As filed with the Securities and Exchange Commission on August 20, 1999.
Registration No. 333-78899
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HI-Q WASON, INC.
------------------------
(Exact Name of registrant
as specified in charter)
British Virgin Islands 5149 Not Applicable
---------------------- ---- --------------
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of incorporation Industrial Classification Identification
or organization) Code Number) Number)
4th Floor, 52 Lane 232, Hu Lin Street
Hsin Yi District
Taipei, Taiwan, Republic of China
011 886(2)2990-8306
--------------------------------------------------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Gary A. Agron
5445 DTC Parkway, Suite 520
Englewood, Colorado 80111
(303) 770-7254
--------------------------------------------------
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copies of all communications to:
Gary A. Agron, Esq. Jay M. Kaplowitz, Esq.
Law Office of Gary A. Agron Gersten, Savage & Kaplowitz, LLP
5445 DTC Parkway, Suite 520 101 East 52nd Steet
Englewood, Colorado 80111 New York, NY 10022-6018
(303) 770-7254 (212) 752-9700
(303) 770-7257(fax)
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ X ]
<PAGE>
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box:
|_| [EXHIBIT INDEX LOCATED PAGE _____ OF THIS FILING]
<TABLE>
<CAPTION>
===================================================================================================
CALCULATION OF REGISTRATION FEE
Title of Each Class Amount Proposed Proposed Maximum Amount
of Securities To Be Maximum Aggregate of
to be Registered Registered Price Per Offering Price(1) Registration Fee
Share
===================================================================================================
<S> <C> <C> <C> <C>
Common Stock, no 1,265,000 $7.00 $8,855,000 $2,613
par value Shares(2)
Common Stock 110,000 $8.40 $ 924,000 $ 272
underlying the Shares
Representative's
Warrants (3)
- ---------------------------------------------------------------------------------------------------
Total................................................................... $2,885(4)
===================================================================================================
</TABLE>
(1) Estimated solely for computing the amount of the registration fee pursuant
to Rule 457(a) under the Securities Act.
(2) Includes the overallotment option granted to the Representative of 165,000
shares.
(3) Pursuant to Rule 416 of the Securities Act of 1933, as amended, the number
of shares of common stock issuable upon exercise of the Representative's
Warrants is subject to adjustment in accordance with the anti-dilution
provisions of such warrants.
(4) Previously paid.
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE>
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 we are not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion dated August 20, 1999
1,100,000 Shares of Common Stock
HI-Q WASON, INC. [LOGO]
We are one of Taiwan's largest providers of bottled water delivered
directly to residences and businesses.
We are offering 1,100,000 shares of common stock priced at $7.00 per share
on a firm commitment basis.
We have applied to list our common stock on the Nasdaq SmallCap Market
under the symbol "HIQW."
See "Risk Factors" beginning on page _______ to read about factors you
should consider before buying shares of our common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
Per Share Total
--------- -----
Public offering price: $7.00 $7,700,000
Underwriting discounts and commissions: $ .70 $ 770,000
Proceeds to Hi-Q Wason, Inc.: $6.30 $6,930,000
We have granted the underwriters an option for 45 days to purchase up to an
additional 165,000 shares at the same price indicated above solely to cover
overallotments.
NUTMEG SECURITIES, LTD.
The date of this prospectus is , 1999.
<PAGE>
TABLE OF CONTENTS
Page
Currency Translations.....................................................3
Prospectus Summary........................................................3
Summary Financial Information.............................................5
Risk Factors..............................................................7
Forward Looking Statements ..............................................10
Use of Proceeds..........................................................10
Dividend Policy..........................................................10
Exchange Rates...........................................................10
Dilution.................................................................11
Capitalization...........................................................12
Selected Financial Data..................................................13
Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................15
Our Business.............................................................21
Enforceability of Civil Liabilities
and Certain Foreign Issuer Considerations ...............................27
Our Management...........................................................28
Principal Stockholders...................................................32
Certain Transactions.....................................................32
Description of Securities................................................33
Taxation.................................................................36
Underwriting.............................................................38
Legal Matters............................................................39
Experts..................................................................40
Additional Information...................................................40
Financial Statements....................................................F-1
No dealer, salesman or other person has been authorized to give any
information or to make any representations other than contained in this
prospectus in connection with the offering described herein, and if given or
made, such information or representations must not be relied upon as having been
authorized by us. This prospectus does not constitute an offer to sell, or the
solicitation of an offer to buy, the securities offered hereby to any person in
any state or other jurisdiction in which such offer or solicitation is unlawful.
Neither the delivery of this prospectus nor any sale hereunder shall, under any
circumstances, create any implication that there has been no change in our
affairs since the date hereof.
Until __________, 1999 (25 days after the date of this prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
2
<PAGE>
CURRENCY TRANSLATIONS
Our published financial statements are presented in New Taiwan dollars, the
lawful currency of the Republic of China. In this Prospectus, references to
"U.S. dollars", "US$" or "$" are to U.S. currency and references to "New Taiwan
dollars" or "NT" are to the Republic of China currency. Solely for the
convenience of the reader, this prospectus contains translations of certain NT
amounts into U.S. dollars at specified rates. These translations should not be
construed as representations that the NT amounts actually represent such U.S.
dollar amounts or could be converted into U.S. dollars at the rate indicated.
Unless otherwise stated, the translations of NT to U.S. dollars have been made
at the exchange rate of NT33.17 to US$1.00, which represents the noon buying
rate of the Federal Reserve Bank of New York on March 31, 1999. See "Exchange
Rates" for historical information regarding the exchange rate.
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and financial statements and notes thereto appearing elsewhere in
this prospectus.
Our Business
We are one of Taiwan's largest providers of bottled water delivered
directly to residences and businesses and have a leading market share position
in Taipei and Hsinchu, Taiwan. Our primary focus is on the bottling, marketing
and delivery of high quality drinking water in five-gallon and three-gallon
bottles to homes and offices, and the related sale or rental of water coolers.
Our Opportunity
We believe that the "alternative to tap water" market represents an
attractive industry opportunity due to the strong growth in demand for bottled
water in Taiwan. We believe this growth will continue to be driven by concerns
related to the quality of tap water, the trend toward consumer selection of
healthy products and consumer taste preferences for bottled water.
We deliver bottled water to an installed base of approximately 5,000 water
coolers in our markets. We believe that direct delivery bottled water companies
enjoy certain advantages over retailers of bottled water because:
o Bottled water customers are reluctant to change from one company to
another due to increased cost and inconvenience; and
o Competition tends to be limited due to the capital costs associated
with the purchase of water coolers, reusable water bottles, bottling
equipment and delivery trucks.
By virtue of our market share position in the Taiwanese bottled water
market, we believe we have a number of competitive advantages over smaller
operators, including:
o more efficient distribution operations;
o the availability of purchasing synergies;
o superior customer service; and
o better established infrastructure.
We intend to use a portion of the proceeds of the offering to acquire some
of these smaller bottled water companies who do not have a sufficiently
developed distribution system, management infrastructure or financial resources
to compete with larger companies. To date, we have not entered into any
agreements to acquire any other companies.
3
<PAGE>
Our Strategy
We expect to benefit from the growing demand for quality drinking water by:
o increasing our installed base of water coolers;
o increasing the water and related products we offer through our
delivery system; and
o consolidating a part of the highly fragmented bottled water industry
in Taiwan.
Our History and Offices
We were incorporated as an international business company of the British
Virgin Islands in April 1999, at which time we acquired all of the common stock
of Hi-Q Wason, Inc., a Taiwanese corporation, for 471,429 shares of our common
stock. Hi-Q Wason was organized in November 1995 to provide bottled water
delivered directly to residences and businesses and is now our operating
subsidiary. Our corporate offices are located at 4th Floor, 52 Lane 232, Hu Lin
Street, Hsin Yi District, Taipei, Taiwan, Republic of China, telephone number
011-886-2-2990-8306.
The Offering
The information set forth below does not take into account 165,000 shares
which may be sold if the underwriters' overallotment option is exercised or
110,000 shares that may be issued to Nutmeg Securities, Ltd., the
representative of the underwriters.
Securities Offered (1)................. 1,100,000 shares of common stock.
Common Stock Outstanding
Prior to Offering .................... 471,429 shares of common stock.
Common Stock to be Outstanding
After Offering (2).................... 1,571,429 shares of common stock.
Use of Proceeds........................ Developing new bottling facilities,
marketing expenses, acquisition of
other bottling companies and working
capital. See "Use of Proceeds."
Proposed Nasdaq SmallCap
Market Symbol......................... HIQW
Risk Factors........................... Please read the Risk Factors section
of this prospectus as investment in
our common stock involves a high
degree of risk and could result in a
loss of your entire investment.
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
We prepare our financial statements in accordance with generally accepted
accounting principles in the United States, which we refer to as US GAAP. The
following summary statement of operations data for the years ended December 31,
1998, 1997 and 1996 and the balance sheet data as of December 31, 1998 and 1997
were derived from our audited financial statements included elsewhere in this
prospectus. The following summary statement of operations data for the period
from November 20, 1995 (inception) to December 31, 1995 and the balance sheet
data as of December 31, 1996 and 1995 was derived from our audited financial
statements, not included in this prospectus. The following summary statement of
operations data for the three months ended March 31, 1999 and 1998, and the
selected balance sheet data as of March 31, 1999 was derived from our unaudited
financial statements included elsewhere in this prospectus and, in our opinion,
includes all adjustments, consisting only of normal recurring adjustments,
necessary to fairly state this information. The results of operations for these
interim periods are not necessarily indicative of the results that may be
expected for the full year. Since the information presented below is only a
summary and does not provide all of the information contained in our financial
statements, including the related notes, you should read "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements.
Unless otherwise indicated, all information in this prospectus assumes no
exercise of the overallotment option granted to the underwriters.
5
<PAGE>
<TABLE>
<CAPTION>
Three-months ended March 31, Years ended December 31,
----------------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995(1)
------------- ---- ----------------- ---- ---- ------
$(2) NT NT $(2) NT NT NT NT
---- -- -- ---- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues 231,420 7,676,197 5,053,631 912,971 30,283,239 19,784,732 9,187,588 170,640
Cost of revenues (89,027) (2,953,039) (2,186,780) (339,870) (11,273,488) (8,330,002) (4,451,269) (798,891)
Selling, general and
administrative expense (106,055) (3,517,829) (2,448,342) (395,424) (13,116,209) (10,088,498) (5,581,969) (657,751)
Operating income (loss) 36,338 1,205,329 418,509 177,677 5,893,542 1,366,232 (845,650) (1,286,002)
Other income (expense),
net (3,650) (121,079) (27,011) (9,257) (307,068) (115,305) 10,815 1,192
Income tax expense (8,172) (271,063) (97,874) (42,534) (1,410,847) (305,250) -0- -0-
Net income (loss) 24,516 813,187 293,624 125,886 4,175,627 945,677 (834,835) (1,284,810)
Basic earnings (loss)
per common share 0.05 1.72 0.62 0.27 8.86 2.01 (1.77) (2.73)
Weighted average common
shares outstanding(3) 471,429 471,429 471,429 471,429 471,429 471,429 471,429 471,429
March 31, 1999 Years ended December 31,
---------------- --------------------------------------------------------------
1998 1997 1996 1995(1)
----------------------- ---- ---- ------
$(2) NT $(2) NT NT NT NT
---- -- ---- -- -- -- --
Balance sheet data:
Working capital 127,233 4,220,346 45,442 1,507,324 6,207,750 (2,375,014) 1,083,459
Property and equipment,
net 679,308 22,532,647 688,711 22,844,554 13,193,564 5,339,769 2,451,331
Total assets 1,016,221 33,708,051 936,446 31,061,917 21,397,061 8,887,655 5,348,568
Capital lease obligations
and short-term
borrowings 119,388 3,960,108 132,456 4,393,576 1,267,400 5,472,089 -0-
Stockholders' equity 718,566(4) 23,834,846 693,447 23,001,659 18,826,032 2,880,355 3,715,190
</TABLE>
(1) Period from November 20, 1995 (inception) to December 31, 1995.
(2) Translated into United Stated dollars solely for the convenience of the
readers using the noon buying rate of the Federal Reserve Bank of New York
on March 31, 1999 of NT33.17 to $1.
(3) Represents the shares we issued to acquire Hi-Q Wason, Inc., the Taiwanese
corporation, in April 1999. See "Our History and Offices."
(4) Upon completion of the offering our as adjusted stockholders' equity and
net tangible book value will be $7,167,566.
6
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding whether to invest in shares of our common stock. If
any of these risks occur, our business, results of operations and financial
condition could be adversely affected. This could cause the trading price of our
common stock to decline, and you might lose part or all of your investment.
In Order To Grow Through Acquisitions We Must Obtain Acquisition Candidates,
Personnel and Financing
We intend to grow internally as well as through the acquisition of other
water bottling companies. Our ability to grow will require the availability of
suitable acquisition candidates and the availability of financing, neither of
which can be assured. Growth through acquisitions also involves risks that could
adversely affect our operating results, including difficulties in integrating
the operations and personnel of acquired companies and the potential loss of key
employees of acquired companies.
Implementation of our proposed expansion strategy will also be dependent
upon our ability to:
o Hire and retain skilled management, financial, marketing and other
personnel;
o Monitor operations;
o Control costs; and
o Maintain effective quality and inventory controls.
Our growth strategy and plans may be affected by:
o Delays in our marketing efforts;
o Changes in economic or market conditions;
o Our ability to make capital expenditures; and
o Competition.
Moreover may require additional debt or equity financing beyond the
proceeds of the offering to fund our operations. To the extent that we raise
additional funds, we will be subject to potentially significant interest expense
for debt financing or dilution to our stockholders for equity financing. There
can be no assurance that additional financing will be available to us on
reasonable terms or at all.
7
<PAGE>
We Face Significant Competition From Larger Competitors
The beverage industry in general, and the bottled water market in
particular, are competitive. We compete with local bottled water companies and
larger beverage companies. Certain of our competitors possess greater financial,
personnel, marketing and other resources than we and may be better able to
withstand market conditions within the beverage industry. We may encounter
increased competition in the future. In addition, a change in consumer
preferences from bottled water to other beverages would have a material adverse
effect on our business.
Our Costs to Produce Purified Water May Increase
We currently have an agreement with Han Tao Pure Waters Proprietor, a
company owned by our chief Executive Officer, to provide us purified water at
Han Tao's cost. We intend to produce our own purified water by December 1999.
If our costs to produce the water are greater than Han Tao's costs, in
which event our financial results could be adversely affected.
We Depend On Certain Key Personnel To Manage Our Company
We are dependent on the continued services of certain members of our
management team, including Tuan-Yuan Hu, our Chief Executive Officer with whom
we have an employment agreement. The loss of, or inability to replace, any key
personnel could have a material adverse effect on our business.
We Could Be Liable For Personal Injury Claims Resulting From Product Defects
We are engaged in a business which could expose us to possible liability
claims from others, including personal injury claims for providing water that
injures or sickens the user. We maintain insurance coverage that we believe is
typical for companies in our industry. There can be no assurance, however, that
our insurance will be sufficient to cover potential claims or that an adequate
level of coverage will be available in the future on acceptable terms.
It May Be Difficult To Serve Us With Legal Process Or Enforce Judgments Against
Us Or Our Management
We are a British Virgin Islands holding company, and all of our assets are
located in Taiwan. In addition, all of our directors and officers are
non-residents of the United States, and all or a substantial portion of the
8
<PAGE>
assets of these non-residents are located outside the United States. As a
result, it may not be possible to effect service of process within the United
States upon such persons. Moreover, there is doubt as to whether the courts of
the British Virgin Islands or Taiwan would enforce:
o judgments of United States courts against us, our directors or our
officers based on the civil liability provisions of the securities
laws of the United States or any state; or
o in original actions brought in the British Virgin Islands or Taiwan,
liabilities against us or other non-residents predicated upon the
securities laws of the United States or any state.
Our New Investors' Stock Value Will Be Diluted
New investors will incur an immediate and substantial reduction in the book
value per share of our common stock of approximately $2.44 per share between the
net tangible book value per share after the offering of $4.56 and the public
offering price of $7.00 per share. Our existing stockholders acquired their
shares of common stock at prices below $7.00 and, accordingly, new investors
will bear most of the risks inherent in an investment in us.
As A Non-U.S. Company, We Are Not Required To Provide Information As Quickly or
As Comprehensively As U.S. Companies
We are a foreign private issuer within the meaning of the rules under the
Securities Exchange Act of 1934, as amended. As such, we are not required to
file some reports such as proxy statements and insider trading reports and we do
not have to file other reports, such as annual reports, as quickly as U.S.
companies. Because of these differences, investors in the offering may not be
afforded the same information generally available to investors in U.S. public
companies.
A Total of 471,429, or 30%, of 0ur Total Outstanding Shares Are Restricted
from Immediate Resale But May Be Sold into the Market in the Near Future. This
Could Cause the Market Price of Our Common Stock to Drop Significantly, Even If
0ur Business Is Doing Well.
After this offering, we will have outstanding 1,571,429 shares of common
stock. This includes the 1,100,000 shares we are selling in this offering, which
may be resold in the public market immediately. The remaining 30% or 471,429
shares, of our total outstanding shares will become available for resale in the
public market in April 2000, subject to a lock up agreement with the
representative prohibiting the sale of these shares for one year from the date
of this prospectus. However, the representative can waive this restriction and
allow these shareholders to sell their shares at any time.
As restrictions on resale end, the market price could drop significantly if
the holders of these restricted shares sell them or are perceived by the market
as intending to sell them.
9
<PAGE>
FORWARD LOOKING STATEMENTS
This prospectus contains certain forward-looking statements that are based
on beliefs and assumptions of our management. Often, you can recognize these
statements because we use words such as "believe", "anticipate", "intend",
"estimate" and "expect" in the statements. Our actual performance in 1999 and
beyond could differ materially from the forward-looking statements contained in
this prospectus. However, we are not obligated to release publicly any revisions
to the forward-looking statements contained in this prospectus.
USE OF PROCEEDS
After payment of underwriting commissions and other expenses of the
offering, the net proceeds of the offering are estimated to be $6,449,000 or
$7,453,850 if the overallotment option is exercised. We expect to use
approximately:
o $1,385,000 to develop new bottling facilities;
o $700,000 for marketing expenses including the salaries and expenses of
newly hired sales and marketing personnel;
o $500,000 for equipment, including reusable water bottles;
o $2,700,000 to acquire other small bottling companies in Taiwan; and
o $1,164,000 for working capital.
We have not entered into any agreements to acquire any other companies.
There may be changes in our proposed use of proceeds due to changes in our
business. Proceeds not immediately needed will be invested in bank certificates
of deposit, insured bank deposit accounts or similar investments.
DIVIDEND POLICY
We do not intend to pay dividends on our common stock in the foreseeable
future. Instead, we will retain our earnings to finance the expansion of our
business and for general corporate purposes.
EXCHANGE RATES
We have prepared our financial statements in accordance with US GAAP and
have published these statements in NT, which is the legal tender currency of the
Republic of China. All references to "U.S. dollars", "dollars" or "$" are to
United States dollars. Conversion of amounts from NT to United States dollars
for the convenience of the reader has been made at the noon buying rate of the
Federal Reserve Bank on March 31, 1999 of $1.00 = NT33.17.
The following table sets forth certain information concerning exchange
rates between NT and U.S. dollars for the periods indicated:
Noon Buying Rate (1)
---------------------------------------
Period End Average(2) High Low
---------- ---------- ---- ---
Calendar Year (NT per US$)
1994 . . . . . . . . . . . . . . 26.29 26.43 27.09 26.02
1995 . . . . . . . . . . . . . . 27.29 26.51 27.55 25.17
1996 . . . . . . . . . . . . . . 27.52 27.48 27.95 27.17
1997 . . . . . . . . . . . . . . 32.80 29.06 32.80 27.34
1998 . . . . . . . . . . . . . . 32.27 33.50 35.00 32.05
1999 (through March 31) . . . . 33.17 32.88 33.20 32.13
(1) The noon buying rate in New York for cable transfers payable in foreign
currencies as certified for customs purposes by the Federal Reserve Bank of
New York.
(2) Determined by averaging the rates on the last business day of each month
during the relevant period.
10
<PAGE>
DILUTION
All information provided in the two dilution tables below has been reported
in United States dollars for the convenience of the reader using the noon buying
rate of the Federal Reserve Bank of New York on March 31, 1999 of NT33.17 to $1.
At March 31, 1999, the net tangible book value of our outstanding shares of
common stock was $718,566 or $1.52 per share. "Net tangible book value" per
share represents the total amount of our tangible assets, less the total amount
of our liabilities, divided by the number of shares of common stock outstanding
and has been prepared as if we acquired Hi Q Wason, Inc., the Taiwanese
corporation, as of March 31,1999. Without taking into account any changes in net
tangible book value after March 31, 1999, other than to give effect to the sale
of the shares of common stock offered hereby at an initial public offering price
of $7.00 per share, less underwriting discounts and commissions and estimated
costs of the offering, our net tangible book value at March 31, 1999 would have
been $7,167,566 or approximately $4.56 per share. This represents an immediate
increase in net tangible book value of $3.04 per share of common stock to our
existing stockholders and an immediate dilution of $2.44 per share to new
investors. "Dilution" per share represents the difference between the price to
be paid by the new stockholders and the net tangible book value per share of
common stock immediately after this offering.
The following table illustrates this per share dilution:
Initial public offering price per share $7.00
Net tangible book value per share before
the offering (1) $1.52
Increase in net tangible book value per share
attributable to new investors purchasing
in the offering $3.04
Net tangible book value per share after the offering $4.56
-----
Dilution per share to new investors $2.44
The following table sets forth the number of shares of common stock
purchased, the total consideration paid and the average price per share paid by
our existing stockholders as of March 31, 1999 and new investors purchasing the
shares of common stock offered hereby:
Average
Shares Purchased Total Consideration Price
Number Percentage Amount Percentage Per Share
------ ---------- ------ ---------- ---------
New investors 1,100,000 70.0% $7,700,000 92.7% $7.00
Existing
stockholders(1) 471,429 30.0% $ 602,954 7.3% $1.28
---------- ---- ---------- ----
TOTALS 1,571,429 100.0% $8,302,954 100.0%
(1) Computed as if we acquired Hi-Q Wason, Inc., the Taiwanese corporation, as
of March 31, 1999.
11
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization and short-term debt as of
March 31, 1999, and as adjusted capitalization, after deducting underwriting
discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
March 31, 1999 March 31, 1999
Historical (As Adjusted) (1)
---------- -----------------
$ (2) NT $ NT
----- -- ---- --
<S> <C> <C> <C> <C>
Current installments of
capital lease obligations 47,578 1,578,164 47,578 1,578,164
------ --------- ------ ---------
Capital lease obligations,
excluding current installments 71,810 2,381,944 71,810 2,381,944
Stockholders' equity (3)
Preferred stock, 5,000,000
no par value shares
authorized, no shares
issued -0- -0- -0- -0-
Common stock, 20,000,000
no par value shares
authorized, 471,429
shares outstanding,
1,571,429 shares
outstanding as adjusted (1) -0- -0- -0- -0-
Additional paid-in capital 602,954 20,000,000 7,051,954 233,913,310
Retained earnings 115,612 3,834,846 115,612 3,834,846
---------- ----------- ---------- ------------
Total stockholders' equity 718,566 23,834,846 7,167,566 237,748,156
---------- ----------- ---------- ------------
Total capitalization 790,376 26,216,790 7,239,376 240,130,100
========== =========== ========== ============
</TABLE>
(1) As adjusted to reflect the sale of 1,100,000 shares of common stock offered
hereby at an offering price of $7.00 per share and the application of the
net proceeds. See "Use of Proceeds."
(2) Translated into United States dollars solely for the convenience of the
readers using the noon buying rate of the Federal Reserve Bank of New York
on March 31, 1999 of NT33.17 to $1.
(3) The historical stockholders' equity information represents our consolidated
stockholders' equity as if we owned 100% of the common shares of Hi-Q
Wason, Inc. (Taiwan) as of March 31, 1999.
12
<PAGE>
SELECTED FINANCIAL DATA
We prepare our financial statements in accordance with US GAAP. The
following summary statement of operations data for the years ended December 31,
1998, 1997 and 1996 and the balance sheet data as of December 31, 1998 and 1997
were derived from our audited financial statements included elsewhere in this
prospectus. The following summary statement of operations data for the period
from November 20, 1995 (inception) to December 31, 1995 and the balance sheet
data as of December 31, 1996 and 1995 was derived from our audited financial
statements, not included in this prospectus. The following summary statement of
operations data for the three months ended March 31, 1999 and 1998, and the
selected balance sheet data as of March 31, 1999 was derived from our unaudited
financial statements included elsewhere in this prospectus and, in our opinion,
includes all adjustments, consisting only of normal recurring adjustments,
necessary to fairly state this information. The results of operations for these
interim periods are not necessarily indicative of the results that may be
expected for the full year. Since the information presented below is only a
summary and does not provide all of the information contained in our financial
statements, including the related notes, you should read "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements.
13
<PAGE>
<TABLE>
<CAPTION>
Three-months ended March 31, Years ended December 31,
----------------------------- -----------------------------------------------------------
1999 1998 1998 1997 1996 1995(1)
------------- ---- ----------------- ---- ---- ------
$(2) NT NT $(2) NT NT NT NT
---- -- -- ---- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues 231,420 7,676,197 5,053,631 912,971 30,283,239 19,784,732 9,187,588 170,640
Cost of revenues (89,027) (2,953,039) (2,186,780) (339,870) (11,273,488) (8,330,002) (4,451,269) (798,891)
Selling, general and
administrative expense (106,055) (3,517,829) (2,448,342) (395,424) (13,116,209) (10,088,498) (5,581,969) (657,751)
Operating income (loss) 36,338 1,205,329 418,509 177,677 5,893,542 1,366,232 (845,650) (1,286,002)
Other income (expense),
net (3,650) (121,079) (27,011) (9,257) (307,068) (115,305) 10,815 1,192
Income tax expense (8,172) (271,063) (97,874) (42,534) (1,410,847) (305,250) -0- -0-
Net income (loss) 24,516 813,187 293,624 125,886 4,175,627 945,677 (834,835) (1,284,810)
Basic earnings (loss)
per common share 0.05 1.72 0.62 0.27 8.86 2.01 (1.77) (2.73)
Weighted average common
shares outstanding(3) 471,429 471,429 471,429 471,429 471,429 471,429 471,429 471,429
March 31, 1999 Years ended December 31,
---------------- --------------------------------------------------------------
1998 1997 1996 1995(1)
----------------------- ---- ---- ------
$(2) NT $(2) NT NT NT NT
---- -- ---- -- -- -- --
Balance sheet data:
Working capital 127,233 4,220,346 45,442 1,507,324 6,207,750 (2,375,014) 1,083,459
Property and equipment,
net 679,308 22,532,647 688,711 22,844,554 13,193,564 5,339,769 2,451,331
Total assets 1,016,221 33,708,051 936,446 31,061,917 21,397,061 8,887,655 5,348,568
Capital lease obligations
and short-term
borrowings 119,388 3,960,108 132,456 4,393,576 1,267,400 5,472,089 -0-
Stockholders' equity 718,566 23,834,846 693,447 23,001,659 18,826,032 2,880,355 3,715,190
</TABLE>
(1) Period from November 20, 1995 (inception) to December 31, 1995.
(2) Translated into United Stated dollars solely for the convenience of the
readers using the noon buying rate of the Federal Reserve Bank of New York
on March 31, 1999 of NT33.17 to $1.
(3) Represents the shares we issued to acquire Hi-Q Wason, Inc., the Taiwanese
corporation, in April 1999. See "Our History and Offices."
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
We were incorporated and began operations in 1995. Our revenue consists
primarily of the sale of bottled water and the related sale or rental of water
coolers. As of December 31, 1998, we served an installed base of approximately
5,000 water coolers as compared to 3,500 at December 31, 1997. The growth in
customer accounts resulted in increased revenue during 1998, which we attribute
to an effective customer retention and referral program and increased customer
water consumption. We anticipate that our customer base and revenue will
continue to expand as sales of bottled water increase and we expand into new
markets.
Transportation expenses comprise the largest controllable component of our
variable expenses. Transportation expenses include truck drivers' salaries and
bonuses, lease expenses and fuel, insurance, repair and maintenance expenses
associated with our delivery trucks.
Depreciation and amortization expenses consist primarily of the
depreciation of our delivery trucks, water coolers, bottles and the bottling
equipment. Depreciation and amortization are expected to increase as we continue
to purchase additional assets.
Bottled water sales are subject to seasonal variations with decreased sales
during cold weather months and increased sales during warm weather months. Water
cooler rentals are typically paid monthly and do not reflect any seasonal
effects.
Results of Operations
Three Month Period Ended March 31, 1999 and 1998
Revenue. Total revenue for the three month period ended March 31, 1999
increased 52% to NT7,676,000 from NT5,054,000 in the comparable period in 1998.
Although we are unable to quantify these increses we believe they resulted from
our increased emphasis upon our customer retention program, developing new
customers and increased water consumption from existing customers. Bottled water
sales increased from NT4,698,000 in 1998 to NT7,064,000 in the 1999 period,
which represented an increase of 50%. Our marketing efforts increased our water
cooler sales and rental income 72% to NT612,000 in the 1999 period from
NT355,000 in the 1998 period. We believe that as a percentage of sales, water
cooler sales and rental income will remain at approximately 8% of sales.
Cost of Revenue. Cost of revenue increased from NT2,187,000 in 1998 to
NT2,953,000 in 1999 which represents an increase of 35%. Cost of bottled water
sales increased 31% to NT2,596,000 in 1999 from NT1,989,000 in 1998. Cost of
water cooler sales and rentals increased to NT357,000 in 1999 from NT197,000 in
1998 as a result of increased water cooler and rental income. The increase in
cost of revenue was due to increased sales of NT480,000 and increased
depreciation and rental expenses of NT2,622,000 resulting from our new
facilities in Hsinchu, Taiwan. Cost of water sales included NT700,000 and
NT515,100 for water purification fees for 1999 and 1998, respectively, charged
by Han Tao Pure Water Proprietor, a company that holds a license to produce
purified water, which is wholly-owned by our Chief Executive Officer.
15
<PAGE>
We have a contract under which Han Tao provides purified water to us at Han
Tao's cost. We recently applied for our own water purification license and
expect to obtain it by December 1999. When we obtain the license, we will
terminate our contract with Han Tao.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to NT3,518,000 in 1999 from NT2,448,000 in
1998. This is primarily due to an increase in employee costs of NT314,000 and
an increase in depreciation and insurance costs of NT269,000. The remaining
increase of NT287,000 relates to various other costs.
Operating Income. Operating income increased to NT1,205,000 in 1999 from
NT418,000 in 1998. As a percentage of sales, operating income increased to 16%
for the three months ended March 31, 1999 from 8% during the same period in
1998. The increase in operating income was due to increased sales volume and
increased gross profit and was somewhat offset by increased personnel costs and
depreciation expenses due to the expansion of our operations. We believe that
operating income will continue to increase as our sales increase.
Interest Expense. Interest expense increased from NT29,000 for the
three-month period of 1998 to NT109,000 in the same period in 1999. This
increase was primarily due to new capital leases entered into for production
equipment through sale-leaseback transactions in the last half of 1998. We were
not charged any interest on our short-term borrowings from our Chief Executive
Officer in 1999 or 1998. The short-term borrowings from our Chief Executive
Officer were fully paid as of March 31, 1999. We do not anticipate borrowing
funds from our Chief Executive Officer in the future.
Income Taxes. Our effective income tax rate remained consistent at 25% in
both 1999 and 1998, and we expect to remain at 25% in the future.
Net Income. Net income increased from NT293,624 (NT0.62 per share) in 1998
to NT813,187 (NT1.72 per share) in 1999 due to the factors described above.
Years Ended December 31, 1998 and 1997
Revenue. Total revenue increased 53% to NT30,283,000 from NT19,785,000 in
1997. Bottled water sales increased from NT17,335,000 in 1997 to NT27,946,000 in
1998, which represented an increase of 61%. Water cooler sales and rental income
decreased slightly to NT2,337,000 in 1998 from NT2,449,000 in 1997. We believe
this increase in total revenue was primarily due to obtaining new customers and
opening our new bottling facilities in Hsinchu.
Cost of Revenue. Cost of revenue increased from NT8,330,000 in 1997 to
NT11,273,000 in 1998, which represents an increase of 35%. Cost of bottled water
sales increased 40% to NT9,740,000 in 1998 from NT6,969,000 in 1997. Cost of
water cooler sales and rentals increased to NT1,534,000 in 1998 from NT1,361,000
from 1997 as a result of increased water cooler costs. The increase in cost of
revenue was due to an increase in sales of bottled water and increased
depreciation of NT883,000 and overhead expenses of NT1,860,000 resulting from
the new facilities in Hsinchu. Cost of water sales include NT3,134,000 and
NT2,176,000 for water purification fees for 1998 and 1997, respectively, charged
by Han Tao Pure Water Proprietor.
16
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of sales, decreased to 43% or
NT13,116,000 during 1998 from 51% or NT10,088,000 in 1997. This decrease was
primarily due to sales increases without proportional increases in fixed
expenses such as depreciation and salaries.
Operating Income. Operating income increased to NT5,894,000 during 1998
from NT1,366,000 in 1997. As a percentage of sales, operating income increased
to 19% in 1998 from 7% in 1997. The increase in operating income is due to
increased sales volume and increased gross profit. We believe that operating
income will continue to increase as sales increase.
Interest Expense. Interest expense increased from NT127,000 in 1997 to
NT227,000 in 1998. This is primarily due to a new capital lease entered into for
production equipment through a sale-leaseback transaction in 1998. During 1998
and 1997, we also had average outstanding borrowings from our Chief Executive
Officer of approximately NT1,500,000 and NT2,700,000. The funds were loaned to
us on an interest-free basis and were used for working capital.
Income Taxes. Our effective income tax rate increased from 24% in 1997 to
25% in 1998. The effective tax rate in 1997 was slightly lower than our
statutory rate of 25% due to a reversal of the deferred tax asset valuation
allowance of NT67,000.
Net Income. Net income increased from NT946,000 (NT2.01 per share) in 1997
to NT4,176,000 (NT8.86 per share) in 1998 due to the factors described above.
Years Ended December 31, 1997 and 1996
Revenue. Total revenue increased 115% to NT19,785,000 from NT9,188,000 in
1996. Bottled water sales increased from NT7,898,000 in 1996 to NT17,335,000 in
1997, which represented an increase of 120%. Water cooler sales and rental
income increased 90% to NT2,449,000 in 1997 from NT1,290,000 in 1996. We believe
the increase was primarily due to obtaining new customers, the retention of
existing customers and increases in consumption of bottled water during 1997.
Cost of Revenue. Cost of revenue increased from NT4,451,000 in 1996 to
NT8,330,000 in 1997, which represents an increase of 87%. Cost of bottled water
sales increased 81% to NT6,969,000 in 1997 from NT3,842,000 in 1996. Cost of
water cooler sales and rentals increased to NT1,361,000 in 1997 from NT610,000
in 1996 as a result of increased water cooler sales and rental income. The
increase in cost of revenue is primarily due to an increase in sales and an
increase in depreciation expenses of NT536,000. Cost of water sales include
NT2,176,000 andNT1,284,000 for water purification fees for 1998 and 1997,
respectively, charged by Han Tao Pure Water Proprietor.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of sales, decreased to 51% or
NT10,088,000 during 1997 from 61% or NT5,582,000 in 1996. This is primarily due
to sales increases without proportional increases in fixed expenses. The overall
increase from 1996 to 1997 is primarily due to increased depreciation of
delivery vehicles of NT276,000 and the addition of employees that increased
salary expenses by NT3,308,000.
17
<PAGE>
Operating Income. Operating income increased to NT1,366,000 during 1997
from an operating loss of NT846,000 in 1996. The increase in operating income
was due to increases in sales of bottled water and water coolers without
proportional increases in operating expenses such as salaries, depreciation and
office expenses.
Interest Expense. Total interest expense of NT127,000 was incurred in 1997
due to new capital leases for bottling equipment. There was no interest charged
in 1997 or 1996 relative to borrowings from our Chief Executive Officer of
approximately NT2,700,000 and NT4,200,000, respectively.
Income Taxes. We did not record a tax benefit on pre-tax losses of
NT835,000 in 1996. The taxable loss incurred in 1996 was not available for
future carryforward. We also provided full valuation allowance against our
deferred income tax asset balance as of December 31, 1996. The valuation
allowance was subsequently reversed in 1997, which reduced our effective tax
rate to 24% from the statutory rate of 25%.
Net Income (loss). Net income increased to NT946,000 (NT2.01 per share)
from a net loss of NT885,000 (NT1.77 per share) due to the factors described
above.
Liquidity and Capital Resources
We have generally financed our operations from a combination of vendor
financing, short-term borrowings from our Chief Executive Officer, capital
leases and cash generated from operations. We purchase water coolers and cooler
equipment through vendor financing. Generally, vendors extend credit without
interest charges for a period of 90 days to 120 days. We lease water processing
and bottling equipment and trucks from financial institutions under capital
lease arrangements.
Cash provided by operating activities for the period ended March 31, 1999
was NT1,167,000 compared to NT1,634,000 during the same period in 1998. The
decrease in our cash provided by operating activities was primarily the result
of an increase in other current assets due to costs incurred related to this
offering. The decrease in cash provided by operating activities was somewhat
offset by an increase in accounts payable as a portion of these costs were not
paid as of March 31, 1999.
During the three months ended March 31, 1999, we made capital expenditures
of NT762,000 mainly for reusable water bottles. We entered into a
sales-leaseback transaction to refinance bottling equipment and to provide funds
for other capital expenditures and to pay off the short-term borrowings from our
Chief Executive Officer, which was NT1,300,000 as of December 31, 1998.
Cash provided by operating activities was NT9,291,000 in 1998 compared to
cash used in operating activities of NT695,000 in 1997. The increase in our cash
provided by operating activities was primarily the result of increases in net
income and accrued liabilities and a decrease in prepaid assets. The increase in
cash provided by operating activities was somewhat offset by an increase in
accounts receivable. As of December 31, 1998, our working capital was
NT1,507,000 compared to NT6,208,000 in 1997. The decrease in working capital was
primarily due to capital expenditures made in 1998 using cash generated from
operations.
During 1998, we made capital expenditures of NT12,746,000 for bottling
equipment, reusable water bottles and delivery trucks. Most of the capital
expenditures were financed through cash generated from operations,
sale-leaseback transactions and short-term borrowings from our Chief Executive
Officer.
18
<PAGE>
Cash used by operating activities in 1997 was NT695,000 compared to
NT2,813,000 in 1996. The decrease in cash used by operating activities was
primarily the result of an increase in net income. The increase in net cash
provided by operating activities was somewhat offset by an increase in accounts
receivable and prepaid assets.
During 1997, we made capital expenditures of NT9,435,000 for bottling
equipment, reusable water bottles and delivery trucks. Most of the capital
expenditures were financed through the issuance of common stock and proceeds
from sale-leaseback transactions. Capital expenditures of NT3,559,000 in 1996
were financed by short-term borrowings from our Chief Executive Officer. These
borrowings were repaid in 1997 with the proceeds from a common stock issuance.
During 1997, we issued additional shares of our common stock for
NT15,000,000. We reduced borrowing from our Chief Executive Officer by
NT5,472,000 and made NT1,033,000 in capital lease principle payments.
Our anticipated capital requirements are limited to NT2,517,500 for 1999
and NT992,500 for 2000, primarily for equipment and vehicles. We anticipate that
we will be able to meet our ongoing cash requirements for at least the next 12
months with cash generated from operations and from proceeds of this offering.
Economy of Taiwan, Republic of China
The economy of Taiwan differs from the economies of other Asian countries.
Many productive assets in Taiwan are owned by small or mid-sized companies which
primarily export electronic components, computers and other originally
manufactured products to U.S. electronic companies. Up to now, the relatively
stable demand for these goods and a relatively low debt structure have enabled
these companies to endure the Asian financial crisis. The Taiwanese gross
domestic product grew at a 3.7% rate in the fourth quarter of 1998 according to
economic data released by the Taiwan Ministry of Economic Affairs and is
expected to grow at a 5% rate for 1999. We expect to benefit from the growth of
the Taiwanese economy in general and the increased consumption of bottled water
in particular. We do not believe inflation has had a material impact on our
operations.
Currency and Exchange Rate
Our functional currency is the NT. Substantially all of our revenue and
expenses are generated in Taiwan and are denominated in NT. Therefore,
fluctuations in exchange rates are not expected to have a significant impact on
our operations.
Year 2000 Issue
The "Year 2000 Issue" is typically the result of limitations of certain
software written using two digits rather than four to define the applicable
year. If software with date-sensitive functions is not Year 2000 compliant, it
may recognize a date using "00" as the year 1900 rather than the year 2000. The
Year 2000 Issue could result in a system failure or miscalculations causing
significant disruption of our operations, including, among other things,
ordering of products and accounts receivable and payable calculations. It is
possible that this disruption could continue for an extended period of time.
19
<PAGE>
We depend on information contained primarily in electronic format in
databases and computer systems maintained by third parties and us. The
disruption of third-party systems or our systems interacting with these third
party systems could prevent us from processing transactions and ordering
products and could materially adversely affect our business and results of
operations.
We have completed an audit of our internal systems and believe these
systems are Year 2000 compliant. We do not rely on any non-compliant third party
software and therefore third party non-compliance will not materially adversely
affect our business operations. We have upgraded our software and hardware to
the latest year 2000 compliant platform and tested our in-house developed
software in the new platform. In case our computerized information system fails,
we will rely on our manual information system, which is comprised of original
hand written or typed records, to process our transactions such as accounts
receivable, accounts payable, delivery schedules and invoicing. The manual
system will be very time consuming and labor intensive, therefore, additional
staff would be required if we have to use the manual system in the worst case
scenario. We believe that additional staff can be hired and trained within a
reasonable time frame to meet our requirements in case our information system
failed.
20
<PAGE>
OUR BUSINESS
Introduction
We are one of Taiwan's largest providers of bottled water delivered
directly to residences and businesses and have a leading market share position
in Taipei and Hsinchu, Taiwan. Our primary focus is on the bottling, marketing
and delivery of high quality drinking water in five-gallon and three-gallon
bottles to homes and offices, and the related sale or rental of water coolers.
We believe our bottled water market share in Taiwan to be between 6% and
12% and therefore, we expect to benefit from competitive advantages over smaller
operators, including what we believe to be more efficient distribution
operations, the availability of purchasing synergies, superior customer service
and better established infrastructure.
We deliver bottled water to an installed base of approximately 5,000 water
coolers in our markets. We believe that direct delivery bottled water companies
enjoy certain advantages over retailers of bottled water because:
o Customers are reluctant to change from one bottled water company to
another due to increased cost and inconvenience; and
o Competition tends to be limited due to the capital costs associated
with the purchase of water coolers, reusable water bottles, bottling
equipment and delivery trucks.
Our Industry
According to the Taiwan Beverage Industry Union:
o The Taiwan bottled water market grew at a compounded annual rate of
13.9% from 1986 to 1996, and is projected to grow at an annual rate of
16.5% between 1996 and 2001;
o Bottled water volume in Taiwan increased from 28.7 million gallons in
1980 to 242.85 million gallons in 1997, and is projected to reach 364
million gallons in 2001;
o Per capita bottled water consumption increased ten-fold in Taiwan from
1980 to 1997 with annual consumption increasing from 1.2 gallons per
capita in 1980 to 12.1 gallons per capita in 1997;
o Per capita consumption is expected to reach 18.2 gallons in Taiwan by
2001; and
o Bottled water sales in Taiwan totaled $104 million in 1997.
We believe that growth in bottled water sales has been and will continue to
be driven by the following factors:
21
<PAGE>
o Tap Water Concerns. The aging of the tap water supply infrastructure and
the high cost of adequately maintaining or replacing existing water
delivery systems have resulted in an increasein tap water contamination
incidences in recent years. Specifically according to published sources in
Taiwan, the failure rate for purity of drinking water from drinking
fountains in Taiwan increased from 46% to 54% between 1996 and 1999.
o Health Concerns. There is a movement in Taiwan, as well as in many
industrial nations, toward a healthier lifestyle and the consumption of
healthier products. Within the "healthy products" segment, clear or
naturally colored products are experiencing significant growth. Bottled
water is perceived as a product with strong health and fitness appeal.
o Taste Preferences. The taste of tap water is affected by cleaning
substances used to filter water. Products used to sterilize tap water, such
as chlorine, are safe but often produce an undesirable after-taste and
consequently, many people prefer to drink bottled water.
o Favorable Demographics. Consumption of bottled water is much more prevalent
among younger consumers. We believe that, as younger consumers age and
their purchasing power increases, sales of bottled water will continue to
grow.
The bottled water industry is highly fragmented throughout the world. In
Taiwan, the bottled water market is comprised of approximately 500 companies
generating approximately NT3.4 billion of sales. Of these companies, according
to a Taiwan Beverage Union report, the five largest companies account for
approximately 20% of the total market, with the remainder comprised of small
regional and local companies. We believe that the industry in Taiwan will
consolidate due to the operating advantages of larger companies, disputes and
difficulties at many smaller, family-owned companies when the founder retires
and the pressure to meet improving water quality standards. With a significant
market share in Taiwan, we believe that we are well-positioned to benefit from
the growth and consolidation trends in the industry.
Our Business Strategy
We believe that the growth in bottled water sales stems from consumer
dissatisfaction with tap water and increased consumer health consciousness
resulting in the substitution of water for other less healthy beverages. We
expect to benefit from the growing demand for quality drinking water by
increasing our installed base of water coolers, increasing the water and related
products we offer through our delivery system and consolidating a part of the
highly fragmented bottled water industry in Taiwan. Specifically, we intend to
continue to pursue the following business strategies:
o Focus On The Water Cooler Segment Within The Growing Alternative To Tap
Water Market.
We believe that the overall growth of the bottled water industry and the
relatively low level of water cooler penetration in Taiwan compared to the
United States provide us with significant growth opportunities. We believe that
health concerns and problems with the taste and odor of tap water have generated
consumer demand for an alternative to tap water, driving consumers to
increasingly rely on bottled water and filtration systems in order to satisfy
their drinking water needs. We intend to take advantage of this growth in demand
by offering premium bottled water to the direct delivery water cooler segment.
22
<PAGE>
The water cooler segment enjoys higher margins, less competition and
greater operating leverage than the retail bottled water or the water filter
businesses. We believe that sales in this segment are less price sensitive than
retail sales of bottled water because the customer is generally more concerned
with service and convenience than price and price is not readily comparable due
to variations in charges for the water, the rental of equipment and the costs of
other supplies. In addition, there are cost and inconvenience factors associated
with changing bottled water suppliers. Furthermore, bottled water companies have
lower advertising costs than retailers of bottled water because consumers
generally do not select a bottled water provider on the basis of brand name.
Competition in the water cooler segment tends to be more limited than other
segments of the industry due to the capital costs associated with the purchase
of water coolers, reusable water bottles, bottling equipment and delivery
trucks. Finally, the significant growth potential in the bottled water market
allow industry participants to focus on attracting new customers rather than on
capturing market share from competitors.
o Pursue Strategic Acquisitions.
We intend to pursue an acquisition strategy which seeks to consolidate the
highly-fragmented Taiwanese bottled water industry. We believe our acquisitions
will be comprised of two segments: larger entities with more sophisticated
management, or "platforms", and smaller, less sophisticated entities known as
"fill-ins" or "spokes" which can be consolidated with platforms. Our approach to
acquiring companies in new markets will be to identify one of the larger bottled
water companies in a market as a platform acquisition, and complement it with
smaller fill-in acquisitions in neighboring or overlapping geographic
territories. We will be generally unwilling to enter a new market through
acquisition unless the company being acquired is one of the market share leaders
and provides the critical mass necessary to act as a platform in that market.
While the purchase price paid for a platform company may be higher than that for
a fill-in acquisitions, we believe we will be able to reduce our average
acquisition cost by acquiring the fill-in companies at more attractive prices
due to the limited strategic options available to these smaller operators. With
over 500 bottled water companies in Taiwan, we anticipate that, for the
foreseeable future, attractive acquisition opportunities will be available for
us.
We believe that consolidation will offer the following cost savings and
synergies:
o Decreased operating costs through elimination of duplicative
administrative costs;
o Decreased production and distribution costs through integration with a
larger, geographically adjacent entity, and the resulting achievement
of greater delivery route density;
o Decreased purchasing costs through realization of economies of scale;
o Improved management control through centralized accounting and
reporting systems;
o Improved marketing efficiency.
We are not currently negotiating any acquisitions, and there can be no
assurance we can successfully negotiate any acquisitions in the future.
o Leverage Existing Infrastructure.
Due to the fixed costs associated with bottled water delivery systems,
additional operating leverage can be achieved by increasing the number of
customers in any one route. We believe we will improve the amount of bottled
water delivered within a specific geographical area, which we refer to as "route
density" by increasing our overall customer base and increasing per capita
customer consumption. As we increase our route density we lower our
transportation costs, vehicle usage and labor time per bottle delivered. We also
intend to further use our route delivery systems to offer products which are
complementary to our bottled water, including cups, cooler sanitation services
and related products.
23
<PAGE>
o Provide Outstanding Customer Service.
We believe quality of service and reliability of delivery are the primary
competitive factors in the water cooler business. We intend to continue to
provide outstanding customer service by:
o reliably delivering bottled water on schedule;
o meeting customer shortages with the quick delivery of refills;
o providing regular maintenance and sanitation of water coolers; and
o effectively addressing other customer needs.
We monitor on a monthly basis the non-renewal rate of our water cooler
rental agreements, in an effort to continually enhance customer service. Our
non-renewal rate averaged approximately 1.6% per month in 1998 and 1.3% per
month for the three months ended March 31, 1999.
Business and Products
We generated approximately 92.25% of our 1998 revenue from the sale of
bottled water products and 7.5% from the sale or rental of water coolers. The
remaining .25% of 1998 revenue was generated from the sale of paper cups and
related products.
Bottled Water. We sell bottled water for water coolers in two sizes: a
five-gallon (19 liter) bottle and a three-gallon (12 liter) bottle. We also
offer a smaller package for residential customers who may not be able to lift
five- or three-gallon bottles or who may have storage constraints. We offer
water bottles in plastic packages that facilitate storage and that have
non-spill "closed system" caps, preventing water from spilling from the mouth of
the bottle during insertion or removal from the water cooler. While our pricing
varies from market to market, and we frequently offer promotional discounts in
certain markets, we charge on average approximately NT71 for a five-gallon
bottle of water.
We offer only premium drinking water which is drawn from local municipal
sources. The water is passed through a series of carbon filters, processed by
reverse osmosis, passed through a micron filter, ozonated and then bottled. As a
result, our bottled water has 99.9% of all impurities removed from it, including
its natural mineral content.
We have two bottling facilities located in Taipei and Hsinchu, Taiwan,
along with a separate distribution center in Tainan, Taiwan. The Taipei facility
occupies 4,000 square feet and employs 16, while the Hsinchu facility occupies
6,000 square feet and employs 11.
Water Coolers. We have an installed base of approximately 5,000 water
coolers in our markets. Customers usually purchase their water coolers, which
provides us with a relatively stable stream of revenue from the sale of bottled
water. In addition, our installed customer base creates operating efficiencies
that can be used to support additional water cooler installations at an improved
marginal profitability rate. While our pricing varies from market to market and
depends on the water cooler selected by the customer, our current average
monthly rental charge for water coolers is approximately NT363, and our average
sales price is approximately NT5,181.
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We purchase our water coolers from one of three suppliers. We strip down,
clean and redeploy returned water coolers prior to all new installations. Our
average cost per water cooler is approximately NT3003, and we estimate that the
average life of a water cooler is five years. The typical pay back period on a
water cooler investment, assuming only rental revenue, is approximately nine
months. In the event of termination of the rental agreement, water coolers can
be readily redeployed at a relatively low cost.
Customers
We have grown from an installed base of approximately 200 water coolers in
1995 to an installed base of approximately 5,000 water coolers as of December
31, 1998. No customer accounted for more than 10% of our revenue in 1998 or in
the three months ended March 31, 1999. Approximately 95% of our revenue in 1998
was derived from sales to commercial establishments, with the remaining 5%
attributable to residential customers. Our commercial customers are generally
larger established businesses, including firms listed on the Taiwan Stock
Exchange, smaller regional and local shops, offices, warehouses, production
facilities and many of Taiwan's international airlines.
Sales and Marketing
We market our products principally through yellow page advertisements,
newspaper advertisements, coupons, product sponsorship programs, direct mail and
various referral programs which are supported by the efforts of salaried sales
and marketing personnel. To supplement this effort, we solicit potential new
customers in specific geographical areas in which we desire to increase the
density of existing routes or in which we desire to establish new routes. A
potential new customer may be offered various introductory promotions including
a free trial offer. Our marketing activity emphasizes the benefits of bottled
water and the convenience of a water cooler.
An important part of our sales, marketing and customer service strategy is
our focus on retaining customers. We experienced an average non-renewal rate for
water cooler rental agreements of 1.6% per month in 1998 as compared to a 2.5%
average for the industry. Our primary strategy for minimizing non-renewal rates
is our focus on customer service. In addition, we employ marketing strategies to
retain customers who indicate they wish to discontinue receiving bottled water,
including commission payments to service representatives for the customers they
help to retain.
Distribution
As of December 31, 1998, we owned or leased 16 trucks used in our
distribution operations. The average cost per new truck is approximately
NT594,000, and we generally deliver to customers within a 90 minute drive from
our facilities. Each truck has a useful life of five years and can hold 100 to
120 five-gallon bottles. Our drivers are generally paid on a
per-delivered-bottle basis, promoting efficiency and therefore, higher
utilization of the delivery trucks. On average, a truck driver services
approximately 300 customers, who typically receive deliveries once a week. In
addition, our drivers actively generate sales and are compensated for each new
customer contract they originate.
We believe that one of the most important factors in the bottled water
business is delivery route efficiency. The average cost of local delivery per
bottle is over four times the cost of preparing a bottle for distribution,
whereas, the marginal distribution cost of an additional bottle on an existing
route is relatively low.
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Competition
We compete in the alternative to tap water market in two areas. First, we
compete directly with the approximately 500 bottled water companies in Taiwan.
This segment is highly fragmented with the vast majority of the companies being
operated as small entrepreneurial and family-owned businesses. We believe
quality of service and reliability of delivery are the primary competitive
factors in the bottled water business. Additionally, we believe that the capital
costs associated with the purchase of water coolers, bottling equipment and
delivery trucks create certain barriers to entry.
We also compete indirectly with companies that distribute water through
retail stores and vending machines. The competitive advantage of water coolers
over these alternative distribution channels is primarily based on the
convenience of home or office delivery and, to a lesser extent, price.
Similarly, we compete with providers of on-premises water filtration systems,
including systems distributed through retail outlets. The competitive advantages
of water coolers over filtration systems include better quality assurance of the
water, fewer maintenance requirements and the elimination of filter replacement
requirements.
Properties
We lease a 4,000 square foot bottling and office facility in Taipei, Taiwan
on a lease which expires in October 1999 at a monthly rental of NT70,000. We
also lease a 6,000 square foot bottling and office facility in Hsinchu, Taiwan
on a lease which expires in September 2004 at a monthly rental of NT60,000.
We believe that our bottling and distribution facilities are in good
operating condition and generally have sufficient capacity to handle current
sales volumes.
Employees
As of March 31, 1999, we had approximately 27 full-time employees, of which
15 were in sales, services and distribution, four in maintenance, water
production and warehousing and eight in administration. Our workforce is
non-unionized and temporary workers are used during peak demand periods. We
believe that we enjoy good relations with our employees.
Regulation
Our operations are subject to various laws and regulations, which require
us, among other things, to obtain licenses for our business, to pay annual
license and inspection fees and to comply with quality standards regarding our
bottled water, plants and equipment. We are subject to monthly inspections by
the Taiwan Department of Health, and our water must meet physical, biological
and chemical requirements set by the Department of Health. We believe that we
are currently in substantial compliance with these laws and regulations. In
addition, we do not believe that the cost of compliance with applicable laws and
regulations is material to our business. However, laws and regulations are
subject to change, and no assurance can be given that future actions by
governmental authorities will not have an adverse effect on our business.
We are in good standing with the International Bottled Water Association,
which mandates compliance with quality control standards worldwide.
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Enforceability of Civil Liabilities and Certain Foreign Issuer Considerations
We are a British Virgin Islands holding company, and all of our assets are
located in the Republic of China. In addition, all of our directors and officers
are non-residents of the United States, and all or a substantial portion of the
assets of these non-residents are located outside the United States. As a
result, it may be difficult for investors to effect service of process within
the United States upon these non-residents or to enforce against them judgments
obtained in United States courts, including judgments based upon the civil
liability provisions of the securities laws of the United States or any state
thereof. There is uncertainty as to whether courts of the Republic of China or
the British Virgin Islands would enforce:
o judgments of United States courts obtained against us or these
non-residents based on the civil liability provisions of the
securities laws of the United States or any state or
o in original actions brought in the Republic of China or the British
Virgin Islands, liabilities against us or these non-residents
predicated upon the securities laws of the United States or any state.
We have designated the Law Office of Gary A. Agron, 5445 DTC Parkway, Suite
520, Englewood, Colorado 80111, as our agent for service of process in the
United States with respect to this offering.
There are no treaties between the Republic of China and the United States,
nor between the British Virgin Islands and the United States providing for the
reciprocal enforcement of foreign judgments. However, the courts of the Republic
of China and the British Virgin Islands may accept a foreign judgment as
evidence of a debt due. An action may be commenced in the Republic of China or
the British Virgin Islands for recovery of this debt. However, a Chinese or
British Virgin Islands court will only accept a foreign judgment as evidence of
a debt due, if:
o the judgment is for a liquidated amount in a civil matter;
o the judgment is final and conclusive and has not been stayed or
satisfied in full;
o the judgment is not directly or indirectly for the payment of foreign
taxes, penalties, fines or charges of a like nature. In this regard, a
Chinese or British Virgin Islands court is unlikely to accept a
judgment of an amount obtained by doubling, trebling or otherwise
multiplying a sum assessed as compensation for the loss or damages
sustained by the person in whose favor the judgment is given;
o the judgment was not obtained by actual or constructive fraud or
duress;
o the foreign court has taken jurisdiction on grounds that are
recognized by the private international law rules in the Republic of
China as to conflict of laws in the Republic of China or common law
rules as to conflict of laws in the British Virgin Islands;
o the proceedings in which the judgment was obtained were not contrary
to the concept of fair adjudication;
o the proceedings in which the judgment was obtained, the judgment
itself and the enforcement of the judgment are not contrary to the
public policy of the Republic of China or the British Virgin Islands;
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<PAGE>
o the person against whom the judgment is given is subject to the
jurisdiction of the Chinese or the British Virgin Islands courts; and
o the judgment is not on a claim for contribution in respect of damages
awarded by a judgment that does not satisfy the above requirements.
Enforcement of a foreign judgment in the Republic of China or the British
Virgin Islands also may be limited or otherwise affected by applicable
bankruptcy, insolvency, liquidation, arrangement, moratorium or similar laws
relating to or affecting creditors' rights generally and will be subject to a
statutory limitation of time within which proceedings may be brought.
Under United States law, majority and controlling stockholders generally
have certain "fiduciary" responsibilities to minority stockholders. Shareholder
action must be taken in good faith and actions by controlling stockholders that
are obviously unreasonable may be declared null and void. While we believe there
are no material differences between the protection afforded to minority
stockholders of a company organized as an International Business Company under
the law of the British Virgin Islands from those generally available to
stockholders of corporations organized in the United States, there may be
circumstances where the British Virgin Islands law protecting the interests of
minority stockholders may not be as protective as the law protecting minority
stockholders in United States jurisdictions. Under British Virgin Islands law, a
shareholder of a company organized as an International Business Company under
the laws of the British Virgin Islands may bring an action against a company,
even if other stockholders do not wish to bring an action and even though no
wrong has been done to the shareholder personally. This is a representative
action, that is, an action on the shareholder's own behalf and on behalf of
other persons in his class, or similarly situated. Instances where
representative actions may be brought include:
* to compel a company to act in a manner consistent with its Memorandum
of Association and Articles of Association;
* to restrain directors from acting on resolutions, where notice of a
stockholders' meeting failed adequately to inform stockholders of a
resolution proposed at the meeting;
* to restrain a company, where it proposes to perform an act not
authorized by the Memorandum of Association and the Articles of
Association or to seek damages from a director to compensate a company
from the consequences of such an unauthorized act, or to recover
property of a company disposed of pursuant to such unauthorized act;
* to restrain a company from acting upon a resolution that was not made
in good faith and for the benefit of stockholders as a whole;
* to redress where a resolution passed at a stockholders' meeting was
not properly passed, for instance if it was not passed with the
necessary majority;
* to restrain a company from performing an act which is contrary to law;
and
* to restrain a company from taking any action in the name and for the
benefit of a company.
Such an action also may be brought against directors and promoters who have
breached their fiduciary duties to the company, though acts amounting to a
breach of a fiduciary duty can be ratified by a general meeting of stockholders,
in the absence of fraud. Such actions against directors and promoters only may
be taken, however, if such directors and promoters have power to influence the
action taken by a general meeting by means of, for instance, their votes as
stockholders, thereby preventing a company from suing them in the company's
name. Although British Virgin Islands law does permit a shareholder of a British
Virgin Islands company to sue its directors representatively or derivatively,
the circumstances in which any such action may be brought as set forth above may
result in the rights of stockholders of a British Virgin Islands company being
more limited than those of stockholders in a United States company.
28
<PAGE>
OUR MANAGEMENT
Officers and Directors
Information concerning each of our executive officers and directors is set
forth below:
Name Age Position
- ---- --- --------
Tuan-Yuan Hu 43 Chairman of the Board of Directors, Chief
Executive Officer and Chief Financial Officer
Yu Feng Cheng 34 Vice President--Marketing
Terry Tsao 45 Vice President--Operations
Ben-Yu Chow 76 Director
Ben-Yuan Chou 66 Director
F.C. Toyo Tsai 60 Director
Andrew Chu 28 Director
Directors hold office for a period of one year from their election at the
annual meeting of stockholders or until their successors are duly elected and
qualified. Officers are elected by, and serve at the discretion of, the Board of
Directors. Our audit committee consists of Messrs. Chou, Tsai and Chu, and our
compensation committee consists of Messrs. Chou, Hu and Chu.
Tuan-Yuan Hu founded our company in 1995 and has been our Chairman and
Chief Executive Officer since that time. He is also the owner of Han Tao Pure
Water Proprietor which provides purified water to us. From 1983 to 1993, he was
the Vice President--Operations for Hwa Seng Bottled Water Corporation, one of
the largest and oldest bottled water companies in Taiwan. From 1980 to 1983, Mr.
Hu was general manager of Hsing Feng Advertisement, Ltd., a Taiwan-based
advertising and marketing company.
Yu Feng Cheng joined us as our Vice President--Marketing in 1995. Her
responsibilities include marketing and sales, including advertising development,
direct mail and Yellow Page campaigns. From 1991 to 1995, Ms. Cheng attended and
graduated from Japan University in Japan with a Bachelor of Arts degree. From
1985 to 1991, she was employed by An-Ching Corporation, an investment services
company, as a marketing and customer service manager, managing a team of 25
customer representatives.
Terry Tsao joined us as our Vice President--Operations in 1995. Mr. Tsao is
responsible for the production of bottled water, scheduling of delivery drivers,
sales and promotional campaign execution and delivery routing. From 1992 to
1995, he was the regional manager of Hwa Seng Bottled Water Corporation, where
he was responsible for the daily operation of Hwa Seng's regional offices. From
1983 to 1992, Mr. Tsao was employed by First Bank (Taipei) as its office
manager. His duties included staff scheduling, customer services, administrative
tasks and peer performance evaluations. He graduated from Tan Chang University
in 1992 with a Bachelor of Science degree.
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<PAGE>
Ben-Yu Chow joined us as a director in 1999. He has served as a consultant
to the International Commercial Bank of China since 1989. From 1938 to 1989, Mr.
Chow was employed by the International Commercial Bank of China in a number of
capacities, including Senior Vice President and subsequently, Executive Vice
President. He served as President of Asia Trust and Investment Corporation and
Director of the National Credit Card Center during his employment with the
International Commercial Bank of China. Mr. Chow earned a Bachelor's degree in
economics from Central University in China.
Ben-Yuan Chou joined us as a director in 1999 and since 1997, has served as
Chairman of Chou's Enterprises, Ltd., a trading and finance company. From 1984
to 1997, Mr. Chou served as President of Chou's Enterprises, Ltd. From 1972 to
1984, he served as the Chairman of the Board for Singapore-based Asia Kingdoms
PTE, Ltd., a trading company. Mr. Chou earned a Bachelor's degree in economics
from Soo-Chow University.
F.C. Toyo Tsai joined us as a director in 1999. Since 1989, Mr. Tsai has
been the Chairman of Jen Tsong Lace Co., Ltd., a Taiwan-based lace manufacturer,
and a director of Triocean Textile Company. From 1954 to 1989, Mr. Tsai served
as President of Lian Zune Textile Co., Ltd.
Andrew Chu joined us as a director in 1999. Since 1997, Mr. Chu has served
as Chief Financial Officer for CPC International Investment Inc., which
specializes in corporate financial consulting for Asian companies. From 1994 to
1997, Mr. Chu served as the Chief Financial Officer of ProtoSource Corporation,
a Nasdaq-traded company.
Executive Compensation
The following table provides certain summary information concerning
compensation paid to our Chief Executive Officer for the years ended December
31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long Term Compensation Awards
------------------- -----------------------------
Other Restricted Shares All
Name and Annual Stock Underlying Other
Principal Position Year Salary Bonus Compensation Award(s) Options Compensation
------------------ ---- ------ ----- ------------ -------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Tuan-Yuan Hu......... 1998 NT1,200,000 0 0 0 0 0
Chief Executive 1997 NT1,200,000 0 0 0 0 0
Officer 1996 NT 600,000 0 0 0 0 0
</TABLE>
We have entered into a five year employment agreement with Mr. Hu which
expires in March 2004 and provides for an annual salary of NT3,980,400.
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1999 Stock Option Plan
In April 1999, we adopted a stock option plan which provides for the grant
of options to officers, directors and key employees. The purposes of the plan
are to attract and retain the best available personnel, to provide additional
incentives to our employees and to promote the success of our business.
We have reserved 300,000 shares of common stock for issuance under the
plan, which is administered by our Board of Directors. Under the plan, the Board
of Directors determines which individuals will receive options, the time period
during which the options may be partially or fully exercised, the number of
shares of common stock that may be purchased under each option and the option
price. As of the date hereof, no options have been issued.
The per share exercise price of the common stock subject to options must
not be less than the fair market value of the common stock on the date the
option is granted. The stock options are subject to anti-dilution provisions in
the event of stock splits, stock dividends and the like. No stock options are
transferable by an optionee other than by will or the laws of descent and
distribution, and during the lifetime of an optionee, the option is only
exercisable by the optionee. The exercise date of an option granted under the
plan must not be later than ten years from the date of grant. Any options that
expire unexercised or that terminate upon an optionee's ceasing to be employed
by us will become available once again for issuance. Shares issued upon exercise
of an option rank equally with other shares then outstanding.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the holdings
of common stock (1) by each person who, as of this date, holds of record or is
known by us to hold beneficially or of record, more than 5% of our common stock,
(2) by each director, and (3) by all officers and directors as a group. The
address of each person is our address at 4th Floor, 52 Lane 232, Hu Lin Street,
Hsin Yi District, Taipei, Taiwan, Republic of China.
Percent Percent
Shares of Class of Class
Name Owned Prior to Offering After Offering
---- -------- ------------------ --------------
Tuan-Yuan Hu................ 157,143 33.3 10.0
Yu Feng Cheng............... -0- -0- -0-
Terry Tsao.................. -0- -0- -0-
Ben-Yu Chow................. -0- -0- -0-
Ben-Yuan Chou............... -0- -0- -0-
F.C. Toyo Tsai.............. -0- -0- -0-
Andrew Chu.................. -0- -0- -0-
Lai Ling Tse................ 137,498 29.2 8.8
Yuk Sun Tang................ 137,498 29.2 8.8
All executive officers and
directors as a group
(7 persons)................ 157,143 33.3 10.0
CERTAIN TRANSACTIONS
In April 1999, we entered into a ten-year contract with Han Tao Pure Waters
Proprietor, a company owned by Tuan-Yuan Hu, our Chief Executive Officer, to
provide purified water to us. Han Tao holds a license to produce purified water
and provides us with our purified water at NT20 per five gallons of water, which
is Han Tao's production cost. The contract does not require Han Tao to produce
or us to purchase water from the other party. We have applied and expect to
obtain by approximately December 1999 our own license to purify water although
we cannot so assure. The cost of the application was NT9,951, upon approval
water will remain available to us from the municipal water supply for
approximately NT6634 per month and no additional plant facilities will need to
be built as we will continue to use our existing facilities.
Any future transactions with related parties will be approved by a majority
of our disinterested directors.
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<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
We are authorized to issue 20,000,000 shares of no par value common stock,
of which 471,429 shares are outstanding as of the date of this prospectus. Each
share of common stock is entitled to one vote on all matters submitted to a vote
of the stockholders, and cumulative voting is not permitted. Upon issuance,
shares of common stock are not subject to further assessment or call. Subject to
the rights of any series of preferred stock that may be issued by us in the
future, holders of common stock are entitled to receive ratably such dividends
that may be declared by the Board of Directors out of legally available funds
and are entitled to share ratably in all assets remaining after payment of
liabilities in the event of our liquidation, dissolution or winding up. Holders
of common stock have no preemptive rights or rights to convert their common
stock into any other securities. The outstanding common stock is fully paid and
nonassessable.
Preferred Stock
Our Memorandum of Association authorizes the issuance of up to 5,000,000
shares of no par value preferred stock with such rights and preferences as may
be determined from time to time by our Board of Directors. Accordingly, under
the Memorandum of Association, the Board of Directors may, without stockholder
approval, issue preferred stock with dividend, liquidation, conversion, voting,
redemption or other rights which could adversely affect the voting power or
other rights of the holders of the common stock. The issuance of any shares of
preferred stock having rights superior to those of the common stock may result
in a decrease of the value or market price of the common stock and could further
be used by the Board of Directors as a device to prevent a change in our
control. We have no other anti-takeover provisions in our Memorandum of
Association. Holders of the preferred stock may have the right to receive
dividends, certain preferences in liquidation and conversion rights.
Shares Eligible for Future Sale
Before this offering, there has been no public market for our common stock.
Future sales of substantial amounts of common stock in the public market could
adversely affect prevailing market prices. Furthermore, since only a limited
number of shares will be available for sale shortly after the offering because
of the contractual and legal restrictions on resale described below, sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of the offering, we will have outstanding 1,571,429 shares
of common stock. Of these shares, 1,100,000 shares sold in the offering (plus
any shares issued upon exercise of the underwriters' overallotment option) will
be freely tradable without restriction under the Securities Act, unless
purchased by our "affiliates", such as officers, directors or 10% stockholders.
The remaining 471,429 shares outstanding are "restricted securities" within
the meaning of Rule 144 under the Securities Act. Restricted securities may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rule 144. Sales of restricted securities in the public
market, or the availability of such securities for sale, could adversely affect
the market price of the common stock.
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<PAGE>
All of our stockholders have entered into lock-up agreements with the
representative of the underwriters providing that they will not offer, sell,
contract to sell, pledge, hypothecate or grant any option to purchase or
otherwise dispose of our common stock or any securities exercisable for or
convertible into our common stock owned by them for a period of one year from
the effective date of the registration statement filed as a part of this
offering without the prior written consent of the representative of the
underwriters. As a result of these contractual restrictions, even though the
shares might be sold under the provisions of Rule 144, shares subject to lockup
agreements will not be salable until such agreements expire or are waived by the
representative of the underwriters. In addition to the lock-up agreements, all
471,429 shares of our outstanding securities may not be sold until at least
April 2000 under Rule 144.
In general, under Rule 144, a person who has beneficially owned restricted
securities for at least one year is entitled to sell within any three-month
period a number of shares that does not exceed the greater of:
o one percent of the number of shares of common stock then outstanding, which
will equal 15,714 shares immediately after the offering; or
o the average weekly trading volume of the common stock during the four
calendar weeks preceding the sale.
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the three months preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years, is entitled to sell
such shares without complying with the volume limitations of Rule 144.
We have granted demand and piggy-back registration rights covering 110,000
shares of common stock underlying the common stock purchase warrants to be
issued to the representative of the underwriters.
Transfer Agent
Corporate Stock Transfer, Inc., Denver, Colorado, is our transfer agent.
The transfer agent's address is 370-17th Street, Suite 2350, Denver, Colorado
80202-4614, and its telephone number is (303) 595-3300.
Exchange Controls and Other Limitations Affecting Stockholders
There are no exchange control restrictions in the Republic of China on the
repatriation of dividends by our subsidiaries. In addition, there are no
material British Virgin Islands laws that impose foreign exchange controls on us
or that affect the payment of dividends, interest or other payments to
non-resident holders of our capital stock. British Virgin Islands law and our
Memorandum of Association and Articles of Association impose no limitations on
the right of non-resident or foreign owners to hold or vote the common stock.
Differences in Corporate Law
Under the laws of most jurisdictions in the U.S., majority and controlling
stockholders generally have certain "fiduciary" responsibilities to the minority
stockholders. Stockholder action must be taken in good faith and actions by
controlling stockholders which are obviously unreasonable may be declared null
and void. British Virgin Islands law protecting the interests of minority
stockholders may not be as protective in all circumstances as the law protecting
minority stockholders in U.S. jurisdictions.
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<PAGE>
While British Virgin Islands law does permit a stockholder of a British
Virgin Islands company to sue its directors derivatively that is, in the name of
and for the benefit of our company and to sue a company and its directors for
his benefit and for the benefit of others similarly situated, the circumstances
in which any such action may be brought, and the procedures and defenses that
may be available in respect to any such action, may result in the rights of
stockholders of a British Virgin Islands company being more limited than those
of stockholders of a company organized in the U.S.
Our directors have the power to take certain actions without stockholder
approval, including an amendment of our Memorandum of Association or Articles of
Association or an increase or reduction in our authorized capital, which would
require stockholder approval under the laws of most U.S. jurisdictions. In
addition, the directors of a British Virgin Islands corporation, subject in
certain cases to court approval but without stockholder approval, may, among
other things, implement a reorganization, certain mergers or consolidations, the
sale, transfer, exchange or disposition of any assets, property, part of the
business, or securities of the corporation, or any combination thereof, if they
determine it is in the best interests of the corporation, its creditors, or its
stockholders. Our ability to amend our Memorandum of Association and Articles of
Association without stockholder approval could have the effect of delaying,
deterring or preventing our change in control without any further action by the
stockholders, including, but not limited to a tender offer to purchase the
common stock at a premium over then current market prices.
As in most U.S. jurisdictions, the board of directors of a British Virgin
Islands corporation is charged with the management of the affairs of the
corporation. In most U.S. jurisdictions, directors owe a fiduciary duty to the
corporation and its stockholders, including a duty of care, pursuant to which
directors must properly apprise themselves of all reasonably available
information, and a duty of loyalty, pursuant to which they must protect the
interests of the corporation and refrain from conduct that injures the
corporation or its stockholders or that deprives the corporation or its
stockholders of any profit or advantage. Many U.S. jurisdictions have enacted
various statutory provisions which permit the monetary liability of directors to
be eliminated or limited. Under British Virgin Islands law, liability of a
corporate director to the corporation is primarily limited to cases of willful
malfeasance in the performance of his duties or to cases where the director has
not acted honestly and in good faith and with a view to the best interests of
the corporation. However, under our Articles of Association, we will be
authorized to indemnify any director or officer who is made or threatened to be
made a party to a legal or administrative proceeding by virtue of being one of
our directors or officers, provided such person acted honestly and in good faith
and with a view to our best interests and, in the case of a criminal proceeding,
such person had no reasonable cause to believe that his conduct was unlawful.
Our Articles of Association also enable us to indemnify any director or officer
who was successful in such a proceeding against expense and judgments, fines and
amounts paid in settlement and reasonably incurred in connection with the
proceeding.
The above description of certain differences between British Virgin Islands
and U.S. corporate laws is only a summary and does not purport to be complete or
to address every applicable aspect of such laws. However, we believe that all
material differences are disclosed above.
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<PAGE>
TAXATION
The following is a summary of anticipated material U.S. federal income and
British Virgin Islands tax consequences of an investment in the common stock.
The summary does not deal with all possible tax consequences relating to an
investment in the common stock and does not purport to deal with the tax
consequences applicable to all categories of investors, some of which, such as
dealers in securities, insurance companies and tax-exempt entities, may be
subject to special rules. In particular, the discussion does not address the tax
consequences under state, local and other non-U.S. and non-British Virgin
Islands tax laws. Accordingly, each prospective investor should consult its own
tax advisor regarding the particular tax consequences to it of an investment in
the common stock. The discussion below is based upon laws and relevant
interpretations in effect as of the date of this Prospectus, all of which are
subject to change.
United States Federal Income Taxation
The following discussion addresses only the material U.S. federal income
tax consequences to a U.S. person, defined as a U.S. citizen or resident, a U.S.
corporation, or an estate or trust subject to U.S. federal income tax on all of
its income regardless of source making an investment in the common stock. For
taxable years beginning after December 31, 1996, a trust will be a U.S. person
only if:
o a court within the United States is able to exercise primary supervision
over its administration; and
o one or more United States persons have the authority to control all of its
substantial decisions.
In addition, the following discussion does not address the tax consequences
to a person who holds or will hold, directly or indirectly, 10% or more of the
common stock which we refer to as a "10% Stockholder". Non-U.S. persons and 10%
Stockholders are advised to consult their own tax advisors regarding the tax
considerations incident to an investment in the common stock.
A U.S. Investor receiving a distribution of the common stock will be
required to include such distribution in gross income as a taxable dividend, to
the extent of our current or or accumulated earnings and profits as determined
under U.S. federal income tax principles. Any distributions in excess of such
earnings and profits will first be treated, for U.S. federal income tax
purposes, as a nontaxable return of capital, to the extent of the U.S.
Investor's adjusted tax basis in the common stock, and then as gain from the
sale or exchange of a capital asset, provided that the common stock constitutes
a capital asset in the hands of the U.S. Investor. U.S. corporate stockholders
will not be entitled to any deduction for distributions received as dividends on
the common stock.
Gain or loss on the sale or exchange of the common stock will be treated as
capital gain or loss if the common stock is held as a capital asset by the U.S.
Investor. Such capital gain or loss will be long-term capital gain or loss if
the U.S. Investor has held the common stock for more than one year at the time
of the sale or exchange.
A holder of common stock may be subject to "backup withholding" at the rate
of 31% with respect to dividends paid on such common stock if such dividends are
paid by a paying agent, broker or other intermediary in the United states or by
a U.S. broker or certain United States-related brokers to such holder outside
the United States. In addition, the proceeds of the sale, exchange or redemption
of common stock may be subject to backup withholding, if such proceeds are paid
by a paying agent, broker or other intermediary in the United States.
36
<PAGE>
Backup withholding may be avoided by the holder of common stock if such
holder:
o is a corporation or comes within certain other exempt categories; or
o provides a correct taxpayer identification number, certifies that such
holder is not subject to backup withholding and otherwise complies with the
backup withholding rules.
In addition, holders of common stock who are not U.S. persons are generally
exempt from backup withholding, although such holders may be required to comply
with certification and identification procedures in order to prove their
exemption.
Any amounts withheld under the backup withholding rules from a payment to a
holder will be refunded or credited against the holder's U.S. federal income tax
liability, if any, provided that amount withheld is claimed as federal taxes
withheld on the holder's U.S. federal income tax return relating to the year in
which the backup withholding occurred. A holder who is not otherwise required to
file a U.S. income tax return must generally file a claim for refund,or, in the
case of non-U.S. holders, an income tax return, in order to claim refunds of
withheld amounts.
British Virgin Islands Taxation
Under the International Business Companies Act of the British Virgin
Islands as currently in effect, a holder of common stock who is not a resident
of the British Virgin Islands is exempt from British Virgin Islands income tax
on dividends paid with respect to the common stock and all holders of common
stock are not liable to British Virgin Islands income tax on gains realized
during that year on sale or disposal of such shares; the British Virgin Islands
does not impose a withholding tax on dividends paid by a company incorporated
under the International Business Companies Act.
There are no capital gains, gift or inheritance taxes levied by the British
Virgin Islands on companies incorporated under the International Business
Companies Act. In addition, the common stock is not subject to transfer taxes,
stamp duties or similar charges.
There is no income tax treaty or convention currently in effect between the
United States and the British Virgin Islands.
Republic of China Taxation
There is no direct taxation on our common stock holders under Chinese law.
In the event we distribute a dividend from our Taiwanese subsidiary to our
company we would be required to pay a 20% tax on the distribution. We do not
anticipate paying any dividends from the subsidiary level.
37
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
this date, the underwriters named below have agreed to purchase from us the
number of shares of common stock set forth opposite their names below.
Number of
Underwriters Shares
------------ ------
Nutmeg Securities, Ltd
..................................
---------
Total............................................... 1,100,000
The underwriting agreement provides that the obligations of the
underwriters to purchase and accept delivery of the shares of common stock
offered hereby are subject to approval by their counsel of certain legal
matters. The underwriters are obligated to purchase and accept delivery of all
the shares of common stock offered hereby (other than those shares covered by
the overallotment option described below) if any are purchased.
The underwriters initially propose to offer the shares of common stock
through other licensed dealers and directly to the public at the initial public
offering price set forth on the cover page of this prospectus less a concession
not in excess of $ per share. The underwriters may allow, and such dealers may
re-allow, to certain other dealers a concession not in excess of $____ per
share. After the initial offering of the common stock, the public offering price
and other selling terms may be changed by the representative of the underwriters
at any time without notice. The underwriters do not intend to confirm sales to
any accounts over which they exercise discretionary authority.
We will pay to the representative of the underwriters a nonaccountable
expense allowance of 3% of the purchase price of all common stock sold in the
offering and issue to the Representative common stock purchase warrants, which
we refer to as "Representative's Warrants", to purchase up to 110,000 shares at
$8.40 per share.
We have granted to the underwriters an option, exercisable within 45 days
after the date of this prospectus, to purchase, from time to time, in whole or
in part, up to an aggregate of 165,000 additional shares of common stock at the
initial public offering price less underwriting discounts and commissions. The
underwriters may exercise such option solely to cover overallotments, if any,
made in connection with the offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of such additional shares based on
such underwriter's percentage underwriting commitment as indicated above.
We have agreed to issue the Representative's Warrants to the representative
of the underwriters for a consideration of $100. The Representative's Warrants
are exercisable at any time in the four-year period commencing one year from the
date of this prospectus to purchase up to 110,000 shares of common stock for
$8.40 per share. The Representative's Warrants are not transferable, nor may
they be sold, hypothecated or pledged for one year from the date of this
prospectus except:
o to an underwriter or a partner or officer of an underwriter; or
o by will or operation of law.
During the term of the Representative's Warrants, the holder is given the
opportunity to profit from a rise in the market price of our securities. If we
file a registration statement relating to an equity offering under the
provisions of the Securities Act of 1933 at any time during the five-year period
following the date of this prospectus, the holders of the Representative's
Warrants or underlying common stock will have the right, subject to certain
conditions, to include in such registration statement, at our expense, all or
part of the underlying common stock at the request of the holders. Additionally,
we have agreed, for a period of five years commencing on the date of this
prospectus, on demand of the holders of a majority of the Representative's
Warrants or the common stock issued or issuable thereunder, to register
38
<PAGE>
the common stock underlying the Representative's Warrants one time at our
expense. The registration of securities pursuant to the Representative's
Warrants may result in substantial expense to us at a time when we may not be
able to afford such expense. The number of shares of common stock covered by the
Representative's Warrants and the exercise price are subject to adjustment under
certain events to prevent dilution.
We have also agreed with the representative of the underwriters:
o to allow an observer designated by the representative to attend our
board of directors meetings;
o to have the first right to handle Rule 144 sales for our stockholders.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments
that the underwriters may be required to make in respect thereof. We have also
agreed to:
o cause all of our stockholders to sign lockup agreements prohibiting them
from selling, transferring or conveying their shares to anyone for a period
of one year from the date of this prospectus without the written consent
of the representative;
o elect for five years as one of our directors a nominee proposed by the
representative; and
o grant the representative for three years the right of first refusal to
match the terms of any sale of securities offered by any other selling
agent.
Before the offering, there has been no established trading market for the
common stock. The initial public offering price for the shares of common stock
offered will be determined by negotiation among us and the representative of the
underwriters. Among the factors to be considered in determining the initial
public offering price were:
o the history of and the prospects for the industry in which we compete;
o our past and present operations;
o our historical results of operations;
o our prospects for future earnings;
o the recent market prices of securities of generally comparable
companies; and
o the general condition of the securities markets at the time of the
offering.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the securities,
including overallotment, stabilizing and short-covering transactions in such
securities, and the imposition of a penalty bid in connection with the offering.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by Harney Westwood & Riegels, as to British Virgin Islands law.
Certain legal matters in connection with the offering will be passed upon for us
by the Law Office of Gary A. Agron, Englewood, Colorado, and for the
underwriters by Gersten, Savage & Kaplowitz, LLP, New York, New York.
39
<PAGE>
EXPERTS
Our financial statements as of December 31, 1998 and 1997, and for each of
the years in the three-year period ended December 31, 1998, have been included
herein and in the registration statement in reliance upon the report of KPMG
Certified Public Accountants, appearing elsewhere herein, and upon the authority
of this firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement under the Securities Act, covering the common stock. As permitted by
the rules and regulations of the Commission, this prospectus does not contain
all of the information set forth in the Registration Statement and the exhibits.
For further information with respect to our company and the common stock,
reference is made to the Registration Statement and the exhibits, which may be
examined without charge at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C. 20549,
copies of which may be obtained from the Commission upon payment of the
prescribed fees.
We will be subject to the foreign private issuer informational requirements
of the Securities Exchange Act and therefore will be required to file reports,
and other information with the Commission. As a foreign private issuer, we are
exempt under the Exchange Act from, among other things, the rules prescribing
the furnishing and content of proxy statements and annual reports to
shareholders. In addition, our officers, directors and principal shareholders
are exempt from the reporting and short-swing profit recovery provisions set
forth in Section 16 of the Exchange Act. We also are not required under the
Exchange Act to file periodic reports and financial statements with the
Commission as frequently or as promptly as U.S. companies whose securities are
registered under the Exchange Act. Any reports we file may be inspected at the
public reference facilities of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. Copies of these materials may be obtained
at prescribed rates from the Commission at that address. The reports, proxy
statements and other information can also be inspected at the Commission's
regional offices at 7 World Trade Center, Suite 300, New York, New York 10048,
at Northwestern Atrium Center, 500 West Madison, Chicago, Illinois 60621 and on
the Commission's Web site at www.sec.gov.
We will furnish to our stockholders annual reports which will include
audited financial statements. We may also furnish to our stockholders quarterly
financial statements and other reports that may be authorized by our Board of
Directors.
40
<PAGE>
HI-Q WASON INC.
Financial Statements
December 31, 1998, 1997 and 1996
(With Independent Auditors' Report Thereon)
<PAGE>
INDEX TO FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996 Financial Statements
Independent Auditors' Report............................................ F-2
Balance Sheets as of December 31, 1998 and 1997......................... F-3
Statements of Operations for the years
ended December 31 1998, 1997 and 1996.................................. F-4
Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996....................................... F-5
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996....................................... F-6
Notes to Financial Statements........................................... F-7
March 31, 1999 and 1998 Quarterly Financial statements (Unaudited)
Balance Sheet as of March 31, 1999...................................... F-13
Statements of Operations for the three-months
ended March 31, 1999 and 1998.......................................... F-14
Statements of Cash Flows for the three-months
ended March 31, 1999 and 1998.......................................... F-15
Notes to Quarterly Financial Statements................................. F-16
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors
Hi-Q Wason, Inc.:
We have audited the accompanying balance sheets of Hi-Q Wason, Inc. as of
December 31, 1998 and 1997, and the related statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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
in the Republic of China, which are substantially equivalent to auditing
standards generally accepted in the United States. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hi-Q Wason, Inc. as of December
31, 1998 and 1997, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles in the United States.
The accompanying financial statements as of and for the year ended December 31,
1998 have been translated into United States dollars soley for the convenience
of the readers. We have audited the translation and, in our opinion, the
financial statements expressed in New Taiwan dollars have been translated into
United States dollars on the basis set forth in note 1 of the notes to the
financial statements.
/s/ KPMG Certified Public Accountants
--------------------------------------
KPMG Certified Public Accountants
January 23, 1999, except as to note
1 which is as of April 26, 1999
Taipei, Taiwan
F-2
<PAGE>
<TABLE>
<CAPTION>
HI-Q WASON, INC.
Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
-----------------------------
US$ NT$ NT$
--- --- ---
<S> <C> <C> <C>
Current assets:
Cash 28,303 938,791 1,189,299
Notes and accounts receivable, net of allowance for doubtful
accounts of NT$20,000 and NT$15,000, respectively 176,329 5,848,850 3,640,386
Inventories 23,291 772,579 685,896
Prepaid assets (including prepayments of NT$1,000,000 as
of December 31, 1997 to a related party for water purification) 5,826 193,238 2,247,995
Other current assets 145 4,805 94,571
----------- ----------- -----------
Total current assets 233,894 7,758,263 7,858,147
Property and equipment:
Equipment 209,242 6,940,548 3,712,261
Delivery trucks 178,529 5,921,822 4,084,397
Furniture and fixtures 81,487 2,702,898 1,595,947
Reusable water bottles 305,784 10,142,862 5,220,046
Water coolers held for rental 65,027 2,156,956 869,664
Less: accumulated depreciation (151,358) (5,020,532) (2,288,751)
----------- ----------- -----------
Net property and equipment 688,711 22,844,554 13,193,564
Refundable deposits 6,862 227,600 200,600
Deferred income tax assets 6,979 231,500 144,750
----------- ----------- -----------
Total assets 936,446 31,061,917 21,397,061
=========== =========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings from related party 39,192 1,300,000 --
Current installments of capital lease obligations 66,634 2,210,257 925,768
Accrued expenses and other current liabilities 23,932 793,809 275,353
Income tax payable 58,694 1,946,873 449,276
----------- ----------- -----------
Total current liabilities 188,452 6,250,939 1,650,397
Capital lease obligations, excluding current installments 26,630 883,319 341,632
Accrued pension 27,917 926,000 579,000
----------- ----------- -----------
Total liabilities 242,999 8,060,258 2,571,029
----------- ----------- -----------
Stockholders' equity:
Common stock, NT$10 par value, authorized, issued
and outstanding shares of 2,000,000 602,954 20,000,000 20,000,000
Retained earnings (accumulated deficit) 90,493 3,001,659 (1,173,968)
----------- ----------- -----------
Total stockholders' equity 693,447 23,001,659 18,826,032
----------- ----------- -----------
Commitments
Total liabilities and stockholders' equity 936,446 31,061,917 21,397,061
=========== =========== ===========
See accompanying notes to financial statements
F-3
<PAGE>
HI-Q WASON, INC.
Statements of Operations
Years ended December 31, 1998, 1997 and 1996
1998
-------------------- 1997 1996
US$ NT$ NT$ NT$
--- --- --- ---
Revenues:
Bottled water sales 842,511 27,946,072 17,335,408 7,897,594
Water cooler sales and rentals 70,460 2,337,167 2,449,324 1,289,994
----------- ----------- ----------- -----------
Total revenues 912,971 30,283,239 19,784,732 9,187,588
Costs and expenses:
Cost of bottled water sales (including
water purification fees of
NT$3,133,600, NT$2,176,100
and NT$1,283,890, respectively,
from a related party) 293,633 9,739,823 6,968,926 3,841,646
Cost of water cooler sales and rentals 46,237 1,533,665 1,361,076 609,623
Selling, general and administrative expenses 395,424 13,116,209 10,088,498 5,581,969
----------- ----------- ----------- -----------
Operating income (loss) 177,677 5,893,542 1,366,232 (845,650)
Interest expense (6,854) (227,342) (127,400) --
Interest income 215 7,120 7,292 10,815
Other income (loss), net (2,618) (86,846) 4,803 --
----------- ----------- ----------- -----------
Income (loss) before income taxes 168,420 5,586,474 1,250,927 (834,835)
Income tax expense (42,534) (1,410,847) (305,250) --
----------- ----------- ----------- -----------
Net income (loss) 125,886 4,175,627 945,677 (834,835)
=========== =========== =========== ===========
Basic earnings (loss) per common share 0.27 8.86 2.01 (1.77)
=========== =========== =========== ===========
Weighted average common shares outstanding 471,429 471,429 471,429 471,429
=========== =========== =========== ===========
See accompanying notes to financial statements
F-4
<PAGE>
HI-Q WASON, INC.
Statements of Changes in Stockholders' Equity
Years ended December 31, 1998, 1997 and 1996
Common stock Reained earnings
------------ (accumulated
Par value deficit) Total
Shares NT$ NT$ NT$
------ --- --- ---
Balance at January 1, 1996 500,000 5,000,000 (1,284,810) 3,715,190
Net loss -- -- (834,835) (834,835)
----------- ----------- ----------- -----------
Balance at December 1, 1996 500,000 5,000,000 (2,119,645) 2,880,355
Issuance of common shares 1,500,000 15,000,000 -- 15,000,000
Net income -- -- 945,677 945,677
----------- ----------- ----------- -----------
Balance at December 31, 1997 2,000,000 20,000,000 (1,173,968) 18,826,032
Net income -- -- 4,175,627 4,175,627
----------- ----------- ----------- -----------
Balance at December 31, 1998 2,000,000 20,000,000 3,001,659 23,001,659
=========== =========== =========== ===========
See accompanying notes to financial statements
F-5
<PAGE>
HI-Q WASON, INC.
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998
------------------ 1997 1996
US$ NT$ NT$ NT$
--- --- --- ---
Cash flows from operating activities:
Net income (loss) 125,886 4,175,627 945,677 (834,835)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Bad debt expense 192 6,366 15,000 --
Depreciation 87,526 2,903,220 1,593,005 670,221
Deferred income tax benefit (2,615) (86,750) (144,750) --
Loss (gain) on disposal of property and equipment 2,618 86,846 (12,121) --
Changes in operating assets and liabilities:
Notes and accounts receivable (66,772) (2,214,830) (1,686,696) (1,829,764)
Inventories (2,613) (86,683) (100,962) 220,591
Prepaid assets 61,946 2,054,757 (2,220,660) --
Other current assets 2,706 89,766 81,054 126,313
Accounts payable -- -- -- (1,610,045)
Accounts payable to related party -- -- (30,939) 30,939
Income tax payable 45,149 1,497,597 449,276 --
Accrued expenses and other current liabilities 15,630 518,456 106,081 145,939
Accrued pension 10,461 347,000 311,000 268,000
----------- ----------- ----------- -----------
Cash provided by (used in) operating activities 280,114 9,291,372 (695,035) (2,812,641)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (384,257) (12,745,818) (9,434,679) (3,558,659)
Proceeds from sale of property and equipment 3,158 104,762 -- --
Increase in refundable deposits (814) (27,000) (17,000) (3,200)
----------- ----------- ----------- -----------
Cash used in investing activities (381,913) (12,668,056) (9,451,679) (3,561,859)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Net decrease (increase) in short-term borrowings from
related party 39,192 1,300,000 (5,472,089) 5,472,089
Payments of capital lease obligations (50,462) (1,673,823) (1,032,600) --
Proceeds from sale-leaseback transactions 105,517 3,499,999 2,300,000 --
Issuance of common shares -- -- 15,000,000 --
----------- ----------- ----------- -----------
Cash provided by financing activities 94,247 3,126,176 10,795,311 5,472,089
----------- ----------- ----------- -----------
Net increase (decrease) in cash (7,552) (250,508) 648,597 (902,411)
Cash at beginning of year 35,855 1,189,299 540,702 1,443,113
----------- ----------- ----------- -----------
Cash at end of year 28,303 938,791 1,189,299 540,702
=========== =========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest 6,854 227,342 127,400 --
=========== =========== =========== ===========
See accompanying notes to financial statements
F-6
</TABLE>
<PAGE>
HI-Q WASON, INC.
Notes to Financial Statements
(1) Organization, Principal Activities and Basis of Presentation
Hi-Q Wason, Inc. (the "Company") was incorporated on July 4, 1995 under the
Company Law of the Republic of China (Taiwan). The Company commenced its
operations on November 20, 1995. The Company is primarily engaged in the
manufacture and sale of bottled water and sale and rental of water coolers
in Taiwan.
In April 1999, the stockholders of the Company established a holding
company in the British Virgin Islands to acquire 100% of the outstanding
shares of the Company. The newly formed company, Hi-Q Wason, Inc. ("BVI")
issued 471,429 shares of common stock to the stockholders of the Company in
exchange for their common share ownership in the Company on April 26, 1999.
The BVI intends to issue an additional 1,100,000 shares of common stock in
an initial public offering in the United States.
The accompanying financial statements have been prepared on a historical
cost basis to reflect the financial position and results of operations of
the Company in accordance with accounting principles generally accepted in
the United States. Earnings per share information has been prepared using
the outstanding common shares of BVI.
The financial statements are stated in New Taiwan dollars. Translations of
New Taiwan dollar amounts into United States dollars in the 1998 financial
statements are included solely for the convenience of the readers, using
the noon buying rate of the Federal Reserve Bank of New York on March 31,
1999 of NT$33.17 to US$1. The convenience translations should not be
construed as representations that the New Taiwan dollar amounts have been,
could have been, or could in the future be, converted into United States
dollars at this or any other rate of exchange.
(2) Summary of Significant Accounting Policies
Revenue recognition
The Company recognizes revenue from the sale of water coolers and bottled
water upon shipment. Income earned from the rental of water coolers is
recognized over the rental service period.
Inventories
Inventories primarily consist of water coolers. Inventories are valued at
the lower of cost or net realizable value. Cost determined is by the
first-in, first-out (FIFO) method.
Property and equipment
Property and equipment is stated at cost. The Company provides for
depreciation of plant and equipment utilizing the straight-line method over
the estimated useful lives of the assets. Equipment is depreciated over 5
to 10 years, furniture and fixtures over 5 to 8 years and reusable water
bottles and delivery trucks over 5 years.
F-7
<PAGE>
HI-Q WASON, INC.
Notes to Financial Statements
Water coolers held for rental are depreciated on a straight-line basis over
their estimated useful life of 5 years. Accumulated depreciation related to
these assets amounted to NT$240,793 (US$7,260) and NT$77,970 as of December
31, 1998 and 1997, respectively.
Assets recorded under capital leases are recorded at the lower of the
present value of the lease payments (including bargain purchase price) or
the fair value of the assets at the inception date of the lease.
Amortization of such assets is provided over the life of the lease for
leases that do not contain a bargain purchase option. For leases that
contain a bargain purchase option, amortization is provided over the
estimated useful lives of the assets.
Accrued pension
---------------
Pursuant to the ROC Labor Standards Law (the "Law") the Company has
established a defined benefit retirement plan for all full-time employees.
This plan provides for lump-sum retirement benefits to retiring employees
based on length of service, age and certain other factors. In addition, the
Law requires that the Company fund the plan annually at a rate of 2% to 15%
of total employee salaries. The plan is funded through deposits with the
Central Trust of China, a governmental institution that administrates
pension investments for all entities in Taiwan. As of December 31, 1998,
the Company had not yet contributed funds to the Central Trust of China.
In accordance with Statement of Financial Accounting Standards No. 87
"Employers' Accounting for Pensions," the Company records a pension accrual
in the financial statements based on the projected benefit obligation, less
the fair value of plan assets, plus or minus any unrecognized gains or
losses.
Advertising expense
-------------------
Advertising costs are expensed as incurred. Advertising costs, including
product promotion costs, amounted to NT$1,520,384 (US$45,836), NT$432,223
and NT$215,435 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Income taxes
------------
Income taxes are accounted for under the asset and liability. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax basis.
Deferred tax asset and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized as income
in the period that includes the enactment date.
F-8
<PAGE>
HI-Q WASON, INC.
Notes to Financial Statements
Accounting 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 date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
(3) Related Party Transactions
The Company borrows funds for operations from Tuan-Yuan Hu, the chief
executive officer and a stockholder of the Company, on an interest free
basis. The average outstanding borrowings from Tuan-Yuan Hu were
approximately NT$1,500,000 (US$45,222), NT$2,700,000 and NT$4,200,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. The
outstanding balance relating to these borrowings was NT$1,300,000
(US$39,192) and NT$0 as of December 31, 1998 and 1997, respectively. The
borrowings are due on demand from Tuan-Yuan Hu.
In 1997, the Company entered into a contract with Han Tao Wason Pure Water
Proprietor, a company wholly owned by Tuan-Yuan Hu, for water purification.
The contract expired on December 31, 1998. The contract stipulated that Han
Tao Pure Water Proprietor would perform water purification services for the
Company at cost over the contract period. The processing fee amounted to
NT$3,133,600 (US$94,471), NT$ 2,176,100 and NT$1,283,890 for the years
ended December 31, 1998, 1997 and 1996, respectively. As of December 31,
1997, the related prepaid fees amounted to $1,000,000. The Company expects
to renew this contract in 1999.
(4) Allowance for Doubtful Accounts
The movements in the allowance for doubtful accounts from January 1, 1996
to December 31, 1998 is shown below:
<TABLE>
<CAPTION>
1998
------------------ 1997 1996
US$ NT$ NT$ NT$
--- --- --- ---
<S> <C> <C> <C> <C>
Balance at beginning of year 452 15,000 - -
Bad debt expense 192 6,366 15,000 -
Less: accounts receivable written off (41) (1,366) - -
--- -------- ------- ------
Balance at end of year 603 20,000 15,000 -
=== ====== ====== ======
</TABLE>
F-9
<PAGE>
HI-Q WASON, INC.
Notes to Financial Statements
(5) Capital Leases
As of December 31, 1998 and 1997, assets recorded under capital leases were
as follows:
1998
---------------- 1997
US$ NT$ NT$
--- --- ---
Equipment 174,856 5,799,999 2,300,000
Less: accumulated depreciation (11,579) (384,091) (121,970)
-------- --------- ---------
163,277 5,415,908 2,178,030
======== ========= =========
The equipment recorded under capital leases resulted from sale-leaseback
transactions. Cash received from the sale-leaseback transactions equaled
the new book value of the assets on the dates of the leaseback
transactions.
Future minimum payments for capitalized leases were as follows as of
December 31, 1998:
US$ NT$
--- ---
1999 75,897 2,517,500
2000 29,921 992,500
-------- ----------
Total minimum lease payments 105,818 3,510,000
Less: amount representing interest (12,554) (416,424)
-------- ----------
Present value of net minimum lease payment 93,264 3,093,576
Less: current installments (66,634) (2,210,257)
-------- ---------
Long-term obligation 26,630 883,319
======== ==========
(6) Income Taxes
The Company is subject to income tax at a rate of 25%. Additionally, the
Company is subject to a retained earnings tax of 10% related to earnings
generated after December 31, 1997 if the earnings are not distributed to
the stockholders in the following year. The dividend distribution may be in
the form of stock or cash. The Company plans to avoid the payment of the
10% tax related to 1998 earnings by distributing a stock dividend and/or
employing other tax planning strategies.
The components of income tax expense (benefit) for the years ended December
31, 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998
---------------- 1997 1996
US$ NT$ NT$ NT$
--- --- --- ---
<S> <C> <C> <C>
Current income tax expense 45,149 1,497,597 450,000 -
Deferred income tax benefit (2,615) (86,750) (144,750) -
------- --------- ------- ----
Total income tax expense (benefit) 42,534 1,410,847 305,250 -
======= ========= ======= ====
F-10
</TABLE>
<PAGE>
HI-Q WASON, INC.
Notes to Financial Statements
The following is a reconciliation of income taxes calculated at the
statutory rate of 25% to the actual income tax expense for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998
-------------- 1997 1996
US$ NT$ NT$ NT$
--- --- --- ---
<S> <C> <C> <C> <C> <C>
Income tax expense (benefit) at 25% statutory rate 42,105 1,396,619 312,732 (208,709)
Expenses disallowed for tax purposes 429 14,228 59,518 -
Non-deductible operating loss - - - 141,709
Valuation allowance - - - 67,000
Reversal of valuation allowance - - (67,000) -
------- ---------- -------- --------
Actual income tax expense 42,534 1,410,847 305,250 -
======= ========== ======== ========
</TABLE>
A valuation allowance of NT$67,000 was recorded as of December 31, 1996 to
offset the related deferred income tax asset balance. The valuation
allowance was reversed in 1997.
The deferred income tax asset balance of NT$231,500 (US$6,979) and
NT$144,750 as of December 31, 1998 and 1997 relates to temporary
differences between the financial statement carrying amount of the accrued
pension balance and the tax basis of this balance. Management believes that
the Company will more likely than not recover the deferred income tax asset
balance through future earnings.
(7) Pension Plan
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 132, "Employers' Disclosures about Pensions and Others
Postretirement Benefits." The provisions of SFAS No. 132 revise employers'
disclosures about pension plans. The statement does not change the
measurement or recognition of these plans. The following provides a
reconciliation of the projected benefit obligation and the unfunded status
of the Company's pension plan.
<TABLE>
<CAPTION>
1998
-------------- 1997
US$ NT$ NT$
--- --- ---
<S> <C> <C> <C>
Projected benefit obligation at beginning of year 15,375 510,000 268,000
Service cost 9,436 313,000 294,000
Interest cost 1,056 35,000 17,000
(Gain) loss on projected benefit obligation 1,176 39,000 (69,000)
------- ------- -------
Projected benefit obligation at end of year 27,043 897,000 510,000
Fair value of plan assets - - -
Unfunded status of plan 27,043 897,000 510,000
Unrecognized actuarial gain 874 29,000 69,000
------- ------- -------
Accrued pension at end of year 27,917 926,000 579,000
======= ======= =======
F-11
</TABLE>
<PAGE>
HI-Q WASON, INC.
Notes to Financial Statements
The discount rate and rate of compensation increase used in the above
calculation was 6.5% and 5.0%, respectively, at both December 31, 1998 and
1997.
The components of net pension cost for the years ended December 31, 1998,
1997 and 1996 are summarized as follows:
1998
-------------- 1997 1996
US$ NT$ NT$ NT$
--- --- --- ---
Service cost 9,436 313,000 294,000 260,000
Interest cost 1,055 35,000 17,000 8,000
Amortization of actuarial gain (30) (1,000) - -
------ ------- ------- -------
Net pension cost 10,461 347,000 311,000 268,000
====== ======= ======= =======
(8) Commitments
The Company has entered into operating leases for office and manufacturing
space. Minimum lease payments in future years under these noncanceable
operating leases are as follows:
US$ NT$
--- ---
1999 22,309 740,000
2000 23,515 780,000
2001 24,118 800,000
2002 25,324 840,000
2003 16,883 560,000
------- ---------
112,149 3,720,000
======= =========
The Company recorded rental expense aggregating NT$798,000 (US$24,058),
NT$396,000 and NT$756,000 for the years ended December 31, 1998, 1997 and
1996, respectively.
(9) Fair Value of Financial instruments
The carrying amount of short-term borrowings to related party at December
31, 1998 and 1997 approximates fair value due to the short-term nature of
the borrowings.
(10) Segment Information
The Company classifies its operations into one operating segment, consumer
water products. For the years ended December 31, 1998, 1997 and 1996, all
sales were made to customers located in Taiwan. Additionally, all assets of
the Company were located in Taiwan as of December 31, 1998 and 1997.
F-12
<PAGE>
HI-Q WASON, INC.
Condensed Balance Sheet (Unaudited)
March 31, 1999
Assets US$ NT$
--- ---
Current assets:
Cash 27,798 922,066
Notes and accounts receivable
net of allowance for doubtful
accounts of NT$20,000 184,462 6,118,582
Inventories 21,494 712,964
Prepaid assets 6,599 218,896
Other current assets 81,884 2,716,099
----------- -----------
Total current assets 322,237 10,688,607
Property and equipment:
Equipment 204,808 6,793,487
Delivery trucks 178,529 5,921,822
Furniture and fixtures 81,487 2,702,898
Reusable water bottles 323,209 10,720,842
Water coolers held for rental 65,027 2,156,956
Less: accumulated depreciation (173,752) (5,763,358)
----------- -----------
Net property and equipment 679,308 22,532,647
Refundable deposits 6,966 231,047
Deferred income tax assets 7,710 255,750
----------- -----------
Total assets 1,016,221 33,708,051
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of capital
lease obligations 47,578 1,578,164
Accounts payable 57,277 1,899,875
Accrued expenses and other current
liabilities 22,552 748,036
Income tax payable 67,597 2,242,186
----------- -----------
Total current liabilities 195,004 6,468,261
Capital lease obligations, excluding
current installments 71,810 2,381,944
Accrued pension 30,841 1,023,000
----------- -----------
Total liabilities 297,655 9,873,205
----------- -----------
Stockholders' equity:
Common stock, NT$10 par value,
authorized, issued and
outstanding shares of 2,000,000 602,954 20,000,000
Retained earnings 115,612 3,834,846
----------- -----------
Total stockholders' equity 718,566 23,834,846
----------- -----------
Commitments
Total liabilities and
stockholders' equity 1,016,221 33,708,051
=========== ===========
See accompanying notes to condensed financial statements
F-13
<PAGE>
<TABLE>
<CAPTION>
HI-Q WASON, INC.
Condensed Statements of Operations (Unaudited)
Three-months ended March 31, 1999 and 1998
1999
----------------------- 1998
US$ NT$ NT$
--- --- ---
<S> <C> <C> <C>
Revenues:
Bottled water sales 212,950 7,063,566 4,698,188
Water cooler sales and rentals 18,470 612,631 355,443
---------- ---------- ----------
Total revenues 231,420 7,676,197 5,053,631
Costs and expenses:
Cost of bottled water sales
(including water purification fees of
NT$700,000 and NT$515,100,
respectively, from a related party) 78,257 2,595,780 1,989,288
Cost of water cooler sales and rentals 10,770 357,259 197,492
Selling, general and administrative expenses 106,055 3,517,829 2,448,342
---------- ---------- ----------
Operating income 36,338 1,205,329 418,509
Interest expense (3,287) (109,032) (28,811)
Interest income 54 1,800 1,800
Other loss, net (417) (13,847) --
---------- ---------- ----------
Income before income taxes 32,688 1,084,250 391,498
Income tax expense (8,172) (271,063) (97,874)
---------- ---------- ----------
Net income 24,516 813,187 293,624
========== ========== ==========
Basic earnings per common share 0.05 1.72 0.62
========== ========== ==========
Weighted average common shares outstanding 471,429 471,429 471,429
========== ========== ==========
See accompanying notes to condensed financial statements
F-14
<PAGE>
HI-Q WASON, INC.
Condensed Statements of Cash Flows (Unaudited)
Three-months ended March 31, 1999 and 1998
1999
--------------------- 1998
US$ NT$ NT$
--- --- ---
Cash flows from operating activities:
Net income 24,516 813,187 293,624
Adjustments to reconcile net income to cash
flows provided by operating activities:
Depreciation 31,503 1,044,940 499,814
Deferred income tax benefit (731) (24,250) (21,750)
Gain on disposal of equipment 417 13,847 --
Changes in operating assets and liabilities:
Notes and accounts receivable (7,529) (249,732) (685,222)
Inventories 1,798 59,615 183,948
Prepaid assets (774) (25,658) 501,694
Other current assets (81,739) (2,711,294) 9,401
Accounts payable 57,277 1,899,875 --
Income tax payable 8,903 295,313 119,624
Accrued expenses and other current liabilities (1,380) (45,773) 646,156
Accrued pension 2,924 97,000 87,000
---------- ---------- ----------
Cash provided by operating activities 35,185 1,167,070 1,634,289
---------- ---------- ----------
Cash flows from investing activities:
Additions to property and equipment (22,972) (761,980) (703,608)
Proceeds from sale of property and equipment 455 15,100 --
Increase in refundable deposits (104) (3,447) --
---------- ---------- ----------
Cash used in investing activities (22,621) (750,327) (703,608)
---------- ---------- ----------
Cash flows from financing activities:
Net decrease in short-term borrowings from related party (39,192) (1,300,000) --
Payments of capital lease obligations (33,235) (1,102,407) (158,689)
Proceeds from sale-leaseback transactions 59,359 1,968,939 --
---------- ---------- ----------
Cash used in financing activities (13,068) (433,468) (158,689)
---------- ---------- ----------
Net increase in cash (504) (16,725) 771,992
Cash at beginning of period 28,302 938,791 1,189,299
---------- ---------- ----------
Cash at end of period 27,798 922,066 1,961,291
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest 3,287 109,032 28,811
========== ========== ==========
See accompanying notes to condensed financial statements
F-15
</TABLE>
<PAGE>
HI-Q WASON, INC.
Notes to Quarterly Financial Statements (Unaudited)
(1) Organization and Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with the United States Securities and Exchange
Commission Regulation S-X for interim financial statements and do not
include all the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, the unaudited condensed financial statements include all
adjustments, consisting primarily of recurring accruals, considered
necessary for a fair presentation of the financial position and the results
of operations.
In April 1999, the stockholders of Hi-Q Wason, Inc. ("the Company")
established a holding company in the British Virgin Islands to acquire 100%
of the outstanding shares of the Company. The newly formed company, Hi-Q
Wason, Inc. ("BVI") issued 471,429 shares of common stock to the
stockholders of the Company in exchange for their common share ownership in
the Company on April 26, 1999. The BVI intends to issue an additional
1,100,000 shares of common stock in an initial public offering in the
United States.
The financial statements have been prepared on a historical cost basis to
reflect the financial position and results of operations of the Company in
accordance with accounting principles generally accepted in the United
States. Earnings per share information has been prepared using the
outstanding common shares of BVI.
The financial statements are stated in New Taiwan dollars. Translations of
New Taiwan dollar amounts into United States dollars in the 1999 financial
statements are included solely for the convenience of the readers, using
the noon buying rate of the Federal Reserve Bank of New York on March 31,
1999 of NT$33.17 to US$1. The convenience translations should not be
construed as representations that the New Taiwan dollar amounts have been,
could have been, or could in the future be, converted into United States
dollars at this or any other rate of exchange.
(2) Inventories
Inventories primarily consist of water coolers. Inventories are valued at
the lower of cost or net realizable value. Cost determined is by the
first-in, first-out (FIFO) method.
(3) Other Current Assets
Cost directly related to the pending initial public offering of
NT$2,637,692 (US$79,520) were included in other current assets as of March
31, 1999. These cost will be offset against the proceeds from the offering
as a reduction in additional paid-in capital. In the event that the pending
initial public offering is not finalized, these costs will be expensed in
the period it becomes probable that the offering will not occur.
(4) Subsequent Event
In April 1999, the Company adopted a stock option plan which provides for
the grant of options to officers, directors and key employees. The Company
has reserved 300,000 shares of common stock for issuance under the plan.
The Company's Board of Directors will determine the issuance of shares
under this plan. The Company intends to issue shares under the plan after
completion of the pending initial public offering in the United States.
F-16
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (1)
SEC Registration Statement................................ $ 2,885
NASD Filing Fee........................................... $ 1,478
NASDAQ Application Fee.....................................$ 10,000
Blue Sky Filing Fees.......................................$ 10,000
Blue Sky Legal Fees........................................$ 15,000
Printing Expenses..........................................$ 30,000
Legal Fees and Expenses....................................$ 85,000
Accounting Fees............................................$ 70,000
Transfer Agent Fees....................................... $ 5,000
Miscellaneous Expenses.....................................$ 20,637
---------
Total......................................................$ 250,000(2)
(1) All expenses, except the SEC registration fee and NASD filing fee, are
estimated.
(2) Does not include the underwriters' commissions and expense allowance.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As in most United States jurisdictions, the board of directors of a British
Islands company is charged with the management and affairs of the company, and
subject to any limitations to the contrary in the Memorandum of Association of
the Company, the Board of Directors is entrusted with the power to manage the
business and affairs of the Company (hereinafter the "Company" or the
"Registrant"). In most United States jurisdictions, directors owe a fiduciary
duty to the company and its stockholders, including a duty of care, pursuant to
which directors must properly apprise themselves of all reasonably available
information, and a duty of loyalty, pursuant to which they must protect the
interests of the company and refrain from conduct that injures the company or
its stockholders or that deprives the company or its stockholders of any profit
or advantage. Many United States jurisdictions have enacted various statutory
provisions which permit the monetary liability of directors to be eliminated or
limited. Under British Virgin Islands law, liability of a director to the
company is basically limited to cases of wilful malfeasance in the performance
of his duties or to cases where the director has not acted honestly and in good
faith and with a view to the best interests of the company. However, under its
Memorandum of Association, the Company is authorized to indemnify any person who
is made or threatened to be made a party to a legal or administrative proceeding
by virtue of being a director, officer or liquidator of the Company, provided
such person acted honestly and in good faith and with a view to the best
interests of the Company and, in the case of a criminal proceeding, such person
had no reasonable cause to believe that his conduct was unlawful. The Company's
Memorandum of Association also permits the Company to indemnify any director,
officer or liquidator of the Company who was successful in any proceeding
against expenses and judgments, fines and amounts paid in settlement and
reasonably incurred in connection with the proceeding, where such person met the
standard of conduct described in the preceding sentence.
The Company has provisions in its Memorandum of Association that insure or
indemnify, to the full extent allowed by the laws of the Territory of the
British Virgin Islands, directors, officers, employees, agents or persons
serving in similar capacities in other enterprises at the request of the
Company.
The Company may obtain a directors' and officers' insurance policy.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, the Registrant sold the following securities
which were not registered under the Securities Act, as amended.
In April 1999 the Registrant issued all 471,429 shares of its unregistered
outstanding common stock to the following persons in exchange for all of the
outstanding common stock of Hi-Q Wason, a Taiwanese corporation.
Name Number of Shares
---- ----------------
Tuan-Yuan Hu 157,143
Lai Ling Tse 137,498
Sun Hin Enterprises, Inc. 137,498
James Clark 39,290
With respect to the sales made, the Registrant relied on the securities
laws of Taiwan, where these transactions occurred, and on Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"). No advertising or
general solicitation was employed in offering the securities. The securities
were offered to a limited number of persons all of whom were business associates
of the Registrant or its executive officers and directors, and the transfer
thereof was appropriately restricted by the Registrant. All persons were capable
of analyzing the merits and risks of their investment and acknowledged that they
were acquiring the securities for investment and not with a view toward
distribution or resale and that they understood the speculative nature of their
investment.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibit No. Title
- ----------- -----
1.01 Form of Underwriting Agreement
1.02 Form of Representative's Warrant
3.01 Memorandum of Association of the Registrant (1)
3.02 Articles of Association of the Registrant (1)
5.01 Opinion of Harney Westwood & Riegels, as British Virgin Island
counsel to the Registrant
10.01 Taipei Facilities Lease (1)
10.02 Hsinchu Facilities Lease (1)
10.03 Han Tao Contract For Water Production (1)
10.04 Employment Agreement with Mr. Hu
23.01 Consent of Harney Westwood & Riegels (Included in 5.01, above.)
23.02 Consent of KPMG Certified Public Accountants (1)
23.03 Consent of KPMG Certified Public Accountants (1)
23.04 Consent of KPMG Certified Public Accountants
(1) Previously Filed
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes:
(a) That insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant, 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
II-2
<PAGE>
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 of 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.
(b) That subject to the terms and conditions of Section 13(a) of the
Securities Exchange Act of 1934, it will file with the Securities and
Exchange Commission such supplementary and periodic information, documents
and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority
conferred in that section.
(c) That any post-effective amendment filed will comply with the
applicable forms, rules and regulations of the Commission in effect at the
time such post-effective amendment is filed.
(d) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(e) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(f) 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.
(g) To provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriter to permit prompt delivery to each
purchaser.
(h) To provide to the Underwriter, at the closing specified in the
Underwriting Agreement, certificates in such denominations and registered
in such names as required by the Underwriter to permit prompt delivery to
each purchaser.
(i) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended (the "Act"), may be permitted to
directors, officers and controlling persons of the 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
II-3
<PAGE>
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 poliicy as expressed in the Act and will be governed by the
final adjudication of such issue.
(j) The undersigned registrant hereby undertakes that it will:
(i) For purposes of determining any liability under the
Securities Act of 1933, as amended, treat the information omitted from
the form of prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of prospectus filed by
the registrant under Rule 424(b)(1) or (4) or 497(h) under the
Securities Act as part of this registration statement as of the time
the Commission declared it effective;
(ii) For the purpose of determining any liability under the
Securities Act of 1933, as amended, treat each post-effective
amendment that contains a form of prospectus as a new registration
statement relating to the securities offered therein, and that
offering of such securities at that time as the initial bona fide
offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, as amended, the
Registrant hereby certifies that it has reasonable grounds to believe that it
meets all the requirements for filing on Form F-1 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Republic of China, on August 20, 1999.
HI-Q WASON, INC.
By: /s/ Tuan-Yuan Hu
-------------------------------------------
Tuan-Yuan Hu, Chief Executive Officer
Pursuant to the requirements of the Securities Act, as amended, this
registration statement has been signed below by the following persons on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Tuan-Yuan Hu Chairman of the Board of August 20, 1999
- -------------------------- Directors, Chief Executive
Tuan-Yuan Hu Officer, Chief Financial
Officer (Principal
Accounting Officer)
/s/ Yu Feng Cheng Vice President--Marketing August 20, 1999
- --------------------------
Yu Feng Cheng
/s/ Terry Tsao Vice President--Operations August 20, 1999
- --------------------------
Terry Tsao
/s/ Ben-Yu Chow Director August 20, 1999
- --------------------------
Ben-Yu Chow
/s/ Ben-Yuan Chou Director August 20, 1999
- --------------------------
Ben-Yuan Chou
/s/ F.C. Toyo Tsai Director August 20, 1999
- --------------------------
F.C. Toyo Tsai
/s/ Andrew Chu Director August 20, 1999
- --------------------------
Andrew Chu
/s/ Gary A. Agron Authorized Representative August 20, 1999
- -------------------------- in the United States
Gary A. Agron
II-5
<PAGE>
EXHIBIT INDEX
Exhibit No. Title
- ----------- -----
1.01 Form of Underwriting Agreement
1.02 Form of Representative's Warrant
3.01 Memorandum of Association of the Registrant (1)
3.02 Articles of Association of the Registrant (1)
5.01 Opinion of Harney Westwood & Riegels, as British Virgin Islands
counsel to the Registrant
10.01 Taipei Facilities Lease (1)
10.02 Hsinchu Facilities Lease (1)
10.03 Han Tao Contract For Water Production (1)
10.04 Employment Agreement with Mr. Hu
23.01 Consent of Harney Westwood & Riegels (Included in 5.01, above.)
23.02 Consent of KPMG Certified Public Accountants (1)
23.03 Consent of KPMG Certified Public Accountants (1)
23.04 Consent of KPMG Certified Public Accountants
- ---------------
(1) Previously Filed
Exhibit 1.01
HI-Q WASON, INC.
1,100,000 Shares of Common Stock
UNDERWRITING AGREEMENT
----------------------
________________, 1999
Nutmeg Securities, Ltd.
495 Post Road East
Westport, Connecticut 06880
Gentlemen:
HI-Q Wason, Inc., a corporation organized under the laws of the British
Virgin Islands (the "Company"), hereby confirms its agreement with Nutmeg
Securities, Ltd. ("Nutmeg"), as representative (the "Representative") of the
several underwriters listed on Schedule 1 annexed hereto (the "Underwriters"),
as set forth below.
The Company proposes to issue and sell to the Underwriters 1,100,000 shares
of the Company's common stock, [$___] par value (the "Common Stock"). The shares
of Common Stock being sold by the Company are referred to as the "Firm Shares."
In addition, for the sole purpose of covering over-allotments from the sale
of the Firm Shares the Company proposes to grant to the Underwriters an option
to purchase an additional 165,000 shares of Common Stock (the "Firm Option
Shares" or the "Option Shares"), all as provided in Section 2(c) of this
agreement (the "Agreement") and to issue to you the Representative's Warrant (as
defined in Section 2 hereof) to purchase certain further additional shares of
Common Stock. The Firm Shares and the Option Shares are collectively referred to
herein as either the "Shares" or the "Securities."
1. Representations and Warranties of the Company. The Company represents
and warrants to, and agrees with, the Underwriter that:
(a) A registration statement on Form F-1 (File No. 333-78899), with
respect to the Securities and the Representative's Warrant Securities (as
hereinafter defined), including a prospectus subject to completion, has been
filed by the Company with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act "), and one
or more amendments to that registration statement may have been so filed. Copies
of such registration statement and of each amendment heretofore filed by the
Company with the Commission have been delivered to the Underwriters. After the
execution of this Agreement, the Company will file with the Commission either
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(i) if the registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, a prospectus in the
form most recently included in that registration statement (or, if an amendment
thereto shall have been filed, in such amendment), with such changes or
insertions as are required by Rule 430A under the Act or permitted by Rule
424(b) under the Act and as have been provided to and approved by the
Underwriters prior to the execution of this Agreement, or (ii) if that
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Act, an amendment to that registration
statement, including a form of prospectus, a copy of which amendment has been
furnished to and approved by the Underwriters prior to the execution of this
Agreement. The Company also may file a related registration statement with the
Commission pursuant to Rule 462(b) under the Act for purposes of registering
certain additional Securities, which registration statement shall become
effective upon filing with the Commission (the "Rule 462(b) Registration
Statement"). As used in this Agreement, the term "Registration Statement" means
that registration statement, as amended at the time it was or is declared
effective, and any amendment thereto that was or is thereafter declared
effective, including all financial schedules and exhibits thereto and any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined), together with any Rule 462(b)
Registration Statement; the term "Preliminary Prospectus" means each prospectus
subject to completion filed with the Registration Statement (including the
prospectus subject to completion, if any, included in the Registration Statement
at the time it was or is declared effective); and the term "Prospectus" means
the prospectus first filed with the Commission pursuant to Rule 424(b) under the
Act or, if no prospectus is so filed pursuant to Rule 424(b), the prospectus
included in the Registration Statement. The Company has caused to be delivered
to the Underwriters copies of each Preliminary Prospectus and has consented to
the use of those copies for the purposes permitted by the Act. If the Company
has elected to rely on Rule 462(b) and the Rule 462(b) Registration Statement
has not been declared effective, then (i) the Company has filed a Rule 462(b)
Registration Statement in compliance with and that is effective upon filing
pursuant to Rule 462(b) and has received confirmation of its receipt and (ii)
the Company has given irrevocable instructions for transmission of the
applicable filing fee in connection with the filing of the Rule 462(b)
Registration Statement, in compliance with Rule 111 promulgated under the Act or
the Commission has received payment of such filing fee.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus. When each Preliminary Prospectus and each
amendment and each supplement thereto was filed with the Commission it (i)
contained all statements required to be stated therein, in accordance with, and
complied with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. When the Registration Statement was or is declared
effective, it (i) contained or will contain all statements required to be stated
therein in accordance with, and complied or will comply with the requirements
of, the Act and the rules and regulations of the Commission thereunder and (ii)
did not or will not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein not misleading.
When the Prospectus and each amendment or supplement thereto is filed
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with the Commission pursuant to Rule 424(b) (or, if the Prospectus or such
amendment or supplement is not required so to be filed, when the Registration
Statement containing such Prospectus or amendment or supplement thereto was or
is declared effective) and on the Firm Closing Date and any Option Closing Date
(as each such term is hereinafter defined), the Prospectus, as amended or
supplemented at any such time, (i) contained or will contain all statements
required to be stated therein in accordance with, and complied or will comply
with the requirements of, the Act and the rules and regulations of the
Commission thereunder and (ii) did not or will not include any untrue statement
of a material fact or omit to state any material fact necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. The foregoing provisions of this paragraph (b) do not
apply to statements or omissions made in any Preliminary Prospectus, 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 the Underwriters specifically for use therein.
(c) The Company and HI-Q Wason, Inc., incorporated under the Company
Law of the Republic of China (Taiwan) ("HI-Q Taiwan"), the Company's
wholly-owned subsidiary, are each duly incorporated and are validly existing as
corporations in good standing under the laws of their respective jurisdictions
of incorporation, and are duly qualified or authorized to transact business as
foreign corporations and are in good standing in each jurisdiction where the
ownership or leasing of its properties or the conduct of its businesses require
such qualification or authorization. Other than HI-Q Taiwan, the Company has no
subsidiaries.
(d) The Company and HI-Q Taiwan have full corporate power and
authority, and all necessary material authorizations, approvals, orders,
licenses, certificates and permits of and from all governmental regulatory
authorities, to own or lease its property and conduct its business as now being
conducted and as proposed to be conducted as described in the Registration
Statement and the Prospectus (and, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(e) Except for HI-Q Taiwan, the Company does not own, directly or
indirectly, an interest in any corporation, partnership, limited liability
company, joint venture, trust or other business entity.
(f) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus). All of the issued shares of
capital stock of the Company, have been duly authorized and validly issued and
are fully paid, nonassessable and free of preemptive rights. There are no
outstanding options, warrants or other rights granted by the Company to purchase
shares of its Common Stock or other securities, other than as described in the
Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus). The Firm Shares have been duly authorized, by all
necessary corporate action on the part of the Company and, when the Firm Shares
are issued and delivered to and paid for by the Underwriter pursuant to this
Agreement, the Firm Shares will be validly issued, fully paid, nonassessable and
free of preemptive rights and will conform to the description thereof in the
Prospectus (and, if the Prospectus is not in existence, the most recent
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Preliminary Prospectus). No holder of outstanding securities of the Company is
entitled as such to any preemptive or other right to subscribe for any of the
Securities, and no person is entitled to have securities registered by the
Company under the Registration Statement or otherwise under the Act other than
as described in the Prospectus (and, if the Prospectus is not in existence, the
most recent Preliminary Prospectus).
(g) The capital stock of the Company conforms to the description
thereof contained in the Prospectus (and, if the Prospectus is not in existence,
the most recent Preliminary Prospectus).
(h) All issuances of securities of the Company have been effected
pursuant to an exemption from the registration requirements of the Act. Except
as previously disclosed in writing to the Representative, no compensation was
paid to or on behalf of any member of the National Association of Securities
Dealers, Inc. ("NASD"), or any affiliate or employee thereof, in connection with
any such issuance.
(i) The financial statements of the Company included in the
Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus) fairly present the financial
position of the Company as of the dates indicated and the results of operations
of the Company for the periods specified. Such financial statements have been
prepared in accordance with generally accepted accounting principles in effect
in the United States of America, consistently applied, except to the extent that
certain footnote disclosures regarding unaudited interim periods may have been
omitted in accordance with the applicable rules of the Commission under the
Securities Exchange Act of 1934, as amended (the "1934 Act"). The financial data
set forth under the caption "Summary Financial Information" in the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) fairly present, on the basis stated in the Prospectus (or such
Preliminary Prospectus), the information included therein.
(j) KPMG Certified Public Accountants, which has audited certain
financial statements of the Company and HI-Q Taiwan and delivered its report
with respect to the financial statements included in the Registration Statement
and the Prospectus (and, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), is an independent public accountant with respect to the
Company as required by the Act and the applicable rules and regulations
thereunder.
(k) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), (i) except as otherwise
contemplated therein, there has been no material adverse change in the business,
operations, condition (financial or otherwise), earnings or prospects of the
Company, whether or not arising in the ordinary course of business, (ii) except
as otherwise stated therein, there have been no transactions entered into by the
Company and no commitments made by the Company that, individually or in the
aggregate, are material with respect to the Company, (iii) there has not been
any change in the capital stock or indebtedness of the Company, and (iv) there
has been no dividend or distribution of any kind declared, paid or made by the
Company in respect of any class of its capital stock.
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(l) The Company has full corporate power and authority to
enter into and perform its obligations under this Agreement and the
Representative's Warrant Agreement (as hereinafter defined). The execution and
delivery of this Agreement and the Representative's Warrant Agreement have been
duly authorized by all necessary corporate action on the part of the Company and
this Agreement and the Representative's Warrant Agreement have each been duly
executed and delivered by the Company and each is a valid and binding agreement
of the Company, enforceable against the Company in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, fraudulent conveyance, moratorium and other similar laws
affecting creditors' rights generally and by general principles of equity
(regardless of whether enforcement is considered in a proceeding in equity or at
law), and except as rights to indemnity and contribution under this Agreement
may be limited by applicable law. The issuance, offering and sale by the Company
to the Underwriters of the Securities pursuant to this Agreement or the
Representative's Securities pursuant to the Representative's Warrant Agreement,
the compliance by the Company with the provisions of this Agreement and the
Representative's Warrant Agreement, and the consummation of the other
transactions contemplated by this Agreement and the Representative's Warrant
Agreement do not (i) require the consent, approval, authorization, registration
or qualification of or with any court or governmental or regulatory authority,
except such as have been obtained or may be required under state securities or
blue sky laws and, if the Registration Statement filed with respect to the
Securities (as amended) is not effective under the Act as of the time of
execution hereof, such as may be required (and shall be obtained as provided in
this Agreement) under the Act, or (ii) conflict with or result in a breach or
violation of, or constitute a default under, any material contract, indenture,
mortgage, deed of trust, loan agreement, note, lease or other material agreement
or instrument to which the Company is a party or by which the Company or any of
its property is bound or subject, or the certificate of incorporation or by-laws
of the Company, or any statute or any rule, regulation, judgment, decree or
order of any court or other governmental or regulatory authority or any
arbitrator applicable to the Company.
(m) No legal or governmental proceedings are pending to which the
Company is a party or to which the property of the Company is subject, and no
such proceedings have been threatened against the Company or with respect to any
of its property, except such as are described in the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus). No
contract or other document is required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement that is not described therein (and, if the Prospectus is not in
existence, in the most recent Preliminary Prospectus) or filed as required.
(n) The Company is not in (i) violation of its certificate of
incorporation, by-laws or other governing documents, (ii) violation in any
material respect of any law, statute, regulation, ordinance, rule, order,
judgment or decree of any court or any governmental or regulatory authority
applicable to it, or (iii) default in any material respect in the performance or
observance of any obligation, agreement, covenant or condition contained in any
material contract, indenture, mortgage, deed of trust, loan agreement, note,
lease or other material agreement or instrument to which it is a party or by
which it or any of its property may be bound or subject, and no event has
occurred which with notice or lapse of time or both would constitute such a
default.
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(o) The Company currently owns or possesses adequate rights to use all
intellectual property, including all trademarks, service marks, trade names,
copyrights, inventions, know-how, trade secrets, proprietary technologies,
processes and substances, or applications or licenses therefor, that are
described in the Prospectus (and if the Prospectus is not in existence, the most
recent Preliminary Prospectus), and any other rights or interests in items of
intellectual property as are necessary for the conduct of the business now
conducted or proposed to be conducted by them as described in the Prospectus
(or, such Preliminary Prospectus), and, except as disclosed in the Prospectus
(and such Preliminary Prospectus), the Company is not aware of the granting of
any patent rights to, or the filing of applications therefor by, others, nor is
the Company aware of, nor has the Company received notice of, infringement of or
conflict with asserted rights of others with respect to any of the foregoing.
All such intellectual property rights and interests are (i) valid and
enforceable and (ii) to the best knowledge of the Company, not being infringed
by any third parties.
(p) The Company possesses adequate licenses, orders, authorizations,
approvals, certificates or permits issued by the appropriate federal, state or
foreign regulatory agencies or bodies necessary to conduct its business as
described in the Registration Statement and the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), and,
except as disclosed in the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), there are no pending or, to
the best knowledge of the Company, threatened, proceedings relating to the
revocation or modification of any such license, order, authorization, approval,
certificate or permit.
(q) The Company has good and marketable title to all of the properties
and assets reflected in the Company's financial statements or as described in
the Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), subject to no lien,
mortgage, pledge, charge or encumbrance of any kind, except those reflected in
such financial statements or as described in the Registration Statement and the
Prospectus (and such Preliminary Prospectus). Except as disclosed in the
Prospectus, the Company occupies its leased properties under valid and
enforceable leases conforming to the description thereof set forth in the
Registration Statement and the Prospectus (and such Preliminary Prospectus).
(r) The Company is not and does not intend to conduct its business in
a manner in which it would be an "investment company" as defined in Section 3(a)
of the Investment Company Act of 1940 (the "Investment Company Act").
(s) The Company has obtained and delivered to the Representative the
agreements (the "Lock-up Agreements") with the officers, directors and certain
other security holders owning shares of Common Stock substantially to the effect
that, among other things, each such person will not, commencing on the date that
the Registration Statement is declared effective by the Commission (the
"Effective Date") and continuing for a period of twelve (12) months thereafter,
without the prior written consent of the Representative, directly or indirectly,
publicly sell, offer or contract to sell or grant any option to purchase,
transfer, assign or pledge, or otherwise encumber, or dispose of any shares of
Common Stock now or hereafter owned by such person and
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that the purchaser or transferee in any private sale agrees to be bound by the
Lock-up Agreement.
(t) No labor dispute with the employees of the Company exists, is
threatened or, to the best of the Company's knowledge, is imminent that could
result in a material adverse change in the condition (financial or otherwise),
business, prospects, net worth or results of operations of the Company, except
as described in or contemplated by the Prospectus (and, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(u) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which it is engaged; the Company has not been
refused any insurance coverage sought or applied for; and the Company has no
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the condition (financial or
otherwise), business, prospects, net worth or results of operations of the
Company, except as described in or contemplated by the Prospectus (and, if the
Prospectus is not in existence, the most recent Preliminary Prospectus).
(v) The Representative's Warrant (as hereinafter defined) will conform
to the description thereof in the Registration Statement and in the Prospectus
(and, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) and, when sold to and paid for by the Representative in accordance
with the Representative's Warrant Agreement, will have been duly authorized and
validly issued and will constitute valid and binding obligations of the Company
entitled to the benefits of the Representative's Warrant Agreement. The shares
of Common Stock issuable upon exercise of the Representative's Warrant (the
"Representative's Warrant Shares") have been duly authorized and reserved for
issuance upon exercise of the Representative's Warrant by all necessary
corporate action on the part of the Company and, when issued and delivered and
paid for upon such exercise in accordance with the terms of the Representative's
Warrant Agreement and the Representative's Warrant, respectively, will be
validly issued, fully paid, nonassessable and free of preemptive rights and will
conform to the description thereof in the Prospectus (and, if the Prospectus is
not in existence, the most recent Preliminary Prospectus).
(w) No person has acted as a finder in connection with, or is entitled
to any commission, fee or other compensation or payment for services as a finder
for or for originating, or introducing the parties to, the transactions
contemplated herein and the Company will indemnify the Underwriter with respect
to any claim for finder's fees in connection herewith. Except as set forth in
the Registration Statement and the Prospectus (and, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), the Company has no
management or financial consulting agreement with anyone. No promoter, officer,
director or stockholder of the Company is, directly or indirectly, affiliated or
associated with an NASD member and no securities of the Company have been
acquired by an NASD member, except as previously disclosed in writing to the
Representative.
(x) The Company has filed all federal, state, local and foreign tax
returns which are required to be filed through the date hereof, or has received
extensions thereof, and has paid all taxes shown on such returns and all
assessments received by it to the extent that the same are material and have
become due.
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(y) Neither the Company nor any director, officer, agent, employee or
other person associated with or acting on behalf of the Company has, directly or
indirectly; used any corporate funds for unlawful contributions, gifts,
entertainment, or other unlawful expenses relating to political activity; made
any unlawful payment to foreign or domestic government officials or employees or
to foreign or domestic political parties or campaigns from corporate funds;
violated any provision of the Foreign Corrupt Practices Act of 1977, as amended;
or made any bribe, rebate, payoff, influence payment, kickback, or other
unlawful payment. No transaction has occurred between or among the Company and
any of its officers or directors or any affiliates of any such officer or
director, that is required to be described in and is not described in the
Registration Statement and the Prospectus.
(z) Neither the Company nor any of its officers, directors or
affiliates (as defined in the Regulations), has taken or will take, directly or
indirectly, prior to the completion of the Offering, any action designed to
stabilize or manipulate the price of any security of the Company, or which has
caused or resulted in, or which might in the future reasonably be expected to
cause or result in, stabilization or manipulation of the price of any security
of the Company, to facilitate the sale or resale of any of the Securities or the
Option Securities.
2. Purchase, Sale and Delivery of the Securities and the Representative's
Warrants.
(a) On the basis of the representations, warranties, agreements and
covenants herein contained and subject to the terms and conditions herein set
forth, the Company agrees to issue and sell to each Underwriter, and each
Underwriter agrees, severally and not jointly, to purchase from the Company, the
number of Firm Shares as set forth opposite its name on Schedule 1 annexed
hereto, at a purchase price of [$_____] per share.
(b) Certificates in definitive form for the Firm Securities that the
Underwriters have agreed to purchase hereunder, and in such denomination or
denominations and registered in such name or names as the Underwriters request
upon notice to the Company at least 48 hours prior to the Firm Closing Date,
shall be delivered by or on behalf of the Company to the Underwriters, against
payment by or on behalf of the Underwriters of the purchase prices therefor by
wire transfer of immediately available funds to a bank account specified by the
Company. Such delivery of the Firm Securities shall be made at the offices of
Counsel for the Underwriters, 101 East 52nd Street, New York, New York at 9:30
A.M., New York City time on _________, 1999, or at such other place, time or
date as the Underwriters and the Company may agree upon, such time and date of
delivery against payment being herein referred to as the "Firm Closing Date."
The Company will make such certificates for the Firm Securities available for
checking and packaging by the Underwriters, at such offices as may be designated
by the Representative, at least 24 hours prior to the Firm Closing Date. In lieu
of physical delivery, the closing may occur by "DTC" delivery.
(c) For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Securities as contemplated by the
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Prospectus, the Company hereby grants to the Underwriter an option to purchase
any or all of the Option Shares, which options are exercisable by the
Representative on behalf of and for the account of the Underwriters. The
purchase price to be paid for any of the Option Shares shall be the same price
per share for the Firm Securities set forth above in paragraph (a) of this
Section 2. The option granted hereby may be exercised as to all or any part of
the Option Shares from time to time within 45 calendar days after the Firm
Closing Date. The Underwriters shall not be under any obligation to purchase any
of the Option Shares prior to the exercise of such option. The Representative
may from time to time exercise the option granted hereby on behalf of the
Underwriters by giving notice in writing or by telephone (confirmed in writing)
to the Company setting forth the aggregate number of Option Shares as to which
the Underwriters are then exercising the option and the date and time for
delivery of and payment for such Option Shares. Any such date of delivery shall
be determined by the Underwriters but shall not be earlier than two business
days or later than three business days after such exercise of the option and, in
any event, shall not be earlier than the Firm Closing Date. The time and date
set forth in such notice, or such other time on such other date as the
Representative and the Company may agree upon, is herein called the "Option
Closing Date" with respect to such Option Shares. Upon exercise of the option as
provided herein, the Company shall become obligated to sell to the Underwriters,
and, subject to the terms and conditions herein set forth, each Underwriter
shall become obligated to purchase from the Company, the Option Shares as to
which the Underwriter is then exercising its option. If the option is exercised
as to all or any portion of the Option Shares, certificates in definitive form
for such Option Shares, and payment therefor, shall be delivered on the related
Option Closing Date in the manner, and upon the terms and conditions, set forth
in paragraph (b) of this Section 2, except that reference therein to the Firm
Securities and the Firm Closing Date shall be deemed, for purposes of this
paragraph (c), to refer to such Option Shares and Option Closing Date,
respectively.
(d) On the Firm Closing Date, the Company will further issue and sell
to the Representative or, at the direction of the Representative, to bona fide
officers of the Underwriters, for an aggregate purchase price of $100, warrants
to purchase Common Stock (the "Representative's Warrant") entitling the holders
thereof to purchase an aggregate of 110,000 shares of Common Stock for a period
of four years, such period to commence on the first anniversary of the Effective
Date. The Representative's Warrant shall be exercisable at a price equal to 120%
of the public offering price of the Common Stock, and shall contain terms and
provisions more fully described herein below and as set forth more particularly
in the warrant agreement relating to the Representative's Warrant to be executed
by the Company on the Effective Date (the "Representative's Warrant Agreement"),
including, but not limited to, (i) customary anti-dilution provisions in the
event of stock dividends, split mergers, sales of all or substantially all of
the Company's assets, sales of stock below then prevailing market or exercise
prices and other events, and (ii) prohibitions of mergers, consolidations or
other reorganizations of or by the Company or the taking by the Company of other
action during the five-year period following the Effective Date unless adequate
provision is made to preserve, in substance, the rights and powers incidental to
the Representative's Warrant. As provided in the Representative's Warrant
Agreement, the Representative may designate that the Representative's Warrant be
issued in varying amounts directly to bona fide officers of the Underwriters. As
further provided, no sale, transfer, assignment, pledge or hypothecation of the
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Representative's Warrant shall be made for a period of 12 months from the
Effective Date, except (i) by operation of law or reorganization of the Company,
or (ii) to the Underwriters and bona fide partners, officers of the Underwriters
and selling group members.
3. Offering by the Underwriters. The Underwriters propose to offer the Firm
Securities for sale to the public upon the terms set forth in the Prospectus
(the "Offering").
4. Covenants of the Company. The Company covenants and agrees with the
Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the time of execution of this Agreement, to
become effective as promptly as possible. If required, the Company will file the
Prospectus and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rule 424(b) under the Act. During
any time when a prospectus relating to the Securities is required to be
delivered under the Act, the Company (i) will comply with all requirements
imposed upon it by the Act and the rules and regulations of the Commission
thereunder to the extent necessary to permit the continuance of sales of or
dealings in the Securities in accordance with the provisions hereof and of the
Prospectus, as then amended or supplemented, and (ii) will not file with the
Commission any prospectus or amendment referred to in the first sentence of
section (a) (i) hereof, any amendment or supplement to such prospectus or any
amendment to the Registration Statement as to which the Underwriters shall not
previously have been advised and furnished with a copy for a reasonable period
of time prior to the proposed filing and as to which filing the Underwriters
shall not have given their consent. The Company will prepare and file with the
Commission, in accordance with the rules and regulations of the Commission,
promptly upon request by the Underwriters or counsel to the Underwriters, any
amendments to the Registration Statement or amendments or supplements to the
Prospectus that may be necessary or advisable in connection with the
distribution of the Securities by the Underwriters, and will use its best
efforts to cause any such amendment to the Registration Statement to be declared
effective by the Commission as promptly as possible. The Company will advise the
Underwriters, promptly after receiving notice thereof, of the time when the
Registration Statement or any amendment thereto has been filed or declared
effective or the Prospectus or any amendment or supplement thereto has been
filed and will provide evidence satisfactory to the Underwriters of each such
filing or effectiveness.
(b) The Company will advise the Underwriters, promptly after receiving
notice or obtaining knowledge thereof, of (i) the issuance by the Commission of
any stop order suspending the effectiveness of the Registration Statement or any
order preventing or suspending the use of any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, (ii) the suspension of the
qualification of any Securities for offering or sale in any jurisdiction, (iii)
the institution, threat or contemplation of any proceeding for any such purpose,
or (iv) any request made by the Commission for amending the Registration
Statement, for amending or supplementing the Prospectus or for additional
information. The Company will use its best efforts to prevent the issuance of
any such stop order and, if any such stop order is issued, to obtain the
withdrawal thereof as promptly as possible.
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(c) The Company will, in cooperation with counsel to the Underwriters,
arrange for the qualification of the Securities for offering and sale under the
blue sky or securities laws of such jurisdictions as the Underwriters may
designate and will continue such qualifications in effect for as long as may be
necessary to complete the distribution of the Securities.
(d) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, or if for any other reason it is necessary at
any time to amend or supplement the Prospectus to comply with the Act or the
rules or regulations of the Commission thereunder, the Company will promptly
notify the Underwriters thereof and, subject to Section 4(a) hereof, will
prepare and file with the Commission, at the Company's expense, an amendment to
the Registration Statement or an amendment or supplement to the Prospectus that
corrects such statement or omission or effects such compliance.
(e) Intentionally left blank.
(f) The Company will, without charge, provide to the Underwriters and
to counsel for the Underwriters (i) as many signed copies of the Registration
Statement originally filed with respect to the Securities and each amendment
thereto (in each case including exhibits thereto) as the Underwriters may
reasonably request, (ii) as many conformed copies of such Registration Statement
and each amendment thereto (in each case without exhibits thereto) as the
Underwriters may reasonably request, and (iii) so long as a prospectus relating
to the Securities is required to be delivered under the Act, as many copies of
each Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto as the Underwriters may reasonably request.
(g) The Company, as soon as practicable, will make generally available
to its security holders and to the Underwriters an earnings statement of the
Company that satisfies the provisions of Section 11 (a) of the Act and Rule 158
thereunder.
(h) The Company will reserve and keep available for issuance that
maximum number of authorized but unissued shares of Common Stock which are
issuable upon exercise of any outstanding warrants and the Representative's
Warrant (including the underlying securities) outstanding from time to time.
(i) The Company will apply the net proceeds from the sale of the
Securities being sold by it as set forth under "Use of Proceeds" in the
Prospectus.
(j) Intentionally left blank.
(k) Prior to the Closing Date or the Option Closing Date (if any), the
Company will not, directly or indirectly, without prior written consent of the
Representative, issue any press release or other public announcement or hold any
press conference with respect to the Company or its activities with respect
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to the Offering (other than trade releases issued in the ordinary course of the
Company's business consistent with past practices with respect to the Company's
operations).
(l) If, at the time that the Registration Statement becomes effective,
any information shall have been omitted therefrom in reliance upon Rule 430A
under the Act, then immediately following the execution of this Agreement, the
Company will prepare, and file or transmit for filing with the Commission in
accordance with Rule 430A and Rule 424(b) under the Act, copies of the
Prospectus including the information omitted in reliance on Rule 430A, or, if
required by such Rule 430A, a post-effective amendment to the Registration
Statement (including an amended Prospectus), containing all information so
omitted.
(m) The Company will cause the Securities to be included in The Nasdaq
SmallCap Market on the Effective Date and to maintain such listing thereafter.
The Company will file with The Nasdaq SmallCap Market all documents and notices
that are required by companies with securities that are traded on The Nasdaq
SmallCap Market.
(n) During the period of five years from the Firm Closing Date, the
Company will, as promptly as possible, not to exceed 135 days, after each annual
fiscal period render and distribute reports to its stockholders which will
include audited statements of its operations and changes of financial position
during such period and its audited balance sheet as of the end of such period,
as to which statements the Company's independent certified public accountants
shall have rendered an opinion and shall timely file all reports required to be
filed under the securities laws.
(o) During a period of three years commencing with the Firm Closing
Date, the Company will furnish to the Representative, at the Company's expense,
copies of all periodic and special reports furnished to stockholders of the
Company and of all information, documents and reports filed with the Commission.
(p) The Company has appointed Corporate Stock Transfer, Inc. as
transfer agent for the Common Stock, subject to the Closing. The Company will
not change or terminate such appointment for a period of three years from the
Firm Closing Date without first obtaining the written consent of the
Representative. For a period of three years after the Effective Date, the
Company shall cause the transfer agent to deliver promptly to the Underwriters a
duplicate copy of the daily transfer sheets relating to trading of the
Securities. The Company shall also provide to the Representative, on a weekly
basis, copies of the DTC special securities positions listing report.
(q) During the period of 180 days after the date of this Agreement,
the Company will not at any time, directly or indirectly, take any action
designed to or that will constitute, or that might reasonably be expected to
cause or result in, the stabilization of the price of the Common Stock to
facilitate the sale or resale of any of the Securities.
(r) The Company will not take any action to facilitate the sale of any
shares of Common Stock pursuant to Rule 144 under the Act if any such sale would
violate any of the terms of the Lock-up Agreements.
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(s) Prior to the 120th day after the Firm Closing Date, the Company
will provide the Underwriters and their designees with three bound volumes of
the transaction documents relating to the Registration Statement and the
closing(s) hereunder, in form and substance reasonably satisfactory to the
Representative.
(t) The Company shall consult with the Representative prior to the
distribution to third parties of any financial information news releases or
other publicity regarding the Company, its business, or any terms of this
offering and the Underwriters will consult with the Company prior to the
issuance of any research report or recommendation concerning the Company's
securities. Copies of all documents that the Company or its public relations
firm intend to distribute will be provided to the Representative for review
prior to such distribution.
(u) The Company and the Underwriters will advise each other
immediately in writing as to any investigation, proceeding, order, event or
other circumstance, or any threat thereof, by or relating to the Commission or
any other governmental authority, that could impair or prevent the Offering.
Except as required by law or as otherwise mutually agreed in writing, neither
the Company nor the Underwriters will acquiesce in such circumstances and each
will actively defend any proceedings or orders in that connection.
(v) The Company shall first submit to the Representative certificates
representing the Securities for approval prior to printing, and shall, as
promptly as possible, after filing the Registration Statement with the
Commission, obtain CUSIP numbers for the Securities.
(w) The Company will prepare and file a registration statement with
the Commission pursuant to section 12 of the 1934 Act, and will use its best
efforts to have such registration statement declared effective by the Commission
on an accelerated basis on the day after the Effective Date. For this purpose
the Company shall prepare and file with the Commission a General Form of
Registration of Securities (Form 8-A or Form 10).
(x) For so long as the Securities are registered under the 1934 Act,
the Company will hold an annual meeting of stockholders for the election of
directors within 180 days after the end of each of the Company's fiscal years
and within 135 days after the end of each of the Company's fiscal years will
provide the Company's stockholders with the audited financial statements of the
Company as of the end of the fiscal year just completed prior thereto. Such
financial statements shall be those required by Rule 14a-3 under the 1934 Act
and shall be included in an annual report pursuant to the requirements of such
Rule.
(y) The Company will engage a financial public relations firm
reasonably satisfactory to the Representative on or before the Firm Closing
Date, and continuously engage such firm, or a substitute firm reasonably
acceptable to the Representative, for a period of twelve (12) months following
the Firm Closing Date.
(z) The Company will take all necessary and appropriate actions to be
included in Standard and Poor's Corporation Descriptions or other equivalent
manual and to maintain its listing therein for a period of five (5) years from
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<PAGE>
the Effective Date. Such application shall be made on an accelerated basis no
more than two days following the Effective Date.
(aa) On or prior to the Effective Date, the Company will give written
instructions to the transfer agent for the Common Stock directing said transfer
agent to place stop-order restrictions against, and appropriate legends advising
of the Lock-up Agreements on, the certificates representing the securities of
the Company owned by the persons who have entered into the Lock-up Agreements.
(bb) During the twelve month period commencing on the later of the
Effective Date and the Closing Date, and provided that the Representative agrees
to a complete or partial release of the restrictions contained in a Lock-up
Agreement, the Company shall grant the Representative the right to sell, within
seven business days of the effective date of such release, for the account of
any person who was a shareholder of the Company prior to the Offering and who
owns at least five percent (5%) of the Company's Common Stock after the
Offering, any securities sold pursuant to Rule 144 under the Act, provided that
such sale is made in accordance with the applicable shareholder's instructions.
(cc) During the twelve month period commencing on the later of the
Effective Date or the Firm Closing Date, the Company and each of shareholders
owning 5% or more of the Company's Common Stock immediately preceding the
Effective Date, shall grant the Representative the right of first offer to act
as lead manager, placement agent, or investment banker with respect to any
proposed underwritten public distribution or private placement of the Company's
securities having an aggregate value of $5,000,000 or more, or any merger,
acquisition or disposition of assets of the Company and any fairness opinions or
valuations. Accordingly, if during such period, the Company intends to make such
a transaction, the Company shall notify the Representative in writing of such
intention and of the proposed terms of the transaction. The Representative shall
notify the Company within seven (7) days of the receipt of such notice of
intention, of the Representative's election to exercise its right to act as lead
manager, placement agent or investment banker, with respect to such transaction.
If such right is not exercised by the Representative and the terms of the
applicable transaction are subsequently modified, the Company shall resubmit
such modified transaction to the Representative. The Representative's election
not to exercise its rights in any particular instance shall not affect in any
way such right with respect to any subsequent transaction by the Company.
(dd) Prior to the Effective Date, the Company will have taken all
necessary and appropriate action to have at least two persons be elected to the
Company's Board of Directors who are deemed to be independent of the Company's
management.
(ff) Prior to the Effective Date, the Company will have entered into
employment agreements with ________________.
(gg) Prior to the Effective Date, the Company will have obtained "Key
Man" life insurance, for an amount equal to at least $1,000,000, on the lives of
each of ___________.
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<PAGE>
4. Expenses
(a) The Company shall pay all costs and expenses incident to the
performance of its obligations under this Agreement, whether or not the
transactions contemplated hereby are consummated or this Agreement is terminated
pursuant to Section 10 hereof, including all costs and expenses incident to (i)
the preparation, printing and filing or other production of documents with
respect to the transactions, including any costs of printing the Registration
Statement originally filed with respect to the Securities and any amendment
thereto, any Preliminary Prospectus and the Prospectus and any amendment or
supplement thereto, this Agreement, the selected dealer agreement and the other
agreements and documents governing the underwriting arrangements and any blue
sky memoranda, (ii) all reasonable and necessary arrangements relating to the
delivery to the Underwriters of copies of the foregoing documents, and the costs
and expenses of the Underwriters in mailing or otherwise distributing the same
including telephone charges, duplications and other accountable expenses, (iii)
the fees and disbursements of the counsel, the accountants and any other experts
or advisors retained by the Company, (iv) the preparation, issuance and delivery
to the Underwriters of any certificates evidencing the Securities, including
transfer agent's, warrant agent's and registrar's fees or any transfer or other
taxes payable thereon, (v) the qualification of the Securities under state blue
sky or securities laws, including filing fees and fees and disbursements, (vi)
the filing fees of the Commission and the NASD relating to the Securities, (vii)
the inclusion of the Securities on The Nasdaq SmallCap Market and in the
Standard and Poor's Corporation Descriptions Manual, (viii) any "road shows" or
other meetings with prospective investors in the Securities, including
transportation, accommodation, meal, conference room, audio-visual presentation
and similar expenses, but not including such expenses for the Underwriters or
their representatives or designees in excess of $15,000 and (ix) the publication
of "tombstone advertisements" in The Wall Street Journal and/or Investor's
Business Daily to be selected by the Representative, and the manufacture of
prospectus memorabilia. In addition to the foregoing, the Company, shall
reimburse the Representative for its expenses on the basis of a non-accountable
expense allowance in the amount of 3.00% of the gross offering proceeds to be
received by the Company. The non-accountable expense allowance, based on the
gross proceeds from the sale of the Firm Securities, shall be deducted from the
funds to be paid by the Representative in payment for the Firm Securities,
pursuant to Section 2 of this Agreement, on the Firm Closing Date. To the extent
any Option Shares are sold, any remaining non-accountable expense allowance
based on the gross proceeds from the sale of the Option Shares shall be deducted
from the funds to be paid by the Representative in payment for the Option
Shares, pursuant to Section 2 of this Agreement, on the Option Closing Date. The
Company warrants, represents and agrees that all such payments and
reimbursements will be promptly and fully made.
(b) Notwithstanding any other provision of this Agreement, if the
Offering is terminated in accordance with the provisions of Section 6 or Section
10(a)(i), the Company agrees that, in addition to the Company paying its own
expenses as described in subparagraph (a) above, the Company shall reimburse the
Representative for its actual accountable out-of-pocket expenses net of the
[$_______] which has previously been advanced to the Representative, up to a
maximum of $100,000. Such expenses shall include, but are not to be limited to,
fees for the services and time of counsel for the Underwriters to the extent not
covered by clause (a) above, plus any additional
15
<PAGE>
expenses and fees, including, but not limited to, travel expenses, postage
expenses, duplication expenses, long-distance telephone expenses, and other
expenses incurred by the Representative in connection with the proposed
offering.
5. Intentionally left blank.
6. Conditions of the Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Firm Shares shall be subject, in the
Underwriters' sole discretion, to the accuracy of the representations and
warranties of the Company contained herein as of the date hereof and as of the
Firm Closing Date as if made on and as of the Firm Closing Date, to the accuracy
of the statements of the Company's officers made pursuant to the provisions
hereof, to the performance by the Company of its covenants and agreements
hereunder and to the following additional conditions:
(a) If the Registration Statement, as heretofore amended, has not been
declared effective as of the time of execution hereof, the Registration
Statement, as heretofore amended or as amended by an amendment thereto to be
filed prior to the Firm Closing Date, shall have been declared effective not
later than 5:30 P.M., New York City time, on the date on which the amendment to
such Registration Statement containing information regarding the initial public
offering price of the Securities has been filed with the Commission, or such
later time and date as shall have been consented to by the Underwriters; if
required, the Prospectus and any amendment or supplement thereto shall have been
filed with the Commission in the manner and within the time period required by
Rule 424(b) under the Act, no stop order suspending the effectiveness of the
Registration Statement shall have been issued, and no proceedings for that
purpose shall have been instituted or threatened or, to the knowledge of the
Company or the Underwriters, shall be contemplated by the Commission; and the
Company shall have complied with any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise).
(b) The Underwriters shall have received an opinion, dated the Firm
Closing Date, of Harney Westwood & Riegels, counsel to the Company, as to
British Virgin Islands law, substantially to the effect that:
(1) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its organization and is duly qualified to transact business as a foreign
corporation and is in good standing under the laws of each other jurisdiction in
which its ownership or leasing of any properties or the conduct of its business
requires such qualification, except where the failure to be in good standing or
so qualify would not have a materially adverse effect upon the Company;
(2) the Company has full corporate power and authority to own or
lease its property and conduct its business as it is now being conducted and as
it is proposed to be conducted, as described in the Registration Statement and
the Prospectus, and the Company has full corporate power and authority to enter
into this Agreement and the Representative's Warrant Agreement and to carry out
all the terms and provisions hereof and thereof to be carried out by it;
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<PAGE>
(3) to the knowledge of such counsel, there are no outstanding
options, warrants or other rights granted by the Company to purchase shares of
its Common Stock, preferred stock or other securities other than as described in
the Prospectus; the Shares have been duly authorized and the Representative's
Warrant Shares have been duly reserved for issuance by all necessary corporate
action on the part of the Company and the Shares when issued and delivered to
and paid for by the Representative, pursuant to this Agreement, the
Representative's Warrant when issued and delivered and paid for in accordance
with this Agreement and the Representative's Warrant Agreement by the
Underwriters, and the Representative's Warrant Shares when issued upon payment
of the exercise price specified in the Representative's Warrant, will be validly
issued, fully paid, nonassessable and free of preemptive rights and will conform
to the description thereof in the Prospectus; to the knowledge of such counsel,
no holder of outstanding securities of the Company is entitled as such to any
preemptive or other right to subscribe for any of the Shares or the
Representative's Warrant Shares; and to the knowledge of such counsel, no person
is entitled to have securities registered by the Company under the Registration
Statement or otherwise under the Act other than as described in the Prospectus;
(4) the execution and delivery of this Agreement and the
Representative's Warrant Agreement have been duly authorized by all necessary
corporate action on the part of the Company and this Agreement and the
Representative's Warrant Agreement have been duly executed and delivered by the
Company, and each is a valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, except as enforceability may
be limited by bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium and other similar laws affecting creditors' rights generally and by
general principles of equity (regardless of whether enforcement is considered in
a proceeding in equity or at law) and except as rights to indemnity and
contribution under this Agreement and the Representative's Warrant Agreement may
be limited by applicable securities laws and the public policy underlying such
laws;
(5) the Representative's Warrant is duly authorized and upon
payment of the purchase price therefore specified in Section 2(d) of this
Agreement will be validly issued and constitute valid and binding obligations of
the Company; and the certificates representing the Securities are in due and
proper form under law;
(6) the statements set forth in the Prospectus under the caption
"Description of Securities" insofar as those statements purport to summarize the
terms of the capital stock and warrants of the Company, provide a fair summary
of such terms; to the knowledge of such counsel, the statements set forth in the
Prospectus describing statutes and regulations and the descriptions of the
consequences to the Company under such statutes and regulations are fair
summaries of the information set forth therein and are accurate in all material
respects; to the knowledge of such counsel, the statements in the Prospectus,
insofar as those statements constitute summaries of the contracts, instruments,
leases or licenses referred to therein, constitute a fair summary in all
material respects of those contracts, instruments, leases or licenses and
include all material terms thereof, as applicable;
17
<PAGE>
(7) none of (A) the execution and delivery of this Agreement and
the Representative's Warrant Agreement, (B) the issuance, offering and sale by
the Company to the Underwriters of the Securities pursuant to this Agreement and
the Representative's Warrant Shares pursuant to the Representative's Warrant
Agreement, or (C) the compliance by the Company with the other provisions of
this Agreement and the Representative's Warrant Agreement and the consummation
of the transactions contemplated hereby and thereby, to the knowledge of such
counsel (1) requires the consent, approval, authorization, registration or
qualification of or with any court or governmental authority known to us, except
such as have been obtained and such as may be required under state blue sky or
securities laws as to which we express no opinion or (2) conflicts with or
results in a breach or violation of, or constitutes a default under, any
material contract, indenture, mortgage, deed of trust, loan agreement, note,
lease or other material agreement or instrument known to such counsel to which
the Company is a party or by which the Company or any of its property is bound
or subject, or the certificate of incorporation or by-laws of the Company, or
any material statute or any judgment, decree, order, rule or regulation of any
court or other governmental or regulatory authority known to us applicable to
the Company;
(8) to the knowledge of such counsel, (A) no legal or
governmental proceedings are pending to which the Company is a party or to which
the property of the Company is subject except those arising in the ordinary
course of business and fully covered by insurance and (B) no contract or other
document is required to be described in the Registration Statement or the
Prospectus or to be filed as an exhibit to the Registration Statement that is
not described therein or filed as required;
(9) to the knowledge of such counsel, the Company possesses
adequate licenses, orders, authorizations, approvals, certificates or permits
issued by the appropriate federal, state or local regulatory agencies or bodies
necessary to conduct its business as described in the Registration Statement and
the Prospectus, and, there are no pending or threatened proceedings relating to
the revocation or modification of any such license, order, authorization,
approval, certificate or permit, except as disclosed in the Registration
Statement and the Prospectus, which would have a material adverse effect on the
Company;
(10) The Company is not in violation or breach of, or in default
with respect to, any term of its certificate of incorporation or by-laws, and to
the knowledge of such counsel, the Company is not in (i) violation in any
material respect of any law, statute, regulation, ordinance, rule, order,
judgment or decree of any court or any governmental or regulatory authority
applicable to it, or (ii) default in any material respect in the performance or
observance of any obligation, agreement, covenant or condition contained in any
material contract, indenture, mortgage, deed of trust, loan agreement, note,
lease or other material agreement or instrument to which it is a party or by
which it or any of its property may be bound or subject, and no event has
occurred which with notice, lapse of time or both would constitute such a
default.
(c) The Underwriters shall have received an opinion, dated the date of
the Firm Closing of Gary A. Agron, Esq., counsel to the Company, substantially
to the effect that:
18
<PAGE>
(1) the Shares have been approved for inclusion on The Nasdaq
SmallCap Market;
(2) the Registration Statement is effective under the Act; any
required filing of the Prospectus pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b); and to our knowledge,
no stop order suspending the effectiveness of the Registration Statement or any
amendment thereto has been issued, and no proceedings for that purpose have been
instituted or threatened or, to the best knowledge of such counsel, are
contemplated by the Commission;
(3) the Registration Statement originally filed with respect to
the Securities and each amendment thereto and the Prospectus (in each case,
other than the financial statements, the notes, schedules and other financial
and statistical information contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
applicable requirements of the Act and the rules and regulations of the
Commission thereunder; and
(4) the Company is not an "investment company" as defined in
Section 3(a) of the Investment Company Act of 1940 and, if the Company conducts
its business as set forth in the Prospectus, it will not become an "investment
company" and will not be required to register under the Investment Company.
Such counsel also shall state in its opinion that it has participated in
the preparation of the Registration Statement and the Prospectus and that
nothing has come to its attention that has caused it to believe that the
Registration Statement, at the time it became effective (including the
information deemed to be a part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b), if applicable), contained an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
that the Prospectus, as of its date or as of the Firm Closing Date, contained an
untrue statement of material fact or omitted to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
In rendering any such opinion, such counsel may rely, as to matters of
fact, to the extent such counsel deems proper, on certificates of responsible
officers of the Company and public officials, copies of which certificates will
be provided to the Underwriters, and, as to matters of the laws of certain
jurisdictions, on the opinions of other counsel to the Company, which opinions
shall also be delivered to the Underwriters, in form and substance acceptable to
the Underwriters, if such other counsel expressly authorize such reliance and
counsel to the Company expressly states in their opinion that such counsel's and
the Underwriters' reliance upon such opinion is justified.
(d) A. At the time this Agreement is executed, the Representative
shall have received a letter, dated such date, addressed to the Underwriters in
form and substance satisfactory (including the non-material nature of the
changes or decreases, if any, referred to in clause (iii) below) in all respects
to the Representative and Representative's counsel, from KPMG Certified Public
Accountants:
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(i) confirming that it is a independent certified public
accountant with respect to the Company within the meaning of the Act and the
applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial
statements of the Company and HI-Q Taiwan included in the Registration Statement
comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations thereunder and that the
Representative may rely upon the opinion of KPMG Certified Public Accountants
with respect to the financial statements included in the Registration Statement;
(iii) stating that, on the basis of a limited review which
included a reading of the latest available unaudited interim financial
statements of the Company, a reading of the latest available minutes of the
stockholders and board of directors and the various committees of the boards of
directors of the Company, consultations with officers and other employees of the
Company responsible for financial and accounting matters and other specified
procedures and inquiries (which, as to the interim financial statements included
in the Registration Statement, shall constitute a review as described in SAS No.
71, Interim Financial Statements), nothing has come to KPMG Certified Public
Accountants' attention which would lead them to believe that (A) the unaudited
financial statements of the Company included in the Registration Statement do
not comply as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or are not fairly
presented in conformity with generally accepted accounting principles applied on
a basis substantially consistent with that of the audited financial statements
of the Company included in the Registration Statement, or (B) at a specified
date not more than five (5) days prior to the Effective Date, there has been any
change in the capital stock or long-term debt of the Company, or any decrease in
the stockholders' equity or net current assets or net assets of the Company as
compared with amounts shown in the December 31, 1998 balance sheet included in
the Registration Statement, other than as set forth in or contemplated by the
Registration Statement, or, if there was any change or decrease, setting forth
the amount of such change or decrease, and (C) during the period from December
31, 1998 to a specified date not more than five (5) days prior to the Effective
Date, there was any decrease (increase) in net revenues, net income (loss) or in
net earnings (loss) per common share of the Company, in each case as compared
with the corresponding period December 31, 1997 beginning, other than as set
forth in or contemplated by the Registration Statement, or, if there was any
such decrease, setting forth the amount of such decrease (increase);
(iv) setting forth, at a date not later than five (5) days prior
to the Effective Date, the amount of liabilities of the Company;
(v) stating that they have compared specific dollar amounts,
numbers of shares, percentages of revenues and earnings, statements and other
financial information pertaining to the Company set forth in the Prospectus in
each case to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records, including work
sheets, of the Company and excluding any questions requiring an interpretation
by legal counsel, with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement; and
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(vi) statements as to such other matters incident to the
transaction contemplated hereby as the Representative may request.
B. At the Firm Closing Date and the Option Closing Date, if any, the
Representative shall have received from KPMG Certified Public Accountants, a
letter, dated as of the Firm Closing Date or the Option Closing Date, as the
case may be, to the effect that it reaffirms that statements made in the letter
furnished pursuant to subsection A of this Section 6(e), except that the
specified date referred to shall be a date not more than five (5) days prior to
the Firm Closing Date or the Option Closing Date, as the case may be, and, if
the Company has elected to rely on Rule 430A of the Rules and Regulations, to
the further effect that they have carried out procedures as specified in clause
(v) of subsection A of this Section 6(e) with respect to certain amounts,
percentages and financial information as specified by the Representative and
deemed to be a part of the Registration Statement pursuant to Rule 430A(b) and
have found such amounts, percentages and financial information to be in
agreement with the records specified in such clause (v).
(e) The representations and warranties of the Company contained in
this Agreement shall be true and correct as if made on and as of the Firm
Closing Date; the Registration Statement shall not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein in order to make the statements therein not misleading, and the
Prospectus, as amended or supplemented as of the Firm Closing Date, shall not
include any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and the Company shall
have performed all covenants and agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to the Firm Closing Date.
(f) No stop order suspending the effectiveness of the Registration
Statement or any amendment thereto shall have been issued, and no proceedings
for that purpose shall have been instituted or threatened or contemplated by the
Commission.
(g) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall not have
been any material adverse change, or any development involving a prospective
material adverse change, in the business, operations, condition (financial or
otherwise), earnings or prospects of the Company, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto).
(h) The Underwriters shall have received a certificate, dated the Firm
Closing Date, of the Chief Executive Officer and the Secretary of the Company to
the effect set forth in subparagraphs (d) through (f) above.
(i) The Common Stock shall be qualified in such jurisdictions as the
Underwriters may reasonably request pursuant to Section 4(c), and each such
qualification shall be in effect and not subject to any stop order or other
proceeding on the Firm Closing Date.
21
<PAGE>
(j) The Company shall have executed and delivered to the Underwriters
the Representative's Warrant Agreement and a certificate or certificates
evidencing the Representative's Warrant, in each case in a form acceptable to
the Underwriters.
(k) The Underwriters shall have received Lock-up Agreements executed
by the persons listed on Schedule 2 annexed hereto.
(l) On or before the Firm Closing Date, the Underwriters and counsel
for the Underwriters shall have received such further certificates, documents,
letters or other information as they may have reasonably requested from the
Company and other security holders of the Company.
All opinions, certificates, letters and documents delivered pursuant to
this Agreement will comply with the provisions hereof only if they are
reasonably satisfactory in all material respects to the Underwriters and counsel
for the Underwriters. The Company shall furnish to the Underwriters such
conformed copies of such opinions, certificates, letters and documents in such
quantities as the Underwriters and counsel for the Underwriters shall reasonably
request.
The obligation of the Underwriters to purchase and pay for any Option
Shares shall be subject, in its discretion, to each of the foregoing conditions,
except that all references to the Firm Securities and the Firm Closing Date
shall be deemed to refer to such Option Shares and the related Option Closing
Date, respectively.
7. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the Underwriters
and each person, if any, who controls the Underwriters within the meaning of
Section 15 of the Act or Section 20 of the 1934 Act against any losses, claims,
damages, or liabilities, joint or several, to which the Underwriters, or such
controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon:
(1) any untrue statement or alleged untrue statement of any
material fact contained in (A) the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or (B) any application or other document, or any amendment
or supplement thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in order to
qualify the Securities under the Blue Sky or securities laws thereof or filed
with the Commission or any securities association or securities exchange (each
an "Application"), or
(2) the omission or alleged omission to state in such
Registration Statement or any amendment thereto, any Preliminary Prospectus or
22
<PAGE>
the Prospectus or any amendment or supplement thereto, or any Application a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse, as incurred, the Underwriters and
such controlling person for any legal or other expenses reasonably incurred by
the Underwriters or such controlling person in connection with investigating or
defending against any loss, claim, damage, liability, action, investigation,
litigation or proceeding; provided, however, that the Company will not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in such Registration Statement or any
amendment thereto, any Preliminary Prospectus, the Prospectus or any amendment
or supplement thereto, or any Application in reliance upon and in conformity
with written information furnished to the Company by the Underwriters,
specifically for use therein. This indemnity agreement will be in addition to
any liability which the Company may otherwise have. The Company will not,
without the prior written consent of the Underwriters, or controlling person,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder (whether or not the Underwriters or any person who
controls the Underwriters or within the meaning of Section 15 of the Act or
Section 20 of the 1934 Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of the Underwriters and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
(b) The Underwriters will indemnify and hold harmless the Company,
each of its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the Act or Section 20 of the 1934 Act against, any losses,
claims, damages or liabilities to which the Company or any such director,
officer, or controlling person may become subject under the Act or otherwise,
but only insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the Registration
Statement or any amendment thereto, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, or any Application, or (ii) the omission
or the alleged omission to state therein a material fact required to be stated
in the Registration Statement or any amendment thereto, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or any
Application, or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that such untrue statement or
alleged untrue statement or omission or alleged omission was made in reliance
upon and in conformity with written information furnished to the Company by the
Underwriters specifically for use therein; and, subject to the limitation set
forth immediately preceding this clause, will reimburse, as incurred, any legal
or other expenses reasonably incurred by the Company or any such director,
officer, or controlling person in connection with investigating or defending
against any such loss, claim, damage, liability, action investigation,
litigation or proceedings, in respect thereof. This indemnity agreement will be
in addition to any liability which the Underwriters may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
23
<PAGE>
Section 7, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Section 7. In case any such action is brought against any indemnified party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that it may
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party;
provided, however, that if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
those available to the indemnifying party, the indemnifying party shall not have
the right to direct the defense of such action on behalf of such indemnified
party or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action, the indemnifying
party will not be liable to such indemnified party under this Section 7 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the next preceding sentence or (ii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. After such notice from the
indemnifying party to such indemnified party, the indemnifying party will not be
liable for the costs and expenses of any settlement of such action effected by
such indemnified party without the consent of the indemnifying party.
(d) In circumstances in which the indemnity obligation provided for in
the preceding paragraphs of this Section 7 is unavailable or insufficient to
hold harmless an indemnified party in respect of any losses, claims, damages or
liabilities (or actions in respect thereof), each indemnifying party, in order
to provide for just and equitable contribution, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect (i) the relative benefits received by the indemnifying
party or parties on the one hand and the indemnified party on the other from the
offering of the Securities, or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, not only such relative benefits
but also the relative fault of the indemnifying party or parties on the one hand
and the indemnified party on the other in connection with the statements or
omissions or alleged statements or omissions that resulted in such losses,
claims, damages or liabilities (or actions in respect thereof). The relative
benefits received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total proceeds from
the Offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company bear to the total underwriting discounts and
commissions received by the Underwriters. The relative fault of the parties
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Underwriters, the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission, and the other
24
<PAGE>
equitable considerations appropriate in the circumstances. The Company and the
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d).
Notwithstanding any other provision of this paragraph (d), the Underwriters
shall not be obligated to make contributions hereunder that in the aggregate
exceeding the total public offering price of the Securities purchased by the
Underwriters under this Agreement, less the aggregate amount of any damages that
the Underwriters have otherwise been required to pay in respect of the same or
any substantially similar claim, and no person guilty of fraudulent
misrepresentation (within the meaning of Section 11 (f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (d), each person, if any, who
controls an Underwriter within the meaning of Section 15 of the Act or Section
20 of the 1934 Act shall have the same rights to contribution as the
Underwriters, and each director of the Company, each officer of the Company who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the 1934
Act, shall have the same rights to contribution as the Company.
8. Substitution of Underwriters.
If any Underwriter shall for any reason not permitted hereunder cancel its
obligations to purchase the Firm Securities hereunder, or shall fail to take up
and pay for the number of Firm Securities set forth opposite names in Schedule 1
hereto upon tender of such Firm Securities in accordance with the terms hereof,
then:
(a) If the aggregate number of Firm Securities which such Underwriter
or Underwriters agreed but failed to purchase does not exceed 10% of the total
number of Firm Securities, the other Underwriters shall be obligated to purchase
the Firm Securities which such defaulting Underwriter agreed but failed to
purchase.
(b) If any Underwriter so defaults and the agreed number of Firm
Securities with respect to which such default or defaults occurs is more than
10% of the total number of Firm Securities, the remaining Underwriters shall
have the right to take up and pay for the Firm Securities which the defaulting
Underwriter agreed but failed to purchase. If such remaining Underwriters do
not, at the Firm Closing Date, take up and pay for the Firm Securities which the
defaulting Underwriter agreed but failed to purchase, the time for delivery of
the Firm Securities shall be extended to the next business day to allow the
remaining Underwriters the privilege of substituting within twenty-four hours
(including nonbusiness hours) another underwriter or underwriters satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid, within such twenty-four hour period, the time of
delivery of the Firm Securities may, at the option of the Company, be again
extended to the next following business day, if necessary, to allow the Company
the privilege of finding within twenty-four hours (including nonbusiness hours)
another underwriter or underwriters to purchase the Firm Securities which the
defaulting Underwriter or Underwriters agreed but failed to purchase. If it
shall be arranged for the remaining Underwriter or substituted Underwriters to
take up the Firm Securities of the defaulting Underwriter
25
<PAGE>
as provided in this section, (i) the Company or the Underwriters shall have the
right to postpone the time of delivery for a period of not more than seven
business days, in order to effect whatever changes may thereby be made necessary
in the Registration Statement or the Prospectus, or in any other document or
arrangements, and the Company agrees promptly to file any amendments to the
Registration Statement or supplements to the Prospectus which may thereby be
made necessary, and (ii) the respective numbers of Firm Securities to be
purchased by the remaining Underwriters or substituted Underwriters shall be
taken as the basis of the underwriting obligation for all purposes of this
agreement.
If in the event of a default by any Underwriter and the remaining
Underwriters shall not take up and pay for all the Firm Securities agreed to be
purchased by the defaulting Underwriter or substitute another underwriter or
underwriters as aforesaid, the Company shall not find or shall not elect to seek
another underwriter or underwriters for such Firm Securities as aforesaid, then
this Agreement shall terminate.
If, following exercise of the option provided in Section 2(c) hereof, any
Underwriter or Underwriters shall for any reason not permitted hereunder cancel
their obligations to purchase Option Shares at the Option Closing Date, or shall
fail to take up and pay for the number of Option Shares, which it became
obligated to purchase at the Option Closing Date upon tender of such Option
Shares in accordance with the terms hereof, then the remaining Underwriters or
substituted Underwriters may take up and pay for the Option Shares of the
defaulting Underwriters in the manner provided in Section 8(b) hereof. If the
remaining Underwriters or substituted Underwriters shall not take up and pay for
all such Option Shares, the Underwriters shall be entitled to purchase the
number of Option Shares for which there is no default or, at their election, the
option shall terminate, the exercise thereof shall be of no effect.
As used in this Agreement, the term "Underwriter" includes any person
substituted for an Underwriter under this Section. In the event of termination,
there shall be no liability on the part of any non-defaulting Underwriter to the
Company, provided that the provisions of this Section 8 shall not in any event
affect the liability of any defaulting Underwriter to the Company arising out of
such default.
9. Survival. The respective representations, warranties, agreements,
covenants, indemnities and other statements of the Company, any of its officers
or directors and the Underwriter set forth in this Agreement or made by or on
behalf of them, respectively, pursuant to this Agreement shall remain in full
force and effect, regardless of (i) any investigation made by or on behalf of
the Company, any of its officers or directors, the Underwriter or any
controlling person referred to in Section 7 hereof, and (ii) delivery of and
payment for the Securities. The respective agreements, covenants, indemnities
and other statements set forth in Sections 4 and 7 hereof shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement.
10. Termination.
(a) This Agreement may be terminated with respect to the Firm
Securities or any Option Shares in the sole discretion of the Representative
26
<PAGE>
by notice to the Company given prior to the Firm Closing Date or the related
Option Closing Date, respectively, in the event that the Company shall have
failed, refused or been unable to perform all obligations and satisfy all
conditions on its part to be performed or satisfied under Section 6 hereunder at
or prior thereto or if at or prior to the Firm Closing Date or such Option
Closing Date, respectively:
(1) the Company sustains a loss by reason of explosion, fire,
flood, accident or other calamity, which, in the opinion of the Underwriter,
substantially affects the value of the properties of the Company or which
materially interferes with the operation of the business of the Company
regardless of whether such loss shall have been insured; there shall have been
any material adverse change, or any development involving a prospective material
adverse change (including, without limitation, a change in management or control
of the Company), in the business, operations, condition (financial or
otherwise), earnings or prospects of the Company, except in each case as
described in or contemplated by the Prospectus (exclusive of any amendment or
supplement thereto);
(2) any action, suit or proceeding shall be threatened,
instituted or pending, at law or in equity, against the Company, by any person
or by any federal, state, foreign or other governmental or regulatory
commission, board or agency wherein any unfavorable result or decision could
materially adversely affect the business, operations, condition (financial or
otherwise), earnings or prospects of the Company;
(3) trading in the Common Stock shall have been suspended by the
Commission, the NASD or on Nasdaq, or trading in securities generally on the New
York Stock Exchange shall have been suspended or minimum or maximum prices shall
have been established on either such exchange or quotation system;
(4) a banking moratorium shall have been declared by New York or
United States authorities;
(5) there shall have been (A) an outbreak of hostilities between
the United States and any foreign power (or, in the case of any ongoing
hostilities, a material escalation thereof), (B) an outbreak of any other
insurrection or armed conflict involving the United States or (C) any other
calamity or crisis or material change in financial, political or economic
conditions, having an effect on the financial markets that, in any case referred
to in this clause (5), in the sole judgment of the Underwriter makes it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Securities as contemplated by the Registration Statement; and
(6) termination of this Agreement pursuant to this Section 10
shall be without liability of any party to any other party, except as provided
in Section 5(b) and Section 7 hereof.
11. Information Supplied by the Underwriter. The statements set forth in
the "Underwriting Section" in any Preliminary Prospectus or the Prospectus
27
<PAGE>
constitute the only information furnished by the Underwriter to the Company for
the purposes of Section 7(b) hereof. The Underwriter confirms that such
statements (to such extent) are correct.
12. Notices. All notice hereunder to or upon either party hereto shall be
deemed to have been duly given for all purposes if in writing and (i) delivered
in person or by messenger or an overnight courier service against receipt, or
(ii) send by certified or registered mail, postage paid, return receipt
requested, or (iii) sent by telegram, facsimile, telex or similar means,
provided that a written copy thereof is sent on the same day by postage paid
first-class mail, to such party at the following address:
To the Company: HI-Q Wason, Inc.
4th Floor, 52 Lane 232
Hu Lin Street
Taipei, Taiwan, Republic of China
Attn: Chief Executive Officer
Fax: (___) ___-____
and a copy to:
Gary A. Agron, Esq.
5445 DTC Parkway
Suite 520
Englewood, Colorado 80111
Fax: (___) ___-____
To the Representative: Nutmeg Securities, Ltd.
495 Post Road East
Westport, Connecticut 06880
Attn: Managing Director - Corporate Finance
Department
Fax: (203) 226-5343
and a copy to:
Jay Kaplowitz, Esq.
Gersten, Savage & Kaplowitz, LLP
101 East 52nd Street
New York, New York 10022-6018
or such other address as either party hereto may at any time, or from time to
time, direct by notice given to the other party in accordance with this section.
The date of giving of any such notice shall be, in the case of clause (i), the
date of the receipt; in the case of clause (ii), five business days after such
notice or demand is sent; and, in the case of clause (iii), the business day
next following the date such notice is sent.
28
<PAGE>
13. Amendment. Except as otherwise provided herein, no amendment of this
Agreement shall be valid or effective, unless in writing and signed by or on
behalf of the parties hereto.
14. Waiver. No course of dealing or omission or delay on the part of either
party hereto in asserting or exercising any right hereunder shall constitute or
operate as a waiver of any such right. No waiver of any provision hereof shall
be effective, unless in writing and signed by or on behalf of the party to be
charged therewith. No waiver shall be deemed a continuing waiver or waiver in
respect of any other or subsequent breach or default, unless expressly so stated
in writing.
15. Applicable Law. This agreement shall be governed by, and interpreted
and enforced in accordance with, the laws of the State of New York without
regard to principles of choice of law or conflict of laws.
16. Jurisdiction. Each of the parties hereto hereby irrevocably consents
and submits to the exclusive jurisdiction of the Supreme Court of the State of
New York and the United States District Court for the Southern District of New
York in connection with any suit, action or other proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby, waives any
objection to venue in the County of New York, State of New York, or such
District and agrees that service of any summons, complaint, notice or other
process relating to such suit, action or other proceeding may be effected in the
manner provided by clause (ii) of Section 12.
17. Remedies. In the event of any actual or prospective breach or default
by either party hereto, the other party shall be entitled to equitable relief,
including remedies in the nature of rescission, injunction and specific
performance. All remedies hereunder are cumulative and not exclusive, and
nothing herein shall be deemed to prohibit or limit either party from pursuing
any other remedy or relief available at law or in equity for such actual or
prospective breach or default, including the recovery of damages.
18. Attorneys' Fees. The prevailing party in any suit, action or other
proceeding arising out of or relating to this Agreement or the transactions
contemplated hereby, shall be entitled to recover its costs and reasonable
attorneys' fees.
19. Severability. The provisions hereof are severable and in the event that
any provision of this Agreement shall be determined to be invalid or
unenforceable in any respect by a court of competent jurisdiction, the remaining
provisions hereof shall not be affected, but shall, subject to the discretion of
such court, remain in full force and effect, and any invalid or unenforceable
provision shall be deemed, without further action on the part of the parties
hereto, amended and limited to the extent necessary to render the same valid and
enforceable.
20. Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original and which together shall constitute one and
the same agreement.
21. Successors. This Agreement shall inure to the benefit of and be binding
upon the Underwriter, the Company and their respective successors and assigns.
Nothing expressed or mentioned in this Agreement is intended or shall be
29
<PAGE>
construed to give any other person any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provisions herein contained, this
Agreement and all conditions and provisions hereof being intended to be and
being for the sole and exclusive benefit of such persons and for the benefit of
no other person except that (i) the indemnities of the Company contained in
Section 7 of this Agreement shall also be for the benefit of any person or
persons who control any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the 1934 Act, and (ii) the indemnities of the Underwriter
contained in Section 7 of this Agreement shall also be for the benefit of the
directors of the Company, the officers of the Company who have signed the
Registration Statement and any person or persons who control the Company within
the meaning of Section 15 of the Act or Section 20 of the 1934 Act. No purchaser
of Securities from the Underwriter shall be deemed a successor because of such
purchase.
22. Titles and Captions. The titles and captions of the articles and
sections of this Agreement are for convenience of reference only and do not in
any way define or interpret the intent of the parties or modify or otherwise
affect any of the provisions hereof.
23. Grammatical Conventions. Whenever the context so requires, each pronoun
or verb used herein shall be construed in the singular or the plural sense and
each capitalized term defined herein and each pronoun used herein shall be
construed in the masculine, feminine or neuter sense.
24. References. The terms "herein," "hereto," "hereof," "hereby," and
"hereafter," and other terms of similar import, refer to this Agreement as a
whole, and not to any Article, Section or other part hereof.
25. Entire Agreement. This Agreement embodies the entire agreement of the
parties hereto with respect to the subject matter hereof and supersedes any
prior agreement, commitment or arrangement relating thereto.
[Signatures on following page]
30
<PAGE>
If the foregoing correctly sets forth our understanding, please indicate
your acceptance thereof in the space provided below for that purpose, whereupon
this letter shall constitute an agreement binding the Company, and the
Underwriter.
Very truly yours,
HI-Q WASON, INC.
By:
----------------------------------------
Name:
Title: Chief Executive Officer
The foregoing agreement is hereby confirmed and accepted as of the date first
above written.
NUTMEG SECURITIES, LTD.
as representative of the several underwriters listed
on Schedule l annexed hereto
By:
-----------------------------------------------
Name: Daniel T. Guilfoile
Title: Director Investment Banking
31
<PAGE>
Schedule 1
Underwriter Number of Shares
- ----------- ----------------
32
<PAGE>
SCHEDULE 2
SHAREHOLDER LOCK UP PERIOD
.............................................. 12 months
.............................................. 12 months
.............................................. 12 months
.............................................. 12 months
.............................................. 12 months
.............................................. 12 months
33
Exhibit 1.02
HI-Q WASON, INC.
AND
NUTMEG SECURITIES, LTD.
REPRESENTATIVE'S
WARRANT AGREEMENT
REPRESENTATIVE'S WARRANT AGREEMENT dated as of ____________, 1999 by and
between HI-Q WASON, INC., (the "Company") and NUTMEG SECURITIES, LTD.
("Representative" or "Nutmeg").
W I T N E S S E T H:
--------------------
WHEREAS, the Company proposes to issue to the Representative 110,000
warrants (each a "Representative's Warrant") each to purchase a share of the
Company's common stock, par value [$___] per share (the "Common Stock").
WHEREAS, the Representative has agreed, pursuant to the underwriting
agreement (the "Underwriting Agreement") dated _________, 1999 by and between
the Representative and the Company, to act as the Representative in connection
with the Company's proposed public offering (the "Public Offering") of 1,100,000
shares of Common Stock (the "Offering Securities"); and
WHEREAS, the Representative's Stock Warrants to be issued pursuant to this
Agreement will be issued on the Firm Closing Date (as such term is defined in
the Underwriting Agreement) by the Company to the Representative in
consideration for, and as part of, the Representative's compensation in
connection with the Representative's acting as the Representative pursuant to
the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of One Hundred Dollars ($100.00), the agreements
herein set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Grant. The Holder (as defined in Section 3 below) is hereby granted the
right to purchase, at any time from ____________, 2000 until 5:00 p.m., New York
time, __________, 2005, up to 110,000 shares of Common Stock, at an initial
purchase price (subject to adjustment as provided in Section 8 hereof) of
$______ per share of Common Stock (120% of the per share public offering price),
subject to the terms and conditions of this Agreement. The securities issuable
upon exercise of the Representative's Warrant are sometimes referred to herein
as the "Representative's Securities."
<PAGE>
2. Warrant Certificates. The warrant certificate (the "Representative's
Warrant Certificate") to be delivered pursuant to this Agreement shall be in the
form set forth in Exhibit A attached hereto and made a part hereof, with such
appropriate insertions, omissions, substitutions, and other variations as
required or permitted by this Agreement.
3. Exercise of Representative's Warrant.
(a) The Representative's Warrant is exercisable during the term set
forth in Section 1 hereof payable by certified or cashier's check or money order
in lawful money of the United States. Upon surrender of Representative's Warrant
Certificate with the annexed Form of Election to Purchase duly executed,
together with payment of the Purchase Price (as hereinafter defined) for the
Representative's Securities (and such other amounts, if any, arising pursuant to
Section 4 hereof) at the Company's principal office currently located at 4th
Floor, 52 Lane 232, Hu Lin Street, Taipei, Taiwan, Republic of China, the
registered holder of a Representative's Warrant Certificate ("Holder" or
"Holders") shall be entitled to receive a certificate or certificates for the
Representative's Securities so purchased. The purchase rights represented by
each Representative's Warrant Certificate are exercisable at the option of the
Holder or Holders thereof, in whole or in part as to Representative's
Securities. The Representative's Warrant may be exercised to purchase all or any
part of the Representative's Securities represented thereby. In the case of the
purchase of less than all the Representative's Securities purchasable on the
exercise of the Representative's Warrant represented by a Representative's
Warrant Certificate, the Company shall cancel the Representative's Warrant
Certificate represented thereby upon the surrender thereof and shall execute and
deliver a new Representative's Warrant Certificate of like tenor for the balance
of the Representative's Securities purchasable thereunder.
(b) In lieu of the payment of cash upon exercise of the
Representative's Warrant as provided in Section 3(a), the Holder may exercise
the Representative's Warrant by surrendering the Representative's Warrant
Certificate at the principal office of the Company, accompanied by a notice
stating (i) the Holder's intent to effect such exercise by an exchange, (ii) the
Common Stock to be issued upon the exchange, (iii) whether Representative's
Warrants are to be surrendered in connection with the exchange, and (iv) the
date on which the Holder requests that such exchange is to occur. The Purchase
Price for the Representative's Securities to be acquired in the exchange shall
be paid by the surrender as indicated in the notice, of Representative's
Warrants, having a "Value", as defined below, equal to the Purchase Price.
"Value" as to each Representative's Warrant shall mean the difference between
the "Market Price", as hereinafter defined, of a share of Common Stock and the
then Purchase Price for a share of Common Stock.
By way of example of the application of the formula, assume that the Market
Price of the Common Stock is $8.00, the Purchase Price of the Representative's
Warrant is $6.00. On such assumptions, the Value of a Representative's Warrant
is $2.00 ($8.00-$6.00) and therefore for each three (3) Representative's
Warrants surrendered, the Holder could acquire one (1) share of Common Stock in
the exchange. Notwithstanding the example, the Holder shall not be limited to
exchanging Representative's Warrants for Common Stock.
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The Warrant Exchange shall take place on the date specified in the notice
or if the date the notice is received by the Company is later than the date
specified in the notice, on the date the notice is received by the Company.
4. Issuance of Certificates. Upon the exercise of the Representative's
Warrant and payment of the Purchase Price therefor, the issuance of certificates
representing the Representative's Securities or other securities, properties or
rights underlying such Representative's Warrant, shall be made forthwith (and in
any event within five (5) business days thereafter) without further charge to
the Holder thereof, and such certificates shall (subject to the provisions of
Sections 5 and 7 hereof) be issued in the name of, or in such names as may be
directed by, the Holder thereof; provided, however, that the Company shall not
be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any such certificates in a name other
than that of the Holder, and the Company shall not be required to issue or
deliver such certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
The Representative's Warrant Certificates and the certificates representing the
Representative's Securities or other securities, property or rights (if such
property or rights are represented by certificates) shall be executed on behalf
of the Company by the manual or facsimile signature of the then present Chairman
or Vice Chairman of the Board of Directors or President or Vice President of the
Company, attested to by the manual or facsimile signature of the then present
Secretary or Assistant Secretary or Treasurer or Assistant Treasurer of the
Company. The Representative's Warrant Certificates shall be dated the date of
issuance thereof by the Company upon initial issuance, transfer or exchange.
5. Restriction On Transfer of Representative's Warrant. The Holder of a
Representative's Warrant Certificate (and its Permitted Transferee, as defined
below), by its acceptance thereof, covenants and agrees that until ____________,
2000 (one year following the effective date of the Public Offering), the
Representative's Warrant may not be sold, transferred, assigned, hypothecated or
otherwise disposed of, in whole or in part, except to officers and partners of
the Representatives, or any Public Offering selling group member and their
respective officers and partners, ("Permitted Transferees"). Thereafter the
Representative's Warrant may be transferred, assigned, hypothecated or otherwise
disposed of in compliance with applicable law.
6. Purchase Price.
(a) Initial and Adjusted Purchase Price. Except as otherwise provided
in Section 8 hereof, the initial purchase price of the Representative's
Securities shall be $_____ per share of Common Stock (120% of the per share
public offering price). The adjusted purchase price shall be the price which
shall result from time to time from any and all adjustments of the initial
purchase price in accordance with the provisions of Section 8 hereof.
(b) Purchase Price. The term "Purchase Price" herein shall mean the
initial purchase price or the adjusted purchase price, depending upon the
context.
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7. Registration Rights.
(a) Registration Under the Securities Act of 1933 as amended ("Act").
The Representative's Warrant may have not been registered under the Act. The
Representative's Warrant Certificates may bear the following legend:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933 (the "Act"), and may not be offered
for sale or sold except pursuant to (i) an effective registration statement
under the Act, or (ii) an opinion of counsel, if such opinion and counsel shall
be reasonably satisfactory to counsel to the issuer, that an exemption from
registration under the Act is available."
(b) Demand Registration. (1) At any time commencing on the first
anniversary of and expiring on the fifth anniversary of the effective date of
the Company's Registration Statement relating to the Public Offering (the
"Effective Date"), the Holders of a Majority (as hereinafter defined) in
interest of the Representative's Warrant, or the Majority in interest of the
Representative's Securities (assuming the exercise of all of the
Representative's Warrant) shall have the right, exercisable by written notice to
the Company, to have the Company prepare and file with the U.S. Securities and
Exchange Commission (the "Commission"), on one (1) occasion, a registration
statement on Form F-1, SB-2, S-1 or other appropriate form, and such other
documents, including a prospectus, as may be necessary in the opinion of both
counsel for the Company and counsel for the Holders, in order to comply with the
provisions of the Act, so as to permit a public offering and sale, of the
Representative's Securities by such Holders and any other Holders of the
Representative's Warrant and/or the Representative's Securities who notify the
Company within fifteen (15) business days after receipt of the notice described
in Section 7(b)(2).
(2) The Company covenants and agrees to give written notice of
any registration request under this Section 7(b) by any Holders to all other
registered Holders of the Representative's Warrant and the Representative's
Securities within ten (10) calendar days from the date of the receipt of any
such registration request.
(3) For purposes of this Agreement, the term "Majority" in
reference to the Holders of the Representative's Warrant or Representative's
Securities, shall mean in excess of fifty percent (50%) of the then outstanding
Representative's Warrant or Representative's Securities that (i) are not held by
the Company, an affiliate, officer, creditor, employee or agent thereof or any
of their respective affiliates, members of their family, persons acting as
nominees or in conjunction therewith, or (ii) have not been resold to the public
pursuant to a registration statement filed with the Commission under the Act.
(4) The Company shall have no obligation to prepare and file a
registration statement pursuant to this Section 7(b) if, within twenty (20) days
after the Company receives such a demand for registration, the Company agrees,
or insiders who own individually more than 5% of the Company's outstanding
Common Stock agree, to purchase the Holder's Warrants and/or Warrant Shares from
the requesting Holders at a price equal to the difference between the Exercise
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Price then in effect and the then current market price of the Company's Common
Stock. The market price of the Company's Common Stock shall be the average of
the closing asked prices for the Company's Common Stock during the ten (10)
business days period preceding such request.
(c) Piggyback Registration. (1) If, at any time within the period
commencing on the first anniversary and expiring on the sixth anniversary of the
Effective Date, the Company should file a registration statement with the
Commission under the Act (other than in connection with a merger or other
business combination transaction or pursuant to Form S-8), it will give written
notice at least twenty (20) calendar days prior to the filing of each such
registration statement to the Representative and to all other Holders of the
Representative's Warrant and/or the Representative's Securities of its intention
to do so. If a Representative or other Holders of the Representative's Warrant
and/or the Representative's Securities notify the Company within fifteen (15)
calendar days after receipt of any such notice of its or their desire to include
any Representative's Securities in such proposed registration statement, the
Company shall afford the Representative and such Holders of the Representative's
Warrant and/or Representative's Securities the opportunity to have any such
Representative's Securities registered under such registration statement.
Notwithstanding the provisions of this Section 7(c)(1) and the provisions of
Section 7(d), the Company shall have the right at any time after it shall have
given written notice pursuant to this Section 7(c)(1) (irrespective of whether a
written request for inclusion of any such securities shall have been made) to
elect not to file any such proposed registration statement, or to withdraw the
same after the filing but prior to the effective date thereof.
(2) If the managing underwriter of an offering to which the above
piggyback rights apply, in good faith and for valid business reasons, objects to
such rights, such objection shall preclude such inclusion.
(d) Covenants of the Company With Respect to Registration. In
connection with any registrations under Sections 7(b) and 7(c) hereof, the
Company covenants and agrees as follows:
(1) The Company shall use its best efforts to file a registration
statement within thirty (30) calendar days of receipt of any demand therefor
pursuant to Section 7(b); provided, however, that the Company shall not be
required to produce audited or unaudited financial statements for any period
prior to the date such financial statements are required to be filed in a report
on Form 10-K or Form 10-Q (or Form 10-KSB or Form 10-QSB), as the case may be.
The Company shall use its best efforts to have any registration statement
declared effective at the earliest possible time, and shall furnish each Holder
desiring to sell Representative's Securities such number of prospectuses as
shall reasonably be requested.
(2) The Company shall maintain the effectiveness of the
registration statement for a period of time equal to the lesser of 9 months or
until such time as all of the Warrant Shares have been sold pursuant to the
registration statement.
(3) The Company shall pay all costs (excluding fees and expenses
of Holders' counsel and any underwriting discounts or selling fees, expenses or
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commissions), fees and expenses in connection with any registration statement
filed pursuant to Sections 7(b) and 7(c) hereof including, without limitation,
the Company's legal and accounting fees, printing expenses, blue sky fees and
expenses.
(4) The Company will use its best efforts to qualify or register
the Representative's Securities included in a registration statement for
offering and sale under the securities or blue sky laws of such states as
reasonably are requested by the Holders, provided that the Company shall not be
obligated to execute or file any general consent to service of process or to
qualify as a foreign corporation to do business under the laws of any such
jurisdiction.
(5) The Company shall indemnify the Holders of the
Representative's Securities to be sold pursuant to any registration statement
and each person, if any, who controls such Holders within the meaning of Section
15 of the Act or Section 20(a) of the Securities Exchange Act of 1934 (the
"Exchange Act"), against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or otherwise, arising from such registration
statement, but only to the same extent and with the same effect as the
provisions pursuant to which the Company has agreed to indemnify the
Representative contained in Section 8 of the Underwriting Agreement.
(6) The Holders of the Representative's Securities to be sold
pursuant to a registration statement, and their successors and assigns, shall
indemnify the Company, its officers and directors and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, against all loss, claim, damage or expense or
liability to which they may become subject under the Act, the Exchange Act or
otherwise, arising from information furnished by or on behalf of such Holders,
or their successors or assigns, for specific inclusion in such registration
statement to the same extent and with the same effect as the provisions
contained in Section 8 of the Underwriting Agreement pursuant to which the
Representative has agreed to indemnify the Company.
(7) Nothing contained in this Agreement shall be construed as
requiring the Holders to exercise their Representative's Warrant prior to the
initial filing of any registration statement or the effectiveness thereof,
provided that such Holders have made arrangements reasonably satisfactory to the
Company to pay the exercise price from the proceeds of such offering.
(8) The Company shall furnish to each Representative for the
offering, if any, such documents as such Representative may reasonably require.
(9) The Company shall as soon as practicable after the effective
date of the registration statement, and in any event within 15 months
thereafter, make "generally available to its security holders" (within the
meaning of Rule 158 under the Act) an earnings statement (which need not be
audited) complying with Section 11(a) of the Act and covering a period of at
least 12 consecutive months beginning after the effective date of the
registration statement.
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(10) The Company shall deliver promptly to each Holder
participating in the offering requesting the correspondence described below and
any managing Representative copies of all correspondence between the Commission
and the Company, its counsel or auditors with respect to the registration
statement and permit each Holder and Representative to do such investigation,
upon reasonable advance notice, with respect to information contained in or
omitted from the registration statement as it deems reasonably necessary to
comply with applicable securities laws or rules of the National Association of
Securities Dealers, Inc. ("NASD"). Such investigation shall include access to
books, records and properties and opportunities to discuss the business of the
Company with its officers and independent auditors, all to such reasonable
extent and at such reasonable times and as often as any such Holder shall
reasonably request.
(11) The Company shall enter into an underwriting agreement with
the managing underwriter selected for such underwriting by Holders holding a
Majority of the Representative's Securities requested to be included in such
underwriting, provided, however that such managing underwriter shall be
reasonably acceptable to the Company, except that in connection with an offering
for which the Holders have piggyback rights, the Company shall have the sole
right to select the managing underwriter or underwriters. Such underwriting
agreement shall be satisfactory in form and substance to the Company, a Majority
of such Holders (in respect of a registration under Section 7(b) only) and such
managing underwriter, and shall contain such representations, warranties and
covenants by the Company and such other terms as are customarily contained in
agreements of that type. The Holders shall be parties to any underwriting
agreement relating to an underwritten sale of their Representative's Securities.
Such Holders shall not be required to make any representations or warranties to
or agreements with the Company or the underwriters except as they may relate to
such Holders and their intended methods of distribution.
8. Adjustments to Purchase Price and Number of Securities.
(a) Computation of Adjusted Purchase Price. Except as hereinafter
provided, in case the Company shall at any time after the date hereof issue or
sell any shares of Common Stock (other than the issuances referred to in Section
8(g) hereof), including shares held in the Company's treasury, for a
consideration per share less than the "Market Price" (as defined in Section
8(a)(6) hereof) per share of Common Stock on the date immediately prior to the
issuance or sale of such shares, or without consideration, then forthwith upon
any such issuance or sale, the Purchase Price of the Common Stock shall (until
another such issuance or sale) be reduced to the price (calculated to the
nearest full cent) determined by dividing (1) the product of (a) the Purchase
Price in effect immediately before such issuance or sale and (b) the sum of (i)
the total number of shares of Common Stock outstanding immediately prior to such
issuance or sale, and (ii) the number of shares determined by dividing (A) the
aggregate consideration, if any, received by the Company upon such sale or
issuance, by (B) the Market Price, and by (2) the total number of shares of
Common Stock outstanding immediately after such issuance or sale provided,
however, that in no event shall the Purchase Price be adjusted pursuant to this
computation to an amount in excess of the Purchase Price in effect immediately
prior to such computation, except in the case of a combination of outstanding
shares of Common Stock, as provided by Section 8(c) hereof.
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For the purposes of this Section 8, the term "Purchase Price" shall
mean the Purchase Price of the Common Stock forming a part of the
Representative's Securities set forth in Section 6 hereof, as adjusted from time
to time pursuant to the provisions of this Section 8.
For the purposes of any computation to be made in accordance with this
Section 8(a), the following provisions shall be applicable:
(1) In case of the issuance or sale of shares of Common Stock (or
of other securities deemed hereunder to involve the issuance or sale of shares
of Common Stock) for a consideration part or all of which shall be cash, the
amount of the cash consideration therefor shall be deemed to be the amount of
cash received by the Company for such shares (or, if shares of Common Stock are
offered by the Company for subscription, the subscription price, or, if such
securities shall be sold to Representatives or dealers for public offering
without a subscription offering, the initial public offering price) before
deducting therefrom any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by Representatives or dealers or others
performing similar services, or any expenses incurred in connection therewith.
(2) In case of the issuance or sale (otherwise than as a dividend
or other distribution on any stock of the Company, and otherwise than on the
exercise of options, rights or warrants or the conversion or exchange of
convertible or exchangeable securities) of shares of Common Stock (or of other
securities deemed hereunder to involve the issuance or sale of shares of Common
Stock) for a consideration part or all of which shall be other than cash, the
amount of the consideration therefor other than cash shall be deemed to be the
value of such consideration as determined in good faith by the Board of
Directors of the Company.
(3) Shares of Common Stock issuable by way of dividend or other
distribution on any stock of the Company shall be deemed to have been issued
immediately after the opening of business on the day following the record date
for the determination of stockholders entitled to receive such dividend or other
distribution and shall be deemed to have been issued without consideration.
(4) The reclassification of securities of the Company other than
shares of Common Stock into securities including shares of Common Stock shall be
deemed to involve the issuance of such shares of Common Stock for a
consideration other than cash immediately prior to the close of business on the
date fixed for the determination of security holders entitled to receive such
shares, and the value of the consideration allocable to such shares of Common
Stock shall be determined as provided in Section 8(a)(2).
(5) The number of shares of Common Stock at any one time
outstanding shall include the aggregate number of shares of Common Stock issued
or issuable (subject to readjustment upon the actual issuance thereof) upon the
exercise of options, rights or warrants and upon the conversion or exchange of
convertible or exchangeable securities.
(6) As used herein in the phrase "Market Price" at any date shall
be deemed to be the last reported sale price, or, in the case no such reported
sale takes place on such day, the average of the last reported sales prices
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for the last three (3) trading days, in either case as officially reported by
the principal securities exchange on which the Common Stock is listed or
admitted to trading, or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, the average closing bid price as
furnished by the NASD through the NASD Automated Quotation System ("NASDAQ") or
similar organization if NASDAQ is no longer reporting such information, or if
the Common Stock is not quoted on NASDAQ, as determined in good faith by
resolution of the Board of Directors of the Company, based on the best
information available to it.
(b) Options, Rights, Warrant and Convertible and Exchangeable
Securities. Except in the case of the Company issuing rights to subscribe for
shares of Common Stock distributed to all the stockholders of the Company and
Holders of Representative's Warrant pursuant to Section 8(i) hereof, if the
Company shall at any time after the date hereof issue options, rights or
warrants to purchase shares of Common Stock, or issue any securities convertible
into or exchangeable for shares of Common Stock (other than the issuances
referred to in Section 8(g) hereof), (i) for a consideration per share less than
the Market Price (including the issuance thereof without consideration such as
by way of dividend or other distribution), or (ii) without consideration, the
Purchase Price in effect immediately prior to the issuance of such options,
rights or warrants, or such convertible or exchangeable securities, as the case
may be, shall be reduced to a price determined by making a computation in
accordance with the provisions of Section 8(a) hereof, provided that:
(1) The aggregate maximum number of shares of Common Stock
issuable or that may become issuable under such options, rights or warrants
(assuming exercise in full even if not then currently exercisable or currently
exercisable in full) shall be deemed to be issued and outstanding at the time
such options, rights or warrants were issued, and for a consideration equal to
the minimum purchase price per share provided for in such options, rights or
warrants at the time of issuance, plus the consideration (determined in the same
manner as consideration received on the issue or sale of shares in accordance
with the terms of the Representative's Warrant), if any, received by the Company
for such options, rights or warrants; provided, however, that upon the
expiration or other termination of such options, rights or warrants, if any
thereof shall not have been exercised, the number of shares of Common Stock
deemed to be issued and outstanding pursuant to this Section 8(b)(1) (and for
the purposes of Section 8(a)(5) hereof) shall be reduced by such number of
shares as to which options, warrants and/or rights shall have expired or
terminated unexercised, and such number of shares shall no longer be deemed to
be issued and outstanding, and the Purchase Price then in effect shall forthwith
be readjusted and thereafter be the price which it would have been had
adjustment been made on the basis of the issuance only of shares actually issued
or issuable upon the exercise of those options, rights or warrants as to which
the exercise rights shall not be expired or terminated unexercised.
(2) The aggregate maximum number of shares of Common Stock
issuable upon conversion or exchange of any convertible or exchangeable
securities (assuming conversion or exchange in full even if not then currently
convertible or exchangeable in full) shall be deemed to be issued and
outstanding at the time of issuance of such securities, and for a consideration
equal to the consideration (determined in the same manner as consideration
received on the issue or sale of shares of Common Stock in accordance with the
terms of the Representative's Warrant) received by the Company for such
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securities, plus the minimum consideration, if any, receivable by the Company
upon the conversion or exchange thereof; provided, however, that upon the
expiration or other termination of the right to convert or exchange such
convertible or exchangeable securities (whether by reason or redemption or
otherwise), the number of shares deemed to be issued and outstanding pursuant to
this Section 8(b)(2) (and for the purpose of Section 8(a)(5) hereof) shall be
reduced by such number of shares as to which the conversion or exchange rights
shall have expired or terminated unexercised, and such number of shares shall no
longer be deemed to be issued and outstanding and the Purchase Price then in
effect shall forthwith be readjusted and thereafter be the price which it would
have been had adjustment been made on the basis of the issuance only of the
shares actually issued or issuable upon the conversion or exchange of those
convertible or exchangeable securities as to which the conversion or exchange
rights shall not have expired or terminated unexercised.
(3) If any change shall occur in the price per share provided for
in any of the options, rights or warrants referred to in Section 8(b)(1), or in
the price per share at which the securities referred to in Section 8(b)(2) are
convertible or exchangeable, and if a change in the Purchase Price has not
occurred by reason of the event giving rise to the change in the price per share
of such other options, rights, warrants, or convertible or exchangeable
securities, such options, rights or warrants or conversion or exchange rights,
as the case may be, to the extent not theretofore exercised, the shall be deemed
to have expired or terminated on the date when such price change became
effective in respect of shares not theretofore issued pursuant to the exercise
or conversion or exchange thereof, and the Company shall be deemed to have
issued upon such date new options, rights or warrants or convertible or
exchangeable securities at the new price in respect of the number of shares
issuable upon the exercise of such options, rights or warrants or the conversion
or exchange of such convertible or exchangeable securities.
(c) Subdivision and Combination. In case the Company shall at any time
issue any shares of Common Stock in connection with a stock dividend in shares
of Common Stock or subdivide or combine the outstanding shares of Common Stock,
the Purchase Price shall forthwith be proportionately decreased in the case of a
stock dividend or a subdivision or increased in the case of combination.
(d) Adjustment in Number of Securities. Upon each adjustment of the
Purchase Price pursuant to the provisions of this Section 8, the number of
Representative's Securities issuable upon the exercise of the Representative's
Warrant shall be adjusted to the nearest whole share by multiplying a number
equal to the Purchase Price in effect immediately prior to such adjustment by
the number of Representative's Securities issuable upon exercise of the
Representative's Warrant immediately prior to such adjustment and dividing the
product so obtained by the adjusted Purchase Price.
(e) Definition of Common Stock. For the purpose of this Agreement, the
term "Common Stock" shall mean the class of stock designated as Common Stock in
the Certificate of Incorporation, of the Company as it may be amended as of the
date hereof.
(f) Reclassification, Merger or Consolidation. The Company will not
merge, reorganize or take any other action which would terminate the
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Representative's Warrant without first making adequate provision for the
Representative's Warrant. In case of any reclassification or change of the
outstanding shares of Common Stock issuable upon exercise of the outstanding
warrants (other than a change in par value to no par value, or from nor par
value to par value, or as a result of a subdivision or combination), or in case
of any consolidation of the Company with, or merger of the Company with, or
merger of the Company into, another corporation (other than a consolidation or
merger in which the Company is the continuing corporation and which does not
result in any reclassification or change of the outstanding Common Stock except
a change as a result of a subdivision or combination of such shares or a change
in par value, as aforesaid), or in the case of a sale or conveyance to another
corporation or other entity of the property of the Company as an entirety or
substantially as an entirety, the Holders of each Representative's Warrant then
outstanding or to be outstanding shall have the right thereafter (until the
expiration of such Representative's Warrant) to purchase, upon exercise of such
Representative's Warrant, the kind and number of shares of stock and other
securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance as if the Holders were the owner of
the shares of Common Stock underlying the Representative's Warrant immediately
prior to any such events at a price equal to the product of (x) the number of
shares issuable upon exercise of the Representative's Warrant and (y) the
Purchase Price in effect immediately prior to the record date for such
reclassification, change, consolidation, merger, sale or conveyance, as if such
Holders had exercised the Representative's Warrant. In the event of a
consolidation, merger, sale or conveyance of property, the corporation formed by
such consolidation or merger, or acquiring such property, shall execute and
deliver to the Holders a supplemental Representative's warrant agreement to such
effect. Such supplemental Representative's warrant agreement shall provide for
adjustments which shall be identical to the adjustment provided for in this
Section 8. The provisions of this Section 8(f) shall similarly apply to
successive consolidations or mergers.
(g) No Adjustment of Purchase Price in Certain Cases. No adjustment of
the Purchase Price shall be made:
(1) Upon the issuance or sale of (i) the Representative's Warrant
or the securities underlying the Representative's Warrant, (ii) the securities
sold pursuant to the Public Offering (including those sold upon exercise of the
Representative's over-allotment option), or (iii) the shares issuable pursuant
to the options, warrants, rights, stock purchase agreements or convertible or
exchangeable securities outstanding or in effect on the date hereof as described
in the prospectus relating to the Public Offering.
(2) If the amount of said adjustments shall aggregate less than
two ($.02) cents for one (1) share of Common Stock; provided, however, that in
such case any adjustment that would otherwise be required then to be made shall
be carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment so carried forward,
shall aggregate at least two ($.02) cents for one (1) share of Common Stock. In
addition, Registered Holders shall not be entitled to cash dividends paid by the
Company prior to the exercise of any warrant or warrants held by them.
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9. Exchange and Replacement of Warrant Certificates. Each Representative's
Warrant Certificate is exchangeable without expense, upon the surrender thereof
by the registered Holders at the principal executive office of the Company, for
a new Representative's Warrant Certificate of like tenor and date representing
in the aggregate the right to purchase the same number of Representative's
Securities in such denominations as shall be designated by the Holders thereof
at the time of such surrender.
10. Loss, Theft etc. of Certificates Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft, destruction or
mutilation of any Representative's Warrant Certificate, and, in case of loss,
theft or destruction, of indemnity or security reasonably satisfactory to it,
and reimbursement to the Company of all reasonable expenses incidental thereto,
and upon surrender and cancellation of the Representative's Warrant
Certificates, if mutilated, the Company will make and deliver a new
Representative's Warrant Certificate of like tenor, in lieu thereof.
11. Elimination of Fractional Interests. The Company shall not be required
to issue certificates representing fractions of shares of Common Stock upon the
exercise of the Representative's Warrant, nor shall it be required to issue
scrip or pay cash in lieu of fractional interests; provided, however, that if a
Holder exercises all Representative's Warrant held of record by such Holder the
fractional interests shall be eliminated by rounding any fraction to the nearest
whole number of shares of Common Stock or other securities, properties or
rights.
12. Reservation and Listing of Securities. The Company shall at all times
reserve and keep available out of its authorized shares of Common Stock, solely
for the purpose of issuance upon the exercise of the Representative's Warrant,
such number of shares of Common Stock or other securities and properties or
rights as shall be issuable upon the exercise thereof. The Company covenants and
agrees that, upon exercise of Representative's Warrant and payment of the
Purchase Price therefor, all the shares of Common Stock issuable upon such
exercise shall be duly and validly issued, fully paid, non-assessable and not
subject to the preemptive rights of any stockholder. As long as the
Representative's Warrant shall be outstanding, the Company shall use its best
efforts to cause the Common Stock to be listed (subject to official notice of
issuance) on all securities exchanges on which the Common Stock issued to the
public in connection herewith may then be listed or quoted.
13. Notices to Representative's Warrant Holders. Nothing contained in this
Agreement shall be construed as conferring upon the Holders the right to vote or
to consent or to receive notice as a stockholder in respect of any meetings of
stockholders for the election of directors or any other matter, or as having any
rights whatsoever as a stockholder of the Company. If, however, at any time
prior to the expiration of the Representative's Warrant and their exercise, any
of the following events shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or distribution
payable otherwise than out of current or retained earnings, as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
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(b) the Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities convertible into
or exchangeable for shares of capital stock of the Company, or any option, right
or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; then, in any one or more of said events, the Company shall give
written notice of such event at least fifteen (15) calendar days prior to the
date fixed as a record date or the date of closing the transfer books for the
determination of the stockholders entitled to such dividend, distribution,
convertible or exchangeable securities or subscription rights, or entitled to
vote on such proposed dissolution, liquidation, winding up or sale. Such notice
shall specify such record date or the date of closing the transfer books, as the
case may be. Failure to give such notice or any defect therein shall not affect
the validity of any action taken in connection with the declaration or payment
of any such dividend, or the issuance of any convertible or exchangeable
securities, or subscription rights, options or warrants, or any proposed
dissolution, liquidation, winding up or sale.
14. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or five days after being mailed by registered or certified mail,
return receipt requested:
(a) If to the registered Holders of the Representative's Warrant, to
the address of such Holders as shown on the books of the Company; or
(b) If to the Company to 4th Floor, 52 Lane 232, Hu Lin Street,
Taipei, Taiwan, Republic of China, attention: ________ or to such other address
as the Company may designate by notice to the Holders, with a courtesy copy to
Gary A. Agron, Esq., 5445 DTC Parkway, Suite 520, Engelwood, Colorado 80111.
15. Supplements and Amendments. The Company and the Representative may from
time to time supplement or amend this Agreement without the approval of any
Holders of Representative's Warrant Certificates (other than the Representative)
in order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or to
make any other provision in regard to matters or questions arising hereunder
which the Company and the Representative may deem necessary or desirable and
which the Company and the Representative deem shall not adversely affect the
interests of the Holders of Representative's Warrant Certificates.
16. Successors. All the covenants and provisions of this Agreement shall be
binding upon and inure to the benefit of the Company, the Representative, the
Holders and their respective successors and assigns hereunder.
17. Termination. This Agreement shall terminate at the close of business on
_____________, 2005. Notwithstanding the foregoing, the indemnification
provisions of Section 7 shall survive such termination until the close of
business on the expiration of any applicable statue of limitations.
13
<PAGE>
18. Governing Law; Submission to Jurisdiction. This Agreement and each
Representative's Warrant Certificate issued hereunder shall be deemed to be a
contract made under the laws of the State of New York and for all purposes shall
be construed in accordance with the laws of said state without giving effect to
the rules of said state governing the conflicts of laws.
19. Entire Agreement; Modification. This Agreement (including the
Underwriting Agreement, to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and thereof. This Agreement may not be modified or amended
except by a writing duly signed by the Company and the Holders of a Majority in
Interest of the Representative's Securities (for this purpose, treating all then
outstanding Representative's Warrants as if they had been exercised).
20. Severability. If any provision of this Agreement shall be held to be
invalid or unenforceable, such invalidity or unenforceability shall not affect
any other provision of this Agreement.
21. Captions. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
22. Benefits of this Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holders of the Representative's Warrant
Certificates or Representative's Securities any legal or equitable right, remedy
or claim under this Agreement; and this Agreement shall be for the sole and
exclusive benefit of the Company and the Representative and any other Holders of
the Representative's Warrant Certificates or Representative's Securities.
23. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute but one and the
same instrument.
24. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Company, the Representative and their respective successors and
assigns and the Holders from time to time of the Representative's Warrant
Certificates or any of them.
[Signature on following page]
14
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
HI-Q WASON, INC.
By:__________________________________________
_________, Chief Executive Officer
NUTMEG SECURITIES, LTD., for itself and as
Representative of the Several Underwriters listed On
By:__________________________________________
Name: Daniel T. Guilfoile
Title: Director Investment Banking
15
<PAGE>
Schedule A
to
Representative's Warrant Agreement
Between
HI-Q Wason, Inc.
and
Nutmeg Securities, Ltd.
Representative
Nutmeg Securities, Ltd.
Underwriters:
16
<PAGE>
HI-Q WASON, INC.
----------------
WARRANT CERTIFICATE
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT"), AND MAY NOT BE OFFERED FOR SALE OR SOLD
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR
(ii) AN OPINION OF COUNSEL, IF SUCH OPINION AND COUNSEL SHALL BE REASONABLY
SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER
THE ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT
REFERRED TO HEREIN.
EXERCISABLE COMMENCING _________, 2000 THROUGH
5:00 P.M., NEW YORK TIME ON ___________, 2005
Warrant covering 110,000 shares of
Common Stock
No. UW-1
This Warrant Certificate certifies that Nutmeg Securities, Ltd. or
registered assigns, is the registered holder of this Warrant to purchase
initially, at any time from ___________, 2000, until 5:00 p.m., New York time on
__________, 2005 (the "Expiration Date"), up to 110,000 shares of Common Stock,
$[___] par value (the "Common Stock") of HI-Q Wason, Inc. ("Company")
exercisable to purchase one share of Common Stock at a purchase price of $_____
per share (120% of the per share public offering price) (the "Purchase Price"),
upon the surrender of this Warrant Certificate and payment of the applicable
Purchase Price at an office or agency of the Company, but subject to the
conditions set forth herein and in the Representative's Warrant Agreement, dated
as of _______, 1999, by and between the Company and Nutmeg Securities, Ltd. (the
"Warrant Agreement"). Payment of the Purchase Price shall be made by certified
or cashier's check or money order payable to the order of the Company.
No Warrant may be exercised after 5:00 p.m., New York time, on the
Expiration Date, at which time all Warrant evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrant evidenced by this Warrant Certificate is part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement between
the Company and the Representative, which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrant.
17
<PAGE>
The Warrant Agreement provides that upon the occurrence of certain events
the Purchase Price and the type and/or number of the Company's securities
issuable upon the exercise of this Warrant, may, subject to certain conditions,
be adjusted. In such event, the Company will, at the request of the holder,
issue a new Warrant Certificate evidencing the adjustment in the Purchase Price
and the number and/or type of securities issuable upon the exercise of the
Warrant; provided, however, that the failure of the Company to issue such new
Warrant Certificates shall not in any way change, alter, or otherwise impair,
the rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrant shall be issued to the transferee(s) in exchange as provided herein,
without any charge except for any tax or other governmental charge imposed in
connection with such transfer.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the undersigned has executed this certificate this
____day of ________________, 1999.
HI-Q WASON, INC.
By:______________________________________
ATTEST:
By:__________________________________
Name:
Title: Secretary
18
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED___________________________
hereby sells, assigns and transfers unto _____________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _____________________
Attorney, to transfer the within Warrant Certificate on the books of HI-Q Wason,
Inc., with full power of substitution.
Dated:
Signature_____________________
(Signature must conform in all respects
to the name of holder as specified on
the face of the Warrant Certificate.)
[Signature guarantee] ________________________________
(Insert Social Security or Other
Identifying Number of Holders)
19
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right, represented by
this Warrant Certificate, to purchase ______ shares of Common Stock Warrant and
herewith tenders in payment for such securities a certified or cashier's check
or money order payable to the order of HI-Q Wason, Inc in the amount of $______,
all in accordance with the terms hereof. The undersigned requests that
certificates for such securities be registered in the name of
___________________________ whose address is _____________________ and that such
certificates be delivered to ____________ whose address is
____________________________________________________________.
Dated:
Signature_______________________
(Signature must conform in all respects to the name of holder as specified on
the face of the Warrant Certificate.)
(Insert Social Security or Other
Identifying Number of Holders)
[Signature guarantee]
20
Exhibit 5.01
HARNEY WESTWOOD & RIEGELS
ATTORNEYS AT LAW
[Letterhead]
____________, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: HI Q WASON, INC.
REGISTRATION STATEMENT ON FORM F-1
REGISTRATION NO. 333-78899
Ladies and Gentlemen:
As special British Virgin Islands counsel to Hi Q Wason, Inc., a British
Virgin Islands corporation (the "Company"), we are rendering this opinion in
connection with the registration by the Company of warrants (the "Warrants") to
purchase 110,000 shares of the Company's no par value common stock ("Common
Stock"), 1,265,000 shares of Common Stock including 165,000 shares subject to an
over-allotment option and an additional 110,000 shares of Common Stock
underlying the Warrants (collectively, the "Shares") and the proposed issuance
and sale of the Warrants and Shares under the above-referenced registration
statement.
We have examined all instruments, documents and records which we deemed
relevant and necessary for the basis of our opinion hereinafter expressed. In
such examination, we have assumed the genuineness of all signatures and the
authenticity of all documents submitted to us as originals and the conformity to
the originals of all documents submitted to us as copies.
Based on such examination and subject to the completion of all conditions
to closing provided under the relevant underwriting agreement, and subject to
such other limitations hereinabove provided, we are of the opinion that the
Shares are validly authorized shares of Common Stock, and when issued, will be
legally issued, fully paid and nonassessable, and that the Warrants are validly
authorized Warrants to purchase shares of Common Stock and when issued will be
legally issued, fully paid and nonassessable.
We hereby consent to the filing of the foregoing opinion as an Exhibit to
the above-referenced registration statement to be filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, and to the use
of our name in such registration statement and in the related Prospectus under
the heading "Legal Matters."
Sincerely,
/s/ Harney Westwood & Riegels
-------------------------------------------
HARNEY WESTWOOD & RIEGELS
Exhibit 10.4
EMPLOYMENT AGREEMENT
This Employment Agreement is made by and between Hi-Q Wason Corporation, a
British Virgin Island corporation (hereinafter referred to as "Company"). and
TUAN-YUAN. HU, an individual (hereinafter referred to as "Employee").
RECITALS
A. Company is engaged in the business of the design, development and
marketing of drinking water for commercial and residential users.
B. Company desires to employ Employee and Employee desires to be employed
by Company, on the terms, covenants, and conditions set forth in this Agreement.
AGREEMENT
Upon the terms and conditions set forth in this Agreement, the parties
agree as follows:
1. Title, Duties and Authority. Company hereby employs Employee as the
Chief Executive Officer of Company. Except as otherwise provided in this
Agreement, Employee shall have full power and authority to hire and fire all
employees of Company and to supervise, direct, manage and conduct the business
of Company on a day-to-day basis. Company's board of directors (the "Board") in
its sole discretion from time to time may change or modify the position or
duties of Employee and Company may employ Employee in such other capacity or
capacities as the Board may from time to time prescribe.
2. Employment.
2.1 Performance of Duties. During Employee's employment hereunder,
Employee shall devote Employee's full performance of Employee's duties under
this Agreement with fidelity and in Company's best interests. At all times
during Employee's employment, Employee will comply with all reasonably
applicable policies and procedures established from time to time by Company and
which reasonably relate to the conduct of Company's business.
2.2 Limitations on Authority. Employee shall at all times be subject
to the direction of the Board and in no event shall Employee take any of the
following actions on Company's behalf without the Board's specific approval:
2.2.1 Borrowing or obtaining credit in any amount;
2.2.2. Executing any guaranty;
2.2.3 Expending funds in excess of budgeted expenditures for any
specified period;
2.2.4 Selling or otherwise transferring capital assets of
Company;
<PAGE>
2.2.5 Executing any contract or making any commitment for the
purchase, sale, lease or rental of any personal or real property or services in
an amount exceeding budgeted expenditures; and
2.2.6 Terminating the services of any managerial or supervisory
level employee of Company of
hiring any replacement of any managerial or supervisory level employee whose
services have been terminated.
2.3 Noncompetition. Without Company's prior written consent, Employee
shall not render other services of any kind for compensation; and Employee will
not engage in any other business activity that would interfere or conflict with
the performance of Employee's duties under this Agreement. Without limiting the
generality of the foregoing, Employee shall not directly or indirectly carry on,
engage in, or have any interest in (whether as a director, officer, employee,
shareholder, partner, joint venture, trustee, consultant, investor or otherwise)
any business activity now or hereafter engaged in by Company.
3. Duration of Employment. Subject to the provisions for termination
provided in Section 8, Employee's term of employment shall commence on , 1999
and continue for a period of five (5) years, terminating at midnight on , 2004.
4. Place of Employment. Employee shall perform the duties Employee is
required to perform under this Agreement at Company's principal offices located
at . Further, Company from time to time may require Employee to travel to job
sites and other locations on Company's business.
5. Compensation.
5.1 Base Salary. Company shall pay Employee a salary at the rate of
TEN THOUSAND DOLLARS ($10,000) per month. The monthly salary shall be paid
one-half (1/2) on the fifteenth (15th) day of each month and one-half (1/2) on
the last day of each month, or any other intervals as determined by Company, but
not less than monthly. The salary will be adjusted annually according to the
inflation rate in Taiwan, ROC. Any increase in salary shall be as determined
from time to time by Company in its sole discretion. Nothing contained in this
Section shall prohibit the Board from increasing Employee's salary in the future
based upon Employee's performance.
5.2 Additional Compensation. At the end of each fiscal year of
Company, Company may pay Employee such additional compensation for services
rendered under this Agreement as may be determined in the sole and absolute
discretion of the Board. The Additional compensation will not exceed FIVE
percent (5%) of the Company's net income of the current fiscal year. Further,
Employees shall receive up to 25,000 options to purchase common stock of the
Company at 110% of the current market price.
<PAGE>
5.3 Employee Benefits. During the term of this Agreement, Employee
shall be entitled to receive such benefits, including health insurance, life
insurance, automobile allowance, vacation time and the like, as may be agreed
upon by Company and Employee in a written letter of understanding. If such a
written letter of understanding is executed, it shall be attached to this
Agreement. In addition, Employee shall be entitled to receive all other benefits
of employment generally available to Company's other employees when and as
Employee becomes eligible for them.
5.4 Withholding. Company shall have the right to deduct or withhold
from compensation due to Employee under this Agreement any and all sums required
for federal income and Social Security taxes and all state or local taxes now
applicable or that may be enacted and become applicable in the future.
5.5 Expense Reimbursement. Employee is authorized to incur reasonable
for promoting the business of Company, including expenses for entertainment,
travel and similar items. Upon adequate accounting by the Employee to Company,
Company shall reimburse Employee for these and other expenses reasonably
incurred by Employee in connection with Company's business and Employee's duties
as Cheif Executive Officer. This reimbursement is subjected to prior approval by
the board and such policies as the board may reasonable establish form time to
time.
5.6 Disability. Employee shall be entitled to continue to receive
Employee's salary under this Agreement during such time as Employee is unable to
perform Employee's duties by reason of illness or incapacity for a period of up
to and including a maximum of one (1) year. Thereafter, Employee shall not be
entitled to receive any further compensation until Employee returns to full
employment as provided by this Agreement. Should Employee be absent from
employment for whatever cause for a continuous period of more than one (1) year,
Company may terminate this Agreement in which case all obligations of Company
under this Agreement shall immediately cease and terminate.
6.0 Ownership Of Intangibles. All concepts, procedures, programs,
processes, ideas, inventions, patents, copyrights, trademarks and other
intangible rights that Employee may conceive or develop either alone or in
conjunction with others, during Employee's working hours, and with respect to
which (I) the personal, facilities, equipment, supplies or trade secret
information of Company was used, (ii) that relate, at the time of conception or
reduction to practice of the invention to Company's business, or to Company's
actual or demonstrably anticipated research and development, or (iii) that
result from any work performed by Employee for Company, shall be the sole
property of Company. Employee shall disclose to Company all such items conceived
or developed during Employee's employment by Company and for one (1) year
thereafter, whether or not the property of Company under the terms of the
preceding provisions of this Section, providing that such disclosure shall be
received by Company in confidence. Employee shall execute any and all documents
required by Company to establish or perfect Company's rights under this Section.
7. Trade Secrets.
7.1 General. The parties acknowledge and agree that during Employee's
employment by Company and in the course of the discharge of Employee's duties
hereunder, Employee shall have access to and become acquainted with information
concerning the operation of Company, including, without limitation , policies;
procedures; operating manuals; business practices, methods and theories;
business expertise and knowledge; forms; operational systems and information;
data processing systems; contracts; financial, personnel and pricing
<PAGE>
information; customer lists and information; bidding and pricing strategies;
public relations; marketing and sales techniques; names of vendors and
suppliers; costs of materials; manufacturing and sales costs; sales prices;
matters pertaining to the processes used in the development of Company's
projects; compensation paid to employees and other terms of employment; and
other information that is owned by company , not otherwise publicly available
and used in the operation of Company's business. The parties further acknowledge
and agree that this information constitutes Company's trade secrets and that
such matters are important, material and confidential and affect the successful
conduct of Company's business and it's goodwill, and that any breach of any term
of this Section is a material breach of this Agreement.
7.2 Confidentiality. Employee shall maintain all such trade secrets in
strict secrecy and Employee agrees that he will not disclose any such trade
secrets, directly or indirectly, to any other person or entity or use them in
any way, either while employed by Company or at any other time thereafter,
except as required in the course of Employee's employment for Company upon prior
written approval of Company.
7.3 Property of Company. Employee further agrees that all files,
lists, records, notebooks, memoranda, reports, books documents, customer lists,
other complications of information, correspondence, and similar items relating
to Company's business, whether prepared by Employee or others, are used and
shall remain exclusively the property of Company and that any such items may be
removed from the premises of Company only with express prior consent of the
Board. Employee also agrees that upon termination of Employee's employment for
any reason, Employee shall deliver promptly to Company all equipment, supplies,
files, lists, records, notebooks, memoranda, reports, books, customer lists,
correspondence, other written or graphic records and materials, and all
compilations of information or data maintained in or by electronic, optical or
laser storage or magnetic media, and the like, affecting or relating to
Company's business, which are or have been used by Employee or in Employee's
possession or under Employee's control.
8. Termination of Employment.Employee's employment under this Agreement
shall terminate as follows:
8.1 Expiration of Term. Upon the expiration of the term of this
Agreement as provided in Section 3.
8.2 Termination by Company with Cause. Company may terminate
Employee's employment upon the majority vote of the Board if Employee commits
any act of dishonesty, discloses confidential information or trade secrets of
Company without prior written approval of Company, is guilty of gross
carelessness or misconduct, unjustifiably neglects Employee's duties under this
Agreement, continuously fails or refuses to comply with the policies, standards
and regulations of Company, or acts in any way that has a substantially adverse
effect on Company's business or reputation.
8.3 Termination by Company without Cause. If the Company terminates
the Employment Agreement other than for cause, Employee will be entitled to one
(1) year of the base salary that he would otherwise be entitled to under the
term of the Employment Agreement. In such event, Employee will also be entitled
to a prorated portion of any bonus otherwise payable to him with respect to the
year of such termination.
<PAGE>
9. Notices. All notices, requests, demands, instructions or other
communications to be given to any party hereunder shall be in writing and shall
be deemed to have been duly given (i) on the date of service if personally
served on the party to whom notice is to be given; (ii) within twenty-four (24)
hours after mailing, if mailed to the party to whom notice is to be given, by
first class mail which is registered or certified, return receipt requested,
postage prepaid; (iii) within twenty-four (24) hours after being deposited with
a recognized private courier service (e.g., Federal Express), if delivered by a
private courier service to the party to whom notice is to be given, all charges
prepaid; or (iv) when sent, if given by telex or telecopy. Any notice, request,
demand, instructions or other communication sent by telex or telecopy must be
confirmed within twenty-four (24) hours by letter mailed or delivered in
accordance with this Section. All notices shall be properly addressed to the
party receiving notice as follows: If to Company to:
Hi-Q Wason Corporation
- -------------------------
- -------------------------
If to Employee to:
Tuan-Yuan Hu
- -------------------------
- -------------------------
The address for the purposes of this Section may be changed by giving written
notice of such change.
10. General Provisions.
10.1 No Acts Contrary to Law. Nothing contained in this Agreement
shall be construed to require the commission of any act contrary to law, and
whenever there is any conflict between any provision of this Agreement and any
statute, law, ordinance, or regulation, contrary to which the parties have no
legal right to contract, then the latter shall prevail; but in such an event,
the provisions of this Agreement so affected shall be curtailed and limited only
to the extent necessary to bring it within the legal requirements.
10.2 Waiver. Failure to insist upon strict compliance with any of the
terms, covenants, and conditions hereof shall not be deemed a waiver of such
term, covenant or condition. No waiver of any of the provisions of this
Agreement shall be deemed, or shall constitute a waiver of any other provision,
whether or not similar, not shall any waiver constitute a continuing waiver; and
no waiver shall be binding unless contained in a writing specifically referring
to this Agreement and executed by the party making the waiver.
10.3 Severability. The invalidity or unenforceability of any provision
hereof shall in no way affect the validity or enforceability of any other
provision.
10.4 Entire Agreement.This Agreement constitutes the entire agreement
between the parties pertaining to the subject matter contained herein and
supersedes all prior and contemporaneous agreements, representations and
understandings, whether oral or written, of the parties and none shall be
available to interpret or construe this Agreement. No supplement, modification
or amendment of this Agreement shall be binding unless contained in writing
specifically referring to this Agreement and executed by Employee and all of the
members of the Board.
<PAGE>
10.5 Paragraph Headings. The paragraph headings used in this Agreement
are for reference and convenience only, and shall not in any way limit or
amplify the terms and provisions hereof, nor enter into the interpretation of
this Agreement.
10.6 Benefit. This Agreement shall inure to the benefit of and be
binding upon the parties and their respective heirs, executors, administrators,
successors and assigns, except that the duties and obligations of Employee
hereunder may not be delegated or assigned.
10.7 Applicable Law. Company and Employee agree that this Agreement
and performance under it, and all suits and special proceedings that may ensue
from its breach, be construed in accordance with and under the laws of the State
of California, and may be brought arising out of, in connection with, or by
reason of this Agreement, the laws of the State of California shall be
applicable and shall govern to the exclusion of the law of any other forum and
any such action or proceeding shall be brought in the County of Los Angeles,
State of California.
10.8 Representations by Employee. Employee represents and warrants
that Employee is free to enter into this Agreement and to perform each of the
terms and covenants herein. Employee represents and warrants that Employee is
not restricted or prohibited, contractually or otherwise, from entering into and
performing this Agreement, and that Employee's execution and performance of this
Agreement is not a violation or breach of any other agreement between Employee
and any other person or entity.
10.9 Representations by Company. Company represents and warrants that
it is free to enter into this Agreement and to perform each of the terms and
covenants herein. Company represents and warrants that it is not restricted or
prohibited, contractually or otherwise, from entering into and performing this
Agreement, and that its execution and performance of it is not a violation or
breach of any other agreement between Company and any other person or entity.
Company also represents and warrants that each person signing this Agreement and
any related document on its behalf has full power and authority to execute this
Agreement on behalf of Company.
10.10 Effective Date. This Agreement shall be effective as of
,1999.
Company:
HI-Q WASON CORPORATION,
a British Virgin Island corporation
Execute on , 1999 By:
--------------- ----------------------------------
----------------------------------
Secretary and Treasurer
Employee:
Execute on , 1999 By:
--------------- ----------------------------------
----------------------------------
Exhibit 23.04
The Board of Directors
Hi-Q Wason,, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG Certified Public Accountants
Taipei, Taiwan
August 20, 1999
