal proceeding.
<PAGE> 20
Market for Common Equity and Related Stockholder Matters
There is no public market for our units, common stock or redeemable
warrants. There is no assurance that a public market for our securities
will develop in the future, or if a public market does develop, that it
will be sustained over a period of time.
Currently, there are no options or warrants to purchase, or
securities convertible into our common stock. All of the outstanding
shares of common stock were issued pursuant to Reg. 504 of the Securities
Act and are free trading. Shares of common stock owned by officers and
directors may only be resold pursuant to Rule 144 of the Securities Act
of 1933, but do not have to held for one year as provided therein.
We are proposing to offer in this offering 1,000,000 units at $5.10
per unit. Each unit consists of one share of common stock and one
redeemable warrant. Each redeemable warrant is convertible into one share
of common stock. The exercise price of the redeemable warrant is $7.00 if
exercised from __________ to __________ and $9.00 if exercised from
__________ to __________. We are also offering an additional 1,000,000
redeemable warrants at $0.10 per warrant. The exercise price of the
additional redeemable warrants is set forth above. We are also selling to
the underwriter, up to 100,000 underwriter warrants exercisable at $6.12
per warrant. Upon the exercise on an underwriter warrant, the underwriter
will receive one unit consisting of one share of common stock and one
redeemable warrant. Each redeemable warrant is exercisable on the same
terms as the redeemable warrants sold to the public.
As of February 4, 2000, there were 45 shareholders of our common
stock.
We have not paid any dividends on our common stock and do not intend
to do so in the immediate future.
- ---------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
- ---------------------------------------------------------------------
Plan of Operation
The following Plan of Operation contains forward-looking statements,
which involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth elsewhere in this
document.
Our plan and focus during the next twelve months include the
following,
1. Complete agreements for the manufacture of the Turbolator and
PHTEM.
2. Initiate manufacturing of the Turbolator and PHTEM.
3. Begin to market and sell the Turbolator and PHTEM.
We are considered to be in the development stage, as defined in
Statement of Financial Accounting Standards No. 7. We have been in the
development stage since its inception. We have had no recurring source of
revenue, we have incurred operating losses since inception and at October
31, 1999 had a working capital deficiency. Additionally, as of October
31, 1999, we had an accumulated deficit of approximately $138,000.
<PAGE> 21
The development and marketing of new automotive technology is
capital intensive. We have funded operations to date either from the sale
of its common stock or through advances made by our Chief Executive
Officer through a line of credit agreement. We have utilized funds
obtained to date for organizational purposes and to complete certain
research and development. We do not currently intend to conduct any
additional product research or development in the next twelve months.
Further, it is our belief that both the Turbolator and the PHTEM are
ready for manufacture and marketing in their current state. At the
present time we have not engaged anyone to market our products. We have
located manufacturers for the Turbolator and PHTEM and are arranging for
product molds to be built. As of October 31, 1999, we require additional
funding to continue our efforts and have therefore entered into an
understanding with an underwriter to sell shares of our common stock and
common stock purchase warrants to the public market.
We do not currently intend to purchase a plant or to expend
significant amounts for additional equipment in the next twelve months.
We may execute employment agreements with our Chief Executive Officer and
Matt Sterling, operations manager, upon completion of the registration
document for the sale of units and redeemable warrants to the public,
provided it is profitable to do so.
In August 1999, we entered into a purchase agreement with Apex
Industries, Inc. ("Apex"), whereby Apex agreed to manufacture, and we
agreed to purchase, 10,000 Turbolator assemblies. The total cost of the
10,000 Turbolator assemblies is estimated to be approximately $200,000,
of which $28,500 relates to tooling cost that will become our property.
In conjunction with the purchase agreement, our president secured an
irrevocable standby letter of credit with a bank for $80,000 on our
behalf and for the benefit of Apex. Drawings under the letter of credit
will bear interest payable monthly at the bank's prime rate plus two
percent (2%) matured on November 23, 1999.
Operating Expenses:
Operating expenses include those costs incurred for professional
services provided to us in connection with certain agreements executed by
us and the costs incurred for the private placement of our common stock.
In addition we incurred certain expenses necessary to complete the
necessary research and development associated with our products.
Operating expenses totaling $134, 000 have been incurred since inception.
For the nine-month period ended October 31, 1999 our operating expenses
totaled $99,000 as compared to $31,000 for the period from inception July
21, 1998 through October 31, 1998. This increase of approximately $68,000
or 219% was primarily the result of an increase of $49,000 from
professional services and $41,000 in research and development costs, as
partially offset by $30,000 in fees paid to our Directors in the form of
common stock. Finally, approximately $8,000 of additional expense was
incurred in 1999, and was primarily the result of the increase in our
general administrative activities.
Other Expenses:
Other expenses consist of interest expense incurred by us on
borrowings on the related party line of credit. Interest expense totaling
$5,000 has been incurred since inception, as of October 31, 1999. During
the nine-month period ended October 31, 1999 we recognized interest
expense of $4,000. There were no outstanding borrowings on the related
party line of credit for the comparable period of the prior year.
<PAGE> 22
Net Loss:
Primarily as a result of the foregoing factors, our net loss was
$138,000 as of the period from inception through October 31, 1999. The
net loss for the nine-month period ended October 31, 1999 was $102,000 as
compared to $31,000 for the period from inception July 21, 1998 through
October 31, 1998. This increase of approximately $71,000 lead to a $0.01
increase in the loss per share to $0.02 for the nine month period ended
October 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Financial Condition:
During the period from inception through October 31, 1999, we used
cash in operating activities of $130,000. For the nine-month period ended
October 31, 1999 we used cash in operating activities of $118,000 as
compared to a $1,000 which was used in the period from date of inception
(July 21, 1998) through October 31, 1998. This increase in the cash used
in operating activities was primarily associated with the increase in the
net loss for the nine months ended October 31, 1999. As of October 31,
1999 we had a cash balance of $516 in cash and cash equivalents. From the
date of inception to October 31, 1999 we used cash in investing
activities of $73,000, all of which occurred during the nine month period
ended October 31, 1999 and related to the acquisition of certain
licensing rights and for limited production and testing equipment. We
have historically financed our operation from either the sale of our
common stock or from borrowings on the related party line of credit. From
inception through October 31, 1999 we obtained financing funds totaling
$203,000, the majority of which were obtained during the nine months
ended October 31, 1999.
At October 31, 1999, we had a deferred tax asset of approximately
$136,000. We do not believe that our present condition or past results
makes it more likely than not that we will be able to realize the benefit
of this deferred tax asset. As such a valuation allowance has been
established equal to the net deferred tax asset.
As of October 31, 1999, we had no recurring source of revenue, had
incurred losses since inception and had a working capital deficiency.
Primarily as a result of these factors, our independent certified public
accountants included an explanatory paragraph in their report on our
financial statements for the period ended July 31, 1999, which expressed
substantial doubt about our ability to continue as a going concern. We
believe the ability of our Company to continue as a going concern and
achieve profitability is highly dependent on a number of factors
including, but not limited to: our ability to market and distribute our
products, obtain sufficient financing, and to secure an agreement with a
manufacturer to produce in sufficient quantity and at a cost efficient
price, our two products, the Turbolator and the PHTEM.
IMPACT OF YEAR 2000
The Year 2000 issue was the result of computer programs written
using two digits rather than four to define the applicable year. As a
result, date sensitive software could have recognized a date using "00"
as the year 1900 rather than the year 2000. This could result in system
failures or miscalculations causing disruptions of operations, including
among others, temporary inability to process transactions, send invoices,
or engage in similar normal business activities.
<PAGE> 23
Though we did not acquire any additional hardware or software
technology in support of our services, any future acquisitions will most
likely involve hardware or software which is relatively new and therefore
we do not anticipate that we will incur significant operating expenses or
be required to invest heavily in computer systems improvements to be Year
2000 compliant. Hardware and software manufactured before January 1,
2000 but sold thereafter may contain defects which could cause a hardware
or software failure. As we make arrangements with significant hardware
and software suppliers, we intend to determine the extent to which we may
be vulnerable should those third parties fail to address and correct
their own Year 2000 issues and take measures to reduce our exposure, such
as, finding alternative suppliers or requiring the suppliers to correct
Year 2000 compliance issues prior to acquiring the product. If our
suppliers have Year 2000 compliance deficiencies, we have located
alternative suppliers on terms that are similar to those being sought at
this time. Other than the foregoing measures, we have no other
contingency plans for dealing with third parties which do not become Year
2000 compliant within a timely manner. We anticipate that this will be an
ongoing process as we begin to implement our plan of operation. There can
be no assurances that the systems of suppliers or other companies on
which we may rely will be converted in a timely manner and will not have
a materially adverse effect on our systems.
Additionally there can be no assurances that the computer systems
necessary to maintain the viability of the Internet will be Year 2000
compliant. We believe that we have taken the steps necessary regarding
Year 2000 compliance issues with respect to matters within our control,
and to date, we have not experienced any Year 2000 issues. However, no
assurance can be given that Year 2000 compliant issues will not have a
material adverse effect on our business, financial condition and results
of operations in the future.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
for Derivative Instruments and Hedging Activities. SFAS No. 133 requires
companies to recognize all derivative contracts as either assets or
liabilities in the balance sheet and to measure them at fair value. If
certain conditions are met, a derivative may be specifically designated
as a hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized as income in the period of
change. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Based on our current and planned future
activities relative to derivative instruments, we believe that the
adoption of SFAS No. 133 on January 1, 2001 will not have a significant
effect on our financial statements.
<PAGE> 24
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MANAGEMENT
- ---------------------------------------------------------------------
Officers and Directors
Each of our directors is elected by the stockholders to a term of
one (1) year and serves until his or her successor is elected and
qualified. Each of our officers is elected by the board of directors to
a term of one (1) year and serves until his or her successor is duly
elected and qualified, or until he or she is removed from office. The
board of directors has no nominating, auditing or compensation
committees.
The name, age and position of our present officers and directors are
set forth below:
Name Age Position
Robert E. Sterling 56 President and a member of the Board
of Directors
Ronald L. Allen 59 Vice President and a member of the
Board of Directors
William A. Sutherland 54 Secretary/Treasurer and a member of
the Board of Directors
All directors hold office until the next annual meeting of
shareholders and until their successors have been elected and qualified.
Our officers are elected by the Board of Directors after each annual
meeting of shareholders and hold office until their death, or until they
resign or have been removed from office.
Robert E. Sterling - President and a member of the Board of Directors.
Mr. Sterling, one of our founders, has been our President and a
member of the Board of Directors since our inception. Mr. Sterling is the
founding principal and sole owner of Bob Sterling Enterprises, Inc., a
Washington corporation, located in Spokane, Washington. Sterling
Enterprises was formed in 1967 and conducts business through itself and
several subsidiary corporations in general contracting, real estate and
retail stores. Since 1967, Mr. Sterling has owned Midas Muffler Shops in
Washington and Idaho and has from time-to-time owned and operated Midas
Muffler Shops in Hawaii (1978) and Nevada (1979 TO 1984). Mr. Sterling
has also served as an officer and director of the following publicly
traded corporations: Gold Express Corporation (1984 to 1989) and Gold
Coin Mining, Inc. (1984 to 1989).
Ronald L. Allen - Vice President and a member of the Board of Directors.
Mr. Allen, one of our founders, has been our Vice President and a
member of the Board of Directors since our inception. Mr. Allen has been
engaged in the commodity futures business since 1973 and since 1994 has
owned Merchants Futures of the Northwest, a commodity brokerage company
located in Spokane, Washington. Mr. Allen has served as an officer and
director of the following publicly traded corporations: Gold Capital,
Inc. (1983); Remco Enterprises, Inc. (1978) and, Calco Enterprises, Inc.
(1981).
<PAGE> 25
William A. Sutherland - Secretary/Treasurer, Chief Financial Officer, and
a member of the Board of Directors.
Mr. Sutherland, one of our founders, has been our
Secretary/Treasurer, Chief Financial Officer and a member of the Board of
Directors since our inception. Since 1970, Mr. Sutherland has been
involved in the automotive industry as a consultant (1979 to the present)
and automobile dealer (1975 to 1989). He has owned Lincoln, Mercury, and
Mercedes Benz car dealerships and is currently a consultant to a number
of auto dealerships located in Spokane, Washington.
All of our officers and directors are engaged in other business. As
such, they will not be devoting time exclusively to our operations. Our
officers and directors intend to devote approximately 80% of their time
to the operation of our business.
- ---------------------------------------------------------------------
EXECUTIVE COMPENSATION
- ---------------------------------------------------------------------
Summary Compensation
The following table sets forth the compensation paid to our officers
during fiscal 1999. This information includes the dollar value of base
salaries, bonus awards and number of stock options granted, and certain
other compensation, if any.
SUMMARY COMPENSATION TABLE [1]
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Name and Annual Restricted Underlying All Other
Principal Compen- Stock Options/ LTIP Compen-
Position Year Salary Bonus sation Award(s) SARs Payouts sation
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert E. 1999 - - $10,000[2] - - - -
Sterling 1998 - - - - - - -
President 1997 - - - - - - -
Ronald L. 1999 - - $10,000[2] - - - -
Allen 1998 - - - - - - -
Vice 1997 - - - - - - -
President
William A. 1999 - - $10,000[2] - - - -
Sutherland 1998 - - - - - - -
Secretary- 1997 - - - - - - -
Treasurer
</TABLE>
[1] All compensation received by the officers and directors has been
disclosed.
[2] Represents the value of 50,000 shares issued to each individual for
services as a director.
There are no stock option, retirement, pension, or profit sharing
plans for the benefit of our officers and directors.
Option/SAR Grants
No individual grants of stock options, whether or not in tandem
with stock appreciation rights ("SARs") and freestanding SARs have been
made to any executive officer or any director since our inception,
accordingly, no stock options have been exercised by any of the officers
or directors in fiscal 1999.
<PAGE> 26
Long-Term Incentive Plan Awards
We do not have any long-term incentive plans that provide
compensation intended to serve as incentive for performance to occur over
a period longer than one fiscal year, whether such performance is
measured by reference to our financial performance, our stock price, or
any other measure.
Compensation of Directors
Each member of the Board of Directors received 50,000 shares of
common stock to serve on the Board of Directors during fiscal 1999. The
directors did not receive any other compensation for serving as members
of the Board of Directors. The Board has not implemented a plan to award
options. There are no contractual arrangements with any member of the
Board of Directors.
We do not expect to pay any salaries to our officers for the fiscal
year-ended January 31, 2000. We do not expect to pay salaries to any of
our officers until such time as we generate sufficient revenues to do so.
We do not anticipate paying any salaries to our officers until fiscal
2001. We do not intend to pay any additional compensation to our
directors. As of the date hereof, we have not entered into employment
contracts with any of our officers and we do not intend to enter into any
employment contracts until such time as it profitable to do so.
Indemnification
Pursuant to the Articles of Incorporation and Bylaws of the
corporation, we may indemnify an officer or director who is made a party
to any proceeding, including a law suit, because of his position, if he
acted in good faith and in a manner he reasonably believed to be in our
best interest. In certain cases, we may advance expenses incurred in
defending any such proceeding. To the extent that the officer or director
is successful on the merits in any such proceeding as to which such
person is to be indemnified, we must indemnify him against all expenses
incurred, including attorney's fees. With respect to a derivative action,
indemnity may be made only for expenses actually and reasonably incurred
in defending the proceeding, and if the officer or director is judged
liable, only by a court order. The indemnification is intended to be to
the fullest extent permitted by the laws of the State of Washington.
Regarding indemnification for liabilities arising under the
Securities Act of 1933, as amended, which may be permitted to directors
or officers pursuant to the foregoing provisions, we are informed 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.
- ---------------------------------------------------------------------
PRINCIPAL STOCKHOLDERS
- ---------------------------------------------------------------------
The following table sets forth, as of the date of this prospectus,
the total number of shares owned beneficially by each of our directors,
officers and key employees, individually and as a group, and the present
owners of 5% or more of our total outstanding shares. The table also
reflects what such ownership will be assuming completion of the sale of
all shares in this offering, which we can't guarantee. The stockholders
listed below has direct ownership of his shares and possesses sole voting
and dispositive power with respect to the shares.
<PAGE> 27
<TABLE>
<CAPTION>
Name and Address Number of Number of Percentage
Beneficial Share Before Shares After of Ownership
owner [1] Offering Offering After Offering
<S> <C> <C> <C>
Robert Sterling 4,300,000 2,607,250 65.18%
230 N. Division St.
Spokane, WA 99202
Ronald Allen 50,000 50,000 1.25%
3031 W. 22nd
Spokane, WA 99204
William Sutherland 50,000 50,000 1.25%
7202 S. Oak Road
Spokane, WA 99224
All Officers and
Directors as a Group
(3 Persons) 4,400,000 2,707,250 67.68%
</TABLE>
[1] The persons named above may be deemed to be a "parent" and
"promoter" of our company, within the meaning of such terms under
the Securities Act of 1933, as amended, by virtue of his/its direct
and indirect stock holdings. Messrs. Sterling, Allen and Sutherland
are the only "promoters" of our company.
Future Sales by Existing Stockholders
A total of 4,692,750 shares of common stock were issued and
outstanding on January 1, 2000. Mr. Sterling has agreed to return
1,692,750 shares which he owns to us upon the registration statement
being declared effective by the SEC. After Mr. Sterling returns
1,692,750 shares to us, there will be outstanding, prior to this
offering, 3,000,000 shares of common stock. While the foregoing
3,000,000 shares are all free trading, each officer and director has
agreed not to sell transfer or convey by registration or otherwise,
without the prior consent of the underwriter, any of our securities owned
by them, directly or indirectly, for a period of two years from the
effective date of this offering. However, Robert Sterling, our President
and Matthew Sterling his son, may resell up to a maximum of 200,000
shares provided the bid price for the common stock is at least $10.00
after one year from the effective date. Further, all sales of such stock
must be made through the underwriter.
Escrow of 1,000,000 Shares by Robert Sterling
Robert Sterling, our President, has agreed to escrow 1,000,000
shares of his common stock with our attorney, Conrad C. Lysiak, In the
event that we do not achieve sales of $35,000,000 and pre-tax income in
excess of $7,500,000 by January 31, 2004, the 1,000,000 shares will be
delivered by Mr. Lysiak to us and canceled. If the foregoing thresholds
are achieved by us, the 1,000,000 shares will be delivered by Mr. Lysiak
to Mr. Sterling. The $7,500,000 shall be computed based on pretax income
before any effect created by the stock held in escrow.
The units and warrants sold in this offering will be immediately
resalable. Sales of our other shares could have a depressive effect on
the market price, if any, of our common stock and the shares we are
offering. See "Dilution of the Price You Pay for Your Shares - Restricted
Shares Eligible for Future Sale."
<PAGE> 28
- ---------------------------------------------------------------------
DESCRIPTION OF SECURITIES
- ---------------------------------------------------------------------
Units
Each unit consists of one share of common stock and one warrant.
Each warrant entitles the holder to purchase one share of common stock
at a price of $7.00 provided the same is exercised from __________ to
__________ and at a price of $9.00 if the warrant is exercised
__________ to __________ warrants are not exercised by __________ and
cannot be exercised thereafter. If the redeemable warrants are not
exercised by _________ they will expire and cannot be exercised
thereafter.
Common Stock
Our authorized capital stock consists of 100,000,000 shares of
common stock, par value $0.00001 per share. The holders of our common
stock:
* have equal ratable rights to dividends from funds legally
available therefor, when, as and if declared by our board of
directors;
* are entitled to share ratably in all of our assets available
for distribution to holders of common stock upon liquidation,
dissolution or winding up of our affairs;
* do not have preemptive, subscription or conversion rights and
there are no redemption or sinking fund provisions or rights;
and
* are entitled to one non-cumulative vote per share on all
matters on which stockholders may vote.
All shares of common stock now outstanding are fully paid for and
non-assessable and all shares of common stock which are the subject of
this offering, when issued, will be fully paid for and non-assessable. We
refer you to our Articles of Incorporation, Bylaws and the applicable
statutes of the State of Washington for a more complete description of
the rights and liabilities of holders of our securities.
Non-Cumulative Voting
Holders of shares of our common stock do not have cumulative voting
rights, which means that the holders of more than 50% of the outstanding
shares, voting for the election of directors, can elect all of the
directors to be elected, if they so choose, and, in such event, the
holders of the remaining shares will not be able to elect any of our
directors. After this offering is completed, the present stockholders
will own approximately 75% of our outstanding shares. See "Principal
Stockholders."
<PAGE> 29
Cash Dividends
As of the date of this prospectus, we have not paid any cash
dividends to stockholders. The declaration of any future cash dividend
will be at the discretion of our board of directors and will depend upon
our earnings, if any, our capital requirements and financial position,
our general economic conditions, and other pertinent conditions. It is
our present intention not to pay any cash dividends in the foreseeable
future, but rather to reinvest earnings, if any, in our business
operations.
Redeemable Warrants
Each redeemable warrant entitles the holder to purchase one share
of common stock at a price of $7.00 provided the same is exercised from
__________ to __________ and at a price of $9.00 if the warrant is
exercised from __________ to __________ If the redeemable warrants are
not exercised by __________ they will expire and cannot be exercised
thereafter.
The redeemable warrants are subject to redemption by us upon the
following conditions:
1. Thirty (30) days written notice to you.
2. The effectiveness of a current registration statement.
3. Our common stock having traded at least $10.00 per share for
thirty (30) trading days immediately preceding the date of the notice
to you during the exercise period __________ to __________.
4. Our common stock having traded at least $15.00 per share for
thirty (30) trading days immediately preceding the date of the notice
to you during the exercise period _________ to __________.
If we call the redeemable warrants for redemption, and you do not
exercise your redeemable warrant, the warrant will terminate on the date
set forth in the notice to you.
Reports
We are subject to certain reporting requirements and will furnish
annual financial reports to you certified by our independent accountants,
and may, in our discretion, furnish unaudited quarterly financial
reports.
Stock Transfer and Warrant Agent
The stock transfer and redeemable warrant agent for our securities
is American Securities Transfer & Trust, Inc., 12039 West Alameda
Parkway, Suite Z-2, Lakewood, Colorado 80228 and its telephone
number is (303) 986-5400.
<PAGE> 30
- ---------------------------------------------------------------------
CERTAIN TRANSACTIONS
- ---------------------------------------------------------------------
On July 21, 1998, we entered into a Licensing Agreement with Robert
Sterling, our President, and Matthew Sterling, the son of Robert Sterling
for the licensing of the development, manufacturing and marketing of the
Turbolator. Further, on the same date, we entered into a licensing
agreement with Robert Sterling, for the development, manufacturing and
marketing of the PHTEM. The foregoing agreements were subsequently
amended to extend the time period that we have to generate revenues from
the sale of our products.
On July 31, 1998, we issued 4,500,000 shares of Common Stock to
the following pursuant to Reg. 504 of the Securities Act of 1933 (the
"Act"):
Total consideration
Name and shares acquired
Robert E. Sterling 4,250,000 shares for President and the
Licensing Agreement and Director 50,000 shares
for services as a director
Ronald L. Allen 50,000 shares for services as a director
William A. Sutherland 50,000 shares for services as a director
Matthew R. Sterling 100,000 shares for the Licensing Agreement
TOTAL 4,500,000 shares for Licensing Agreements and
Services valued at $45,841
We received cash advances under a line of credit totaling $177,160
at October 31, 1999 from Robert Sterling. Borrowings under the line of
credit accrue interest at the rate of 8% per annum and mature on August
1, 1999. The borrowings are unsecured.
Upon this registration statement being declared effective by the
SEC, Robert Sterling will return 1,692,750 shares to us for cancellation
as a condition to Castle Securities Corp. acting as our underwriter.
A conflict of interest exists between us and Robert Sterling, our
president. Pursuant to the licensing agreements between us and Robert
Sterling, if we do not sell a minimum number of Turbolators and PHTEMs
the licensing agreements will terminate. Therefore, it may be to Mr.
Sterling's advantage to cause the termination of the licensing
agreements. This directly conflicts with his duty as our president to do
all things necessary to assure that we meet the minimum sales in order to
maintain the licensing agreements.
- ---------------------------------------------------------------------
LITIGATION
- ---------------------------------------------------------------------
We are not a party to any pending litigation and none is
contemplated or threatened.
<PAGE> 31
- ---------------------------------------------------------------------
EXPERTS
- --------------------------------------------------------------------
The financial statements included in this prospectus and in the
registration statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth
in their report (which contained an explanatory paragraph regarding our
ability to continue as a going concern) appearing elsewhere herein and in
the registration statement, and are included herein in reliance upon such
report given upon the authority of said firm as experts in auditing and
accounting.
- ---------------------------------------------------------------------
LEGAL MATTERS
- ---------------------------------------------------------------------
Conrad C. Lysiak, Attorney at Law, 601 West First Avenue, Suite 503,
Spokane, Washington 99201, telephone (509) 624-1475 has acted as legal
counsel for our company. Robert C. Beers, P.C., Attorney at Law, 3 Linden
Street, Selden, New York 11784 telephone (631) 698-7794 has acted as
legal counsel for the Underwriter.
- ---------------------------------------------------------------------
FINANCIAL STATEMENTS
- ---------------------------------------------------------------------
Our fiscal year end is January 31. We will provide audited financial
statements to our stockholders on an annual basis; the statements will be
audited by an Independent Certified Public Accountant.
Our audited financial statements from inception through July 31,
1999; and our unaudited financial statements for the quarter ended
October 31, 1999 immediately follow:
INDEX TO FINANCIAL STATEMENTS
Exhaust Technologies, Inc. (a development stage company)
Report of Independent Certified Public Accountant . . F-1
Balance Sheets . . . . . . . . . F-2
Statements of Loss . . . . . . . . F-3
Statement of Changes in Stockholders' (Deficit) Equity . F-4
Statements of Cash Flows . . . . . . F-5 to F-6
Summary of Accounting Policies . . . . F-7 to F-10
Notes to Financial Statements . . . . .F-11 to F-14
<PAGE> 32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Exhaust Technologies, Inc.
We have audited the accompanying balance sheets of Exhaust Technologies,
Inc. (a development stage company), as of July 31, 1999 and January 31,
1999, and the related statements of loss, changes in stockholders'
(deficit) equity and cash flows for the six month period ended July 31,
1999 and for the period from July 21, 1998 (date of inception) through
January 31, 1999. We have also audited the statements of loss, changes
in stockholders' equity and cash flows from inception (July 21, 1998)
through July 31, 1999. 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 audits
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 Exhaust
Technologies, Inc. as of July 31, 1999 and January 31, 1999, and the
results of its operations and its cash flows for the six month period
ended July 31, 1999, the period from July 21, 1998 (date of inception)
through January 31, 1999 and the period from inception (July 21, 1998)
through July 31, 1999, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the Company has no recurring source of revenue
and has incurred losses since inception. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also
described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Spokane, Washington
August 9, 1999, except for Note 3
which is as of December 14, 1999
F-1
<PAGE> 33
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
ASSETS (Note 1)
<TABLE>
<CAPTION>
October 31, July 31, January 31,
1999 1999 1999
---------- --------- ---------
(Unaudited)
<S> <C> <C> <C>
Current assets:
Cash $ 516 $ 2,081 $ 27,265
Inventory 29,983 - 7,991
Prepaid expenses 10,866 1,105 -
---------- --------- ---------
Total current assets 41,365 3,186 35,256
---------- --------- ---------
Equipment, net (Note 2) 57,409 10,239 -
Other assets:
Licenses, net of
accumulated amortization
of $3,486, $2,849 and
$1,584 (Note 3) 27,948 28,585 14,257
Deferred stock offering
costs (Note 7) 25,000 25,000 -
---------- --------- ---------
$ 151,722 $ 67,010 $ 49,513
========== ========= =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable $ 36,250 $ 16,256 $ -
Accrued interest 4,534 2,017 785
Line of credit -
related party (Note 4) 177,160 74,509 22,509
---------- --------- ---------
Total current liabilities 217,944 92,782 23,294
---------- --------- ---------
Commitments and contingencies
(Notes 1, 6 and 7)
Stockholders' (deficit) equity:
Common stock, $.00001 par value;
100,000,000 shares authorized;
4,692,750, 4,692,750 and
4,642,500 shares issued and
outstanding 47 47 46
Additional paid-in capital 72,088 72,088 62,039
Deficit accumulated during
the development stage (138,357) (97,907) (35,866)
---------- ---------- ---------
Total stockholders'
(deficit) equity (66,222) (25,772) 26,219
---------- ---------- ---------
$ 151,722 $ 67,010 $ 49,513
========== ========== =========
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-2
<PAGE> 34
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF LOSS
<TABLE>
<CAPTION>
Date of Date of
Inception Nine Inception
(July 21, 1998) Months (July 21, 1998)
Through Ended Through
October 31, October 31, October 31,
1999 1999 1998
---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Revenues $ - $ - $ -
---------- ---------- ---------
Operating expenses:
Professional services 49,447 49,447 -
Research and development 40,518 40,518 -
Office expense 3,050 2,391 304
Advertising 1,300 1,300 -
Amortization 3,486 1,902 678
Travel 3,100 262 295
Directors fees 30,000 - 30,000
Dues and subscriptions 275 275 -
Supplies 2,647 2,647 -
---------- ---------- ---------
Total operating expenses 133,823 98,742 31,277
---------- ---------- ---------
Loss from operations (133,823) (98,742) (31,277)
---------- ---------- ---------
Other expense:
Interest expense (4,534) (3,749) -
---------- ---------- ---------
Net loss $ (138,357) $ (102,491) $ (31,277)
========== ========== =========
Net loss per share
basic and diluted $ (0.02) $ (0.01)
========== =========
Weighted average
number of shares
basic and diluted 4,687,405 4,500,000
========== ==========
See accompanying summary of accounting policies and
notes to financial statements.
F-3a
<PAGE> 35
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF LOSS
Date of Date of
Inception Six Inception
(07/21/98) Months (07/21/98)
Through Ended Through
July 31, July 31, January 31,
1999 1999 1999
--------- -------- -----------
<S> <C> <C> <C>
Revenues $ - $ - $ -
--------- -------- -----------
Operating expenses:
Professional services 41,445 41,445 -
Research and development 15,171 15,171 -
Office expense 1,300 1,300 659
Advertising 2,278 1,619 -
Amortization 2,858 1,274 1,584
Travel 2,838 - 2,838
Directors fees 30,000 - 30,000
Dues and subscriptions - - -
Supplies - - -
--------- --------- -----------
Total operating expenses 95,890 60,809 35,081
--------- --------- -----------
Loss from operations (95,890) (60,809) (35,081)
--------- --------- -----------
Other expense:
Interest expense (2,017) (1,232) (785)
--------- --------- -----------
Net loss $ (97,907) $ (62,041) $ (35,866)
========= ========= ===========
Net loss per share basic
and diluted $ (0.01) $ (0.01)
========= ===========
Weighted average number of
shares basic and diluted 4,687,405 4,516,264
========= ===========
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-3b
<PAGE> 36
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
For the Nine Months Ended October 31, 1999 (Unaudited) and the Six
Month Period Ended July 31, 1999 and the Period Ended January 31, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Additional During the
Common Stock Paid-in Development
Shares Amount Capital Stage Total
--------- ---- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Common stock issued
to inventors at
inception for
licenses at $0.01
per share 4,350,000 $ 43 $ 15,798 $ - $ 15,841
Common stock issued
for services at $0.20
per share 150,000 2 29,998 - 30,000
Common stock issued
for cash at $0.20
per share 142,500 1 16,243 - 16,244
Net loss for
the period - - - (35,866) (35,866)
--------- ---- -------- ---------- ---------
Balance,
January 31, 1999 4,642,500 46 62,039 (35,866) 26,219
Common stock issued
for cash at $0.20
per share 50,250 1 10,049 - 10,050
Net loss for
the period - - - (62,041) (62,041)
--------- ---- -------- ---------- ---------
Balance,
July 31, 1999 4,692,750 47 72,088 (97,907) (25,772)
Net loss for the
period (unaudited) - - - (40,450) (40,450)
--------- ---- -------- ---------- ---------
Balance,
October 31, 1999
(unaudited) 4,692,750 $ 47 $ 72,088 $ (138,357) $ (66,222)
========= ==== ======== ========== =========
</TABLE>
See accompanying summary accounting policies and
notes to financial statements
F-4
<PAGE> 37
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash Flow
<TABLE>
<CAPTION>
Date of Date of
Inception Nine Inception
(07/21/98) Months (07/21/98)
Through Ended Through
October 31, October 31, October 31,
1999 1999 1998
---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss $ (138,357) $ (102,491) $ (31,277)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Amortization 3,486 1,902 678
Issuance of common stock
for services 30,000 - 30,000
Changes in assets and
liabilities:
Deposits (25,000) (25,000) -
Accounts payable 36,250 36,250 -
Supplies inventory (22,772) (21,992) -
Prepaid expenses (10,866) (10,866) -
Accrued interest 4,534 3,749 -
---------- ---------- ---------
Net cash used in
operating activities (122,725) (118,448) (599)
---------- ---------- ---------
Cash flows from
investing activities:
Cash paid for licenses (15,593) (15,593) -
Cash paid for property
and equipment (57,409) (57,409) -
---------- ---------- ---------
Net cash used in
investing activities (73,002) (73,002) -
---------- ---------- ---------
See accompanying summary of accounting policies and
notes to financial statements.
F-5a
<PAGE> 38
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash Flow
Date of Date of
Inception Six Inception
(07/21/98) Months (07/21/98)
Through Ended Through
July 31, July 31, January 31,
1999 1999 1999
--------- -------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (97,907) $ (62,041) $ (35,866)
Adjustments to reconcile net loss to net
cash used in operating activities:
Amortization 2,858 1,274 1,584
Issuance of common stock for services 30,000 - 30,000
Changes in assets and liabilities:
Deposits (26,105) (26,105) -
Accounts payable 16,256 16,256 -
Supplies inventory 7,211 7,991 (780)
Prepaid expenses - - -
Accrued interest 2,017 1,232 785
--------- --------- ---------
Net cash used in operating activities (65,670) (61,393) (4,277)
--------- --------- ---------
Cash flows from investing activities:
Cash paid for licenses (15,602) (15,602) -
Cash paid for property and equipment (10,239) (10,239) -
--------- --------- ---------
Net cash used in investing activities (25,841) (25,841) -
--------- --------- ---------
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-5b
<PAGE> 39
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
Increase (Decrease) in Cash Flow
<TABLE>
<CAPTION>
Date of Date of
Inception Nine Inception
(07/21/98) Months (07/21/98)
Through Ended Through
October 31, October 31, October 31,
1999 1999 1998
---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Cash flows from financing
activities:
Borrowings under line of
credit related party 169,949 154,651 6,400
Net proceeds from sale
of common stock 26,294 10,050 8,744
--------- --------- --------
Net cash provided by
financing activities 196,243 164,701 15,144
--------- --------- --------
Net increase (decrease) in cash 516 (26,749) 14,545
Cash, beginning of period - 27,265 -
--------- --------- --------
Cash, end of period $ 516 $ 516 $ 14,545
========= ========= ========
Supplemental disclosures of
cash flow information:
Cash paid during the period for:
Interest $ - $ - $ -
Income taxes $ - $ - $ -
========= ========= ========
Noncash financing activities:
Issuance of common stock in
exchange for licenses $ 15,841 $ - $ -
Inventory advanced under line
of credit - related party $ 7,211 $ - $ -
========= ========= ========
See accompanying summary of accounting policies and
notes to financial statements.
F-6a
<PAGE> 40
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash Flow
Date of Date of
Inception Six Inception
(07/21/98) Months (07/21/98)
Through Ended Through
July 31, July 31, January 31,
1999 1999 1999
--------- -------- ----------
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings under line of
credit related party 67,298 52,000 15,298
Net proceeds from sale of common stock 26,294 10,050 16,244
-------- --------- --------
Net cash provided by financing activities 93,592 62,050 31,542
-------- --------- --------
Net increase (decrease) in cash 2,081 (25,184) 27,265
Cash, beginning of period - 27,265 -
-------- ---------- --------
Cash, end of period $ 2,081 $ 2,081 $ 27,265
======== ========== ========
Supplemental disclosures of cash
flow information:
Cash paid during the period for:
Interest $ - $ - $ -
Income taxes $ - $ - $ -
======== ========== ========
Noncash financing activities:
Issuance of common stock in
exchange for licenses $ 15,841 $ - $ 15,841
Inventory advanced under line
of credit - related party $ 7,211 $ - $ 7,211
======== ========== ========
</TABLE>
See accompanying summary of accounting policies and
notes to financial statements.
F-6b
<PAGE> 41
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
For the Nine Months Ended October 31, 1999 and the Period From Date
of Inception (July 21, 1998) through October 31, 1998 (Unaudited) and
the Six Month Period Ended July 31, 1999 and the Period From Date of
Inception (July 21, 1998) through January 31, 1999
Nature of Business
Exhaust Technologies, Inc. ("Exhaust Technologies" or "the Company") is
a development stage enterprise which holds exclusive manufacturing,
developing, and marketing rights in the United States for the
Turbolator, a tube-housing designed for installation on vehicles to
regulate exhaust flow from the engine, and for the Pneumatic Hand Tool
Exhaust Muffler ("PHTEM"), a noise muffling system installed on
pneumatic wrenches which can reduce the sound levels and remove
contaminates from the exhaust air before discharging into the
atmosphere. The Company was incorporated pursuant to the laws of the
state of Washington in July 1998. The Company's fiscal year end is
January 31.
Cash Equivalents
For financial reporting purposes, the Company considers all highly
liquid investments with an original maturity of three months or less
when purchased to be a cash equivalent. Financial instruments, which
potentially subject the Company to a concentration of credit risk,
consist of cash and cash equivalents. Cash and cash equivalents
consist of funds deposited with various high credit quality financial
institutions.
Inventory
Inventory consists of supplies and component parts. Inventory is
stated at the lower of cost (first-in, first-out method) or market.
Equipment
Equipment is recorded at cost. Depreciation and amortization are
provided using the straight-line method over the useful lives of the
respective assets. Major additions and betterments are capitalized.
Upon retirement or disposal, the cost and related accumulated
depreciation or amortization are removed from the accounts and any gain
or loss is reflected in operations. Equipment with a nominal value was
contributed by the founders at inception, and accordingly, no asset has
been recognized.
F-7
<PAGE> 42
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
For the Nine Months Ended October 31, 1999 and the Period From Date
of Inception (July 21, 1998) through October 31, 1998 (Unaudited) and
the Six Month Period Ended July 31, 1999 and the Period From Date of
Inception (July 21, 1998) through January 31, 1999
Licenses
The costs associated with acquiring exclusive licensing rights to
patented technology have been capitalized and are being charged to
expense using the straight line method of amortization over ten years,
the estimated useful lives of the patents.
In accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to be Disposed of", management
of the Company reviews the carrying value of its intangible assets on
a regular basis. Estimated undiscounted future cash flows from the
intangible assets are compared with the current carrying value.
Reductions to the carrying value are recorded to the extent the net
book value of the property exceeds the estimate of future undiscounted
cash flows.
Income Taxes
Income taxes are provided based on the liability method of accounting
pursuant to SFAS No. 109, "Accounting for Income Taxes." Under this
approach, deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax basis of
assets and liabilities and their financial reporting amounts at each
year end. A valuation allowance is recorded against deferred tax
assets if management does not believe the Company has met the "more
likely than not" standard imposed by SFAS No. 109 to allow recognition
of such an asset.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated balance sheet as of
October 31, 1999, July 31, 1999 and January 31, 1999 for cash
equivalents and accrued expenses approximate fair value because of the
immediate or short-term maturity of these financial instruments. The
fair value of the line of credit - related party approximates its
carrying value as the stated rate of the debt reflects recent market
conditions.
F-8
<PAGE> 43
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
For the Nine Months Ended October 31, 1999 and the Period From Date
of Inception (July 21, 1998) through October 31, 1998 (Unaudited) and
the Six Month Period Ended July 31, 1999 and the Period From Date of
Inception (July 21, 1998) through January 31, 1999
Research and Development Costs
Research and development costs are charged to expense as incurred.
Net Loss Per Share
SFAS No. 128 requires dual presentation of basic EPS and diluted EPS on
the face of all income statements issued after December 15, 1997 for
all entities with complex capital structures. Basic EPS is computed as
net income divided by the weighted average number of common shares
outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock
options, warrants and other convertible securities. The Company had no
dilutive potential common stock at October 31, 1999, July 31, 1999 and
January 31, 1999 and therefore, basic and diluted EPS are the same for
both periods.
New Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 requires companies to recognize all
derivative contracts as either assets or liabilities in the balance
sheet and to measure them at fair value. If certain conditions are
met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition
on the hedging derivative with the recognition of (i) the changes in
the fair value of the hedged asset or liability that are attributable
to the hedged risk, or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging
instrument, the gain or loss is recognized as income in the period of
change. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
effective date of SFAS No. 133." SFAS No. 137 amends the effective
date of SFAS No. 133 to now be for all fiscal quarters of fiscal years
beginning after June 15, 2000. Based on its current and planned future
activities relative to derivative instruments, the Company believes
that the adoption of SFAS No. 133 will not have a significant effect on
its financial statements.
F-9
<PAGE> 44
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
SUMMARY OF ACCOUNTING POLICIES
For the Nine Months Ended October 31, 1999 and the Period From Date
of Inception (July 21, 1998) through October 31, 1998 (Unaudited) and
the Six Month Period Ended July 31, 1999 and the Period From Date of
Inception (July 21, 1998) through January 31, 1999
Interim Accounting Policy
In the opinion of the Company's management, the accompanying unaudited
financial statements include all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of the balance
sheet of the Company and the statement of operations and cash flows as
of and for the nine months ended October 31, 1999 and the period ended
October 31, 1998. The statement of operations for the nine months
ended October 31, 1999 are not necessarily indicative of results of
operations to be expected for the year ended January 31, 2000.
F-10
<PAGE> 45
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
For the Nine Months Ended October 31, 1999 and the Period From Date
of Inception (July 21, 1998) through October 31, 1998 (Unaudited) and
the Six Month Period Ended July 31, 1999 and the Period From Date of
Inception (July 21, 1998) through January 31, 1999
1. Development Stage Operations and Going Concern
The Company has been in the development stage since its inception. The
Company has no recurring source of revenue and has incurred losses
since inception. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The financial
statements do not include any adjustments that may be necessary if the
Company is unable to continue as a going concern.
Management of the Company has undertaken certain actions to address
these conditions. Management currently plans to commence production in
fiscal 2000. To this end, management is currently in negotiations with
manufacturers to produce the Company's products and with marketing
representatives to establish a product channel. Funds required to
carry out management's plans are expected to be derived from future
stock sales or borrowings from the Company's shareholders. (See Note
7.) There can be no assurances that the Company will be successful in
executing its plans.
2. Equipment
Major classes of property and equipment consist of the following:
<TABLE>
<CAPTION>
October 31, July 31, January 31,
1999 1999 1999
(Unaudited)
<S> <C> <C> <C>
Equipment $ 6,715 $ 6,715 $ 6,715
Equipment held for use
in future production 57,409 10,239 -
-------- -------- -------
Total property and equipment 64,124 16,954 6,715
Less accumulated depreciation 6,715 6,715 6,715
-------- -------- -------
Net property and equipment $ 57,409 $ 10,239 $ -
======== ======== =======
</TABLE>
F-11
<PAGE> 46
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
For the Nine Months Ended October 31, 1999 and the Period From Date
of Inception (July 21, 1998) through October 31, 1998 (Unaudited) and
the Six Month Period Ended July 31, 1999 and the Period From Date of
Inception (July 21, 1998) through January 31, 1999
3. Licenses
In 1998, the Company acquired exclusive licensing rights to
manufacture, develop and market the Turbolator and the PHTEM from the
Company's president and his son ("the inventors") under separate
licensing agreements. The licenses were acquired through the issuance
of 4,350,000 shares of common stock, valued at $15,841, which
represented the inventors' historical cost basis in the licenses.
Pursuant to the terms of the agreements, and a modification to these
agreements executed on December 14, 1999, the Company is required to
generate sales of the Turbolator and the PHTEM of at least $500,000 per
year, beginning in fiscal 2002 and continuing for all years thereafter,
in order to retain the licensing rights.
4. Line of Credit - Related Party
The Company has a line of credit with the Company's president which
allows for borrowings up to $400,000. Borrowings under the line of
credit are unsecured. Outstanding borrowings under the line of credit
accrue interest at 8% and mature on August 1, 2000.
5. Income Taxes
At October 31, 1999, July 31, 1999 and January 31, 1999, the Company
had net deferred tax assets of approximately $136,000 (unaudited) and
$39,000 and $12,500 principally arising from net operating loss
carryforwards for income tax purposes. As management of the Company
cannot determine that it is more likely than not that the Company will
realize the benefit of the net deferred tax asset, a valuation
allowance equal to the net deferred tax asset has been established at
October 31, 1999, July 31, 1999 and January 31, 1999. The difference
in the expected federal benefit and the actual tax benefit recorded is
due to the increase in the valuation allowance.
At July 31, 1999, the Company has net operating loss carryforwards
totaling approximately $93,000, which expire in the years 2014 through
2015.
F-12
<PAGE> 47
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
For the Nine Months Ended October 31, 1999 and the Period From Date
of Inception (July 21, 1998) through October 31, 1998 (Unaudited) and
the Six Month Period Ended July 31, 1999 and the Period From Date of
Inception (July 21, 1998) through January 31, 1999
6. Commitments and Contingencies
In May 1999, the Company entered into a consulting and marketing
agreement with Clarkstone International Corporation ("Clarkstone")
relating to product development and marketing of the Company's
products. Clarkstone will be paid a fee of $150 per hour at an
estimated 80 hours, which will be paid in the form of common stock at
$5.00 per share. In addition, the Company will pay commissions of 15%
of the sales price for sales under $10,000; $1,500 plus 12% of the
sales price for sales over $10,000; $2,700 plus 11% of the sales price
for sales over $20,000; and $3,800 plus 10% of the sales price for
sales over $30,000. The foregoing agreement may be terminated by
either party upon 90 days written notice to the other; however,
Clarkstone will be entitled to the compensation set forth therein for
a period of twelve months from the date of termination. On November
10, 1999, the Company provided Clarkstone with written notice and
effectively terminated this agreement.
7. Subsequent Events
In August 1999, the Company entered into a purchase agreement with Apex
Industries, Inc. ("Apex"), whereby Apex agreed to manufacture, and the
Company agreed to purchase, 10,000 Turbolator assemblies. The total
cost of the 10,000 Turbolator assemblies is estimated to be
approximately $200,000, of which $28,500 relates to tooling costs that
will become the property of the Company. In conjunction with the
purchase agreement, the Company's president secured an irrevocable
standby letter of credit with a bank for $80,000 on the Company's
behalf and for the benefit of Apex. Drawings under the letter of
credit shall bear interest payable monthly at the bank's prime rate
plus 2% and shall mature on November 23, 1999.
The Company has entered into a letter of intent with an underwriter
pursuant to which the underwriter has agreed to sell, on a best efforts
basis, up to 1,000,000 units (each unit consisting of one share of the
Company's common stock and one warrant) at a per unit price of $5.10
and 1,000,000 warrants at a per warrant price of $0.10. Each warrant
would grant the holder the right to purchase a share of the Company's
common stock at an initial per share price of $7.00 for a one year
period from the date of the offering, then increasing to $9.00 through
the date of the second anniversary from the offering. The Company has
advanced a nonrefundable fee of $25,000 to the underwriter and has
agreed to pay the underwriter commissions and, based on the results of
the offering, to issue the underwriter warrants to purchase up to
100,000 units (each unit consisting of one share of the Company's
common stock and a warrant to purchase a share of stock at $6.12).
F-13
<PAGE> 48
EXHAUST TECHNOLOGIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
For the Nine Months Ended October 31, 1999 and the Period From Date
of Inception (July 21, 1998) through October 31, 1998 (Unaudited) and
the Six Month Period Ended July 31, 1999 and the Period From Date of
Inception (July 21, 1998) through January 31, 1999
In connection with the underwriting, the Company will enter into
employment agreements with its Chief Executive Officer and Operations
Manager, provided sufficient funds are obtained from the offering.
These employment agreements will be effective for a period of three
years and contain terms, which specify annual compensation of $125,000
and $100,000, respectively. Finally, each of the two Company founders
(named above), will deliver back to the Company at the date that the
Company's registration statement is declared effective a total of
1,692,750 shares of the Company's common stock held by them. These
shares will be held until the Company achieves annual sales of
$35,000,000 and pretax income of $7,500,000. If these targets are not
attained by January 31, 2004, the shares will be cancelled.
F-14
<PAGE> 49
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The only statute, charter provision, bylaw, contract, or other
arrangement under which any controlling person, director or officer
of the Registrant is insured or indemnified in any manner against any
liability which he may incur in his capacity as such, is as follows:
1. Article X of the Articles of Incorporation of the company, filed
as Exhibit 3.1 to the Form 10SB as filed with the Securities and
Exchange Commission.
2. Article IX of the Bylaws of the company, filed as Exhibit 3.2 to
the Registration Statement.
3. Revised Code Washington.
The Corporation shall indemnify its Directors and Officers to the
fullest extent permitted by the Washington Business Act now or
hereafter in force. However, such indemnity shall not apply on account
of:
a. Acts or omissions of the Director or Officer finally adjudged
to be intentional misconduct or a knowing violation of law;
b. Conduct of the Director or Officer finally adjudged to be in
violation of RCW 23B.08.310; or,
c. Any transaction with respect to which it was finally adjudged
that such Director or Officer personally received a benefit in money,
property, or services to which the Director was not legally entitled.
The Corporation shall advance expenses for such persons pursuant
to the terms set forth in the Bylaws, or in a separate Directors'
resolution or contract.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of the offering (assuming all shares are
sold), all of which are to be paid by the registrant, are as follows:
SEC Registration Fee $ 6,286.38
NASD Registration Fee 6,886.38
Underwriter Non-Accountable
Expense Allowance 156,000.00
Printing Expenses 20,000.00
Accounting Fees and Expenses 25,000.00
Legal Fees and Expenses 10,000.00
Blue Sky Fees/Expenses 20,000.00
Transfer Agent Fees 3,000.00
Miscellaneous Expenses 12,827.24
------------
TOTAL $ 260,000.00
============
<PAGE> 50
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
During the past three years, the Registrant has sold the
following securities which were not registered under the
Securities Act of 1933, as amended:
On July 31, 1998, we issued 4,500,000 shares of Common Stock to
the following pursuant to Reg. 504 of the Securities Act of 1933 (the
"Act"):
Robert E. Sterling 4,250,000 shares for President and the
Licensing Agreement and Director 50,000
shares for services as a director
Ronald L. Allen 50,000 shares for services as a director
William A. Sutherland 50,000 shares for services as a director
Matthew R. Sterling 100,000 shares for the Licensing Agreement
Between August 1998 and March 1999, we issued the following
pursuant to Reg. 504 of the Act:
<TABLE>
<CAPTION>
Name and Address Date Shares Consideration
- ------------------- ------- --------- -----------------------
<S> <C> <C> <C>
Jerry W. Johnson 08/27/98 5,000 $ 1,000 in Cash
3298 Mill Road
Moscow, Idaho 83843
Win Dire 09/22/98 20,000 $ 4,000 in Cash
304 Cedar Street
Wallace, Idaho 83873
Alta Grant 10/23/98 5,000 $ 1,000 in Cash
3298 Mill Road
Moscow, Idaho 83843
Chris Schutte 12/26/98 2,500 $ 500 in Cash
628 Ninth Avenue
Camanche, Iowa 52730
Byron Rhoades 12/29/98 5,000 $ 1,000 in Cash
3850 E. Payment Park Rd.
Post Falls, Idaho 83854
Joan H. Rhoades 12/29/98 5,000 $ 1,000 in Cash
3850 E. Payment Park Rd.
Post Falls, Idaho 83854
Eddie Roberts 12/30/98 2,500 $ 500 in Cash
5303 E. Twain Road
Suite 212
Las Vegas, Nevada 89122
Mary Wyatt 12/30/98 2,500 $ 500 in Cash
5303 E. Twain Road
Suite 212
Las Vegas, Nevada 89122
<PAGE> 51
Name and Address Date Shares Consideration
- ------------------- ------- --------- -----------------------
<S> <C> <C> <C>
David L. Overstreet II 12/26/98 2,500 $ 500 in Cash
P. O. Box 3251
Moscow, Idaho 83843
Ronald Freitas 11/04/98 5,000 $ 1,000 in Cash
74 - 4920 Kiwi Street
Kailua - Kona, Hawaii 96740
Kenneth M. Lewis 11/04/98 5,000 $ 1,000 in Cash
73-1149 Anikawa
Suite #A
Kailua - Kona, Hawaii 96740
Keith W. Lewis 11/04/98 5,000 $ 1,000 in Cash
P. O. Box 2642
Kailua - Kona, Hawaii 96745
Sandra D. Dunn 10/21/98 5,000 $ 1,000 in Cash
1528 Pine Cone Road
Moscow, Idaho 83843
Genevieve A. Pereira 10/25/98 5,000 $ 1,000 in Cash
1811 Cornell Drive
Alameda, California 94501
Charles Littlejohn 09/21/98 5,000 $ 1,000 in Cash
2756 Park Blvd.
Oakland, California 94606
Terry Applegate 09/08/98 10,000 $ 2,000 in Cash
532 Huntgate Road
Woodstock, Georgia 30189
Ray Loesche 08/13/98 10,000 $ 2,000 in Cash
P. O. Box 1112
Palm City, Florida 34991
Willard Gutman 11/24/98 5,000 $ 1,000 in Cash
P.O.Box 71029
Fairbanks, Alaska 99707
Larry Wood 11/25/98 15,000 $ 3,000 in Cash
2505 Swan Lake
Las Vegas, Nevada 89121
Eleanor L. Nevin 11/25/98 5,000 $ 1,000 in Cash
2505 Swan Lake
Las Vegas, Nevada 89121
Rick Blackwood 03/03/99 1,750 $ 350 in Cash
2630 Blackwood Road
Bozeman, Montana 59715
Jerry Allen 03/05/99 2,500 $ 500 in Cash
77-357 Nohealani
Kailua - Kona, Hawaii 96740
<PAGE> 52
Name and Address Date Shares Consideration
- ------------------- ------- --------- -----------------------
<S> <C> <C> <C>
William D. Ross 03/03/99 2,500 $ 500 in Cash
78-6650 Mamelehoa Hwy.
Holualoa, Hawaii 96725
Linda M. Kelly 03/03/99 2,500 $ 500 in Cash
P.O. Box 599
Holualoa, Hawaii 96725
Denny Martin 03/04/99 2,500 $ 500 in Cash
1050 E. Brigham Road
Suite 39
St. George, Utah 84790
William S. Waller 03/01/99 5,000 $ 1,000 in Cash
73-4280 Keokeo St.
Kailua - Kona, Hawaii 96740
Charles Bush 02/26/99 1,000 $ 200 in Cash
4171 West Beryl Avenue
Phoenix, Arizona 85051
Jerry Scarsella 01/07/99 5,000 $ 1,000 in Cash
5977 E. Weaver Circle
Englewood, Colorado 80111
Phil Allen 12/21/98 2,500 $ 500 in Cash
1605 Springdale Drive
Clinton, Iowa 52732
James W. Babb 09/08/98 10,000 $ 2,000 in Cash
819 West Kidd Island Rd.
Coeur d'Alene, Idaho 83814
Joseph E. Ausich 12/15/98 5,000 $ 1,000 in Cash
1414 South Main
Moscow, Idaho 83843
Ronald Hasson 12/24/98 2,500 $ 500 in Cash
6478 Broadway Avenue
Newark, California 94560
Edward F. Pereira 12/25/98 2,500 $ 500 in Cash
5575 Tait Court
Newark, California 94560
Lonnie Wharf 02/02/99 2,500 $ 500 in Cash
1706 Summer Hills Court
Post Falls, Idaho 83854
John Hamilton 10/31/98 5,000 $ 1,000 in Cash
4724 S.E. Mason Hill Dr.
Milwaukee, Oregon 97222
Benjamin McNutt 12/23/98 2,500 $ 500 in Cash
2814 Hillside Avenue
Concord, California 94520
<PAGE> 53
Name and Address Date Shares Consideration
- ------------------- ------- --------- -----------------------
<S> <C> <C> <C>
Marion A. Sherman 12/24/98 2,500 $ 500 in Cash
1815 Cornell Drive
Alameda, California 94501
Janine Ragsdale 03/08/99 2,500 $ 500 in Cash
3799 Neal Road
Bailey, Colorado 80421
Donald R. Benson 03/09/99 2,000 $ 500 in Cash
435 Sea Village Drive
Imperial Beach, California 91932
Dawna Dia Patton 03/15/99 2,000 $ 500 in Cash
4584 Adams Street
Carlsbad, California 92008
Dennis R. Cintas 03/13/99 2,500 $ 500 in Cash
P. O. Box 2666
Kailua - Kona, Hawaii 96745
</TABLE>
Further, no commissions were paid to anyone in connection with the sale
of the shares and general solicitation was made to anyone.
ITEM 27. EXHIBITS.
The following Exhibits are incorporated herein by reference from
the Registrants's Form 10SB Registration Statement filed with the
Securities and Exchange Commission, SEC file #000-25875 on April 27,
1999. Such exhibits are incorporated herein by reference pursuant to
Rule 12b-32:
Exhibit No. Document Description
- ------------ -------------------
3.1 Articles of Incorporation.
3.2 Bylaws.
4.1 Specimen Stock Certificate.
4.2 Specimen Warrant Certificate.
10.1 Licensing Agreement for Turbolator
10.2 Licensing Agreement for Pneumatic Hand Tool Exhaust
Muffler.
<PAGE> 54
The following Exhibits are filed as part of this Registration
Statement, pursuant to Item 601 of Regulation K:
Exhibit No. Document Description
- ------------ -------------------
1.1 Underwriting Agreement.
1.2 Selected Dealers Agreement.
1.3 Unit Purchase Warrant.
5.1 Opinion of Conrad C. Lysiak.
10.3 Modification to Licensing Agreement for Turbolator.
10.4 Modification to Licensing Agreement for Pneumatic Hand
Tool Exhaust Muffler.
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Conrad C. Lysiak, Attorney at Law.
<PAGE> 55
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
* To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
* 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;
* To include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any change to such information in the
registration statement.
2. That, for the purpose of determining any liability under the
Securities Act of 1933, 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.
<PAGE> 56
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing of this Form SB-2 Registration
Statement and has duly caused this Form SB-2 Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized,
in Spokane, Washington, on this day 22 of February, 2000.
EXHAUST TECHNOLOGIES, INC.
BY: /s/ Robert Sterling
Robert Sterling, President
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below constitutes and appoints Robert Sterling, as true and
lawful attorney-in-fact and agent, with full power of substitution, for
his and in his name, place and stead, in any and all capacities, to
sign any and all amendment (including post-effective amendments) to
this registration statement, and to file the same, therewith, with the
Securities and Exchange Commission, and to make any and all state
securities law or blue sky filings, granting unto said attorney-in-fact
and agent, full power and authority to do and perform each and every
act and thing requisite or necessary to be done in about the premises,
as fully to all intents and purposes as he might or could do in person,
hereby ratifying the confirming all that said attorney-in-fact and
agent, or any substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Form SB-2 Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
Signature Title Date
/s/ Robert E. Sterling President and member February 22, 2000
Robert E. Sterling of the Board of Directors
/s/ Ronald L. Allen Vice President and a February 22, 2000
Ronald L. Allen member of the Board of
Directors
/s/William A. Sutherland Secretary/Treasurer, February 22, 2000
William A. Sutherland Chief Financial Officer,
and a member of the
Board of Directors
<PAGE> 57
EXHIBIT 1.1
CASTLE SECURITIES CORP.
45 Church Street, Suite #25
Freeport, New York 11520
(516) 868-2000
with
EXHAUST TECHNOLOGIES, INC.
Up to 1,000,000 Units
and
1,000,000 Class A Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
Exhaust Technologies, Inc.
230 North Division
Spokane, Washington 99201
Dear Sirs:
Exhaust Technologies, Inc., a Washington corporation (the
"Company"), with principal offices located at 230 North Division,
Spokane, Washington 99201, has an authorized capitalization of
100,000,000 shares of Common Stock, $.00001 par value per share
("Common Stock"), of which 3,000,000 shares of Common Stock are
presently issued and outstanding. The Company proposes to offer and
sell to the public up to 1,000,000 Units at $5.10 per Unit and
1,000,000 Class A Common Stock Purchase Warrants ("Additional
Warrants") at $.10 per Warrant. Each Unit shall consist of one (1)
share of Common Stock, $.00001 par value per share, and one (1) Class
A Common Stock Purchase Warrant. Each Class A Warrant included in the
Units as well each Additional Warrant shall entitle the holder thereof
to purchase one share of Common Stock, par value $.00001 per share, at
a price of $7.00 exercisable at any time from the Separation Date (as
hereinafter defined) through _________________________, 2000 ("Exercise
Period One") and at a price of $9.00 from ______________, 2000 to
______________, 2001 ("Exercise Period Two"). Moreover, the respective
exercise prices may be adjusted pursuant to the anti-dilution
provisions contained therein. In addition, the Class A Common Stock
Purchase Warrants shall be callable at any time solely during the
exercise period at $.01 per Warrant on at least thirty (30) days'
written notice and provided that the closing bid price for the Common
Stock of the Company on each day during the thirty (30) trading days
immediately preceding the date of the notice during Exercise Period One
is at least $10.00 per share and is at least $15.00 per share during
Exercise Period Two. None of the Class A Common Stock Warrants shall
be exercisable, detachable or transferable until the "Closing Date" (as
hereinafter defined). The date on which the Class A Common Stock
Purchase Warrants shall become detachable is referred to herein as the
"Separation Date". The Units and the Common Stock and Warrants of
which they consist as well as the Additional Warrants are to be sold as
more fully set forth in the "Registration Statement" and "Prospectus"
hereinafter mentioned.
<PAGE> 58
1. Certain Definitions
The following shall constitute the definitions of certain
additional terms used in this Agreement.
(a) "Act" shall refer to the Securities Act of 1933, as amended.
(b) "Closing Date" shall be the time and date set for payment and
delivery of the offered Units and Additional Warrants.
(c) "Commission" shall refer to the Securities and Exchange
Commission.
(d) "Common Stock" shall refer to the Common Stock, $.00001 par
value, of the Company.
(e) "Company" shall refer to Exhaust Technologies, Inc.
(f) "Effective Date" shall be the date upon which the
Registration Statement becomes effective pursuant to notice from the
Securities Exchange Commission (the "SEC") and/or the passage of time
in accordance with the Act.
(g) "Preliminary Prospectus" refers to and means any Prospectus
included in the Registration Statement before the Registration
Statement becomes effective.
(h) "Prospectus" shall refer to the Prospectus filed as part of
the Registration Statement as finally amended and revised prior to the
Effective Date.
(i) "Public Warrants" shall refer to the Class A Common Stock
Purchase Warrant included in the Units and the Additional Warrants
which the Company proposes to offer and sell pursuant to this
Agreement.
(j) "Registration Statement" shall refer to the Registration
Statement filed by the Company, including exhibits and financial
statements as finally amended and revised prior to the Effective Date.
(k) "Regulations" shall refer to the rules and regulations of the
Commission.
(l) "Securities Being Offered" shall mean the Units and
Additional Warrants which the Company proposes to offer and sell to the
public pursuant to this Agreement.
(m) "Share" shall mean one (1) share of Common Stock, $.00001 par
value of the Company.
(n) "Termination Date" shall refer to the date upon which this
Agreement shall terminate for whatever reason.
(o) "Underwriter" shall refer to Castle Securities Corp.
<PAGE> 59
(p) "Underwriter's Public Warrants" shall mean the Public
Warrants except that (i) the initial exercise date thereof shall be the
date of exercise of the Underwriter's Warrant, and the expiration
thereof shall be the expiration date of the Public Warrants, (ii) the
initial exercise prices thereof shall be $7.00 per share during
Exercise Period One and $9.00 during Exercise Period Two; and,
thereafter determined as hereinafter set forth, (iii) the Company may
not redeem such Underwriter's Public Warrants, (iv) no terms of the
Underwriter's Public Warrants may be modified without the consent of
the Underwriter and (v) the Common Shares subject to the Underwriter's
Public Warrants shall initially be as set forth in the Warrant
Agreement and thereafter determined as hereinafter set forth without
regard to the terms of the Warrant Agreement.
(q) "Underwriter's Warrants" shall mean the Warrants referred in
Section 2(d) hereof.
(r) "Units" shall refer to the 1,000,000 Units which the Company
proposes to offer and sell pursuant to this Agreement.
(s) "Warrants" shall refer to the Class A Common Stock Purchase
Warrants issued in connection with the sale of the Units..
(t) "Warrant Agreement" shall refer to an agreement between the
Company and American Securities Transfer & Trust, Inc. with respect to
the Warrants and Additional Warrants.
2. Underwriter's Compensation
(a) The Company hereby appoints the Underwriter as its exclusive
agent for a period of ninety (90) days from the Effective Date (unless
extended by mutual written consent for an additional ninety (90) days)
to sell and to obtain purchasers for the purchase of up to 1,000,000
Units at a price of $5.10 per Unit (the "Public Offering Unit Price")
and the purchase of up to 1,000,000 Additional Warrants at a per of
$.10 per Warrant (the "Public Offering Additional Warrant Price") all
on a "best efforts" basis. Unless at least one (1) Unit and/or one
(1) Additional Warrant is sold and paid for within 90 days from the
Effective Date (unless further extended as specified in Paragraph 4
hereof), the Underwriter will not receive any of the commissions
or expense allowances hereinafter mentioned unless otherwise
hereinafter provided. Moreover, it is understood that if the required
funds relating to one Unit and/or one (1) Additional Warrant or such
greater amount sold are received and deposited within the Escrow
Account referred in Paragraph 4 hereof, but not cleared within the time
set forth above, then up to an additional five (5) business days shall
be allowed for the sole purpose of clearance of such funds and the
Closing of the offering. Such exclusive agency shall be good and
irrevocable unless and until terminated as herein and hereinafter set
forth.
(b) Subject to the filing and the becoming effective of a
Registration Statement in compliance with the provisions of the Act and
the availability for sale to the public of the Units and Additional
Warrants, pursuant to law, and subject to the fulfillment of all of the
obligations of the Company and compliance with all of the terms and
conditions hereof by the Company and in reliance upon the warranties,
representations and covenants made by the Company herein, the
Underwriter accepts the foregoing exclusive agency and agrees to use
its best efforts during the term of the within Agreement to sell the
<PAGE> 60
Units and Additional Warrants when and as issuable at the public
offering price set forth above; and to make a public offering of the
Units and Additional Warrants as soon as reasonably practicable after
the Registration Statement has become effective and the Units and
Additional Warrants have become available for public offering.
(c) As compensation for the services of the Underwriter herein,
the Company shall allow the Underwriter subject to the sale and receipt
of funds for at least one (1) Unit and/or one (1) Additional Warrant
to be offered herein, a sales commission or discount of Ten Percent
(10%) of the Public Offering Price on all offered Units and Additional
Warrants to be sold hereunder. The Underwriter may organize a selling
group (the "Selected Dealers", each of whom shall be a member of the
National Association of Securities Dealers, Inc.), which group may
include the Underwriter; in such event, the Underwriter may allow to
such Selected Dealers such part of the aforementioned commission or
discount as it may, in its sole discretion, determine. The Selected
Dealers, other than the Underwriter itself, are not to be deemed agents
of the Company and shall not offer or sell the offered Units and
Additional Warrants except at the price of $5.10 per Unit and $.10 per
Additional Warrant. The Underwriter shall be paid a non-accountable
expense allowance of $.153 for each Unit sold and $.003 for each
Additional Warrant sold, subject to the conditions set forth in Section
6(m) hereof. Such commission and expense allowance shall be deductible
by the Underwriter at closing prior to remittance by it to the Company
on account of the Units and Additional Warrants sold.
(d) At the closing of this offering the Company shall, subject to
the sale and receipt of funds for at least one Unit to be offered
herein, sell and deliver to the Underwriter for each 10 offered Units
sold herein, 1 Underwriter's Warrant at a purchase price of $.0001 per
Underwriter's Warrant, up to a maximum of 100,000 Underwriter's
Warrants.
The said Underwriter's Warrants shall represent the right to
purchase one Unit, each consisting of one (1) Share of Common Stock and
one (1) Public Warrant for each Underwriter's Warrant owned and shall
be exercisable only during a term of 4 years commencing 12 months after
the Effective Date, at an exercise price of $6.12 per Unit. The sale
and delivery to the Underwriter of the Underwriter's Warrants will take
place at the Closing Date. The Underwriter's Warrants shall contain
customary anti-dilution clauses, protecting warrant holders in the
event the Company pays stock dividends, effects stock splits,
or effects a sale of assets, merger or consolidation. The Underwriter
represents that for a period of not less than 12 months commencing from
the Effective Date of the offering the Underwriter will not sell,
transfer, assign or hypothecate any of the said Underwriter's Warrants
or the securities underlying said Underwriter's Warrants except to
officers or partners of the Underwriter, Selected Dealers or officers
or partners of the Selected Dealers and that upon the purchase by the
Underwriter of the said Underwriter's Warrants, the Underwriter will
not thereafter resell any of the said Underwriter's Warrants or the
underlying securities thereof, except in conformity with the applicable
provisions of the Act and all applicable "Blue Sky" laws.
(e) The Company agrees that upon written request of the holders
(including the Underwriter or its specific authorized designee) of at
least a 40% of the Underwriter's Warrants and/or the underlying
securities, together with the Underwriter's or its specific authorized
designee's consent, made at any time after 12 months following the
<PAGE> 61
Effective Date (and during the Underwriter's exercise period) but, in
any event for a period not to exceed seven (7) years following the
Effective Date, the Company will file no more than one Registration
Statement under the Act or Notification under Regulation A (or any
successor thereto) registering or qualifying the Underwriter's Warrants
and/or the securities underlying the Underwriter's Warrants, and the
Company agrees to use its best efforts to cause the above filing to
become effective and to keep said Registration Statement current for
two (2) years after it has been cleared by the SEC. The expenses of
such registration or qualification, including but not limited to
printing charges (including sufficient number of Prospectuses to permit
the sale of the securities), all legal fees and disbursements of the
Company's counsel and all accounting fees, and all filing and
miscellaneous expenses, will be borne by the Company. The Company
agrees that if at any time during the period when the Underwriter or
its specific authorized designee and/or the holders have the right to
exercise their Warrants but in any event for a period not to exceed
seven (7) years following the Effective Date it should file a
Registration Statement or Notification with the Commission pursuant to
the Act regardless of whether the Underwriter specific authorized
designee and/or the holders shall have theretofore availed themselves
of the right hereinabove provided, the Company, at its own expense,
will offer to the Underwriter and/or the holders the opportunity to
register or qualify the Underwriter's Warrants and/or securities
underlying the Underwriter's Warrants, limited, in the case of a
Regulation A offering, to the amount of any available exemption, but
unless such registration or qualification includes all of the
Underwriter's Warrants and/or underlying securities it will not relieve
the Company of such foregoing obligation to qualify the same. In
addition to the rights hereinabove provided, the Company will cooperate
with the Underwriter or its specific authorized designee and/or the
holders in preparing any additional Registration Statement or
Notification required to sell or transfer the underlying securities and
will supply information required therefore, but such additional
Registration Statement or Notification shall be at the holders of the
Warrants and/or securities issuable thereunder, and not at the expense
of the Company.
(f) If at any time any condition of the material obligations of
the Company hereunder shall not have been met or shall cease to be met
after five (5) days written notice of such deficiency by the
Underwriter and the Underwriter shall have given the Company further
notice of the desire of the Underwriter to terminate this Agreement on
account of the non-fulfillment of any such condition or obligation,
then upon such notice, the within Agreement shall terminate, saving all
such rights as the respective parties may then by law possess. Any
such notice must be in writing. If the within Agreement shall not be
sooner terminated as provided in the within paragraph, then, and in all
events, the Agreement herein shall terminate at such time as all of the
offered Units shall have been subscribed for pursuant to the terms of
the public offering herein.
3. Representations and Warranties of the Company
As a material inducement to the Underwriter to enter into this
Agreement, the Company hereby represents and warrants to, and agrees
with the Underwriter, which representations, warranties and agreements
shall survive the closing, as follows:
<PAGE> 62
(a) A Registration Statement with respect to the Units and
Additional Warrants, copies of which have heretofore been delivered by
the Company to the Underwriter, has been carefully prepared by the
Company in conformity with the requirements of the Act, and such
Registration Statement has been filed with the Commission, and one or
more amendments to said Registration Statement copies of which have
heretofore been delivered to the Underwriter, has or have been filed;
and the Company may file on or prior to the Effective Date an
additional amendment to said Registration Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any Prospectus with respect to the Units and
Additional Warrants and each Prospectus has conformed in all material
respects with the requirements of the Act and the Regulations and has
not included any fact required to be stated therein or necessary to
make the statements therein not misleading. When the Registration
Statement becomes effective and on the Closing Date hereinafter
mentioned, it will conform in all material respects with the
requirements of the Act and the applicable Regulations and the
Registration Statement and any further amendments or supplements
thereto will contain all statements which are required to be stated
therein or necessary to make the statements therein not misleading;
provided, however the Company does not make any representations or
warranties as to information contained in or omitted from the
Registration Statement or Prospectus in reliance upon written
information furnished on behalf of the Underwriter or by the
Underwriter, specifically for use therein or in any amendments or
supplements thereto.
(c) The financial statements of the Company together with the
related schedules and notes as set forth in the Registration Statement
and Prospectus, as reported upon by an independent certified public
accountant, fairly present the financial position of the Company at the
respective dates or for the respective periods to which they apply;
such financial statements have been prepared in accordance with
generally accepted principles of accounting consistently applied
throughout the periods concerned except as otherwise stated therein.
(d) Except as may be reflected in or contemplated by the
Registration Statement or the Prospectus, subsequent to the dates as of
which information is given in the Registration Statement and the
Prospectus, and prior to the Closing Date (i) there shall not be any
material adverse change in the condition, financial or otherwise, or in
the results of operations or the general affairs of the Company or in
its business taken as a whole; (ii) there shall not have been any
material transaction entered into by the Company other than
transactions in the ordinary course of business; (iii) the Company
shall not have incurred any material obligations, contingent or
otherwise, which are not disclosed in the Prospectus; and (iv) there
shall not have been, nor will there be any change in the common stock
or long term debt (except current payments) of the Company.
(e) Except as may be set forth in the Registration Statement or
Prospectus, the Company is not in violation of any term or provision of
its Charter or By-Laws, or of any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to
the Company.
<PAGE> 63
(f) The execution and delivery of this Agreement by the Company
has been duly authorized by all necessary corporate action, and this
Agreement is the valid, binding and legally enforceable obligation of
the Company; the execution and delivery of, and compliance with, this
Agreement, and the issuance and delivery of the securities being
offered do not conflict with or constitute a breach of or default under
the Certificate of Incorporation or By-Laws of the Company, any
indenture, agreement, or other instrument by which the Company is, or
on the Closing Date will be bound, or any order, rule or regulation
applicable to the Company of any court or any law, administrative
regulation or court decree.
(g) The Company is, and at the Closing Date will be, duly
incorporated and validly existing in good standing as a corporation
under the laws of its jurisdiction of incorporation, with an authorized
and outstanding common stock as set forth in the Registration Statement
and the Prospectus, and with full power and authority (corporate and
other) to own its property and conduct its business, present and
proposed, as described in the Registration Statement and Prospectus;
the Company has full power and authority to enter into this Agreement;
the Company has no subsidiaries; and the Company is duly qualified and
in good standing as a foreign corporation in each jurisdiction, other
than its jurisdiction of incorporation, in which such qualification is
required by the laws of such jurisdiction.
(h) The Company has an authorized and outstanding capitalization
as set forth in the Registration Statement and Prospectus; all of the
outstanding securities of the Company have been validly authorized and
issued and are fully paid and nonassessable; no sales of securities
have been made by the Company in violation of the Act; the securities
being offered hereunder have been validly authorized and, upon delivery
and payment therefor pursuant to this Agreement, will have been validly
issued and will be fully paid and non-assessable; the Warrants and
Underwriter's Warrants will represent the binding obligations of the
Company; the holders of the Underwriter's Warrants and or underlying
securities thereof and any of the Units and Additional Warrants to be
sold by the Company are not and will not be subject to any liability as
shareholders; and except as set forth in the Prospectus there are no
preemptive or other rights to subscribe for or purchase any of the
securities being offered, or any options, warrants, agreements or
similar rights calling for the issuance by the Company of any of its
securities outstanding as of the Closing Date.
(i) The securities being offered conform to the description
thereof contained in the Prospectus.
(j) No consent, approval, authorization or other order of any
governmental authority is required in connection with the execution and
delivery by the Company of this Agreement or the issuance and sale by
the Company of the Units and Additional Warrants, except such as may be
required under the Act or state securities laws.
(k) Except as set forth in the Registration Statement and
Prospectus there is, and at the Closing Date there will be, no action,
suit or proceeding before any court or governmental agency, authority
or body pending or, to the knowledge of the Company, threatened, which
might result in judgments against the Company not adequately covered by
insurance or which collectively might result in any material adverse
change in the condition (financial or otherwise), business or prospects
of the Company or would materially affect its properties or assets.
<PAGE> 64
(l) Upon delivery of any payment for the Underwriter's
Warrants to be sold by the Company as set forth in Paragraph 2(d) of
this Agreement, the Underwriter will receive good and marketable title
thereto free and clear of any and all liens, encumbrances, charges and
claims whatsoever; and the Company will have, on the Effective Date and
at the time of delivery of such Underwriter's Warrants, full legal
right and power and all authorization and approval required by law to
sell, transfer and deliver such Underwriter's Warrants in the manner
provided hereunder.
(m) 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 Units hereunder resulting from its acts for which the
Underwriter may be responsible.
(n) Each contract to which the Company is a party and to which
reference is made in the Registration Statement and Prospectus has been
duly and validly executed, is in full force and effect in all material
respects in accordance with their respective terms, and none of such
contracts have been assigned by the Company and the Company knows of no
present situation or condition or fact which would prevent compliance
with the terms of such contracts, as amended to date. The Company has
no intention of exercising any right which it may have to cancel any of
its rights or obligations under any of such contracts and has no
knowledge that any other party to any of such contracts has any
intention not to render full performance under such contracts.
(o) The Company has filed all federal and state tax returns which
are required to be filed, and will pay all taxes shown due on such
returns and all assessments received by it to the extent such taxes
have become due. All taxes with respect to which the Company is
obligated have been paid or adequate accruals have been set up to cover
any such unpaid taxes.
(p) Except as otherwise set forth in the Prospectus, (i) the
Company has good and marketable title, free and clear of all liens,
encumbrances and defects, except liens for current taxes not due and
payable, to all property and assets which are described in the
Registration Statement and the Prospectus as being owned by the
Company, subject only to such exceptions as are not material and do not
adversely affect the present or prospective business of the Company;
and, (ii) the properties, including any equipment, referred to in the
Registration Statement and the Prospectus as being held under lease by
the Company are held under valid, subsisting and enforceable leases
with only such exceptions which collectively are not material and do
not adversely affect the present or prospective business of the
Company.
4. Escrow Account
(a) Notwithstanding anything contained herein to the contrary,
unless the Underwriter shall sell at least one (1) Unit and/or one (1)
Additional Warrant, none of the Units and Additional Warrant, as the
case may be, will be sold to the public and this Agreement shall
automatically be terminated with respect to the security not sold. The
Underwriter agrees to open an appropriate escrow account to be
maintained at __________________________, ____________________________,
______________________, ______________________ at the Company's
expense, if any, for all monies to be received from the sale of the
securities being offered. Such monies shall be deposited in full
<PAGE> 65
without any deductions for commissions and/or expenses. In the event
that none of the Units and/or Additional Warrants are sold and paid for
within ninety (90) days from the Effective Date (unless extended by
mutual written consent for an additional Ninety (90) days) the proposed
offering herein will be withdrawn. However, it is understood that if
the required funds relating to one (1) Unit and/or one (1) Additional
Warrant or such greater amount sold are received and deposited within
the Escrow Account referred in Paragraph 4 hereof, but not cleared
within the time set forth above, then up to an additional five (5)
business days shall be allowed for the sole purpose of clearance of
such funds and the Closing of the offering.
(b) Appropriate arrangements will be made by the Underwriter to
provide for the receipt of funds from the subscribers of the securities
being offered and to provide for the disposition thereof, in accordance
with the provisions of this section.
(c) Unless the Underwriter shall have sold at least one (1) Unit
and/or one Additional Warrant and the proceeds thereof shall have been
received by the Company, it shall not be entitled to receive any
expense allowance or commissions, or be entitled to purchase any
Underwriter's Warrants from the Company (except as otherwise stated
hereinafter).
(d) The "Closing Date" shall take place at the office of the
______________________________________, ______________________________,
________________________, ___________________ or the Underwriter at
such time as will be fixed by notice in writing to be given by the
Underwriter to the Company, such date to be not less than five (5) full
business days after the date on which such notice shall have been given
and not less than five (5) and not more than ten (10) full business
days after the date on which any of the conditions allowing the release
of the proceeds from the escrow account to the Company, and Underwriter
as provided in the Escrow Agreement shall have occurred. The Closing
Date and place may be changed by agreement of the Underwriter and the
Company.
(e) The Underwriter shall comply in all respects with the
requirements of Rule 15c2-4 of the rules and regulations made by the
Commission under the Securities Exchange Act of 1934, as amended. The
Underwriter shall deposit by 12 noon of the next business day
subsequent to the receipt of funds all funds received from the sale of
the offered Units and/or Additional Warrant, which funds shall be made
payable to the escrow agent, in an escrow account, to be maintained at
a bank as escrow agent for the benefit of the Subscribers, and the same
shall be held in such bank account until the Closing Date, and upon
such Closing Date the said funds, shall be promptly transmitted to the
Company, who shall at said time provide such documents, certificates,
receipts and any and all other papers or instruments as counsel may
reasonably deem necessary or appropriate under the circumstances.
5. Selected Dealers
(a) In selling the securities being offered the Underwriter shall
offer them solely as agent for the Company and such offer shall be made
upon the terms and subject to the conditions set forth in the
Registration Statement and Prospectus. The Underwriter shall commence
making such offer as agent for the Company as soon after the Effective
Date as it may deem advisable.
<PAGE> 66
(b) The Underwriter may offer and sell the securities being
offered for the Company's account to Selected Dealers pursuant to a
form of Selling Agreement pursuant to which the Underwriter may allow
such concession (out of its underwriting commission) as it may
determine, within the limits set forth in the Registration Statement
and Prospectus. All purchases by selected dealers, shall be as agents
for the accounts of their customers, and the Underwriter shall have no
authority to employ any such dealers as agents for the Company.
(c) On each sale by the Underwriter of any of the securities
being offered to selected dealers, the Underwriter shall require any
selected dealer purchasing any such securities being offered to agree
to re-offer the same on the terms and conditions of offering set forth
in the Prospectus and to comply with all Commission requirements that
the Underwriter is required to comply with.
(d) The Selected Dealer shall comply in all respects with the
requirements of Rule 15c2-4 of the rules and regulations made by the
Commission under the Securities Exchange Act of 1934, as amended. The
Selected Dealer shall deposit by 12 noon of the next business day
subsequent to the receipt of funds all funds received from the sale of
the offered Units, which funds shall be made payable to the escrow
agent, in an escrow account, to be maintained at a bank as escrow agent
for the benefit of the Subscribers, and the same shall be held in such
bank account until the Closing Date, and upon such Closing Date the
said funds, shall be promptly transmitted to the Company, who shall at
said time provide such documents, certificates, receipts and any and
all other papers or instruments as counsel may reasonably deem
necessary or appropriate under the circumstances.
6. Covenants of the Company
The Company covenants and agrees with the Underwriter as follows:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective and will advise the
Underwriter immediately and, if requested by the Underwriter, will
confirm such advice in writing (i) when the Registration Statement has
become effective and when any post-effective amendment thereto becomes
effective, or when any supplement to the Prospectus or any amended
Prospectus has been filed; (ii) of any request by the Commission for
any amendments or supplements to the Registration Statement or the
Prospectus or for additional information; (iii) of the issuance by the
Commission of any order suspending the effectiveness of the
Notification for the sale of the Units hereunder or of any order
preventing or suspending the use of any Prospectus or the institution
of any proceedings for any such purposes; (iv) of the happening of any
event which in the judgment of the Company makes any statement in the
Registration Statement or Prospectus untrue or which requires the
making of any changes in the Registration Statement or the Prospectus
in order to make the statements therein not misleading; and (v) of the
refusal to qualify or the suspension of the qualifications of the Units
and the Additional Warrants for offering or sale in any jurisdiction,
or of the institution of any proceedings for any of such purposes. The
Company will use its best efforts to prevent the issuance of any such
order or of any order preventing or suspending such use, to prevent any
such refusal to qualify or any such suspension, and to obtain as soon
as possible a lifting of any such order, the reversal of any such
refusal and the termination of any such suspension.
<PAGE> 67
(b) The Company will not at any time, whether before, after or on
the Effective Date, file any amendment to the Registration Statement or
supplement to the Prospectus of which the Underwriter shall not
previously have been advised and furnished with copies or to which the
Underwriter shall have objected in writing or which is not in
compliance with the Act and the Regulations.
(c) To deliver to the Underwriter, without charge, three (3)
signed copies of the Registration Statement, including all financial
statements and exhibits filed therewith and any amendments or
supplements thereto, and to deliver without charge to the Underwriter
three (3) conformed copies of the Registration Statement and any
amendment or supplement thereto, including such financial statements
and exhibits.
(d) Prior to the Effective Date of the Registration Statement the
Company will have delivered to the Underwriter, without charge, in such
quantities as the Underwriter may reasonably request, copies of each
form of Preliminary Prospectus. The Company consents to the use of
each form of Prospectus by the Underwriter and by dealers prior to the
Effective Date of the Registration Statement, if permitted under the
Act.
(e) To deliver to the Underwriter, without charge, as soon as
practicable after the Effective Date of the Registration Statement and
thereafter from time to time as many copies as it may reasonably
request of the Prospectus and of any amended or supplemented Prospectus
as the Underwriter may reasonably request.
(f) If, during such period of time as in the opinion of the
Underwriter or its counsel a Prospectus relating to this financing is
required to be delivered, any event occurs as a result of which the
Prospectus as then amended or supplemented would include an untrue
statement of a material fact, or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time after the Effective Date of the Registration
Statement to amend or supplement the Prospectus to comply with the Act,
the Company will forthwith notify the Underwriter thereof and prepare
and file with the Commission and furnish and deliver to the Underwriter
and to others whose names and addresses are designated by the
Underwriters, all at the cost of the Company, a reasonable number of
the amended or supplemented Prospectus which as so amended or
supplemented will not contain any untrue statement of a material fact
or omit to state any material fact necessary in order to make the
Prospectus not misleading in the light of the circumstances when it is
delivered to a purchaser or prospective purchaser, and which will
comply in all respects with the Act; and, in the event the Underwriter
is required to deliver a Prospectus 90 days or more after the Effective
Date upon request to prepare promptly such Prospectus as may be
necessary to permit compliance with the requirements of the Act.
(g) For a period of three (3) years after the Closing Date, the
Company will, as soon as practicable and in any event within 120 days
after the close of each fiscal year, deliver (i) to its security
holders and to the Underwriter a copy of the annual report of the
Company containing a balance sheet setting forth the financial
condition of the Company as of the end of such fiscal year, together
with statements of income and surplus of the Company for such fiscal
year, all reasonably detailed. Such balance sheet and statements of
<PAGE> 68
income and surplus shall be accompanied by a copy of the accountant's
report with respect thereto of independent public accountants, who may
be the regular accountants for the Company; and (ii) to the
Underwriter, (a) a copy of all reports which the Company shall file
with the Commission or with any national securities exchange promptly
after the same have been forwarded to the Commission or exchange and a
copy of all financial statements and other reports which the Company
shall send to its security holders, and (b) from time to time such
other information as the Underwriter may reasonably request. In the
event the Company shall have any subsidiaries the account of which are
customarily consolidated with those of the Company, the financial
statements to be furnished in this paragraph shall be the consolidated
financial statements of the Company and such subsidiaries. In
addition, and for a period of three (3) years after the Closing Time,
the Company shall furnish unaudited monthly financial statements to the
Underwriter on a timely basis.
(h) The Company will enter into employment contracts no later
then the Effective Date but to begin on the Closing Date with its
President and Chief Executive Officer, Robert E. Sterling, and its
Vice-President, Matthew R. Sterling, which agreements shall remain in
effect for at least three (3) years and provide that their annual
compensation shall be $125,000.00 and $100,00.00, respectively. In
addition, the Company will enter into employment contracts no later
then the Effective Date but to begin on the Closing Date with its other
key personnel, which agreements shall remain in effect for at least
three (3) years and provide that their annual compensation shall be
subject to the approval of the Underwriter.
(i) The Company will provide the Underwriter for its confidential
use, at the Company's expense, with copies of its quarterly transfer
sheets and annual lists of shareholders for a period of three (3) years
from the Closing Date.
(j) The Company will deliver to the Underwriter true and correct
copies of its Articles of Incorporation and all amendments thereto,
such copies to be certified by the Secretary of the Company; true and
correct copies of the By-Laws of the Company and of the minutes of all
meetings of the directors and stockholders of the Company held prior to
the Closing Date; and true and correct copies of all contracts to which
the Company is a party.
(k) Prior to the Effective Date the Company will cooperate with
the Underwriter and its counsel in connection with the registration or
qualification of the securities being offered for offering and sale by
the Underwriter and dealers under the Securities or Blue Sky laws of
such states as the Underwriter may reasonably designate and will file
such consents to service of process or other documents as may be
necessary in order to effect such registration or qualification. The
Company shall bear the expenses incurred in qualifying the securities
being offered under the Securities or Blue Sky laws of such states
including the fees and charges of the various states, the cost of a
printed memorandum with respect thereto, and reasonable legal fees and
expenses. The Company shall not be required, however, to sign a
general consent to service of process in any jurisdiction where it is
not now subject to such service.
<PAGE> 69
(l) The Company will pay and bear, whether or not the
transactions contemplated hereunder are consummated or this Agreement
is prevented from becoming effective, or is terminated, all costs and
expenses incident to the performance of its obligations under this
Agreement, including all expenses incident to the authorization of the
securities being offered and their issue and delivery to the
Underwriter, any original issue taxes in connection therewith, all
transfer taxes, if any, incident to the initial sale of the securities
being offered by the Underwriter to the public and to Selected Dealers;
the fees and expenses of the Company's counsel and accountants, the
costs and expenses incident to the issuance, sale and delivery of the
Underwriter's Warrants to the Underwriter, the costs and expenses
incident to the preparation, printing and filing under the Act, the
Registration Statement (including financial statements), any
Preliminary Prospectus and the Prospectus and any amendments or
supplements thereto; the reproduction and distribution of this
Agreement, the Agreement Among Underwriters, if any, the Selected
Dealers Agreement, the Underwriter's Questionnaire, the Blue Sky
survey, the Certificates for the Shares and Warrants, the issue and
delivery of the securities being offered, the filing fees of the
Commission and the National Association of Securities Dealers, Inc.,
and any state regulatory agencies, the cost of preparing and filing all
exhibits to the Registration Statement, the cost of furnishing the
Underwriter copies of the Registration Statement and Prospectus as
herein provided; the cost and fees of qualifying the securities being
offered under the Securities or Blue Sky laws as herein provided, and
disbursements incurred by counsel for the Company, in connection with
the Blue Sky filing of this offering; and, the costs and fees of any
escrow agent referred to in Paragraph 4(a).
In addition, the Company shall also bear the cost of investigative
reports (such as Bishop's Reports) of the Company's principal executive
officers, directors and substantial shareholders which cost shall not
exceed the sum of $5,000.
(m) Provided that at least one (1) Units and/or one (1)
Additional Warrant is sold during the offering, the Company will pay to
the Underwriter a non-accountable expense allowance of $.153 for each
Unit sold and $.003 for each Additional Warrant sold, i.e., $.303 if
one (1) Unit is sold and $.003 if one (1) Additional Warrant is sold;
and adjusted proportionately upwards ($25,000 of which has been
advanced to the Underwriter and shall be credited as a part payment of
this allowance) if all of the securities being offered are sold for the
fees and disbursements of counsel to the Underwriter and for the actual
costs of advertising, traveling, postage, due diligence expenses,
telephone and telegraph expenses and other miscellaneous expenses
incurred by or on behalf of the Underwriter in preparation for, or in
connection with, the offering and sale and distribution of the
securities being offered, and the Underwriter shall not be obligated to
account to the Company for such disbursements and expenses.
(n) If the Underwriter is unable to attempt or complete the
proposed offering and sale of the securities being offered mentioned
hereinabove because of (i) any failure or non-willingness of the
Company to act as contemplated herein or to qualify the Units and
Additional Warrants contemplated to be offered herein, or (ii) any
material discrepancy in any representations made to the Underwriter, or
(iii) any reason within the control of the Company, then the Company
will reimburse the Underwriter for any actual costs and expenses, on an
<PAGE> 70
accountable basis, incurred by the Underwriter relative to the offering
contemplated hereby (including counsel fees of the Underwriter) up to
but not exceeding $50,000 inclusive of the $25,000 previously paid and
referred to in 6(m) hereof.
(o) Prior to the Closing Date, the Company will cooperate with
the Underwriter in such investigation as the Underwriter may make or
cause to be made of the properties, business and operations of the
Company in connection with the purchase and public offering of the
securities being offered and will make available to the Underwriter in
connection therewith such information in its possession as the
Underwriter may request, provided the Underwriter agrees to treat any
such information as confidential information.
(p) The Company has appointed or shall promptly hereafter appoint
American Securities Transfer and Trust Co., Inc. as its Transfer and
Warrant Agent, which entity shall agree to provisions of Paragraph 9(b)
of the Underwriter's Warrant, for the securities being offered.
Subject to the closing, for a period of five (5) years following the
Closing Date the Company will not change or terminate any such
appointments without the written consent of the Underwriter, which
consent shall not be unreasonably withheld.
(q) The Company will use all reasonable efforts to comply or
cause to be complied with, the conditions precedent to the several
obligations of the Underwriter specified in this Agreement.
(r) On or prior to the Effective Date, unless waived, in part or
in whole, by the Underwriter in writing, the Company shall deliver an
agreement of each officer, director (except that Robert Sterling and
Matthew Sterling, combined, shall be allowed to sell up to in the
aggregate 200,000 shares after one (1) year following the Effective
Date provided the bid price for the common stock is at least $10.00 and
all sales of such stock are effected through the Underwriter) and
shareholder of the Company setting forth a representation to the effect
that such shareholders agree not to sell, transfer or convey by
registration or otherwise, without the prior consent of the
Underwriter, any of the securities of the Company owned directly or
beneficially for a period of two (2) years from the Effective Date
without the written consent of the Underwriter or its specific
authorized designee or any greater period required by any state in
which the offering of the securities being offered is to be registered;
and that, thereafter, and for a period of two (2) years, all sales
pursuant to Rule 144 shall be effected through the Underwriter. An
appropriate legend shall be marked on the face of the stock
certificates representing all of such securities.
(s) The Company will deliver to the Underwriter and its counsel
bound volumes of copies of all documents and appropriate correspondence
filed or received from the Commission and the NASD and all closing
documents.
(t) The Company shall use its best efforts to obtain on or before
the Closing Date a "Key Man" life insurance policy in the amount of
$500,000 each on the lives of its key personnel and the Company shall
pay the premiums therefor for a period of not less than five (5) years
from the Closing Date.
<PAGE> 71
(u) The Company will use its best efforts promptly to do and
perform all things to be done and performed by it hereunder prior to
the Closing Date and to satisfy all conditions which it is required to
satisfy prior to the delivery by it of the securities being offered.
(v) The Company will use the net proceeds to be received by it
from the sale of the securities being offered in the manner and for the
purposes set forth in the Prospectus and will comply with all reporting
and other requirements of the Act respecting the use of the proceeds.
(w) The Company will comply with the Act and Regulations and the
Securities Exchange Act of 1934 and the rules and regulations of the
Commission thereunder so as to permit the continuance of sales of and
dealings in the securities being offered under the Act and the
Securities Exchange Act of 1934, as and if required under said Act.
(x) The Company will pay and bear the full cost of "Tombstone"
advertisements of at least 5 x 5 inches in publications to be
designated by the Underwriter the cost of which shall not exceed
$4,000.
(y) Prior to the Closing time the Company will not issue directly
or indirectly without the Underwriter's prior written consent any press
release or other communication or hold any press conference with
respect to the Company or its activities or the offering of the
securities.
(z) If at least one (1) Unit and/or one Additional Warrant is
sold and for a period of five (5) years commencing from the Closing
Date, the Company shall continue to employ the services of a firm of
independent certified public accountants acceptable to the Underwriter
in connection with the preparation of the financial statements to be
included in any Registration Statement to be filed by the Company
hereunder, or any amendment or supplement thereto. For the purposes of
the foregoing, BDO Seidman LLP and any "Regional" accounting firm shall
be deemed to be acceptable to the Underwriter.
(aa) If at least one (1) Unit and/or one Additional Warrant is
sold and for a period of five (5) years after the Closing Time, the
Underwriter shall have the right to have a designated non-voting
advisor appointed by the Company. Said designee shall be entitled to
attend meetings of the Company's Board of Directors and shall be
entitled to receive reimbursement for all reasonable costs incurred in
attending such meetings, including, but not limited to food, lodging
and transportation.
(bb) The Company will, within thirty (30) days after the Closing
Time, apply for listing in Standard and Poor's Corporation Reports and
Moody's Over-the-Counter Guide, and will use its best efforts to have
itself listed in such reports.
(cc) The Company will employ an investor relations firm
reasonably satisfactory to the Underwriter for a period of not less
than three (3) years from the closing date.
(dd) Within ten (10) days after the end of the first three (3)
month period following the Effective Date of the Registration
Statement, the Company shall prepare and file with the Commission a
report on Form SR as prescribed by Rule 463 of Regulation C under the
Securities Act of 1933, as amended. Within thirty (30) days after the
<PAGE> 72
Closing Date, the Company shall prepare and file with the Commission a
Registration Statement on Form 8-A with respect to the Securities being
offered pursuant to and as contemplated by Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "34 Act"), regardless
of whether the Company would be required otherwise by the terms of such
Section to file such a Registration Statement, and shall file a request
for acceleration of the effective date under Section 12(g) in
connection therewith. The Company shall thereafter comply with all
periodic reporting and proxy solicitation requirements imposed by the
Commission pursuant to the 34 Act, and shall promptly furnish the
Underwriter with copies of all materials filed with the Commission
pursuant to the 34 Act or otherwise furnished to shareholders of the
Company.
(ee) The Company will pay to you a commission in an amount equal
to ten (10%) percent of the exercise price of the Warrants included in
the Units and the Additional Warrants for each Warrant exercised
commencing one year after the Effective Date provided (1) the market
price for the Common Stock is greater than the exercise price of the
Warrant; (2) that the Underwriter had solicited the holder to exercise
the Warrant with such solicitation being confirmed in writing by each
holder; and (3) that the compensation arrangements were disclosed to
holders at the time of exercise as well as in the Prospectus, such
disclosure being confirmed in writing by each holder. The commission
is further conditioned upon the Warrant Agent being furnished by the
Underwriter with a certificate stating that:
i) the Warrants exercised were not held in a discretionary
account;
ii) the Underwriter did not, within the required time period
(2 or 9 business days) immediately preceding the solicitation of
the exercise of the Warrant or the date of such exercise, bid for
or purchase the Common Stock of the Company or any securities of
the Company immediately convertible into or exchangeable for the
Common Stock (including the Warrants) or otherwise engage in any
activity that would be prohibited by Regulation M under the
Securities Exchange Act of 1934, as amended, with one engaged in
a distribution of the Company's securities, and
iii) in connection with the solicitation, the Underwriter
disclosed the compensation it would receive upon exercise of the
Warrant.
(ff) At the Closing Time, the Company shall enter into a
financial consulting agreement with us pursuant to which we will
receive a consulting fee in an amount equal to two (2%) of the gross
proceeds of the total dollar amount raised payable at the Closing for
services for a period of one (1) year from the Effective Date which
shall include, but not be limited to, advising the Company regarding
shareholder relations including the preparation of the annual report
and other releases, assisting in long-term financial planning, advice
in connection with corporate re-organizations and expansion and capital
structure, and other financial assistance.
(gg) If at least one (1) Unit and/or one Additional Warrant is
sold and for a period of five (5) years after the Closing Time, the
Company may not adopt a qualified and/or non-qualified stock option
plan for its employees without the prior written concent of the
Underwriter, which consent shall not be unreasonably withheld.
<PAGE> 73
(hh) For a period of five (5) years following the Effective Date
or until such time as the securities of the Company are listed on the
New York Stock Exchange or the American Stock Exchange, the Company
shall cause its legal counsel to provide the Underwriter with a list,
to be updated at least annually, of those states in which the
securities of the Company may be traded in non-issuer transactions
under the Blue Sky laws of the states and the basis for such authority
with the first list to be given at the time of Closing.
(ii) For a period of three (3) years following the Closing Date,
the Company, at its expense, shall cause its regularly engaged
independent certified public accountants to review (but not audit) the
Company's financial statements for each of the first three (3) fiscal
quarters prior to the announcement of quarterly financial information,
the filing of the Company's 10-Q quarterly report and the mailing of
quarterly financial information to security holders.
(jj) If at least one (1) Unit and/or one Additional Warrant is
sold, the Company shall grant the Underwriter a right of first refusal
with respect to the public sale of any securities of the Company to be
made by the Company, its principal shareholders or subsidiaries at any
time during the period commencing at the completion of the offering and
ending three (3) years thereafter except (1) securities which are the
issued in connection with or pursuant to mergers, acquisitions,
recapitalizations, reorganizations or stock option plans, solely by the
Company and/or its subsidiaries, and (2) private or broker sales
pursuant to Rule 144 or otherwise by shareholders on a principal basis
provided such sales do not result in the loss of control of the Company
by those shareholders presently having such control. In connection
with such right, the Company covenants and agrees to furnish the Under-
writer with the terms and conditions of any bona fide proposed public
sale of securities to be made by it, its principal shareholders or
subsidiaries, and the name and address of the Underwriter, broker or
dealer proposing to effectuate such sale, together with all compensa-
tion terms. The Underwriter shall have the right within ten (10) days
from such notification by the Company to notify the Company whether the
Underwriter will exercise its right to effect such proposed financing
on the terms no less favorable to the Company than those proposed by
such other broker or dealer. In the event the Underwriter declines to
exercise its right of first refusal, such action shall only relate to
the financing and terms and conditions contained in the specific notice
furnished to the Underwriter and not to any other proposed financing
thereafter.
(kk) If at least one (1) Unit and/or one Additional Warrant is
sold, should the Company shall within five (5) years from the Effective
Date, enter into any agreement or understanding introduced by the
Underwriter involving (I) the sale of all or substantially all of the
assets and properties of the Company, (ii) the merger or consolidation
of the Company (other than a merger or consolidation effected for the
purpose of changing the Company's domicile) or (iii) the acquisition by
the Company of the assets or stock of another business entity, which
agreement or understanding is thereafter consummated, whether or not
during such five (5) year period, the Company, upon such consummation,
shall pay to the Underwriter an amount equal to the following
percentages of the consideration paid by the Company in connection with
such transaction:
<PAGE> 74
5% of the first $1,000,000, or portion thereof, of such
consideration;
4% of the second $1,000,000, or portion thereof, of such
consideration;
3% of such consideration in excess of the first $2,000,000 of
such consideration.
(ll) If at least one (1) Unit and/or one Additional Warrant is
sold, the Company, provided its meets the financial requirements, shall
use its best reasonable efforts at its cost and expense to take all
necessary and appropriate action such that the Securities are listed
for trading in the NASDAQ System immediately upon the closing of the
proposed offering and, that the Securities remain listed for at least
five years from said Closing Date provided that the Company otherwise
complies with the prevailing requirements of NASDAQ.
(mm) The Company shall deliver to the Underwriter an agreement
executed by the founders of the Company owning 1,000,000 shares of
Common Stock whereby each of them agree to place their securities
(1,000,000) in escrow with the Company's counsel at the time of
closing of the offerings contemplated herein subject to the Company
reflecting on an audited financial statement sales and pretax income in
excess of $35,000,000.00 and $7,500,000.00, respectively, no later than
January 31, 2004. In the event such sales and pretax income are not
achieved by January 31, 2004, then the shares shall be cancelled. The
1,000,000 shares as well as the dollar amount of sales and pretax
income set forth above shall be prorated downward if less than
$5,000,000 is raised in the offering contemplated herein.
7. Conditions of Underwriter's Obligations
The Underwriter's obligation to act as Agents of the Company
hereunder and to find purchasers for the securities being offered and
to make payment to the Company on the Closing Date is subject to the
accuracy of and compliance with the representations and warranties on
the part of the Company herein as of the date hereof and as of the
Closing Date, to the performance by the Company of its obligations and
covenants hereunder, to the accuracy of certificates of the Company and
officers of the Company to be delivered pursuant to this Agreement, all
as to the Closing Date, and to the following further conditions:
(a) The Registration Statement shall become effective on or at
such reasonable date as the Underwriter may agree to. No stop order or
order suspending the effectiveness of the Registration Statement for
the sale of the securities being offered shall have been issued at or
before the Closing Date and no proceedings for that purpose shall have
been instituted or shall be pending or, to the knowledge of the
Company, contemplated by the Commission, and any request for additional
information on the part of the Commission to be included in the
Registration Statement or the Prospectus or otherwise shall have been
complied with, and no amendments to the Registration Statement or
Prospectus shall have been filed to which the Underwriter and its
counsel have not given their consent in writing.
<PAGE> 75
(b) All corporate action taken and all legal opinions and
proceedings relating to the securities being offered and the
Underwriter's Warrants, the Registration Statement and Prospectus and
all other matters incident thereto and to the transaction to which this
Agreement relates shall be satisfactory in all respects to Robert C.
Beers, P.C. and Stephen W. Wilk, Esq., counsel for the Underwriter and
he shall have been furnished with such certificates, documents and
information as he may request in this connection.
(c) On the Closing Date, (i) the Registration Statement and
Prospectus and any amendments or supplements thereto shall contain all
statements which are required to be stated therein in accordance with
the Act and shall in all material respects conform to the requirements
of the Act and neither the Registration Statement nor the Prospectus
nor any amendment or supplement thereto shall 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 not misleading, (ii) since the respective dates as of which
information is given in the Notification there shall have been no
material adverse change in the business, properties or financial
condition of the Company from that set forth in the Registration
Statement and Prospectus and there shall not have been any material
transaction, contract or agreement entered into by the Company which
is not referred to in the Registration Statement, (iii) no action, suit
or proceeding at law or in equity shall be pending or, to the knowledge
of the Company, threatened against the Company which would be required
to be set forth in the Registration Statement other than as set forth
therein, and no proceedings shall be pending or, to the knowledge of
the Company, threatened against the Company before or by any federal,
state or other commission, board or administrative agency wherein an
unfavorable decision, ruling or finding would have a material adverse
effect upon the business, property, financial condition or income of
the Company, and (iv) the Company shall not have declared dividends or
made any payments or made any acquisitions or capital stock or made any
other distribution on outstanding shares of capital stock other than as
set forth in the Registration Statement.
(d) Prior to the Closing Date the Company shall not have
sustained a loss on account of fire, flood, accident or other calamity
which, in the judgment of the Underwriter materially and adversely
affects the Company, regardless of whether or not such loss shall have
been insured.
(e) The Underwriter shall receive on and as of the Closing Date
an opinion of ____________________________, counsel for the Company,
to the effect that (i) the Company is a corporation in good standing,
duly organized and validly existing under the laws of the state of
incorporation, and is authorized by its Certificate of Incorporation to
own its properties and to conduct its business, present and proposed,
as set forth in the Prospectus; (ii) the Company is duly qualified to
transact the business in which it is engaged and is in good standing in
each jurisdiction in which its ownership of property or its conduct of
business requires such qualification or registration (naming such
jurisdiction); the Company does not own or control any subsidiaries;
(iii) the Company has an authorized and outstanding capitalization as
set forth in the Prospectus all of the outstanding securities of the
Company have been validly authorized and issued, and are fully paid and
non-assessable; the securities being offered to be sold by the Company
have been validly authorized and when issued will be fully paid and
non-assessable; the securities issuable upon exercise of the
<PAGE> 76
Underwriter's Warrants has been validly authorized and reserved for
issuance and when issued, will be validly issued and will be fully paid
and nonassessable; there are no preemptive or other rights to subscribe
for or purchase the securities being offered; there are no options,
warrants, agreements or similar rights calling for the issuance by the
Company of any of its securities except as described in the
Registration Statement; (iv) the securities being offered by the
Company conform as to their legality with the description thereof
contained in the Registration Statement; (v) this Agreement has been
duly authorized, executed and delivered by the Company and is a valid
and binding agreement of the Company in accordance with its terms; the
Company has the legal power to sell and deliver the securities being
offered pursuant to the provisions of this Agreement and will deliver
to the purchasers valid marketable title thereto, free and clear of any
claims, liens and encumbrances; to the best of such counsel's
knowledge, (1) the execution, performance and delivery of this
Agreement and the consummation of the transactions contemplated hereby
will not result in any breach of violation (a) of any of the terms or
provisions of, or constitute a default under, any statute, indenture,
mortgage, deed of trust, note, agreement or other agreement or
instrument known to counsel to which the Company is a party or by which
it is bound or of which any of its property is the subject, and (b) the
Company's Articles of Incorporation, as amended, or By-Laws, or any
order, rule or regulation known to counsel of any court or governmental
agency or body having jurisdiction over the Company or any of their
activities or properties, and, (2) no consent, approval, authorization
or order of any court or governmental agency or body is required for
the consummation of the transaction contemplated hereby except such as
have been obtained under the Act or Regulations or under state
securities laws; (vi) the sale of the Company's securities (other than
the securities being offered) prior to the Closing Date was made
pursuant to exemptions from the registration requirements of the Act;
(vii) the Registration Statement has become effective under the Act and
the public offering and sale of the securities being offered is made
pursuant to such effective Registration Statement and, to the best
knowledge of such counsel, no order suspending the effectiveness of
such Registration Statement for the sale of securities being offered
has been issued and no proceedings for such for such purposes have been
instituted or are pending or contemplated by the Commission and to such
counsel's knowledge and belief no grounds exist for the suspension of
such Registration Statement the Registration Statement and Prospectus
and any supplement or amendment thereto (except as to the financial
statements and schedules included therein as to which counsel need not
express opinion) comply as to form in all material respects with the
Act and such counsel has received no information which would indicate
that the Registration Statement or Prospectus or any supplement or
amendment thereto contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading;
(viii) such counsel does not know of any legal or government
proceedings required to be described in the Registration Statement or
Prospectus or of any contract or document of a character required to be
described in the Registration Statement or Prospectus or required to be
filed as an exhibit to the Registration Statement which is not
described or filed as required; (ix) the Company has good marketable
title in fee simple, except as stated in the Registration Statement or
Prospectus to all of the real property described therein as being owned
by it, free and clear of all liens and encumbrances, except liens and
encumbrances, if any, which in the opinion of such counsel, are not
material and do not interfere with the use made and proposed to be made
<PAGE> 77
of such property, and holds such valid leases, property rights and
easements as are set forth in the Registration Statement or the
Prospectus are necessary to the operations and proposed operations of
the Company (such counsel being entitled to rely with respect to the
opinions called for by this subdivision (x) on certificates of the
Company as to the use or proposed use of properties and as to the
materiality and non-interference of liens and encumbrances and on
opinions of local counsel or on abstracts of title and certificates;
reports or title policies of title insurance companies); and (xi) the
Underwriter's Warrants to be sold by the Company have been duly
authorized and constitute valid and binding obligations of the Company;
the Company had at the date of this Agreement and has at the Closing
Date full legal right and authority to sell and deliver in the manner
provided in this Agreement, the Underwriter's Warrants sold by it
hereunder; and the delivery by the Company as described in the
Registration Statement of certificates for the Underwriter's Warrants
sold hereunder, will pass good and marketable title to such
Underwriter's Warrants, free and clear of all liens, encumbrances,
charges and claims whatsoever, except as may be provided by federal and
state securities laws. The opinion referred to in this subsection
shall also cover such other legal matters relating to this Agreement
and the transactions contemplated hereby as the Underwriter or their
counsel may reasonably request.
In expressing their opinion on the matters set forth in this
Paragraph 7(e), said counsel shall be entitled to rely, as to any
questions of fact upon which such opinion is predicated, on the
representations of the officers of the Company or opinions of other
counsel.
(f) The Underwriter shall have received on the Closing Date
certificates, dated as of the Closing Date, signed by the President,
Treasurer and Secretary of the Company certifying that:
(i) No Order suspending the effectiveness of the Registration
Statement or stop order regarding the sale of the securities being
offered is in effect and no proceedings for such purpose are pending or
are, to their knowledge, threatened by the Commission;
(ii) They do not know of any litigation instituted or threatened
against the Company of a character required to be disclosed in the
Registration Statement which are not disclosed therein; they do not
know of any contracts which are required to be summarized in the
Prospectus which are not so summarized; and they do not know of any
material contracts required to be filed as exhibits to the Registration
Statement which are not so filed;
(iii) They have each carefully examined the Registration
Statement and the Prospectus and, to the best of their knowledge,
neither the Registration Statement nor the Prospectus nor any amendment
or supplement to either of the foregoing contains an untrue statement
of any material fact or omits to state any material fact required to be
stated therein or necessary to make the statement therein not
misleading; and since the Effective Date, to the best of their
knowledge, there has occurred no event required to be set forth in an
amended or supplemented Prospectus which has not been so set forth;
<PAGE> 78
(iv) Since the respective dates as of which information is given
in the Registration Statement and the Prospectus there has not been any
material adverse change in the condition of the Company, financial or
otherwise, or in the results of its operations, except as reflected in
or contemplated by the Registration Statement and the Prospectus, and
except as so reflected or contemplated since such date there has not
been any material transaction entered into by the Company;
(v) The representations and warranties set forth in this
Agreement are true and correct and the corporation has complied with
all of its agreements herein contained;
(vi) The Company is not delinquent in the filing of any federal,
state and municipal tax return or the payment of any federal, state or
municipal taxes; they know of no proposed redetermination or
re-assessment of taxes, adverse to the Company, and the Company has
paid or provided by adequate reserves for all known tax liabilities;
(vii) They know of no material obligation or liability of the
Company, contingent or otherwise, not disclosed in the Registration
Statement and Prospectus;
(viii) This Agreement, the consummation of the transactions
herein contemplated, and the fulfillment of the terms hereof, will not
result in a breach by the Company of any terms of, or constitute a
default under, its Certificate of Incorporation or By-Laws, any
indenture, mortgage, lease, deed or trust, bank loan or credit
agreement or any other agreement or undertaking of the Company
including, by way of specification but not by way of limitation, any
agreement or instrument to which the Company is now a party or pursuant
to which the Company has acquired any right and/or obligations by
succession or otherwise;
(ix) The financial statements and schedules filed with and as
part of the Registration Statement present fairly the financial
position of the Company as of the dates thereof all in conformity with
generally accepted principles of accounting applied on a consistent
basis throughout the periods involved. Since the respective dates of
such financial statements there has been no material adverse change in
the condition or general affairs of the Company, financial or
otherwise, other than as referred to in the Prospectus; and,
(x) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, except as may
otherwise be indicated therein, the Company has not prior to the
Closing Date, either (i) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money, or
(ii) entered into any material transaction other than in the ordinary
course of business. The Company has not declared, paid or made any
dividend or distribution of any kind on its capital stock.
(g) The Company shall have performed all agreements herein
contained to be performed on its part at or before the Closing Date and
all other covenants and conditions set forth in Paragraph 6 shall have
been performed.
(h) At the time that this Agreement is executed by the
Company and at the Closing Date, the Underwriter shall have received a
letter from BDO Seidman LLP, dated as of the date this Agreement is
executed by the Company and as of the Closing Date, confirming that it
<PAGE> 79
is an independent public accountant with the meaning of the Securities
Act and the published Rules and Regulations and that the answer to Item
25 of the Registration Statement is correct insofar as it related to it
and stating in effect (a) that in its opinion the financial statements
and schedules examined by it and included or incorporated by reference
in the Registration Statement and Prospectus comply as to form in all
material respects with the applicable accounting requirements of the
Securities Act and the published Rules and Regulations, and (b) that on
the basis of a reading of the unaudited financial statements and the
schedules included in the Registration Statement and of the latest
available unaudited interim financial statement prepared by the
Company, consultations with and inquiries of officials of the Company,
responsible for financial and accounting matters, a reading of the
Minute Book of the Company, and such other procedures and inquiries (if
any) as may be specified in such letter, nothing has come to its
attention which gave it reason to believe that (i) the unaudited
financial statements and schedules included in the Registration
Statement and Prospectus do not comply as to form in all material
respects with the applicable accounting requirements of the Securities
Act and the published Rules and Regulations or were not prepared in
accordance with generally accepted accounting principles and practices
applied on a basis consistent with those followed in the preparation of
such audited financial statements or that (ii) during the period from
________________, 199__ to a specified date not more than five days
prior to the date of such letter there was any change in the capital
stock or long term debt of the Company as compared with corresponding
amounts shown in the ________________, 199__ Balance Sheet included in
the Registration Statement or (iii) during the period from June 1, 1993
to the date of the Company's most recent financial statement there was
any decreases in net current assets or net assets as compared with
corresponding amounts shown in the ________________, 199__ Balance
Sheet included in the Registration Statement or any decreases in net
sales or in the total or per share amounts of income before
extraordinary items or of net income of the Company compared with the
corresponding period of the preceding year, except as set forth in or
contemplated by the Registration Statement or Prospectus.
(i) All of the securities being offered by the Company shall be
tendered for delivery in accordance with the terms and provisions of
this Agreement.
(j) The securities being offered shall be qualified in such
states as the Underwriter may reasonably request and each such
qualification shall be in effect and not subject to any stop order or
other proceeding on the Effective Date, and Closing Date.
(k) The Company shall have furnished to the Underwriter such
other and further certificates, documents, and opinions as the
Underwriter may reasonably request or its counsel may request
(including certificates of officers) as to the accuracy, at and as of
the Closing Date, of the representations and warranties of the Company
herein, as to the performance by the Company of its obligations
hereunder, and as to other conditions concurrent and precedent to its
obligations hereunder.
All the opinions, affidavits, letters, evidence and certificates
specified in this Paragraph 7 or elsewhere in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are
in form reasonably satisfactory to the Underwriter and its counsel.
<PAGE> 80
Any certification signed by an officer of the Company and
delivered to the Underwriter or to its counsel will be deemed a
representation and warranty by the Company to the Underwriter as to the
statements made therein.
In the event that any of the conditions specified in this
Paragraph 7 shall not have been fulfilled, the Underwriter shall have
the right, upon written notice to the Company, and upon the Company's
failure to cure the condition within ten (10) days from the date of
such notice, to terminate the obligations of the Underwriter under this
Agreement.
8. Indemnification
(a) The Company will indemnify and hold harmless the Underwriter
and each person who controls the Underwriter within the meaning of
Section 15 of the Act from and against any and all losses, claims,
damages, expenses or liabilities, joint or several to which they or any
of them may become subject under the Act or under any other statute or
at common law or otherwise and will reimburse the Underwriter and each
such person specified as above for any legal or other expenses
(including the cost of any investigation and preparation) reasonably
incurred by them or any one them in connection with investigating or
defending any litigation or claim whether or not resulting in any
liability, only insofar as such losses, claims, damages, expenses,
liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement or any post-effective amendment thereto or
in any Blue Sky application or arise out of or are based upon the
omission or alleged omission to state therein a material fact required
to be stated therein necessary to make the statements therein not
misleading, all as of the date when the Registration Statement or such
post-effective amendment, the filing of any such Blue Sky application
as the case may be, becomes effective or any untrue statement or
alleged untrue statement of a material fact contained in the
Preliminary Prospectus or Prospectus (as amended or as supplemented
thereto), or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary in order to make the statements therein, not misleading;
provided, however, that the indemnity agreement contained in this
subsection (a) shall not apply to amounts paid in settlement of any
such litigation if such settlement is effected without the consent of
the Company, nor shall it extend to any Underwriter or any person
controlling any Underwriter in respect of any such losses, claims,
damages, expenses, liabilities, or actions arising out of, or based
upon any such untrue statement or alleged untrue statement, or any such
omission, if such statement or omission was made in reliance upon and
in conformity with, written information furnished to the Company by the
Underwriter on behalf of such Underwriter specifically for use in
connection with the preparation of the Registration Statement, the
Prospectus, or any such amendment thereof or supplement thereto or Blue
Sky Application.
The Underwriter and each controlling person of the Underwriter
agree after their receipt of written notice of the commencement of any
action against such Underwriter or against any such person controlling
any Underwriter as aforesaid, in respect of which indemnity may be
sought from the Company on account of the Indemnity agreement contained
in this subsection (a), to notify the Company within ten (10) days in
writing of the commencement thereof and to supply a copy of any legal
<PAGE> 81
documents served upon such Underwriter or such controlling person in
connection with such action. The omission of such Underwriter or such
controlling person of such Underwriter to so notify the Company of any
such action shall relieve the Company from any liability which it may
have to such Underwriter or such controlling persons as to any such
action on account of the indemnity agreement contained in this
subsection (a), but shall not relieve the Company from any other
liability which it may have to such Underwriter, to such controlling
person or to any other underwriter or controlling person. In case any
such action shall be brought against any Underwriter or any controlling
person, such Underwriter or controlling person of such Underwriter
shall promptly notify the Company of the commencement thereof and the
Company shall be entitled to participate in (and, to the extent it
shall wish, to direct) the defense thereof at its own expense but such
defense shall be conducted by counsel of recognized standing and
reasonably satisfactory to such Underwriter and to such controlling
person or persons who are defendant or defendants in such litigation.
The Underwriter or any such controlling person shall have the right to
employ separate counsel in any such action and to participate in the
defense thereof subject to the Company's reasonable right to approve
such counsel which will not be unreasonably withheld, but the fees and
expenses of such counsel shall not be at the expense of the Company
unless (i) the employment of such counsel has been specifically
authorized by the Company, or (ii) the Company shall not have employed
counsel to have charge of the defense of such action,. or (iii) there
is a conflict of interest which would prevent counsel for the Company
from representing both the Company and the Underwriter or such
controlling person, in any of which cases the Company shall not have
the right to direct the defense of such action on behalf of the
Underwriter or such controlling person. It is understood that,
regardless of whether such counsel is representing all of the parties
entitled to indemnification under this subsection (a), the Company
shall not be liable, under clause (iii) above, for the fees and
expenses of more than one separate counsel who shall be approved by the
Underwriter. The Company agrees to notify each Underwriter promptly of
the commencement of any litigation or proceeding against it or against
any of the officers or directors of the Company of which it may be
advised, in connection with the issue and sale of any of its
securities, and to furnish the Underwriter, at the Underwriter's
request, with copies of all pleadings therein and to permit the
Underwriter to be an observer therein and to apprise it of all of the
developments therein, all at the Company's expense. The provisions of
this paragraph 8(a) shall also apply to the subsequent registration of
the Underwriter's Warrants and/or the securities underlying the
Underwriter's Warrants.
(b) The Underwriter will indemnify and hold harmless the Company,
the directors of the Company, the officers of the Company who shall
have signed the Registration Statement and each person, if any, who
controls the Company within the meaning of Section 15 of the Act, from
and against any and all losses, claims, damages, expenses or
liabilities, joint or several, to which they or any of them may become
subject under the Act or under any other statute or at common law or
otherwise and, except as hereinafter provided, will reimburse the
Company and such officers or controlling person indemnified for as
above for any legal or other expenses (including the cost of any
investigation and preparation) reasonably incurred by them or any of
them in connection with investigating or defending any litigation or
claims whether or not resulting in any liability, only insofar as such
losses, claims, damages, expenses, liabilities or actions arise out of
<PAGE> 82
or are based upon any untrue statement or alleged untrue statement of
a material fact contained in the Registration Statement or any
post-effective amendment thereto or in any Blue Sky application or
arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, all as of the
date when the Registration Statement or such post-effective amendment,
or the date the filing of any such Blue Sky application as the case may
be, becomes effective, or any untrue statement or alleged untrue
statement of a material fact contained in the Preliminary Prospectus or
the Prospectus (as amended or as supplemented if the Company shall have
filed with the Commission any amendments thereof or supplements
thereto), or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading,
but only if insofar as such statement or omission was made in reliance
upon information furnished in writing to the Company by the Underwriter
specifically for use in connection with the preparation of the
Registration Statement, the Preliminary Prospectus or the Prospectus,
or any such amendment thereof or supplement thereto or Blue Sky
application. This indemnity agreement is in addition to any other
liability which the Underwriter may have to the Company. The
Underwriter shall not be liable for amounts paid in settlement of any
such litigation, if such settlement was effected without its consent.
In case of the commencement of any action, respect of which indemnity
may be sought from any such Underwriter on account of its indemnity
agreement contained in this subsection (b), the Company and each person
agreed to be indemnified by such Underwriter shall have the same
obligation to notify such Underwriter and such Underwriter shall have
the same right to participate in (and, to the extent that it shall
wish, to direct), as set forth in subsection (a) above, the defense of
such action at its own expense but such defense shall be conducted by
counsel of recognized standing and reasonably satisfactory to the
Company or such other person agreed to be indemnified by such
Underwriter. The Underwriter agrees to notify the Company promptly of
the commencement of any litigation or proceeding against it or against
any such controlling person of which it may be advised in connection
with the issue or sale of any of the securities of the Company. The
provisions of this subparagraph shall also apply to the subsequent
registration of the Underwriter's Warrants and/or securities underlying
the Underwriter's Warrants.
(c) The respective indemnity agreements of the Company, and the
Underwriter contained in subsections (a) and (b) above, and the
representations and warranties of the Company set forth in this
Agreement, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of any such
officer or controlling person of the Company, and shall survive the
delivery of the Units and/ additional Warrants, and any successor of
the Underwriter, or of such controlling person of the Company or of any
controlling person of the Company, as the case may be, shall be
entitled to the benefit of these respective indemnity agreements.
9. Contribution.
In order to provide for just and equitable contribution under the
Act in any case in which (i) the Underwriter makes claims for
indemnification pursuant to Section 8 hereto but it is judicially
determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the
<PAGE> 83
denial of the last right of appeal) that such indemnification may not
be enforced in such case, notwithstanding the fact that the express
provisions of Section 8 provide for indemnification in such case, or
(ii) contribution under the Act may be required on the part of the
Underwriter, then the Company and each person who controls the Company,
in the aggregate, and the Underwriter shall contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject
(which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all
reasonable attorneys' fees) in either such case (after contribution
from others) in such proportions that the Underwriter is responsible in
the aggregate for that portion of such losses, claims, damages or
liabilities represented by the percentage that the underwriting
commission per Unit appearing on the cover page of the Prospectus bears
to the public offering price appearing thereon, and the Company shall
be responsible for the remaining portion, provided, however, that (a)
if such allocation is not permitted by applicable law, then the
relative fault of the Company and the Underwriter and controlling
persons, in the aggregate, in connection with the statements or
omissions which resulted in such damages and other relevant equitable
considerations shall also be considered. The relative fault shall be
determined by reference to, among other things, whether in the case of
an untrue statement of a material fact or the omission to state a
material fact, such statement or omission relates to information
supplied by the Company or the Underwriter, and the parties' relative
intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The Company and the
Underwriter agree that it would not be just and equitable if the
representative obligations of the Company and the Underwriter to
contribute pursuant to this Section 9 were to be determined by pro rata
or per capita allocation of the aggregate damages or by any other
method of allocation that does not take account of the equitable
considerations referred to in the first sentence of this Section 9;
and, (b) the contribution of the Underwriter shall not be in excess of
its proportionate share of the portion of such losses, claims, damages
or liabilities for which the Underwriter is responsible. No person
guilty of a fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who
is not guilty of such fraudulent misrepresentation. As used in this
paragraph, the word "Company" includes any officer, director, or person
who controls the Company within the meaning of Section 15 of the Act.
If the full amount of the contribution specified in this paragraph is
not permitted by law, then the Underwriter and each person who controls
any Underwriter shall be entitled to contribution from the Company to
the full extent permitted by law. The foregoing contribution agreement
shall in no way affect the contribution liabilities of any persons
having liability under Section 11 of the Act other than the Company and
the Underwriter. No contribution shall be requested with regard to the
settlement of any matter from any party who did not consent to the
settlement; provided, however, that such consent not be unreasonably
withheld in light of all factors of importance to such party.
10. Termination
This Agreement shall be terminated (a) in the event that all the
Securities Being Offered are not sold as provided in sections 2 and 4
above; (b) at any time prior to the Closing Date by the Underwriter by
written notice to the Company if in the sole and absolute judgment of
the Underwriter it is impracticable to offer the Securities Being
Offered for sale, by reason of (i) an outbreak of major hostilities or
<PAGE> 84
other national or international calamity having occurred; (ii) any loss
of whatsoever nature, whether or not insured, which, in the sole and
absolute opinion of the Underwriter, substantially affects the value of
the property of the Company or materially interferes with the operation
of the business of the Company; (iii) any material adverse change in
the business, property or financial condition of the Company; (iv) any
action, suit or proceeding at law or in equity against the Company, or
by any Federal, State or other Commission, board or agency wherein any
unfavorable decision would materially adversely effect the business,
property, financial condition or income of the Company; (v) adverse
market conditions including but not limited to the suspension and\or
limitations of trading in securities on the New York Stock Exchange,
Inc., or the American Stock Exchange, Inc. and\or minimum prices having
been established on either such Exchange; (vi) any action having been
taken by any government in respect of its monetary affairs which, in
the sole and absolute opinion of the Underwriter, has a material
adverse effect on the United States securities markets, or
(vii) conditions arising subsequent to the execution hereof, the
Underwriter believes no favorable public market exists for the sale of
the Securities Being Offered.
If this Agreement shall be terminated pursuant to section 7 or
this section 10, or if the transaction provided for herein is not
consummated because of any refusal, inability or failure on the part of
the Company to comply with any of the terms or to fulfill any of the
conditions of this Agreement, or if for any reason the Company shall be
unable to perform all of its obligations under this Agreement, the
Company shall not be liable to the Underwriter for liability of any
character on account of loss of anticipated profits arising out of the
transactions covered by this Agreement, but the Company shall remain
liable to the extent provided in Paragraphs 6(l), 6(m), 6(n) and 8(a)
hereof, and except where termination occurs pursuant to clauses (i),
(iv), (v), (vi) or (vii) of this Section 10, the Company shall pay in
addition thereto all out-of-pocket expenses incurred by the
Underwriter, on an accountable basis, in contemplation of the
performance by it of its obligations hereunder, including fees and
disbursements of counsel and printing and traveling expenses and
postage, due diligence expenses, charges of the Underwriter which
charges shall not exceed the sum of $50,000; and, if termination should
occur pursuant to clauses (i), (iv), (v), (vi) or (vii) of this section
10, the Company shall reimburse the Underwriter for the aforesaid
expenses incurred by it, on an accountable basis, in the sum of not
more than $25,000
Any notice under this section 10 may be given by telephone or
telegraph, but shall be subsequently confirmed by letter within three
(3) days of such notification. Moreover, nothing in this section 10
shall be construed so to permit the Underwriter to be reimbursed for
expenses by it in excess of its actual expenses as described above.
11. Finders
(a) The Company knows of no claims for services in the nature of
a finder's fee or origination fee with respect to this financing
resulting from the respective acts of its officers, directors or
employees, for which the Underwriter may be responsible, and the
Company agrees to indemnify and hold the Underwriter free and harmless
from any claims for any services of such nature arising from any act of
the Company or its employees, and will reimburse the Underwriter for
any counsel fees, legal or other expenses reasonably incurred by the
Underwriter in investigating or defending against any such claim.
<PAGE> 85
(b) The Underwriter knows of no claims for services in the nature
of a finder's fee or origination fee with respect to this financing
resulting from the respective acts of its officers, directors, or
employees, for which the Company may be responsible, and the
Underwriter agrees to indemnify and hold the Company free and harmless
from any claims for any services of such nature arising from any act of
such Underwriter or their employees or agents, and will reimburse the
Company for any legal or other expenses reasonably incurred by the
Company in investigating or defending against any such claim.
11. Underwriter's Covenant
The Underwriter covenants and agrees with the Company as follows:
(a) By the Closing Date the Underwriter will supply the Company
with all information requested by the Company with regard to the names
and addresses of all subscribers to the securities being offered; and,
(b) The Underwriter and all Selected Dealers are registered as a
broker-dealers with the Commission and are members in good standing
with the NASD, and the Underwriter and all Selected Dealers will be
registered as broker-dealers with the Commission and members in good
standing of the NASD.
(c) There is not now pending or threatened or to the best
knowledge of the Underwriter or its counsel, contemplated against the
Underwriter any action or proceeding, either in any court of competent
jurisdiction or before the Commission or any state securities
commission, or administrative body or tribunal, except as fully
disclosed or required to be disclosed in the Prospectus.
(d) In the event of any action or proceeding of the type referred
to in subparagraph (c) above shall be instituted or threatened against
the Underwriter at any time prior to the Effective Date, or in the
event that the Underwriter shall cease to be a member in good standing
of the National Association of Securities Dealers, Inc. ("NASD"), or in
the event there shall be filed by or against the Underwriter in any
court pursuant to any federal, state, local or municipal statute, a
petition in bankruptcy or insolvency or for reorganization or for the
appointment of a receiver or trustee of its assets or if the
Underwriter makes an assignment for the benefit of creditors, the
Underwriter shall give written notice of the occurrence of such event
or events to the Company, and the Company shall have the right on three
(3) days' written notice to the Underwriter to terminate this Agreement
without any liability to the Underwriter of any kind.
(e) The Company agrees that, upon the closing and immediately
upon the request of the Underwriter it will give instructions to its
Transfer Agent to issue Share and Warrant Certificates in the names and
denominations submitted to it by the Underwriter. The Underwriter
agrees that when funds in sufficient amount as required by this
Agreement are in liquid form it will submit, within three (3) days
thereafter, to the Transfer Agent a list of the names and addresses of
the subscribers and the denominations of the certificates to be issued
to them. The Transfer Agent shall be required by the Company to issue
said certificates within seven (7) days after receipt of the aforesaid
list from the Underwriter and the delivery of the certificates shall be
made to the Underwriter within seven (7) days thereafter against
receipt of payments as provided in this Agreement.
<PAGE> 86
(f) Whether or not the transactions contemplated hereunder are
consummated or this Agreement is prevented from becoming effective, the
Underwriter will pay and bear all costs and expenses incident to the
performance of its obligations of this Agreement except as otherwise
specified herein.
12. Survival of Representation, Warranties and Agreements
The respective indemnities, agreements, representations,
warranties and other statements of the Company or its officers as set
forth in or made pursuant to this Agreement and the respective
indemnities, agreements, representations, warranties, covenants and
other statements of the Underwriter or its officers as set forth in or
made pursuant to this Agreement shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf
of the Company or the Underwriter or any controlling person, and will
survive termination of this Agreement and the delivery of any payment
for the securities being offered, on the Closing Date.
13. Benefit
This Agreement has been made solely for the benefit of and
shall be binding upon the Underwriter, the Company and, to the extent
expressed, any person controlling the Company or the Underwriter and
the officers and directors of the Company, and their respective legal
representatives, successors and assigns, all as and to the extent
provided herein, and no other person shall acquire or have any right
under or by virtue of this Agreement. The term "legal representatives,
successors and assigns" shall not include any purchaser of any of the
securities being offered from the Underwriter merely because of such
purchase.
14. New York Law
This Agreement shall be construed in accordance with the laws of
the State of New York and subject to the exclusive jurisdiction of the
courts of said state.
15. Notices
All communications hereunder shall be in writing and, if to the
Underwriter, shall be mailed by certified mail or delivered to the
Underwriter at its address appearing on Page 1 hereof, or if to the
Company, shall be mailed by certified mail or delivered to it at its
address appearing on Page 1 hereof, or sent to Counsel to such parties
named in the Prospectus at the respective addresses indicated therein.
If the foregoing correctly states and sets forth in full the
Agreement between us, please indicate by signing this letter in the
space provided below for that purpose. The within Agreement may be
executed simultaneously in two or more counterparts, each of which
shall be deemed the original, but all of which together shall
constitute one and the same instrument and shall be valid and binding
between us.
<PAGE> 87
Very truly yours,
CASTLE SECURITIES CORP.
By: ____________________________________
Michael T. Studer, President
Dated: Spokane, Washington
_________________, 1999
ACCEPTED AND AGREED:
EXHAUST TECHNOLOGIES, INC.
By: ___________________________________
Robert Sterling, President
<PAGE> 88
EXHIBIT 1.2
CASTLE SECURITIES CORP.
45 Church Street, Suite #25
Freeport, New York 11520
(516) 868-2000
EXHAUST TECHNOLOGIES, INC.
(a Washington corporation)
Up to 1,000,000 Units
and
1,000,000 Class A Common Stock Purchase Warrants
SELECTED DEALER'S AGREEMENT
CASTLE SECURITIES CORP., as Underwriter for EXHAUST TECHNOLOGIES,
INC., a Washington corporation (the "Company"), invite your
participation as a Selected Dealer ("Selected Dealer") in an offering
of up to 1,000,000 Units at $5.10 per Unit and 1,000,000 Class A Common
Stock Purchase Warrants ( "Additional Warrants") at $.10 per Warrant.
Each Unit shall consists of one (1) share of Common Stock, $.00001 par
value per share, and one (1) Class A Common Stock Purchase Warrant.
Each Class A Warrant included in the Units as well each Additional
Warrant shall entitle the holder thereof to purchase one share of
Common Stock, par value $.00001 per share, at a price of $7.00
exercisable at any time from the Separation Date (as hereinafter
defined) through ________________, 2000 ("Exercise Period One") and at,
a price of $10.00 from _______________, 2000 to _______________, 2001
(Exercise Period Two"). Moreover, the respective exercise prices may be
adjusted pursuant to the anti-dilution provisions contained therein. In
addition, the Class A Common Stock Purchase Warrants shall be callable
at any tine solely during the exercise period at $.01 per Warrant on at
least thirty (30) days' written notice and provide that the closing bid
price for the Common Stock of the Company on each day during the thirty
(30) trading days immediately preceding the date of the notice during
Exercise Period One is at least $10.00 per share and is at least $15.00
per share during Exercise Period Two. The Underwriter is offering the
Units and the Additional Warrants pursuant to a Registration Statement
filed under the Securities Act of 1933, as amended ("the 33 Act"),
subject to the, terms of (a) its Underwriting Agreement with the
Company, (b) this Agreement and (c) the Underwriter's instructions
which, may be forwarded to the Selected Dealers from time to time. This
invitation is made by the Underwriter only if the Units may be lawfully
offered by dealers in your state. The terms and conditions of this
invitation are as follows:
1. Acceptance of Orders. Orders received from the Selected Dealers
will be accepted only at the price, in the amounts and on the terms
which are set forth. in the Company's current Prospectus.
2. Selling Concession. All Selected Dealers will be allowed on all
Units sold by them, a commission of ____________ of the total sales
prices, respectively (________________ of the full 10% commission,
respectively, or, ________________ per Unit or per Additional Warrant,
respectively) as shown in the Company's current Prospectus.,
3. Selected Dealers Sales. The Selected Dealer shall purchase the
Units and/or Additional Warrants for its customers only through the
Underwriter, and all such purchases shall be made only upon orders
already received by the Selected Dealer from its customers. No Units,
<PAGE> 89
and/or Additional Warrants may be purchased for the account of the
Selected Dealer or its principals. In all sales of the Units and/or
Additional Warrants to the public, the Selected Dealer shall confirm
as agent for another.
4. Delivery of Funds. The Selected Dealer shall promptly transmit
to the escrow agent no later than 12 noon of the day subsequent to the
receipt of funds all funds received from purchasers and a confirmation
or a record of each sale which shall set forth the name, address and
social security, number of each individual purchaser, the number of
Units and/or Additional Warrants purchased, and, if there is more than
one registered owner, whether the certificate or certificates
evidencing the securities comprising the Units as well as the
Additional Warrants purchased are to be issued to the purchaser in
joint tenancy or otherwise. Also, each Selected Dealer shall report, in
writing, to the Underwriter the number of persons in each such state
who purchase the Units and/or Additional Warrants from Selected
Dealers. Each sale may be rejected by the Underwriter; and if rejected,
the escrow agent will return to the purchaser all funds paid by the
purchaser which have been received by the escrow agent.
5. Payment for Sales. Payment for the Company's Units and/or
Additional Warrants shall accompany all confirmations and applications
and shall be in clearing house funds. All checks and other orders for
the payment of money shall be made payable to the escrow agent for
deposit into an escrow, account maintained at ________________________
entitled "Escrow Account for the Benefit of Subscribers to EXHAUST
TECHNOLOGIES, INC.'s securities." Units and/or Additional Warrants sold
by the Selected Dealer will be available for delivery at American
Securities Transfer and Trust Co., Inc., unless other arrangements are
made with the Underwriter for delivery.
6. Deposit of Sales Proceeds. The proceeds from the sale of all
of the Units and/or Additional Warrants sold in the offering (the
"offering proceeds") will be deposited in the escrow account mentioned
in Paragraph 5 hereof. In the event that offering proceeds in an amount
of at least $5.10 and/or $.10 have not been deposited and cleared
within ninety (90) days from the date the Company's Registration
Statement is declared effective (unless, extended by mutual written
consent for an additional ninety (90) days) by the Securities and
Exchange Commission, the full amount paid will be refunded to the
purchasers. No certificates evidencing, the securities comprising the
Company's Units and/or Additional Warrants will be issued, unless and
until offering proceeds in an amount of $5.10 and $.10, respectively
have been cleared and such funds have been released and the net
proceeds thereof delivered to the Company. If offering proceeds in an
amount set forth above are cleared within the time period provided
above, all amounts so deposited will be delivered to the Company,
except that the Underwriter may deduct as underwriting commissions from
the proceeds of the offering prior to the delivery of such proceeds to
the Company. No commissions will be paid by the Company of concessions
allowed by the Underwriter unless and until offering proceeds in a
minimum amount set forth above have been cleared and such funds have
been released and the net proceeds thereof delivered to the Company.
However, it is understood that if the required funds relating to at
least one (1) Unit and/or one (1) Additional Warrants are received and
deposited within the Escrow Account referred in Paragraph 4 hereof, but
not cleared within the time set forth above, then up to an additional
five (5) business days shall be allowed for the sole purpose of
clearance of such funds and the Closing of the offering.
<PAGE> 90
7. Failure of Order. If an order is rejected or if a payment is
received which proves insufficient, any compensation paid to the
Selected Dealer shall be returned either by the Selected Dealer in cash
or by a charge, against the account of the Selected Dealer, as the
Underwriter may elect.
8. Conditions of Offering. All sales, will be subject to delivery
by the Company of certificates evidencing the securities.
9. Selected Dealer's Undertakings. No person is authorized to make
any representations concerning the Company's Units and/or the
Additional Warrants except those contained in the Company's then
current Prospectus. The Selected Dealer will not sell the Company's
Units and/or the Additional Warrants pursuant to this Agreement unless
the Prospectus is furnished to the purchaser at least forty-eight (48)
hours prior to the mailing of the confirmation of sale, or is sent to
such persons under such circumstances that it would be received by him
48 hours prior to his receipt of a confirmation of the sale. The
Selected Dealer agrees not to use any supplemental sales literature of
any kind without prior written approval of the Underwriter unless it
is furnished by the Underwriter for such purpose. In offering and
selling the Company's Units and/or Additional Warrants, the Selected
Dealer will rely solely on the representations contained in the
Company's then current Prospectus. Additional copies of the then
current Prospectus will be supplied by the Underwriter in reasonable
quantities upon request.
The Selected Dealer understands that during the ninety (90) day
period after the first date upon which the Company's Units and/or
Additional Warrants are bona ride offered to the public, all dealers
effecting transactions in the Company's Units and/or Additional
Warrants may be required to deliver the Company's current Prospectus to
any purchaser thereof prior to or concurrent with the receipt of the
confirmation of sale. Additional copies of the then current Prospectus
will be supplied by the Underwriter in reasonable quantities upon
request.
10. Representations and Agreements of Selected Dealers. By
accepting this Agreement, the Selected Dealer represents that either
(a) it is registered as a broker-dealer under the Securities and
Exchange Act of 1934, as amended; is qualified to act as a dealer in
the states or other jurisdictions in which it offers the Company's
Units and/or Additional Warrants; is a member in good standing with the
National Association of Securities Dealers, Inc. ("NASD"), and will
maintain such registrations, qualifications and memberships throughout
the term of this Agreement or (b) is, a foreign bank, dealer or
institution not eligible for membership in the NASD which agrees to
make no sales in the United States, its territories or possessions or
to persons who are citizens thereof or residents therein, and in making
other sales to comply with NASD's interpretation with respect to
rewriting and withholding. Further, the Selected Dealer agrees to
comply with all applicable Federal laws, the laws of the states or
other jurisdictions concerned and the Rules and Regulations of the
NASD, and in particular the Selected Dealer agrees that in connection
with any purchase or sale of the Company's Units and/or Additional
Warrants wherein a selling concession, discount or other allowance is
received or granted (1) that it will comply with the decisions of
Conduct Rule 2420 of the NASD or (2) if a non-NASD member, broker or
dealer in a foreign country, it will also comply with the provisions of
the successor Conduct Rules to Sections 8 and 36 of Article III of the
<PAGE> 91
NASD's Rules of Fair Practice, thereof as though it were a NASD member
and with the provisions of Conduct Rule 2420 Subsection (c) thereof as
such applies to a non-NASD member, broker, or dealer in a foreign
country. Further, the Selected Dealer agrees that it will not offer to
sell the Company's Units and/or Additional Warrants in any state or
jurisdiction except the states in which it is licensed as a broker-
dealer under the laws of such states. The Selected Dealer shall not be
entitled to any compensation during any period in which it has been
suspended or, expelled from membership in the NASD.
11. Selected Dealer's Employees. By accepting this Agreement,
the Selected Dealer has assumed full responsibility for proper
training and instruction of its representatives concerning the selling
methods to be used in connection with the offer and sale of the
Company's Units and/or Additional Warrants, giving special emphasis to
the principles of suitability and full disclosure to prospective
investors, and prohibitions against "free-riding and withholding."
12. Indemnification. The Company has agreed in the Underwriting
Agreement to indemnify and hold harmless the Underwriter (including
within the definition of Underwriter, any member of the Selected Dealer
group) and each person, if any, who controls the Underwriter within,
the meaning of Section 15 of the 33 Act or under any other statute or
at common law and will reimburse the Underwriter and each such person
specified as above for any legal or other expenses (including the cost
of any investigation and preparation) reasonably incurred by them or
any of them in connection with any litigation or claim whether or not
resulting in any liability, but only insofar as such losses, claims,
damages, liabilities or actions arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement or any post-effective amendment
thereto or in any Blue Sky application or arise out of or are based
upon the omission or alleged omission to state therein a material fact
required to be stated therein necessary to make the statements therin
not misleading, all as of the date when the Registration Statement or
such post-effective amendment, the filing of any such Blue Sky
application as the case may be, becomes effective or any untrue
statement or alleged untrue statement of a material fact contained in
any preliminary prospectus or final prospectus (as amended or
supplemented thereto), or arise out of or are based upon the omission
to state therein a material fact required to be stated therein or
necessary in order to make the statements therein, not misleading;
provided however, that the indemnity agreement contained in this
paragraph 12 shall not apply to amounts paid in settlement of any such
litigation if such settlement is effected without the consent of the
Company nor shall it extend to any Underwriter or any person
controlling the Underwriter in respect of any such losses, claims,
damages, liabilities or actions of any such losses, claims, damages,
liabilities or actions arising out of, or based upon any such untrue
statement or alleged untrue statement, or any such omission, if such
statement or omission was made in reliance upon and in conformity with
written information furnished to the Company by the Underwriter on
behalf of such Underwriter specifically for use in connection with the
preparation of the Registration Statement, the Prospectus or any such
amendment thereof or supplement thereto or Blue Sky application.
13. Selected Dealer's Indemnification. The Selected Dealer agrees
to indemnify and hold harmless the Company, the, Underwriter, each of
the Company's officers and directors who signed the Registration
Statement, and each person, if any, who controls the Company and the
<PAGE> 92
Underwriter within the meaning of Section 15 of the 33 Act, against any
and all loss, liability, claim, damage and expense (a) described in the
indemnity contained in Paragraph 12 of this Agreement, but only with
respect to untrue statements or omissions or alleged untrue. statements
or omissions, made in the Registration Statement or the Prospectus or
any amendment or supplement thereto in reliance upon and in conformity
with written information furnished to the Company by such Selected
Dealer expressly for use in the Registration Statement (or any
amendment thereto) or the Prospectus (or any amendment or supplement
thereto) or (b) based upon allegpd misrepresentations or omissions to
state material facts in connection with statements made by the Selected
Dealer or the Selected Dealer's salesmen orally or by other means; and
the Selected Dealer will reimburse the Company, the Underwriter, each
of the Company's officers and directors who signed the Registration
Statement and each person, if any, who controls the Company and the
Underwriter within the meaning of Section 15 of the 33 Act, for any
legal or other expenses reasonably incurred in connection with the
investigation of or the defending of any such action or claim.
14. Required Notices and Claims. Each indemnified party is
required to give prompt notice to each indemnifying party of any action
commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not
relieve it from any liability which it may otherwise have on account of
the indemnification provisions hereof. Any indemnifying party may
participate at its own expense in the defense of such action. If it so
elects within a reasonable time after receipt of such notice, an
indemnifying party, jointly with any other indemnifying parties
receiving such notice, may assume the defense of such action with
counsel chosen by it and approved by the indemnified parties defendant
in such action, unless such indemnified parties reasonably object to
such assumption on the ground that there may be legal defenses
available to them which are different from or in addition to those
available to such indemnifying parties and shall not be liable for any
fees and expenses of counsel for the indemnified parties incurred
thereafter in connection with such action. In no event shall the
indemnify parties be liable for the fees and expenses of more than one
counsel for all indemnified parties in connection with any one action
or separate but similar or related actions in the same jurisdiction
arising out of the same general alleptiom or circumstances.
15. Expenses. No expenses will be charged to Selected Dealers. A
single transfer tax, if any, on the sale of the Units and/or Additional
Warrants by the Selected Dealer to its customers will be paid when such
Units and/or Additional Warrants are delivered to the Selected Dealer
for delivery to its customers. However, the Selected Dealer will pay
its proportionate share of any transfer tax or any other tax (other
than the single transfer tax described above) if any such tax shall be
from time to time assessed against the Underwriter and other Selected
Dealers.
16. Communications. All communications to the Underwriter should
be sent to the address shown in the first page of this Agreement. Any
notice the Selected Dealer shall be properly given if mailed or
telephoned to the Selected Dealer at the address given below. This
Agreement shall be construed according to the laws of the State of New
York.
<PAGE> 93
17. Assignment and Term This Agreement may not be assigned by the
Selected Dealer without the Underwriter's written consent. This
Agreement will terminate upon the termination of the offering of the
Units and/or Additional Warrants except that either party may terminate
this Agreement at any time by giving written, notice to the other.
CASTLE SECURITIES CORP.
BY: __________________________________
Date of Acceptance: _____________________________
Dealer Name: _____________________________
Address: _____________________________
_____________________________
_____________________________
Accepted: _____________________________
Telephone No.: _____________________________
IRS Employer I.D. No.: _____________________________
Unit Allocation _____________________________
<PAGE> 94
EXHIBITI 1.3
No sale, offer to sell or transfer of the securities represented by
this certificate or any interest therein shall be made unless a
registration statement under the Federal Securities Act of 1933, as
amended, with respect to such transaction is then in effect, or the
issuer has received an opinion of counsel satisfactory to it that such
transfer does not require registration under that Act.
This Warrant will be void after 3:00 p.m. New York time on
_________________________, 2000.
UNIT PURCHASE WARRANT
To Subscribe for and Purchase Units and Additional Warrants of
EXHAUST TECHNOLOGIES, INC.
(Transferability Restricted as Provided in Paragraph 2 Below)
THIS CERTIFIES THAT, for value received, CASTLE SECURITIES CORP.,
(the "Underwriter") or registered assigns, is entitled to subscribe for
and purchase from EXHAUST TECHNOLOGIES, INC., incorporated under the
laws of the State of Washington, (the "Company") up to _________ fully
paid and non-assessable Units consisting of __________ fully paid and
non-assessable Common Stock of the Company and ___________ fully paid
non-assessable __________ (___) month Public Warrants of the Company,
as here in after defined, at the "Warrant Prices" and during the period
hereinafter set forth, subject, however, to the provisions and upon the
terms and conditions hereinafter set forth. This Warrant is one of an
issue of the Company's Unit Purchase Warrants (herein called the
"Warrants"), identical in all respects except as to the names of the
holders thereof and the number of Units purchasable thereunder,
representing on the original issue there of rights to purchase up to
__________ Units.
1. As used herein:
(a) "Common Stock" or Common Shares" shall initially refer
to the Company's common stock, $.0001 par value, per share as more
fully setforth in Section 5 hereof.
(b) The "Warrant Agreement" shall refer to the Warrant
Agreement dated as of ________________, 1999 between American
Securities Transfer & Trust, Inc. and the Company.
(c) "Public Warrants" shall refer to the Warrants included
in the Units offered to the public by the Company through CASTLE
SECURITIES CORP., pursuant to a Registration Statement cleared by the
SEC on __________________, 1999, and issued or to be issued pursuant to
the Warrant Agreement.
(d) "Underwriter's Public Warrants" shall mean the Public
Warrants except that (i) the initial exercise date thereof shall be the
date of exercise of the Underwriter's Warrant and the expiration
thereof shall be the expiration date of the Public Warrants, (ii) the
initial exercise price thereof shall be $7.00 per share during Exercise
Period One and $9.00 During Exercise Period Two (as such exercise
periods are set forth in the Underwriting Agreement defined below) and
thereafter determined as hereinafter set forth, (iii) the Company may
not redeem such Underwriter's Public Warrants, (iv) no
<PAGE> 95
terms of the Underwriter's Public Warrants may be modified without the
consent of the Underwriter and (v) the Common Shares subject to the
Underwriter's Public Warrants shall initially be as set forth in the
Warrant Agreement and there after determined as herein after set forth
without regard to the terms of the Warrant Agreement.
(e) "Units" shall consist of one fully paid and non-
assessable Common Shares and one Underwriter's Public Warrant, and
subject to adjustment pursuant to Section 4 hereof.
(f) "Common Share" Price shall, subject to adjustment
pursuant to Section 4 hereof, be $5.508 in the case of each share
included in the Units and shall be $6.12 at the time when the
Underwriter's Public Warrants have expired pursuant to the terms of the
Public Warrants. The Common Share price shall also, in the case of the
Common Shares solely related to those issued or to be issued upon
exercise of the Underwriter's Public Warrant be $7.00 if such Warrant
is exercise during exercise per one and $9.00 if such Warrant is
exercise during exercise period 2. In addition and solely for income
tax purposes, Common Share Price shall be $5.508 in the case of each
share included in the Units and shall be $6.12 at the time when the
Underwriter's Public Warrants have expired pursuant to the terms of the
Public Warrants.
(g) "Warrant Price" shall be $6.12 which is subject to
adjustment pursuant to Section 4 hereof.
(h) "Underwriter" shall refer to CASTLE SECURITIES CORP.
(i) "Underwriting Agreement" shall refer to the Underwriting
Agreement dated _______________, 199___ between the Company and the
Underwriter.
(j) "Warrants" shall refer to Warrants to purchase an
aggregate of up to __________ Units issued to the Underwriter or its
designees by the Company pursuant to the Underwriting Agreement
(including the Warrants represented by this Certificate), as such may
be adjusted from time to time pursuant to the terms of Section 4 (and
including any Warrants represented by any certificate issued from time
to time in connection with the transfer, partial exercise, exchange of
any Warrants or in connection with a lost, stolen, mutilated or
destroyed Warrant certificate, if any, or to reflect an adjusted number
of Units.
(k) "Underlying Securities" shall refer to and include the
Common Shares and Underwriter's Public Warrants issuable or issued upon
exercise of the Warrants as well as any Common Shares issued upon
exercise of the Underwriter's Public Warrants.
(l) "Holders" shall mean the registered holder of such
Warrants or any issued Underlying Securities.
2. The purchase rights represented by this Warrant may be
exercised by the holder hereof, in whole or in part at any time, and
from time to time, during the period commencing on _______________,
199____ (the "Commencement Date") until _______________, 200__ (the
"Expiration Date"), by the presentation of this Warrant, with the
purchase form attached duly executed, at the Company's office (or such
office or agency of the Company as it may designate in writing to the
Holder hereof by notice pursuant to Section 14 hereof), and upon
<PAGE> 96
payment by the Holder to the Company in cash, or by certified check or
bank draft of the Warrant Price for such Units, except if exercise is
made pursuant to Section 9 hereof, in which event Section 9 shall
control. The Company agrees that the Holder hereof shall be deemed the
record owner of such Underlying Securities as of the close of business
on the date on which this Warrant shall have been presented and payment
made for such Units as aforesaid. Certificates for the Underlying
Securities so purchased shall be delivered to the Holder hereof within
a reasonable time, not exceeding fifteen (15) days, after the rights
represented by this Warrant shall have been so exercised. If this
Warrant shall be exercised in part only, the Company shall, upon
surrender of this Warrant for cancellation, deliver a new Warrant
evidencing the rights of the Holder hereof to purchase the balance of
the Units which such Holder is entitled to purchase hereunder.
Exercise in full of the rights represented by this Warrant shall not
extinguish the rights granted under Section 9 hereof.
Nothing herein shall permit the exercise of this Warrant for
Units, Public Warrants or Shares prior to _______________, 1999.
3. Subject to the provisions of Section 8 hereof, (i) this
Warrant is exchangeable at the option of the Holder at the aforesaid
office of the Company for other Warrants of different denominations
entitling the Holder thereof to purchase in the aggregate the same
number of Units as are purchasable hereunder; and (ii) this Warrant may
be divided or combined with other Warrants which carry the same rights,
in either case, upon presentation hereof at the aforesaid office of the
Company together with a written notice, signed by the Holder hereof,
specifying the names and denominations in which new Warrants are to be
issued, and the payment of any transfer tax due in connection
therewith.
4. Subject and pursuant to the provisions of this Section 4, the
Warrant Price and number of Units subject to this Warrant shall be
subject to adjustment from time to time as set forth hereinafter in
this Section 4.
(a) (i) If the Company shall at any time subdivide its
outstanding Common Shares by recapitalization, reclassification or
split-up thereof, or other such issuance without additional
consideration, the number of Common Shares included in the Units
subject to this Warrant immediately prior to such subdivision shall be
proportionately increased, and if the Company shall at any time combine
the outstanding Common Shares by recapitalization, reclassification or
combination thereof, the number of Common Shares included in the Units
subject to this Warrant immediately prior to such combination shall be
proportionately decreased. Any such adjustment to the Warrant Price
pursuant to Section 4(e) shall become effective at the close of
business on the record date for such subdivision or combination. No
adjustment to the number of shares issuable upon exercise of this
Warrant shall be required if such adjustment provides the holders of
this Warrant with disproportionate rights, privileges and economic
benefits which are not provided to the public warrantholders.
(ii) Upon any adjustment of the number of Common Shares
included in the Units purchasable upon exercise of this Warrant
pursuant to Section 4 hereof, the number of Common Shares subject to
the Underwriter's Public Warrants in each Unit shall be adjusted to
such number of Common Shares as is equal to such adjusted number of
<PAGE> 97
Common Shares in each Unit. If any adjustment is made to the number of
Common Shares subject to the Underwriter's Public Warrants hereunder,
no adjustment shall be made at the same time to such number of shares
pursuant to the terms of the Warrant Agreement.
(b) If the Company after the date hereof shall distribute to
all of the holders of its Common Shares any securities or other assets
(other than a distribution of Common Shares or a cash distribution made
as a dividend payable out of earnings or out of any earned surplus
legally available for dividends under the laws of the jurisdiction of
incorporation of the Company), the Board of Directors shall be required
to make such equitable adjustment in the Warrant Price in effect
immediately prior to the record date of such distribution as may be
necessary to preserve to the Holder of this Warrant rights
substantially proportionate to those enjoyed hereunder by such Holder
immediately prior to the happening of such distribution. Any such
adjustment made in good faith by the Board of Directors shall be final
and binding upon the Holders and shall become effective as of the
record date for such distribution.
(c) In case of any reclassification of the outstanding
Common Shares (other than a change covered by Section 4(a) (i) hereof
or which solely affects the par value of such Common Shares) or in the
case of any merger or consolidation of the Company with or into another
corporation (other than a consolidation or merger in which the Company
is the continuing corporation and which does not result in any
reclassification or capital reorganization of the outstanding Common
Shares), or in the case of any sale or conveyance to another
corporation of the property of the Company as an entirety or
substantially as an entirety in connection with which the Company is
dissolved, the Holder of this Warrant shall have the right thereafter
(until the expiration of the right of exercise of this Warrant) to
receive upon the exercise hereof, for the same aggregate Warrant Price
payable hereunder immediately prior to such event, the kind and amount
of shares of stock or other securities or property receivable upon such
re classification, capital reorganization, merger or consolidation, or
upon the dissolution following any sale or other transfer, by a Holder
of the number of Common Shares of the Company obtain able upon the
exercise of this Warrant and the Underwriter's Public Warrants
immediately prior to such event; and if any reclassification also
results in a change in Common Shares covered by Section 4(a) (i), then
such adjustment shall be made pursuant to both this Section 4(c) and
Section 4(a) (i). The provisions of this Section 4(c) shall similarly
apply to successive re-classifications, or capital reorganizations,
mergers or consolidations, sales or other transfers.
(d) No adjustment in the number of Common Shares included in
the Units subject to this Warrant shall be required under this Section
4 hereof unless such adjustment would require an increase or decrease
in such number of shares of at least 1% of the then adjusted number of
Common Shares included in the Units issuable upon exercise of this
Warrant, provided, however, that any adjustments which by reason of the
foregoing are not required at the time to be made shall be carried
forward and taken into account and included in determining the amount
of any subsequent adjustment; and provided further, however, that in
case the Company shall at any time subdivide or combine the outstanding
Common Shares or issue any additional Common Shares as a dividend, said
percentage shall forthwith be proportionately increased in the case of
a combination or decreased in the case of a subdivision or dividend of
Common Shares so as to appropriately reflect the same. If the Company
<PAGE> 98
shall make a record of the Holders of its Common Shares for the purpose
of entitling them to receive any dividend or distribution and legally
abandon its plan to pay or deliver such dividend or distribution then
no adjustment in the number of Common Shares subject to the Warrant
shall be required by reason of the making of such record.
(e) Whenever the number of Common Shares included in the
Units purchasable upon the exercise of this Warrant is adjusted, as
provided in Section 4, the Warrant Price shall be adjusted (to the
nearest one tenth of a cent by multiplying such Warrant price
immediately prior to such adjustment by a fraction, the numerator of
which shall be the number of Common Shares included in the Units
purchasable upon the exercise of this Warrant immediately prior to such
adjustment, and the denominator of which shall be the number of Common
Shares included in the Units so purchasable immediately thereafter.
The exercise price of the Underwriters Public Warrants shall be
adjusted pursuant to the terms and conditions of the Warrant Agreement
assuming an adjustment in the number of Common Shares subject to such
Underwriters Public Warrants as provided for in Section 4(a)(ii).
(f) (1) Upon occurrence of either (i) each event requiring
an adjustment of the Warrant Price and of the number of Common Shares
and Underwriter's Public Warrants obtainable upon exercise of this
Warrant in accordance with, and as required by, the terms of this
Section 4, or (ii) the simultaneous exercise of more than 50% of the
Warrants, the Company shall forthwith employ a firm of certified public
accountants (who may be the regular accountants for the Company) who
shall compute the adjusted Warrant Price and the adjusted number of
Common Shares and Underwriter's Public Warrants purchasable at such
adjusted Warrant Price by reason of such event in accordance with the
provisions of this Section 4. The Company shall mail forthwith to the
Holder of this Warrant a copy of such computation which shall be
conclusive and shall be binding upon such Holder unless contested by
such Holder by written notice to the Company within thirty (30) days
after receipt thereof by such Holder.
(2) In case the Company after the date hereof shall
propose (i) to pay any dividend payable in stock to the Holders of its
Common Shares or to make any other distribution (other than cash
dividends) to the Holders of its Common Shares rights to subscribe to
or purchase any additional shares of any class or any other rights or
options, or (ii) to effect any reclassification of Common Shares (other
than a reclassification involving merely the subdivision or combination
of outstanding Common Shares) or (iii) any capital reorganization or
any consolidation or merger, or any sale, transfer or other disposition
of its property, assets and business substantially as an entirety, or
the liquidation, dissolution or winding up of the Company, then in each
such case, the Company shall obtain the computation described in
paragraph 4(f)(1) hereof and if an adjustment to the Warrant Price is
required under this Section 4, the Company shall notify the registered
Holder of this Warrant of such proposed action, which shall specify the
record date for any such action or if no record date is established
with respect thereto, the date on which such action shall occur or
commence, or the date of participation therein by the Holders of Common
Shares if any such date is to be fixed, and shall also set forth such
facts with respect thereto as shall be reasonably necessary to indicate
the effect of such action on the Warrant Price and the number, or kind,
or class of shares or other securities or property obtainable upon
exercise of this Warrant after giving affect to any adjustment which
will be required as a result of such action. Such notice shall be
<PAGE> 99
given at least twenty (20) days prior to the record date for
determining Holders of the Common Shares for purposes of any such
action, and in the case of any action for which a record date is not
established then such notice shall be mailed at least twenty (20) days
prior to the taking of such proposed action.
(3) Failure to file any certificate or notice or to
mail any notice, or any defect in any certificate or notice, or any
defect in any certificate or notice, pursuant to this Section 4(f),
shall not effect the legality or validity of the adjustment in the War
rant Price or in the number, or kind, or class or shares or other
securities or property obtainable upon exercise of this Warrant or of
any transaction giving rise there to.
(g) The Company shall not be required to issue fractional
Common Shares or Underwriter's Public Warrants upon any exercise of
this Warrant. As to any final fraction of a Common Share or
Underwriter's Public Warrant which the Holder of this Warrant would
otherwise be entitled to purchase upon such exercise, the Company shall
pay a cash adjustment in respect of such final fraction in an amount
equal to the same fraction of the market value of a share of such stock
(or the market value of the Public Warrant), on the business day
preceding the day of exercise. The Holder of this Warrant, by his
acceptance hereof, expressly waives any right to receive any fractional
shares of stock or fractional Underwriter's Public Warrant upon
exercise of this Warrant.
(h) Irrespective of any adjustments pursuant to this Section
4 in the Warrant Price or in the number, or kind, or class of shares or
other securities or other property obtainable upon exercise of this
Warrant, this Warrant may continue to e press the Warrant Price and the
number of Units obtainable upon exercise at the same price and number
of Units as are stated herein.
(i) Until this Warrant is exercised, the Underlying
Securities, the Warrant Price and Common Share Price and warrant price
of the Underwriters Public Warrants shall be determined exclusively
pursuant to the provisions hereof, with out regard to any of the terms
of the Warrant Agreement except as other wise specifically provided for
in Section 4(e) hereof.
5. For the purposes of this Warrant, the terms "Common Shares"
or "Common Stock" shall mean (i) the class of stock designated as the
common stock, $.0001 par value, of the Company on the date set forth on
the first page hereof or (ii) any other class of stock resulting from
successive changes or reclassifications of such Common Stock consisting
solely of changes in par value, or from no par value to par value, or
from par value to no par value. If at any time, as a result of an
adjustment made pursuant to Section 4, the securities or other property
obtain able upon exercise of this Warrant shall include shares or other
securities of the Company other than Common Shares or securities of
another corporation or other property; thereafter, the number of such
other shares or other securities or property so obtain able shall be
subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the
Common Shares contained in Section 4 and all other provisions of this
Warrant with respect to Common Shares shall apply on like terms to any
such other shares or other securities or property. Subject to the fore
going, and unless the context requires otherwise, all references herein
to Common Shares shall, in the event of an adjustment pursuant to
<PAGE> 100
Section 4, be deemed to refer also to any other securities or property
then obtainable as a result of such adjustments.
6. The Company covenants and agrees that:
(a) During the period within which the rights represented by
the Warrant may be exercised, the Company shall, at all times, reserve
and keep available out of its authorized capital stock, solely for the
purposes of issuance upon exercise of this Warrant, such number of its
Common Shares as shall be issuable upon the exercise of this Warrant
and the Underwriter's Public Warrants and at its expense will obtain
the listing thereof on all national securities exchanges on which the
Common Shares or Public Warrants are then listed; and if at any time
the number of authorized Common Shares shall not be sufficient to
effect the exercise of this Warrant and the Underwriter's Public
Warrants included therein, the Company will take such corporate action
as may be necessary to increase its authorized but unissued Common
Shares to such number of shares as shall be sufficient for such
purpose; the Company shall have analogous obligations with respect to
any other securities or property issuable upon exercise of this
Warrant.
(b) All Common Shares which may be issued upon exercise of
the rights represented by this Warrant or upon the exercise of the
Underwriter's Public Warrant included herein will, upon issuance be
validly issued, fully paid, non assessable and free from all taxes,
liens and charges with respect to the issuance thereof; and,
(c) All original issue taxes payable in respect of the
issuance of Common Shares upon the exercise of the rights represented
by this Warrant or the Underwriter's Public Warrants shall be borne by
the Company but in no event shall the Company be responsible or liable
for income taxes or transfer taxes upon the transfer of any Warrants.
7. Until exercised, this Warrant shall not entitle the Holder
hereof to any voting rights or other rights as a share holder of the
Company, except that the Holder of this Warrant shall be deemed to be
a shareholder of this Company for the purpose of bringing suit on the
ground that the issuance of shares of stock of the Company is improper
under the Florida Corporation Law.
8. This Warrant shall not be sold, transferred, assigned or
hypothecated for a period of twelve (12) months from the effective date
of the Company's public offering with respect to which this Warrant has
been issued, except to officers or partners of the Underwriter, or the
selected dealers who participated in such offering, or the officers or
partners of such selected dealers. In no event shall this Warrant be
sold, transferred, assigned or hypothecated except in conformity with
the applicable provisions of the Securities Act of 1933, as then in
force (the "Act"), or any similar Federal statute then in force, and
all applicable "Blue Sky" laws.
9. The holder of this Warrant, by acceptance hereof, agrees
that, prior to the disposition of this Warrant or of any securities
thereto fore purchased upon the exercise hereof, under circumstances
that might require registration of such securities or the filing of a
post effective amendment under the Act, or any similar Federal statute
then in force, such holder will give written notice to the Company
expressing such holder's intention of effecting such disposition, and
describing briefly such holder's intention as to the disposition to be
<PAGE> 101
made of this Warrant and/or the securities theretofore issued upon
exercise hereof. The term registration as used in this paragraph 9
shall hereinafter refer to either the filing of a registration
statement or the filing of a post effective amendment, whichever is
applicable. Promptly upon receiving such notice, the Company shall
present copies thereof to its counsel and to Stephen W. Wilk, Esq.,
1600 Stewart Avenue, Westbury, New York, and Robert C. Beers, P.C., 3
Linden Street, Selden, New York 11784 and the provisions of the
following subdivisions shall apply:
(a) If, in the opinion of both such counsel, the proposed
disposition does not require registration under the Act or
qualification pursuant to Regulation A promulgated under the Act, or
any similar Federal statute then in force, of this Warrant and/or the
securities issuable or issued upon the exercise of this Warrant, the
Company shall, as promptly as practicable, notify the holder hereof of
such opinion, whereupon such holder shall be entitled to dispose of
this Warrant and/or such securities theretofore issued upon the
exercise hereof, all in accordance with the terms of the notice
delivered by such holder to the Company.
(b) If, in the opinion of either such counsel, such proposed
disposition requires such registration or qualification under the Act,
or similar Federal statute then in effect, of this Warrant and/or the
securities issuable or issued upon the exercise of this Warrant, the
Company shall promptly give written notice to all then holders of the
Warrants, at the respective addresses thereof shown on the books of the
Company, of a proposed registration or qualification under the Act, or
any similar Federal statute then in force, and the Company shall, as
expeditiously as possible, use its best efforts to effect such
registration or qualification under the Act or similar statute, at the
sole expense of the Company, on one occasion only, for a period not to
exceed five (5) years from the effective date of the Company's public
offering, of (i) the War rants and/or the securities issuable or issued
upon the exercise of this Warrant, and (ii) all such Warrants and/or
securities of the Company issuable or issued upon the exercise of
Warrants, the holders of which shall have made written requests to the
Company for the registration or qualification thereof within thirty
(30) days after the giving of such written notice by the Company, all
to the extent requisite to permit the sale of the Warrants and/or the
securities referred to in the foregoing clauses (i) and (ii), upon the
terms of offering supplied in writing to the Company by the holders
thereof, and upon the effective ness of such registration or
qualification. The Company shall not be required to effect more than
one such registration or qualification pursuant to the foregoing
provisions nor shall it be required to effect such registration or
qualification unless requested by the holders of at least a majority of
the Underwriter's Warrants and/or the holders of the underlying
securities together with the consent of the Underwriter or its specific
authorized designee. In the event the under lying securities are to be
registered, the Underwriter and/or the holders of the Warrants upon
exercise thereof shall pay the exercise price to the transfer agent of
record, which agent shall not release said funds to the issuer until
such time as the under lying securities have been delivered to the
Underwriter and/or holders thereof. The Underwriter and/or holders of
the Warrants shall not be required to exercise such Warrants prior to
the date the Registration Statement has been cleared by the SEC and
State Securities Departments ("the Exercise Date") but in no event
shall such exercise date occur at a date sub sequent to the termination
of this Warrant. In addition to such rights, in the case of any
<PAGE> 102
proposed registration or qualification of Common Stock or other
securities of the Company under the Act, or similar Federal statute
then in force, at any time within five (5) years from the effective
date of the Company's public offering, the Company will give at least
thirty (30) days prior written notice of the filing thereof to (i) each
holder of Warrants and (ii) each holder of underlying securities who
shall have received the same upon the exercise of Warrants previously
held by such holder. If, and to the extent requested by any such
holder in writing within twenty (20) days after receipt of any such
notice, the Company will use its best efforts, at its expense, to
register all or any part of the Warrants and/or the securities issuable
or is sued upon the exercise of the Warrants referred to in the
foregoing clause (i) and/or the securities referred to in the foregoing
clause (ii) under such Act or statute, limited, in the case of a
qualification under Regulation A, to the amount of any available
exemption, concurrently with the registration or qualification of such
other stock or securities, in a manner appropriate to permit the
distribution of such Warrants and/or Common Stock by such holder upon
the terms of offering supplied by such holder concurrently with the
making of the afore said written request. In the event the underlying
securities are to be registered, the Underwriter and/or the holders of
the Warrants upon exercise thereof shall pay the exercise price to the
transfer agent of record, which agent shall not release said funds to
the issuer until such time as the underlying securities have been
delivered to the Underwriter and/or holders thereof. The Underwriter
and/or holders of the Warrants shall not be required to exercise such
Warrants prior to the date the Registration Statement has been cleared
by the SEC and State Securities Departments ("the Exercise Date") but
in no event shall such exercise date occur at a date subsequent to the
termination of this Warrant.
10. The Company agrees to indemnify and hold harmless the holder
of this Warrant, or of securities issuable or issued upon the exercise
hereof, from and against any claims and liabilities caused by any
untrue statement of a material fact, or omission to state a material
fact required to be stated, in any such registration statement,
prospectus, notification or offering circular under Regulation A,
except insofar as such claims or liabilities are caused by any such
untrue statement or omission based on information furnished in writing
to the Company by such holder, or by any other such holder affiliated
with the holder who seeks indemnification, as to which the holder
hereof, by acceptance hereof, agrees to indemnify and hold harmless the
Company.
11. If this Warrant, or any of the securities issuable pursuant
hereto, require qualification or registration with, or approval of, any
governmental official or authority (other than registration under the
Act, or any similar Federal statute at the time in force), before such
shares may be issued on the exercise hereof, the Company, at its
expense, will take all requisite action in connection with such
qualification, and will use its best efforts to cause such securities
and/or this Warrant to be duly registered or approved, as may be
required.
12. This Warrant is exchangeable, upon its surrender by the
registered holder at such office or agency of the Company as may be
designated by the Company, for new Warrants of like tenor,
representing, in the aggregate, the right to subscribe for and purchase
the number of units or Common Shares as the case may be that may be
subscribed for and purchased hereunder, each of such new Warrants to
<PAGE> 103
represent the right to subscribe for and purchase such number of units
or Common Shares as the case may be as shall be designated by the
registered holder at the time of such surrender. Upon receipt of
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of this Warrant, and, in the case of any such loss, theft or
destruction, upon delivery of a bond of indemnity satisfactory to the
Company, or in the case of such mutilation, upon surrender or
cancellation of this Warrant, the Company will issue to the registered
holder a new Warrant of like tenor, in lieu of this Warrant,
representing the right to subscribe for and purchase the number of
units or Common Shares as the case may be that may be subscribed for
and purchased hereunder. Nothing herein is intended to authorize the
transfer of this Warrant except as permitted under Paragraph 8.
13. Every holder hereof, by accepting the same, agrees with any
subsequent holder hereof and with the Company that this Warrant and all
rights hereunder are issued and shall be held subject to all of the
terms, conditions, limitations and provisions set forth in this
Warrant, and further agrees that the Company and its transfer agent may
deem and treat the registered holder of this Warrant as the absolute
owner hereof for all purposes and shall not be affected by any notice
to the contrary.
14. All notices required hereunder shall be given by first- class
mail, postage prepaid; if given by the holder hereof, addressed to the
Company at 230 North Division Spokane, Washington 99201 or such other
address as the Company may designate in writing to the holder hereof;
and if given by the Company, ad dressed to the holder at the address of
the holder shown on the books of the Company.
15. The Company will not merge or consolidate with or into any
other corporation, or sell or otherwise transfer its property, assets
and business substantially as an entirety to another corporation,
unless the corporation resulting from such merger or consolidation (if
not the Company), or such transferee corporation, as the case may be,
shall expressly assume, by supplemental agreement satisfactory in form
to the Underwriter, the due and punctual performance and observance of
each and every covenant and condition of this Warrant to be performed
and observed by the Company.
16. The validity, construction and enforcement of this Warrant
shall be governed by the laws of the State of New York and exclusive
jurisdiction is hereby vested in the Courts of said State in the event
of the institution of any legal action under this Warrant.
IN WITNESS WHEREOF, EXHAUST TECHNOLOGIES, INC. has caused
this Warrant to be signed by its duly authorized officers under its
corporate seal, to be dated , 199___.
EXHAUST TECHNOLOGIES, INC.
By: __________________________________
Authorized Officer
Attest:
____________________________
Secretary
(Corporate Seal)
<PAGE> 104
PURCHASE FORM
To Be Executed
Upon Exercise of Warrant
The undersigned hereby exercises the right to purchase
____________________ Common Shares and/or _________ Underwriter's
Public Warrants, evidenced by the within Warrant, according to the
terms and conditions thereof, and herewith makes payment of the
purchase price in full. The undersigned requests that certificates for
such shares and warrants shall be issued in the name set forth below.
Dated: _________________, 19___.
______________________________________
Signature
______________________________________
Print Name of Signatory
Name to whom certificates are to be
issued if different from above
Address: _____________________________
______________________________________
______________________________________
Social Security No. __________________
or other identifying number
If said number of shares and warrants shall not be all the shares
and warrants purchasable under the within Warrant, the undersigned
requests that a new Warrant for the unexercised portion shall be
registered in the name of:
______________________________________
(Please Print)
Address: _____________________________
______________________________________
______________________________________
Social Security No. __________________
or other identifying number
______________________________________
Signature
<PAGE> 105
FORM OF ASSIGNMENT
FOR VALUE RECEIVED __________________________, hereby sells
assigns and transfers to __________________________, Soc. Sec. No.
[______________] the within Warrant, together with all rights, title
and interest therein, and does hereby irrevocably constitute and
appoint _________________________ attorney to transfer such Warrant on
the register of the within named Company, with full power of
substitution.
___________________________________
Signature
Dated: _______________, 19___.
Signature Guaranteed:
____________________________
<PAGE> 106
EXHIBIT 5.1
CONRAD C. LYSIAK
Attorney and Counselor at Law
601 West First Avenue
Suite 503
Spokane, Washington 99201
(509) 624-1478
FAX (509) 747-1770
February 22, 2000
Securities and Exchange Commission
450 Fifth Avenue N.W.
Washington, D. C. 20549
RE: Exhaust Technologies, Inc.
Gentlemen:
Please be advised that, I have reached the following
conclusions regarding the above offering:
1. Exhaust Technologies, Inc. (the "Company") is a duly and
legally organized and exiting Washington state corporation, with
its registered office located in Spokane, Washington and its
principal place of business located in Spokane, Washington. The
Articles of Incorporation and corporate registration fees were
submitted to the Washington Secretary of State's office and filed
with the office in July 21, 1998. The Company's existence and form
is valid and legal pursuant to the representation above.
2. The Company is a fully and duly incorporated Washington
corporate entity. The Company has one class of Common Stock at
this time. Neither the Articles of Incorporation, Bylaws, and
amendments thereto, nor subsequent resolutions change the
non-assessable characteristics of the Company's common shares of
stock. The Common Stock previously issued by the Company is in
legal form and in compliance with the laws of the State of
Washington, and when such stock was issued it was fully paid for
and non-assessable. The units, consisting of common stock,
warrants, and shares underlying the warrants; and, the additional
warrants and shares underlying the additional warrants to be sold
under this Form SB-2 Registration Statement are likewise legal
under the laws of the State of Washington.
<PAGE> 107
Securities and Exchange Commission
RE: Exhaust Technologies, Inc.
February 22, 2000
Page 2
3. To my knowledge, the Company is not a party to any legal
proceedings nor are there any judgments against the Company, nor
are there any actions or suits filed or threatened against it or
its officers and directors, in their capacities as such, other than
as set forth in the registration statement. I know of no disputes
involving the Company and the Company has no claim, actions or
inquires from any federal, state or other government agency, other
than as set forth in the registration statement. I know of no
claims against the Company or any reputed claims against it at this
time, other than as set forth in the registration statement.
4. The Company's outstanding shares are all common shares.
There are no liquidation preference rights held by any of the
Shareholders upon voluntary or involuntary liquidation of the
Company.
5. The directors and officers of the Company are indemnified
against all costs, expenses, judgments and liabilities, including
attorney's fees, reasonably incurred by or imposed upon them or any
of them in connection with or resulting from any action, suit or
proceedings, civil or general, in which the officer or director is
or may be made a party by reason of his being or having been such
a director or officer. This indemnification is not exclusive of
other rights to which such director or officer may be entitled as
a matter of law.
6. All tax benefits to be derived from the Company's
operations shall inure to the benefit of the Company. Shareholders
will receive no tax benefits from their stock ownership, however,
this must be reviewed in light of the Tax Reform Act of 1986.
7. By director's resolution, the Company has authorized the
issuance of up to 1,000,000 units each consisting of one share of
common stock and one redeemable warrant. Further, the Company has
authorized the issuance of 1,000,000 additional shares upon the
exercise of the 1,000,000 additional redeemable warrants. Further,
the Company has authorized the issuance of up to 100,000
underwriter warrants, each consisting of one unit described above
to be sold through a public offering.
<PAGE> 108
Securities and Exchange Commission
RE: Exhaust Technologies, Inc.
February 22, 2000
Page 3
The Company's Articles of Incorporation presently provide
the authority to the Company to issue 100,000,000 shares of Common
Stock, $0.00001 par value. Therefore, a Board of Directors'
Resolution which authorized the issuance for sale of up to
1,000,000 units each consisting of one share of Common Stock, one
redeemable warrant, and one shares underlying the redeemable
warrant; the issuance of up to 1,000,000 additional shares upon the
exercise of the 1,000,000 additional warrants; and, the issuance of
up to 100,000 underwriter units each consisting of one unit as
described, above would be within the authority of the Company's
directors and would result in the legal issuance of said
securities.
Yours truly,
/s/ Conrad C. Lysiak
<PAGE> 109
EXHIBIT 10.3
MODIFICATION OF
LICENSE AGREEMENT FOR THE TURBOLATOR
This modification agreement hereby amends the original
Licensing Agreement for Turbolator as follows:
1. Exhaust Technologies, Inc. must generate sales of the
Turbolator of $ -0- in 1998, $ -0- in 2000, $ -0- in
2001 and $500,000 for all the years thereafter.
All other conditions of the original agreement remain
unchanged.
/s/ Robert E. Sterling
Exhaust Technologies, inc.
President
/s/ Robert E. Sterling
Robert E. Sterling
/s/ Matthew R. Sterling
<PAGE> 110
EXHIBIT 10.4
MODIFICATION OF
LICENSE AGREEMENT FOR THE
PNEUMATIC HAND TOOL EXHAUST MUFFLER
This modification agreement hereby amends the original
Licensing Agreement for Pneumatic Hand Tool Exhaust Muffler as
follows:
1. Exhaust Technologies, Inc. must generate sales of hte
Pneumatic Hand Tool Exhaust Muffler of $ -0- in 1998, $
-0- in 1999, $ -0- in 2000, $ -0- in 2001 and $500,000
for all the years thereafter.
All other conditions of the original agreement remain unchanged.
/s/ Robert e. Sterling
Exhaust Technologies, Inc.
President
/s/ Robert E. Sterling
Robert E. Sterling
<PAGE> 111
EXHIBIT 23.1
BDO SEIDMAN, LLP
Accountants and Consultants
601 West Riverside Avenue
Suite 900
Spokane, Washington 99201-0611
Telephone: (509) 747-8095
FAX: (509) 747-0415
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Exhaust Technologies, Inc.
Spokane, Washington
We hereby consent to the use in the Prospectus constituting a part
of this Registration Statement of our report dated August 9, 1999
except for Note 3 which is a s of December 14, 1999 relating to the
financial statements of Exhaust Technologies, Inc., which is
contained in that Prospectus. Our report contains an explanatory
paragraph regarding the ability of the Company to continue as a
going concern.
We also consent to the reference to us under the caption "Experts"
in the Prospectus.
/s/ BDO Seidman, LLP
Spokane, Washington
February 7, 2000
<PAGE> 112
EXHIBIT 23.2
CONRAD C. LYSIAK
Attorney and Counselor at Law
601 West First Avenue
Suite 503
Spokane, Washington 99201
(509) 624-1475
FAX: (509) 747-1770
CONSENT
I HEREBY CONSENT to the inclusion of my name in
connection with the Form SB-2 Registration Statement to be filed
with the Securities and Exchange Commission as attorney for the
Issuer, Exhaust Technologies, Inc.
DATED this 22nd day of February, 2000.
Yours truly,
Conrad C. Lysiak
