<PAGE>
As filed with the Securities and Exchange Commission on September 26, 1996
Registration No. 333-09517
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
EASTCO INDUSTRIAL SAFETY CORP.
(Exact name of registrant as specified in its charter)
New York 5098 11-1874010
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number)
incorporation or Code Number)
organization)
130 West 10th Street
Huntington Station, New York 11746
(516) 427-1802
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive office)
Mr. Alan E. Densen
President
130 West 10th Street
Huntington Station, New York 11746
(516) 427-1802
(Name, address, including zip code, and telephone number
including area code, of agent for service)
Copies To:
Herbert W. Solomon, Esq. Lester Morse, Esq.
Seth I. Rubin, Esq. Steve Morse, Esq.
Hollenberg Levin Solomon Ross Lester Morse, P.C.
Belsky & Daniels, LLP 111 Great Neck Road
585 Stewart Avenue Great Neck, New York 11021
Garden City, New York 11530
(516) 745-6000 (516) 487-1446
fax (516) 745-6642 fax (516) 487-1452
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. [X]
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Maximum Maximum
Title of Each Class Amount Offering Aggregate Amount of
of Securities to to be Price Per Offering Registration
be Registered Registered(1) Unit (1) Price(1) Fee
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rights, each right ("Right")
consisting of one share of
common stock (the "Common
Stock") and one class B
redeemable Common Stock
purchase warrant (the Class B
Warrants")(2)............ 703,591 ---- ---- ----
Common Stock issuable
upon exercise of Rights(2) 703,591 $5.00 $3,517,955.00 $1,231.28
Class B Warrants issuable
upon exercise of Rights(2)(3) 703,591 ---- ---- ----
Common Stock issuable
upon exercise of Class B
Warrants (3)............. 703,591 $6.25 $4,397,443.70 $1,539.11
Underwriter's Warrants... 70,359 $.0001 $7.04 $ 1.00
Common Stock issuable
upon exercise of
Underwriter's Warrants(3) 70,359 $6.00 $ 422,154.00 $ 147.15
Class B Warrants
issuable upon exercise
of Underwriter's Warrants 70,359 ---- ---- ----
Common Stock issuable
upon exercise of Class B
Warrants................. 70,359 $6.25 $ 439,743.75 $ 153.91
Common Stock sellable by
Selling Stockholders..... 513,000 $8.00 $4,104,000.00 $1,436.40
Optional Units........... 300,000 $5.00 $1,500,000.00 $ 525.00
Common Stock issuable upon
exercise of Optional Units(3) 300,000 ---- ---- ----
Warrants issuable upon
exercise of Optional Units 300,000 ---- ---- ----
Common Stock issuable upon
exercise of Warrants
contained in Optional Units(3) 300,000 $6.25 $1,875,000.00 $ 656.25
---------
Total ............................................................ $5,690.10
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
<PAGE>
(2) Includes unsubscribed Rights and Common Stock and Class B Warrants
which may be sold to Royce Investment Group, Inc. under the Standby
Agreement.
(3) Includes such undetermined additional shares as may become issuable
pursuant to the anti-dilution provisions of the Class B Warrants and
Underwriter's warrants and Optional Units.
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
Cross Reference Sheet Showing Location
in Prospectus of Information
Required by Items of Form SB-2
Item and Heading Location in Prospectus
1. Front of the Registration Cover Page of Prospectus
Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Inside Front and Outside
Cover Pages of Prospectus Back Cover Pages of Prospectus
3. Summary Information and Prospectus Summary;
Risk Factors Risk Factors
4. Use of Proceeds Prospectus Summary;
Use of Proceeds
5. Determination of Offering Price Underwriting; Plan of Distribution(*)
6. Dilution Dilution
7. Selling Security Holders Concurrent Registration of Common
Stock; Selling Stockholders(*)
8. Plan of Distribution Plan of Distribution(*)
9. Legal Proceedings Business - Legal Proceedings
10. Directors, Executive Officers, Management
Promoters and Control Persons
11. Security Ownership of Certain Principal Shareholders
Beneficial Owners and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts Legal Matters; Experts
and Counsel
14. Disclosure of Commission Management -
Position on Indemnification Indemnification of Directors
for Securities Act Liabilities and Executive Officers; Underwriting
15. Organization Within Last Five Not Applicable
Years
16. Description of Business Prospectus Summary; Business
17. Management's Discussion and Management's Discussion
Analysis or Plan of Operation and Analysis of Financial
Condition and Results of
Operations
18. Description of Property Business - Properties
19. Certain Relationships and Certain Transactions; Recent Private
Related Transactions Placements
20. Market for Common Equity and Market Information;
Related Stockholder Matters Dividend Policy
21. Executive Compensation Management-Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements Not Applicable
with Accountants on Accounting
and Financial Disclosure
- ----------------------------------
* Selling Shareholders Prospectus Only
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be used
in connection with an offering by the Company of Units, each consisting of one
share of Common Stock and one Class B Redeemable Common Stock Purchase Warrant
(the "Prospectus") and one to be used in connection with the sale of Common
Stock by certain selling shareholders (the "Selling Shareholders Prospectus").
The Prospectus and the Selling Shareholders Prospectus will be identical in all
respects except for the alternate pages for the Selling Shareholders Prospectus
included herein which are labeled "Alternate Page for Selling Shareholders
Prospectus". [This Registration Statement assumes a Subscription Price of $5.00
and an Exercise Price of $6.25 per Class B Warrant.]
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
Subject to Completion Dated September 26, 1996
703,591 Units
$5.00 per Unit
EASTCO INDUSTRIAL SAFETY CORP.
Each unit ("Unit") consists of one share of common stock $0.12 par
value ("Common Stock") and one Class B Redeemable Common Stock Purchase Warrant
("Class B Warrant").
Eastco Industrial Safety Corp. (the "Company") is granting to all
holders of its outstanding common stock of record on the close of business
September 24, 1996 ("Record Date"), in those states where qualified, or exempt
from qualification, (see page 3 for list of such states), the nontransferable
right ("Rights") to subscribe for Units, at the subscription price set forth
below on the basis of 4 Units for every 5 shares of Common Stock owned on the
Record Date. No fractional Rights or Units will be issued. Rights and Units
will be rounded to the nearest lower whole number. Inasmuch as the Rights are
not transferable, there will be no market for the Rights, nor will Royce
Investment Group, Inc. (the "Underwriter") be purchasing any Rights.
The subscription period for the Rights will expire at 5:00 p.m. New
York Time on _________, 1996 ("Expiration Date"). Any Units not subscribed for
(continued on following page)
THESE ARE SPECULATIVE SECURITIES. THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK
AND SUBSTANTIAL DILUTION AS DESCRIBED HEREIN. FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE SECURITIES, SEE "RISK FACTORS" BEGINNING ON PAGE 11 AND "DILUTION" BEGINNING
ON PAGE 24.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
===============================================================================
Subscription Price Standby Proceeds to
and Price to Public Fees(1)(2) Company(1)(2)(3)
- -------------------------------------------------------------------------------
Per Unit ..... $5.00 $.50 $4.50
Total......... $3,517,955 $351,795.50 $3,166,159.50
===============================================================================
ROYCE INVESTMENT GROUP, INC.
The date of this Prospectus is __________, 1996
<PAGE>
pursuant to the exercise of Rights will be sold to the Underwriter ("Standby
Offering") at the Subscription Price under a Standby Agreement between the
Company and the Underwriter which is identical to the price under the offering
for the Rights. The term "Offering" as hereinafter utilized in this Prospectus
includes the offering in connection with the Rights, the Standby Offering and
the offering of the Optional Units as hereinafter defined. The Underwriter will
offer to sell the components of the Units to the public at prices not to exceed
the lowest asked prices then existing at the time of sale as reported on the
NASDAQ Small-Cap Market. No Units and/or components thereof will be offered by
the Underwriter to the public until at least two business days after the
Expiration Date of the Rights Offering. See "The Offering" and "Underwriting".
Each Class B Warrant entitles the holder to purchase one share of
Common Stock commencing twelve months (or sooner with the consent of the
Underwriter) after the date of this Prospectus (the date of the Prospectus is
sometimes referred to herein as the "Effective Date") until the close of
business on the third year after the date of this Prospectus at an exercise
price of $6.25 per share subject to adjustment in certain circumstances pursuant
to anti-dilution provisions therein. The Common Stock and Class B Warrants are
immediately detachable from the Units and separately tradeable. See "Description
of Securities - Class B Warrants" for a discussion of the Company's right to
redeem the Class B Warrants on 30 days notice commencing 18 months from the date
of this Prospectus under certain conditions but no sooner than 12 months from
the date the Warrants become exercisable.
- ----------------------------
(1) Represents a 10% standby fee of $351,795.50 ($.50 per share) but does
not include a 3% nonaccountable expense allowance of $105,538.65
($.15 per share) payable to the Underwriter in connection with this
Offering unless the Standby Offering is terminated pursuant to the
terms of the Standby Agreement. Before deducting approximately
$365,000 for printing, legal fees, accounting and other related
expenses of the Offering. See "Underwriting".
(2) Does not include additional compensation to the Underwriter consisting
of (i) an option (the "Underwriter's Warrant" or "Underwriter's
Purchase Option"), sold to the Underwriter for nominal consideration,
entitling the Underwriter to purchase one Unit for each ten Units sold
in the Offering, at a price of $6.00 per Unit, subject to the
anti-dilution provisions thereof, for a period of four years commencing
one year after the Effective Date; and (ii) a one year financial
consulting agreement providing for fees totaling 2% of the proceeds of
the Offering, payable on the closing date(s) of the Offering (the
"Closing") and the Optional Units. The Company has also agreed to pay
the Underwriter a warrant solicitation fee of 7% of the exercise price
for each Class B Warrant exercised during the period commencing one
year after the Effective Date, and to indemnify the Underwriter against
certain liabilities, including those arising under the Securities Act
of 1933, as amended (the "Securities Act"). See "Underwriting".
(3) In the event that the number of unsubscribed Units to be purchased by
the Underwriter is less than 300,000 Units, the Underwriter will have
the right but not the obligation to purchase such number of Units that
will bring the number of Units to be purchased by the Underwriter up to
a total of 300,000 Units at the Subscription Price less a 10% discount
and 3% nonaccountable expense allowance within 30 days of the Closing.
See note (2) regarding a financial consulting fee applicable to the
Optional Units. Such additional Units are herein referred to as the
"Optional Units".
2
<PAGE>
The Company's Common Stock is traded on the over-the-counter market on
NASDAQ Small-Cap Market under the symbol ESTO and upon the closing of the
Offering will be listed on the Boston Stock Exchange under the symbol "______".
Upon closing of this Offering, the Class B Warrants will be listed on NASDAQ
Small-Cap Market under the symbol ESTOZ and the Boston Stock Exchange under the
symbol "_____". The Company will not apply for listing of the Units on NASDAQ.
However, it is possible that some broker-dealers may seek to have the Units
listed on the NASD Electronic Bulletin Board, or in the National Quotation
Bureau's pink sheets at some time in the future. On September 17, 1996,
the reported closing sale price for the Common Stock as reported by NASDAQ
was $7 1/4 per share. The purchase price of the Units and the Exercise Price
of the Class B Warrants for each of the offerings have been arbitrarily
determined through negotiation between the Company and the Underwriter, was set
at approximately 60-70% of the average closing price as reported by NASDAQ for
the ten business days preceding the Effective Date, and may bear no relationship
to current market price, earnings, assets or other recognized criteria of value
applicable to the Company. The Company is unable to predict the impact of the
Offering upon the market price of the stock. There can be no assurances that
shareholders who purchase Units under the Rights Offering and/or investors who
purchase shares under the Standby Offering will be able to sell such shares at
the price they purchased the shares or at any price. See "Underwriting" and
"Market Information".
-------------------------------------------
It is expected that certificates for such Units will be ready for
delivery on or about the third business day after the Underwriter receives
notice from the Subscription Agent as to the number of unsubscribed Units for
which it is committed to purchase. The issuance of the Common Stock at
below-market price will have the effect of adding to the number of shares
issuable under certain outstanding options and warrants. See "Management".
RESTRICTIONS IN CERTAIN STATES
THIS OFFERING WITH RESPECT TO THE UNITS TO BE ISSUED UPON THE EXERCISE OF THE
RIGHTS IS EXPECTED TO BE QUALIFIED OR IS BELIEVED TO BE EXEMPT FROM
QUALIFICATION IN THE FOLLOWING JURISDICTIONS: ALABAMA, ALASKA, ARIZONA,
ARKANSAS, CALIFORNIA, COLORADO, CONNECTICUT, DELAWARE, DISTRICT OF COLUMBIA,
FLORIDA, GEORGIA, HAWAII, ILLINOIS, IDAHO, INDIANA, IOWA, KANSAS, LOUISIANA,
MARYLAND, MASSACHUSETTS, MICHIGAN, MISSISSIPPI, MISSOURI, NEVADA, NEW HAMPSHIRE,
NEW JERSEY, NEW YORK, NORTH CAROLINA, OKLAHOMA, OREGON, PENNSYLVANIA, PUERTO
RICO, RHODE ISLAND, SOUTH CAROLINA, SOUTH DAKOTA, UTAH, VERMONT, VIRGINIA,
WASHINGTON, WEST VIRGINIA, WISCONSIN, AND WYOMING. RESIDENTS OF OTHER
JURISDICTIONS MAY NOT PURCHASE THE COMMON STOCK OFFERED HEREBY UNLESS THEY CAN
DEMONSTRATE TO THE SATISFACTION OF THE COMPANY THAT THEY SATISFY CERTAIN
SPECIFIC CRITERIA FOR EXEMPTION SET FORTH IN THE APPLICABLE STATES SECURITIES
LAWS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OTHER THAN THOSE TO WHICH IT
SPECIFICALLY RELATES, OR A SOLICITATION OF AN OFFER TO BUY FROM ANY PERSON OR
ENTITY IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
FOR OKLAHOMA INVESTORS
- -------------------------
THE OFFERING COVERED BY THE PROSPECTUS CONTAINS OFFERING EXPENSES IN EXCESS
OF 15% PERMITTED BY TITLE 660, CH.10 (660;10-9-35) UNDER THE OKLAHOMA SECURITIES
ACT. FOR FURTHER INFORMATION REGARDING THE EXPENSES OF THE OFFERING, PLEASE SEE
PAGE 2 OF THIS PROSPECTUS. MOREOVER, THIS REGISTRATION STATEMENT PERTAINS ONLY
TO THE SECURITIES OFFERED TO EXISTING COMMON STOCK HOLDERS IN THE STATE OF
OKLAHOMA AND MAY NOT BE USED FOR ANY OTHER SALES UNLESS OTHERWISE REGISTERED OR
EXEMPT FROM REGISTRATION UNDER THE OKLAHOMA SECURITIES ACT.
FOR ALABAMA RESIDENTS
- ------------------------
THE OFFERING COVERED BY THIS PROSPECTUS CONTAINS OFFERING AND MARKETING
3
<PAGE>
EXPENSES IN EXCESS OF THE AMOUNTS PERMITTED BY RULE 830-X-4.09 UNDER THE ALABAMA
SECURITIES ACT. FOR FURTHER INFORMATION REGARDING THE EXPENSES OF THIS OFFERING,
PLEASE SEE PAGE 2 OF THIS PROSPECTUS. MOREOVER, THIS REGISTRATION STATEMENT
PERTAINS ONLY TO THE SECURITIES OFFERED TO EXISTING COMMON STOCK HOLDERS IN THE
STATE OF ALABAMA AND MAY NOT BE USED FOR ANY OTHER SALES UNLESS OTHERWISE
REGISTERED OR EXEMPT FROM REGISTRATION UNDER THE ALABAMA SECURITIES ACT.
STATEMENT OF AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities and Exchange Act of 1934 and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission") under the File No. 0-8027. Such reports, proxy
statements and other information filed by the Company can be inspected at the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates, and at the following Regional Offices of the Commission, Chicago Regional
Office, 219 South Dearborn Street, Chicago, Illinois and New York Regional
Office, 7 World Trade Center, New York, New York 10007.
The Company currently files its reports electronically by EDGAR. The
Company distributes annual reports containing audited financial statements to
its shareholders.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY. SUCH
STATEMENTS REFLECT SIGNIFICANT ASSUMPTIONS AND SUBJECTIVE JUDGMENTS BY THE
COMPANY'S MANAGEMENT CONCERNING ANTICIPATED RESULTS. THESE ASSUMPTIONS AND
JUDGMENTS MAY OR MAY NOT PROVE TO BE CORRECT. MOREOVER, SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT MAY CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS.
FOR A DISCUSSION OF SUCH RISKS, SEE "RISK FACTORS". INVESTORS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS
OF THE DATE HEREOF. THE UNDERWRITER HAS NOT ATTEMPTED TO VERIFY THE BASIS FOR
ANY SUCH STATEMENTS INDEPENDENTLY AND NEITHER THE UNDERWRITER NOR THE COMPANY
UNDERTAKES ANY OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OCCURRING OR CIRCUMSTANCES ARISING
AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
4
<PAGE>
PROSPECTUS SUMMARY
The following is a summary as of the date hereof of certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information and Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus. All shares and shares issuable
under outstanding warrants and options in this Prospectus have been adjusted for
a one-for-ten reverse stock split approved by the shareholders of the Company on
August 12, 1996.
The Company
Eastco Industrial Safety Corp. (the "Company" and sometimes "Eastco")
is a corporation organized and existing under the laws of the State of New York,
having been incorporated on May 15, 1958. The Company, through its wholly-owned
subsidiaries, Disposable Safety Wear, Inc. ("Disposable"), Safety Wear Corp.
("Safety Wear"), Puerto Rico Safety Equipment Corporation ("Puerto Rico Safety
Equipment"), and Puerto Rico Safety Corp. ("Puerto Rico Safety"), manufactures
industrial protective clothing products and distributes a wide range of
industrial safety products. The Company's Manufacturing Operations sells its
products to distributors. The Company's Distribution Operations sells its
products to "end users," including manufacturing companies and service
businesses, public utilities, fisheries, pharmaceutical plants, the
transportation industry and companies engaged in hazardous materials abatement.
The Company's executive offices are located at 130 West 10th Street, Huntington
Station, New York 11746 and its telephone number is (516) 427-1802.
Manufacturing Operations
Manufactured products are sold under the "Charkate/Worksafe",
"Charkate", "Worksafe" and "Cover-up" trade names. The Company, through
Disposable, Safety Wear and Puerto Rico Safety Equipment, manufactures
disposable and reusable industrial protective apparel. Disposable protective
products items include coveralls, shirts, pants, hats, hoods, aprons, smocks,
lab coats, hazardous material handler suits, examination gowns, sleeves, shoe
covers and related items. Disposable clothing is designed to protect the user
from, among other things, splash, dirt, contamination and against a wide range
of hazardous substances. Disposable clothing is made primarily of a spun bonded
polyolefin produced solely by Dupont under the trade name Tyvek(R). Reusable
industrial protective clothing consists of items for the protection of various
parts of the body which are designed to shield the user from, among other
things, splash, dirt, contamination, heat, fire, cold and the outside
environment. Specific products manufactured include coveralls, gloves, mitts,
shirts, thermal underwear, sleeves, coats, pants, leggings, spats, bibs, safety
vests and a variety of other kinds of protective clothing and uniforms. The
Company also manufactures welding blankets, curtains and screens.
The Company's Manufacturing Operations and warehousing are located
primarily in Puerto Rico and Alabama, and are primarily directed from the
Company's offices in New York. The Company's products are sold primarily in the
United States and Puerto Rico. In addition, manufactured products are sold to
"end-users" through the Company's Distribution Operations (the "Eastco
Division") in the Northeastern region of the United States and Puerto Rico.
Distribution Operations
The Company, primarily through its Eastco Division, distributes
5
<PAGE>
industrial safety products to "end-users" made by the Charkate/Worksafe division
as well as by non-affiliated companies. These products include hard hats,
protective glasses, ear muffs, ear plugs, respirators, goggles, face shields,
rainwear, protective footwear, first-aid kits, monitoring devices, signs and
related products. These products are sold to manufacturing companies and service
businesses, including public utilities, fisheries, hospitals, pharmaceutical
plants, the transportation industry and companies engaged in hazardous materials
abatement.
The Company supplies a variety of items which may be used during the
removal and/or encapsulation of hazardous materials in office buildings,
chemical plants, refineries, electric generating plants and schools. Abatement
products sold by the Company include in the largest part, items made by other
companies, such as negative air machines, respirators, air filtration equipment,
vacuums, polybags and sheetings, decontamination showers, signs, tools, pumps,
sprayers and related equipment. The Company does not engage in the removal or
encapsulation of hazardous materials.
The Company's Distribution Operations are primarily directed from the
Company's offices in New York. The Company also has facilities for warehousing
and distribution of its non-manufactured products in Puerto Rico, Connecticut
and Florida. Items distributed are sold primarily in the Northeastern region of
the United States.
The Offering
Securities Offered 703,591 Units. Each Unit consist of
one share of Common Stock and one
Class B Warrant. See "Description of
Securities".
Subscription Price $5.00 per Unit(the "Subscription Price").
Common Stock Outstanding 879,488 shares of Common Stock (as
Prior to the Offering(1) adjusted for prior stock splits and
estimated rounding for fractional shares)
Common Stock Outstanding
After the Offering(1) 1,583,079 shares of Common Stock.
Terms of Rights Offering(3) Holders of record on September 24, 1996 of
the outstanding Common Stock may subscribe
to purchase Units on the basis of 4 Units
for each 5 shares of Common Stock owned on
the Record Date.
Expiration of Offering ________ at 5:00 p.m. New York Time.
Payment must be received by American
Stock Transfer & Trust Co. (the
"Subscription Agent") by this time.
Standby Offering(3) The Underwriter will offer to sell the
components of the Units at a price not to
exceed the lowest asked prices then
existing at the time of sale as reflected on
NASDAQ. No Units and/or components thereof
will be offered by the
6
<PAGE>
Underwriter to the public until at least
two business days after the Expiration
Date of the Rights Offering. See "The
Offering" and "Underwriting".
Class B Warrants to be
Issued in the Offering (2) 703,591 Class B Warrants.
Exercise Terms........ Each Class B Warrant entitles the
holder thereof to purchase one share
of Common Stock for $6.25 (the
"Exercise Price"), during the period
commencing twelve months (or sooner with
the Underwriter's consent) after the
Effective Date, subject to adjustment in
certain circumstances. See "Description
of Securities - Class B Warrants".
Expiration Date........ __________, 1999 (three years after
the Effective Date).
Redemption............. Redeemable by the Company, in whole or in
part, at a price of $.01 per Class B Warrant
commencing eighteen months after the
Effective Date but no sooner than 12 months
after the Warrants become exercisable;
provided that: (i) prior notice of not less
than 30 days is given to the Class B
Warrantholders; and (ii) the closing high
bid price of the Company's Common Stock, for
the 15 consecutive trading days ending on
the third day prior to the date on which
the Company gives notice, has been at least
$9.375 per share (to be adjusted for any
stock dividends and stock splits, and which
may be adjusted to 150% of the exercise
price of the Class B Warrants, if such
exercise price is changed). See "Description
of Securities - Class B Warrants".
Use of Proceeds The Company intends to use the net
proceeds of this Offering, amounting
to approximately $2,695,000 for the
financial consulting fee of $70,359 to
the Underwriter and the balance to
paydown of the amount outstanding on its
line of credit thereby increasing the
amount available under such line of
credit for future working capital and
other needs such as acquisitions. See
"Use of Proceeds".
Risk Factors The securities offered hereby involve
a high degree of risk and immediate
substantial dilution. See "Risk Factors"
and "Dilution".
NASDAQ Symbols Common Stock: ESTO
Class B Warrants: ESTOZ
7
<PAGE>
Boston Stock Exchange Symbols Common Stock:
Class B Warrants:
- ------------
(1) Does not include Common Stock which may be issued upon the exercise
of any options or warrants currently outstanding. The Company
currently has outstanding options and warrants to purchase 617,930
shares of Common Stock exercisable at prices between $5.302
and $30.00 per share which will be adjusted to acquire 630,887
shares at prices between $5.169 and $30.00 as a result of
anti-dilution rights due to this Offering.
(2) Does not include Common Stock which may be issued upon exercise of
Underwriter's Purchase Option and Optional Units.
(3) Since the Company's shares are to a large extent registered in the
names of brokers, banks, and trust companies who may not be the
beneficial holders of such securities and/or nominees, the Company
is unable to determine the number of beneficial holders (and the
amount of shares owned by such persons) that reside in states where
this Offering is being made. Accordingly, there can be no assurances
given that any of the Units offered hereby will be subscribed for by
shareholders and in this event absent the market-out provision, the
Underwriter will be obligated to purchase all unsubscribed Units.
Should the Underwriter not purchase the unsold Units in accordance
with the market-out provision, shareholders who have exercised the
Rights will not have a right to cancel their subscription and under
such circumstances, the Company will retain the monies from the
Rights subscribed for. See "Underwriting".
8
<PAGE>
SUMMARY FINANCIAL INFORMATION
SELECTED CONSOLIDATED FINANCIAL DATA
The following is a summary of the Company's financial information
extracted from the indicated year end Consolidated Financial Statements of the
Company, and is qualified in its entirety by the detailed financial information
appearing in the Consolidated Financial Statements and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Statement of Operations Data:
Year Ended June 30,
-------------------
1996 1995
---- ----
Net sales $26,982,699 $24,024,897
Cost of sales 21,495,693 19,254,571
----------- -----------
Gross profit 5,487,006 4,770,326
----------- -----------
Selling, general
and administrative
expenses 4,546,222 4,148,517
Interest 836,359 583,665
Other expense (income)(NET) 16,388 (39,793)
Settlement with
former underwriter 78,000 -
----------- -----------
Total expenses 5,476,969 4,692,389
----------- -----------
Net income $ 10,037 $ 77,937
=========== ===========
Net income per
share(1):
Primary $ .02 $ .20
=========== ===========
Assuming full dilution $ .02 $ .17
=========== ===========
Average number of shares
used in computing per share
amounts:
Primary 595,758 392,529
========= ==========
Assuming full dilution 595,758 471,698
========= ==========
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SELECTED CONSOLIDATED FINANCIAL DATA (Cont'd)
Consolidated Balance Sheet Data:
As at June 30, 1996
----------------------------------------
As at PRO-FORMA
June 30, PRO- AS
1995 Historical FORMA(1) ADJUSTED(2)
-------- ---------- ----------- -----------
Current
Assets $ 9,265,149 $10,987,100 $11,158,100 $11,228,459
Current
Liabilities 8,200,620 9,434,587 9,434,587 6,809,325
Working Capital 1,064,529 1,552,513 1,723,513 4,419,134
Total
Assets 10,716,048 12,472,105 12,643,105 12,713,464
Long-
Term Debt 489,782 433,738 433,738 433,738
Total
Liabilities 8,690,402 9,868,325 9,868,325 7,243,063
Shareholders'
Equity 2,025,646 2,603,780 2,774,780 5,470,401
- -------------------
(1) Adjusted to give effect to shares issued in a private placement with
net proceeds to the Company of $171,000.
(2) Adjusted to give effect to shares issued in the Rights Offering and the
sale of units offered and the receipt of $2,695,621 in net proceeds and
their initial application which is to prepay the Underwriter $70,359
for a one year consulting agreement with the balance going to pay down
the amount outstanding on the Company's line of credit.
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<PAGE>
RISK FACTORS
The securities offered hereby are highly speculative and should be
purchased only by persons who can afford to lose their entire investment in the
Company. Each prospective investor should carefully consider the following risk
factors, as well as all other information set forth elsewhere in this
Memorandum:
HISTORY OF PREVIOUS SIGNIFICANT LOSSES. Although for the fiscal years ended
June 30, 1996 and 1995, the Company had net income of $10,037 and 77,937,
respectively, the Company incurred losses of $2,711,378, $858,326, $1,362,761
and $1,388,831, respectively, for the fiscal years ended June 30, 1994, 1993,
1992 and 1991. Other than for the fiscal years ended June 30, 1996 and 1995, the
Company has not had a profitable fiscal year since its fiscal year ended June
30, 1989. As of June 30, 1996, the Company had an accumulated deficit of
$4,230,555 compared to an accumulated deficit of $4,240,592 as of June 30, 1995.
There can be no assurances that the Company will be profitable or will not incur
losses in the future. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Consolidated Financial Statements".
LENDING ARRANGEMENTS; LIENS ON THE COMPANY'S ASSETS; USE OF ALL OF NET
PROCEEDS TOWARD PAYMENT OF DEBT. The Company is dependent upon its revolving
line of credit with Congress Financial Corporation ("Congress"), which as
revised during July, 1996, expires October 1, 1999, except that Congress at its
sole option may extend the termination date to October 1, 2000. The line of
credit was increased from $6,000,000 to $9,000,000 as of July, 1996. Interest is
payable monthly at 1.25% (previously 2.25%) over the prime rate, with provision
to further reduce such rate to 1% over the prime rate upon consummation of this
Offering for net proceeds of at least $2,500,000 which must occur no later than
December 31, 1996. Borrowings are currently limited to 55% of the Company's
eligible inventory and 85% of the Company's eligible accounts receivable. As of
June 30, 1996, the amount outstanding on the line of credit was approximately
$5,558,000, with an availability of borrowing $76,000 based upon accounts
receivable and inventory at that date. The loan is subject to certain working
capital and net worth covenants and is collateralized by all of the Company's
assets not previously pledged under other loan agreements. Although the Company
will use substantially all of the net proceeds of this offering to reduce
outstanding indebtedness under its credit facility (See "Use of Proceeds"), the
Company will, in all likelihood, draw down funds under such facility in the
future in order to continue to finance its operations. In the event that the
Company is unable to obtain financing from its principal lender or alternative
sources of financing, or if able to do so but not on favorable terms, the
Company's ability to operate profitably could be materially adversely affected.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In the event that the Company fails to comply with its obligations, the
Company's indebtedness could be declared immediately due and payable and, in
certain cases, the Company's assets could be foreclosed upon. Moreover, to the
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<PAGE>
extent that all of the Company's assets continue to be pledged to secure
outstanding indebtedness, such assets are unavailable to secure additional debt
financing, which may adversely affect the Company's ability to borrow in the
future.
ASBESTOS LITIGATION AGAINST THE COMPANY. The Company, in the past,
manufactured certain products made of asbestos. Such use was terminated by the
Company in the mid-1980's. It has been alleged that asbestos is a cause of
cancer, such as asbestosis, mesothelioma, and other related diseases, the
symptoms of which may not appear for twenty or more years. Since the early
1980's, numerous lawsuits have been instituted against the Company by persons
who have been exposed to asbestos and asbestos products.
As of June 30, 1996, the Company estimates that it is a party to
approximately 280 cases with respect to exposure to asbestos involving
approximately 1300 plaintiffs. All of the actions against the Company to date
have been brought by non-employees of the Company and are based upon personal
injury claims.
These actions are pending in the states of New York, New Jersey, and
Pennsylvania. The number of first-party plaintiffs include, in various
instances, spouses of said plaintiffs. The actions, with the exception of one
pending action, involve a multitude of defendants. The complaints allege
exposure to asbestos and asbestos products over various periods of time. Each
seeks varying amounts of damages, usually unlimited, or for each plaintiff as
high as $10,000,000 for compensatory damages and $20,000,000 for punitive
damages.
From 1981 through June 30, 1996, the Company estimates that approximately
900 actions on behalf of approximately 7500 first-party plaintiffs have been
instituted against it concerning asbestos-related claims, and that the claims of
approximately 6200 plaintiffs have been terminated against the Company. The
Company estimates that, with the exception of defense costs, a total of
approximately $1,400,000 has been paid, or agreed to be paid, in settlements to
date with regard to the terminated actions, of which all but approximately
$30,000 has been or will be paid by the Company's insurance carriers. Through
June 30, 1996, the Company has paid less than approximately $35,000 for legal
and defense costs to counsel appointed by the insurance carriers to defend it.
Past results of settlements and defense costs are not necessarily indicative of
future settlements and defense costs which the Company is unable to predict.
The existence of the asbestos litigation may have an adverse effect upon
the financial liquidity of the Company in the future. The Company is unable to
predict the outcome of this uncertainty or the total extent to which its
insurance carriers will provide coverage. Based upon prior experience, the
Company believes that additional claims will be filed in the future. Further,
the Company's independent auditors report emphasizes the uncertainties of these
matters. See "Legal Proceedings" for a description of asbestos and other
litigation pending against the Company.
12
<PAGE>
INSURANCE COVERAGE APPLICABLE TO ASBESTOS LITIGATION - PERIODS OF
NON-COVERAGE. For the period commencing April 1, 1968 to April 1, 1969 and March
11, 1971 to November 27, 1985, the Company believes that it has various policies
of primary insurance in different amounts which would protect it against
liability for asbestos-made, product-related personal injuries. The policies
range in amounts from $50,000 to $1,000,000 on an annual basis. The Company also
believes that since August 10, 1972 to on or about August 11, 1986 it has had
various policies for excess coverage applicable to asbestos claims on an annual
basis. These policies range in amounts from $500,000 to $10,000,000 for excess
coverage. There are gaps of approximately six weeks in the primary coverage
between March 11, 1971 to November 27, 1985 and approximately thirty-six months
in the excess coverage between August 10, 1972 and August 11, 1986, and an
additional period of approximately thirteen months for excess coverage insurance
companies in liquidation, where there is likely to be no coverage. The policies
of insurance are not applicable to all of the subsidiaries of the Company, which
have varying coverage, and such subsidiaries may also be without coverage for
various times of their doing business. Not all of these policies are in the
possession of the Company.
Effective June 26, 1990, an agreement between Eastco and its primary
insurance carriers dated March 26, 1990 became effective. Eastco entered into
this agreement in an effort to resolve uncertainties as to its insurance
coverage which will cover asbestos claims against the parent Company, Eastco,
where any exposure to asbestos is alleged during the period 1971 to 1985,
inclusive. Pursuant to this agreement, the Company is obligated to share in the
payment of asbestos-related claims against Eastco. Pursuant to the agreement,
the Company is obligated to pay 12% of all attorneys' fees incurred on its
behalf and 17% of indemnity costs (which include judgment and settlement
amounts). The balance of these costs are to be paid by the insurance carriers,
which are parties to the agreement. The agreement is subject to policy
limitations of each insurance policy. The agreement may be terminated at any
time upon ninety (90) days' notice by any of the parties provided that
termination may not be effective as to any asbestos action that has already been
placed on the trial calendar, unless it has a scheduled trial date more than
twelve (12) months from the date the notice of termination is given. The Company
is aware of only one case pending against it which is on the trial calendar.
Effective during May, 1991, the Company entered into a Settlement Agreement
and Release with Mount Vernon Fire Insurance Company. The Company discontinued
its action against Mount Vernon, which provided that, subject to the terms of
the agreement, Mount Vernon would reimburse the Company (where applicable) for
6.25% of attorneys' fees (52.08% of the Company's 12% share referred to in the
agreement in the previous paragraph) and 6.25% of indemnification costs (36.76%
of the Company's 17% share referred to in the agreement in the previous
paragraph). The agreement is not applicable to any asbestos actions against the
Company where no exposure is alleged to products manufactured or distributed by
Eastco between April 1, 1968 and April 1, 1969. The agreement may be terminated
at any time upon 90 days' notice, but such notice is not applicable to asbestos
actions placed on a trial calendar, unless such has a trial date more than
twelve months from the date the notice of termination is given. The agreement
provides that the limit available under the policy is $100,000 plus attorneys'
fees while the agreement is in effect and is applicable only to the parent
Company, Eastco. Approximately $25,000 has been reimbursed by Mount Vernon Fire
Insurance Company as of June 30, 1996 for indemnification.
13
<PAGE>
During fiscal 1994, the Company reached a settlement (the "1994
Settlement") pertaining to all pending and future cases against it in the State
of New York brought by one firm of plaintiffs' attorneys, which firm has been
primarily responsible for bringing asbestos actions against the Company in the
State of New York. The settlement does not apply to Puerto Rico Safety Equipment
and is only applicable to cases brought by the same law firm against the Company
in the State of New York. The Company is to be dismissed without any payment in
cases not involving any exposure to a power generating station in the State of
New York ("Powerhouse"). Where there is Powerhouse exposure, a payment of $100
is to be made for each alleged nonmalignant case and $300 for each malignant
case. Where plaintiffs consist of two spouses, such is deemed one case. Payment
is to await appropriate documentation of exposure, releases from the plaintiffs
and the agreement of each plaintiff whose case is settled.
The two agreements referred to above between the Company and the insurance
carriers may not be applicable to Puerto Rico Safety Equipment, which is covered
by other insurance. To date, the claims settled by Puerto Rico Safety Equipment
have been paid in full by insurance. No agreement has been reached with the
insurance companies confirming all of these policies, which range from $100,000
to $500,000 for primary coverage and $1,000,000 to $5,000,000 for excess
coverage. The policies for Puerto Rico Safety Equipment cover the period March
11, 1971 to July 23, 1986 with various gaps of fourteen months on primary
coverage and forty-two months on excess coverage.
The Company is unable to ascertain the total extent of insurance applicable
to asbestos claims against it or the extent to which its insurance carriers will
provide coverage. The Company's insurance may not provide coverage for punitive
damages where such damages are sought against it in pending litigation. Punitive
damages are allowable in addition to compensatory damages and are awarded as a
punishment to the defendant for wrongs in a particular case as well as for the
protection of the public against similar acts, to deter the defendant from a
repetition of the wrongful act and to serve as a warning to others. Usually a
wrong, aggravated by an evil or wrongful motive or a willful and intentional
misdoing or a reckless indifference equivalent thereto, is required for a court
to award punitive damages. The Company is unable to specify whether its actions
would give rise to punitive damages. It believes that its actions should not
give rise to punitive damages. There, however, can be no assurance that this
will be the case. See "Legal Proceedings".
GOVERNMENT REGULATION; NO ASSURANCE OF COMPLIANCE WITH OSHA. The Company's
manufacturing facilities are subject to regulation and inspection standards
established by the Occupational Safety and Health Administration ("OSHA"), which
were enacted, in part, to require employers to supply protective clothing in
certain work environments. To date, the Company's manufacturing facilities have
not been inspected for compliance with the standards established by OSHA.
Various of the Company's products are also subject to other governmental
standards. Although the Company believes that it is in material compliance with
current standards, there can be no assurance that any inspection will not reveal
that the Company has failed to comply with the standards established by OSHA and
that, as a result, the Company may be required to expend sums, which can be
costly, to assure compliance with OSHA regulations.
NEED FOR SUBSTANTIAL INVENTORIES. The Company is required to maintain
substantial inventories for both its Manufacturing Operations and its
Distribution Operations in order to meet the immediate requirements of its
customers who require products on short notice and who do not maintain an
inventory of such products. The Company had inventory of approximately
$5,230,000 and $4,364,000,as of June 30, 1996 and June 30, 1995, respectively.
Although the Company believes it currently maintains sufficient inventories,
prior to a 1994 public offering (the "1994 Offering"), the Company experienced
14
<PAGE>
periods where it did not have sufficient working capital to maintain its
inventories to meet the demands of certain of its customers. There can be no
assurance that the Company will be able to maintain sufficient inventories or
the Company will not return to periods where there is insufficient working
capital to maintain its inventories to meet the needs of its customers.
DEPENDENCE UPON DUPONT FOR SUPPLY OF TYVEK(R). The Company is not dependent
upon any one company for a source of supply of raw materials for its
manufacturing operations other than DuPont, which supplies the Company with
Tyvek(R), a raw material which is used in various lines of its disposable
products. Products utilizing Tyvek(R) accounted for approximately 41% and 35% of
consolidated sales for the fiscal years ended June 30, 1996 and June 30, 1995,
respectively. Management believes that its current relationship with DuPont is
satisfactory. The Company has no contract with DuPont for the supply of such raw
material; therefore, DuPont could terminate its relationship with the Company at
any time. The Company does not believe that an alternative source exists for the
supply of Tyvek(R). Accordingly, the loss of DuPont as a supplier of Tyvek(R)
would have a material adverse effect on the Company's operations.
NO DIVIDENDS. The Company intends to retain future earnings to finance
future growth. Accordingly, any potential investor who anticipates the need for
dividends for his investment should not purchase any of the securities offered
hereby. In addition, the Company's agreement with Congress contains restrictions
which prohibit the Company from paying cash dividends.
COMPETITION. The market for industrial protective clothing products and
industrial safety products is extremely competitive. The Company faces
competition in all of its product markets from large, established companies that
have greater financial, managerial, sales and technical resources than the
Company, and some of the Company's product markets are dominated by such larger
companies. Where larger competitors offer products that are directly competitive
with the Company's products, particularly as part of an established line of
products, there can be no assurance that the Company can successfully compete
for sales and customers. Larger competitors also may be able to benefit from
economies of scale or to introduce new products that compete with the Company's
products. There can be no assurance that the Company can successfully compete in
any of its product markets.
BROAD DISCRETION ON USE OF PROCEEDS. The net proceeds from the sale of the
Units will be approximately $2,695,000. The Company intends to use the net
proceeds of this Offering to prepay to the Underwriter $70,359 for a one year
consulting agreement with the balance going to paydown of the amount outstanding
on its line of credit thereby increasing the amount available under such line of
credit for future working capital and other needs such as acquisitions. Although
the Company may use substantially all of the net proceeds of this offering to
reduce outstanding indebtedness under its credit facility, the Company will, in
all likelihood, draw down funds under such facility in the future in order to
continue to finance its operations. The proceeds of the Company's line of credit
with Congress are used for working capital and general corporate purposes which
includes salaries, purchase of inventory, marketing, and other applicable
corporate expenses. As a result of the foregoing, the Company will have broad
discretion in allocating a substantial portion of the net proceeds of this
Offering. See "Use of Proceeds".
15
<PAGE>
UNSPECIFIED ACQUISITIONS. The Company has broad flexibility in utilizing
the net proceeds of this Offering. It may utilize a substantial portion of the
proceeds to make unspecified acquisitions. The Company has been having ongoing
discussions with several companies regarding possible acquisitions but has not
entered into any definitive agreement or understanding with respect to any such
acquisition. No assurances can be given that any such acquisition will be
consummated, or if consummated, that such acquisition will be successful. The
Company's shareholders and investors in this Offering are likely not to be able
to vote on, or review the financial statements of any such acquisitions. See
"Use of Proceeds".
BENEFIT OF USE OF PROCEEDS FOR MANAGEMENT. In September 1993, the Company
received an overadvance of $500,000 from Congress. In connection therewith,
Messrs. A. Densen, L. Densen and A. Towell, directors and executive officers of
the Company, obtained a $250,000 junior participation in the loans made to the
Company from Congress by advancing $250,000 of their funds to Congress.
$250,000 of this overadvance has been repaid to Congress. $35,000 has been
repaid to L. Densen. The balance of $215,000 will be repaid by Congress, at its
option, to Messrs. A. Densen and A. Towell, subject to the availability of funds
under the revolving line of credit. The effect of the application of the
proceeds of this Offering to the reduction of the monies owed to Congress should
have the effect of enabling the balance of the overadvance of $215,000 to be
repaid to Messrs. A. Densen and A. Towell. See "Use of Proceeds."
LIMITATION ON NET OPERATING LOSS CARRYFORWARDS. As of June 30, 1996, the
Company had Federal net operating loss carryforwards for income tax purposes of
approximately $4,738,000 which expire through the year 2011. These carryforwards
are subject to limitations on the amount that can be utilized by the Company in
a fiscal year due to "change of ownership" rules as defined by applicable
Federal tax statutes. The amount of income which may be offset after an
ownership change is determined by multiplying the fair market value of the
Company at the time of the ownership change by the long-term tax exempt rate. To
the extent that such annual limitation is not utilized, it may be further
carried forward until the carryforward would have otherwise expired. A "change
in ownership" occurred upon the completion of two 1996 private placements
("Recent Private Placements"). See "Recent Private Placements". Based upon the
number of shares offered in the Recent Private Placements and the applicable
long-term tax exempt rate, the Company's ability to utilize its net operating
carryforward losses in future years is limited to approximately $345,000 per
year. A change in ownership may also occur upon the completion of this Offering
and the Company's ability to utilize its net operating loss carryforwards could
be further limited.
RELIANCE ON CURRENT MANAGEMENT. The Company's current operations and future
success is greatly dependent upon the services of Mr. Alan Densen, its
President, Lawrence Densen, its Senior Vice President and Anthony P. Towell, its
Vice President of Finance. The loss of services of any of the foregoing, who are
each employed under written agreements for five year terms, could have a
material adverse effect on the Company. There is no key man insurance on the
life of the executive officers of the Company.
CONTROL BY MANAGEMENT. As of the date of this Prospectus, the Company's
executive officers and directors own of record and beneficially (assuming
exercise of all their options and warrants), an aggregate of approximately 23%
of the Company's outstanding Common Stock and may be in a position to have
significant influence over the outcome of all matters submitted to stockholders
for approval, including the election of directors of the Company, as a result of
their control of such shares which will vote on all matters. The Company's Board
of Directors is divided into two classes, each of which generally serves for a
term of two years, with only one class of
16
<PAGE>
directors being elected in each year. A classified board under certain
circumstances could discourage, prevent or delay a change in control of the
Company, which could have the effect of discouraging bids for the Company and
thereby prevent shareholders from receiving the maximum value for their shares.
In addition, there are provisions in the employment agreements with Messrs. A.
Densen, A. Towell and L. Densen, that provide for them to receive immediately a
lump sum payment of three years' compensation as well as severance pay should a
"Change in Control" occur, which also could have a similar effect of deterring
bids for the Company. Messrs. A. Densen, L. Densen, and A. Towell, in
modification agreements to their employment agreements, have waived: (i) their
right to bonuses based upon the Company's earnings before interest and taxes for
the fiscal years ended June 30, 1996 through June 30, 2000; (ii) their exercise
rights on options and warrants and repayment of their junior participation
interests with Congress and compensation payable in the event of a Change in
Control with respect to the Offerings; and (iii) their right to terminate their
relationship with the Company, as per the terms of their respective employment
agreements. The modification agreements and waivers provide that their right to
terminate their employment agreements and waiver of their bonuses shall not be
waived in the event that there is a material breach of such agreements by the
Company. See "Management".
OUTSTANDING OPTIONS AND WARRANTS. As of the date hereof, there are 617,930
shares of Common Stock subject to issuance upon currently outstanding options
and warrants at exercise prices between $5.302 and $30.00 per share, which will
be adjusted to acquire 630,887 shares at prices between $5.169 and $30.00 as a
result of anti-dilution rights as a result of this Offering. Approximately
350,000 of these options and warrants have anti-dilution rights with respect to
the subsequent issuance of shares at less than market value or their exercise
price. To the extent that outstanding options and warrants are exercised,
additional equity investment funds will be paid into the Company at the expense
of dilution to the interests of the Company's shareholders. Moreover, the terms
upon which the Company will be able to obtain additional equity capital may be
adversely affected since the holders of outstanding options and warrants can be
expected to exercise or convert them at a time when the Company would, in all
likelihood, be able to obtain any needed capital on terms more favorable to the
Company than those provided in such securities. Outstanding options and warrants
did not materially dilute earnings per share in 1996, but could do so in the
future if there is a significant increase in the spread between their exercise
price and the quoted market price of the Company's Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION. As of June 30, 1996, the pro-forma net
tangible book value, giving effect to the private placement closed in July 1996,
of the Company was $2,724,059 or approximately $3.10 per share of Common Stock,
based upon 879,488 shares outstanding. Investors participating in the Offering
will incur immediate dilution in the pro-forma net tangible book value of $1.58
per share, which is approximately 32%, based upon a (subscription) price of
$5.00 allocated in full to the Common Stock. See "Dilution".
NON-REGISTRATION IN CERTAIN JURISDICTIONS OF SHARES UNDERLYING THE CLASS B
WARRANTS. Although the Units will not knowingly be sold to purchasers in
jurisdictions in which they are not registered or otherwise qualified for sale,
purchasers may buy Units or Class B Warrants in the aftermarket or may move to
jurisdictions in which the shares of Common Stock issuable upon exercise of the
Class B Warrants are not so registered or qualified during the period that the
Class B Warrants are exercisable. In such event, the Company would be unable to
issue shares to those persons desiring to exercise their Class B Warrants unless
and until the shares could be registered or qualified for sale in the
jurisdiction in which such purchasers reside, or an exemption to such
qualification exists in such jurisdiction. If the Company were unable to
register or qualify the shares in a particular state and no exemption to such
17
<PAGE>
registration or qualification was available in such jurisdiction, in order to
realize any economic benefit from purchase of the Class B Warrants, a holder
might have to sell the Class B Warrants rather exercise them. No assurance can
be given, however, as to the ability of the Company to effect any required
registration or qualification of the Units, Common Stock or Class B Warrants in
any jurisdiction in which qualification of registration has not already become
effective. See "Description of Securities - Class B Warrants."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
CLASS B WARRANTS. Holders of the Class B Warrants will have the right to
exercise the Class B Warrants for the purchase of shares of Common Stock only if
a current prospectus relating to such shares is then in effect and only if the
shares are qualified for sale under the securities laws of the applicable state
or states. The Company has undertaken and intends to file and keep current the
Prospectus which will permit the purchase and sale of the Common Stock
underlying the Class B Warrants, but there can be no assurance that the Company
will be able to do so. Although the Company intends to seek to qualify for sale
the shares of Common Stock underlying the Class B Warrants in those states in
which the securities are to be offered, no assurance can be given that such
qualification will occur. The Class B Warrants may be deprived of any underlying
shares which are not, or cannot be, registered in the applicable states. See
"Description of Securities - Class B Warrants."
PENNY STOCK REGULATION. The Commission has adopted rules that regulate
broker-dealer practices in connection with transactions in "penny stocks." Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the NASDAQ system, provided that current price and volume information with
respect to transactions in such securities is provided by the exchange or
system). The penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules to deliver a standardized
risk disclosure document prepared by the Commission that provides information
about penny stocks and the nature and level risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. The bid and
offer quotations, and broker-dealer and salesperson compensation information
must be given to the customer orally or in writing prior to effecting the
transaction and must be given in writing before or with the customer's
confirmation. In addition, the penny stock rules require that prior to a
transaction of a penny stock not otherwise exempt from such rules, the
broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for a stock
that becomes subject to the penny stock rules. If the Company's securities
become subject to the penny stock rules, investors in this offering may find it
more difficult to sell such securities.
Although the Company believes that its securities will, as of the date of
this Prospectus, be outside the definitional scope of a penny stock, as it will
be listed on NASDAQ, in the event the Common Stock were subsequently to become
characterized as a penny stock, the market liquidity for the Company's
securities could be severely affected. In such event, the regulations on penny
stocks could limit the ability of broker-dealers to sell the Company's
securities, and thus, the ability of purchasers in this offering to sell their
securities in the secondary market.
RELATIONSHIP OF UNDERWRITER TO TRADING. Subsequent to the Underwriter
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<PAGE>
completing its distribution of any securities it acquires pursuant to the
Standby Offering, the Underwriter intends to be a market maker for the Common
Stock and Class B Warrants underlying the Units. The Underwriter also has the
right to act as the Company's exclusive agent in connection with any future
solicitation of warrantholders to exercise their Class B Warrants. Unless
granted an exemption by the Commission from Rule 10b-6 promulgated under the
Exchange Act, the Underwriter will be prohibited from engaging in any
market-making activities or solicited brokerage activities with regard to the
Company's securities during a period beginning two or nine business days,
whichever is applicable, prior to the commencement of any such solicitation and
ending on the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that the Underwriter may have
to receive a fee for soliciting the exercise of the Class B Warrants. As a
result, the Underwriter may be unable to continue to make a market for the
Company's securities during certain periods while the Class B Warrants are
exercisable. Such a limitation, while in effect, could impair the liquidity and
market price of the Company's securities. See "Underwriting."
NO PUBLIC MARKET FOR THE COMPANY'S UNITS AND WARRANTS; POSSIBLE VOLATILITY
OF STOCK PRICE; ARBITRARY DETERMINATION OF SUBSCRIPTION PRICE. The Common Stock
and Class B Warrants are immediately detachable from the Units and are
separately tradeable. The Company will not apply for a listing of the Units on
NASDAQ and as a result, such Units are not likely to be tradeable, although it
is possible that some broker-dealers may seek to have the Units listed on the
NASD Electronic Bulletin Board or, in the National Quotation Bureau's pink
sheets at some time in the future. Prior to this Offering, there has been no
public market for the Class B Warrants, and there can be no assurance that a
market will develop at the conclusion of the Offering, or if developed, that it
will be sustained. In addition, if any market does develop, the market price of
these securities might be volatile. Factors such as announcements by the Company
or its competitors concerning proposed plans, procedures and proposed government
regulations, losses and litigation may have a significant effect on the market
price of the Company's securities. Changes in the market price of the Company's
securities may have no connection with the Company's actual financial results.
In addition, the stock market has experienced extreme price and volume
fluctuations which have particularly affected the market prices for many
companies and which have often been unrelated to the operating performance of
the specific companies. These broad market fluctuations may adversely affect the
market price of the Company's securities. The Underwriter has the right after 30
days from the commencement of trading on NASDAQ on at least 15 business days
notice to NASDAQ to request the Company to de-list from NASDAQ the Class B
Warrants, which could have an adverse effect upon their trading.
UNDERWRITER'S WARRANTS, OPTIONAL UNITS, AND REGISTRATION RIGHTS. The
Company will sell to the Underwriter, for nominal consideration, Underwriter's
Warrants to purchase one Unit for each ten Units actually sold in the Offering
at an exercise price of $6.00, regardless of the number of Units purchased by
the Underwriter. The Underwriter's Warrants may not be sold, transferred,
assigned or hypothecated for a period of one year from the Effective Date,
except to officers of the Underwriter. Exercise of the Underwriter's Warrants,
which may be effected at any time, either in whole or in part, beginning 12
months after the Effective Date and not more than four years thereafter, may
dilute the value of the Common Stock, may adversely affect the Company's ability
to obtain equity capital, and, if the Common Stock issuable upon the exercise of
the Underwriter's Warrants is sold in the public market, may adversely affect
the market price of the Common Stock. The Units issuable upon exercise of the
Underwriter's Warrants, the Common Stock and Class B Warrants comprising such
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Units, and the Common Stock issuable upon exercise of the Class B Warrants, have
been included in the Registration Statement of which this Prospectus forms a
part. The Company has an obligation to keep such registration statement current,
which could result in substantial expense to the Company. This obligation is in
addition to the demand registration rights granted to the Underwriter in
connection with the Offering. In the event that the number of the unsubscribed
Units to be purchased by the Underwriter is less than 300,000 Units, the
Underwriter will have the right but not the obligation to purchase a minimum of
300,000 of these Optional Units. Any profit received by the Underwriter either
from the sale of the Underwriter's Warrants or from the sale of the shares of
Common Stock purchasable upon exercise of the Underwriter's Warrant may be
deemed additional underwriting compensation. See "Underwriting" with respect to
these and other rights to compensation that the Underwriter has.
STATE SECURITIES LAWS. The Offering with respect to the exercise of Rights
has been qualified or is exempt from qualification in the states listed on page
3 of this Prospectus.Residents of other jurisdictions may not purchase Units or
exercise Class B Warrants unless they can demonstrate to the Company that under
the particular state's securities laws, an exemption is available for their
transaction. This Prospectus does not constitute an offer other than those to
which it specifically relates, or a solicitation of an offer to buy from any
person or entity in any jurisdiction in which such offer or solicitation is
unlawful. See "The Offering Restrictions in Certain States."
FAILURE TO CONSUMMATE STANDBY OFFERING; RETENTION OF RIGHTS SUBSCRIPTIONS.
In the event that all of the Units offered hereby are not sold pursuant to the
exercise of Rights, the Underwriter has agreed, on a firm commitment basis, to
take and pay for all of the unsold Units, except if, in the reasonable judgment
of the Underwriter, it is impracticable to consummate the Standby Offering under
normal "market out" conditions, such as (i) the Company having sustained a
material loss of any nature, which, in the sole and absolute opinion of the
Underwriter, substantially affects the value of the property of the Company or
materially interferes with the operation of the business of the Company (not
covered by insurance), (ii) any material adverse change in the business,
property or financial condition of the Company, (iii) trading in securities on
the New York Stock Exchange, the American Stock Exchange or NASDAQ System having
been suspended or limited or minimum prices having been established on either
such Exchange or System, (iv) a banking moratorium having been declared by
either federal or state authorities, (v) an outbreak of major hostilities or
other national or international calamity having occurred, (vi) any action having
been taken by any government in respect of its monetary affairs which, in the
reasonable opinion of the Underwriter, has a material adverse effect on the
United States securities markets; (vii) any action, suit or proceeding at law or
in equity against the Company, or by any Federal, State or other Commission,
board or agency wherein any unfavorable decision would materially adversely
effect the business, property, financial condition or income of the Company; or
(viii) due to conditions arising subsequent to the execution hereof, the
Underwriter reasonably believes that, as a result of material and adverse events
affecting the market for the Company's Common Stock or the securities markets in
general, it is impracticable or inadvisable to proceed with the Standby
Offering. Accordingly should the Underwriter not purchase the unsold shares in
accordance with the market out conditions, shareholders who have exercised the
Rights will not have a right to cancel their subscription and under such
circumstances, the Company will retain the monies from the Rights subscribed
for. The Rights Offering is distinct and separate from the Standby Offering
under which the Underwriter has a "market out" right of cancellation as
described above. In such event, investors may be vulnerable to illiquidity
and/or a loss of their entire investment and the Company may also be at a
greater risk of default and accelerated repayment of the Congress loan. See "The
Offering" and "Underwriting".
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TAX INCENTIVES. Puerto Rico Safety Equipment and Disposable have elected to
apply Section 936 of the Internal Revenue Code, effective July 1, 1979. The
provisions of Section 936 are effective until revoked by the Company. If the
conditions of Section 936(a)(2) are satisfied, the Section 936 credit equals the
portion of the United States income tax that is attributable to taxable income
from sources outside the United States derived from the active conduct of a
trade or business within a United States possession, or the sale or exchange of
substantially all of the qualified possession source investment income.
Dividends payable by each subsidiary to the Company from operations are entitled
to a 100% dividends received deduction but are subject to a 10% withholding tax
in Puerto Rico. The Omnibus Budget Reconciliation Act of 1993 (the "Omnibus
Act") imposes new limitations on computing the Possession Tax Credit under
Section 936 for tax years beginning after 1993. There are two methods for
determining the credit under the new law. Under the first method, the amount of
the credit may be determined by using the so-called economic activity limit.
This attempts to limit the credit by applying various percentages to
possession-based compensation, depreciation and taxes paid or accrued.
Alternatively, the Company may make an irrevocable election when it files its
June 30, 1996 federal income tax return to have present rules apply, but to
phase out the credit to 60% of the 1994 level, and further phase down by 5% per
year to 40% in 1998 and years thereafter. Since the credit is a function of
future earnings, if any, the effect of such limitations cannot be determined at
the present time. In addition, the Omnibus Act makes the 100% dividends received
deduction subject to the Alternative Minimum Tax Calculation. No dividends have
been declared on the aggregate undistributed earnings of Puerto Rico Safety
Equipment and Disposable (which through June 30, 1996, aggregates approximately
$2,321,000) and none are intended to be declared because it is management's
intention to reinvest the earnings from such subsidiaries indefinitely. The
Company believes that based upon current operations, the Omnibus Act will not
have a material effect on the Company for the foreseeable future. The Small
Business Job Protection Act of 1996 further limits the Possession tax credit for
years beginning after 2001 with the credit being eliminated for tax years
beginning after 2005.
As Puerto Rico tax exemptions are reduced or expire, the Company may be
required to pay taxes on income earned in Puerto Rico. The Company is unable to
predict the amount of such impact after such exemptions are reduced or expire.
SHARES ELIGIBLE FOR FUTURE SALE. There are 879,488 shares of Common Stock
of the Company outstnding as of the Effective Date. Of these shares 528,607
shares are restricted securities, as that term is defined in Rule 144
promulgated under the Securities Act of 1933 (the "Securities Act"). Of the
restricted securities, 513,000 shares are being registered for sale, of which
114,000 shares are being registered for sale after nine months, by certain
shareholders. See "Recent Private Placements" and "Concurrent Registration of
Common Stock". 14,602 of the shares are restricted securities owned by officers
and directors of the Company. Absent registration under the Securities Act, the
sale of such shares is subject to Rule 144. In general, under Rule 144, subject
to satisfaction of certain other conditions, a person, including an affiliate of
the Company, who has beneficially owned restricted shares of Common Stock for at
least two years is entitled to sell, within any three-month period, a number of
shares that does not exceed the greater of 1% of the total number of outstanding
shares of the same class, or if the Common Stock is quoted on NASDAQ, the
average weekly trading volume during the four calendar
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<PAGE>
weeks preceding the sale. A person who has not been an affiliate of the Company
for at least three months immediately preceding the sale and who has
beneficially owned the shares of Common Stock for at least three years is
entitled to sell such shares under Rule 144 without regard to any of the volume
limitations described above. The Company's executive officers and directors have
agreed not to sell their shares for a period of twelve months from the Effective
Date and an additional six months without the prior consent of the Underwriter.
The Underwriter may consent to the sale of such shares at any time after 12
months from the date of this Prospectus, in its sole discretion, upon the
request of the holder. The Underwriter's decision to consent will be based upon
the current market conditions, liquidity of the Common Stock, as well as such
other factors the Underwriter deems appropriate. No public announcement will be
made with respect to the foregoing. See "Shares Eligible for Future Sale".
RECENT ISSUANCE OF SUBSTANTIAL SHARES AT REDUCED PRICE. During June and
July of 1996, the Company issued 513,000 shares at $1.50 per share at a time
when the market price range was approximately $8 to $12 per share and the
Company was contemplating a prospective rights offering at approximately $5.00
per share. This offering was authorized to provide proceeds to pay loans and
provide working capital. The shares issued are being registered for sale
concurrently herewith. Holders of 114,000 of these shares have agreed not to
sell their shares for nine months from the date hereof. See "Concurrent
Registration of Common Stock" and "Recent Private Placements".
AUTHORITY TO ISSUE BLANK CHECK PREFERRED STOCK. The Company is authorized
to issue 1,000,000 shares of $.01 preferred stock without further action of the
stockholders in one or more series and to fix before issuance with respect to
each series: (a) the designation and the number of shares to constitute each
series, (b) the liquidation rights, if any, (c) the dividend rights and rates,
if any, (d) the rights and terms of redemption, if any, (e) whether the shares
will be subject to the operation of a sinking or retirement fund, if any, (f)
whether the shares are to be convertible or exchangeable into other securities
of the Company, and the rates thereof, if any, (g) any limitation on the payment
of dividends on the Common Stock while any such series is outstanding, if any,
(h) the voting power, if any, in addition to the voting rights provided by law,
of the shares, which voting powers may be general or special, and (i) such other
provisions as shall not be inconsistent with the certificate of incorporation.
All the shares of any one series of the Preferred Stock shall be identical in
all respects. The Company's board of directors has broad discretion with regard
to the issuance of such shares. No preferred shares are currently outstanding.
See "Description of Securities - Preferred Stock".
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<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Units will be approximately
$2,695,621. The Company intends to use the net proceeds of this Offering to (a)
prepay the Underwriter for a one year financial consulting agreement, a fee
equal to 2% of the gross proceeds, or $70,359; and (b) with the balance going to
paydown the amount outstanding on its line of credit thereby increasing the
amount available under such line of credit for future working capital and other
needs such as acquisitions.The Company has been having ongoing discussions with
several companies regarding possible acquisitions but has not entered into any
definitive agreement or understanding with respect to any such acquisition. No
assurances can be given that any such acquisition will be consummated, or if
consummated, that such acquisition will be successful. Although the Company may
use substantially all of the net proceeds of this offering to reduce outstanding
indebtedness under its credit facility, the Company will, in all likelihood,
draw down funds under such facility in the future in order to continue to
finance its operations. The proceeds of the Company's line of credit with
Congress are used for working capital and general corporate purposes which
includes salaries, purchase of inventory, marketing, and other applicable
corporate expenses. The effect of the application of the proceeds of this
Offering to the reduction of the monies owed to Congress should have the effect
of enabling the balance of the overadvance of $215,000 to be repaid to Messrs.
A.Densen and A. Towell.
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<PAGE>
DILUTION
The purchasers of the Units offered hereby can expect an immediate and
substantial dilution of the net tangible book value of their investment. As of
June 30, 1996, the Common Stock of the Company had a pro forma net tangible book
value of $2,724,059 or approximately $3.10 per share, which gives effect to the
private placement closed in July 1996. The Company's pro forma net tangible book
value after the Offering will be $5,419,680 or $3.42 per share, representing an
immediate increase in pro forma net tangible book value of $.32 per share to the
existing shareholders and an immediate dilution of $1.58 per share or 32% to the
persons purchasing the Common Stock contained in the Units offered hereby. The
following table illustrates the per share dilution:
Subscription Price................................. $5.00
Pro-forma net tangible book value before offering.. $3.10
Increase in net tangible book value attributable
to the Common Stock offered by the Company (1).. .32
----
Pro-forma net tangible book value after offering(1). 3.42
-----
Dilution to new investors........................... $1.58
=====
- -----------------
(1) After deduction of standby fees, the Underwriter's non-accountable expense
allowance and estimated offering expenses paid by the Company. None of the
price is allocated to the Class B Warrants.
(2) Gives no effect to outstanding options or warrants, or options or warrants
to be issued in connection with this Offering.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996: (i) on an historical basis; (ii) on a pro-forma basis giving effect to
the sale of 114,000 shares in a private placement; and (iii) on such pro-forma
basis as adjusted giving effect to the Rights Offering and the sale of Units and
the application of the proceeds therefrom. This table should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
As of June 30, 1996
---------------------------------------
Pro-
Pro- Forma As
Actual Forma (1) Adjusted (2)
------ --------- ------------
Current Liabilities:
Loans Payable $5,853,075 $5,853,075 $3,227,813
========== ========== ==========
Long-Term Debt(including the $ 489,782 $ 489,782 $ 489,782
current portion) ---------- ---------- ----------
Stockholders' Equity:
Common Stock, $.12 par value;
authorized 20,000,000 shares;
issued and outstanding;
765,488 actual outstanding,
879,488 pro-forma outstanding,
1,583,079 pro-forma as
adjusted outstanding 91,859 105,539 189,970
Additional paid-in capital 6,742,476 6,899,796 9,510,986
Accumulated Deficit (4,230,555) (4,230,555) (4,230,555)
---------- ---------- ----------
Total Stockholders' Equity 2,603,780 2,774,780 5,470,401
---------- ---------- ----------
Total Capitalization $3,093,562 $3,264,562 $5,960,183
========== ========== ==========
- ----------------------
(1) Adjusted to give effect to the issuance of 114,000 shares in a
private placement with net proceeds of approximately $171,000 during
July, 1996. See Note 7 in the "Consolidated Financial Statements" and
"Recent Private Placements".
(2) Adjusted to give the effect to shares issued in the rights offering and
the sale of units offered hereby and the receipt of $2,695,621 in net
proceeds and their initial application which is to prepay the
Underwriter $70,359 for a one year consulting agreement with the
balance going to paydown the amount outstanding on the Company's line
of credit.
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MARKET INFORMATION
The principal market on which the Common Stock of the Company is traded is
the NASDAQ Small-Cap Market and its symbol is ESTO. The following chart sets
forth the high and low sales price as determined from NASDAQ for the Common
Stock for the periods indicated as adjusted for its reverse 1 for 10 stock split
effective August 12, 1996:
High Low
---- ---
Fiscal Year Ended June 30,
1995
----
First Quarter $ 17.50 $ 8.75
Second Quarter 14.38 5.63
Third Quarter 16.25 7.50
Fourth Quarter 17.50 10.00
1996
----
First Quarter $ 20.00 $15.00
Second Quarter 20.63 10.63
Third Quarter 14.38 7.50
Fourth Quarter 14.38 6.25
1997
----
First Quarter (July 1, $ 10.00 $ 6.00
1996 through September 17,
1996)
The approximate number of holders of record of the Common Stock, as of
September 17, 1996 was 325. The Company believes there are in excess of 1200
beneficial holders of the Common Stock. On September 17, 1996, the closing price
of the Common Stock was $7.25.
DIVIDEND POLICY
The payment by the Company of dividends, if any, rests within the
discretion of the Board of Directors and, among other things, will depend upon
the Company's earnings, capital requirements and financial condition, as well as
other relevant factors. The Company has not declared any dividends since
inception, and has no present intention of paying any dividends on its Common
Stock in the foreseeable future, as it intends to reinvest its earnings, if any,
in the Company's business. In addition, the Company's lending arrangement with
Congress prohibits the payment of dividends without their consent.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Fiscal Year 1996 Compared to Fiscal Year 1995
The Company's net income for fiscal 1996 was $10,000, which included
non-recurring expenses of approximately $113,000, comprised primarily of the
settlement costs with the Company's former underwriter and costs incurred in
connection with the issuance and repurchase of debentures, compared to net
income of approximately $78,000 for fiscal 1995.
Consolidated net sales during fiscal 1996 increased by 12.3% to $26,983,000
from $24,025,000 during fiscal 1995. In fiscal 1996, Manufacturing Operations
revenues increased 20.9% to $17,889,000 from $14,791,000, while Distribution
Operations revenues decreased 1.5% to $9,094,000 from $9,234,000. The Company
believes that the overall increase in sales was due to improved industry
conditions in the manufacturing segment.
The Company's gross profit margin continues to increase resulting in a
20.3% gross profit margin in fiscal 1996 as compared to 19.9% in fiscal 1995.
The Company believes that this increase was due primarily to continued
manufacturing efficiencies, targeting sales that produce higher gross profits
and improved inventory position.
Selling, general, and administrative expenses for fiscal 1996 were
$4,546,000 or 16.8% of sales compared to $4,149,000 or 17.3% for the prior
fiscal year. The decrease as a sales percentage was due to the increase in sales
volume for the year as well as the effect of the Company's continuing cost
reductions and increased purchase discounts and advertising incentives earned.
Interest expense was $836,000 for fiscal 1996 as compared to $584,000 in
the prior year. This increase was due principally due to increased borrowings
during the year for working capital, including establishing of sales-point
warehouses in the southwest and western areas of the United States.
Outstanding options and warrants did not materially dilute earnings per
share in 1996, but could do so in the future if there is a significant increase
in the spread between their exercise price and the quoted market price of the
Company's Common Stock.
Recent hurricanes have adversely affected production and shipments in
Puerto Rico which may adversely affect fiscal first quarter 1997 results. None
of the Company's production facilities have been damaged and the Company
believes that any potential adverse affect would be temporary.
Adoption of New Accounting Standards
Under Financial Accounting Standards Statement No. 123 (FASB 123),
"Accounting for Stock-Based Compensation", companies are required to provide new
disclosures about stock options based upon their fair value at the date of
grant. This new rule becomes effective for fiscal years beginning after December
15, 1995. FASB 123 provides for an option to disclose the pro-forma effects of
stock compensation on net income and earnings per share or charge stock
compensation to earnings. The Company intends to adopt the pro-forma disclosure
method in its June 30, 1997 consolidated financial statements.
Liquidity and Capital Resources
The Company had working capital as of June 30, 1996 of $1,553,000 as
compared to working capital of $1,065,000 as of June 30, 1995. The increase
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<PAGE>
resulted primarily from the sale of stock in a private placement in June 1996. A
substantial portion of the Company's working capital consists of inventory,
which was $5,230,000 and $4,364,000, as of June 30, 1996 and 1995, respectively.
The Company is required to maintain substantial inventories of its numerous
products to meet the immediate requirements of its customers who need products
on short notice and who do not maintain an inventory of such products.
The Company had a line of credit agreement with Congress whereby the
Company could borrow up to $6,000,000, with interest payable at 2.25% above the
prime rate, plus an unused line fee of .25% per year. Borrowings under this
agreement were limited to 50% of the eligible inventory up to a maximum of
$2,875,000 and 80% of eligible accounts receivable. In July, 1996, the line of
credit was amended and extended until October 1, 1999 with an option by Congress
to extend the loan for an additional year. The line was increased to $9,000,000
with an interest rate at 1.25% above the prime rate which will be reduced to
prime plus 1% subject to the consummation of the Company's proposed public
offering by December 31, 1996 and the net proceeds of this offering being at
least $2,500,000. The limits on borrowings were increased to 85% of eligible
accounts receivable and 55% of eligible inventory. The amounts outstanding at
June 30, 1996 and June 30, 1995 were $5,558,000 and $4,829,000, respectively.
The Company had $76,000 available for borrowing at June 30, 1996. The loan is
subject to certain working capital and net worth requirements and is
collateralized by all of the assets of the Company not previously pledged under
other loan agreements. The loan agreement prohibits the payment of cash
dividends by the Company.
In September 1993, the Company received an overadvance of $500,000 from
Congress. In connection therewith, Messrs. A. Densen, L.Densen, and A. Towell
obtained the Junior Participation from Congress by advancing $250,000 of their
funds to Congress. $250,000 of this overadvance has been repaid to Congress.
The balance of $215,000, after repayment of $35,000 to L. Densen, will be repaid
by Congress, at its option, to Messrs. A.Densen, L.Densen, and A. Towell subject
to the availability of funds.
The Company believes that its current working capital position, line of
credit and operations will be sufficient to satisfy its cash needs through June
30, 1997. In addition, the net proceeds of $171,000 from the second private
placement in July, 1996 and the net proceeds of this Offering will provide the
Company with additional funds to be utilized as indicated in "Use of Proceeds."
Net cash used for operating activities was principally a result of an
increase in accounts receivable and inventories which was only partially offset
by an increase in accounts payable. Cash flows used in investing activities was
for the purchase of property, plant, and equipment. Cash flows provided by
financing activities was principally from increased borrowings under the
Company's line of credit and from the proceeds of a private placement of the
Company's Common Stock.
The Company has no material commitments for capital expenditures.
At the present time, the Company, together with a variety of defendants, is
a party to various asbestos-related lawsuits involving a number of plaintiffs
alleging damages from exposure to asbestos products sold by the Company. The
Company may become a party to additional asbestos-related actions in the future.
The Company is also party to a non-asbestos product liability action. While as
indicated in "Business-Legal Proceedings" legal and settlement costs to the
Company have not been material to date, the Company cannot, at this time,
determine the outcome of these uncertainties which may have an adverse effect
upon the liquidity of the Company in the future.
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<PAGE>
From time to time, information provided by the Company or statements made
by its employees, or information provided in its filings with the Securities and
Exchange Commission (including this Prospectus) may contain forward looking
information. The Company's actual future results may differ materially from
those projections or statements made in such forward looking information as a
result of various risks and uncertainties, including each of those risks set
forth in the Risk Factors contained in this Prospectus. See "Risk Factors". The
market price of the Company's Common Stock may be volatile at times in response
to fluctuations in the Company's quarterly operating results, changes in analyst
earnings estimates, market conditions, as well as general conditions and other
factors general to the Company.
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<PAGE>
BUSINESS
General
Eastco Industrial Safety Corp. is a corporation organized and existing
under the laws of the State of New York, having been incorporated on May 15,
1958. The Company, through its wholly-owned subsidiaries, Disposable, Safety
Wear, Puerto Rico Safety Equipment, and Puerto Rico Safety, manufactures
industrial protective clothing products and distributes a wide range of
industrial safety products. The Company's Manufacturing Operations sells its
products to distributors. The Company's Distribution Operations sells products
to "end users," including manufacturing companies and service businesses, public
utilities, fisheries, pharmaceutical plants, the transportation industry and
companies engaged in hazardous materials abatement.
Manufacturing Operations
Manufactured products are sold under the "Charkate/Worksafe", "Charkate",
"Worksafe" and "COVER-UP" trade names. The Company, through Disposable, Safety
Wear and Puerto Rico Safety Equipment, manufactures disposable and reusable
industrial protective apparel. Disposable protective products items include
coveralls, shirts, pants, hats, hoods, aprons, smocks, lab coats, hazardous
material handler suits, examination gowns, sleeves, shoe covers and related
items. Disposable clothing is designed to protect the user from, among other
things, splash, dirt, contamination and against a wide range of hazardous
substances. Disposable clothing is made primarily of a spun bonded polyolefin
produced solely by Dupont under the trade name Tyvek(R). Reusable industrial
protective clothing consists of items for the protection of various parts of the
body which are designed to shield the user from, among other things, splash,
dirt, contamination, heat, fire, cold and the outside environment. Specific
products manufactured include coveralls, gloves, mitts, shirts, thermal
underwear, sleeves, coats, pants, leggings, spats, bibs, safety vests and a
variety of other kinds of protective clothing and uniforms. The Company also
manufactures welding blankets, curtains and screens.
Sales of manufactured disposable clothing and related disposable products
accounted for approximately 43% and 39% of the Company's consolidated revenues
for the fiscal years ended June 30, 1996 and 1995, respectively.
The Company's Manufacturing Operations and warehousing are located
primarily in Puerto Rico and Alabama. The Company's manufacturing operations are
directed primarily from New York. The Company is presently testing the use of
contracted production facilities in Mexico. The Company's products are sold
primarily in the United States and Puerto Rico. The Company sells its
manufactured products through sales representatives. In addition, manufactured
products are sold through the Company's Distribution Operations in the
Northeastern region of the United States and Puerto Rico to "end users."
Distribution Operations
The Company, primarily through Eastco, distributes to "end users"
industrial safety products made by the Charkate/Worksafe division as well as
by non-affiliated companies. These products include hard hats, protective
glasses, ear muffs, ear plugs, respirators, goggles, face shields, rainwear,
protective footwear, first-aid kits, monitoring devices, signs and related
products. These products are sold to manufacturing companies and service
businesses, including public utilities, fisheries, hospitals, pharmaceutical
plants, the transportation industry and companies engaged in hazardous materials
abatement.
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<PAGE>
The Company supplies a variety of items which may be used during the
removal and/or encapsulation of hazardous materials in office buildings,
chemical plants, refineries, electric generating plants and schools. Abatement
products sold by the Company include in the largest part, items made by other
companies, such as negative air machines, respirators, air filtration equipment,
vacuums, polybags and sheetings, decontamination showers, signs, tools, pumps,
sprayers and related equipment. The Company does not engage in the removal or
encapsulation of hazardous materials. Sales of these products accounted for
approximately 20% and 22% of the Company's consolidated revenues for the fiscal
years ended June 30, 1996 and June 30, 1995, respectively. The foregoing
percentages do not include products used in the abatement field which are
manufactured by the Company.
The Company's Distribution Operations are primarily directed from the
Company's offices in New York. The Company also has facilities for warehousing
and distribution of its non-manufactured products in Puerto Rico, Connecticut
and Florida. The Company sells a variety of safety products from independent
manufacturers, including, but not limited to, 3M, Racal Health and Safety, Inc.
and Willson Safety Products, a division of WGM Safety Corporation. Items
distributed are sold primarily in the Northeastern region of the United States.
Sales and Marketing
The Company utilizes catalogs and telemarketing to aid in its sales
efforts; however, the Company does not engage in any mail-order business nor
sell on a retail basis. Sales are also promoted through trade shows, mailings
and advertising in directories and trade magazines. Sales are primarily to "end
users" comprised of industrial, commercial and governmental accounts. The
Company considers industrial accounts to be those businesses which are primarily
based upon manufacturing and production, while commercial accounts are
considered by the Company to be service businesses. The Company also believes
that standards established by OSHA have resulted in a need by others to purchase
the Company's products. The Company employs 10 full-time salespeople in its
Distribution Operations who sell products distributed by the Company, and on a
more limited basis, products manufactured by the Company.
Customers
For the year ended June 30, 1996 and the previous fiscal year, no one
customer accounted for more than 10% of the Company's sales. Accordingly, the
Company believes it is not dependent upon any single customer, the loss of any
one of which would not have an adverse effect on the business of the Company.
Competition
The market for industrial protective clothing and industrial safety
products is extremely competitive. The Company faces competition in all of its
product markets from large, established companies that have greater financial,
managerial, sales and technical resources than the Company, and some of the
Company's product markets are dominated by such larger companies. Larger
competitors also may be able to benefit from economies of scale and introduce
new products that compete with the Company's products.
The Company's primary competitors in its Manufacturing Operations are
Kappler Inc. and Lakeland Industries, Inc., in disposable clothing sales, and
P.G.I., Incorporated; Red Kap, a subsidiary of VF Industries Inc.; Topps Mfg.
Co. and Workrite Uniform Co. in the sale of reusable clothing. Primary
competitors in the manufacture of reusable gloves are Chicago Protective
Apparel, Inc. and Steel Grip, Inc. The Company's major competitors in its
Distribution Operations are Balco Industries, Inc. and Freemont Safety Corp.
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in industrial sales, and Insulation Distributions Company, Industrial
Productions Company and Aramsco Company in abatement sales.
Suppliers
The Company is not dependent upon any one Company for a source of supply of
raw materials for its manufacturing operations other than DuPont which supplies
the Company with Tyvek(R), a raw material which is used in various lines of its
disposable products. Products utilizing Tyvek(R) accounted for approximately 41%
and 35% of consolidated sales for the fiscal years ended June 30, 1996 and June
30, 1995, respectively. Management believes that its current relationship with
DuPont is satisfactory.
Government Regulation
The Company's manufacturing facilities are subject to regulation and
inspection standards established by OSHA. Such facilities have not yet been
inspected for compliance with OSHA. Various of the Company's products are
subject to other government standards. Although the Company believes it is in
material compliance with required standards, there can be no assurance that any
inspection will not reveal that the Company has failed to comply with OSHA and
that, as a result, the Company may be required to expend sums, which can be
costly, to assure compliance with OSHA regulations.
Special Tax Considerations
Puerto Rico Safety Equipment is engaged in manufacturing in Puerto Rico and
was granted an exemption for seventeen (17) years under the Puerto Rico
Industrial Tax Exemption Act of 1963 (the "Industrial Tax Act") with respect to
Puerto Rico income taxes on the production of such items as safety clothing,
protective sleeves, coats, pants, hoods and jackets for the period commencing
January 1, 1970. On July 1, 1989 Puerto Rico Safety Equipment was granted an
extension of its exemption and has a 90% exemption from Puerto Rico income taxes
for the ten-year period ending on June 30, 1999. During this period, Puerto Rico
Safety Equipment has a 75% exemption from Puerto Rico municipal taxes on its
real and personal property utilized in its operations.
Disposable has been granted a fifteen-year exemption under the Industrial
Tax Act with respect to Puerto Rico income taxes on its operations covering the
production of disposable clothing and with respect to the property used in its
operations for the period commencing June 4, 1977, subject to the terms of the
grant. This exemption has been extended until 2006 on the basis of a 90%
exemption on Puerto Rico income taxes and personal property taxes and a 60%
exemption on municipal license taxes.
Puerto Rico Safety Equipment and Disposable have elected to apply Section
936 of the Internal Revenue Code, effective July 1, 1979. The provisions of
Section 936 are effective until revoked by the Company. If the conditions of
Section 936(a)(2) are satisfied, the Section 936 credit equals the portion of
the United States income tax that is attributable to taxable income from sources
outside the United States derived from the active conduct of a trade or business
within a United States possession, or the sale or exchange of substantially all
of the qualified possession source investment income. Dividends payable by each
subsidiary to the Company from operations are entitled to a 100% dividends
received deduction but are subject to a 10% withholding tax in Puerto Rico. The
Omnibus Budget Reconciliation Act of 1993 (the "Omnibus Act") imposes new
limitations on computing the Possession Tax Credit under Section 936 for tax
years beginning after 1993. There are two methods for determining the credit
under the new law. Under the first method, the amount of the credit may be
determined by using the so-called economic activity limit. This attempts to
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<PAGE>
limit the credit by applying various percentages to possession-based
compensation, depreciation and taxes paid or accrued. Alternatively, the Company
may make an irrevocable election when it files its June 30, 1996 federal income
tax return to have present rules apply, but to phase out the credit to 60% of
the 1994 level, and further phase down by 5% per year to 40% in 1998 and years
thereafter. Since the credit is a function of future earnings, if any, the
effect of such limitations cannot be determined at the present time. In
addition, the Omnibus Act makes the 100% dividends received deduction subject to
the Alternative Minimum Tax Calculation. The Small Business Job Protection Act
of 1996 further limits the Possession tax credit for years beginning after 2001
with the credit being eliminated for tax years beginning after 2005. No
dividends have been declared on the aggregate undistributed earnings of Puerto
Rico Safety Equipment and Disposable (which through June 30, 1996, aggregates
approximately $2,321,000) and none are intended to be declared because it is
management's intention to reinvest the earnings from such subsidiaries
indefinitely. The Company believes that based upon current operations, the
Omnibus Act will not have a material effect on the Company for the foreseeable
future.
As Puerto Rico tax exemptions are reduced or expire, the Company may be
required to pay taxes on income earned in Puerto Rico. The Company is unable to
predict the amount of such impact if such exemptions are reduced or expire.
Employees
As of September 7, 1996, the Company has 195 employees in its Manufacturing
Operations and 15 in its Distribution Operations. In addition, there are 4
executive management employees, and 17 clerical and administrative personnel.
None of the Company's employees are covered by a collective bargaining agreement
and the Company considers its relations with its employees to be satisfactory.
Properties
The executive offices of the Company are located at 130 West 10th Street,
Huntington Station, New York (the "Huntington Property"), which building is
owned by the Company. The Huntington Property is also used for warehousing and
distributing and contains approximately 25,000 square feet of warehouse space
and 5,000 square feet of office space. As of June 30, 1996, the Huntington
Property was subject to a first mortgage due to a group of investors (the
"Associates") in the amount of $489,782. The wives of Messrs. Alan Densen and
Anthony P. Towell, executive officers and directors of the Company, and Herbert
Schneiderman, a director, are members of Associates. See "Certain Relationships
and Related Transactions" regarding the extension of this mortgage for five
years.
The Company's wholly owned subsidiary, Disposable, leases a building in
Aguadilla, Puerto Rico, consisting of approximately 45,000 square feet, from the
Puerto Rico Industrial Development Company which is used for manufacturing and
warehousing. A lease was entered into for these premises on February 21, 1995,
effective for the ten year period commencing September 1, 1993. Monthly rent for
the two-year period ending August 31, 1996 is at the rate of $7,079, and
escalates to $13,041 monthly in the final year of the lease.
The Company's wholly owned subsidiary, Safety Wear, occupies approximately
30,000 square feet in Decatur, Alabama. The premises are utilized for the
cutting and warehousing of coveralls and the manufacturing of disposable
products. The Company pays $6,450 rent per month. The premises are leased on a
month-to-month basis. Should these facilities not be available to the Company,
the Company believes that alternative sites are available at a comparative cost.
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Legal Proceedings
The Company, in the past, manufactured certain products made of asbestos.
Such use was terminated by the Company in the mid-1980's. It has been alleged
that asbestos is a cause of cancer, such as asbestosis, mesothelioma, and other
related diseases, the symptoms of which may not appear for twenty or more years.
Since the early 1980's, numerous lawsuits have been instituted against the
Company by persons who have been exposed to asbestos and asbestos products. Such
legal proceedings, for the most part, are covered by the Company's insurance
policies.
As of June 30, 1996, the Company estimates that it is a party to
approximately 280 cases with respect to exposure to asbestos involving
approximately 1300 plaintiffs, of which no cases pertain to Puerto Rico Safety
Equipment. During the twelve months ended June 30, 1996, approximately 30 new
actions involving approximately 630 plaintiffs were commenced against the
Company. During the same period, approximately 30 actions involving
approximately 670 plaintiffs were settled or discontinued, for which the
Company's obligations on these settlements were approximately $19,000. All of
the actions against the Company to date have been brought by non-employees of
the Company and are based upon personal injury claims. The pending actions are
in the Supreme Court of the State of New York,County of New York; Superior Court
of New Jersey, Middlesex County, Law Division; and Court of Common Pleas of
Luzerne County, Trial Division of Pennsylvania. The number of first-party
plaintiffs include, in various instances, spouses of said plaintiffs. The
actions, with the exception of one pending action, involve a multitude of
defendants. The complaints allege exposure to asbestos and asbestos products
over various periods of time. Each seeks varying amounts of damages, usually
unlimited, or for each plaintiff as high as $10,000,000 for compensatory damages
and $20,000,000 for punitive damages. The Company may become a party to
additional asbestos actions in the future.
From 1981 through June 30, 1996, the Company estimates that approximately
900 actions on behalf of approximately 7500 first-party plaintiffs have been
instituted against it concerning asbestos-related claims and that approximately
600 actions and the claims of approximately 6200 plaintiffs have been terminated
against the Company. The Company estimates that as of June 30, 1996, with the
exception of defense costs, a total of approximately $1,400,000 has been paid,
or agreed to be paid, in settlements to date with regard to the terminated
actions (inclusive of actions against Puerto Rico Safety Equipment) of which all
but approximately $30,000 has been paid by the Company's insurance carriers. The
foregoing is based upon information available to the Company to date. Through
June 30, 1996, the Company has paid less than $35,000 for legal and defense
costs to counsel appointed by the insurance carriers to defend it. Past results
of settlements and defense costs are not necessarily indicative of future
settlements and defense costs, which the Company is unable to predict.
For the period commencing April 1, 1968 to April 1, 1969 and March 11, 1971
to November 27, 1985, the Company believes that it has various policies of
primary insurance in different amounts which would protect it against liability
for asbestos-made, product-related personal injuries. The policies range in
amounts from $50,000 to $1,000,000 on an annual basis. The Company also believes
that since August 10, 1972 to on or about August 11, 1986 it has had various
policies for excess coverage applicable to asbestos claims on an annual basis.
These policies range in amounts from $500,000 to $10,000,000 for excess
coverage. There are gaps of approximately six weeks in the primary coverage
between March 11, 1971 to November 27, 1985 and approximately thirty-six months
in the excess coverage between August 10, 1972 and August 11, 1986 and an
additional period of approximately thirteen months for excess coverage insurance
34
<PAGE>
companies in liquidation where there is likely to be no coverage. The policies
of insurance are not applicable to all of the subsidiaries of the Company,
which have varying coverage, and such subsidiaries may also be without coverage
for various times of their doing business. Not all of these policies are in the
possession of the Company. Reference is made to "Risk Factors" regarding the
liquidation of certain of the Company's insurance carriers with respect to
excess product liability coverage.
During fiscal 1994, the Company reached a settlement (the "1994
Settlement") pertaining to all pending and future cases against it in the State
of New York brought by one firm of plaintiffs' attorneys, which firm has been
primarily responsible for bringing asbestos actions against the Company in the
State of New York. The settlement does not apply to Puerto Rico Safety Equipment
and is only applicable to cases brought by the same law firm against the Company
in the State of New York. The Company is to be dismissed without any payment in
cases not involving any exposure to a power generating station in the State of
New York ("Powerhouse"). Where there is Powerhouse exposure, a payment of $100
is to be made for each alleged nonmalignant case and $300 for each malignant
case. Where plaintiffs consist of two spouses, such is deemed one case. Payment
is to await appropriate documentation of exposure, releases from the plaintiffs
and the agreement of each plaintiff whose case is settled.
Effective June 26, 1990, an agreement between Eastco and its primary
insurance carriers dated March 26, 1990 became effective. Eastco entered into
this agreement in an effort to resolve uncertainties as to its insurance
coverage which will cover asbestos claims against the parent Company where any
exposure to asbestos is alleged during the period 1971 to 1985, inclusive.
Pursuant to this agreement, the Company is obligated to share in the payment of
asbestos-related claims against Eastco. Pursuant to the agreement, the Company
is obligated to pay 12% of all attorneys' fees incurred on its behalf and 17% of
indemnity costs (which include judgment and settlement amounts). The balance of
these costs are to be paid by the insurance carriers, which are parties to the
agreement. The agreement is subject to policy limitations of each insurance
policy. The agreement may be terminated at any time upon ninety (90) days'
notice by any of the parties provided that termination may not be effective as
to any asbestos action that has already been placed on the trial calendar,
unless it has a scheduled trial date more than twelve (12) months from the date
the notice of termination is given. The Company is presently aware of only one
pending case on the trial calendar.
Effective during May, 1991, the Company entered into a Settlement Agreement
and Release with Mount Vernon Fire Insurance Company. Pursuant to this
Agreement, the Company discontinued its action against Mount Vernon, which
provided that, subject to the terms of the Agreement, Mount Vernon would
reimburse the Company (where applicable) for 6.25% of attorneys' fees (52.08% of
the Company's 12% share referred to in the agreement in the previous paragraph)
and 6.25% of indemnification costs (36.76% of the Company's 17% share referred
to in the agreement in the previous paragraph). The Agreement is not applicable
to any asbestos actions against the Company where no exposure is alleged to
products manufactured or distributed by Eastco between April 1, 1968 and April
1, 1969. The Agreement may be terminated at any time upon 90 days' notice, but
such notice is not applicable to asbestos actions placed on a trial calendar,
unless such has a trial date more than twelve months from the date the notice of
termination is given. The agreement provides that the limit available under the
policy is $100,000 plus attorneys' fees while the agreement is in effect and is
applicable only to Eastco. Approximately $25,000 has been reimbursed by Mount
Vernon Fire Insurance Company as of June 30, 1996 for indemnification.
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<PAGE>
The two agreements referred to above between the Company and the insurance
carriers may not be applicable to Puerto Rico Safety Equipment, which is covered
by other insurance. To date, the claims settled by Puerto Rico Safety Equipment
have been paid in full by insurance. No agreement has been reached with the
insurance companies confirming all of these policies, which range from $100,000
to $500,000 for primary coverage and $1,000,000 to $5,000,000 for excess
coverage. The policies for Puerto Rico Safety Equipment cover the period March
11, 1971 to July 23, 1986 with various gaps of fourteen months on primary
coverage and forty-two months on excess coverage.
An action entitled Michael F. Cilone and Marie Cilone v. Willson Safety
Products, Inc., Standard Coating Corporation, National Paint Co., Inc., E.I.
Dupont De Nemours & Co Inc., Orb Industries, Inc., PPG Industries Inc., Olde
England Paint & Varnish Corp., Oatey Co., d/b/a Bond Tight Products, Eastco
Industrial Safety Corp. was instituted on September 19, 1988 in the Supreme
Court of the State of New York, County of Kings. The Company has referred this
matter to its insurance carriers applicable to the period 1984 to 1986 and who
have provided primary insurance on an annual basis of $1,000,000 per year in
addition to applicable excess carriers. The complaint alleges four causes of
action, including one for punitive damages on behalf of Michael F. Cilone,
against the Company in the amount of $5,000,000 each and one cause of action for
$500,000 on behalf of Marie Cilone. The complaint alleges that the Company sold
respirators made by Willson Safety Products and other safety equipment to
Michael F. Cilone's employer, the New York City Transit Authority, between 1984
and 1986 and that he sustained injuries as a result of chemicals and various
materials made by the other defendants. The Company has been advised by counsel,
designated by its insurance carriers to defend it, that any settlement and/or
verdict expense should be within the policy limits of the Company's insurance.
This is based upon the present status of the case and the fact that depositions
have not yet all been completed.
The Company is unable to ascertain the total extent of insurance applicable
to asbestos claims against it or the extent to which its insurance carriers will
provide coverage. The Company's insurance may not provide coverage for punitive
damages where such damages are sought against it in pending litigation. Punitive
damages are allowable in addition to compensatory damages and are awarded as a
punishment to the defendant for wrongs in a particular case as well as for the
protection of the public against similar acts, to deter the defendant from a
repetition of the wrongful act and to serve as a warning to others. Usually a
wrong, aggravated by an evil or wrongful motive or a willful and intentional
misdoing or a reckless indifference equivalent thereto, is required for a court
to award punitive damages. The Company is unable to specify whether its actions
would give rise to punitive damages. It believes that its actions should not
give rise to punitive damages. There, however, can be no assurance that this
will be the case.
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<PAGE>
MANAGEMENT
Directors and Officers
The Board of Directors is separated into two classes. All directors hold
office until the second annual meeting of shareholders of the Company following
their election or until their successors are duly elected and qualified officers
are appointed by the Board of Directors and serve at its discretion. The
directors and executive officers of the Company are as follows:
Name Age Position
- ---------------- --- -------------------------
Alan E. Densen 62 President, Chief Executive
Officer, and Director
Lawrence Densen 38 Senior Vice President and
Director
Anthony P. Towell 64 Vice President of Finance,
Secretary, Treasurer, Chief
Financial Officer and
Director
Dr. Martin Fleisher 59 Director
James Favia 62 Director
Herbert Schneiderman 64 Director
The term of office of Alan E. Densen, Lawrence Densen, and Anthony P.
Towell does not expire until the Company's next annual meeting and when their
successors are chosen. The remaining directors' term does not expire until the
following year's annual meeting and when their successors are chosen.
Alan E. Densen has been President, Chief Executive Officer and a director
of the Company since 1958 (except for the period September 1993 to January 1994,
when he served as its Senior Vice President). He was also Treasurer and Chief
Financial Officer of the Company through 1992. He is the father of Lawrence
Densen.
Lawrence Densen, Senior Vice President and director of the Company, has
been a Vice President and a director of the Company since 1986. He is the son
of Alan E. Densen.
Anthony P. Towell has been the Company's Vice President of Finance,
Treasurer, and Chief Financial Officer since 1992, its Secretary since 1993, and
from 1989 to 1992 its Vice President. He has been a director of the Company
since 1989. He was a director of New York Testing Laboratories, Inc. ("NYT"), a
laboratory testing Company and manufacturer of automotive accessories, from 1988
to 1995. In addition, he has been a director since 1988 of Nytest Environmental
Inc. ("Nytest"), a hazardous waste testing Company. Mr. Towell was a director of
Ameridata Technologies, Inc. ("Ameridata"), a provider of computer products and
services from 1991 to 1996. The common stock of Nytest is registered, and the
common stock of Ameridata was registered, under Section 12(g) and (b),
respectively, of the Securities Exchange Act of 1934.
Dr. Martin Fleisher has been a director of the Company since 1989.He holds
a Ph.D. in biochemistry from New York University, and has been an attending
clinical chemist at Memorial Sloan-Kettering Cancer Center since 1967. He
devotes only a limited portion of his time to the business of the Company.
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James Favia has been a director of the Company since July 26, 1995. He has
been a consultant during the past five years to Donald & Co., which has acted as
the Company's investment advisor. He is a chartered financial analyst and has an
MBA in finance which he obtained from New York University in 1959.He was a
director of T.J. Systems until November, 1994. The common stock of T.J. Systems
is registered under Section 12(g) of the Securities Exchange Act of 1934. He
devotes only a limited portion of his time to the business of the Company.
Herbert Schneiderman has been a director of the Company since July 26,1995.
He has been President of the Casablanca Group, L.P. during the past five years,
a manufacturer of diversified women's sportswear. He devotes only a limited
portion of his time to the business of the Company.
There is no key man insurance on the lives of the executive officers of the
Company.
Committees of the Board of Directors
The Board of Directors has established a Compensation Committee, a Stock
Option Committee and an Audit Committee. The Compensation Committee consists of
Messrs. Fleisher, Favia and Schneiderman. The purpose of the Compensation
Committee is to review the Company's compensation of its executives, to make
determinations relative thereto and to submit recommendations to the Board of
Directors with respect thereto.
The Stock Option Committee consists of Messrs. Fleisher, Favia and
Schneiderman. The purpose of the Stock Option Committee is to select the persons
to whom options to purchase shares of the Company's Common Stock under the 1994
Incentive Stock Option Plan and to make various other determinations with
respect to such plans.
The Company has an Audit Committee consisting of Messrs. Towell, Favia and
Schneiderman. The purpose of the Audit Committee is to provide general oversight
of audit, legal compliance and potential conflict of interest matters.
Each of the foregoing committees met once during the fiscal year ended June
30, 1996.
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<PAGE>
EXECUTIVE COMPENSATION
The following describes the components of the total compensation of the CEO and
each other executive officer of the Company whose total annual salary and bonus
exceeds $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long term compensation
------------------- ----------------------
Awards Payouts
------------------------- ------------------
Other Securities All
Name and annual Restricted underlying LTIP other
principal Salary Bonus compen- stock options/ payouts compen-
position Year ($) ($) sation($) award(s)($) SARs(#)(5) ($) sation($)
- -------- ---- ------ ----- --------- ------------ ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alan E. 1996 117,661 -0- 35,672(3) -0- 8,348(4) -0- -0-
Densen, 1995 107,930 -0- 32,875(3) -0- 82,158(2) -0- -0-
CEO 1994(1) 117,154 -0- 30,078(3) -0- -0- -0- -0-
Lawrence 1996 101,778 -0- 4,200 -0- 8,348(4) -0- -0-
Densen, 1995 89,130 -0- 4,200 -0- 82,158(2) -0- -0-
Senior VP 1994 86,936 -0- 4,200 -0- -0- -0- -0-
</TABLE>
(1) From September, 1993 to January, 1994, Mr. Densen was not CEO; he
served as Senior Vice President.
(2) Includes incentive stock options granted January 20, 1995 to acquire
2,000 shares at $10.625 as well as non-qualified stock options to
acquire 80,158 shares exercisable at $5.302 per share, each
exercisable until January 19, 2005. Because it was determined
that the audited pre-tax profit for fiscal 1995 was greater
than $50,000, non-qualified options can now be exercised for 40,079
shares of Common Stock.The remaining 40,079 non-qualified options
can not be exercised during the first five years. The non-qualified
options provide for adjustment in the event of dilution as a
result of sales of securities at less than the exercise price. Each
set of the options to acquire 40,079 shares at $5.302 per share
will,as a result of anti-dilution rights, following the consummation
of this Offering, be adjusted to acquire 41,110 shares at $5.169
per share.
(3) Primarily life insurance premiums on the life of Alan E. Densen owned
by Mr. Densen's wife and paid for by the Company.
(4) Warrants to acquire 8,348 shares of Common Stock at $5.771 granted
February 23, 1996 until February 22, 2001, in consideration of the
guaranty of overadvances by Congress to the Company. These warrants
provide for adjustment in the event of dilution, and will be adjusted
to acquire 8,870 shares at $5.431 as a result of this Offering.
(5) Each person's options including only options directly held by such
person.
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<PAGE>
Stock Options
OPTION/SAR GRANTS IN LAST FISCAL YEAR
[Individual Grants]
Number of Percent of
securities total options/
underlying SARs granted Exercise
Options/SARs in fiscal or base Expiration
Name granted (#)(1) year (1) price ($/Sh) Date
- ----- -------------- -------------- ------------- -----------
Alan E. 8,348 33.3% $5.771 2/22/2001
Densen,
CEO
Lawrence 8,348 33.3% $5.771 2/22/2001
Densen,
Senior V.P.
(1) See note (4) above in the Summary Compensation Table.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
Number
of securities Value
underlying unexercised in-
unexercised the-money options
Shares SARs at FY-end (#) SARs at FY-end($)
acquired on Value exercisable/ exercisable/
Name exercise (#) realized ($) unexercisable(2) unexercisable
- ----- ------------ ------------ ------------------ ------------------
Alan E. 0 0 50,427/40,079 $108,909/$100,619
Densen,
CEO (1)
Lawrence 0 0 51,108/40,079 $108,909/$100,619
Densen,
Senior VP
(1) See footnotes (2) and (4) above in the Summary Compensation Table. Does
not include warrants to acquire 1,667 shares described in Note (1)
under Principal Shareholders or options held by Lawrence Densen.
(2) Each person's options include only options directly held by such
person.
Employment Agreements and Change in Control Features
As of July 1, 1995, Alan E. Densen entered into a new employment agreement
which provides for him to serve as the Company's President for a term of five
years and Lawrence Densen also entered into a new employment agreement to serve
as Senior Vice-President for a term of five years. Anthony P. Towell has a
similar contract. At the end of each fiscal year during the term of the
agreement, the agreements are automatically extended for one additional year to
be added at the end of the then current term of the agreements, unless the Board
of Directors determines not to extend the agreements. Each may also terminate
their agreements upon 30 days written notice. The base annual salaries for
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<PAGE>
Alan E. Densen and Lawrence Densen were $117,661 and $101,778, respectively, for
fiscal 1996 which is to be increased at the beginning of each fiscal year
commencing July 1, 1996, at the discretion of the Board of Directors but not
less than 10% of the minimum compensation paid to the employees in the prior
fiscal year. For fiscal 1997, their base fiscal salaries are $133,100 and
$115,500, respectively. Each is entitled to receive an annual bonus equal to 3
1/3% of the Company's earnings before interest and taxes for the fiscal year
ended June 30, 1996 and each fiscal year thereafter during the term of the
agreement, and Lawrence Densen is entitled to .75% of the Company's revenues in
excess of $20.5 million. Bonuses are to be paid within 30 days after the
completion of the Company's audited financial statements for each fiscal year
and is to be paid in cash or registered shares of common stock of the Company.
In addition, each, in accordance with Company policy, is entitled to receive
reimbursement of ordinary and necessary business expenses, a monthly automobile
allowance of $700 and disability, medical and hospitalization insurance.
The employment agreements entered into by Messrs. Alan E. Densen and
Lawrence Densen include provisions that provide for their right to terminate the
agreements and thereby receive additional compensation, as provided below, in
the event that they are not elected or retained as President and Senior
Vice-President, respectively, or as a director of the Company; the Company acts
to materially reduce their duties and responsibilities under the agreement; the
Company changes the geographic location of their duties to a location from the
New York metropolitan area; their base compensation is reduced by 10% or more;
any successor to the Company fails to assume the agreements; any other material
breach of the agreements which is not cured by the Company within 30 days; and a
"Change of Control" by which a person, other than a person who is an officer
and/or director of the Company as of the effective date of the agreements, or a
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934,
becomes the beneficial owner of 20% or more of the combined voting power of the
then outstanding securities of the Company or the composition of the board
changes so that officers of the Company no longer hold a majority of the seats.
In the event that Messrs. Alan E. Densen or Lawrence Densen terminate their
positions because of any of the aforesaid reasons other than a "Change of
Control", or if the Company terminates their employment in any way that is a
breach of the agreement by the employer, Messrs. Alan E. Densen and Lawrence
Densen shall be entitled to receive, in addition to their salary continuation,
as a bonus, a cash payment equal to their total base salary plus projected
expenses and bonuses for the remainder of the term thereof, payable within 30
days of termination and all stock options, warrants and other stock appreciation
rights granted by the Company, with the exception of qualified incentive stock
option plans,to them shall become immediately exercisable at an exercise price
of $0.10 per share. In the event that either owns or is entitled to receive any
unregistered securities of the Company, than the Company shall register such
securities within 120 days of the their termination.
In the event that there is a "Change of Control", Messrs. Alan E. Densen
and Lawrence Densen shall be paid within 30 days thereof a one-time bonus equal
to their total minimum base salary for the next three years and they shall be
immediately reimbursed for all amounts not yet received for their participation
in the balance of $215,000 ($35,000 has been repaid to Lawrence Densen) junior
participation in the loans made to the Company from Congress Financial
Corporation ("Congress") during September 1993, without regard to whether such
amount is currently due pursuant to the terms thereof.
Messrs. A. Densen, L. Densen, and A. Towell, in modification agreements to
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<PAGE>
their employment agreements, have waived: (i) their right to bonuses based upon
the Company's earnings before interest and taxes for the fiscal years ended June
30, 1996 through June 30, 2000; (ii) their exercise rights on options and
warrants and repayment of their junior participation interests with Congress and
compensation payable in the event of a Change in Control with respect to the
Private Placement and this Rights Offering; and (iii) their right to terminate
their relationship with the Company, as per the terms of their respective
employment agreements. The modification agreements and waivers provide that
their right to terminate their employment agreements and waiver of their bonuses
shall not be waived in the event that there is a material breach of such
agreements by the Company.
During February 1996, Messrs. A. Densen, L. Densen, and A. Towell
guaranteed to Congress overadvances to the Company of up to $500,000 in excess
of the Company's eligible borrowings. The Company issued warrants for a term of
five years in consideration for their guaranty to each Messrs. A. Densen, L.
Densen, and A. Towell to purchase 8,348 shares of Common Stock at an exercise
price of $5.771 per share commencing February 23, 1996. These warrants provide
for adjustment in the event of dilution, and will be adjusted to acquire 8,870
shares at $5.431 as a result of this Offering. The overadvances have since been
repaid and their guarantees are no longer in effect.
Compensation to Directors
No compensation is paid to officers who also serve as directors for their
serving solely as a director. Outside directors are compensated at the rate of
$500 for each board of directors meeting which they attend in person.
Indemnification of Directors and Executive Officers
The Company's Certificate of Incorporation provides that the personal
liability of directors to the corporation or its shareholders for damages for
any breach of duty in such capacity is eliminated to the fullest extent
permitted by law. The bylaws of the corporation provide that directors or
officers of the corporation shall be indemnified by the corporation in the
manner and to the fullest extent permitted by law, as amended from time. Section
722 of the Business Corporation Law of the State of New York contains provisions
entitling directors and officers of the Company to indemnification from
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorney's fees, as the result of an action or proceeding in which they may be
involved by reason of being or having been a director or officer of the Company
provided said officers or directors acted in good faith, the acts were not the
result of deliberate dishonesty, and that the indemnitee does not personally
gain or profit where not legally entitled to do so. The Company maintains
directors and officers liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is therefor unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or paid by a director,
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<PAGE>
officer or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by such director, officer of controlling
person in connection with the securities being registered, the Company will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and is therefore unenforceable and will be governed by the final
adjudication of such issue. See "Underwriting" with reference to provisions in
the Standby Agreement pertaining to reciprocal indemnification of the Company
and the Underwriter.
1996 Stock Option Plans
At a special meeting of shareholders held on August 12, 1996, the
shareholders approved: (i) an incentive stock option plan (the "1996 Incentive
Plan"); and (ii) a non-qualified stock option plan (the "1996 Non-Qualified
Plan").
1996 Incentive Stock Option Plan
The 1996 Incentive Plan authorizes the grant of 300,000 shares of Common
Stock, subject to adjustment as provided in the plan. Eligibility to participate
in the 1996 Incentive Plan is limited to key employees of the Company and its
subsidiaries. The 1996 Incentive Plan terminates May 12, 2006. The term of each
option may not exceed ten years. Options will not be transferable except upon
death and, in such event, transferability will be effected by will or by the
laws of descent and distribution. An option granted under the 1996 Incentive
Plan may not be exercised unless, at the time of exercise, the optionee is then
in the Company's employ and has completed at least twelve (12) months of
continuous employment with the Company from the date of grant of the option.
Incentive Stock Options may not be granted at less than 100% of fair market
value at the time of the grant. Options granted to employees who own more than
10% of the Company's outstanding Common Stock will be granted at not less than
110% of fair market value for a term of five years. The aggregate market value
of stock for which Incentive Stock Options are exercisable during any calendar
year by an individual is limited to $100,000, but the value may exceed $100,000
for which options may be granted to an individual. Payment of the exercise price
for options under the 1996 Incentive Plan are to be made in cash or by the
exchange of Common Stock having equivalent value.
No options have been granted under this Plan.
1996 Non-Qualified Stock Option Plan
The 1996 Non-Qualified Plan authorizes the grant of 300,000 shares of
Common Stock, subject to adjustment as provided in the plan, to key employees,
consultants and others. The 1996 Non-Qualified Plan terminates ten (10) years
after stockholder approval. Options granted shall specify the exercise price,
the duration of the option, the number of shares to which the option applies and
such other terms and conditions not inconsistent with the 1996 Non-Qualified
Plan as the committee, or other legally permissible entity, administering the
1996 Non-Qualified Plan shall determine provided that the option price shall not
be less than 100% of the fair market value at the time the option is granted and
no option may be exercisable for more than ten (10) years after the date on
which it is granted. Payment of the exercise price for options under the 1996
Non-Qualified Plan is to be made in cash, by the exchange of Common Stock having
equivalent value or through a "Cashless Exchange". If a Participant elects to
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<PAGE>
utilize a "Cashless Exercise" (as defined in the Plan), he shall be entitled to
a credit equal to the amount of that equity by which the current Fair Market
Value exceeds the option price on that number of options surrendered and to
utilize that credit to exercise additional options held by him that such equity
could purchase. There shall be canceled that number of options utilized for the
credit and for the options exercised with such credit.
No options have been granted under this Plan.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following are known by the Company, as of the date hereof, to be the
beneficial owners of more than five percent of Common Stock:
<TABLE>
<CAPTION>
Percent Percent
of Class of Class
Name and Address Amount and Nature Before After
Title of Class of Beneficial Owner of Beneficial Owner Offering Offering(A)
- -------------- ------------------- ------------------ -------- -----------
<S> <C> <C> <C> <C>
Common Stock Alan E. Densen 59,396(1)(4)(5) 6.4% 3.7%
$.12 par value 130 West 10th Street shares direct and
Huntington Station, NY beneficial
Common Stock Lawrence Densen 53,608(2)(4)(5) 5.8% 3.4%
$.12 par value 130 West 10th Street shares direct and
Huntington Station, NY beneficial
Common Stock Anthony P. Towell 138,739(3)(4)(5) 13.7% 8.6%
$.12 par value 130 West 10th Street shares direct and
Huntington Station, NY beneficial
Common Stock George Schiavoni 76,000 8.6% 0%(6)
$.12 par value 46 Bayview Avenue shares direct and
Sag Harbor, NY beneficial
</TABLE>
- ------------------
(A) Assumes no Rights, warrants or options will be exercised as a result of
this Offering. However, this column takes into consideration additional
shares issuable under the anti-dilution rights of certain options and
warrants.
(1) Includes warrants, held by Mr. Densen's wife, to acquire 1,667 shares
of Common Stock, exercisable at $13.00 per share which expire April
11,1999.Also includes incentive stock options granted under the 1994
Plan to acquire 2,000 shares of Common Stock, exercisable at $10.625
which expire January 19, 2005. Amount indicated does not include shares
beneficially owned by Lawrence Densen, son of Alan E. Densen.
(2) Does not include shares beneficially owned by Alan E. Densen, father
of Lawrence Densen. Includes 700 Class A Warrants; incentive stock
options granted under the 1983 Incentive Stock Option Plan (the
"1983 Plan") to acquire 625 shares which expire December 17, 1996
and are exercisable at $26.664 per share; incentive stock options
granted under the 1983 Plan to acquire 56 shares of Common Stock
which expire May 31, 1998 and are exercisable at $30.00 per share;
and incentive stock options granted under the 1994 Plan to acquire
2,000 shares of Common Stock , which expire January 19, 2005 and are
exercisable at $10.625.
(3) Includes 1,500 Class A Warrants; warrants, held by Mr. Towell's wife,
to acquire 1,667 shares of Common Stock, exercisable at $13.00 per
share which expire April 11, 1999; and incentive stock options
granted under the 1994 Plan to acquire 2,000 shares of Common Stock,
exercisable at $10.625 which expire January 19, 2005. Also includes
warrants to acquire 82,645 shares of Common Stock exercisable at
$6.292 per share which expire April 11, 1999, which warrants provide
for an anti-dilution adjustment as a result of sales of securities
at less than the exercise price, and will be adjusted to acquire
90,941 shares at $5.718 as a result of this Offering.
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<PAGE>
(4) Includes non-qualified options to acquire 40,079 shares to each
Messrs. A. Densen, A. Towell and L. Densen exercisable until January
19, 2005 at an exercise price of $5.302. Does not include options
to acquire an additional 40,079 shares to each Messrs. A. Densen, A.
Towell and L. Densen which cannot be exercised until January 20,
2000. These options provide for a dilution adjustment as a
result of sales of securities at less than the exercise price. Each
of the options to acquire 40,079 shares at $5.302 per share will, as
a result of anti-dilution rights, following the consummation of this
Offering, become options to acquire 41,110 shares at $5.169 per
share. See "Certain Relationships and Related Transactions".
(5) Includes warrants to acquire 8,348 shares of Common Stock exercisable
at $5.771 per share, which expire February 22, 2001. These warrants
provide for a dilution adjustment as a result of
sales of securities at less than the exercise price, and will be
adjusted to acquire 8,870 shares at $5.431 as a result of this
Offering. See "Certain Relationships and Related Transactions".
(6) Mr. Schiavoni is a selling shareholder and this Prospectus assumes
the sale of his shares of Common Stock after nine months from the
Effective Date.
The following table sets forth as of August 12, 1996, the number of shares
of Common Stock owned by each of the present directors of the Company, together
with certain information with respect to each:
Percent Percent
of Class of Class
Amount and Nature Before After
Name and Address of Beneficial Owner Offering Offering(A)
- ---------------- ------------------- -------- -----------
Alan E. Densen 59,396(1) 6.4% 3.7%
130 West 10th Street shares direct
Huntington Station, NY and beneficial
Anthony P. Towell 138,739(2) 13.7% 8.6%
130 West 10th Street shares direct
Huntington Station, NY and beneficial
Lawrence Densen 53,608(3) 5.8% 3.4%
130 West 10th Street shares direct
Huntington Station, NY and beneficial
Dr. Martin Fleisher 1,000(4) * *
130 West 10th Street shares direct
Huntington Station, NY and beneficial
James Favia 2,000(5) * *
130 West 10th Street shares direct
Huntington Station, NY and beneficial
Herbert Schneiderman 3,833(6) * *
130 West 10th Street shares direct
Huntington Station, NY and beneficial
All executive officers
and directors
as a group
(6 persons) 258,576 23.0% 14.8%
- ------------------
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<PAGE>
* Less than 1%
(A) Assumes no Rights, warrants or options will be exercised as a result of
this Offering. However, this column takes into consideration additional
shares issuable under the anti-dilution rights of certain options and
warrants.
(1) See footnotes (1), (4), and (5) in the preceding chart.
(2) See footnotes (3), (4), and (5) in the preceding chart.
(3) See footnotes (2), (4), and (5) in the preceding chart.
(4) Includes stock options to acquire 1,000 shares of Common Stock.
(5) Includes stock options to acquire 1,000 shares of Common Stock.
(6) Includes warrants and stock options to acquire 1,833 shares of
Common Stock.
The foregoing reflects the outstanding options and warrants held by each of such
persons, and reflects all adjustments for anti-dilution rights through this
Offering.
47
<PAGE>
DESCRIPTION OF SECURITIES
Rights
The Rights offered hereby to the Company's existing stockholders consist of
the right to acquire one Unit of the Company's Common Stock at a price of $5.00
per Unit on the basis of 4 Rights for each 5 shares of Common Stock currently
owned by such holder. No fractional Rights will be issued. Rights will be
rounded to the nearest lower whole number. The Rights are nontransferable and
expire upon the Expiration Date of the Offering unless exercised by the holder
thereof.
Units
The Units offered in the Offering each consist of one share of Common Stock
and one Class B Warrant.
The Class B Warrants are immediately detachable, transferable and
separately tradeable from the Common Stock with which they are issued. The Units
will be evidenced by separate certificates for the Common Stock and the Class B
Warrants which comprise the Units.
Common Stock
The authorized capital stock of the Company is 20,000,000 shares of Common
Stock, $0.12 par value per share. The holders of Common Stock (i) have equal
ratable rights to dividends from funds legally available, therefore, when, as
and if declared by the Board of Directors of the Company; (ii) are entitled to
share ratably in all of the assets of the Company available for distribution to
holders of Common Stock upon liquidation, dissolution or winding up of the
affairs of the Company; (iii) do not have preemptive, subscription or conversion
rights and there are no redemption or sinking fund provisions applicable
thereto; and (iv) are entitled to one vote per share on all matters on which
shareholders may vote at all meetings of shareholders.
The holders of shares of Common Stock of the Company do not have cumulative
voting rights, which means that the holders of more than 51% of such outstanding
shares voting for the election of Directors can elect all of the Directors to be
elected, if they so choose, and, in such event, the holders of the remaining
shares will not be able to elect any of the Company's Directors.
Class B Warrants
The Class B Warrants will be issued pursuant to the Warrant Agreement
between the Company and American Stock Transfer and Trust Co., as warrant agent
(the "Warrant Agent"). None of the Class B Warrants have been issued prior to
the Offering. The following discussion of certain terms and provisions of the
Class B Warrants is qualified in its entirety by reference to the detailed
provisions of the Class B Warrant Agreement and the Class B Warrant
certificates, the forms of which have been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part.
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<PAGE>
Each Class B Warrant entitles its holder to purchase one share of Common
Stock at an exercise price of $6.25 per share commencing twelve months (or
sooner with the consent of the Underwriter)until three years after the date of
this Prospectus.The Class B Warrants may be redeemed by the Company at any time,
commencing eighteen months after the Effective Date, but no sooner than 12
months from the date the Warrants become exercisable, at a redemption price of
$.01 per Warrant upon 30 days prior written notice, provided the closing high
bid price of the Common Stock for the 15 consecutive trading days ending on the
third day prior to the date of notice of redemption is in excess of $9.375 (or
150% of the exercise price of the Class B Warrants to be proportionately
adjusted for any stock dividends and stock splits occurring after the Effective
Date and which may be adjusted to 150% of the current exercise price of the
Class B Warrants, if such exercise price is changed) per share. Warrantholders
shall exercise rights until the close of business on the day preceding the date
fixed for redemption. All Class B Warrants must be redeemed if any are redeemed.
In order for a holder to exercise a Class B Warrant, and as required in the
Warrant Agreement, there must be a current registration statement on file with
the Commission pertaining to the shares of Common Stock underlying the Class B
Warrants, and such shares must be registered or qualified for sale under
securities laws of the state in which such warrantholder resides or such
exercise must be exempt from registration in such state. The Company will be
required to file post-effective amendments to the Registration Statement of
which this Prospectus forms a part during the nine month period from the date
hereof, when events require such amendments. In addition, the Company has agreed
with the Underwriter to use its best efforts to keep the Registration Statement
covering the shares underlying the Class B Warrants current and effective. There
can be no assurance however, that such Registration Statement (or any other
Registration Statement filed by the Company to cover shares of Common Stock
underlying the Class B Warrants) can be kept current. If a Registration
Statement covering the shares of Common Stock is not kept current for any
reason, or if the shares underlying the Class B Warrants are not registered in
the state in which a holder resides, the Class B Warrants will not be
exercisable and will be deprived of any value.
Holders of the Class B Warrants will be protected against dilution upon the
occurrence of certain events, including, but not limited to stock dividends,
stock splits, reclassifications, mergers, and sales of Common Stock below the
Exercise Price or then-current market value. However, holders of Class B
Warrants will have no voting rights and are not entitled to dividends. In the
event of liquidation, dissolution or winding up of the Company, holders of Class
B Warrants will not be entitled to participate in any distribution of the
Company's assets.
The purchase price payable upon exercise of the Class B Warrants is to be
paid in lawful money of the United States by certified or bank check. The
Company is not required to issue certificates representing fractions of shares
of Common Stock upon the exercise of Class B Warrants, but with respect to any
fraction of a share, it will make payment in cash based upon the market price of
the Common Stock as determined by the Warrant Agent based upon the average of
the closing sales prices for the Common Stock on the NASDAQ SmallCap Market (or,
if applicable, NASDAQ National Market) during the ten day trading period
immediately preceding the date of exercise.
49
<PAGE>
Transfer Agent, Warrant Agent and Registrar
The Transfer Agent and Warrant Agent for the Common Stock and the Class
B Warrants is American Stock Transfer and Trust Co., 40 Wall Street, New
York, New York 10005.
Other Publicly Held Securities and Preferred Stock
Class A Warrants
The Company has issued and outstanding 2,262,500 Class A Warrants,
exercisable for 226,250 shares of Common Stock, which are publicly tradeable and
are exercisable at a price of $13.00 per share until April 11, 1999. Such
holders are protected against dilution upon the occurrence of certain events
including but not limited to stock dividends, stock splits, reclassifications,
and mergers, but have no voting rights and are not entitled to dividends. In the
event of liquidation, dissolution, or winding up of the Company, holders of
Class A Warrants are not entitled to participate in the distribution of any of
the Company's assets.
Preferred Stock
Pursuant to shareholder approval at the August 12, 1996 Special
Shareholders' Meeting, the Company is authorized to issue 1,000,000 shares of
preferred stock par value $.01. The Board of Directors has the express
authority, without further action of the stockholders, to issue shares of
Preferred Stock from time to time in one or more series and to fix before
issuance with respect to each series: (a) the designation and the number of
shares to constitute each series, (b) the liquidation rights, if any, (c) the
dividend rights and rates, if any, (d) the rights and terms of redemption, if
any, (e) whether the shares will be subject to the operation of a sinking or
retirement fund, if any, (f) whether the shares are to be convertible or
exchangeable into other securities of the Company, and the rates thereof, if
any, (g) any limitation on the payment of dividends on the Common Stock while
any such series is outstanding, if any, (h) the voting power, if any, in
addition to the voting rights provided by law, of the shares, which voting
powers may be general or special, and (i) such other provisions as shall not be
inconsistent with the certificate of incorporation. All the shares of any one
series of the Preferred Stock shall be identical in all respects. No preferred
shares are currently outstanding.
50
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
There are 879,488 shares of Common Stock of the Company outstnding as of the
Effective Date. Of these shares 528,607 shares are restricted securities, as
that term is defined in Rule 144 promulgated under the Securities Act of 1933
(the "Securities Act"). Of the restricted securities, 513,000 shares are being
registered for sale, of which 114,000 shares are to be registerd for sale after
nine months, by certain shareholders. See "Recent Private Placements" and
"Concurrent Registration of Common Stock". 14,602 of the shares are restricted
securities owned by officers and directors of the Company. Absent registration
under the Securities Act, the sale of such shares is subject to Rule 144. In
general, under Rule 144, subject to satisfaction of certain other conditions, a
person, including an affiliate of the Company, who has beneficially owned
restricted shares of Common Stock for at least two years is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of 1% of the total number of outstanding shares of the same class, or if
the Common Stock is quoted on NASDAQ, the average weekly trading volume during
the four calendar weeks preceding the sale. A person who has not been an
affiliate of the Company for at least three months immediately preceding the
sale and who has beneficially owned the shares of Common Stock for at least
three years is entitled to sell such shares under Rule 144 without regard to any
of the volume limitations described above. The Company's executive officers and
directors have agreed not to sell their shares for a period of twelve months
from the Effective Date and an additional six months without the prior consent
of the Underwriter. The Underwriter may consent to the sale of such shares at
any time after 12 months from the date of this Prospectus, in its sole
discretion, upon the request of the holder. The Underwriter's decision to
consent will be based upon the current market conditions, liquidity of the
Common Stock, as well as such other factors the Underwriter deems appropriate.
No public announcement will be made with respect to the foregoing.
51
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During September 1993, the Company's lender, Congress, agreed to provide an
overadvance to the Company of $500,000. In connection therewith, Messrs. A.
Densen, L. Densen and A. Towell obtained a junior participation interest from
Congress by advancing $250,000 of their funds to Congress. $250,000 of this
overadvance was repaid to Congress during fiscal 1994. Mr. L. Densen was repaid
$35,000 of the previous balance in full by Congress during May, 1996. The
remaining balance of $215,000 will be repaid by Congress, at its option, to
Messrs. A. Densen and A. Towell, subject to the availability of funds.
Associates holds a first mortgage on the Company's executive offices and
warehouse facility in the principal amount of $489,782 as of June 30, 1996 and
security interest on the Company's personal property. The wives of Alan E.
Densen and Anthony P.Towell, executive officers and directors of the Company,
and Herbert Schneiderman, a director of the Company, are members of Associates
owning approximately 38% thereof. During the fiscal year ended June 30, 1996,
the Company paid Associates $121,107 in principal and interest on the mortgage,
of which $72,346 constituted interest.
On January 20, 1995, the Company granted non-qualified options to acquire
80,158 shares of Common Stock to each of Messrs. A. Densen, A. Towell, and L.
Densen. Because it was determined that the audited pre-tax profit for fiscal
1995 was greater than $50,000, non-qualified options can now be exercised for
40,079 shares of Common Stock.The remaining 40,079 non-qualified options can not
be exercised during the first five years. The non-qualified options provide for
adjustment in the event of dilution as a result of sales of securities at less
than the exercise price. Each set of the options to acquire 40,079 shares at
$5.302 per share will,as a result of anti-dilution rights, following the
consummation of this Offering, become options to acquire 41,110 shares at $5.169
per share. All of the options granted on January 20, 1995 were granted in
consideration of previous sacrifices including reduction in salaries,
cancellation of options, and other surrendered benefits by executive officers as
well as the turnaround performance achieved by the Company. The turnaround
achieved by the Company in its performance can be directly related to the
efforts of Messrs. A. Densen, A. Towell, and L. Densen.
On January 31, 1995, the Company's board of directors reduced the exercise
price of the 2.3 million outstanding Class A Warrants issued in connection with
the 1994 Public Offering to $13.00 per share. At the same time, the board of
directors also reduced the exercise price to $13.00 per share with regard to the
10,833 warrants ("Associate Warrants") issued to a group of investors, including
the spouses of Alan Densen (1,667 Associate Warrants owned by her) and Anthony
P. Towell (1,667 Associate Warrants owned by her), and Herbert Schneiderman (833
Associate Warrants owned by him), in connection with a reduction of indebtedness
regarding the Company's premises; 82,645 warrants purchased by Anthony P.
Towell, the Company's Chief Financial Officer, from Scorpio Partners, L.P.
(90,941, as adjusted for this Offering); 4,078 Royce warrants issued in
connection with a 1991 public offering to the same Underwriter herein; and 833
warrants in connection with a 1991 bridge loan. All these warrants have also
been extended to April 11, 1999. These warrants were all adjusted as indicated
so as to treat them on an equal basis and to provide incentives for them to be
exercised.
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<PAGE>
The Company had employment agreements with Messrs. A. Densen, A. Towell and
L. Densen, which commenced as of the effective date of the Company's 1994 public
offering in April, 1994. As of July 1, 1995, these executive officers entered
into new agreements. See "Executive Compensation Employment Agreements and
Change in Control Features" with regards to provisions contained in the
employment agreement of Alan E. Densen, the Company's President and CEO, and
Lawrence Densen, the Company's Senior Vice-President. Similar provisions are
contained in the employment agreement with Anthony P. Towell. Messrs. A. Densen,
L. Densen, and A. Towell, in modification agreements to their employment
agreements, have waived: (i) their right to bonuses based upon the Company's
earnings before interest and taxes for the fiscal years ended June 30, 1996
through June 30, 2000; (ii) their exercise rights on options and warrants and
repayment for their junior participation interests with Congress and
compensation payable in the event of a Change in Control with respect to the
Private Placement and this Rights Offering; and (iii) their right to terminate
their relationship with the Company, as per the terms of their respective
employment agreements. The modification agreements and waivers provide that
their right to terminate their employment agreements and waiver of their bonuses
shall not be waived in the event that there is a material breach of such
agreements by the Company.
On April 18, 1995, the Company entered into an agreement with Donald to act
as its investment adviser for a term of three years at a retainer of $3,000 per
month. The agreement may be terminated for cause at any time and after eighteen
(18) months by either party upon forty-five days notice. Donald was also granted
a five year warrant to purchase 12,500 shares exercisable at $12.50 per share,
the closing market price on the date of grant. James Favia, a director of the
Company, serves as a consultant to Donald.
On July 10, 1995 the Company terminated its relationship with Lew
Lieberbaum & Co., Inc. ("Lew Lieberbaum"), the Company's underwriter in its 1994
public offering. Pursuant to an agreement dated July 10, 1995, the Company
canceled all of Lew Lieberbaum's rights under the Underwriting Agreement (the
"Underwriting Agreement"), including, but not limited to, the right of first
refusal to act on behalf of the Company in future transactions, the cancellation
of all Underwriter's Warrants held by Lew Lieberbaum or its affiliates, their
right to representation on the Company's board of directors and the termination
of any obligation by holders of securities subject to a "lock-up" to obtain the
permission of Lew Lieberbaum prior to sale or other disposition of said
securities. At the same time, Leonard A. Neuhaus and Sheldon Lieberbaum, who are
affiliated with Lew Lieberbaum, resigned as directors of the Company. In
exchange, the Company issued 10,000 shares of common stock to Lew Lieberbaum.
During February 1996, Messrs. A. Densen, A. Towell and L. Densen, executive
officers and directors of the Company, guaranteed to Congress overadvances to
the Company of up to $500,000 in excess of the Company's eligible borrowings.
The Company issued warrants for a term of five years in consideration for their
guaranty to each Messrs. A. Densen, A. Towell, and L. Densen to purchase 8,348
shares of Common Stock at $5.771 per share will, as a result of anti-dilution
rights, following the consummation of this offering, become options to acquire
8,870 shares of Common Stock at $5.431 per share, which expire on February 22,
2001, and are subject to anti-dilution provisions. The overadvance has since
been repaid and their guarantees have been returned to them.
53
<PAGE>
The first mortgage held by Associates which they agreed on in 1992 and upon
which interest was being paid at the rate of 14% comes due on July 1, 1997 in
the amount of approximately $438,000. Associates and the Company have agreed to
extend the mortgage for five years from July 1, 1997 with interest at 12% per
annum or 3% over prime, whichever is greater. At the end of five years, the
mortgage will come due in the amount of approximately $283,000. The Company
intends to explore the refinancing of this mortgage with various lenders.
Considering the circumstances of each transaction, the Company believes
that all transactions heretofore with officers/directors and shareholders of the
Company and their affiliates have been made, and in the future will be made on
terms no less favorable to the Company than those available from unaffiliated
parties and will be approved by a majority of the disinterested directors.
RECENT PRIVATE PLACEMENTS
On June 28, 1996, the Company completed a private placement offering,
pursuant to which it issued 399,000 shares at $1.50 per share to 20 investors,
pursuant to provisions for exemption from registration under the Securities Act
of 1933 as amended. The terms of this private placement offering were
established by negotiation between the Company and Royce Investment Group, Inc.,
a registered broker/dealer (the "Private Placement Agent"). Under the terms of
this private placement offering, 10 1/2 units (the "Units") were offered, and
sold, in multiples of $57,000 per Unit. Each full Unit consists of 38,000 shares
of the Company's Common Stock, par value $0.12 per share. The Company used net
proceeds from this private placement offering to pay off a short-term loan in
the amount of $500,000 from Elono Portfolio S.A., which had been used to reduce
the amount due to Congress. Gross proceeds from this private placement offering
were $598,500. The Underwriter acted as Placement Agent and received a
commission of 10% and a 3% non-accountable expense allowance. On July 9, 1996,
the Company completed an additional private placement offering for 114,000
shares at $1.50 per share for use as working capital to 5 investors, pursuant to
provisions for exemption from registration under the Securities Act of 1933 as
amended. Royce Investment Group, Inc. did not act as placement agent, nor was it
involved in any way with the private placement which closed on July 9, 1996. The
shares sold in the foregoing private placements are being registered
concurrently herewith. None of the foregoing purchasers of these private
placements have had a prior relationship with the Company, with the exception of
Heather Reiser whose husband is affiliated with Donald & Co., the Company's
investment advisor. See "Concurrent Registration of Common Stock".
THE OFFERING
The Rights
The Company is granting to holders of all its outstanding Common Stock of
record on September 24, 1996("Record Date"), in those states where qualified, or
exempt from qualification, (see page 3 for list of such states), the
nontransferable Rights to subscribe for Units, each of which consists of one
share of common stock $0.12 par value (the "Common Stock") of the Company and
one Class B Redeemable Common Stock Purchase Warrant (the "Class B Warrants") of
the Company on the basis of 4 Rights for each 5 shares of Common Stock owned on
the Record Date. Inasmuch as the Rights are not transferable, there will be no
market for the Rights, nor will Royce Investment Group, Inc. (the "Underwriter")
be purchasing any Rights.
54
<PAGE>
Expiration Date
The Rights Offering will terminate, and the Rights will expire, at 5:00
p.m. New York Time, on __________________, 1996 (the "Expiration Date").
Method of Exercising Rights
Rights may be exercised by completing and signing a rights certificate. The
completed and signed subscription form, accompanied by payment in full of the
Subscription Price for all Units purchased, must be received by the Subscription
Agent before the Expiration Date.
The executed rights certificate and payment should be mailed or delivered
to the Subscription Agent at the following address:
American Stock Transfer & Trust Company
40 Wall Street, 46th Floor
New York, New York 10005
Payment of the Subscription Price must be made by certified check, bank
check or money order payable to American Stock Transfer & Trust Company as agent
for Eastco Industrial Safety Corp. on or before the Expiration Date. Wire
transfers may be directed to an account maintained by American Stock Transfer
and Trust Company at Chase Manhattan Bank, Account No. 323-294723;
ABA No. 021 000 021. There is no broker protect period.
Certificates representing the Units purchased by exercising Rights will be
issued as soon as practicable after acceptance, provided that the Subscription
Agent has received a properly completed subscription agreement accompanied by
proper payment in full of the Subscription Price. The sale of the unsubscribed
Units to the Underwriter is expected to occur on the third business day after
the Underwriter receives notice from the Subscription Agent as to the number of
unsubscribed Units for which it is committed to purchase. All funds received by
the Subscription Agent will, upon its acceptance of subscriptions and its
authorization of the issuance of certificates representing the Common Stock, be
placed in the Subscription Agent's escrow account.
All questions as to the validity, form, eligibility (including times of
receipt and beneficial ownership) and the acceptance of rights certificates and
55
<PAGE>
the Subscription Price will be jointly determined by the Company and the
Underwriter, whose determinations will be final and binding. Once made,
subscriptions are irrevocable, and no alternative, conditional or contingent
subscriptions will be accepted. The Company reserves the absolute right to
reject any or all subscriptions not properly submitted or the acceptance of
which would, in the opinion of the Company's counsel, be unlawful. The Company
also reserves the right to waive any irregularities or conditions, and the
Company's and the Underwriter's joint interpretations of the terms and
conditions of the Offering shall be final and binding. Any irregularities in
connection with subscriptions must be cured within such time as the Company
shall determine unless waived. The Company and the Underwriter are not under any
duty to give notification of defects in such subscriptions and will not have any
liability for failure to give such notifications. Subscriptions will not be
deemed to have been made until such irregularities have been cured or waived
and, if rejected, will be returned to the holder of the Rights as soon as
practicable.
Standby Commitment
In accordance with a standby underwriting agreement (the "Standby
Agreement") entered into on the date of this Prospectus and pursuant thereto the
Underwriter shall be obligated to purchase all of the Units subject to the
Rights Offering which are not subscribed for in said offering on the second
business day following the Expiration Date of such offering and commence the
distribution of such securities on or after said time. The Underwriter will pay
for the securities on the seventh calendar day after the Expiration Date, at the
subscription price set forth on the cover page of the Prospectus. If all of the
Rights are exercised, the Underwriter will not, subject to the following,
purchase any of the Units pursuant to the Standby Agreement.
In the event that the unsubscribed Units to be purchased by the Underwriter
is less than 300,000 Units, the Underwriter will have the right but not the
obligation to purchase such number of units that will bring the number of units
to be purchased by the underwriter up to a total of 300,000 of these Optional
Units at the Subscription Price less a 10% discount and 3% nonaccountable
expense allowance.
The Underwriter will offer to sell to the public the components of the
Units it acquires from the Company pursuant to the Standby Agreement (the
"Standby Offering") at prices not to exceed the lowest asked prices then
existing at the time of sale as reported on NASDAQ. If any of the Company's
affiliated stockholders acquire Units or components thereof directly from the
Underwriter in the Standby Offering, such purchases, if any, will not exceed 10%
of the shares being offered hereby. Any securities acquired by affiliates in the
Offering or the Standby Offering will be acquired for investment purposes only
and made subject to a "lock-up" agreement for eighteen (18) months from the date
of this Prospectus with the Underwriter. See "Description of Securities-
Potential Future Sales of Common Stock pursuant to Rule 144."
The Underwriter may terminate its obligations under the Standby Agreement
if there is a material adverse change in the condition of the Company, or if
certain other events occur. In such event investors will not have the right to
56
<PAGE>
cancel their subscriptions. The Company has the right to retain the monies from
Rights subscribed for. The Rights Offering is distinct and separate from the
Standby Offering under which the Underwriter has a market out right of
cancellation as described herein.
Tax Consequences of the Offering
Investors and stockholders are urged to consult with their independent tax
advisors for the tax consequences of this Offering for the following reasons.
Individual shareholders may be subject to federal and/or state inheritance
or estate taxes. A shareholder's evaluation of the federal and/or state income
tax consequences of this Offering may depend on his federal and/or state tax
situation. The Company is unable to determine the federal and/or state income
tax consequences to investors and stockholders of the Company with regard to
their subscribing, or failing to subscribe, for the Rights.
57
<PAGE>
UNDERWRITING
Pursuant to a Standby Underwriting Agreement between the Underwriter and
the Company dated as of the date of this Prospectus (the "Standby Agreement"),
the Underwriter has participated in establishing the terms and structure of the
Offering. Pursuant to the Standby Agreement, the Company will pay to the
Underwriter a 10% standby fee of $351,795.50 ($.50 per share)in consideration of
its agreement to enter into the standby commitment and also will pay the
expenses of the Underwriter, on a 3% nonaccountable basis, in the amount of
$105,538.65 ($.15 per share). In the event that the number of unsubscribed Units
to be purchased by the Underwriter is less than 300,000 Units, the Underwriter
will have the right but not the obligation to purchase a minimum of 300,000
Units at the Subscription Price less a 10% discount and 3% nonaccountable
expense allowance to be purchased within 30 days of the date of the Closing.
These amounts will be paid by the Company to the Underwriter whether or not all
of the Rights are exercised and the Underwriter actually purchases any Units
under the Standby Agreement, unless the Standby Offering is terminated pursuant
to the terms of the Standby Agreement. In addition, the Company has agreed to
pay to the Underwriter for its agreement to act as a financial consultant for a
term of one year from the Effective Date, a fee totaling 2% of the proceeds of
the Offering (including the Optional Units) payable on the Closing and the sale
of the Optional Units.
The Offering is not being underwritten. However, as described above under
"The Offering-Standby Commitment," subject to the terms and conditions of the
Standby Agreement, the Underwriter has committed to purchase, at the
Subscription Price, all of the Units not subscribed for in the Offering. The
Underwriter's commitment to the Company in this regard is made on a "firm
commitment" basis except if, in the reasonable judgment of the Underwriter, it
is impracticable to consummate the Standby Offering under normal "market out"
conditions, such as (i)the Company having sustained a material loss of any
nature which, in the sole and absolute opinion of the Underwriter substantially
affects the value of the property of the Company and materially interferes with
the operation of the business of the Company (not covered by insurance); (ii)
any material adverse change in the business, property or financial condition of
the Company; (iii) trading in securities on the New York Stock Exchange, the
American Stock Exchange or NASDAQ System having been suspended or limited or
minimum prices having been established on either such Exchange or System; (iv) a
banking moratorium having been declared by either federal or state authorities;
(v) an outbreak of major hostilities or other national or international calamity
having occurred; (vi) any action having been taken by any government in respect
of its monetary affairs which, in the reasonable opinion of the Underwriter, has
a material adverse effect on the United States securities markets; (vii) any
action, suit or proceeding at law or in equity against the Company, or by any
Federal, State of other Commission, board or agency wherein any unfavorable
decision would materially adversely effect the business, property, financial
condition or income of the Company; or (viii) due to conditions arising
subsequent to the execution hereof, the Underwriter reasonably believes that, as
a result of material and adverse events affecting the market for the Company's
Common Stock or the securities markets in general, it is impracticable or
inadvisable to proceed with the Standby Offering. Accordingly, should the
Underwriter not purchase the unsold Units in accordance with the market out
conditions, shareholders who have exercised the Rights will not have a right to
cancel their subscription. In addition, in the event that all of the Units
58
<PAGE>
offered hereby are not sold pursuant to the exercise of Rights, and the
Underwriter fails to purchase the unsold Units pursuant to its Standby
Agreement, the Company will elect not to return payment received on the Rights
subscribed for, and investors may be vulnerable to illiquidity and/or a loss of
their entire investment. The Subscription Price has been arbitrarily determined
through negotiation between the Company and the Underwriter, was set at
approximately 60-70% of the average closing bid price as reported by NASDAQ for
the ten business days preceding the Effective Date, and may bear no relationship
to current market price, earnings, assets or other recognized criteria of value
applicable to the Company. Factors considered in determining such prices, in
addition to prevailing market conditions, included the history of and the
prospects for the industry in which the Company competes, an assessment of the
Company's management, the prospects of the Company, its capital structure and
such other factors as were determined relevant. Reference is made to the Standby
Agreement, which is annexed as an exhibit to the Registration Statement, of
which this Prospectus forms a part, for its complete terms and provisions.
On or after the second business day following the Expiration Date of the
Offering, the Underwriter proposes initially to offer from time to time, the
components of the Units, acquired by it pursuant to its standby commitment
directly to the public at prices not to exceed the lowest asked price then
existing on NASDAQ. The Underwriter presently does not make a market in the
Company's securities and in connection with any sales, does not intend to
stabilize prices. In addition, the Underwriter will not purchase or make a
market in any securities of the Company until it has completed its distribution
of the components of the Units acquired in the Standby Offering.
As a portion of the consideration for its standby commitment and the
investment banking services rendered by the Underwriter, the Company has agreed
to sell to the Underwriter for its own account, at a price of $.0001 per Unit
covered thereby, warrants ("Underwriter's Warrants") to purchase 10% of the
Units offered pursuant to its standby commitment. The Underwriter's Warrants may
not be exercised for a period of twelve (12) months from the date of this
Prospectus. The Underwriter's Warrants will be exercisable in whole or in part
for a period of four (4) years thereafter at a price of $6 per Unit which is
equal to 120% of the Subscription Price. The exercise price and the number of
shares of Common Stock issuable under the Underwriter's Warrants and underlying
warrants are subject to adjustment to protect the holder against dilution in
certain events. The Underwriter's Warrants are not transferable by the
Underwriter during the initial twelve (12) months except to one or more of its
officers. The holders of the Underwriter's Warrants have no voting, dividend or
other rights of shareholder of the Company with respect to the shares underlying
such Underwriter's Warrants unless such Warrants have been exercised.
Moreover, in the event that the Underwriter elects to register securities
underlying the Underwriter's Warrants and commence a distribution of such
securities, it will comply with SEC Rule 10b-6 in that, among other things, it
will not make a market or continue to make a market if it should be a market
59
<PAGE>
maker in any of the Company's securities until such time as the distribution of
such securities is completed. Any sale of Units and/or the components thereof at
a price in excess of the Underwriter's purchase price pursuant to the standby
commitment will result in realization by the Underwriter of additional
underwriting compensation. It should be noted that the Underwriter is acting as
a principal in the Standby Offering, and not as agent for the Company.
The Company has agreed, for a period of six(6) years commencing one (1)
year following the date of this Prospectus, that on any occasion that it files a
new registration statement or Regulation A offering within such period (except
on Form S-8 or any other appropriate form) it will include in each such filing
the Underwriter's Warrants and/or underlying securities to the extent permitted
by the then applicable rules and regulations of the Commission, at the request
of any holder or holders of such Underwriter's Warrants and/or underlying
securities at no expense to them.
Further, the Company has agreed to qualify or register the Underwriter's
Warrants and/or the underlying securities once at its own expense during the
four (4) year period commencing one (1) year after the date of this Prospectus,
upon request of the Underwriter or its specific duly authorized designee or the
holders of a least 40% of the Underwriter's Warrants and/or underlying
Securities together with the consent of the Underwriter or its specific duly
authorized designee. Any profit received by the Underwriter either from the sale
of the Underwriter's Warrants or from the sale of the shares of Common Stock
purchasable upon exercise of the Underwriter's Warrants may be deemed additional
underwriting compensation. The Company has agreed to pay the Underwriter a
warrant solicitation fee of 7% of the exercise price for each Class B Warrant
exercised during the period commencing twelve months after the Effective Date
provided: (1) the market price of the Common Stock on the date the Warrant was
exercised was greater than the Warrant exercise price on that date; (2) exercise
of the Warrant was solicited by the Underwriter or a member of the NASD; (3) the
Warrant was not held in a discretionary account; (4) disclosure of compensation
arrangements were made both at the time of the Offering and at the time of
exercise of the Warrant; and (5) the solicitation of the exercise of the Warrant
was not in violation of Rule 10b-6 (as such rule or any successor rule may be in
effect as of such time of exercise) promulgated under the Securities and
Exchange Act of 1934. See Risk Factor entitled "Relationship of Underwriter to
Trading" with reference to the Underwriter's inability to make a market during
any solicitation period.
The Company has agreed that the Underwriter shall have a right of first
refusal with respect to the public sale of any of the Company's securities to be
made by the Company, its principal stockholders or subsidiaries during the three
(3) year period commencing with the consummation of the Standby Agreement,
subject to certain exceptions.
The Standby Agreement provides for reciprocal indemnification between the
Company and the Underwriter against certain liabilities in connection with the
Registration Statement, including liabilities arising under the Act. Insofar as
indemnification for liabilities arising under the Act may be provided to
officers, directors or persons controlling the Company, the Company has been
informed that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy and is therefore unenforceable.
60
<PAGE>
The Standby Agreement provides that the Underwriter shall have the right to
designate a director and/or non-voting advisor to the Company's board of
directors for a period of sixty (60) months after the consummation of the
Standby Agreement and that the Company shall use its best efforts to cause the
election of said member. Said designee shall receive no more or less
compensation than is paid to other non-management directors of the Company and
shall be entitled to receive reimbursement for all reasonable costs incurred in
attending such meetings, including but not limited to food, lodging and
transportation. Moreover, to the extent permitted by law, the Company will agree
to indemnify the Underwriter and its designee(s) for the actions of such
designee(s) as director and/or as advisor of the Company. In the event the
Company maintains a liability insurance policy affording coverage for the acts
of its officers and/or directors, it will agree, to the extent permitted by
under such policy, to include each of the Underwriter and its designee(s) as an
insured under such policy. The Underwriter has no present intent to exercise
this right.
The Standby Agreement provides that if the Company shall within 5 years
from the Effective Date, enter into any agreement or understanding with any
person or entity introduced by the Underwriter involving (i) the sale of all or
substantially all of the assets and properties of the Company, (ii) the merger
or consolidation of the Company (other than a merger or consolidation effected
for the purpose of changing the Company's domicile) or (iii) the acquisition by
the Company of the assets or stock of another business entity, which agreement
or understanding is thereafter consummated, whether or not during such 5 year
period, the Company, upon such consummation, shall pay to the Underwriter an
amount equal to the following percentages of the consideration paid by the
Company in connection with such transaction: 5% of the first $1,000,000 or
portion thereof, of such consideration; 4% of the second $1,000,000 or portion
thereof, of such consideration; and 3% of such consideration in excess of the
first $2,000,000 of such consideration.
The Company, for a period of one year from the Effective Date, shall not
file a Registration Statement for the benefit of officers, directors, employees,
consultants and/or affiliates of the Company without the prior written consent
of the Underwriter. For a period of one year from the Effective Date, without
the consent of the Underwriter, the Company will not place or sell any of its
securities other than in connection with mergers, acquisitions or the exercise
of currently outstanding options and warrants. The Company will maintain a
current Registration Statement for the Underwriter to offer and sell the
securities purchased by it for a period of at least nine months from the
Effective Date or such reasonable further period as the Underwriter may request.
Nevertheless, the Underwriter agrees to notify the Company when its distribution
has been completed. Neither the Company nor any officer or director thereof
shall for a period of 5 years from the Effective Date offer to sell any
securities of the Company in a Regulation S offering without the prior written
consent of the Underwriter.
61
<PAGE>
CONCURRENT REGISTRATION OF COMMON STOCK
Concurrently with this Offering, 513,000 shares of Common Stock have been
registered under the Securities Act of 1933 for resale. The holders of 114,000
of these shares have agreed not to sell any shares for a period of nine months
from the Effective Date without the prior written consent of the Underwriter.
See "Recent Private Placements" regarding issuance of these shares. The
following table sets forth the number of shares of Common Stock of the Company
owned by each of these shareholders:
Name of Shareholder Number of Shares
- ------------------- ----------------
RONALD SPINELLI & RICHARD SPINELLI 9,500
RAMESH PATEL 9,500
BRENDA FURINO 19,000
CINDY DOLGIN 9,500
JOHN CZINGER 9,500
LEONARD MOSKOWITZ & VICKIE MOSKOWITZ 9,500
ALOYSIUS G. FREEMAN & MARY FREEMAN 9,500
RAYMOND KAYAL 9,500
DAVID COHEN 9,500
JOANN WEAN & CHARLES WEAN III 9,500
ASHDOWN HOLDINGS LIMITED 38,000
BLAISE FINANCIAL CORP. 38,000
ELLIOT S. SCHLISSEL & LOIS C. SCHLISSEL 19,000
GLOBALSIDE LIMITED 38,000
CORNELIA COMPANY LIMITED 38,000
WAAL INVESTMENTS LTD 38,000
HARRIET REUTER 19,000
EDMOND O'DONNELL 19,000
DOMINICK LELIA & ALICE LELIA 9,500
MELINDA N. TYRWHITT 38,000
GEORGE SCHIAVONI (A)(B) 76,000
ANTHONY C. SALVO (A) 5,000
ANDREW J. FINKLESTEIN (A) 6,667
HEATHER REISER (A) 21,667
ROBERT W. BURKE (A) 4,666
- --------------
(A) Have agreed not to sell any shares for a period of nine months from the
Effective Date.
(B) Has agreed not to exercise rights resulting in his ownership of more than
5% of the outstanding shares of the Company following the Offering.
LEGAL MATTERS
Certain legal matters with respect to the issuance of securities offered
hereby will be passed upon for the Company by Hollenberg Levin Solomon Ross
Belsky & Daniels, LLP, 585 Stewart Avenue, Garden City, New York 11530. Members
of the firm of Hollenberg Levin Solomon Ross Belsky & Daniels, LLP are members
of Associates and hold warrants to acquire 1,667 shares of Common Stock
exercisable until April 11, 1999 at $13.00 per share. Lester Morse, P.C., 111
Great Neck Road, Great Neck, New York 11021, is acting as counsel for the
Underwriter in connection with certain legal matters relating to the Units of
Common Stock and Warrants offered hereby.
EXPERTS
The Consolidated Financial Statements included in the Registration
62
<PAGE>
Statement, of which this Prospectus forms a part, have been audited by Cornick,
Garber & Sandler, LLP, independent public accountants, to the extent and for the
periods indicated in their report with respect thereto and were included herein
in reliance upon the authority of said firm as experts in giving said report.
Reference is made to said report which contains an emphasis of a matter with
respect to the Company's litigation uncertainties.
ADDITIONAL INFORMATION
The Company has filed with the Commission, a Registration Statement on Form
SB-2 with respect to the securities being offered hereby. This Prospectus does
not contain all the information set forth in such Registration Statement, as
permitted by the Rules and Regulations of the Commission. For further
information with respect to the Company and such securities, reference is made
to the Registration Statement and to the exhibits and schedules filed therewith.
Each statement made in this Prospectus referring to a document field as an
exhibit to the Registration Statement is qualified by reference to the exhibit
for a complete statement of its terms and conditions. The Registration
Statement, including exhibits thereto, may be inspected without charge, by
anyone at the principal office of the Commission in Washington D.C. and copies
of all or any part of thereof may be obtained from the Commission's office in
Washington D.C. upon payment of the Commission's charge for copying.
63
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
INDEX
INDEPENDENT AUDITORS' REPORT.......................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets........................................ F-3
Consolidated Statements of Operations.............................. F-4
Consolidated Statements of Changes in Shareholders' Equity......... F-5
Consolidated Statements of Cash Flows.............................. F-6
Notes to Consolidated Financial Statements......................... F-8
F-1
<PAGE>
[LETTERHEAD OF CORNICK, GARBER & SANDLER, LLP]
Independent Auditors' Report
Board of Directors and Shareholders
Eastco Industrial Safety Corp.
Huntington Station, New York
We have audited the accompanying consolidated balance sheet of EASTCO
INDUSTRIAL SAFETY CORP. AND SUBSIDIARIES as at June 30, 1996 and the related
consolidated statements of operations, changes in shareholders' equity and cash
flows for each of the two years in the period ended June 30, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the consolidated financial position of Eastco
Industrial Safety Corp. and Subsidiaries as at June 30, 1996 and the results of
their operations and their cash flows for each of the two years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 11 to the consolidated financial statements, the
Company is a defendant in various lawsuits alleging exposure by plaintiffs to
asbestos and products containing asbestos sold by the Company. Since the
ultimate outcome or range of liability, if any, resulting from these lawsuits
cannot presently be determined, no provision for any liability that may result
has been made in the accompanying consolidated financial statements.
/s/ CORNICK, GARBER & SANDLER, LLP
----------------------------------
CERTIFIED PUBLIC ACCOUNTANTS
Uniondale, New York
September 11, 1996
F-2
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents (Note 1) $ 646,030
Accounts receivable, net of allowance for
doubtful accounts of $155,000 at June 30,
1995 (Notes 5 and 6) 4,669,070
Inventories (Notes 1, 2 and 5) 5,230,237
Other 441,763
-----------
Total current assets 10,987,100
Property, plant and equipment, net
(Notes 1, 3, 5 and 6) 1,278,095
Other assets 206,910
-----------
T O T A L $12,472,105
===========
LIABILITIES
Current liabilities:
Loans payable (Note 5) $ 5,853,075
Current maturities of long-term debt (Note 6) 56,044
Accounts payable 3,234,127
Accrued expenses 291,341
-----------
Total current liabilities 9,434,587
Long-term debt, less current maturities (Note 6) 433,738
-----------
Total liabilities 9,868,325
-----------
Commitments and contingencies (Notes 9, 10 and 11)
SHAREHOLDERS' EQUITY
(Notes 1, 5, 6, 7, 12 and 13)
Common stock, $.12 par value; authorized 20,000,000
shares; outstanding 765,488 91,859
Additional paid-in capital 6,742,476
(Deficit) (statement attached) (4,230,555)
-----------
2,603,780
-----------
T O T A L $12,472,105
===========
</TABLE>
The notes to consolidated financial statements are made a part hereof.
F-3
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------
1996 1995
----------- ------------
<S> <C> <C>
Net sales $26,982,699 $24,024,897
----------- -----------
Costs and expenses:
Cost of sales (Note 1) 21,495,693 19,254,571
Selling, general and
administrative (Note 1) 4,546,222 4,148,517
Interest (Notes 5, 6 and 7) 836,359 583,665
Other expense (income) (net) 16,388 (39,793)
Settlement with former underwriter (Note 7) 78,000
----------- -----------
Total costs and expenses 26,972,662 23,946,960
----------- -----------
NET INCOME $ 10,037 $ 77,937
=========== ===========
Income per share (Note 1):
Primary $.02 $.20
===== ====
Assuming full dilution $.02 $.17
===== ====
Average number of shares used in computing
per share amounts:
Primary 595,758 392,529
=========== ===========
Assuming full dilution 595,758 471,698
=========== ===========
</TABLE>
The notes to consolidated financial statements are made a part hereof.
F-4
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(NOTES 1, 5, 6, 7, 12 and 13)
<TABLE>
<CAPTION>
Additional
Common Stock* Paid-in
Shares Amount Capital (Deficit) Total
---------- ------ --------- ---------- --------
<S> <C> <C> <C> <C> <C>
BALANCE - JULY 1, 1994 347,738 $41,729 $6,224,509 $(4,318,529) $ 1,947,709
Net income for the year ended
June 30, 1995 77,937 77,937
---------- ------- ---------- ----------- -----------
BALANCE - JUNE 30, 1995 347,738 41,729 6,224,509 (4,240,592) 2,025,646
Shares issued on settlement with
former underwriter 10,000 1,200 70,825 72,025
Exercise of Class A warrants 3,750 450 48,300 48,750
Shares issued on conversion
of subordinated debenture 26,374 3,165 121,963 125,128
Purchase and retirement of
common stock (21,374) (2,565) (177,435) (180,000)
Shares issued in private placement 399,000 47,880 454,314 502,194
Net income for the year ended
June 30, 1996 10,037 10,037
---------- ------- ---------- ----------- -----------
BALANCE - JUNE 30, 1996 765,488 $91,859 $6,742,476 $(4,230,555) $ 2,603,780
========== ======= ========== =========== ===========
</TABLE>
*As restated to give retroactive effect to the 1-for-10 reverse stock split in
August 1996.
The notes to consolidated financial statements are made a part hereof.
F-5
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
INCREASE (DECREASE) IN CASH AND -------------------------------
CASH EQUIVALENTS 1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 10,037 $ 77,937
---------- ----------
Adjustments to reconcile results of
operations to net cash effect of
operating activities:
Depreciation and amortization 134,290 164,533
Provision for (recovery of) losses on
accounts receivable 105,732 (38,655)
Shares issued for settlement
with former underwriter 72,025
Net changes in assets and liabilities:
Accounts receivable (876,629) (430,003)
Inventories (866,339) (1,197,860)
Other current assets 40,105 (37,608)
Other assets (75,122) 20,247
Accounts payable 343,084 401,146
Accrued expenses (40,566) (102,136)
----------- -----------
Total adjustments (1,163,420) (1,220,336)
----------- -----------
Net cash used for operating
activities (1,153,383) (1,142,399)
----------- -----------
Cash flows from investing activities:
Acquisition of property, plant and
equipment (93,274) (191,242)
----------- -----------
</TABLE>
(Continued)
F-6
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from financing activities:
Repayments of long-term debt $ (48,762) $ (42,426)
Borrowings under line of credit
agreements 28,621,372 25,789,531
Repayments under line of credit
agreements (27,697,205) (24,044,483)
Borrowing under Bridge loan 500,000
Repayment of Bridge loan (500,000)
Net proceeds from private placement
of common stock 502,194
Net proceeds from convertible subordinated
debenture 225,128
Repurchase of convertible subordinated
debenture (100,000)
Proceeds from excercise of Class A warrants 48,750
(Decrease) in bank overdrafts (365,277)
Purchase of common stock (180,000)
------------ ------------
Net cash provided by
financing activities 1,371,477 1,337,345
------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 124,820 3,704
Cash and cash equivalents - Beginning 521,210 517,506
------------ ------------
CASH AND CASH EQUIVALENTS - END $ 646,030 $ 521,210
============ ============
Supplemental disclosure of cash paid for:
Interest $ 836,359 $ 583,665
============ ============
Income taxes $ 5,440
============
Supplemental disclosure of noncash financing activities:
Conversion of convertible subordinated
debenture into common stock $ 150,000
============
</TABLE>
The notes to consolidated financial statements are made a part hereof.
F-7
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 1 - Summary of Significant Accounting Policies:
Operations:
The Company operates in two industry segments. The first is the
manufacture and sale of disposable clothing, industrial protective
clothing and protective products to distributors throughout the United
States and in Puerto Rico. The second is the distribution and sale of
industrial protective clothing and protective products directly to "end
users" located primarily in the Northeast United States.
The Company's manufacturing division uses Tyvek(R), which is only
available from one supplier, to produce disposable clothing. Products
made of Tyvek(R) accounted for approximately 41% and 35% of
consolidated sales for the years ended June 30, 1996 and 1995,
respectively.
Principles of Consolidation:
The consolidated financial statements include the accounts of Eastco
Industrial Safety Corp. and its subsidiaries, all of which are
wholly-owned. All significant intercompany balances and transactions
have been eliminated in consolidation.
Use of 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 revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(Continued) F-8
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 1 - Summary of Significant Accounting Policies (Continued):
Cash:
Cash includes certificates of deposit of approximately $300,000 and
$500,000 at June 30, 1996 and 1995, respectively, which are considered
cash equivalents. A $300,000 certificate has been pledged as collateral
for a bank loan to the extent of such loan (see Note 5).
Inventories:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market, which represents estimated net realizable
value.
Depreciation and Amortization:
Property, plant and equipment are depreciated on a straight-line basis
over the estimated useful lives of the related assets. Leasehold
improvements are amortized on a straight-line basis over the shorter of
their estimated useful lives or the remaining term of the lease.
Income Taxes:
The Company accounts for its income taxes under the provisions of
Statement of Financial Accounting Standards No. 109 (FASB 109).
Per Share Amounts:
Primary earnings per share amounts have been computed utilizing the
weighted average number of common and, if material, common equivalent
shares outstanding during the period. Fully diluted earnings per share
is based upon the weighted average number of common and common
equivalent shares outstanding. Per share amounts give effect to the
retroactive adjustment for the 1-for-10 reverse stock split approved by
the shareholders in August 1996 (see Note 12).
All other per share amounts and information set forth in the attached
financial statements and the notes thereto have also been adusted to
give effect to the reverse stock split.
(Continued) F-9
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 2 - Inventories:
Inventories at June 30, 1996 consist of the following:
Raw materials $1,701,676
Work-in-process 514,555
Finished goods 3,014,006
----------
Total $5,230,237
==========
NOTE 3 - Property, Plant and Equipment:
Property, plant and equipment at June 30, 1996 is comprised of the
following:
Estimated
Useful Life
(Years)
-----------
Cost:
Land $ 382,000
Building and leasehold
improvements 827,451 5 - 40
Machinery and equipment 1,187,178 3 - 10
Furniture and fixtures 229,074 7 - 10
----------
Total 2,625,703
Less accumulated depreciation
and amortization 1,347,608
----------
Balance $1,278,095
==========
(Continued) F-10
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 4 - Income Taxes:
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards No. 109 (SFAS 109). While SFAS 109
requires the recognition of a deferred tax asset for the benefit of net
operating loss carryforwards, it also requires the recognition of a
valuation allowance when it is more likely than not that such benefit
will not be realized. As a result of the Company's past history of
losses and the amount of its net income for the two years ended June
30, 1996 and 1995, it has recorded valuation allowances equal to its
net deferred tax asset account.
Deferred income taxes relate to the following temporary differences and
carryforwards at June 30, 1996:
Deferred tax assets:
Net operating loss carryforwards $1,800,000
Allowance for doubtful accounts
and credits 66,000
Tax basis adjustments to inventory 56,000
----------
1,922,000
Total
Less deferred tax liability:
Accelerated depreciation of
property and equipment 11,000
----------
Balance 1,911,000
Less valuation allowance 1,911,000
----------
Net deferred income taxes after
valuation allowance $ --
==========
(Continued)
F-11
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 4 - Income Taxes (Continued):
Two wholly-owned Puerto Rico based subsidiaries have been granted
exemptions from paying Puerto Rico income taxes under provisions of the
Puerto Rico Industrial Tax Exemption Act of 1963, provided such
subsidiaries continue to meet the terms and conditions of their grants.
One subsidiary's exemption expires on June 30, 1999. The subsidiary has
received a 90% exemption from Puerto Rico income taxes and a 75%
exemption from Puerto Rico municipal and property taxes. The second
subsidiary has received a 90% exemption from Puerto Rico income and
property taxes and a 60% exemption from Puerto Rico municipal income
taxes to June 2006. These subsidiaries have elected, pursuant to
Section 936 of the Internal Revenue Code, to receive credits equivalent
to the amount of Federal income taxes which would otherwise be due on
their income. The Omnibus Budget Reconciliation Act of 1993 imposes
limitations on computing the Possession Tax Credit under Section 936
for tax years beginning after 1993. In addition, the Act makes the 100%
dividends received deduction subject to the Alternative Minimum Tax
calculation. The Small Business Job Protection Act of 1996 further
limits the Possession Tax Credit for years beginning after 2001 with
the credit being eliminated for tax years beginning after 2005.
Dividends, if paid by the Puerto Rico based subsidiaries, are subject
to a withholding tax of 10%; however, no taxes have been provided on
their aggregate undistributed earnings (of approximately $2,321,000 at
June 30, 1996) because it is management's intention to reinvest such
earnings indefinitely.
A reconciliation between the expected tax expense at the statutory
federal income tax rate and the Company's actual income tax expense is
as follows:
June 30,
------------------------
1996 1995
--------- ---------
Income tax expense
at the statutory rate $ 3,000 $ 26,000
Effect of net operating loss of
Puerto Rican subsidiaries for
which there is no current tax
benefit
Effect of domestic net operating
loss for which there is no
current tax benefit (3,000)
Benefit of utilization of net
operating loss carryforwards (26,000)
-------- --------
Actual income tax expense $ -- $ --
======== ========
(Continued)
F-12
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 4 - Income Taxes (Continued):
At June 30, 1996, the Company has net operating loss carryforwards of
approximately $4,738,000 for federal income tax purposes. Such
carryforwards expire in 2005 through 2011. As a result of the private
placement offering in June 1996, the amount of the loss carryforwards
which can be utilized to offset future taxable income are limited to
approximately $345,000 a year, plus any loss carryforwards incurred
after June 30, 1996.
The annual limitation of the Company's net operating loss deductions
may be further reduced as a result of the proposed public offering
(see Note 13).
NOTE 5 - Loans Payable:
Loans payable are comprised of short-term bank borrowings of $295,000
at June 30, 1996 and borrowings under the Company's line of credit
agreement with Congress Financial Corporation ("Congress"). Short-term
bank borrowings (which usually have 30 day terms) are renewable at the
bank's option and bear interest at 1% above the bank's prime rate.
In July 1996, the line of credit with Congress was amended and extended
until October 1, 1999 with an option by Congress to extend the loan for
one year. The line was increased from $6,000,000 to $9,000,000 with
interest at 1.25% above the prime rate. If the proposed public offering
is consummated no later than December 31, 1996 and the net proceeds are
at least $2,500,000, the interest charged will be reduced to 1% above
prime. The limit on borrowings was increased to 85% of eligible
accounts receivable and 55% of eligible inventory. The loans are
subject to certain working capital and net worth requirements and are
collateralized by all assets of the Company not previously pledged
under other loan agreements. The loan agreement prohibits the payment
of dividends by the Company. In September 1993, Congress sold to three
individuals, who are officers and directors of the Company, a $250,000
junior participation in the loans made to the Company. The Company had
an informal agreement with Congress, whereby Congress agreed to provide
(Continued) F-13
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 5 - Loans Payable (Continued):
the Company an additional $500,000 in borrowing availability which was
repaid at $11,250 a week beginning November 1, 1993 until $250,000 of
additional borrowings was repaid. Congress can, at its option,
repurchase the junior participation if the Company has at least
$250,000 in availability under the financing agreement. In May 1996,
participations of $35,000 were repurchased. The participants' interest
in the obligations, collateral and collections is subordinated to
Congress.
NOTE 6 - Long-Term Debt:
Long-term debt consists of a mortgage payable, collateralized by land,
building, accounts receivable and personal property. In June 1992, a
group of investors ("investors"), including a director and the spouses
of certain officers and directors of the Company, acquired for
$650,000, the mortgage on the Company's building with a balance of
approximately $962,000 and $500,000 of subordinated debt from a bank.
The group entered into a modification of indebtedness agreement which
reduced the mortgage to $650,000 and forgave the balance, which, after
the write off of related deferred financing costs, resulted in a gain
of $722,000 in fiscal 1992. In connection with this transaction, the
Company also issued five-year warrants to acquire 10,833 shares of
common stock at $30.00 a share. In January 1995, the Company reduced
the exercise price to $13.00 and extended the expiration date until
April 1999. The mortgage is payable in monthly installments of $10,092,
including interest at 14% a year, with the remaining balance of
approximately $439,000 due in June 1997. Interest on the mortgage was
$72,346 and $78,682 for the years ended June 30, 1996 and 1995,
respectively, approximately 38% of which was paid to a director and the
spouses of the officers and directors of the Company.
In September 1996, investors extended the mortgage until July 1, 2002,
with interest at 12% a year or 3% above the prime rate, whichever is
greater. The remaining balance of approximately $283,000 will be due on
July 1, 2002.
Based upon the new terms, the non-current portion of the mortgage is
due as follows:
Year ending June 30,
--------------------
1998 $ 27,000
1999 27,000
2000 30,000
2001 34,000
2002 38,000
2003 283,000
--------
Total $439,000
========
(Continued) F-14
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 7 - Shareholders' Equity:
Common Stock:
In April 1991, the Company sold, pursuant to a rights offering, 48,007
shares of common stock. In this connection, the underwriter was sold a
warrant to purchase 4,078 shares of common stock at $53.30 per share,
which was exercisable until February 28, 1996. The Company also had
borrowed $200,000 with interest at 17% per annum during February 1991
from five unrelated parties. These loans were repaid out of the
proceeds of the rights offering, including interest. In connection with
these loans, the Company issued warrants to purchase 833 shares of
common stock, exercisable at $30.00 per share until May 13, 1996. In
January 1995, the Company reduced the exercise price of the above
warrants to $13.00 and extended their expiration dates until April
1999.
On April 19, 1994, the Company sold in a public offering 200,000 units
at $20.00 per unit. Each unit consists of one share of the Company's
common stock and one Class A warrant. Each warrant entitled the holder
to purchase one share of common stock at an exercise price of $24.00 a
share from April 12, 1995 through April 12, 1999. In January 1995, the
Company reduced the exercise price to $13.00 a share. These warrants
are redeemable by the Company commencing April 12, 1995 at $1.00 a
warrant, provided that the high bid price of its stock is at least
$19.50 for the required number of days prior to the Notice of
Redemption. The Company also granted to the underwriter an option to
purchase, at the same price, 30,000 units to cover over-allotments.
This option was exercised in May 1994. In addition, the Company sold to
the underwriter for $10 an option, exercisable from April 12, 1995 to
April 12, 1999, to purchase 23,000 additional units at $29.00 a unit
and entered into a two year consulting agreement with the underwriter
at a total cost of $72,000. Subsequent to the public offering, two
officers of the underwriter became directors of the Company until their
resignations on July 10, 1995.
On July 10, 1995, the Company issued 10,000 shares of common stock to
the underwriter of its 1994 public stock offering in exchange for the
cancellation of all of its rights under the Underwriting Agreement. The
$78,000 cost thereof, based on the market value of the shares issued
and legal expenses incurred, is separately reflected on the
consolidated statement of operations for the year ended June 30, 1996.
(Continued) F-15
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 7 - Shareholders' Equity (Continued):
Private Placements:
On June 28, 1996, the Company issued, in a private placement, 10 1/2
units at $57,000 a unit. Each unit consists of 38,000 shares of the
Company's common stock. The net proceeds to the Company were
approximately $501,000 after fees to the placement agent and other
expenses. The proceeds were used to repay a $500,000 bridge loan, with
interest at 10%, made on May 17, 1996. In connection with the bridge
loan, the Company issued warrants to purchase 2,500 shares at a $10.00
per share which expire on June 30, 1999. On July 9, 1996, an additional
3 units were sold for net proceeds of $171,000. No fees were paid to
the placement agent for these units. The 513,000 shares issued will be
registered in the proposed public offering (see Note 13). However, the
shares underlying the 3 units cannot be sold until nine months after
the effective date of the proposed public offering.
Convertible Subordinated Debenture:
During April 1996, the holder of a $250,000 convertible subordinated
debenture, issued in February 1996, converted $150,000 of the debenture
into 26,374 shares of the Company's common stock. The Company
repurchased 21,374 of these shares for $180,000 and retired the stock.
The remaining $100,000 balance of the debenture was repurchased for
$120,000, including accrued interest. The $20,000 excess has been
included with interest expense for the year ended June 30, 1996.
Other Warrants:
In January 1994, a corporate officer/director of the Company purchased
a warrant from a prior lender. The warrant is for the purchase of
82,645 shares at $6.29 per share. The warrant expires on March 31,
1997.
On May 13, 1996, warrants to purchase 8,348 shares each were granted to
the Company's president and two vice presidents for their gurantees of
overadvances by Congress (see Note 5). The warrants are exerciseable
until February 23, 2001 at $5.77 per share.
On July 26, 1995, the Company issued to a consulting firm, which is the
employer of a director of the Company, a five year warrant to
purchase 12,500 shares of the Company for $12.50 a share.
(Continued) F-16
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 7 - Shareholders' Equity (Continued):
Incentive Stock Option Plans:
Under the Company's 1983 Incentive Stock Option Plan, options could be
granted to June 23, 1993 for a maximum of 5,625 shares of the Company's
common stock. At June 30, 1996, options to purchase 865 shares at
$26.70 to $30.00 a share are outstanding; no further options may be
granted under this plan.
The Company's 1992 Incentive Stock Option Plan provides for the
granting of options for 20,000 shares of the Company's common stock to
December 20, 2002. The Company has agreed not to issue any additional
options under this plan.
The Company's 1994 Incentive Stock Option Plan provides for the
granting of options for 10,000 shares of the Company's common stock to
January 2004. Options for 1,500 shares may be issued under this plan.
Options granted under the incentive stock option plans must be
exercised within such period as stated in the plans and, in any event,
must be exercised no later than ten years after the date they are
granted. The plans provide that the exercise price of the options may
not be less than 100% of the fair market value of common stock at the
date of grant or 110% in the case of an incentive stock option granted
to any employee owning more than 10% of the voting power of all classes
of stock of the Company.
Transactions under the above plans are summarized as follows:
Shares Option Price Per Share
------ ----------------------
Outstanding - June 30, 1994 1,178 $26.40 to $ 30.00
Granted 8,500 $10.63
Expired (13)
------
Outstanding - June 30, 1995
and 1996 9,665 $10.63 to $30.00
=======
(Continued)
F-17
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 7 - Shareholders' Equity (Continued):
1995 Stock Options:
On January 20, 1995, the Board of Directors granted to the Company's
president and two vice-presidents each ten-year nonqualified options to
purchase 80,158 shares each at $5.30 per share. The options are
exercisable after five years but may become exercisable sooner upon the
Company achieving pretax earnings targets. Based on the earnings for
the year ended June 30, 1995, options for 120,237 shares are now
exercisable.
Other nonqualified options outstanding at June 30, 1996, under prior
years' grants, aggregate 3,108 shares at $16.875 to $30.00 a share.
The following summarizes shares reserved at June 30, 1996 under options
and warrants outstanding:
Price Per
Number Share
-------- ---------------
Stock options:
Incentive stock option plans 9,665 $10.63 - $30.00
Nonqualified options 243,582 $ 5.30 - $30.00
Warrants:
Class A 226,250 $13.00
Other 138,433 $ 5.77 - $13.00
(Continued) F-18
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 8 - Commitments and Contingencies:
Rent:
The Company is obligated through August 2003 under several
noncancellable long-term operating leases covering office, factory and
warehouse facilities. Minimum annual rentals under these leases are:
Year ending June 30:
1997 $ 116,000
1998 127,000
1999 137,000
2000 157,000
2001 142,000
Thereafter 332,000
----------
Total $1,011,000
==========
Rent expense, including month-to-month rentals, was $226,000 and
$219,000 in the fiscal years ended June 30, 1996 and 1995.
Employment Agreements:
The Company had employment agreements, which commenced as of the
effective date of the April 1994 public offering, with three of its
officers. These agreements provided for combined annual salaries of
$247,000. On July 1, 1995, these officers entered into new agreements
which provide for the following:
Officer Period Annual Salary
------- ------ -------------
President 5 years $121,000
Senior Vice-President* 5 years $105,000
Vice-President of Finance
and Treasurer 5 years $ 55,000
(Continued)
F-19
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 8 - Commitments and Contingencies (Continued):
Employment Agreements (Continued):
* This officer is entitled to a bonus of 3/4 of 1% of net
sales in excess of $20,500,000 after June 30, 1997.
The above officers are also entitled to annual increases of not less
than 10% of the prior year's compensation. In addition, should an
unrelated party obtain more than 20% of the Company's then outstanding
stock, other than by transactions initiated by the Company in the
ordinary course of business, the following will occur:
(a) Each will be paid a bonus equal to their minimum base salary for
the next three years.
(b) Each will be repaid their junior participation in loans made to
the Company (see Note 5).
(c) All rights (options, warrants, etc.) will become immediately
vested and exercisable.
These officers have waived their right to additional compensation
payable resulting from a change in control due to the private
placements and the proposed public offering (see Notes 7 and 13).
NOTE 9 - Profit Sharing Plan:
The Company's qualified profit sharing plan covering all eligible
full-time employees provides for discretionary (i.e., no minimum
contributions are required) contributions as approved by the Company's
Board of Directors. The profit sharing plan includes a 401(k) plan.
There were no contributions made for the fiscal years ended June 30,
1996 and 1995.
(Continued)
F-20
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 10 - Industry Segment Information:
Information for the Company's distribution and manufacturing segments
for the years ended June 30, 1996 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1996 Distribution Manufacturing Total
---- ------------ ------------- -----------
<S> <C> <C> <C>
Net sales $9,094,046 $17,888,653 $26,982,699
========== =========== ===========
Operating profit $ 133,760 $ 2,124,131 $ 2,257,891
========== ===========
General corporate expenses (1,411,495)
Interest expense (836,359)
Income before provision for -----------
income taxes $ 10,037
===========
Identifiable assets $5,182,514 $ 7,289,591 $12,472,105
========== =========== ===========
Capital expenditures $ 43,704 $ 49,570 $ 93,274
========== =========== ===========
Depreciation and amortiza-
tion expense $ 58,941 $ 75,349 $ 134,290
========== =========== ===========
1995
----
Net sales $9,233,456 $14,791,441 $24,024,897
========== =========== ===========
Operating profit $ 156,199 $ 1,666,331 $ 1,822,530
========== ===========
General corporate expenses (1,160,928)
Interest expense (583,665)
Loss before provision for -----------
income taxes $ 77,937
===========
Identifiable assets $4,291,806 $ 6,424,242 $10,716,048
========== =========== ===========
Capital expenditures $ 27,882 $ 163,360 $ 191,242
========== =========== ===========
Depreciation and amortiza-
tion expense $ 37,462 $ 127,071 $ 164,533
========== =========== ===========
</TABLE>
(Continued)
F-21
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 11 - Litigation:
At June 30, 1996, the Company is a defendant in approximately 280
lawsuits, together with a multitude of other defendants, in actions
alleging exposure by approximately 1,300 first party plaintiffs to
asbestos and products containing asbestos sold by the Company over
unspecified periods of time.
To June 30, 1996 and since 1981, the Company estimates approximately
900 actions on behalf of approximately 7,500 first party plaintiffs
have been instituted against it concerning asbestos related claims and
that claims of approximately 6,200 plaintiffs have been terminated.
The foregoing numbers assume the consummation of pending settlements.
The Company estimates that with the exception of defense costs, a
total of approximately $1,400,000 has been agreed to in settlements to
date with regard to the terminated actions of which all but $30,000
has been paid by the Company's insurance carriers. To June 30, 1996,
the Company has paid less than $35,000 for legal and defense costs to
counsel appointed by the insurance companies to defend it. The Company
entered into an agreement with its primary insurance companies,
wherein its liability is limited to 12% of the cost of the defense
liability and 17% of the settlement claim of certain litigation. The
agreement, which is subject to policy limitations on each insurance
policy, may be terminated at any time upon 90 days notice by any of
the parties provided that termination may not be effective as to any
asbestos action that has already been placed on the trial calendar,
unless it has a scheduled trial date more than 12 months from the date
the notice is given. In May 1991, the Company reached an agreement
with Mount Vernon Fire Insurance Company, one of its primary insurance
carriers, with respect to its pending and future asbestos litigation.
Mount Vernon agreed to contribute 6.25% to the Company's defense costs
and 6.25% to its indemnity costs for so long a period of time as
$100,000 in aggregate has not been paid for indemnity costs. This
agreement applied only during the period Mount Vernon provided
insurance coverage, which is between April 1, 1968 to April 1, 1969.
However, because past results of settlements and defense costs are not
necessarily indicative of future settlements and defense costs and
because, as of this date, management is still unable
(Continued)
F-22
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 11 - Litigation (Continued):
to fully ascertain the extent of insurance coverage applicable to
asbestos claims against the Company or the extent to which insurance
carriers will provide coverage, neither management nor counsel is able
to predict the outcome of these matters or the range of any potential
liability that might result. In addition, based on past history,
management believes it is likely that there will be additional
asbestos action instituted against the Company.
The Company is party to one other product liability action arising in
the ordinary course of business. After consultation with counsel, the
Company considers that its ultimate liability, if any, after available
insurance coverage, in this matter, would not have a material adverse
effect upon the Company's financial position. However, there can be no
assurances that the Company's insurance coverage will adequately cover
these cases or whether the Company's insurance will provide coverage
for punitive damages should they be awarded.
NOTE 12 - Subsequent Events:
Reverse Stock Split, Preferred Stock, Stock Option Plans and Stock
Options:
On May 13, 1996, the Board of Directors approved the following
proposals which were approved by the shareholders at a special
meeting on August 12, 1996.
1. A 1-for-10 reverse stock split of all outstanding shares of the
Company. The acompanying financial statements and notes thereto
give retroactive effect to this split.
2. Amendment of the certificate of incorporation to authorize a
class of preferred stock consisting of 1,000,000 shares.
3. Adoption of the 1996 incentive stock option plan for the issuance
of 300,000 shares to key employees.
4. Adoption of the 1996 nonqualified stock option plan for the
issuance of 300,000 shares to key employees.
(Continued) F-23
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED JUNE 30, 1996 AND 1995
NOTE 13 - Proposed Public Offering:
The Company has signed a letter of intent with an underwriter for a
rights offering and for the sale of units. Each holder of 5 shares of
the Company's common stock will be allowed to purchase 4 units. Each
unit is comprised of one share of common stock and a Class B warrant
to purchase one share of common stock. The warrants are exercisable
twelve months after the effective date of the offering or earlier with
the underwriters consent and expire three years from the effective
date of the offering. These warrants are redeemable by the Company
eighteen months after the effective date at $.01 a warrant provided
the high bid price of its stock is at least 150% in excess of the
exercise price of the warrants for the required number of days prior
to the redemption notice. The Company entered into a standby agreement
with the underwriter whereby any units not sold pursuant to the
exercise of rights will be sold to the underwriter at the same price.
In the event the unsubscribed units to be purchased by the underwriter
is less than 300,000 units, the underwriter will have the right, but
not the obligation, to purchase additional units that will bring the
total up to 300,000 units. The Company also granted to the
underwriter, for $7, an option to purchase one unit for each 10 units
sold in the offering. The Company will also enter into a one year
financial consulting agreement at a cost of 2% of the gross proceeds
of the offering. The Company also agreed to pay the underwriter a
warrant solicitation fee of 7% of the exercise price of each Class B
warrant.
F-24
<PAGE>
Until ____, 1996 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 soliciting dealer.
TABLE OF CONTENTS Page
---
Restrictions in Certain States
Statement of Available Information
Forward-Looking Statements
Prospectus Summary
Summary Financial
Information
Risk Factors 703,591 Units
Use of Proceeds
Dilution EASTCO INDUSTRIAL
Capitalization SAFETY CORP.
Market Information
Dividend Policy -----------
Management's Discussion
and Analysis of Results PROSPECTUS
of Operations and
Financial Condition
Business
Management
Principal Shareholders
Description of Securities
Shares Eligible for
Future Sale
Certain Relationships and Related
Transactions
Recent Private Placements
The Offering
Underwriting
Concurrent Registration of Common
Stock
Legal Matters
Experts
Additional Information
Consolidated Financial
Statements
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied on as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy, by any person
in any jurisdiction in which it is unlawful for such person to make such offer
or solicitation.
<PAGE>
(Alternate Page for Common Prospectus)
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This Prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION, DATED ________, 1996
EASTCO INDUSTRIAL SAFETY CORP.
513,000 Shares of Common Stock
This Prospectus relates to the sale by certain selling stockholders (the
"Selling Stockholders") of 513,000 shares of common stock, $0.12 par value per
share (the "Common Stock") offered hereby (the "Offering"), of Eastco Industrial
Safety Corp., a New York corporation (the "Company" and sometimes "Eastco" when
referring to the parent company only). None of the proceeds from the sale of the
Common Stock by the Selling Stockholders will be received by the Company. By
agreement, 114,000 shares are restricted from being sold until 9 months from the
date hereof. The Company will bear all expenses (other than selling commissions
and fees and expenses of counsel or other advisors to the Selling Stockholders)
in connection with the registration and sale of the Common Stock being offered
by the Selling Stockholders. See "Selling Stockholders".
The Common Stock will be offered by the Selling Stockholders in
transactions in the over-the counter market, in negotiated transactions or a
combination of such methods of sale, at prices related to such prevailing market
prices, or at negotiated prices. The Selling Stockholders may effect such
transactions by selling the Common Stock to or through broker/dealers, and such
broker/dealers may receive compensation in the form of discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of the Common
Stock for whom such broker/dealers may act as agent or to whom they sell as
principal, or both. The Selling Stockholders may be deemed to be "underwriters"
as defined in the Securities Act of 1933, as amended (the "Securities Act"). If
any broker/dealers are used by the Selling Stockholders, any commissions paid to
broker/dealers and, if broker/dealers purchase any
(Continued on next page)
THESE ARE SPECULATIVE SECURITIES. THESE SECURITIES INVOLVE A HIGH DEGREE OF
RISK AND SUBSTANTIAL DILUTION AS DESCRIBED HEREIN. FOR A DISCUSSION OF CERTAIN
MATERIAL FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN
THE SECURITIES, SEE "RISK FACTORS" BEGINNING ON PAGE 11 AND "DILUTION" BEGINNING
ON PAGE 24.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is____________, 1996.
<PAGE>
(Alternate Page for Common Prospectus)
shares of Common Stock as principals, any profits received by such
broker/dealers on the resales of the shares of Common Stock may be deemed to be
underwriting discounts or commissions under the Securities Act. In addition, any
profits realized by the Selling Stockholders may be deemed underwriting
commissions. All costs, expenses and fees in connection with the registration of
the shares offered by the Selling Stockholders will be borne by the Company.
Brokerage commissions, if any, attributable to the sale of Common Stock will be
borne by the Selling Stockholders. See "Selling Stockholders" and "Plan of
Distribution".
The Company's Common Stock is traded on the NASDAQ Stock Market ("NASDAQ")
under the symbol "ESTO" and on the closing of the Unit Offering will be listed
on the Boston Stock Exchange under the symbol "_____". On September 17, 1996,
the reported closing sale price for the Common Stock as reported by NASDAQ was
$7.25 per share.
Concurrently with the commencement of this offering, the Company offered by
separate Prospectus, 703,591 units (the "Units") each Unit consisting of one
share of Common Stock and one Class B Common Stock purchase warrant (the
"Warrants"). The Company's concurrent offering (the "Unit Offering") is being
offered through Royce Investment Group, Inc. (the "Underwriter"). The Unit
Offering grants to the Company's stockholders as of September 24, 1996, in
those states where qualified, or exempt from qualification, the
nontransferable right to subscribe for Units. Any Units not subscribed for will
be sold to the Underwriter pursuant to a Standby Agreement.
2
<PAGE>
(Alternate Page for Common Prospectus)
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3
<PAGE>
(Alternate Page for Common Prospectus)
STATEMENT OF AVAILABLE INFORMATION
The Company is subject to the information requirements of the
Securities and Exchange Act of 1934 and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "Commission") under the File No. 0-8027. Such reports, proxy
statements and other information filed by the Company can be inspected at the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates, and at the following Regional Offices of the Commission, Chicago Regional
Office, 219 South Dearborn Street, Chicago, Illinois and New York Regional
Office, 7 World Trade Center, New York, New York 10007.
The Company currently files its reports electronically by EDGAR. The
Company distributes annual reports containing audited financial statements to
its shareholders.
FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 WITH RESPECT TO THE
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS OF THE COMPANY. SUCH
STATEMENTS REFLECT SIGNIFICANT ASSUMPTIONS AND SUBJECTIVE JUDGMENTS BY THE
COMPANY'S MANAGEMENT CONCERNING ANTICIPATED RESULTS. THESE ASSUMPTIONS AND
JUDGMENTS MAY OR MAY NOT PROVE TO BE CORRECT. MOREOVER, SUCH FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT MAY CAUSE ACTUAL RESULTS
TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS.
FOR A DISCUSSION OF SUCH RISKS, SEE "RISK FACTORS". INVESTORS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS
OF THE DATE HEREOF. THE UNDERWRITER HAS NOT ATTEMPTED TO VERIFY THE BASIS FOR
ANY SUCH STATEMENTS INDEPENDENTLY AND NEITHER THE UNDERWRITER NOR THE COMPANY
UNDERTAKES ANY OBLIGATION TO RELEASE PUBLICLY ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OCCURRING OR CIRCUMSTANCES ARISING
AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
4
<PAGE>
(Alternate Page for Common Prospectus)
safety products to "end-users" made by the Charkate/Worksafe division as well as
by non-affiliated companies. These products include hard hats, protective
glasses, ear muffs, ear plugs, respirators, goggles, face shields, rainwear,
protective footwear, first-aid kits, monitoring devices, signs and related
products. These products are sold to manufacturing companies and service
businesses, including public utilities, fisheries, hospitals, pharmaceutical
plants, the transportation industry and companies engaged in hazardous materials
abatement.
The Company supplies a variety of items which may be used during the
removal and/or encapsulation of hazardous materials in office buildings,
chemical plants, refineries, electric generating plants and schools. Abatement
products sold by the Company include in the largest part, items made by other
companies, such as negative air machines, respirators, air filtration equipment,
vacuums, polybags and sheetings, decontamination showers, signs, tools, pumps,
sprayers and related equipment. The Company does not engage in the removal or
encapsulation of hazardous materials.
The Company's Distribution Operations are primarily directed from the
Company's offices in New York. The Company also has facilities for warehousing
and distribution of its non- manufactured products in Puerto Rico, Connecticut
and Florida. Items distributed are sold primarily in the Northeastern region of
the United States.
The Offering
Securities Offered 513,000 shares of Common Stock
Common Stock outstanding prior to
the Offering(1)(2)(3) 1,583,079 shares of Common Stock (as
adjusted for prior stock splits and
estimated rounding for fractional
shares)
Common Stock to be outstanding
after the Offering(1)(2)(3)(4) 1,583,079 shares of Common Stock
Use of Proceeds None to the Company.
Risk Factors The securities offered hereby involve
a high degree of risk and immediate
substantial dilution. See "Risk
Factors" and "Dilution."
NASDAQ Symbol Common Stock -- ESTO
Boston Stock Exchange Symbol Common Stock --
- ---------------------
(1) Includes 703,591 shares of common stock issued concurrently as part
of the Unit Offering.
(2) All shares and shares issuable under outstanding warrants and options
in this Prospectus have been adjusted for a one-for-ten reverse stock
split approved by the shareholders of the Company on August 12, 1996.
(3) Does not include Common Stock which may be issued upon the exercise
of any options or warrants currently outstanding. The Company
6
<PAGE>
(Alternate Page for Common Prospectus)
currently has outstanding options and warrants to purchase 617,930
shares of Common Stock exercisable at prices between $5.302 and $30.00
per share which will be adjusted to acquire 630,887 shares at prices
between $5.169 and $30.00 as a result of anti-dilution rights as a
result of the Unit Offering.
(4) Does not include Common Stock which may be issued upon exercise of
Underwriter's Purchase Option and Optional Units.
7
<PAGE>
(Alternate Page for Common Prospectus)
This page left blank intentionally
8
<PAGE>
(Alternate Page for Common Prospectus)
SELECTED CONSOLIDATED FINANCIAL DATA (Cont'd)
Consolidated Balance Sheet Data:
As at June 30, 1996
------------------------------------
As at PRO-FORMA
June 30, PRO- AS
1995 Historical FORMA(1) ADJUSTED(2)
----------- ----------- ----------- ------------
Current
Assets $ 9,265,149 $10,987,100 $11,158,100 $11,228,459
Current
Liabilities 8,200,620 9,434,587 9,434,587 6,809,325
Working Capital 1,064,529 1,552,513 1,723,513 4,419,134
Total
Assets 10,716,048 12,472,105 12,643,105 12,713,464
Long-
Term Debt 489,782 433,738 433,738 433,738
Total
Liabilities 8,690,402 9,868,325 9,868,325 7,243,063
Shareholders'
Equity 2,025,646 2,603,780 2,774,780 5,470,401
- ----------
(1) Adjusted to give effect to shares issued in a private placement with
net proceeds to the Company of $171,000.
(2) Adjusted to give effect to shares issued in the Unit Offering and the
sale of units offered and the receipt of $2,695,621 in net proceeds and
their initial application which is to prepay the Underwriter $70,359
for a one year consulting agreement with the balance going to pay down
the amount outstanding on the Company's line of credit.
10
<PAGE>
(Alternate Page for Common Prospectus)
periods where it did not have sufficient working capital to maintain its
inventories to meet the demands of certain of its customers. There can be no
assurance that the Company will be able to maintain sufficient inventories or
the Company will not return to periods where there is insufficient working
capital to maintain its inventories to meet the needs of its customers.
DEPENDENCE UPON DUPONT FOR SUPPLY OF TYVEK(R). The Company is not dependent
upon any one company for a source of supply of raw materials for its
manufacturing operations other than DuPont, which supplies the Company with
Tyvek(R), a raw material which is used in various lines of its disposable
products. Products utilizing Tyvek(R) accounted for approximately 41% and 35% of
consolidated sales for the fiscal years ended June 30, 1996 and June 30, 1995,
respectively. Management believes that its current relationship with DuPont is
satisfactory. The Company has no contract with DuPont for the supply of such raw
material; therefore, DuPont could terminate its relationship with the Company at
any time. The Company does not believe that an alternative source exists for the
supply of Tyvek(R). Accordingly, the loss of DuPont as a supplier of Tyvek(R)
would have a material adverse effect on the Company's operations.
NO DIVIDENDS. The Company intends to retain future earnings to finance
future growth. Accordingly, any potential investor who anticipates the need for
dividends for his investment should not purchase any of the securities offered
hereby. In addition, the Company's agreement with Congress contains restrictions
which prohibit the Company from paying cash dividends.
COMPETITION. The market for industrial protective clothing products and
industrial safety products is extremely competitive. The Company faces
competition in all of its product markets from large, established companies that
have greater financial, managerial, sales and technical resources than the
Company, and some of the Company's product markets are dominated by such larger
companies. Where larger competitors offer products that are directly competitive
with the Company's products, particularly as part of an established line of
products, there can be no assurance that the Company can successfully compete
for sales and customers. Larger competitors also may be able to benefit from
economies of scale or to introduce new products that compete with the Company's
products. There can be no assurance that the Company can successfully compete in
any of its product markets.
15
<PAGE>
(Alternate Page for Common Prospectus)
LIMITATION ON NET OPERATING LOSS CARRYFORWARDS. As of June 30, 1996, the
Company had Federal net operating loss carryforwards for income tax purposes of
approximately $4,738,000 which expire through the year 2011. These carryforwards
are subject to limitations on the amount that can be utilized by the Company in
a fiscal year due to "change of ownership" rules as defined by applicable
Federal tax statutes. The amount of income which may be offset after an
ownership change is determined by multiplying the fair market value of the
Company at the time of the ownership change by the long-term tax exempt rate. To
the extent that such annual limitation is not utilized, it may be further
carried forward until the carryforward would have otherwise expired.A "change in
ownership" occurred upon the completion of two 1996 private placements ("Recent
Private Placements"). See "Recent Private Placements". Based upon the number of
shares offered in the Recent Private Placements and the applicable long-term tax
exempt rate, the Company's ability to utilize its net operating carryforward
losses in future years is limited to approximately $345,000 per year. A change
in ownership may also occur upon the completion of the Unit Offering and the
Company's ability to utilize its net operating loss carryforwards could be
further limited.
RELIANCE ON CURRENT MANAGEMENT. The Company's current operations and future
success is greatly dependent upon the services of Mr. Alan Densen, its
President, Lawrence Densen, its Senior Vice President and Anthony P. Towell, its
Vice President of Finance. The loss of services of any of the foregoing, who are
each employed under written agreements for five year terms, could have a
material adverse effect on the Company. There is no key man insurance on the
life of the executive officers of the Company.
CONTROL BY MANAGEMENT. As of the date of this Prospectus, the Company's
executive officers and directors own of record and beneficially (assuming
exercise of all their options and warrants), an aggregate of approximately 23%
of the Company's outstanding Common Stock and may be in a position to have
significant influence over the outcome of all matters submitted to stockholders
for approval, including the election of directors of the Company, as a result of
their control of such shares which will vote on all matters. The Company's Board
of Directors is divided into two classes, each of which generally serves for a
term of two years, with only one class of directors being elected in each year.
A classified board under certain circumstances could discourage, prevent or
delay a change in control of the Company, which could have the effect of
discouraging bids for the Company and thereby prevent shareholders from
receiving the maximum value for their shares. In addition, there are provisions
in the employment agreements with
16
<PAGE>
(Alternate Page for Common Prospectus)
Messrs. A. Densen, A. Towell and L. Densen, that provide for them to receive
immediately a lump sum payment of three years' compensation as well as severance
pay should a "Change in Control" occur, which also could have a similar effect
of deterring bids for the Company. Messrs. A. Densen, L. Densen, and A. Towell,
in modification agreements to their employment agreements, have waived: (i)
their right to bonuses based upon the Company's earnings before interest and
taxes for the fiscal years ended June 30, 1996 through June 30, 2000; (ii) their
exercise rights on options and warrants and repayment of their junior
participation interests with Congress and compensation payable in the event of a
Change in Control with respect to the Offerings; and (iii) their right to
terminate their relationship with the Company, as per the terms of their
respective employment agreements. The modification agreements and waivers
provide that their right to terminate their employment agreements and waiver of
their bonuses shall not be waived in the event that there is a material breach
of such agreements by the Company. See "Management".
OUTSTANDING OPTIONS AND WARRANTS. As of the date hereof, there are 617,930
shares of Common Stock subject to issuance upon currently outstanding options
and warrants at exercise prices between $5.302 and $30.00 per share, which will
be adjusted to acquire 630,887 shares at prices between $5.169 and $30.00 as a
result of anti-dilution rights as a result of the Unit Offering. To the extent
that outstanding options and warrants are exercised, additional equity
investment funds will be paid into the Company at the expense of dilution to the
interests of the Company's shareholders. Moreover, the terms upon which the
Company will be able to obtain additional equity capital may be adversely
affected since the holders of outstanding options and warrants can be expected
to exercise or convert them at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company than
those provided in such securities. Outstanding options and warrants did not
materially dilute earnings per share in 1996, but could do so in the future if
there is a significant increase in the spread between their exercise price and
the quoted market price of the Company's Common Stock.
PENNY STOCK REGULATION. The Commission has adopted rules that regulate
broker-dealer practices in connection with transactions in "penny stocks." Penny
stocks generally are equity securities with a price of less than $5.00 (other
than securities registered on certain national securities exchanges or quoted on
the NASDAQ system, provided that current price and volume information with
respect to transactions in such securities is provided by the exchange or
system). The penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules to deliver a standardized
risk disclosure document prepared by the Commission that provides information
about penny stocks and the nature and level risks in the penny stock market. The
broker-dealer must also provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. The bid and
offer quotations, and broker-dealer and salesperson compensation information
must be given to the customer orally or in writing
17
<PAGE>
(Alternate Page for Common Prospectus)
prior to effecting the transaction and must be given in writing before or with
the customer's confirmation. In addition, the penny stock rules require that
prior to a transaction of a penny stock not otherwise exempt from such rules,
the broker-dealer must make a special written determination that the penny stock
is a suitable investment for the purchaser and receive the purchaser's written
agreement to the transaction. These disclosure requirements may have the effect
of reducing the level of trading activity in the secondary market for a stock
that becomes subject to the penny stock rules. If the Company's securities
become subject to the penny stock rules, investors in this offering may find it
more difficult to sell such securities.
Although the Company believes that its securities will, as of the date of
this Prospectus, be outside the definitional scope of a penny stock, as it will
be listed on NASDAQ, in the event the Common Stock were subsequently to become
characterized as a penny stock, the market liquidity for the Company's
securities could be severely affected. In such event, the regulations on penny
stocks could limit the ability of broker-dealers to sell the Company's
securities, and thus, the ability of purchasers in this offering to sell their
securities in the secondary market.
TAX INCENTIVES. Puerto Rico Safety Equipment and Disposable have elected to
apply Section 936 of the Internal Revenue Code, effective July 1, 1979. The
provisions of Section 936 are effective until revoked by the Company. If the
conditions of Section 936(a)(2) are satisfied, the Section 936 credit equals the
portion of the United States income tax that is attributable to taxable income
from sources outside the United States derived from the active conduct of a
trade or business within a United States possession, or the sale or exchange of
substantially all of the qualified possession source investment income.
Dividends payable by each subsidiary to the Company from operations are entitled
to a 100% dividends received deduction but are subject to a 10% withholding tax
in Puerto Rico. The Omnibus Budget Reconciliation Act of 1993 (the "Omnibus
Act") imposes new limitations on computing the Possession Tax Credit under
Section 936 for tax years beginning after 1993. There are two methods for
determining the credit under the new law. Under the first method, the amount of
the credit may be determined by using the so-called economic activity limit.
This attempts to limit the credit by applying various percentages to
possession-based compensation, depreciation and taxes paid or accrued.
Alternatively, the Company may make an irrevocable election when it files its
June 30, 1996 federal income tax return to have present rules apply, but to
phase out the credit to 60% of the 1994 level, and further phase down by 5% per
year to 40% in 1998 and years thereafter. Since the credit is a function of
future earnings, if any, the effect of such limitations cannot be determined at
the present time. In addition, the Omnibus Act makes the 100% dividends received
deduction subject to the Alternative Minimum Tax Calculation. No dividends have
been declared on the aggregate undistributed earnings of Puerto Rico Safety
Equipment and Disposable (which through June 30, 1996, aggregates approximately
$2,321,000) and none are intended to be declared because it is management's
intention to reinvest the earnings from such subsidiaries indefinitely. The
Company believes that based upon current operations, the Omnibus Act will not
have a material effect on the Company for the foreseeable future. The Small
Business Job Protection Act of 1996 further limits the Possession tax credit for
years beginning after 2001 with the credit being eliminated for tax years
beginning after 2005.
As Puerto Rico tax exemptions are reduced or expire, the Company may be
required to pay taxes on income earned in Puerto Rico. The Company is unable to
predict the amount of such impact after such exemptions are reduced or expire.
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SHARES ELIGIBLE FOR FUTURE SALE. There are 1,583,079 shares of Common Stock
(assuming the issuance of 703,591 shares of Common Stock as part of the Unit
Offering to be registered and sold herewith) of the Company outstanding as of
the Effective Date. Of these shares 528,607 shares are restricted securities, as
that term is defined in Rule 144 promulgated under the Securities Act of 1933
(the "Securities Act"). Of the restricted securities, 513,000 shares have been
registered for sale, of which 114,000 shares have been registered for sale after
nine months, by certain shareholders. See "Recent Private Placements" and
"Concurrent Registration of Common Stock". 14,602 of the restricted securities
are owned by officers and directors of the Company. Absent registration under
the Securities Act, the sale of such shares is subject to Rule 144. In general,
under Rule 144, subject to satisfaction of certain other conditions, a person,
including an affiliate of the Company, who has beneficially owned restricted
shares of Common Stock for at least two years is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the total number of outstanding shares of the same class, or if the Common Stock
is quoted on NASDAQ, the average weekly trading volume during the four calendar
weeks preceding the sale. A person who has not been an affiliate of the Company
for at least three months immediately preceding the sale and who has
beneficially owned the shares of Common Stock for at least three years is
entitled to sell such shares under Rule 144 without regard to any of the volume
limitations described above. The Company's executive officers and directors have
agreed not to sell their shares for a period of eighteen months from the
Effective Date without the prior consent of the Underwriter. The Underwriter may
consent to the sale of such shares at any time, in its sole discretion, upon the
request of the holder. The Underwriter's decision to consent will be based upon
the current market conditions, liquidity of the Common Stock, as well as such
other factors the Underwriter deems appropriate. No public announcement will be
made with respect to the foregoing. See "Shares Eligible for Future Sale".
RECENT ISSUANCE OF SUBSTANTIAL SHARES AT REDUCED PRICE. During June and
July of 1996, the Company issued 513,000 shares at $1.50 per share at a time
when the current market price was approximately $8 to $12 per share and the
Company was contemplating a prospective rights offering of $5.00 per share. This
offering was authorized to provide proceeds to pay loans and provide working
capital. The shares issued are being registered for sale concurrently herewith.
Holders of 114,000 of these shares have agreed not to sell their shares for nine
months from the date hereof. See "Concurrent Registration of Common Stock" and
"Recent Private Placements".
AUTHORITY TO ISSUE BLANK CHECK PREFERRED STOCK. The Company is authorized
to issue 1,000,000 shares of $.01 preferred stock without further action of the
stockholders in one or more series and to fix before issuance with respect to
each series: (a) the designation and the number of shares to constitute each
series, (b) the liquidation rights, if any, (c) the dividend rights and rates,
if any, (d) the rights and terms of redemption, if any, (e) whether the shares
will be subject to the operation of a sinking or retirement fund, if any, (f)
whether the shares are to be convertible or exchangeable into other securities
of the Company, and the rates thereof, if any, (g) any limitation on the payment
of dividends on the Common Stock while any such series is outstanding, if any,
(h) the voting power, if any, in addition to the voting rights provided by law,
of the shares, which voting powers may be general or special, and (i) such other
provisions as shall not be inconsistent with the certificate of incorporation.
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All the shares of any one series of the Preferred Stock shall be identical in
all respects. The Company's board of directors has broad discretion with regard
to the issuance of such shares. No preferred shares are currently outstanding.
See "Description of Securities - Preferred Stock".
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USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Stock in
the Selling Stockholder Offering.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996: (i) on an historical basis; (ii) on a pro-forma basis giving effect to
the sale of 114,000 shares in a private placement; and (iii) on such pro-forma
basis as adjusted giving effect to the Unit Offering and the sale of Units and
the application of the proceeds therefrom. This table should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
As of June 30, 1996
---------------------------------------
Pro-
Pro- Forma As
Actual Forma (1) Adjusted (2)
------ --------- ------------
Current Liabilities:
Loans Payable $5,853,075 $5,853,075 $3,227,813
========== ========== ==========
Long-Term Debt(including the $ 489,782 $ 489,782 $ 489,782
current portion) ---------- ---------- ----------
Stockholders' Equity:
Common Stock, $.12 par value;
authorized 20,000,000 shares;
issued and outstanding;
765,488 actual outstanding,
879,488 pro-forma outstanding,
1,583,079 pro-forma as
adjusted outstanding 91,859 105,539 189,970
Additional paid-in capital 6,742,476 6,899,796 9,510,986
Accumulated Deficit (4,230,555) (4,230,555) (4,230,555)
---------- ---------- ----------
Total Stockholders' Equity 2,603,780 2,774,780 5,470,401
---------- ---------- ----------
Total Capitalization $3,093,562 $3,264,562 $5,960,183
========== ========== ==========
- ----------------------
(1) Adjusted to give effect to the issuance of 114,000 shares in a
private placement with net proceeds of approximately $171,000 during
July, 1996. See Note 7 in the "Consolidated Financial Statements" and
"Recent Private Placements".
(2) Adjusted to give the effect to shares issued in the Unit Offering and
the sale of units offered hereby and the receipt of $2,695,621 in net
proceeds and their initial application which is to prepay the
Underwriter $70,359 for a one year consulting agreement with the
balance going to paydown the amount outstanding on the Company's line
of credit.
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resulted primarily from the sale of stock in a private placement in June 1996. A
substantial portion of the Company's working capital consists of inventory,
which was $5,230,000 and $4,364,000, as of June 30, 1996 and 1995, respectively.
The Company is required to maintain substantial inventories of its numerous
products to meet the immediate requirements of its customers who need products
on short notice and who do not maintain an inventory of such products.
The Company had a line of credit agreement with Congress whereby the
Company could borrow up to $6,000,000, with interest payable at 2.25% above the
prime rate, plus an unused line fee of .25% per year. Borrowings under this
agreement were limited to 50% of the eligible inventory up to a maximum of
$2,875,000 and 80% of eligible accounts receivable. In July, 1996, the line of
credit was amended and extended until October 1, 1999 with an option by Congress
to extend the loan for an additional year. The line was increased to $9,000,000
with an interest rate at 1.25% above the prime rate which will be reduced to
prime plus 1% subject to the consummation of the Company's proposed public
offering by December 31, 1996 and the net proceeds of this offering being at
least $2,500,000. The limits on borrowings were increased to 85% of eligible
accounts receivable and 55% of eligible inventory. The amounts outstanding at
June 30, 1996 and June 30, 1995 were $5,558,000 and $4,829,000, respectively.
The Company had $76,000 available for borrowing at June 30, 1996. The loan is
subject to certain working capital and net worth requirements and is
collateralized by all of the assets of the Company not previously pledged under
other loan agreements. The loan agreement prohibits the payment of cash
dividends by the Company.
In September 1993, the Company received an overadvance of $500,000 from
Congress. In connection therewith, Messrs. A. Densen, L.Densen, and A. Towell
obtained the Junior Participation from Congress by advancing $250,000 of their
funds to Congress. $250,000 of this overadvance has been repaid to Congress.
The balance of $215,000, after repayment of $35,000 to L. Densen, will be repaid
by Congress, at its option, to Messrs. A.Densen, L.Densen, and A. Towell subject
to the availability of funds.
The Company believes that its current working capital position, line of
credit and operations will be sufficient to satisfy its cash needs through June
30, 1997. In addition, the net proceeds of $171,000 from the second private
placement in July, 1996 and the net proceeds of the Unit Offering will provide
the Company with additional funds to be utilized substantially to paydown the
amount outstanding on the Company's line of credit thereby increasing the amount
available under such line of credit for working capital and other needs such as
acquisitions. The Company has not entered into any definitive agreement or
understanding regarding any acquisition.
Net cash used for operating activities was principally a result of an
increase in accounts receivable and inventories which was only partially offset
by an increase in accounts payable. Cash flows used in investing activities was
for the purchase of property, plant, and equipment. Cash flows provided by
financing activities was principally from increased borrowings under the
Company's line of credit and from the proceeds of a private placement of the
Company's Common Stock.
The Company has no material commitments for capital expenditures.
At the present time, the Company, together with a variety of defendants, is
a party to various asbestos-related lawsuits involving a number of plaintiffs
alleging damages from exposure to asbestos products sold by the Company. The
Company may become a party to additional asbestos-related actions in the future.
The Company is also party to a non-asbestos product liability action. While as
indicated in "Business-Legal Proceedings" legal and settlement costs to the
Company have not been material to date, the Company cannot, at this time,
determine the outcome of these uncertainties which may have an adverse effect
upon the liquidity of the Company in the future.
28
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EXECUTIVE COMPENSATION
The following describes the components of the total compensation of the CEO
and each other executive officer of the Company whose total annual salary and
bonus exceeds $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long term compensation
------------------- ----------------------
Awards Payouts
------------------------- ---------------------
Other Securities All
Name and annual Restricted underlying LTIP other
principal Salary Bonus compen- stock options/ payouts compen-
position Year ($) ($) sation($) award(s)($) SARs(#)(5) ($) sation($)
- -------- ---- ------ ----- --------- ----------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alan E. 1996 117,661 -0- 35,672(3) -0- 8,348(4) -0- -0-
Densen, 1995 107,930 -0- 32,875(3) -0- 82,158(2) -0- -0-
CEO 1994(1) 117,154 -0- 30,078(3) -0- -0- -0- -0-
Lawrence 1996 101,661 -0- 4,200 -0- 8,348(4) -0- -0-
Densen, 1995 89,130 -0- 4,200 -0- 82,158(2) -0- -0-
Senior VP 1994 86,936 -0- 4,200 -0- -0- -0- -0-
</TABLE>
(1) From September, 1993 to January, 1994, Mr. Densen was not CEO; he
served as Senior Vice President.
(2) Includes incentive stock options granted January 20, 1995 to acquire
2,000 shares at $10.625 as well as non-qualified stock options to
acquire 80,158 shares exercisable at $5.302 per share, each
exercisable until January 19, 2005. Because it was determined
that the audited pre-tax profit for fiscal 1995 was greater
than $50,000, non-qualified options can now be exercised for 40,079
shares of Common Stock.The remaining 40,079 non-qualified options
can not be exercised during the first five years. The non-qualified
options provide for adjustment in the event of dilution as a
result of sales of securities at less than the exercise price. Each
set of the options to acquire 40,079 shares at $5.302 per share
will,as a result of anti-dilution rights, following the consummation
of the Unit Offering, be adjusted to acquire 41,110 shares at $5.169
per share.
(3) Primarily life insurance premiums on the life of Alan E. Densen owned
by Mr. Densen's wife and paid for by the Company.
(4) Warrants to acquire 8,348 shares of Common Stock at $5.771 granted
February 23, 1996 until February 22, 2001, in consideration of the
guaranty of overadvances by Congress to the Company. These warrants
provide for adjustment in the event of dilution, and will be adjusted
to acquire 8,870 shares at $5.431 as a result of the Unit Offering.
(5) Each person's options including only options directly held by such
person.
39
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their employment agreements, have waived: (i) their right to bonuses based
upon the Company's earnings before interest and taxes for the fiscal years ended
June 30, 1996 through June 30, 2000; (ii) their exercise rights on options and
warrants and repayment of their junior participation interests with Congress and
compensation payable in the event of a Change in Control with respect to the
Private Placement and the Unit Offering; and (iii) their right to terminate
their relationship with the Company, as per the terms of their respective
employment agreements. The modification agreements and waivers provide that
their right to terminate their employment agreements and waiver of their bonuses
shall not be waived in the event that there is a material breach of such
agreements by the Company.
During February 1996, Messrs. A. Densen, L. Densen, and A. Towell
guaranteed to Congress overadvances to the Company of up to $500,000 in excess
of the Company's eligible borrowings. The Company issued warrants for a term of
five years in consideration for their guaranty to each Messrs. A. Densen, L.
Densen, and A. Towell to purchase 8,348 shares of Common Stock at an exercise
price of $5.771 per share commencing February 23, 1996. These warrants provide
for adjustment in the event of anti-dilution, and will be adjusted to acquire
8,870 shares at $5.431 as a result of the Unit Offering. The overadvances have
since been repaid and their guarantees are no longer in effect.
Compensation to Directors
No compensation is paid to officers who also serve as directors for their
serving solely as a director. Outside directors are compensated at the rate of
$500 for each board of directors meeting which they attend in person.
Indemnification of Directors and Executive Officers
The Company's Certificate of Incorporation provides that the personal
liability of directors to the corporation or its shareholders for damages for
any breach of duty in such capacity is eliminated to the fullest extent
permitted by law. The bylaws of the corporation provide that directors or
officers of the corporation shall be indemnified by the corporation in the
manner and to the fullest extent permitted by law, as amended from time. Section
722 of the Business Corporation Law of the State of New York contains provisions
entitling directors and officers of the Company to indemnification from
judgments, fines, amounts paid in settlement and reasonable expenses, including
attorney's fees, as the result of an action or proceeding in which they may be
involved by reason of being or having been a director or officer of the Company
provided said officers or directors acted in good faith, the acts were not the
result of deliberate dishonesty, and that the indemnitee does not personally
gain or profit where not legally entitled to do so. The Company maintains
directors and officers liability insurance.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, or otherwise, the Company has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is therefor unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Company of expenses incurred or
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PRINCIPAL SHAREHOLDERS
The following are known by the Company, as of the date hereof, to be the
beneficial owners of more than five percent of Common Stock:
<TABLE>
<CAPTION>
Percent Percent
of Class of Class
Name and Address Amount and Nature Before Unit After Unit
Title of Class of Beneficial Owner of Beneficial Owner Offering Offering(A)
- -------------- ------------------ ------------------- ----------- -----------
<S> <C> <C> <C> <C>
Common Stock Alan E. Densen 59,396(1)(4)(5) 6.4% 3.7%
$.12 par value 130 West 10th Street shares direct and
Huntington Station, NY beneficial
Common Stock Lawrence Densen 53,608(2)(4)(5) 5.8% 3.4%
$.12 par value 130 West 10th Street shares direct and
Huntington Station, NY beneficial
Common Stock Anthony P. Towell 138,739(3)(4)(5) 13.7% 8.6%
$.12 par value 130 West 10th Street shares direct and
Huntington Station, NY beneficial
Common Stock George Schiavoni 76,000 8.6% 0%(6)
$.12 par value 46 Bayview Avenue shares direct and
Sag Harbor, NY beneficial
</TABLE>
- ------------------
(A) Assumes no Rights, warrants or options will be exercised as a result of
the Unit Offering. However, this column takes into consideration
additional shares issuable under the anti-dilution rights of certain
options and warrants.
(1) Includes warrants, held by Mr. Densen's wife, to acquire 1,667 shares
of Common Stock, exercisable at $13.00 per share which expire April
11,1999.Also includes incentive stock options granted under the 1994
Plan to acquire 2,000 shares of Common Stock, exercisable at $10.625
which expire January 19, 2005. Amount indicated does not include shares
beneficially owned by Lawrence Densen, son of Alan E. Densen.
(2) Does not include shares beneficially owned by Alan E. Densen, father
of Lawrence Densen. Includes 700 Class A Warrants; incentive stock
options granted under the 1983 Incentive Stock Option Plan (the
"1983 Plan") to acquire 625 shares which expire December 17, 1996
and are exercisable at $26.664 per share; incentive stock options
granted under the 1983 Plan to acquire 56 shares of Common Stock
which expire May 31, 1998 and are exercisable at $30.00 per share;
and incentive stock options granted under the 1994 Plan to acquire
2,000 shares of Common Stock , which expire January 19, 2005 and are
exercisable at $10.625.
(3) Includes 1,500 Class A Warrants; warrants, held by Mr. Towell's wife,
to acquire 1,667 shares of Common Stock, exercisable at $13.00 per
share which expire April 11, 1999; and incentive stock options
granted under the 1994 Plan to acquire 2,000 shares of Common Stock,
exercisable at $10.625 which expire January 19, 2005. Also includes
warrants to acquire 82,645 shares of Common Stock exercisable at
$6.292 per share which expire April 11, 1999, which warrants provide
for an anti-dilution adjustment as a result of sales of securities
at less than the exercise price, and will be adjusted to acquire
90,941 shares at $5.718 as a result of the Unit Offering.
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(4) Includes non-qualified options to acquire 40,079 shares to each
Messrs. A. Densen, A. Towell and L. Densen exercisable until January
19, 2005 at an exercise price of $5.302. Does not include options
to acquire an additional 40,079 shares to each Messrs. A. Densen, A.
Towell and L. Densen which cannot be exercised until January 20,
2000 unless the pre-tax profit for fiscal 1996 is greater than
$250,000. These options provide for an anti-dilution adjustment as a
result of sales of securities at less than the exercise price. Each
of the options to acquire 40,079 shares at $5.302 per share will, as
a result of anti-dilution rights, following the consummation of the
Unit Offering, become options to acquire 41,110 shares at $5.169 per
share. See "Certain Relationships and Related Transactions".
(5) Includes warrants to acquire 8,348 shares of Common Stock exercisable
at $5.771 per share, which expire February 22, 2001. These warrants
provide for an adjustment anti-dilution adjustment as a result of sales
of securities at less than the exercise price, and will be adjusted to
acquire 8,870 shares at $5.431 as a result of the Unit Offering. See
"Certain Relationships and Related Transactions".
(6) Mr. Schiavoni is a selling shareholder and this Prospectus assumes the
sale of his shares of Common Stock after nine months from the Effective
Date.
The following table sets forth as of August 12, 1996, the number of shares
of Common Stock owned by each of the present directors of the Company, together
with certain information with respect to each:
Percent Percent
of Class of Class
Amount and Nature Before Unit After Unit
Name and Address of Beneficial Owner Offering Offering(A)
- ---------------- ------------------- ----------- -----------
Alan E. Densen 59,396(1) 6.4% 3.7%
130 West 10th Street shares direct
Huntington Station, NY and beneficial
Anthony P. Towell 138,739(2) 13.7% 8.6%
130 West 10th Street shares direct
Huntington Station, NY and beneficial
Lawrence Densen 53,608(3) 5.8% 3.4%
130 West 10th Street shares direct
Huntington Station, NY and beneficial
Dr. Martin Fleisher 1,000(4) * *
130 West 10th Street shares direct
Huntington Station, NY and beneficial
James Favia 2,000(5) * *
130 West 10th Street shares direct
Huntington Station, NY and beneficial
Herbert Schneiderman 3,833(6) * *
130 West 10th Street shares direct
Huntington Station, NY and beneficial
All executive officers
and directors
as a group
(6 persons) 258,576 23.0% 14.8%
- ------------------
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* Less than 1%
(A) Assumes no Rights, warrants or options will be exercised as a result of
the Unit Offering. However, this column takes into consideration
additional shares issuable under the anti-dilution rights of certain
options and warrants.
(1) See footnotes (1), (4), and (5) in the preceding chart.
(2) See footnotes (3), (4), and (5) in the preceding chart.
(3) See footnotes (2), (4), and (5) in the preceding chart.
(4) Includes stock options to acquire 1,000 shares of Common Stock.
(5) Includes stock options to acquire 1,000 shares of Common Stock.
(6) Includes warrants and stock options to acquire 1,833 shares of
Common Stock.
The foregoing reflects the outstanding options and warrants held by each of such
persons, and reflects all adjustments for anti-dilution rights through the Unit
Offering.
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DESCRIPTION OF SECURITIES
Common Stock
The authorized capital stock of the Company is 20,000,000 shares of Common
Stock, $0.12 par value per share. The holders of Common Stock (i) have equal
ratable rights to dividends from funds legally available, therefore, when, as
and if declared by the Board of Directors of the Company; (ii) are entitled to
share ratably in all of the assets of the Company available for distribution to
holders of Common Stock upon liquidation, dissolution or winding up of the
affairs of the Company; (iii) do not have preemptive, subscription or conversion
rights and there are no redemption or sinking fund provisions applicable
thereto; and (iv) are entitled to one vote per share on all matters on which
shareholders may vote at all meetings of shareholders.
The holders of shares of Common Stock of the Company do not have cumulative
voting rights, which means that the holders of more than 51% of such outstanding
shares voting for the election of Directors can elect all of the Directors to be
elected, if they so choose, and, in such event, the holders of the remaining
shares will not be able to elect any of the Company's Directors.
Transfer Agent
The Transfer Agent for the Common Stock is American Stock Transfer and
Trust Co., 40 Wall Street, New York, New York 10005.
Other Publicly Held Securities and Preferred Stock
Class A Warrants
The Company has issued and outstanding 2,262,500 Class A Warrants,
exercisable for 226,250 shares of Common Stock, which are publicly tradeable and
are exercisable at a price of $13.00 per share until April 11, 1999. Such
holders are protected against dilution upon the occurrence of certain events
including but not limited to stock dividends, stock splits, reclassifications,
and mergers, but have no voting rights and are not entitled to dividends. In the
event of liquidation, dissolution, or winding up of the Company, holders of
Class A Warrants are not entitled to participate in the distribution of any of
the Company's assets.
Class B Warrants
The Company will issue 703,591 Class B Warrants as part of the Unit
Offering for Units which also includes 703,591 shares of Common Stock. Each
Class B Warrant entitles its holder to purchase one share of Common Stock at an
exercise price of $6.25 per share commencing twelve months (or sooner with the
consent of the Underwriter) until three years after the date of this Prospectus.
The Class B Warrants may be redeemed by the Company at any time, commencing
eighteen months after the Effective Date, but no sooner than 12 months from the
date the warrants become exercisable at a redemption price of $.01 per Warrant
upon 10 days prior written notice, provided the closing high bid price of the
Common Stock for the 15 consecutive trading days ending on the third day prior
to the date of notice of redemption is in excess of $9.375 (or 150% of the
exercise price of the Class B Warrants to be proportionately adjusted for any
stock dividends and stock splits occurring after the Effective Date and which
may be adjusted to 150% of the current exercise price of the Class B Warrants,
if such exercise price is
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changed) per share. Warrantholders shall exercise rights until the close of
business on the day preceding the date fixed for redemption.
Holders of the Class B Warrants will be protected against dilution upon the
occurrence of certain events, including, but not limited to stock dividends,
stock splits, reclassifications, mergers, and sales of Common Stock below the
Exercise Price or then-current market value. However, holders of Class B
Warrants will have no voting rights and are not entitled to dividends. In the
event of liquidation, dissolution or winding up of the Company, holders of Class
B Warrants will not be entitled to participate in any distribution of the
Company's assets.
Preferred Stock
Pursuant to shareholder approval at the August 12, 1996 Special
Shareholders' Meeting, the Company is authorized to issue 1,000,000 shares of
preferred stock par value $.01. The Board of Directors has the express
authority, without further action of the stockholders, to issue shares of
Preferred Stock from time to time in one or more series and to fix before
issuance with respect to each series: (a) the designation and the number of
shares to constitute each series, (b) the liquidation rights, if any, (c) the
dividend rights and rates, if any, (d) the rights and terms of redemption, if
any, (e) whether the shares will be subject to the operation of a sinking or
retirement fund, if any, (f) whether the shares are to be convertible or
exchangeable into other securities of the Company, and the rates thereof, if
any, (g) any limitation on the payment of dividends on the Common Stock while
any such series is outstanding, if any, (h) the voting power, if any, in
addition to the voting rights provided by law, of the shares, which voting
powers may be general or special, and (i) such other provisions as shall not be
inconsistent with the certificate of incorporation. All the shares of any one
series of the Preferred Stock shall be identical in all respects. No preferred
shares are currently outstanding.
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SHARES ELIGIBLE FOR FUTURE SALE
There are 1,583,079 shares of Common Stock (assuming the issuance of 703,591
shares of Common Stock as part of the Unit Offering to be registered and sold
herewith) of the Company outstanding as of the Effective Date. Of these shares
528,607 shares are restricted securities, as that term is defined in Rule 144
promulgated under the Securities Act of 1933 (the "Securities Act"). Of the
restricted securities, 513,000 shares have been registered for sale , of which
114,000 shares have been registered for sale after nine months by certain
shareholders. See "Recent Private Placements" and "Concurrent Registration of
Common Stock". 14,602 shares of the restricted securities are owned by officers
and directors of the Company. Absent registration under the Securities Act, the
sale of such shares is subject to Rule 144, as promulgated under the Securities
Act. In general, under Rule 144, subject to satisfaction of certain other
conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted shares of Common Stock for at least two years is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class, or if the Common Stock is quoted on NASDAQ, the average weekly
trading volume during the four calendar weeks preceding the sale. A person who
has not been an affiliate of the Company for at least three months immediately
preceding the sale and who has beneficially owned the shares of Common Stock for
at least three years is entitled to sell such shares under Rule 144 without
regard to any of the volume limitations described above. The Company's executive
officers and directors have agreed not to sell their shares for a period of
eighteen months from the Effective Date without the prior consent of the
Underwriter. The Underwriter may consent to the sale of such shares at any time,
in its sole discretion, upon the request of the holder. The Underwriter's
decision to consent will be based upon the current market conditions, liquidity
of the Common Stock, as well as such other factors the Underwriter deems
appropriate. No public announcement will be made with respect to the foregoing.
See "Concurrent Registration of Common Stock."
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During September 1993, the Company's lender, Congress, agreed to provide an
overadvance to the Company of $500,000. In connection therewith, Messrs. A.
Densen, L. Densen and A. Towell obtained a junior participation interest from
Congress by advancing $250,000 of their funds to Congress. $250,000 of this
overadvance was repaid to Congress during fiscal 1994. Mr. L. Densen was repaid
$35,000 of the previous balance in full by Congress during May, 1996. The
remaining balance of $215,000 will be repaid by Congress, at its option, to
Messrs. A. Densen and A. Towell, subject to the availability of funds.
Associates holds a first mortgage on the Company's executive offices and
warehouse facility in the principal amount of $489,782 as of June 30, 1996 and
security interest on the Company's personal property. The wives of Alan E.
Densen and Anthony P. Towell, executive officers and directors of the Company,
and Herbert Schneiderman, a director of the Company, are members of Associates
owning approximately 38% thereof. During the fiscal year ended June 30, 1996,
the Company paid Associates $121,107 in principal and interest on the mortgage,
of which $72,346 constituted interest. The Company intends to explore
refinancing of this mortgage with various lenders.
On January 20, 1995, the Company granted non-qualified options to acquire
80,158 shares of Common Stock to each of Messrs. A. Densen, A. Towell, and L.
Densen. Because it was determined that the audited pre-tax profit for fiscal
1995 was greater than $50,000, non-qualified options can now be exercised for
40,079 shares of Common Stock.The remaining 40,079 non-qualified options can not
be exercised during the first five years. The non-qualified options provide for
adjustment in the event of dilution as a result of sales of securities at less
than the exercise price. Each set of the options to acquire 40,079 shares at
$5.302 per share will,as a result of anti-dilution rights, following the
consummation of the Unit Offering, become options to acquire 41,110 shares at
$5.169 per share. All of the options granted on January 20, 1995 were granted in
consideration of previous sacrifices including reduction in salaries,
cancellation of options, and other surrendered benefits by executive officers as
well as the turnaround performance achieved by the Company. The turnaround
achieved by the Company in its performance can be directly related to the
efforts of Messrs. A. Densen, A. Towell, and L. Densen.
On January 31, 1995, the Company's board of directors reduced the exercise
price of the 2.3 million outstanding Class A Warrants issued in connection with
the 1994 Public Offering to $13.00 per share. At the same time, the board of
directors also reduced the exercise price to $13.00 per share with regard to the
10,833 warrants ("Associate Warrants") issued to a group of investors, including
the spouses of Alan Densen (1,667 Associate Warrants owned by her) and Anthony
P. Towell (1,667 Associate Warrants owned by her), and Herbert Schneiderman (833
Associate Warrants owned by him), in connection with a reduction of indebtedness
regarding the Company's premises; 82,645 warrants purchased by Anthony P.
Towell, the Company's Chief Financial Officer, from Scorpio Partners, L.P.
(90,941, as adjusted for the Unit Offering); 4,078 Royce warrants issued in
connection with a 1991 public offering to the same Underwriter herein; and 833
warrants in connection with a 1991 bridge loan. All these warrants have also
been extended to April 11, 1999. These warrants were
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all adjusted as indicated so as to treat them on an equal basis and to provide
incentives for them to be exercised.
The Company had employment agreements with Messrs. A. Densen, A. Towell and
L. Densen, which commenced as of the effective date of the Company's 1994 public
offering in April, 1994. As of July 1, 1995, these executive officers entered
into new agreements. See "Executive Compensation Employment Agreements and
Change in Control Features" with regards to provisions contained in the
employment agreement of Alan E. Densen, the Company's President and CEO, and
Lawrence Densen, the Company's Senior Vice-President. Similar provisions are
contained in the employment agreement with Anthony P. Towell. Messrs. A. Densen,
L. Densen, and A. Towell, in modification agreements to their employment
agreements, have waived: (i) their right to bonuses based upon the Company's
earnings before interest and taxes for the fiscal years ended June 30, 1996
through June 30, 2000; (ii) their exercise rights on options and warrants and
repayment for their junior participation interests with Congress and
compensation payable in the event of a Change in Control with respect to the
Private Placement and the Unit Offering; and (iii) their right to terminate
their relationship with the Company, as per the terms of their respective
employment agreements. The modification agreements and waivers provide that
their right to terminate their employment agreements and waiver to their bonuses
shall not be waived in the event that there is a material breach of such
agreements by the Company.
On April 18, 1995, the Company entered into an agreement with Donald to act
as its investment adviser for a term of three years at a retainer of $3,000 per
month. The agreement may be terminated for cause at any time and after eighteen
(18) months by either party upon forty-five days notice. Donald was also granted
a five year warrant to purchase 12,500 shares exercisable at $12.50 per share,
the closing market price on the date of grant. James Favia, a director of the
Company, serves as a consultant to Donald.
On July 10, 1995 the Company terminated its relationship with Lew
Lieberbaum & Co., Inc. ("Lew Lieberbaum"), the Company's underwriter in its 1994
public offering. Pursuant to an agreement dated July 10, 1995, the Company
canceled all of Lew Lieberbaum's rights under the Underwriting Agreement (the
"Underwriting Agreement"), including, but not limited to, the right of first
refusal to act on behalf of the Company in future transactions, the cancellation
of all Underwriter's Warrants held by Lew Lieberbaum or its affiliates, their
right to representation on the Company's board of directors and the termination
of any obligation by holders of securities subject to a "lock-up" to obtain the
permission of Lew Lieberbaum prior to sale or other disposition of said
securities. At the same time, Leonard A. Neuhaus and Sheldon Lieberbaum, who are
affiliated with Lew Lieberbaum, resigned as directors of the Company. In
exchange, the Company issued 10,000 shares of common stock to Lew Lieberbaum.
During February 1996, Messrs. A. Densen, A. Towell and L. Densen, executive
officers and directors of the Company, guaranteed to Congress overadvances to
the Company of up to $500,000 in excess of the Company's eligible borrowings.
The Company issued warrants for a term of five years in consideration for their
guaranty to each Messrs. A. Densen, A.
53
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Towell, and L. Densen to purchase 8,348 shares of Common Stock at $5.771 per
share, which will, as a result of anti-dilution rights following the Unit
Offering become options to purchase 8,870 shares of Common Stock at $5.431 per
share which expire on February 22, 2001, and are subject to anti-dilution
provisions. The overadvance has since been repaid and their guarantees have been
returned to them.
The first mortgage held by Associates which they agreed on in 1992 and upon
which interest was being paid at the rate of 14% comes due on July 1, 1997 in
the amount of approximately $438,000. Associates has agreed to extend the
mortgage for five years from July 1, 1997 with interest at 12% per annum or 3%
over prime, whichever is greater. At the end of five years, the mortgage will
come due in the amount of approximately $283,000.
Considering the circumstances of each transaction, the Company believes
that all transactions heretofore with officers/directors and shareholders of the
Company and their affiliates have been made, and in the future will be made on
terms no less favorable to the Company than those available from unaffiliated
parties and will be approved by a majority of the disinterested directors.
RECENT PRIVATE PLACEMENTS
On June 28, 1996, the Company completed a private placement offering,
pursuant to which it issued 399,000 shares at $1.50 per share to 20 investors,
pursuant to provisions for exemption from registration under the Securities Act
of 1933 as amended. The terms of this private placement offering were
established by negotiation between the Company and Royce Investment Group, Inc.,
a registered broker/dealer (the "Private Placement Agent"). Under the terms of
this private placement offering, 10 1/2 units (the "Units") were offered, and
sold, in multiples of $57,000 per Unit. Each full Unit consists of 38,000 shares
of the Company's Common Stock, par value $0.12 per share. The Company used net
proceeds from this private placement offering to pay off a short-term loan in
the amount of $500,000 from Elono Portfolio S.A., which had been used to reduce
the amount due to Congress. Gross proceeds from this private placement offering
were $598,500. The Underwriter acted as Placement Agent and received a
commission of 10% and a 3% non-accountable expense allowance. On July 9, 1996,
the Company completed an additional private placement offering for 114,000
shares at $1.50 per share for use as working capital to 5 investors, pursuant to
provisions for exemption from registration under the Securities Act of 1933 as
amended. Royce Investment Group, Inc. did not act as placement agent, nor was it
involved in any way with the private placement which closed on July 9, 1996. The
shares sold in the foregoing private placements are being registered
concurrently herewith. None of the foregoing purchasers of these private
placements have had a prior relationship with the Company, with the exception of
Heather Reiser whose husband is affiliated with Donald & Co., the Company's
investment advisor.
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CONCURRENT REGISTRATION OF COMMON STOCK
Concurrently with the commencement of this Offering, the Company has
offered by separate prospectus 703,591 Units at $5.00 per Unit. Each Unit
consists of one share of Common Stock and one Class B Warrant. The Unit Offering
is being offered through the Underwriter.
SELLING STOCKHOLDERS
The following table sets forth the number of shares of Common Stock of the
Company owned by each Selling Stockholder and the number of shares of Common
Stock included for sale in this Prospectus.
Beneficial Ownership Beneficial Ownership
of shares of Common of shares of Common
Selling Stockholders Stock prior to Sale Stock after Sale(B)
- -------------------- ---------------------- --------------------
RONALD SPINELLI &
RICHARD SPINELLI 9,500 0
RAMESH PATEL 9,500 0
BRENDA FURINO 19,000 0
CINDY DOLGIN 9,500 0
JOHN CZINGER 9,500 0
LEONARD MOSKOWITZ &
VICKIE MOSKOWITZ 9,500 0
ALOYSIUS G. FREEMAN
& MARY FREEMAN 9,500 0
RAYMOND KAYAL 9,500 0
DAVID COHEN 9,500 0
JOANN WEAN &
CHARLES WEAN III 9,500 0
ASHDOWN HOLDINGS LIMITED 38,000 0
BLAISE FINANCIAL CORP. 38,000 0
ELLIOT S. SCHLISSEL
& LOIS C. SCHLISSEL 19,000 0
GLOBALSIDE LIMITED 38,000 0
CORNELIA COMPANY LIMITED 38,000 0
WAAL INVESTMENTS LTD 38,000 0
HARRIET REUTER 19,000 0
EDMOND O'DONNELL 19,000 0
DOMINICK LELIA &
ALICE LELIA 9,500 0
MELINDA N. TYRWHITT 38,000 0
GEORGE SHIAVONI (A) 76,000 0
ANTHONY C. SALVO (A) 5,000 0
ANDREW J. FINKLESTEIN (A) 6,667 0
HEATHER REISER (A) 21,667 0
ROBERT W. BURKE (A) 4,666 0
- ------------------
(A) Has agreed not to sell their shares for 9 months from the date hereof.
(B) Assumes no exercise of rights in the Unit Offering.
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PLAN OF DISTRIBUTION
Each Selling Stockholder is free to offer and sell his or her shares of
Common Stock at such times, in such manner and at such prices as he or she shall
determine. Such shares may be offered by the Selling Stockholders in one or more
types of transactions, which may or may not involve brokers, dealers or cash
transactions. The Selling Stockholders may also use Rule 144 under the
Securities Act, to sell such securities, if they meet the criteria and conform
to the requirements of such Rule. There is no underwriter or coordinating broker
acting in connection with the proposed sale of Common Stock to the Selling
Stockholders.
Sales of common stock by the Selling Stockholders may be effected from
time to time in transactions (which may include block transactions) in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Common Stock, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices.The Selling Stockholders may effect such transactions by
selling Common Stock directly to purchasers or to or through broker/dealers
which may act as agents or principals. Such broker/dealers may receive
compensation in the form of discounts, concessions, or commissions from the
Selling Stockholders and/or purchasers of Common Stock for whom such
broker/dealers may act as agents or to whom they sell as principal, or both
(which compensation as to a particular broker/dealer might be in excess of
customary commissions). The Selling Stockholders and any broker/dealers that act
in connection with the sale of the Common Stock might be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by them and any profit on the resale of the shares of
Common Stock as principal might be deemed to be underwriting discounts and
commissions under the Securities Act. The Selling Stockholders may agree to
indemnify any agent, dealer or broker/dealer that participates in transactions
involving sales of the shares against certain liabilities, including liabilities
arising under the Securities Act.
Because Selling Stockholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the Selling Stockholders will be
subject to prospectus delivery requirements under the Securities Act.
Furthermore, in the event of a "distribution" of his or her shares, any Selling
Stockholder, any selling broker or dealer and any "affiliated purchasers" may be
subject to Rule 10b-7 under the Exchange Act which prohibits any "stabilizing
bid" or "stabilizing purchase" for the purpose of pegging, fixing or stabilizing
the price of Common Stock in connection with this Offering.
61
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LEGAL MATTERS
Certain legal matters with respect to the issuance of securities offered
hereby will be passed upon for the Company by Hollenberg Levin Solomon Ross
Belsky & Daniels, LLP, 585 Stewart Avenue, Garden City, New York 11530. Members
of the firm of Hollenberg Levin Solomon Ross Belsky & Daniels, LLP are members
of Associates and hold warrants to acquire 1,667 shares of Common Stock
exercisable until April 11, 1999 at $13.00 per share.
EXPERTS
The Consolidated Financial Statements included in the Registration
Statement, of which this Prospectus forms a part, have been audited by Cornick,
Garber & Sandler, LLP, independent public accountants, to the extent
62
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(Alternate Page for Common Prospectus)
TABLE OF CONTENTS Page
----
Restrictions in Certain States
Statement of Available Information
Forward-Looking Statements
Prospectus Summary
Summary Financial
Information
Risk Factors
Use of Proceeds 513,000 Shares
Dilution
Capitalization
Market Information
Dividend Policy EASTCO INDUSTRIAL
Management's Discussion SAFETY CORP.
and Analysis of Results
of Operations and
Financial Condition
Business -----------
Management
Principal Shareholders PROSPECTUS
Description of Securities
Shares Eligible for
Future Sale
Certain Relationships and
Related Transactions
Recent Private Placements
Selling Stockholders
Plan of Distribution
Concurrent Registration of
Common Stock
Legal Matters
Experts
Additional Information
Consolidated Financial
Statements
No dealer, salesman or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus, and, if given or made, such information or representations must not
be relied on as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy, by any person
in any jurisdiction in which it is unlawful for such person to make such offer
or solicitation.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers. The Company's Certificate
of Incorporation provides that the personal liability of directors to the
corporation or its shareholders for damages for any breach of duty in such
capacity is eliminated to the fullest extent permitted by law. The bylaws of the
corporation provide that directors or officers of the corporation shall be
indemnified by the corporation in the manner and to the fullest extent permitted
by law, as amended from time to time. Article VII, Sections 719-726 of the
Business Corporation law of the State of New York, provide various provisions
with respect to indemnification and liability of directors and officers of the
corporation.
Item 25. Other Expenses of Issuance and Distribution
SEC Registration Fee 5,690.10
NASD Filing Fee 2,125.63
Transfer Agent Fee* 5,000.00
Printing Costs* 80,000.00
Legal Fees and Expenses* 120,000.00
Accounting Fees and Expenses* 75,000.00
Blue Sky Fees and Expenses* 60,000.00
Miscellaneous Expenses* 17,184.27
----------
TOTAL 365,000.00
- ------------
*Indicates expenses that have been estimated for the purpose of filing.
Item 27. List of Exhibits
Exhibit Description of Exhibit
- ------- ----------------------
1.01 Form of Standby Agreement
1.02 Warrant Exercise Fee Agreement
3.01.1 Certificate of Amendment to Certficate of Incorporation filed
August 12, 1996
3.01.2 Certificate of Amendment to Certificate of Incorporation dated
February 15, 1989
3.02.1 Amendments to By-Laws
4.01 Form of Common Stock Certificate
4.02 Form of Rights Certificate
4.03 Form of Subscription Agreement for
Rights between the Registrant and
American Stock Transfer & Trust Co.
4.04 Form of Class B Warrant Certificate
4.05 Form of Warrant Agency Agreement for Class
B Warrants between the Registrant and American Stock Transfer &
Trust Co.
5.01 Opinion of Hollenberg Levin Solomon Ross
Belsky & Daniels, LLP
10.05 Amendment to Financing Agreements with
Congress dated July, 1996
10.07 Form of Modification Agreement to
Employment Agreements with Alan Densen,
Lawrence Densen and Anthony Towell and Waiver
10.08 Joint Participation Agreement between Congress and Alan E.
Densen dated September 20,1993 (referred to as Exhibit 10.4)(A)
10.09 Joint Participation Agreement between Congress and Anthony
P. Towell dated September 20,1993 (referred to as Exhibit
10.5)(A)
10.10 Joint Participation Agreement between Congress and Lawrence
Densen dated September 20,1993 (referred to as Exhibit 10.6)(A)
11.01 Statement re: Computation of per share
earnings
21.01 Subsidiaries of the Registrant (Note that this
was filed as part of the original filing and is not included
herein).
23.01 Consent of Cornick, Garber & Sandler, LLP
23.02 Consent of Hollenberg Levin Solomon Ross Belsky & Daniels, LLP
27.01 Financial Data Schedule
- ------------------
(A) Incorporated by reference to Form 10K for the year ended June 30, 1993.
II-1
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this Amendment to the
Registration Statement to be signed on its behalf by the undersigned, in
Huntington Station, New York on September 20, 1996.
EASTCO INDUSTRIAL SAFETY CORP.
By: /S/ Alan E. Densen
-------------------
ALAN E. DENSEN, President
/s/ Alan E. Densen Date: September 20, 1996
- ----------------------------
ALAN E. DENSEN, President,
and Director
/s/ Anthony P. Towell Date: September 20, 1996
- -----------------------------
ANTHONY P. TOWELL
Vice President of Finance, Secretary,
Treasurer, and Chief Financial Officer
/s/ Lawrence Densen Date: September 20, 1996
- -----------------------------
LAWRENCE DENSEN
Executive Vice-President and
Director
/s/ Herbert Schneiderman Date: September 20, 1996
- ------------------------------
HERBERT SCHNEIDERMAN
Director
/s/ Martin Fleisher Date: September 20, 1996
- ------------------------------
MARTIN FLEISHER
Director
/s/ James A. Favia Date: September 20, 1996
- ------------------------------
JAMES A. FAVIA
Director
II-2
<PAGE>
EXHIBIT INDEX
Exhibit Description of Exhibit
- ------- ----------------------
1.01 Form of Standby Agreement
1.02 Warrant Exercise Fee Agreement
3.01.1 Certificate of Amendment to Certficate of Incorporation filed
August 12, 1996
3.01.2 Certificate of Amendment to Certificate of Incorporation dated
February 15, 1989
3.02.1 Amendments to By-Laws
4.01 Form of Common Stock Certificate
4.02 Form of Rights Certificate
4.03 Form of Subscription Agreement for
Rights between the Registrant and
American Stock Transfer & Trust Co.
4.04 Form of Class B Warrant Certificate
4.05 Form of Warrant Agency Agreement for Class
B Warrants between the Registrant and American Stock Transfer &
Trust Co.
5.01 Opinion of Hollenberg Levin Solomon Ross
Belsky & Daniels, LLP
10.05 Amendment to Financing Agreements with
Congress dated July, 1996
10.07 Form of Modification Agreement to
Employment Agreements with Alan Densen,
Lawrence Densen and Anthony Towell and Waiver
10.08 Joint Participation Agreement between Congress and Alan E.
Densen dated September 20,1993 (referred to as Exhibit 10.4)(A)
10.09 Joint Participation Agreement between Congress and Anthony
P. Towell dated September 20,1993 (referred to as Exhibit
10.5)(A)
10.10 Joint Participation Agreement between Congress and Lawrence
Densen dated September 20,1993 (referred to as Exhibit 10.6)(A)
11.01 Statement re: Computation of per share
earnings
21.01 Subsidiaries of the Registrant (Note that this and was
filed as part of the original filing and is not included herein)
23.01 Consent of Cornick, Garber & Sandler, LLP
23.02 Consent of Hollenberg Levin Solomon Ross Belsky & Daniels, LLP
27.01 Financial Data Schedule
- ------------------
(A) Incorporated by reference to Form 10K for the year ended June 30, 1993.
<PAGE>
ROYCE INVESTMENT GROUP, INC.
199 Crossways Park Drive
Woodbury, NY 11797
with
EASTCO INDUSTRIAL SAFETY CORP.
STANDBY AGREEMENT
Eastco Industrial Safety Corp.
130 West 10th Street
Huntington Station, New York 11746
Gentlemen:
Eastco Industrial Safety Corp., a New York corporation (the "Company"),
with principal offices located at 130 West 10th Street, Huntington Station, New
York 11746, has an authorized capitalization as set forth in the Prospectus.
The Company has offered to its shareholders the non-transferable right to
purchase Units, each Unit consisting of one share of Common Stock and one Class
B Redeemable Common Stock Purchase Warrant (the "Class B Warrants") on the basis
of four rights for each five shares of Common Stock owned by each shareholder at
a price of $5.00 per Unit.
The Company has issued and outstanding 879,488 shares of its Common
Stock after giving effect to the reverse stock split which was to be approved by
shareholders on August 12, 1996. The Company by this Agreement will have entered
into a Stand-by Agreement with Royce Investment Group, Inc. ("Royce"), the terms
of which are set forth hereinafter, for the purpose of effectuating the exercise
of all of the rights. The exercise of the such rights and the terms of this
Stand-by Agreement will be set forth in a Registration Statement, effective
__________, 1996, as hereinafter more fully referred to.
1. Certain Definitions.
The following shall constitute the definitions of certain
additional terms used in this Agreement.
(a) "Act" shall refer to the Securities Act of 1933, as
Amended.
(b) "Closing Date" shall be the third business day after the
Underwriter receives notice from the Company or its Subscription Agent as to the
number of unsubscribed Units.
(c) "Commission" shall refer to the Securities and
Exchange Commission.
(d) "Common Stock" shall refer to the Common Stock, $.12
par value, of the Company.
1
<PAGE>
(e) "Company" shall refer to Eastco Industrial Safety
Corp and its subsidiaries.
(f) "Effective Date" shall be the date upon which the
Registration Statement becomes effective pursuant to notice from the Commission
and/or the passage of time in accordance with the Act.
(g) "Exercise Price" shall mean the exercise price of
the Rights ($5.00 per Unit).
(h) "Prospectus" shall refer to the Prospectus filed as part
of the Registration Statement filed by the Company, as finally amended and
revised prior to the Effective Date.
(i) "Regulations" shall refer to the rules and regulations
of the Commission.
(j) "Rights" shall mean each Right offered pursuant to the
Registration Statement to the shareholders of the Company to purchase one Unit
at $5.00 per Unit with each shareholder receiving four Rights for each five
shares owned by the shareholder. No fractional Rights will be issued and all
rights will be rounded down to the nearest whole number.
(k) "Share" shall mean one (1) share of Common Stock, $.12 par
value, of the Company.
(l) Class B Warrant shall mean the right to purchase one share
of Common Stock, $.12 par value, at an exercise price of $6.25 per share (125%
of the Exercise Price) commencing ________, 1997 (12 months from the Effective
Date) and expiring _______, 1999 (36 months from the Effective Date). The Class
B Warrants shall be redeemable commencing _______, 1998 (18 months from the
Effective Date), but no earlier than twelve months from the date that the
Warrants first become exercisable, at a redemption price of $.01 per Warrant
provided that the closing high bid price of the Company's Common Stock for the
fifteen consecutive trading days ending on the third day prior to the date on
which the Company gives notice, has been at least $9.375 per share (150% of the
exercise price of the Class B Warrants to be proportionately adjusted for any
stock dividends and stock splits occurring after the Effective Date and which
may be adjusted to 150% of the then current exercise price of the Class B
Warrants, if such exercise price is changed.
(m) "Royce" shall refer to Royce Investment Group, Inc.
(n) "Registration Statement" shall refer to the Registration
Statement filed by the Company, including exhibits and financial statement,
under Commission File Number 333-09517 as amended through the Effective Date.
(o) "Royce's Warrant" shall mean the Warrants referred
to in Section 2(d) hereof.
2
<PAGE>
(p) "Termination Date" shall refer to the date upon which this
Agreement shall terminate for whatever reason.
(q) "Subscription Agency Agreement" shall refer to an
agreement between the Company and American Stock Transfer & Trust Company with
respect to the Rights.
(r) "Warrant Agreement" shall refer to the agreement
between the Company and American Stock Transfer & Trust Company
with respect to the Class B Warrants.
2. Terms of the Stand-by Agreement.
(a) On the Closing Date, subject to all the terms and conditions set
forth herein, (i) the Company hereby agrees to sell to Royce the number of Units
determined as hereinafter provided, and (ii) on the basis of the representations
and warranties and agreements of the Company herein contained, Royce agrees to
purchase from the Company the Units determined as hereinafter provided, at a
price of $5.00 per Unit. All references herein to the number of Units that may
be purchased by Royce shall be referred to as the "Standby Units." The precise
number of Units to be issued and sold by the Company to Royce shall be the
difference between 703,591 Units and the number of Units sold pursuant to the
exercise of the Rights to buy Units offered by the Company that have been
exercised on or before 30 days from the Effective Date (the "Unsubscribed
Units"). The determination of the number of Units to be purchased by Royce shall
be made by American Stock Transfer and Trust Company, acting as Subscription
Agent, pursuant to the Subscription Agency Agreement.
In the event that the Unsubscribed Units to be purchased by Royce is
less than 300,000 Units, certain additional Units (hereinafter referred to as
the "Optional Units") will be sold to Royce at Royce's option so that it will
have the right but not the obligation to purchase such number of Units that will
bring the number of Units to be purchased by Royce up to a total of 300,000
Units within 30 days of the Closing Date at the subscription price paid by the
public of $5.00 per Unit less a 10% discount and 3% non-accountable expense
allowance so that at closing of the Optional Units, Royce will pay $4.35 per
Unit for the Optional Units.
(b) The Company shall pay to Royce at Closing its standby fee
in the sum of $351,795.50 (i.e. an amount equal to 10% of the gross proceeds
from the sale of the Standby Units), which fee is payable irrespective of any
amount required to be paid by Royce pursuant to its stand-by commitment
hereunder.
(c) As and for its non-accountable expense allowance, the
Company shall pay to Royce at Closing the sum of $105,538.65 (i.e. an amount
equal to 3% of the gross proceeds from the sale of the Standby Units).
(d) At the Closing of this offering the Company shall sell and
deliver to Royce warrants ("Royce's Warrant") at a price of $.0001 per warrant,
for the purchase of 70,359 Units equal to
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ten (10%) percent of the amount of Units purchasable by shareholders pursuant
to this Stand-by Agreement, which shall be exercisable only during a term of 4
years commencing 12 months after the Effective Date, at an exercise price of
120% of the public offering price of the Units. The sale and delivery to Royce
of Royce's Warrants will take place at the Closing Date. Royce represents that
for a period of not less than 12 months commencing from the Effective Date of
the offering Royce will not sell, transfer, assign or hypothecate any of the
said Royce's Warrants or the securities underlying said Royce's Warrants except
to officers of Royce and that upon the purchase by Royce of the said Royce's
Warrants, Royce will not thereafter resell any of the said Royce's Warrants or
the underlying securities thereof, except in conformity with the applicable
provisions of the Act and all applicable "Blue Sky" laws.
The Company agrees that solely upon the written request of
Royce or its specific authorized designee or, together with Royce's or its
specific authorized designee's consent, the holders of at least 40% of Royce's
Warrants and/or the holders of the underlying securities made at any time after
12 months following the Effective Date (and during Royce's exercise period) but,
in any event for a period not to exceed five (5) years following the Effective
Date, the Company will file no more than one Registration Statement under the
Act registering Royce's Warrants and/or the securities underlying Royce's
Warrants, and the Company agrees to use its best efforts to cause the above
filing to become effective. The expenses of such registration, including but
not limited to printing charges (including sufficient number of Prospectuses to
permit the sale of the securities), all legal fees and disbursements of the
Company's counsel and all accounting fees, and all filing and miscellaneous
expenses, will be borne by the Company. The Company agrees that if at any time
during the period when Royce has the right to exercise its Warrants but in any
event for a period not to exceed seven (7) years following the Effective Date it
should file a Registration Statement or Notification with the Commission
pursuant to the Act regardless of whether Royce or Royce's specific authorized
designee shall have theretofore availed themselves of the right hereinabove
provided, the Company, at its own expense, will offer to Royce or its specific
authorized designee the opportunity to register Royce's Warrants and/or
securities underlying Royce's Warrants, but unless such registration includes
all of Royce's Warrants and/or underlying securities it will not relieve the
Company of such foregoing obligation to qualify the same. In addition to the
rights hereinabove provided, the Company will cooperate with Royce or its
specific authorized designee in preparing any additional Registration Statement
required to sell or transfer the underlying securities and will supply
information required therefore, but such additional Registration Statement
shall be at the expense of the holders of the Warrants and/or securities
issuable thereunder, and not at the expense of the Company.
Moreover, the Company represents that, except as described in the
Prospectus, no existing shareholders, option holders, warrant
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holders nor any other existing holder of any right or interest in the Company,
as of the date hereof as well as the Effective Date, have or will have any
registration rights with respect to their holdings or interest and that such
rights, if subsequently granted, will be subordinate to the registration rights
contained in Royce's Warrants. It being understood that such rights, if granted
without Royce's prior written consent, shall only become operative when the
registration rights contained in Royce's Warrants have been exercised and six
(6) months after such Warrants and/or underlying securities have been
effectively registered with the Securities and Exchange Commission and the
appropriate regulatory authority of states in which said securities are to be
distributed.
(e) If at any time any condition of the obligations of the
Company hereunder shall not have been met or shall cease to be met and Royce
shall have given the Company notice of the desire of Royce to terminate this
Agreement on account of the non-fulfillment of any such condition or obligation,
then upon such notice, the within Agreement shall terminate, saving all such
rights as the respective parties may then by law possess. Any such notice must
be in writing.
(f) The Company and Royce each agree to use their best efforts
to secure prompt and maximum exercise of the Rights by the shareholders prior to
Closing.
(g) The Company shall be obligated to pay to Royce the
compensation set forth in this paragraph 2 irrespective of how many Units are
actually required to be purchased by Royce pursuant to this Agreement.
3. Representations and Warranties of the Company.
(a) A Registration Statement with respect to the within
transaction, copies of which have heretofore been delivered by the Company to
Royce, has been carefully prepared by the Company in conformity with the
requirements of the Act, and such Registration Statement has been filed with the
Commission, and one or more amendments to said Registration Statement, copies of
which have heretofore been delivered to Royce, has or have been filed; and the
Company may file on or prior to the Effective Date an additional amendment to
said Registration Statement.
(b) The Commission has not issued any order preventing or
suspending the use of any Prospectus with respect to the within transaction and
each Prospectus has conformed in all material respects with the requirements of
the Act and the Regulations and has not included any fact required to be stated
therein or necessary to make the statements therein not misleading. When the
Registration Statement becomes effective and on the Closing Date hereinafter
mentioned, it will conform in all material respects with the requirements of the
Act and the applicable Regulations, and the Registration Statement and any
further amendments or supplements thereto will contain all statements which are
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, the Company does not make any representations or
warranties as to information contained in or
5
<PAGE>
omitted from the Registration Statement or Prospectus in reliance upon written
information furnished on behalf of Royce or by Royce, specifically for use
therein or in any amendments or supplements thereto.
(c) The financial statements of the Company together with the
related schedules and notes as set forth in the Registration Statement and
Prospectus or incorporated therein by reference, as reported upon by an
independent certified public accountant, fairly present the financial position
of the Company at the respective dates or for the respective periods to which
they apply; such financial statements have been prepared in accordance with
generally accepted principles of accounting consistently applied throughout the
periods concerned except as otherwise stated therein.
(d) Except as may be reflected in or contemplated by the
Registration Statement or the Prospectus, subsequent to the dates as of which
information is given in the Registration Statement and the Prospectus, and prior
to the Closing Date (i) there shall not be any material adverse change in the
condition, financial or otherwise, or in the results of operations or the
general affairs of the Company or in its business taken as a whole; (ii) there
shall not have been any material transaction entered into by the Company other
than transactions in the ordinary course of business; (iii) the Company shall
not have incurred any material obligations, contingent or otherwise, which are
not disclosed in the Prospectus; and (iv) there shall not have been, nor will
there be, any change in the common stock or long term debt (except current
payments) of the Company.
(e) Except as may be set forth in the Registration Statement
or Prospectus, the Company is not in violation of any term or provision of its
Charter or By-laws, or of any material agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to the Company.
(f) The execution and delivery of this Agreement by the
Company has been duly authorized by all necessary corporate action, and this
Agreement is the valid, binding and legally enforceable obligation of the
Company; the execution and delivery of, and compliance with, this Agreement, and
the consummation of the transaction hereunder do not conflict with or constitute
a breach of or default under the Certificate of Incorporation or By-laws of the
Company, any indenture, agreement, or other instrument by which the Company is,
or on the Closing Date will be, bound, or any order, rule or regulation
applicable to the Company of any court or any law, administrative regulation or
court decree.
(g) The Company is, and at the Closing Date will be, duly
incorporated and validly existing in good standing as a corporation under the
laws of its jurisdiction of incorporation, with an authorized and outstanding
common stock as set forth in the Registration Statement and the Prospectus, and
with full power and authority (corporate and other) to own its property and
conduct its
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<PAGE>
business, present and proposed, as described in the Registration Statement and
Prospectus; the Company has full power and authority to enter into this
Agreement; the Company has subsidiaries; and the Company including its
subsidiaries is duly qualified and in good standing as a foreign corporation in
each jurisdiction, other than its jurisdiction of incorporation, in which
qualification is required by the laws of such jurisdiction.
(h) The Company has an authorized and outstanding
capitalization as set forth in the Registration Statement and Prospectus; all of
the outstanding securities of the Company have been validly authorized and
issued and are fully paid and non-assessable; no sales of securities have been
made by the Company in violation of the Act; the transaction hereunder has been
validly authorized; Royce's Warrant will represent the binding obligations of
the Company; and the holders of Royce's Warrant and/or underlying shares thereof
will not be subject to any liability as shareholders.
(i) The securities referred to hereunder conform to the
description thereof contained in the Prospectus.
(j) No consent, approval, authorization or other order of any
governmental authority is required in connection with the consummation of the
transaction set forth herein, except such as may be required under the Act or
state securities laws.
(k) Except as set forth in the Registration Statement and
Prospectus, there is, and at the Closing Date there will be, no action, suit or
proceeding before any court or governmental agency, authority or body pending
or, to the knowledge of the Company, threatened, which might result in judgments
against the Company not adequately covered by insurance or which collectively
might result in any material change in the condition (financial or otherwise),
business or prospects of the Company or would materially affect its properties
or assets.
(l) Upon delivery of any payment required by Royce for the
purchase of Units hereunder and for Royce's Warrant to be sold by the Company
set forth herein, Royce will receive good and marketable title thereto free and
clear of any and all liens, encumbrances, charges and claims whatsoever; and the
Company will have, on the Effective Date and at the time of delivery of such
securities, full legal right and power and all authorization and approval
required by law to sell, transfer and deliver such securities in the manner
provided hereunder.
(m) The Company knows of no outstanding claims for services in
the nature of a finder's fee or origination fee with respect to the transaction
hereunder resulting from its acts for which Royce may be responsible.
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<PAGE>
(n) Each contract to which the Company is a party and to which
reference is made in the Registration Statement and Prospectus has been duly
and validly executed, is in full force and effect in all material respects in
accordance with their respective terms, and none of such contracts have been
assigned by the Company and the Company knows of no present situation or
condition or fact which would prevent compliance with the terms of such
contracts, as amended to date. The Company has no intention of exercising any
right which it may have to cancel any of its rights or obligations under any of
such contracts and has no knowledge that any other party to any of such
contracts has any intention not to render full performance under such contracts.
(o) The Company has filed all federal and state tax returns
which are required to be filed, and will pay all taxes shown due on such returns
and all assessments received by it to the extent such taxes have become due. All
taxes with respect to which the Company is obligated have been paid or adequate
accruals have been set up to cover any such unpaid taxes.
(p) Except as otherwise set forth in the Prospectus, (i) the
Company has good and marketable title, free and clear of all liens, encumbrances
and defects, except liens for current taxes not due and payable, to all property
and assets which are described in the Registration Statement and the Prospectus
as being owned by the Company, subject only to such exceptions as are not
material and do not adversely affect the present or prospective business of the
Company; and (ii) the properties, including any equipment, referred to in the
Registration Statement and the Prospectus as being held under lease by the
Company are held under valid, subsisting and enforceable leases with only such
exceptions which collectively are not material and do not adversely affect the
present or prospective business of the Company.
(q) The Company's Common Stock is currently listed for trading
in the NASDAQ Small Cap Market under the symbol ESTO.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or that has constituted
or that might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Units.
4. The Closing Date.
The Closing Date will take place at a place to be designated
by Royce in writing in the Metropolitan New York area at 10:00 A.M. At such
Closing Royce will make payment
8
<PAGE>
to the Company by a certified or a bank check for any Units required to be
purchased by Royce under this Agreement upon delivery of the Units to be
purchased by the Company to Royce in such names and denominations as may be
required by Royce, as set forth in a written notice delivered to the Company at
least 48 hours prior to Closing. At Closing the Company will pay to Royce the
standby fee, non-accountable expense allowance and financial consulting fee.
5. Covenants of the Company.
The Company covenants and agrees with Royce as follows:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective and will advise Royce immediately
and, if requested by Royce, will confirm such advice in writing (i) when the
Registration Statement has become effective and when any amendment thereto
becomes effective, or when any supplement to the Prospectus or any amended
Prospectus has been filed; (ii) of any request by the Commission for any
amendments or supplements to the Registration Statement or the Prospectus or for
additional information; (iii) of the issuance by the Commission of any order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any Prospectus or the institution of any
proceedings for any such purposes; and (iv) of the happening of any event which
in the judgment of the Company makes any statement in the Registration Statement
or the Prospectus untrue or which requires the making of any changes in the
Registration Statement or the Prospectus in order to make the statements therein
not misleading. The Company will use its best efforts to prevent the issuance of
any such order or of any order preventing or suspending such use, to prevent any
such refusal to qualify or any such suspension, and to obtain as soon as
possible a lifting of any such order, the reversal of any such refusal and the
termination of any such suspension.
(b) The Company will not at any time, whether before, after or
on the Effective Date, file any amendment to the Registration Statement or
supplement the Prospectus of which Royce shall not previously have been advised
and furnished with copies and to which Royce and its counsel shall have approved
(which approval shall not be unreasonably withheld) in writing or which is not
in compliance with the Act and the Regulations. It is understood that no such
approval shall make Royce or its counsel responsible in any way for
misstatements or omissions therefrom, except to the extent, if any, such
misstatements or omissions are in conformity with written information furnished
by Royce or its counsel for use in the Registration Statement or the Prospectus.
(c) To deliver to Royce, without charge, three (3) signed
copies of the Registration Statement, including all financial statements and
exhibits filed therewith and any amendments or supplements thereto, and to
deliver, without charge, to Royce three (3) conformed copies of the Registration
Statement and any amendment or supplement thereto, including financial
statements and exhibits.
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<PAGE>
(d) Prior to the Effective Date of the Registration Statement,
the Company will have delivered to Royce, without charge, in such quantities as
Royce may reasonably request, copies of each form of Preliminary Prospectus.
(e) To deliver to Royce, without charge, as soon as
practicable after the Effective Date of the Registration Statement and
thereafter from time to time as many copies as it may request of the Prospectus
and of any amended or supplemented Prospectus as Royce may reasonably request.
(f) If, during such period of time as in the opinion of Royce
or its counsel, a Prospectus relating to this transaction is required to be
delivered, any event occurs as a result of which the Prospectus as then amended
or supplemented would include an untrue statement of a material fact, or omit to
state any material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, or if it is
necessary at any time after the Effective Date of the Registration Statement to
amend or supplement the Prospectus to comply with the Act, the Company will
forthwith notify Royce thereof and prepare and file with the Commission and
furnish and deliver to Royce and to others whose names and addresses are
designated by Royce, all at the cost of the Company, a reasonable number of the
amended or supplemented Prospectus which as so amended or supplemented will not
contain any untrue statement of a material fact or omit to state any material
fact necessary in order to make the Prospectus not misleading in light of the
circumstances when it is delivered to a purchaser or prospective purchaser, and
which will comply in all respects with the Act; and, in the event Royce is
required to deliver a Prospectus twenty-five (25) days or more after the
Effective Date, upon request, to prepare promptly such Prospectus as may be
necessary to permit compliance with the requirements of the Act.
(g) The Company will at its own expense, for a period of five
(5) years from the Closing Date: (i) furnish to Royce and to the Company's
shareholders annual financial statements; (ii) furnish to Royce quarterly
unaudited financial statements including both a balance sheet and statement of
income; (iii) distribute an annual report to all shareholders setting forth
clearly the financial position of the Company; (iv) furnish Royce with a
duplicated copy of the daily transfer sheets prepared by the transfer agent a
duplicated copy of the transfer sheets prepared by Depository Trust Company and
a duplicate copy of a list of shareholders.
(h) The Company will deliver to Royce true and correct copies
of its Articles of Incorporation and all amendments thereto, such copies to be
certified by the Secretary of the Company; true and correct copies of the
By-laws of the Company and of the minutes of all meetings of the directors and
stockholders of the Company held during the twenty-four (24) month period
immediately prior to the Closing Date; and true and correct copies of all
material contracts to which the Company is a party.
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<PAGE>
(i) Prior to the Effective Date, the Company will make such
necessary registration or qualification under the Securities or Blue Sky laws of
such states as Royce may designate and will file such consents to service of
process or other documents as may be necessary in order to effect such
registration or qualification. The Company shall bear the expenses incurred in
such registration or qualification under the Securities or Blue Sky laws of such
states including the fees and charges of the various states, the cost of a
printed memorandum with respect thereto, and reasonable legal fees and expenses
as set forth in sub-paragraph 5(j), below. The Company shall not be required,
however, to sign a general consent to service of process in any jurisdiction
where it is not now subject to such service.
(j) The Company will pay and bear, whether or not the
transactions contemplated hereunder are consummated or this Agreement is
prevented from becoming effective, or is terminated all costs and expenses
incident to the performance of its obligations under this Agreement, including
all expenses incident to this transaction; the fees and expenses of the
Company's counsel and accountants, the costs and expenses incident to the
issuance, sale and delivery of Royce's Warrant to Royce, the costs and expenses
incident to the preparation, printing and filing under the Act, the Registration
Statement (including financial statements), any Preliminary Prospectus and the
Prospectus and any amendments or supplements thereto; the reproduction and
distribution of this Agreement, the filing fees of the Commission and the
National Association of Securities Dealers, Inc., and any state regulatory
agencies, the cost of preparing and filing all exhibits to the Registration
Statement; the cost of furnishing the Underwriter copies of the Registration
Statement and Prospectus as herein provided; the cost and fees of qualifying the
Registration Statement under the Securities or Blue Sky laws as herein provided,
legal fees of $20,000 to the Underwriter's counsel for filing in up to twenty
(20) states ($750 for each additional state) and disbursements incurred by said
counsel, in connection with the Blue Sky filing of this transaction.
(k) If the transaction pursuant to this Standby Agreement is
not completed because (i) of any reason solely within the control of the Company
or its stockholders, (ii) the Company does not permit the Registration Statement
to become effective for any reason whatsoever, or (iii) of any material
discrepancy in any representation by the Company and/or its officers, directors,
shareholders, agents, advisers or representatives, made in writing, including
but not limited to the Registration Statement, to Royce Investment Group, Inc.,
then the Company will be obligated to reimburse Royce Investment Group, Inc. for
all of its out-of-pocket expenses incurred in connection herewith less credit
for monies paid on account. It is understood and agreed by the parties hereto
that any expense incurred by the Underwriter shall be deemed to be reasonable
and unobjectionable upon a reasonable showing by the
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Underwriter that such expenses were incurred, directly or indirectly, in
connection with the proposed transaction and/or relationship of the parties
hereto, as described herein.
Furthermore, if the Company should fail to pay the agreed upon
amounts set forth above to Royce, its successors or assigns, said Company shall,
furthermore, be liable to Royce for attorney's fees and costs incurred in the
collection of said amounts.
(l) Royce may offer components of the Units it acquires
pursuant to the Standby Agreement, to investors at prices set from time to time
by it. Such prices may not exceed the lowest asked price for the securities
reported on NASDAQ (or in the over-the-counter market).
(m) The Company represents that its Common Stock is, and its
Class B Warrants will be, registered pursuant to Section 12(g) of the Securities
Exchange Act of 1934, as amended ("1934 Act") and will promptly furnish Royce
with all materials filed with the SEC pursuant to the 1934 Act.
(n) The Company represents that none of the selling security
holders have provided any consulting or other services to the Company.
(o) Provided this Standby Agreement is consummated, the
Company shall enter into a one year Financial Consulting Agreement with us
pursuant to which we shall receive a consulting fee in an amount equal to 2% of
the gross proceeds of the Offering (including the Optional Units). Such
consulting fee shall be paid in full in advance at closing.
(p) Provided this Standby Agreement is consummated, unless
waived by Royce, Royce shall have the right to designate a director and/or a
non-voting advisor to the Board for a period of five years after the Effective
Date. Said designee(s), shall attend meetings of the Board and receive no more
or less compensation than is paid to other non-management directors of the
Company and shall be entitled to receive reimbursement for all reasonable costs
incurred in attending such meetings, including but not limited to, food, lodging
and transportation. Moreover,to the extent permitted by law, the Company will
agree to indemnify the Underwriter and its designee(s) for the actions of such
designee(s) as director and/or as advisor of the Company. In the event the
Company maintains a liability insurance policy affording coverage for the acts
of its officers and/or directors, it will agree, to the extent permitted under
such policy, to include each of the Underwriter and its designee(s) as an
insured under such policy.
(q) The Company represents that its shares of Common Stock are
currently listed on NASDAQ Small Cap system and further represents that it shall
use its best reasonable efforts at its
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cost and expense to take all necessary and appropriate action such that its
Common Stock continue to be listed and its Class B Warrants be listed for
trading in the NASDAQ Small Cap System for at least ten years from the date of
consummation of this Standby Agreement provided that the Company otherwise
complies with the prevailing requirements of NASDAQ. In the case of the Class B
Warrants, the Company agrees to maintain such listing for the life of the
Warrants unless the Underwriter requests the Company to delist such Warrants.
The Company agrees to list its Common Stock and Class B Warrants on NASDAQ/NMS
as soon as practicable after the Company is eligible to do same in lieu of the
Small Cap Market. Further, the Company agrees not to list the Units for trading
on NASDAQ without the prior written consent of the Underwriter.
(r) Provided this Standby Agreement is consummated, all
officers and directors and their relatives who own securities of the Company
(including but not limited to stock, options and warrants to purchase stock, and
securities convertible into stock), and 3% or greater stockholders (excluding
institutional investors and investors who purchased in the Company's recent
private placements) as of the Effective Date, shall agree not to sell, transfer
or convey any of such securities by registration or otherwise for a period of
twelve (12) months from Effective Date and thereafter for an additional six
months without the prior written consent of Royce or any greater period required
by any state in which the offering of the securities is to be registered. An
appropriate legend shall be marked on the face of stock certificates
representing all of such securities.
(s) Prior to the Effective Date, the Company will enter
into employment contracts with its President, Alan E. Densen, and
its Vice-President, Larry Densen satisfactory to Royce.
(t) Prior to the Effective Date, the Company shall apply for
listing in Standard & Poor's Corporation Reports and shall use its best
efforts to have the Company listed in such reports for a period of not less than
ten (10) years thereafter.
(u) The Company has appointed or shall promptly hereafter
appoint American Stock Transfer & Trust Company as Transfer Agent, which entity
shall agree to provisions of Royce's Warrant, for the securities being offered
and for a period of five (5) years following the Closing Date the Company will
not change or terminate any such appointment without the written consent of
Royce, which consent shall not be unreasonably withheld.
(v) The Company will deliver to Royce and its counsel two (2)
bound volumes of copies of all documents and appropriate correspondence filed or
received from the Commission and the NASD and all closing documents.
(w) The Company will use the net proceeds to be received
by it from the sale of the securities being offered in the manner
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and for the purposes set forth in the Prospectus and will comply with all
reporting and other requirements of the Act respecting the use of the proceeds.
(x) The Company will comply with the Act and Regulations and
the Securities Exchange Act of 1934 and the rules and regulations of the
Commission thereunder so as to permit the continuance of sales of and dealings
in the securities being offered under the Act and the Securities Exchange Act of
1934, as and if required under said Act.
(y) Prior to the Closing time the Company will not issue
directly or indirectly without Royce's prior written consent any press release
or other communication or hold any press conference with respect to the Company
or its activities or the offering of the securities.
(z) Provided this Standby Agreement is consummated and for a
period of five (5) years commencing from the Closing Date, the Company shall
continue to employ the services of a firm of independent certified public
accountants reasonably acceptable to Royce in connection with the preparation of
the financial statements to be included in any Registration Statement to be
filed by the Company hereunder, or any amendment or supplement thereto. For the
purposes of the foregoing, Cornick, Garber & Sandler LLP, and any "Regional"
accounting firm shall be deemed to be acceptable to Royce.
(aa) Notwithstanding any provision contained to the contrary,
if the Company shall within five (5) years from the Effective Date, enter into
any agreement or understanding with any person or entity introduced by the
Underwriter involving (i) the sale of all or substantially all of the assets and
properties of the Company, (ii) the merger or consolidation of the Company
(other than a merger or consolidation effected for the purpose of changing the
Company's domicile) or (iii) the acquisition by the Company of the assets or
stock of another business entity, which agreement or understanding is thereafter
consummated, whether or not during such five (5) year period, the Company, upon
such consummation, shall pay to the Underwriter an amount equal to the following
percentages of the consideration paid by the Company in connection with such
transaction: 5% of the first $1,000,000 or portio thereof, of such
consideration; 4% of the second $1,000,000 or portion thereof, of such
consideration; and 3% of such consideration in excess of the first $2,000,000 of
such consideration.
(bb) The Company will pay the Underwriter a fee of 7% of the
aggregate exercise price of each Warrant exercised commencing one year after the
Effective Date; provided: (1) the market price of the Common Stock on the date
the Warrant was exercised was greater than the Warrant exercise price on that
date;
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(2) exercise of the Class B Warrant was solicited by a member of the NASD; (3)
the Class B Warrant was not held in a discretionary account; (4) disclosure of
compensation arrangements was made both at the time of the offering and at the
time of exercise of the Class B Warrant; and (5) the solicitation of the
exercise of the Class B Warrant was not in violation of Rule 10b-6 promulgated
under the Securities Exchange Act of 1934.
(cc) The Company, for a period of one year from the Effective
Date, shall not file a registration statement for the benefit of officers,
directors, employees, consultants and/or affiliates of the Company without the
prior written consent of the Underwriter.
(dd) For a period of one year from the Effective Date, without
the consent of Royce, the Company will not place or sell any of its securities
other than in connection with mergers, acquisitions or the exercise of currently
outstanding options and warrants.
(ee) The Company will maintain a current Registration
Statement for the Underwriter to offer and sell the Units and the components
thereof purchased by it for a period of at least nine months from the Effective
Date or such reasonable further period as Royce may request. Nevertheless, Royce
agrees to notify the Company when its distribution has been completed.
(ff) Neither the Company nor any officer or director thereof
shall for a period of five years from the Effective Date offer to sell any
securities of the Company in a Regulation S offering without the prior written
consent of Royce.
(gg) Until such time as the securities of the Company are
listed on the New York Stock Exchange, the American Stock Exchange, or the
NASDAQ/NMS; the Company shall cause its legal counsel or an independent firm
acceptable to the Representative to provide the Representative with a survey, to
be updated at least semi-annually, of those states in which the securities of
the Company may be traded in non-issuer transactions under the Blue Sky laws of
the states and the basis for such authority. The first such survey shall be
delivered by Company's counsel at closing and, thereafter, on a semi-annual
basis on April 30 and October 31 of each year.
6. Conditions of Royce's Obligations.
Royce's obligations to perform its obligations pursuant to
this Agreement and the purchase of securities of the Company required hereunder
on the Closing Date is subject to the accuracy of and compliance with the
representations and warranties on the part of the Company herein as of the date
hereof and as of the Closing Date, to the performance by the Company of its
obligations and covenants hereunder, to the accuracy of certificates of the
Company and officers of the Company to be delivered pursuant to
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this Agreement, all as of the Closing Date, and to the following
further conditions:
(a) The Registration Statement shall become effective on or at
such reasonable date as Royce may agree to. No stop order or order suspending
the effectiveness of the Registration Statement shall have been issued at or
before the Closing Date and no proceedings for that purpose shall have been
instituted or shall be pending or, to the knowledge of the Company, contemplated
by the Commission, and any request for additional information on the part of the
Commission to be included in the Registration Statement or the Prospectus or
otherwise shall have been complied with, and no amendments to the Registration
Statement or the Prospectus shall have been filed to which Royce and its counsel
have not given their consent in writing.
(b) All corporate action taken and all legal opinions and
proceedings relating to the transaction and Royce's Warrant, the Registration
Statement and Prospectus and all other matters incident thereto and to the
transaction to which this Agreement relates shall be satisfactory in all
respects to Lester Morse P.C., counsel for Royce, and they shall have been
furnished with such certificates, documents and information as they may request
in this connection.
(c) On the Closing Date, (i) the Registration Statement and
Prospectus and any amendments or supplements thereto shall contain all
statements which are required to be stated therein in accordance with the Act
and shall in all material respects conform to the requirements of the Act and
neither the Registration Statement nor the Prospectus nor any amendment or
supplement thereto shall contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein not misleading, (ii) there shall have been no material
adverse change in the business, properties or financial condition of the Company
from that set forth in the Registration Statement and Prospectus and there shall
not have been any material transaction, contract or agreement entered into by
the Company which is not referred to in the Registration Statement, (iii) no
action, suit or proceeding at law or in equity shall be pending or, to the
knowledge of the Company, threatened against the Company which would be required
to be set forth in the Registration Statement other than as set forth therein,
and no proceedings shall be pending or, to the knowledge of the Company,
threatened against the Company before or by any federal, state or other
commission, board or administrative agency wherein an unfavorable decision,
ruling or finding would have a material adverse effect upon the business,
property, financial condition or income of the Company, and (iv) the Company
shall not have declared dividends or made any payments or made any acquisitions
or capital stock or made any other distribution on outstanding shares of
capital stock other than as set forth in the Registration Statement.
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(d) Prior to the Closing Date, the Company shall not have
sustained a loss on account of fire, flood, accident or other calamity which, in
the judgment of Royce materially and adversely affects the Company, regardless
of whether or not such loss shall have been insured.
(e) Royce shall receive on and as of the Closing Date an
opinion of Hollenberg Levin Solomon Ross Belsky & Daniels, counsel for the
Company, to the effect that (i) the Company is a corporation in good standing,
duly organized and validly existing under the laws of the state of
incorporation, and is authorized by its Certificate of Incorporation to own its
properties and to conduct its business, present and proposed, as set forth in
the Prospectus; (ii) the Company is duly qualified to transact the business in
which it is engaged and is in good standing in each jurisdiction in which its
ownership of property or its conduct of business requires such qualification or
registration (naming such jurisdictions except where failure to qualify would
have no material effect upon the Company); (iii) the Company has an authorized
and outstanding capitalization as set forth in the Prospectus; all of the
outstanding securities of the Company have been validly authorized and issued;
and are fully paid and non-assessable; the Common Stock issuable upon exercise
of the Class B Warrant, Royce Warrant and underlying warrants have been validly
authorized and reserved for issuance and when issued, will be validly issued and
will fully paid and non-assessable; there are no options, warrants, agreements
or similar rights calling for the issuance by the Company of any of its
securities except as described in the Registration Statement and the Prospectus;
(iv) this Agreement has been duly authorized, executed and delivered by the
Company and is a valid and binding agreement of the Company in accordance with
its terms; to the best of such counsel's knowledge, (1) the execution,
performance and delivery of this Agreement and the consummation of the
transactions contemplated hereby will not result in any material breach or
violation (a) of any of the terms or provisions of, or constitute a default
under, any statute, indenture, mortgage, deed or trust, note, material agreement
or other agreement or instrument known to counsel to which the Company is a
party or by which it is bound or of which any of its property is the subject,
and (b) the Company's Certificate of Incorporation, as amended, or By-laws, or
any order, rule or regulation known to counsel of any court or governmental
agency or body having jurisdiction over the Company or any of their activities
or properties, and, (2) no consent, approval, authorization or order of any
court or governmental agency or body is required for the consummation of the
transactions contemplated hereby except such as have been obtained under the Act
or Regulations or under state securities laws; (v) the Registration Statement
has become effective under the Act and the transaction hereunder is made
pursuant to such effective Registration Statement and, to the best knowledge of
such counsel, no order suspending the effectiveness of such Registration
Statement has been issued and no proceedings for such purposes have been
instituted or are pending or contemplated by the Commission and to such
counsel's knowledge and belief no grounds exit for the suspension of such
Registration
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<PAGE>
Statement and Prospectus and any supplement of amendment thereto (except as to
the financial statements and schedules included therein as to which counsel need
not express an opinion) comply as to form in all material respects with the Act
and such counsel has received no information which would indicate that the
Registration Statement or Prospectus or any supplement or amendment thereto
contains any untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make the statements
therein not misleading; (vi) such counsel does not know of any legal or
government proceedings required to described in the Registration Statement or
Prospectus or of any contract or document of a character required to be
described in the Registration Statement or Prospectus or required to be filed as
an exhibit thereto which is not described or filed as required; (vii) the
Company, to the best knowledge of such counsel, has good marketable title in fee
simple, except as stated in the Registration Statement or Prospectus, to all of
the real property described therein as being owned by it, free and clear of all
liens and encumbrances other than mortgages as more fully described in the
Registration Statement and Prospectus, except liens and encumbrances, if any,
which in the opinion of such counsel, are not material and do not interfere with
the use made and proposed to be made of such property, and holds such valid
leases, property rights and easements as are set forth in the Registration
Statement or the Prospectus, are necessary to the operations and proposed
operations of the Company (such counsel being entitled to rely with respect to
the opinions called for by this subdivision on certificates of the Company as to
the use or proposed use of properties and as to the materiality and
non-interference of liens and encumbrances on opinions of local counsel or on
abstracts of title and certificates, reports or title policies of title
insurance companies); and (viii) Royce's Warrant to be sold by the Company have
been duly authorized and constitute valid and binding obligations of the
Company; the Company had at the date of this Agreement and has at the Closing
Date full legal right and authority to sell and deliver in the manner provided
in this Agreement, Royce's Warrant sold by it hereunder; and the delivery by the
Company as described in the Registration Statement or certificates for Royce's
Warrant sold hereunder, will pass good and marketable title to such Royce's
Warrant, free and clear of all liens, encumbrances, charges and claims
whatsoever, except as may be provided by federal and state securities laws. The
opinion referred to in this subdivision shall also cover such other legal
matters relating to this Agreement and the transactions contemplated hereby as
Royce or its counsel may reasonably request.
In expressing their opinion on the matters set forth in this
paragraph 6(e), said counsel shall be entitled to rely, as to any questions of
fact upon which such opinion is predicated, on the representations of the
officers of the Company or opinions of other counsel.
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(f) Royce shall have received on the Closing Date certificates
dated as of the Closing Date, signed by the President, Treasurer and Secretary
of the Company certifying that:
(i) No order suspending the effectiveness of the Registration
Statement or stop order is in effect and no proceeding for such purpose are
pending or are, to their knowledge, threatened by the Commission;
(ii) They do not know of any litigation instituted or
threatened against the Company of a character required to be disclosed in the
Post Effective amendment to the Registration Statement which are not disclosed
therein; they do not know of any contracts which are required to be summarized
in the Prospectus which are not so summarized; and they do not know of any
material contracts required to be filed as exhibits to the Registration
Statement which are not so filed;
(iii) They have each carefully examined the Registration
Statement and the Prospectus and, to the best of their knowledge, neither the
Registration Statement nor the Prospectus nor any amendment or supplement to
either of the foregoing contains an untrue statement of any material fact or
omits to state any material fact required to be so stated therein or necessary
to make the statement therein not misleading; and since the Effective Date, to
the best of their knowledge, there has occurred no event required to be set
forth in an amended or supplemented Prospectus which has not been so set forth;
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there has not been any
material adverse change in the condition of the Company, financial or otherwise,
or in the results of its operations, except as reflected in or contemplated by
the Registration Statement and the Prospectus, and except as so reflected or
contemplated since such date, there has not been any material transaction
entered into by the Company;
(v) The representations and warranties set forth in this
Agreement are true and correct and the Company has complied with all of its
agreements herein contained;
(vi) The Company is not delinquent in the filing of any
federal, state and municipal taxes return or the payment of any federal, state
or municipal taxes; they known of no proposed redetermination or re-assessment
of taxes, adverse to the Company, and the Company has paid or provided by
adequate reserves for all known tax liabilities;
(vii) They know of no material obligation or liability of
the Company, contingent or otherwise, not disclosed in the
Registration Statement and Prospectus;
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<PAGE>
(viii) This Agreement, the consummation of the transactions
herein contemplated, and the fulfillment of the terms hereof, will not result in
a breach by the Company of any terms or constitute a default under its
Certificate of Incorporation or Bylaws, any indenture, mortgage, lease, deed or
trust, bank loan or credit agreement or any other agreement or undertaking of
the Company including, by way of specification but not by way of limitation, any
agreement or instrument to which the Company is now a party or pursuant to which
the Company has acquired any right and/or obligations by succession or
otherwise;
(ix) The financial statements and schedules filed with and as
part of the Registration Statement present fairly the financial position of the
Company as of the dates thereof all in conformity with generally accepted
principles of accounting applied on a consistent basis throughout the periods
involved. Since the respective dates of such financial statements, there has
been no material adverse change in the condition or general affairs of the
Company, financial or otherwise, other than as referred to in the Prospectus;
and
(x) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, except as may otherwise
be indicated therein, the Company has not prior to the Closing Date, either (i)
issued any securities or incurred any liability or obligation, direct or
contingent, or borrowed money, or (ii) entered into any material transaction
other than in the ordinary course of business. The Company has not declared ,
paid or made any dividend or distribution of any kind on its capital stock.
(g) The Company shall have performed all agreements herein
contained to be performed on its part at or before the Closing Date and all
other covenants and conditions set forth in paragraph 5 shall have been
performed.
(h) At the time that this Agreement is executed by the Company
and at the Closing Date, Royce shall have received a letter from Cornick, Garber
& Sandler, LLP, dated as of the date this Agreement is executed by the Company
and as of the Closing Date, confirming that it is an independent public
accountant within the meaning of the Securities Act and the published Rules and
Regulations and the answer to item 11 of Registration Statement is correct
insofar as it related to it and stating in effect that:
(i) They are independent public accountants with
respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations of the Commission;
(ii) In their opinion, the financial statements and
related schedules of the Company included in the Registration Statement and
Prospectus and covered by their reports comply as to form in all material
respects with the applicable accounting
20
<PAGE>
requirements of the Act and the published Rules and Regulations of
the Commission issued thereunder;
(iii) On the basis of limited procedures, not
constituting an audit, including a review of the latest interim unaudited
financial statements of the Company on the basis specified by the American
Institute of Certified Public Accountants for a review of interim financial
information, a reading of the minutes of meetings of the boards of directors,
and stockholders of the Company, inquiries of officials of the Company
responsible for financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their attention
which caused them to believe:
(A) that at the date of the latest balance sheet
read by them and at a subsequent specified date not more than five business days
prior to the date of such letter, there was any change in the capital stock or
increase in long-term debt of the Company as compared with amounts shown in the
most recent balance sheet included in the Prospectus, except for changes which
the Prospectus discloses have occurred or may occur or which are described in
such letter;
(B) that at the date of the latest balance sheet
read by them and at a subsequent specified date not more than five business days
prior to the date of such letter, there were any decreases, as compared with
amounts shown in the most recent balance sheet included in the Prospectus, in
total assets, net current assets or stockholder's equity of the Company except
for decreases which the Prospectus discloses have occurred or may occur or which
are described in such letter; or
(C) that for the period from the date of the most
recent financial statements in the Registration Statement to a subsequent
specified date not more than five business days prior to the date of such
letter, there were any decreases, as compared with the corresponding period of
the preceding year, in gross profit or the total or per share amounts of net
income of the Company except for decreases which the Prospectus discloses have
occurred or may occur or which are described in such letter.
(iv) In addition to the audit referred to in their
report included in the Registration Statement and the Prospectus and the limited
procedures referred to in clause (iii) above, they have carried out certain
specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information which are derived from the
general accounting records of the Company which appear in the Prospectus under
the captions "Summary Financial Information," "Capitalization", "Management",
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", "Certain Transactions", "Dilution" and "Risk Factors," as well as
such other financial information as may be specified by the Representative, and
that they have compared
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<PAGE>
such amounts, percentages and financial information with the accounting records
of the Company and have found them to be in agreement.
(i) The transaction herein shall be qualified under the
Securities and Blue Sky laws of such states as Royce may request and each such
qualification shall be in effect and not subject to any stop order or other
proceeding on the Effective Date, and Closing Date.
(j) The Company shall have furnished to Royce such other and
further certificates, documents, and opinions as Royce may reasonably request or
its counsel may request (including certificates of officers) as to the
accuracy, at and as of the Closing Date, of the representations and warranties
of the Company herein, to the performance by the Company of its obligations
hereunder as to other conditions concurrent and precedent to its obligations
hereunder.
All opinions, affidavits, letters, evidence and certificates
specified in this paragraph 6 or elsewhere in this Agreement shall be deemed to
be in compliance with the provisions hereof only if they are in form reasonable
satisfactory to Royce and its counsel.
Any certification signed by an officer of the Company and
delivered to Royce or to its counsel will be deemed a representation and
warranty of the Company to Royce as to the Statements made therein.
In the event that any of the conditions specified in this
paragraph 6 shall not have been fulfilled, Royce shall have the right, upon
written notice to the Company, and upon the Company's failure to cure the
condition within ten (10) days from the date of such notice, to terminate the
obligations of Royce under this Agreement.
7. Termination.
This Agreement shall be terminated at any time prior to the
Closing Date, by Royce by written notice to the Company if in the reasonable
judgment of Royce it is impracticable to consummate this transaction, by reason
of (i) the Company having sustained a material loss of whatsoever nature, except
losses which occur as result of litigations solely and unequivocally based 1)
upon asbestos provided that the Company remains and/or would remain a viable
entity, and 2) upon product liability provided such litigation is covered under
the Company's basic product liability insurance coverage and to the extent that
the losses in excess of such insurance coverage do not cause the Company to be
and/or result in it becoming an inviable entity, whether or not insured, which,
in the sole and absolute opinion of Royce, substantially affects the value of
the property of the Company or materially
22
<PAGE>
interferes with the operation of the business of the Company, (ii) any material
adverse change in the business, property or financial condition of the Company;
(iii) trading in securities on the New York Stock Exchange, the American Stock
Exchange or NASDAQ System having been suspended or limited or minimum prices
having been established on either such Exchange or System, (iv) a banking
moratorium having been declared by either federal or state authorities, (v) an
outbreak of major hostilities or other national or international calamity having
occurred, (vi) any action having been taken by any government in respect of its
monetary affairs which, in the reasonable opinion of Royce, has a material
adverse effect on the United States securities markets; (vii) any action, suit
or proceeding at law or in equity against the Company, or by any Federal, Sate
or other Commission, board or agency wherein any unfavorable decision would
materially adversely effect the business, property, financial condition or
income of the Company; or (viii) due to conditions arising subsequent to the
execution hereof, Royce reasonably believes that, as a result of material and
adverse events affecting the market for the Company's Common Stock or the
securities markets in general, it is impracticable or inadvisable to proceed
with the offering.
Any notice under this section 7 may be given by telephone, or
telegraph, but shall be subsequently confirmed by letter within three (3) days
of such notification.
8. Registration of Units to be Purchased by Royce.
The Registration Statement will include registration of up to
a maximum of 703,591 Units that may be purchased by Royce pursuant to this
Standby Agreement and provide for the distribution of such Units and the
components therein by Royce from time to time.
9. Indemnification.
(a) The Company will indemnify and hold harmless Royce and
each person who controls Royce within the meaning of Section 15 of the Act from
and against any and all losses, claims, damages, expenses or liabilities, joint
or several to which they or any of them may become subject under the Act or
under any other statute or at common law or otherwise and will reimburse Royce
and each such person specified as above for any legal or other expenses
(including the cost of any investigation and preparation) reasonably incurred by
them or any one them in connection with investigating or defending any
litigation or claim whether or not resulting in any liability, only insofar as
such losses, claims, damages, expenses, liabilities or actions arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement or any amendment thereto or in any
Blue Sky application or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein
necessary to make the statements
23
<PAGE>
therein not misleading, all as of the date when the Registration Statement or
any amendment thereto, the filing of any such Blue Sky application as the case
may be, becomes effective or any untrue statement or alleged untrue statement of
a material fact contained in the Preliminary Prospectus or Prospectus (as
amended or as supplemented thereto), or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary in order to make the statements therein, not
misleading; provided, however, that the indemnity agreement contained in this
subsection (a) shall not apply to amounts paid in settlement of any such
litigation if such settlement is effected without the consent of the Company,
nor shall it extend to Royce or any person controlling Royce in respect of any
such losses, claims, damages, expenses, liabilities, or actions arising out of,
or based upon any such untrue statement or alleged untrue statement, or any such
omission, if such statement or omission was made in reliance upon and in
conformity with, written information furnished to the Company by Royce on its
behalf specifically for use in connection with the preparation of the
Registration Statement, the Prospectus, or any such amendment thereof or
supplement thereto or Blue Sky Application.
Royce and each controlling person of Royce agree after their
receipt of written notice of the commencement of any action against Royce or
against any such person controlling Royce as aforesaid, in respect of which
indemnity may be sought from the Company on account of the Indemnity agreement
contained in this subsection (a), to notify the Company within ten (10) days in
writing of the commencement thereof and to supply a copy of any legal documents
served upon such Underwriter or such controlling person in connection with such
action. The omission of Royce or such controlling person of Royce to so notify
the Company of any such action shall relieve the Company from any liability
which it may have to Royce or such controlling persons as to any such action on
account of the indemnity agreement contained in this subsection (a), but shall
not relieve the Company from any other liability which it may have to Royce, to
such controlling person. In case any such action shall be brought against Royce
or any controlling person, Royce or such controlling person shall promptly
notify the Company of the commencement thereof and the Company shall be entitled
to participate in (and, to the extent it shall wish, to direct) the defense
thereof at its own expense but such defense shall be conducted by counsel of
recognized standing and reasonably satisfactory to Royce and to such controlling
person or persons who are defendant or defendants in such litigation. Royce or
any such controlling person shall have the right to employ separate counsel in
any such action and to participate in the defense thereof subject to the
Company's reasonable right to approve such counsel which will not be
unreasonably withheld, but the fees and expenses of such counsel shall not be at
the expense of the Company unless (i) the employment of such counsel has been
specifically authorized by the Company, or (ii) the Company shall not have
employed counsel to have charge of the defense of such action,. or (iii) there
is a
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<PAGE>
conflict of interest which would prevent counsel for the Company from
representing both the Company and Royce or such controlling person, in any of
which cases the Company shall not have the right to direct the defense of such
action on behalf of Royce or such controlling person. It is understood that,
regardless of whether such counsel is representing all of the parties entitled
to indemnification under this subsection (a), the Company shall not be liable,
under clause (iii) above, for the fees and expenses of more than one separate
counsel who shall be approved by Royce. The Company agrees to notify each
Underwriter promptly of the commencement of any litigation or proceeding
against it or against any of the officers or directors of the Company of which
it may be advised, in connection with the issue and sale of any of its
securities, and to furnish Royce, at the Royce's request, with copies of all
pleadings therein and to permit Royce to be an observer therein and to apprise
it of all of the developments therein, all at the Company's expense. The
provisions of this paragraph 9(a) shall also apply to the subsequent
registration of Royce's Warrants and/or the securities underlying Royce's
Warrants.
(b) Royce will indemnify and hold harmless the Company, the
directors of the Company, the officers of the Company who shall have signed the
Registration Statement and each person, if any, who controls the Company within
the meaning of Section 15 of the Act, from and against any and all losses,
claims, damages, expenses or liabilities, joint or several, to which they or any
of them may become subject under the Act or under any other statute or at common
law or otherwise and, except as hereinafter provided, will reimburse the Company
and such officers or controlling person indemnified for as above for any legal
or other expenses (including the cost of any investigation and preparation)
reasonably incurred by them or any of them in connection with investigating or
defending any litigation or claims whether or not resulting in any liability,
only insofar as such losses, claims, damages, expenses, liabilities or actions
arise out of or are based upon any untrue statem ent or alleged untrue statement
of a material fact contained in the Registration Statement or any amendment
thereto or in any Blue Sky application or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, all
as of the date when the Registration Statement or such amendment thereto, or the
date the filing of any such Blue Sky application as the case may be, becomes
effective, or any untrue statement or alleged untrue statement of a material
fact contained in the Preliminary Prospectus or the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendments
thereof or supplements thereto), or the omission or alleged omission to state
therein a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading, but
only if insofar as such statement or omission was made in reliance upon
information furnished in writing to the Company by Royce specifically for use
in connection with the preparation of the Registration Statement, the
Preliminary Prospectus or the Prospectus, or any such amendment thereof or
supplement thereto or Blue Sky application. This indemnity agreement is in
addition to any other liability which Royce may have to the Company. Royce shall
not be liable for amounts paid in settlement of any such litigation, if such
settlement was effected without its consent. In case of the commencement of any
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action, respect of which indemnity may be sought from Royce on account of its
indemnity agreement contained in this subsection (b), the Company and each
person agreed to be indemnified by Royce shall have the same obligation to
notify Royce and Royce shall have the same right to participate in (and, to the
extent that it shall wish, to direct), as set forth in subsection (a) above, the
defense of such action at its own expense but such defense shall be conducted by
counsel of recognized standing and reasonably satisfactory to the Company or
such other person agreed to be indemnified by Royce. Royce agrees to notify the
Company promptly of the commencement of any litigation or proceeding against it
or against any such controlling person of which it may be advised in connection
with the issue or sale of any of the securities of the Company. The provisions
of this subparagraph shall also apply to the subsequent registration of Royce's
Warrants and/or securities underlying Royce's Warrants.
(c) The respective indemnity agreements of the Company, and
Royce contained in subsections (a) and (b) above, and the representations and
warranties of the Company set forth in this Agreement, shall remain operative
and in full force and effect, regardless of any investigation made by Royce or
on its behalf or by or on behalf of any person who controls Royce or the Company
or any controlling person of the Company or any director or any officer of the
Company,, and shall survive the delivery of the Units, and any successor of
Royce, or the Company or of any controlling person of Royce or the Company, as
the case may be, shall be entitled to the benefit of these respective indemnity
agreements.
10. Contribution.
In order to provide for just and equitable contribution under the Act
in any case in which (i) Royce makes claims for indemnification pursuant to
Section 9 hereto but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact that
the express provisions of Section 9 provide for indemnification in such case, or
(ii) contribution under the Act may be required on the part of Royce, then the
Company and each person who controls the Company, in the aggregate, and Royce
shall contribute to the aggregate losses, claims, damages or liabilities to
which they may be subject (which shall, for all purposes of this Agreement,
include, but not be limited to, all reasonable costs of defense and
investigation and all reasonable attorneys' fees) in either such case (after
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<PAGE>
contribution from others) in such proportions that Royce is responsible in the
aggregate for that portion of such losses, claims, damages or liabilities
represented by the lower of the percentage that a) the standby fee set forth in
the Prospectus bears to the total gross sum received by the Company without
deduction of any nature whatsoever thereon, or b) the dollar amount of the
securities acquired by Royce pursuant to this Standby Agreement bears to the
total gross sum received by the Company without deduction of any nature
whatsoever thereon, and the Company shall be responsible for the remaining
portion, provided, however, that (a) if such allocation is not permitted by
applicable law, then the relative fault of the Company and Royce and controlling
persons, in the aggregate, in connection with the statements or omissions which
resulted in such damages and other relevant equitable considerations shall also
be considered. The relative fault shall be determined by reference to, among
other things, whether in the case of an untrue statement of a material fact or
the omission to state a material fact, such statement or omission relates to
information supplied by the Company or Royce, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and Royce agree that it would not be
just and equitable if the representative obligations of the Company and Royce to
contribute pursuant to this Section 10 were to be determined by pro rata or per
capita allocation of the aggregate damages or by any other method of allocation
that does not take account of the equitable considerations referred to in the
first sentence of this Section 10; and, (b) the contribution of Royce shall not
be in excess of its proportionate share of the portion of such losses, claims,
damages or liabilities for which Royce is responsible. No person guilty of a
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who is not guilty of such
fraudulent misrepresentation. As used in this paragraph, the word "Company"
includes any officer, director, or person who controls the Company within the
meaning of Section 15 of the Act. If the full amount of the contribution
specified in this paragraph is not permitted by law, then Royce and each person
who controls any Underwriter shall be entitled to contribution from the Company
to the full extent permitted by law. The foregoing contribution agreement shall
in no way affect the contribution liabilities of any persons having liability
under Section 11 of the Act other than the Company and Royce. No contribution
shall be requested with regard to the settlement of any matter from any party
who did not consent to the settlement; provided, however, that such consent not
be unreasonably withheld in light of all factors of importance to such party.
11. Finders.
(a) The Company knows of no claims for services in the nature
of a finder's fee or origination fee with respect to this transaction resulting
from the respective acts of its officers,
27
<PAGE>
directors or employees, for which Royce may be responsible, and the Company
agrees to indemnify and hold Royce free and harmless from any claims for any
services of such nature arising from any act of the Company or its employees,
officers or directors and will reimburse Royce for any counsel fees, legal or
other expense reasonable incurred by Royce in investigating or defending against
any such claim.
(b) Royce knows of no claims for services in the nature of a
finder's fee or origination fee with respect to this transaction resulting from
the respective acts of its officers, directors or employees, for which the
Company may be responsible, and Royce agrees to indemnify and hold the Company
free and harmless from any claims for any services of such nature arising from
any act of Royce or its employees, officers or directors and will reimburse the
Company for any legal or other expenses reasonable incurred by the Company in
investigating or defending against any such claim.
12. Royce's Covenant.
Royce covenants and agrees with the Company as follows:
(a) Royce is registered as a broker-dealer with the
Commission and is a member in good standing with the National
Association of Securities Dealers, Inc. ("NASD").
(b) There is not now pending or threatened or to the best
knowledge of Royce or its counsel, contemplated against Royce any action or
proceeding, either in any court of competent jurisdiction or before the
Commission or any state securities commission, or administrative body or
tribunal, except as fully disclosed or required to be disclosed in the
Prospectus.
(c) In the event of any action or proceeding of the type
referred to in subparagraph (b) above shall be instituted or threatened against
Royce at any time prior to the Effective Date, or in the event that Royce shall
cease to be a member in good standing of the NASD, or in the event there shall
be filed by or against Royce in any court pursuant to any federal, state, local
or municipal statute, a petition in bankruptcy or insolvency or for
reorganization or for the appointment of a receiver or trustee of its assets or
if Royce makes an assignment for the benefit of creditors, Royce shall give
written notice of the occurrence of such event or events to the Company, and the
Company shall have the right on three (3) days written notice to Royce to
terminate this Agreement without any liability to Royce of any kind.
13. Survival of Representations, Warranties and Agreements.
The respective indemnities, agreements, representations,
warranties and other statements of the Company or its officers as set forth in
or made pursuant to this Agreement and the respective indemnities, agreements,
representations, warranties, covenants and
28
<PAGE>
other statements of Royce or its officers as set forth in or made pursuant to
this Agreement shall remain operative and in full force and effect, regardless
of any investigation made by or on behalf of the Company or Royce or any
controlling person, and will survive termination of this Agreement and the
delivery of any payment for the consummation of this transaction, on the Closing
Date.
14. Benefits and Assignment.
This Agreement has been made solely for the benefit of the
Company and its legal representatives and may not be assigned by the Company to
any other entity and no other person shall qualify or have any right in or by
virtue of this Agreement.
15. Other Agreements.
The Registration Statement shall also cover 513,000 shares of
the Company's Common Stock for sale by certain selling security holders.
However, the Company has entered into agreements with certain Selling Security
Holders who own 114,000 shares of the Company's Common Stock which prohibit them
from making any sales until nine months after the Effective Date. The 513,000
shares being sold by the selling security holders are not covered by this
Standby Agreement except for the aforementioned restriction against sale and as
provided below.
With respect to the selling security holders, the Company
agrees (i)to provide the National Association of Securities Dealers, Inc.
("NASD") all post-effective amendments or prospectus supplements disclosing
actual price and selling terms at the same time they are filed with the
Securities and Exchange Commission; (ii) to provide the NASD with notice if
subsequent to the filing of this offering any 5% or greater shareholder of the
Company is or becomes an affiliate or associated person of an NASD member
participating in the distribution and (iii) in the event a portion of the
securities being registered become underwritten, the Company will prior to the
commencement of the distribution provide the Corporate Finance Department of the
NASD with copies of all underwriting documents for the Department's review and
that the maximum compensation to be paid will first be approved by the
Department.
16. New York Law.
This Agreement shall be construed in accordance with the laws
of the State of New York.
17. Notices.
All communications hereunder shall be in writing and, if to
Royce, shall be mailed by certified mail or delivered to Royce at its address
appearing on page 1 hereof, or if to the Company, shall be mailed by certified
mail or delivered to it at its address appearing on page 1 hereof, or sent to
counsel to such parties
29
<PAGE>
named in the Prospectus at the respective addresses indicated
therein.
If a party signs this Agreement and transmits an electronic
facsimile of the signature page to the other party, the party who receives the
transmission may rely upon the electronic facsimile as a signed original of this
Agreement.
If the foregoing correctly states and sets forth in full the
Agreement between us, please indicate by signing this letter in the space
provided below for that purpose. The within Agreement may be executed
simultaneously in two or more counterparts, each of which shall be deemed the
original, but all of which together shall constitute one and the same instrument
and shall be valid and binding between us.
Very truly yours,
ROYCE INVESTMENT GROUP, INC.
By:
---------------------------
ROYCE KANOFSKY, President
Dated: Woodbury, New York
_____________, 1996
Accepted and Agreed:
EASTCO INDUSTRIAL SAFETY CORP.
By:
------------------------------
ALAN E. DENSEN, President
30
<PAGE>
Exhibit 1.02
WARRANT EXERCISE FEE AGREEMENT
AGREEMENT dated as of the ___ of _________, 1996, by and among
Royce Investment Group, Inc. ("Royce"), Eastco Industrial Safety
Corp. (the "Company") and American Stock Transfer & Trust Company
(the "Warrant Agent").
W I T N E S S E T H:
WHEREAS, on ________________, 1996, the Company entered into a Standby
Agreement with Royce pursuant to which the Company has distributed to its
stockholders non-transferable Rights to purchase 703,591 Units (as defined
below) and Royce has agreed to purchase the Unsubscribed Units; and
WHEREAS, in connection with the Rights offering each stockholder has
received Rights on the basis of four Rights for every five shares of Common
Stock owned by them; and
WHEREAS, each Right allows the stockholder to purchase one Unit at a
price of $5.00 per Unit with each Unit consisting of one share of the Company's
Common Stock ("Common Stock"), and one Class B Common Stock Purchase Warrant
(the "Class B Warrants"); and
WHEREAS, the Company has entered into an agreement dated as of
___________, 1996 by and between the Company and the Warrant Agent (the "Warrant
Agreement"), covering 703,591 Class B Warrants (plus an additional 70,359 Class
B Warrants that may be issued upon exercise of the Underwriter's Warrants); and
WHEREAS, each Class B Warrant entitles the holder to purchase one share
of Common Stock at an exercise price of $6.25 per share commencing on
_______________ (12 months from the effective date of the Registration
Statement) and expiring on the close of business on ________________ (36 months
from the effective date of the Registration Statement; and
WHEREAS, the parties hereto wish to provide Royce, a member of the
National Association of Securities Dealers, Inc. ("NASD") with certain rights on
an exclusive basis in connection with the exercise of the Class B Warrants
during the exercise period.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth, the parties hereto agree as follows:
Section 1. Description of the Class B Warrants. The Company's Class B
Warrants may be exercised on or after ____________, 199__ and expire at 5:00
p.m. New York time on ____________, ______ (the "Expiration Date"), subject to
(i) the Company's right to extend the Expiration Date, at which time all rights
evidenced by the Class B Warrants shall cease and the Class B Warrants shall
become void and (ii) certain redemption rights commencing on or after
___________, _____ (18 months from
1
<PAGE>
the effective date of the Registration Statement, but no sooner than 12 months
from the date the Warrants first become exercisable). In accordance with the
provisions of the Warrant Agreement, the holder of each Class B Warrant shall
have the right to purchase from the Company, and the Company shall issue and
sell to such holders of Class B Warrants, one fully paid and non-assessable
share of the Company's Common Stock for every Class B Warrant exercised at an
Exercise Price of $6.25 per share, subject to adjustment as provided in the
Warrant Agreement.
Section 2. Notification of Exercise. Within five (5) days of the last
day of each month commencing ___________, 199__ (12 months from the date of the
Company's Prospectus), the Warrant Agent or the Company will notify Royce of
each Class B Warrant certificate which has been properly completed and delivered
for exercise by holders of Class B Warrants during each such month, the
determination of the proper completion to be in the sole and absolute reasonable
discretion of the Company and the Warrant Agent. The Company or the Warrant
Agent will provide Royce with such information, in connection with the exercise
of each Class B Warrant, as Royce shall reasonably request.
Section 3. Payment to Royce. The Company hereby agrees to pay to Royce
an amount equal to seven (7%) percent of the then exercise price (i.e. $.4375
per share based on the initial exercise price of the Class B Warrants which is
$6.25 per share) for each Class B Warrant exercised (the "Exercise Fee") a
portion of which may be allowed by Royce to the dealer who solicited the
exercise (which may also be Royce) provided that:
(a) such Class B Warrant is exercised no earlier than one year from
the effective date of the Company's Registration Statement;
(b) at the time of exercise, the market price of the Company's Common
Stock is higher than the applicable Exercise Price of the Class B Warrant being
exercised;
(c) the holders of Class B Warrants being exercised have indicated in
writing, either in the Form of Election contained on the specimen Class B
Warrant Certificate attached hereto as Exhibit A, or by written documents signed
and dated by the holders and specifically stating that the exercise of such
Class B Warrants were solicited by Royce or another member of the NASD; and
(d) Royce delivers a certificate to the Company within five (5)
business days of receipt of information relating to such exercised Class B
Warrants from the Company or the Warrant Agent in the form attached hereto as
Exhibit B, stating that:
(1) the Class B Warrants exercised were not held in a
discretionary account;
2
<PAGE>
(2) Royce did not, (unless granted an exemption by the
Securities and Exchange Commission from the provisions thereof), within the
applicable number of business days under Rule 10b-6 immediately preceding the
date of exercise of the Class B Warrant bid for or purchase the Common Stock of
the Company or any securities of the Company immediately convertible into or
exchangeable for the Common Stock (including the Class B Warrants) or otherwise
engage in any activity that would be prohibited by Rule 10b-6 under the
Securities Exchange Act of 1934, as amended, with one engaged in a distribution
of the Company's securities; and
(3) in connection with the solicitation, it disclosed the
compensation it would receive upon exercise of the Class B Warrant.
Section 4. Payment of the Exercise Fee. The Company hereby agrees to
pay over to Royce within two (2) business days after receipt by the Company of
the certificate described in Section 3(d) above, the Exercise Fee out of the
proceeds it received from the applicable Exercise Price paid for the Class B
Warrants to which the certificate relates.
Section 5. Inspection of Records. Royce may at any time during business
hours, at its expense, examine the records of the Company and the Warrant Agent
which relate to the exercise of the Class B Warrants.
Section 6. Termination. Royce shall be entitled to terminate this
Agreement prior to the exercise of all Class B Warrants at any time upon five
(5) business days' prior notice to the Company and the Warrant Agent.
Notwithstanding any such termination notice, Royce shall be entitled to receive
an Exercise Fee for the exercise of any Class B Warrant for which it has already
delivered to the Company prior to any such termination the certificate required
by Section 3(d) of this Agreement.
Section 7. Notices. Any notice or other communication required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be deemed sufficiently given if sent by first class certified mail, return
receipt requested, postage prepaid, addressed as follows: if to the Company at
130 West 10th Street, Huntington Station, New York 11746, copy to Herbert W.
Solomon, Esq., Hollenberg Levin Solomon Ross Belsky & Daniels, LLP 585 Stewart
Avenue, Garden City, New York 11530-4732; if to Royce at 199 Crossways Park
Drive, Woodbury, NY 11797; and if to the Warrant Agent at American Stock
Transfer & Trust Company, 40 Wall Street, New York, N. Y. l0005, or such other
address as such party shall have given notice to other parties hereto in
accordance with this Section. All such notices or other communications shall be
deemed given three (3) business days after mailing, as aforesaid.
Section 8. Supplements and Amendments. The Company, the Warrant Agent
and Royce may from time-to-time supplement or amend this Agreement by a written
instrument signed by the party to be
3
<PAGE>
charged, without the approval of any holders of Class B Warrants in order to
cure any ambiguity or to correct or supplement any provisions contained herein
or to make any other provisions in regard to matters or questions arising
hereunder which the Company, the Warrant Agent and Royce may deem necessary or
desirable and which do not adversely affect the interests of the holders of
Class B Warrants.
Section 9. Assignment. This Agreement may not be assigned by any party
without the express written approval of all other parties, except that Royce may
assign this Agreement to its successors.
Section 10. Governing Law. This Agreement will be deemed made under the
laws of the State of New York with respect to matters of contract law and for
all purposes shall be governed by and construed in accordance with the internal
laws of said State, without regard to the conflicts of laws provisions thereof.
Section 11. Benefits of this Agreement. Nothing in this Agreement shall
be construed to give any person or corporation other than the Company, the
Warrant Agent and Royce any legal or equitable right, remedy or claim under this
Agreement; and this Agreement shall be for the sole and exclusive benefit of,
and be binding upon, the Company, the Warrant Agent and Royce and their
respective successors and permitted assigns.
Section 12. Descriptive Headings. The descriptive headings of the
sections of this Agreement are inserted for convenience only and shall not
control or affect the meanings or construction of any of the provisions hereof.
Section 13. Superseding Agreement. This Agreement supersedes any and
all prior agreements between the parties with respect to the subject matter
hereof.
Section 14. Exclusive Agreement. It is understood that this agreement
is on an exclusive basis to solicit the exercise of the Class B Warrants and
that the Company may not engage other broker-dealers to solicit the exercise of
Class B Warrants without the consent of Royce.
4
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
EASTCO INDUSTRIAL SAFETY CORP.
By:
-----------------------------------
ROYCE INVESTMENT GROUP, INC.
By:
-----------------------------------
AMERICAN STOCK TRANSFER & TRUST COMPANY
By:
-----------------------------------
5
<PAGE>
CERTIFICATE
The undersigned, being the ________________ of Royce Investment Group, Inc.
("Royce") pursuant to Section 3(d) of the Warrant Exercise Fee Agreement
relating to the exercise of Warrants dated ____________, 1996 between Eastco
Industrial Safety Corp. (the "Company") and American Stock Transfer & Trust
Company (the "Warrant Agent") hereby certifies that:
1. The Company or the Warrant Agent has notified Royce that
______________ Class B Warrants (as defined in the Agreement) have been
exercised during _____________, 199___.
2. The exercise of ______________ of such Class B Warrants
was solicited by Royce.
3. Such Class B Warrants were not held in a discretionary
account.
4. ______________ did not, within _____ business days immediately
preceding _______________ 199___, bid for or purchase the Common Stock of the
Company or any securities of the Company immediately convertible into or
exchangeable for the Common Stock (including Class B Warrants) or otherwise
engage in any activity that would be prohibited by Rule 10b-6 under the
Securities Exchange Act of 1934, as amended, to one engaged in a distribution of
the Company's securities.
5. In connection with the solicitation of the exercise of
the Class B Warrants, _____________ disclosed the compensation it
will receive to holders of the Class B Warrants.
DATED: __________________, 199___
ROYCE INVESTMENT GROUP, INC.
By:
-----------------------------------
6
<PAGE>
EXHIBIT 3.01-1
CERTIFICATE OF AMENDMENT
OF
EASTCO INDUSTRIAL SAFETY CORP.
Under Section 805 of the Business Corporation Law
of the State of New York
The undersigned, being the president and the secretary of EASTCO
INDUSTRIAL SAFETY CORP., do hereby certify and set forth:
1. The name of the corporation is EASTCO INDUSTRIAL SAFETY CORP.
2. The date that the certificate of incorporation of the corporation
was filed by the Department of State is the 15th day of May, 1958 under the name
Glofane Co., Inc.
3. The certificate of incorporation is hereby amended as follows: (a)
to increase the authorized shares from twenty million common shares, par value
$0.12 per share to twenty-one million shares by adding a class of one million
preferred shares, par value $0.01 per share to the existing 20,000,000 common
shares, par value $0.12 per share; (b) to change the 8,794,890 presently issued
shares of the Corporation's Common Stock, par value $0.12 per share into 879,489
issued shares of the Corporation's Common Stock, par value $0.12 per share, on
the basis of a one (1) share $0.12 par value for ten (10) shares $0.12 par
value; and (c) to change the 11,205,110 unissued shares of the Corporation's
Common Stock, par value $0.12 per share, into 19,120,511 unissued shares of the
Corporation's Common Stock, par value $0.12 per share, on the basis of
19120511/11205110 of $0.12 par value shares for one $0.12 par value share.
4. Paragraph "3" of the Certificate of Incorporation relating to
authorized shares is hereby amended to read in full as follows:
<PAGE>
The corporation is authorized to issue two classes of stock to
be designated respectively "Common Stock" and "Preferred
Stock." The total number of shares of stock which the
corporation shall have authority to issue is Twenty-One
Million (21,000,000). The total number of shares of Common
Stock which the corporation shall have authority to issue is
Twenty Million (20,000,000), twelve cents par value per share.
The total number of shares of Preferred Stock which the
corporation shall have the authority to issue is One Million
(1,000,000), one cent par value per share. The shares of
Preferred Stock may be issued from time to time in one or more
series. The board of directors of the corporation is
authorized to determine or alter any or all of the
designations, powers, preferences and rights and the
qualifications, limitations or restrictions thereof, in
respect of the wholly unissued class of Preferred Stock or any
wholly unissued series of Preferred Stock, and to fix or alter
the number of shares comprising any series of Preferred Stock
(but not below the number of shares of any such series then
outstanding).
5. The manner in which the amendment to the certificate of
incorporation of the corporation was authorized was by the affirmative vote of
the board of directors, followed by the affirmative vote of the holders of a
majority of all outstanding shares entitled to vote thereon at a meeting of the
shareholders.
IN WITNESS WHEREOF, the undersigned have signed this certificate this
12th day of August, 1996, and affirm that the statements made herein are true
under the penalties of perjury.
/s/ ALAN E. DENSEN
------------------------
ALAN E. DENSEN
President
/s/ ANTHONY P. TOWELL
------------------------
ANTHONY P. TOWELL
Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
EASTCO INDUSTRIAL SAFETY CORP.
Under Section 805 of the Business Corporation Law
of the State of New York
Hollenberg Levin Solomon Ross Belsky & Daniels, LLP
585 Stewart Avenue
Garden City, New York 11530
<PAGE>
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
EASTCO INDUSTRIAL SAFETY CORPORATION
Under Section 805 of the Business Corporation Law.
The undersigned, being the President and Secretary of Eastco Industrial Safety
Corporation, do hereby certify and set forth:
FIRST: The name of the corporation is Eastco Industrial Safety
Corporation.
SECOND: The Certificate of Incorporation of the corporation was filed
by the Department of State on the 15th day of May, 1958, under the name of
Glofane Co. Inc.
THIRD: The Certificate of Incorporation of the corporation is hereby
changed to effectuate the following changes: (1) to change the name of the
corporation and (2) to eliminate certain liabilities of members of the Board of
Directors to the corporation or its stockholders for money damages for certain
breaches of fiduciary duty as a director.
FOURTH: Article 1 of the Certificate of Incorporation is hereby amended
to read as follows:
"1. The name of the corporation is Eastco Industrial Safety Corp."
FIFTH: Article 15 of the Certificate of Incorporation of the
corporation is hereby added to read as follows:
"15. Elimination of Certain Liabilities. The personal liability of
directors to the corporation or its shareholders for damages for any
breach of duty in such capacity is eliminated to the fullest extent
permitted by law."
SIXTH: This amendment of the Certificate of Incorporation was
authorized by the holders of a majority of all outstanding shares entitled to
vote at a meeting of the shareholders duly held on the 15th day of February,
1989. Said authorization was subsequent to the unanimous vote of the Board of
Directors.
1
<PAGE>
IN WITNESS WHEREOF, the parties have signed their names and affirm that
the statements contained herein are true under the penalties of perjury this
15th day of February, 1989.
/s/ Alan E. Densen
------------------------------------
ALAN E. DENSEN - President
/s/ Mark J. Fredericks
------------------------------------
MARK J. FREDERICKS - Secretary
2
<PAGE>
Exhibit 3.02.1
BYLAW AMENDMENT
Article I
MEETING OF STOCKHOLDERS
:
:
Sec.2 SPECIAL MEETINGS. Special Meetings of Stockholders other than those
regulated by statute, may be called at any time by a majority of the Directors.
Notice of such meeting stating the purpose for which it is called at any time by
a majority of the Directors. Notice of such meeting stating the purpose for
which it is called shall be served personally or by mail, not less than 10 days
before the date set for such meeting. If mailed, it shall be directed to a
stockholder at his address as it appears on the stock book; but at any meeting
at which all stockholders shall be present, or of which stockholders not present
have waived notice in writing, the giving of notice as above described may be
dispensed with. The Board of Directors shall also, in like manner, call a
special meeting of stockholders whenever so requested in writing by stockholders
representing not less than ten (10%) percent of the outstanding shares of the
company. The President may in his discretion call a special meeting of
stockholders upon ten days notice. No business other than that specified in the
call for the meeting, shall be transacted at any meeting of the stockholders,
except upon the unanimous consent of all the stockholders entitled to notice
thereof.
ADOPTED SEPTEMBER 20, 1996
<PAGE>
Article II
DIRECTORS
:
:
Sec.6. NOTICE OF MEETINGS. Notice of meetings, other than the regular annual
meeting shall be given by service upon each Director in person, or by mailing or
faxing to him at his last known post-office address, at least 2 days before the
date therein designated for such meeting, including the day of mailing, of a
written or printed notice thereof specifying the time and place of such meeting,
and the business to be brought before the meeting and no business other than
that specified in such notice shall be transacted at any special meeting. At any
meeting at which every member of the Board of Directors shall be present,
although held without notice, any business may be transacted which might have
been transacted if the meeting had been duly called.
ADOPTED SEPTEMBER 20, 1996
<PAGE>
EXHIBIT 4.01
COMMON SHARES eastco COMMON SHARES
NUMBER SHARES
----------- -------------
| | | |
| | | |
----------- -------------
EASTCO INDUSTRIAL SAFETY CORP.
INCORPORATED UNDER THE LAWS OF THE STATE OF NEW YORK
CUSIP 276162 40 1
THIS CERTIFIES THAT
SEE REVERSE
FOR CERTAIN
DEFINITIONS
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE PAR VALUE OF
TWELVE CENTS ($.12) OF THE COMMON STOCK OF
===============EASTCO INDUSTRIAL SAFETY CORP.======================
(herein called the "Corporation"), transferable on the books of the Corporation
by the holder hereof in person or by duly authorized attorney upon the surrender
of this certificate properly endorsed. This certificate is not valid unless
countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
Anthony P. Towell Alan Densen
---------------------- ----------------------
Secretary President
[SEAL
OF EASTCO
INDUSTRIAL SAFETY CORP.]
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
NEW YORK, NY 10005
TRANSFER AGENT
AND REGISTRAR
AUTHORIZED SIGNATURE
<PAGE>
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- _________ Custodian _________
(Cust) (Minor)
under Uniform Gifts to Minors
Act___________
(State)
Additional abbreviations may also be used though not in the above list.
For value received _______________________hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
OF ASSIGNEE
----------------------------
| |
| |
----------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- -----------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-------------------
------------------------------------------------------
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NOTICE: NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.
Signature(s) Guranteed:
- -------------------------------------------------------
THE SIGNATURES(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
CONTROL NUMBER SUBSCRIPTION CERTIFICATE FOR
UNITS
SUBSCRIPTION PRICE: U.S. $5.00 PER UNIT
CUSIP 276162 13 8
SUBSCRIPTION CERTIFICATE REPRESENTING RIGHTS TO PURCHASE __________ UNITS,
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK $.12 PAR VALUE, AND
ONE CLASS B WARRANT, OF EASTCO INDUSTRIAL SAFETY CORP. VOID IF NOT
EXERCISED BEFORE 5:00 P.M. NEW YORK TIME ON ___________________, 1996
THIS SUBSCRIPTION CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY ARE
NON-TRANSFERABLE.
THE TERMS AND CONDITIONS OF THE RIGHTS
OFFERING ARE SET FORTH IN THE COMPANY'S
PROSPECTUS DATED ______________, 1996
(THE "RIGHTS OFFERING PROSPECTUS") AND
ARE INCORPORATED HEREIN BY REFERENCE.
COPIES OF THE RIGHTS OFFERING PROSPECTUS
ARE AVAILABLE UPON REQUEST FROM AMERICAN
STOCK TRANSFER & TRUST COMPANY AS
SUBSCRIPTION AGENT.
REGISTERED OWNER:
The registered owner whose name is inscribed hereon is entitled to subscribe for
Units upon the terms and subject to the conditions set forth in the Rights
Offering Prospectus and instructions relating hereto on the reverse side. The
Rights represented by this Subscription Certificate may be exercised by duly
completing Form 1. Special delivery instructions, may be specified by completing
Form 2. THE RIGHTS EVIDENCED BY THIS SUBSCRIPTION CERTIFICATE MAY NOT BE
EXERCISED UNLESS THE REVERSE SIDE HEREOF IS COMPLETED AND SIGNED WITH A
SIGNATURE GUARANTEE, IF APPLICABLE, ANY SIGNATURE GUARANTEE MUST BE IN
ACCORDANCE WITH THE MEDALLION SIGNATURE GUARANTEE PROGRAM.
Date:
Anthony P. Towell Alan Densen
---------------------------- ----------------------
Anthony P. Towell, Secretary Alan Densen, President
[SEAL
OF EASTCO
INDUSTRIAL SAFETY CORP.]
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY
Rights Agent
By
Authorized Signature
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
FORM 1 - EXERCISE AND SUBCRIPTION: The undersigned irrevocably exercises one or
more Rights to subscribe for Units, each Unit consisting of one share of Common
Stock, $.12 par value, and one Class B Warrant as indicated below, on the terms
and subject to the conditions specified in the prospectus of EASTCO INDUSTRIAL
SAFETY CORP. dated ___________________, 1996 (the "Right Offering Prospectus"),
receipt of which is hereby acknowledged.
(a) Number of Units subscribed for pursuant to the Subscription Privilege
(one Right needed to subscribe for each full Unit): __________________
(b) Total Subscription Price (total number of shares subscribed for pursuant
to the Subscription Privilege times the Subscription Price of
$5.00): $________
METHOD OF PAYMENT (CHECK ONE)
| | CERTIFIED CHECK OR BANK CHECK DRAWN ON A U.S. BANK OR MONEY ORDER PAYABLE
TO AMERICAN STOCK TRANSFER & TRUST COMPANY.
| | WIRE TRANSFER DIRECTED TO THE ACCOUNT MAINTAINED BY AMERICAN STOCK TRANSFER
& TRUST COMPANY AT CHASE MANHATTAN BANK, 55 WATER STREET, NEW YORK,
NEW YORK 10041. ACCOUNT NO. 323-294723; ABA NO. 021 000 021.
If the amount enclosed or transmitted is not sufficient to pay the Subscription
Price for all Units that are stated to be subscribed for, or if the number of
units being subscribed for is not specified, the number of Units subcribed for
will be assumed to be the maximum number that could be subscribed for upon
payment of such amount. If the amount enclosed or transmitted exceeds the
Subscription Price for all Units that the undersigned has the right to purchase
pursuant to the Subscription Privilege (the "Subscription Excess"), the
Subscription Agent shall return the Subscription Excess to the subscriber
without interest or deduction.
FORM 2 - DELIVERY INSTRUCTIONS: Name and/or address for mailing of any stock,
warrant or Subscription Excess, if other than shown on the reverse
hereof:
Name: __________________________________________
Address: _______________________________________
________________________________________________
(Including Zip Code)
- -------------------------------------------------------------------------------
<PAGE>
IMPORTANT
-- RIGHTS HOLDERS SIGN HERE
AND, IF RIGHTS ARE EXERCISED,
COMPLETER SUBSTITUTE FORM W-9
-------------------------------------------
-------------------------------------------
(Signature(s) of Holder(s))
Dated:_________________________________1996
(Must be signed by the Rights holders(s)
exactly as name(s) appear(s) on this
Subscription Certificate. If signature is by
trustee(s), executor(s), administrator(s),
guradian(s), attorney(s)-in-fact, agent(s),
officer(s) of a corporation or another
acting in a fiduciary or representative
capacity, please provide the following
information. See Instructions).
Name(s) ____________________________________
____________________________________________
(Please Print)
Capacity ___________________________________
Address ____________________________________
____________________________________________
(Including Zip Code)
Area Code and
Telephone Number ___________________________
(Home)
____________________________________________
(Business)
Tax Identification or
Social Security No. ________________________
(Complete Substitute Form W-9)
<PAGE>
EASTCO INDUSTRIAL SAFETY CORP.
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY
------------------------
SUBSCRIPTION AGENCY AGREEMENT
DATED AS OF ______________
<PAGE>
SUBSCRIPTION AGENCY AGREEMENT dated as of __________, 1996 by and
between EASTCO INDUSTRIAL SAFETY CORP. (the "Company") and AMERICAN STOCK
TRANSFER & TRUST COMPANY as Subscription Agent (the "Subscription Agent").
WHEREAS, the Company has caused a Registration Statement on Form SB-2
(Registration No. 333-09517) under the Securities Act of 1933, as amended (the
"Act"), to be filed with the Securities and Exchange Commission (the
"Commission") relating to the distribution by the Company of nontransferable
subscription rights (the "Rights") to subscribe for units ("Units"), which
registration statement was declared effective by the Commission on ______, 1996
(the "Effective Date"); and
WHEREAS, each Unit consists of one share of common stock $0.12 par
value ("Common Stock") and one Class B Redeemable Common Stock Purchase Warrant
("Class B Warrant"), issuable upon the exercise of the Rights (such Registration
Statement, in the form in which it first becomes effective under the Act, and as
it may thereafter be amended from time to time, is referred to herein as the
"Registration Statement"; the distribution of the Rights and the sale of Units
upon the exercise thereof as contemplated by the Registration Statement is
referred to herein as the "Rights Offering"); and
WHEREAS, the Rights will be distributed to holders of record of shares
of Common Stock as of the close of business on ____________ (the "Record Date")
at a rate of four Rights for each five shares of Common Stock held on the Record
Date; and
WHEREAS, the Rights are non-transferable and upon the expiration date
for the Rights ("Expiration Date"), Royce Investment Group, Inc. ("Royce") will
purchase all unsubscribed for Units; and
WHEREAS, the Company has reserved for issuance, and has authorized the
issuance of, an aggregate number of authorized and unissued shares of Common
Stock (the "Underlying Shares") and Class B Warrants equal to the aggregate
number of Rights to be distributed pursuant to the Rights Offering; and
WHEREAS, Rights holders will be entitled to subscribe to purchase, at a
per Unit price of $5.00 (the "Subscription Price"); and
WHEREAS, the Company desires the Subscription Agent to act on its
behalf in connection with the Rights Offering as set forth herein, and the
Subscription Agent is willing so to act.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto hereby agree as follows:
SECTION 1. Appointment of Subscription Agent. The Company hereby
appoints the Subscription Agent to act as agent for the Company in accordance
with the instructions set forth in this Agreement, and the Subscription Agent
hereby accepts such appointment. The Company may from time to time appoint such
co-subscription agents as it may deem necessary or desirable.
<PAGE>
SECTION 2. Issue of Securities.
(a) The Company has distributed or will distribute the Rights
to holders of record of shares of Common Stock as of the close of business on
the Record Date. The Company will promptly notify the Subscription Agent upon
the effectiveness of the Registration Statement. As transfer agent for the
shares of Common Stock, the Subscription Agent shall provide such assistance as
the Company may require in order to effect the distribution of the Rights to
holders of record of shares of Common Stock as of the close of business on the
Record Date, it being understood that Rights Certificates (as defined in Section
3(b) hereof) shall be mailed to record holders (except those located in
_________________________) of the Common Stock together with a copy of the
Prospectus no later than two business days following the Effective Date.
(b) The Company has authorized the issuance of and will hold
in reserve the Underlying Shares, and upon the valid exercise of Rights, the
Company will issue Underlying Shares and Class B Warrants to validly exercising
Rights holders as set forth in the Registration Statement.
SECTION 3. Subscription Privilege; Form of Subscription Certificates.
(a) Each Right carries with it a Subscription Privilege,
pursuant to which the holder of such Right, upon the valid exercise of the Right
pursuant to Section 7 hereof, has the right to purchase from the Company one
Underlying Share and one Class B Warrant for the Subscription Price.
(b) The Rights shall be evidenced by subscription certificates
(the "Subscription Certificates"). The Subscription Certificates (and the form
of election to exercise or transfer Rights to be printed on the reverse thereof)
shall be substantially in the form attached as Exhibit A hereto. Neither the
Subscription Certificates, nor the Rights represented thereby, shall be
transferable.
SECTION 4. Signature and Registration.
(a) The Subscription Certificates shall be executed on behalf
of the Company by two of its executive officers. Any Subscription Certificate
may be signed on behalf of the Company by any person who, at the actual date of
the execution of such Subscription Certificate, shall be a proper officer of the
Company to sign such Subscription Certificate, even if at the date of the
execution of this Agreement or the date of the actual issuance of such
certificate any such person is not such an officer.
(b) The Subscription Agent will keep or cause to be kept, at
its principal offices in New York, books for registration and transfer of the
Rights issued hereunder. Such books shall show the names and addresses of the
respective holders of the Rights and the number of Rights evidenced by each
outstanding Subscription Certificate.
2
<PAGE>
SECTION 5. Mutilated, Destroyed, Lost or Stolen Subscription
Certificates. Upon receipt by the Company and the Subscription Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Subscription Certificate, and, in case of loss, theft or destruction, of
indemnity and/or security satisfactory to them which may be in the form of an
open penalty bond, and reimbursement to the Company and the Subscription Agent
of all reasonable expenses incidental thereto, and upon surrender and
cancellation of the Subscription Certificate if mutilated, the Company will make
and deliver a new Subscription certificate of like tenor to the Subscription
Agent for delivery to the registered owner in lieu of the Subscription
Certificate so lost, stolen, destroyed or mutilated. If required by the Company
or the Subscription Agent, an indemnity bond must be sufficient in the judgment
of both to protect the Company, the Subscription Agent or any agent thereof from
any loss which any of them may suffer if a Subscription Certificate is replaced.
SECTION 6. Subsequent Issue of Subscription Certificates. Subsequent to
their original issuance, no Subscription Certificates shall be issued except
such Subscription Certificates issued in replacement of mutilated, destroyed,
lost or stolen Subscription Certificates pursuant to Section 5 hereof.
SECTION 7. Exercise of Rights; Exercise Price; Expiration Date.
(a) The holder of any Subscription Certificate may exercise
some or all of the Rights evidenced thereby (but not in amounts of less than one
Right or an integral multiple thereof) by delivering to the Subscription Agent,
on or prior to 5:00 p.m., New York time, on ____________ (the "Expiration
Date"), a properly completed and executed Subscription Certificate evidencing
such Rights if the holder of such right has provided special delivery
instructions on Form 2 of the Subscription Certificate) together with payment of
the Subscription Price for each Underlying Share subscribed for pursuant to the
Subscription Privilege. In the case of holders of Rights that are held of record
through The Depository Trust Company ("DTC"), exercises of the Subscription
Privilege may be effected by instructing DTC to transfer Rights (such rights
being "DTC Exercised Rights") from the DTC account of such holder to the DTC
account of the Subscription Agent, together with payment of the Subscription
Price for each Underlying share subscribed for pursuant to the Subscription
Privilege.
3
<PAGE>
(b) The Rights shall expire at 5:00 p.m., New York time, on
the Expiration Date.
(c) The "Subscription Price" shall be $5.00 per Unit
subscribed for pursuant to the Subscription Privilege payable (in United States
dollars) (i) by certified check or bank check drawn upon a U.S. bank or postal,
telegraphic or express money order payable to the Subscription Agent, or (ii) by
wire transfer of funds to the account maintained by the Subscription Agent for
such purpose at _________________________. The Subscription Price shall be
deemed to have been received by the Subscription Agent only upon (i) receipt by
the Subscription Agent of any certified check or bank check drawn upon a U.S.
bank or of any postal, telegraphic or express money order or (ii) receipt of
good funds in the Subscription Agent's account designated above, in payment of
the Subscription Price.
(d) If an exercising Rights holder has not indicated the
number of Rights being exercised, or if the Subscription Price payment forwarded
by such holder to the Subscription Agent is not sufficient to purchase the
number of Units subscribed for, the Rights holder will be deemed to have
exercised the Subscription Privilege with respect to the maximum number of whole
Rights which may be exercised for the Subscription Price delivered to the
Subscription Agent and, to the extent that the Subscription Price payment
delivered by such holder exceeds the Subscription Price multiplied by the number
of Rights exercised (such excess being the "Subscription Excess"), the
Subscription Agent will refund the Subscription Excess to such Rights holder
without interest or deduction.
4
<PAGE>
(e) Once a holder of Rights has exercised a Right, such
exercise may not be revoked.
SECTION 8. Payment for Units, Delivery of Units, Refund and
Subscription Excess.
(a) The closing of the sale of the Units upon exercise of the
Rights (the "Closing") will take place at 10:00 a.m., New York time, on the
third business day after the Underwriter receives notice from the Subscription
Agent as to the number of unsubscribed Units for which it is committed to
purchase (such date and time being referred to herein as the "Closing Date"). At
the Closing, the Subscription Agent shall pay to the Company and/or its
designees as specified in writing, by wire transfer, certified or bank check or
other method acceptable to the Company and/or its designees, the amount of all
funds received by the Subscription Agent in payment of the Subscription Price
for Underlying Shares subscribed for pursuant to the Subscription Privilege less
the aggregate Refund due to the Rights holders who exercise Rights.
Notwithstanding the foregoing, the closing shall occur regardless of whether or
not the Underwritten Public Offering occurs.
(b) The Company shall deliver, or arrange to have delivered,
at the closing the number of Units as are properly subscribed for pursuant to
the Rights Offering and as soon as practicable after the Closing, the
Subscription Agent shall deliver to each exercising Rights holder certificate(s)
representing the shares of Common Stock purchased and Class B Warrants pursuant
to the Subscription Privilege.
SECTION 9. Fractional Rights and Shares.
(a) The Company shall not issue fractions of shares nor shall
the Subscription Agent distribute Subscription Certificates which evidence
fractional Rights. The number of Rights issued to each holder will be rounded
down to the nearest lower whole number.
(b) The Company shall not issue fractional shares of Common
Stock or Warrants to exercising Rights holders upon exercise and acceptance of
Rights.
SECTION 10. Transferability of Rights. The Rights are non-transferable.
SECTION 11. Reports. The Subscription Agent shall notify both the
Company and its designated representatives by telephone as requested during the
period commencing with the mailing of Subscription Certificates and ending on
the Expiration Date (and in the case of guaranteed deliveries pursuant to
Section 7(b), the period ending two NASDAQ trading days after the Expiration
Date), which notice shall thereafter be confirmed in writing, of (i) the number
of Rights exercised on the day of such request, (ii) the number of Units
5
<PAGE>
subscribed for pursuant to the Subscription Privilege and the number of such
Rights for which payment has been received, (iii) the number of Rights subject
to guaranteed delivery pursuant to Section 7(b) on such day, (iv) the number of
Rights for which defective exercises have been received on such day and (v)
cumulative totals derived from the information set forth in clauses (i) through
(iv) above. At or before 5:00 p.m., New York time, on the first NASDAQ trading
day following the Expiration Date, the Subscription Agent shall certify in
writing to the Company the cumulative totals through the Expiration Date derived
from the information set forth in clauses (i) through (iv) above. The
Subscription Agent shall also maintain and update a listing of holders who have
fully or partially exercised their Rights, and holders who have not exercised
their Rights. The Subscription Agent shall provide the Company or its designated
representatives with the information compiled pursuant to this Section 11 as any
of them shall request.
SECTION 12. Future Instructions and Interpretation.
(a) All questions as to the timeliness, validity, form and
eligibility of any exercise of Rights will be determined by the Company and the
Underwriter, whose determinations shall be final and binding. The Company in its
sole discretion may waive any defect or irregularity, permit a defect or
irregularity to be corrected within such time as it may determine or reject the
purported exercise of any Right. Subscriptions will not be deemed to have been
received or accepted until all irregularities have been waived or cured within
such time as the Company determines in its sole discretion. Neither the Company
nor the subscription Agent shall be under any duty to give notification of any
defect or irregularity in connection with the submission of Subscription
Certificates or incur any liability for failure to give such notification.
(b) The Subscription Agent is hereby authorized and directed
to accept instructions with respect to the performance of its duties hereunder
from an authorized officer of the Company, and to apply to such officers for
advice or instructions in connection with its duties, and it shall not be liable
for any action taken or suffered to be taken by it in good faith in accordance
with instructions of any such officer.
SECTION 13. Payment of Taxes. The Company covenants and agrees that it
will pay when due and payable all documentary, stamp and other taxes, if any,
which may be payable in respect of the issuance or delivery of any Subscription
Certificate or of the Underlying Shares and Class B Warrants; provided, however,
that the Company shall not be liable for any tax liability arising out of any
transaction which results in, or is deemed to be, an exchange of Rights or
securities or a constructive dividend with respect to the Rights or securities
and provided further that the Company shall not be required to pay any tax or
other governmental charge which may be payable in respect of any delivery of any
Subscription Certificate or the issuance or delivery of certificates for shares
of Common Stock or Class B Warrants in a name other than that of the registered
holder of such Subscription Certificate evidencing the Rights exercised, and the
Subscription Agent shall not issue any such certificate until such tax or
governmental charge, if required, shall have been paid.
6
<PAGE>
SECTION 14. Cancellation and Destruction of Subscription Certificates.
All Subscription Certificates surrendered for the purpose of exercise or
substitution shall be canceled by the Subscription Agent, and no Subscription
Certificates shall be issued in lieu thereof except as expressly permitted by
provisions of this Agreement. The Subscription Agent shall deliver all canceled
Subscription Certificates to the Company, or shall, at the written request of
the Company, destroy such canceled Subscription Certificates, and in such case
shall deliver a certificate of destruction thereof to the Company.
SECTION 15. Right of Action. All rights of action in respect of this
Agreement are vested in the Company and the respective registered holders of the
Subscription Certificates; and any registered holder of any Subscription
Certificate, without the consent of the Subscription Agent or of the holder of
any other Subscription Certificate, may, on his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Subscription Certificate in the manner
provided in such Subscription Certificate and in this Agreement.
SECTION 16. Concerning the Subscription Agent.
(a) The Company agrees to pay to the Subscription Agent
compensation in the amount of $_____________ for all services rendered by it
hereunder and, from time to time, on demand of the Subscription Agent, its
reasonable out-of-pocket expenses and disbursements for mailing, postage and
delivery. The Company also agrees to indemnify the Subscription Agent for, and
to hold it harmless against, any loss, liability, or expense incurred without
negligence or bad faith on the part of the Subscription Agent for anything done
or omitted by the Subscription Agent in connection with the acceptance and
administration of this Agreement, including the costs and expenses of defending
against any claim of liability in the premises, provided that the Subscription
Agent shall have provided the Company with notice of any such claim promptly
after such claim became known to the Subscription Agent, and provided further
that the Company shall have the right to assume the defense of any such claim
upon receipt of written notice thereof from the Subscription Agent. If the
Company assumes the defense of any such claim, the Subscription Agent shall be
entitled to participate in (but not control) the defense of any such claim at
its own expense. The Company shall not indemnify the Subscription Agent with
respect to any claim or action settled without its consent, which consent shall
not be unreasonably withheld.
(b) The Subscription Agent shall be protected and shall incur
no liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any
Subscription Certificate, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice direction, consent,
certificate, statement or other paper or document reasonable believed by it to
be genuine and to be signed, executed and, where necessary verified or
acknowledged by the proper person or persons.
SECTION 17. Merger or Consolidation of Subscription Agent. Any
corporation into which the Subscription Agent or any successor Subscription
Agent may be merged or with which it may be consolidated or any corporation
resulting from any merger or consolidation to which the Subscription Agent
7
<PAGE>
or any successor Subscription Agent shall be a party, or any corporation
succeeding to the corporate trust business of the Subscription Agent or any
success or Subscription Agent, shall be the successor to the Subscription Agent
under this Agreement without the execution or filing of any paper or any further
act on the part of any of the parties hereto.
SECTION 18. Duties of Subscription Agent. The Subscription Agent
undertakes the duties and obligations imposed by this Agreement upon the
following terms and conditions, by all of which the Company and the holders of
Subscription Certificates by their acceptance thereof shall be bound:
(a) The Subscription Agent may consult with legal counsel (who
may be, but is not required to be, legal counsel for the Company), and the
opinion of such counsel shall be full and complete authorization and protection
to the Subscription Agent as to any actions taken or omitted by it in good faith
and in accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Subscription Agent shall deem it necessary or desirable that any
fact or matter be proved or established by the Company prior to taking or
suffering any action hereunder, such fact or matter (unless other evidence in
respect thereof be herein specifically prescribed) may be deemed to be
conclusively proved and established by a certificate signed by the Chairman of
the Board, the President or a Vice President (including any Senior or Executive
Vice President) and by the Treasurer or any Assistant Treasurer or the Secretary
or any Assistant Secretary of the Company and delivered to the Subscription
Agent; and such certificate shall be full authorization to the Subscription
Agent for any action taken or suffered in good faith by it under the provisions
of this Agreement in reliance upon such certificate.
(c) The Subscription Agent shall be liable hereunder only for
its own negligence or willful misconduct.
(d) The Subscription Agent shall not be liable for or by
reason of any of the statements of fact or recitals contained in this Agreement
or in the Subscription Certificates or be required to verify the same, but all
such statements and recitals are and shall be deemed to have been made by the
Company only.
(e) The Subscription Agent shall not be under any
responsibility in respect of the validity of this Agreement or the execution and
delivery hereof (except the due execution hereof by the Subscription Agent) or
in respect of the validity or execution of any Subscription Certificate; nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Subscription Certificate; nor
shall it by any act hereunder be deemed to make any representation or warranty
as to the authorization or reservation of any shares of Common Stock to be
issued pursuant to this Agreement or any Subscription Certificate or as to
whether any shares of Common Stock will, when issued, be validly authorized and
issued, fully paid and non-assessable.
8
<PAGE>
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Subscription Agent for the carrying out or
performing by the Subscription Agent of the provisions of this Agreement.
(g) Nothing herein shall preclude the Subscription Agent from
acting in any other capacity for the Company.
SECTION 19. Notices to the Company, Holders, Royce Investment Group,
Inc. and Subscription Agent. All notices and other communications provided for
or permitted hereunder shall be made by hand delivery, prepaid first-class mail,
or telecopier:
(a) If to the Company, to:
Eastco Industrial Safety Corp.
130 West 10th Street
Huntington Station, NY 11746
Att: Anthony P. Towell
Telecopier: (516) 427-1840
with copies to:
Hollenberg Levin Solomon Ross Belsky & Daniels, LLP
585 Stewart Avenue, Suite 700
Garden City, NY 11530
Att: Herbert W. Solomon, Esq.
Telecopier: (516) 745-6642
Royce Investment Group, Inc.
199 Crossways Park Drive
Woodbury, New York 11797
Att: John Higgins, Vice-President of
Corporate Finance
Telecopier: (516) 364-2518
Lester Morse, P.C.
111 Great Neck Road
Great Neck, New York 11021
Att: Steve Morse, Esq.
Telecopier: (516) 487-1452
9
<PAGE>
(b) if to the Subscription Agent, to:
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
Att: Executive Vice-President
Telecopier: (718) 234-5001
(c) if to a registered holder, at the address shown on the
registry books of the Company.
All such notices and communications shall be deemed to have
been duly given: when delivered by hand, if personally delivered; two business
days after being deposited in the mail, postage prepaid, if mailed as aforesaid;
when answered back if telexed; and when receipt is acknowledged, if telecopied.
SECTION 20. Supplements and Amendments. The Company and the
Subscription Agent may from time to time supplement or amend this Agreement
without the approval of any holders of Subscription Certificates in order to
cure any ambiguity or to correct or supplement any provision contained herein
which may be defective or inconsistent with any other provision herein, or to
make any other provisions in regard to matters or questions arising hereunder
which the Company and the Subscription Agent may deem necessary or desirable and
which shall not materially adversely affect the interests of the holders of the
Subscription Certificates.
SECTION 21. Successors. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Subscription Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder.
SECTION 22. Termination. This Agreement shall terminate at 5: 00 p.m.,
New York time, on the seventh day following the Expiration Date. Upon
termination of this Agreement, and provided that all shares of Common Stock and
Class B Warrants for Rights accepted for execution prior to such termination are
issued and delivered by the Company, the Company shall be discharged from all
obligations under this Agreement except for its obligations to the Subscription
Agent under Sections 13 and 16 hereof and except with respect to the obligation
of the Company to provide instruction and direction to the Subscription Agent as
may be provided in this Agreement.
SECTION 23. Governing Law. This Agreement and each Subscription
Certificate 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 internal
laws of said State.
SECTION 24. Benefits of This Agreement. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Subscription Agent and the holders of the Subscription Certificates any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Subscription Agent and
the holders of the Subscription Certificates.
10
<PAGE>
SECTION 25. 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, but all such counterparts shall together constitute one and
the same instrument.
SECTION 26. Descriptive Headings. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF the undersigned have caused this Subscription Agency
Agreement to be executed by their duly authorized representative as of the date
first above written.
EASTCO INDUSTRIAL SAFETY CORP.
By:_________________________________
Name:
Title:
AMERICAN STOCK TRANSFER & TRUST COMPANY
By:________________________________
Name:
Title:
11
<PAGE>
NUMBER WARRANTS
VOID AFTER
EWB EASTCO INDUSTRIAL SAFETY CORP.
CLASS B COMMON STOCK WARRANT CERTIFICATE
CUSIP 276162 12 0
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Class B Common Stock Warrants (the "Warrants") specified above. Each Warrant
initially entitles the Registered Holder to purchase, subject to the terms and
conditions set forth in this Certificate and the Warrant Agreement (as
hereinafter defined), one fully paid and non-assessable share of Common Stock,
$.12 par value, of Eastco Industrial Safety Corp., a New York corporation (the
"Company"), at any time from ___________ __, 1996 and prior to the Expiration
Date (as hereinafter defined) upon the presentation and surrender of this
Warrant Certificate with the Subscription Form on the reverse hereof duly
executed, at the corporate office of American Stock Transfer & Trust Company, 40
Wall Street, New York, New York 10005, as Warrant Agent, or its successor (the
"Warrant Agent"), accompanied by payment of $6.25, subject to adjustment (the
"Purchase Price"), in lawful money of the United States of America by certified
or Bank check made payable to the Warrant Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated _________ __,
1996, by and between the Company and the Warrant Agent.
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price and the number of shares of Common Stock subject
to purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the Warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 P.M. (New York time) on ________
__, 1999. If such date shall in the State of New York be Saturday, Sunday, or a
holiday or a day on which the banks are authorized to close, then the Expiration
Date shall mean 5:00 P.M. (New York time) the next following day which in the
State of New York is not Saturday, Sunday, or a holiday or a day on which banks
are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933 (the "Act"), with respect to such securities is effective
or an exemption thereunder is available. The Company has covenanted and agreed
that, if required by the Act, it will file a registration statement under the
Act, use its best efforts to cause the same to become effective, to keep such
registration statement current, if required under the Act, while any of the
Warrants are outstanding, and deliver a prospectus which complies with Section
10(a)(3) of the Act to the Registered Holder exercising this Warrant. This
Warrant shall not be exercisable by a Registered Holder in any state where such
exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
or Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement. Commencing on ________ __, 1998, but no
sooner than 12 months after the Warrants become exercisable the Warrants are
subject to redemption under the terms set forth in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
<PAGE>
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations or ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in the
Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to the conflicts of
laws principles thereof.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
DATED: EASTCO INDUSTRIAL SAFETY CORP.
CORPORATE
SEAL
1958
NEW YORK
/s/ Anthony P. Towell EASTCO INDUSTRIAL SAFETY CORP.
- ----------------------
Anthony P. Towell /s/ Alan Densen
Secretary ----------------------
Alan Densen, President
<PAGE>
To be Executed by the Holder in Order to Exercise Warrants
The undersigned Holder hereby irrevocably elects to exercise _________________
Warrants represented by this Warrant Certificate, and to purchase the securities
issuable upon the exercise of such Warrants, and requests that certificates or
such securities shall be issued in the name of: ________________________________
________________________________________________________________________________
(PRINTED NAME OF HOLDER)
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF HOLDER
__________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
and be delivered to: ___________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME(S) AND ADDRESS, INCLUDING ZIP CODE)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Holders at the
address stated below.
Dated _____________________ __________________________________
(SIGN EXACTLY AS NAME(S) APPEARS
ON THE OTHER SIDE OF THIS WARRANT)
__________________________________
(PRINTED NAME OF HOLDER)
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF HOLDER
__________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME(S) AND ADDRESS, INCLUDING ZIP CODE)
________________________________________________________________________________
________________________________________________________________________________
SIGNATURE(s) GUARANTEED: _______________________________________________________
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. The exercise of this Warrant was solicited by Royce
Investment Group, Inc. [ ]
2. The exercise of this Warrant was solicited by __________________. [ ]
3. If the exercise of this Warrant was not solicited, please
check the following box. [ ]
Dated _____________________ __________________________________
(Sign exactly as name(s) appears
on the other side of this Warrant)
__________________________________
__________________________________
Address
__________________________________
Social Security or Taxpayer
Identification Number
Signature(s) Guaranteed: _______________________________________________________
ASSIGNMENT
To be Executed by the Holder in Order to Assign Warrants
FOR VALUE RECEIVED, ____________________________________________________________
hereby sells, assigns and transfers unto:
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF HOLDER
__________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME(S) AND ADDRESS, INCLUDING ZIP CODE)
________________________________________________________________________________
____________________________________________ of the Warrants represented by this
Warrant Certificate, and hereby irrevocably constitutes and appoints ___________
__________________________________ Attorney to transfer this Warrant Certificate
on the books of the Warrant Agent, with full power of substitution in the
premises.
<PAGE>
Dated _____________________ __________________________________
(SIGN EXACTLY AS NAME(S) APPEARS
ON THE OTHER SIDE OF THIS WARRANT)
SIGNATURE(s) GUARANTEED: _______________________________________________________
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF HOLDER
__________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME(S) AND ADDRESS, INCLUDING ZIP CODE)
________________________________________________________________________________
________________________________________________________________________________
THE SIGNATURE ON THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE
GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM). PURSUANT TO S.E.C.RULE 17Ad-15.
<PAGE>
AGREEMENT, dated this ______ day of _____________, 1996 between EASTCO
INDUSTRIAL SAFETY CORP., a New York corporation with offices at 130 West 10th
Street, Huntington Station, New York 11746 (the "'Company"), and AMERICAN STOCK
TRANSFER & TRUST COMPANY, as Warrant Agent, with offices at 40 Wall Street, New
York, New York 10005 (the "Warrant Agent").
W I T N E S S E T H :
WHEREAS, in connection with (i) the offering (the "Public Offering") to
the shareholders of the Company and the public of up to 703,591 shares (the
"Shares") of the Company's common stock, $.12 par value ("Common Stock"), and
703,591 Class B redeemable Common Stock Purchase Warrants (the "Redeemable
Warrants"), entitling the holder of each Redeemable Warrant to purchase one
share of Common Stock, (ii) the option to purchase up to an additional 300,000
shares of Common Stock and 300,000 Redeemable Warrants (the "Optional Units"),
and (iii) the sale to Royce Investment Group, Inc., its successors and assigns
("Royce" or the "Underwriter") of warrants (the "Underwriter's Warrants") to
purchase up to 70,359 shares of Common Stock and 70,359 Redeemable Warrants,
such Redeemable Warrants being identical to the Redeemable Warrants being sold
to the public, it being understood that any change in the terms of the
Redeemable Warrant will likewise cause an identical change in the terms of the
Common Stock Warrants(the Warrants issuable upon the exercise of the
Underwriter's Warrants are referred to as the "Common Stock Warrants"), the
Company will issue up to 703,591 Redeemable Warrants, 70,359 Common Stock
Warrants and the Underwriter's Warrants (subject to increase as provided in the
Underwriter's Warrant Agreement); and
<PAGE>
WHEREAS, the Company desires to provide for the issuance of
certificates representing the Redeemable Warrants and the Common Stock Warrants
(collectively, the Redeemable Warrants and the Common Stock Warrants shall be
referred to herein as the "Warrants"); and
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing to so act, in connection
with the issuance, registration, transfer and exchange of certificates
representing the Warrants and the redemption and exercise of the Warrants.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements hereinafter set forth and for the purpose of defining the
terms and provisions of the Warrants and the respective rights and obligations
thereunder of the Company, the Underwriter, the holders of certificates
representing the Warrants and the Warrant Agent, the parties hereto agree as
follows:
SECTION 1. Definitions. As used herein, the following terms shall have
the following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean stock of the Company of any class,
whether now or hereafter authorized, which has the right to participate in the
voting and in the distribution of earnings and assets of the Company without
limit as to amount or percentage.
(b) "Corporate Office" shall mean the office of the Warrant Agent
(or its successor) at which at any particular time its principal business shall
be administered, which office is located on the date hereof at 40 Wall Street,
New York, NY 10005.
2
<PAGE>
(c) "'Effective Date" shall mean the effective date of the Registration
Statement.
(d) "Exercise Date" shall mean, subject to the provisions of Section
5(b) hereof, as to any Warrant, the date on which the Warrant Agent shall have
received both (i) the Warrant Certificate representing such Warrant, with the
exercise form thereon duly executed by the Registered Holder hereof or his
attorney duly authorized in writing, and (ii) payment in cash or by certified or
bank check made payable to the Warrant Agent for the account of the Company, of
the amount in lawful money of the United States of America equal to the
applicable Purchase Price.
(e) "Initial Warrant Exercise Date" shall mean _____________________,
1998 (12 months after the Effective Date of the Registration Statement or sooner
with the consent of Royce, but no sooner than nine months after the Effective
Date).
(f) "Initial Warrant Redemption Date" shall mean __________, 1998 (18
months after the Effective Date of the Registration Statement but no sooner than
12 months after the Initial Warrant Exercise Date).
(g) "Purchase Price" shall mean $6.25 for the Warrants subject in each
case to modification and adjustment as provided in Section 8, and further
subject to Company's right, with the prior written consent
3
<PAGE>
of the Underwriter, to decrease the Purchase Price for a period of not less than
30 days on not less than 30 days prior written notice to the Registered Holders.
(h) "Registered Holder" shall mean the person in whose name any
certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(i) "Registration Statement" shall mean the registration statement,
as amended, as filed by the Company on Form SB-2 with the Securities and
Exchange Commission under File No. 333-09517.
(j) "Subsidiary" or "Subsidiaries" shall mean any corporation or
corporations, as the case may be, of which stock having ordinary power to elect
a majority of the Board of Directors of such corporation (regardless of whether
or not at the time stock of any other class or classes of such corporation shall
have or may have voting power by reason of the happening of any contingency) is
at the time directly or indirectly owned by the Company or by one or more
Subsidiaries, or by the Company and one or more Subsidiaries.
(k) "Transfer Agent" shall mean American Stock Transfer & Trust
Company or its authorized successor.
(l) "Standby Agreement" shall mean the standby agreement dated
_________, 1996 between the Company and the Underwriter, relating to the Rights
Offering and Standby Commitment for the Company to issue and sell its shares and
its Redeemable Warrants.
(m) "Underwriter's Warrant Agreement" shall mean the Unit Purchase
Option dated as of ______________, 1996 between the
4
<PAGE>
Company and the Underwriter relating to and governing the terms and provisions
of the Underwriter's Warrants.
(n) "Warrant Certificate" shall mean a certificate representing
Warrants substantially in the form annexed hereto as Exhibit A.
(o) "Warrant Expiration Date" shall mean, unless the Warrants are
redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (New York
City Time) on ________________, 1999, or if such date shall in the State of New
York be a Saturday, Sunday, holiday or a day on which banks are authorized to
close, then 5:00 p.m. (New York City Time) on the next following day which in
the State of New York is not a Saturday, Sunday, holiday or a day on which banks
are authorized to close, subject to the Company's right, prior to the Warrant
Expiration Date, in its sole discretion, to extend such Warrant Expiration Date
on five business days prior written notice to the Registered Holders.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) One Warrant shall initially entitle the Registered Holder of
the Warrant Certificate representing such Warrant to purchase at the Purchase
Price therefor from the Initial Warrant Exercise Date until the Warrant
Expiration Date one share of Common Stock upon the exercise thereof, subject to
modification and adjustment as provided in Section 8.
(b) Upon execution of this Agreement, Warrant Certificates
representing 703,591 Redeemable Warrants to purchase up to an aggregate of
703,591 shares of Common Stock (subject to
5
<PAGE>
modification and adjustment as provided in Section 8) shall be executed by the
Company and delivered to the Warrant Agent.
(c) Upon exercise of the Optional Units, in whole or in part, Warrant
Certificates representing up to 300,000 Redeemable Warrants to purchase up to an
aggregate of 300,000 shares of Common Stock (subject to modification and
adjustment as provided in Section 8) shall be executed by the Company and
delivered to the Warrant Agent.
(d) Upon exercise of the Underwriter's Warrants as provided therein,
Certificates representing 70,359 shares of Common Stock and 70,359 Common Stock
Warrants (identical to the Redeemable Warrants in all respects) to purchase up
to an aggregate of 70,359 shares of Common Stock (subject to modification and
adjustment as provided in Section 8 hereof and in the Underwriter's Warrant
Agreement), shall be countersigned, issued and delivered by the Warrant Agent
upon written order of the Company signed by its Chairman of the Board, Chief
Executive Officer, or President and by its Treasurer or an Assistant Treasurer
or its Secretary or an Assistant Secretary.
(e) From time to time until the Warrant Expiration Date, the Warrant
Agent shall countersign and deliver Warrant Certificates in required
denominations of one or whole number multiples thereof to the person entitled
thereto in connection with any transfer or exchange permitted under this
Agreement. Except as provided in Section 7 hereof, no Warrant Certificates shall
be issued except (i) Warrant Certificates initially issued hereunder, (ii)
Warrant Certificates issued upon any transfer or exchange of
6
<PAGE>
Warrants, (iii) Warrant Certificates issued in replacement of lost, stolen,
destroyed or mutilated Warrant Certificates pursuant to Section 7, (iv) Warrant
Certificates issued pursuant to the Underwriter's Warrant Agreement (including
Common Stock Warrants in excess of the 70,359 Common Stock Warrants initially
issuable upon exercise of the Underwriter's Warrants and any Warrants issued as
a result of the anti-dilution provisions contained in the Underwriter's Warrant
Agreement), and (v) at the option of the Company, Warrant Certificates in such
form as may be approved by its Board of Directors, to reflect any adjustment or
change in the Purchase Price, the number of shares of Common Stock purchasable
upon exercise of the Warrants or the Redemption Price therefor made pursuant to
Section 8 hereof.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates evidencing the Redeemable Warrants
shall be substantially in the form annexed hereto as Exhibit A (the provisions
of which are hereby incorporated herein), and may have such letters, numbers or
other marks of identification or designation and such legends, summaries or
endorsements printed, lithographed or engraved thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any law or with any rule or regulation made
pursuant thereto or with any rule or regulation of any stock exchange on which
the Warrants may be listed, or to conform to usage. The Warrant Certificates
shall be dated the date of issuance thereof (whether upon initial issuance,
7
<PAGE>
transfer, exchange or in lieu of mutilated, lost, stolen or destroyed Warrant
Certificates).
(b) Warrant Certificates shall be executed on behalf of the Company
by its Chairman of the Board, Chief Executive Officer, or President and by its
Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary,
by manual signatures or by facsimile signatures printed thereon. Warrant
Certificates shall be manually countersigned by the Warrant Agent and shall not
be valid for any purpose unless so countersigned. In case any officer of the
Company who shall have signed any of the Warrant Certificates shall cease to be
such officer of the Company before the date of issuance of the Warrant
Certificates or before countersignature by the Warrant Agent and issue and
delivery thereof, such Warrant Certificates, nevertheless, may be countersigned
by the Warrant Agent, issued and delivered with the same force and effect as
though the person who signed such Warrant Certificates had not ceased to be such
officer of the Company.
SECTION 4. Exercise.
(a) Warrants in denominations of one or whole number multiples
thereof may be exercised commencing at any time on or after the Initial Warrant
Exercise Date, but not after the Warrant Expiration Date, upon the terms and
subject to the conditions set forth herein (including the provisions set forth
in Sections 5 and 9 hereof) and in the applicable Warrant Certificate. A Warrant
shall be deemed to have been exercised immediately prior to the close of
business on the Exercise Date, provided that the Warrant
8
<PAGE>
Certificate representing such Warrant, with the exercise form thereon duly
executed by the Registered Holder thereof or his attorney duly authorized in
writing, together with payment in cash or by certified or bank check made
payable to the Warrant Agent for the account of the Company, of an amount in
lawful money of the United States of America equal to the applicable Purchase
Price has been received in good funds by the Warrant Agent. The person entitled
to receive the securities deliverable upon such exercise shall be treated for
all purposes as the holder of such securities as of the close of business on the
Exercise Date. If Warrants in denominations other than one or whole number
multiples thereof shall be exercised at one time by the same Registered Holder,
the number of full shares of Common Stock which shall be issuable upon exercise
thereof shall be computed on the basis of the aggregate number of full shares of
Common Stock issuable upon such exercise. As soon as practicable on or after the
Exercise Date and in any event within five business days after such date, if one
or more Warrants have been exercised, the Warrant Agent on behalf of the Company
shall cause to be issued to the person or persons entitled to receive the same,
a Common Stock certificate or certificates for the shares of Common Stock
deliverable upon such exercise, and the Warrant Agent shall deliver the same to
the person or persons entitled thereto. Upon the exercise of any one or more
Warrants, the Warrant Agent shall promptly notify the Company and Royce in
writing of such fact and of the number of securities delivered upon such
exercise and, subject to subsection (b) below, shall cause all
9
<PAGE>
payments of an amount in cash or by certified or bank check made payable to the
order of the Company, equal to the Purchase Price, to be deposited promptly in
the Company's bank account.
(b) If at the time of exercise of any Warrant, but no earlier than
one year after the Effective Date (i) the market price of the Company's Common
Stock is greater than the then Purchase Price of the Warrant, (ii) the exercise
of the Warrant is solicited by Royce or another broker-dealer who is at such
time is a member of the National Association of Securities Dealers, Inc.
("NASD"), (iii) the Warrant is not held in a discretionary account, (iv)
disclosure of the compensation arrangement is made at the time of the Public
Offering and in documents provided to the holders of the Warrants, and (v) the
solicitation of the exercise of the Warrant is not in violation of Rule 10b-6
(as such rule or any successor rule may be in effect as of such time of
exercise) promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"), then Royce shall be entitled to receive from the Company upon exercise of
each of the Warrants so exercised a fee (the "Exercise Fee") of seven percent
(7%) of the aggregate Purchase Price of the Warrants so exercised commencing in
the second year following the date of issuance. The procedures for payment of
the warrant solicitation fee are set forth in Section 5(c) below.
(c) (1) Within ten (10) days after the last day of each month
commencing with the Initial Warrant Exercise Date, the
10
<PAGE>
Warrant Agent will notify Royce of each Warrant Certificate which has been
properly completed for exercise by holders of Warrants during the last month.
The Company and Warrant Agent shall determine, in their sole and absolute
discretion, whether a Warrant Certificate has been properly completed. The
Warrant Agent will provide Royce with such information in connection with the
exercise of each Warrant as Royce shall reasonably request.
(2) The Company hereby authorizes and instructs the Warrant Agent
to deliver to Royce the Exercise Fee promptly after receipt by the Warrant Agent
from the Company of a check payable to the order of Royce in the amount of the
Exercise Fee. In the event that an Exercise Fee is paid to Royce with respect to
a Warrant which the Company or the Warrant Agent determines is not properly
completed for exercise or in respect of which Royce is not entitled to an
Exercise Fee, Royce will be instructed by the Warrant Agent to return such
Exercise Fee to the Warrant Agent which shall forthwith return such fee to the
Company.
While the Redeemable Warrants are outstanding, Royce and the
Company may at any time during business hours, examine the records of the
Warrant Agent, including its ledger of original Warrant certificates returned to
the Warrant Agent upon exercise of Warrants. Notwithstanding any provision to
the contrary, the provisions of Section 4(b) and 4(c) may not be modified,
amended or deleted without the prior written consent of Royce.
(d) The Company shall not be obligated to issue any fractional
share interests or fractional warrant interests upon the
11
<PAGE>
exercise of any Warrant or Warrants, nor shall it be obligated to issue scrip in
lieu of fractional interests. However, the Company shall pay the Registered
Holder of any fractional warrant interest an amount in cash based upon the
average of the closing sales prices for the Common Stock on the Nasdaq SmallCap
Market (or if applicable NASDAQ National Market) during the ten day trading
period immediately preceding the date of exercise, as determined by the Warrant
Agreement.
SECTION 5. Reservation of Shares: Listing;Payment of Taxes; etc.
(a) The Company covenants that it will at all times reserve and
keep available out of its authorized Common Stock, solely for the purpose of
issuance upon exercise of Warrants, such number of shares of Common Stock as
shall then be issuable upon the exercise of all outstanding Warrants. The
Company covenants that all shares of Common Stock which shall be issuable upon
exercise of the Warrants shall, at the time of delivery thereof, be duly and
validly issued and fully paid and nonassessable and free from all preemptive or
similar rights, taxes, liens and charges with respect to the issue thereof, and
that upon issuance such shares shall be listed on each securities exchange, if
any, on which the other shares of outstanding Common Stock of the Company are
then listed.
(b) The Company covenants that if any securities to be reserved for
the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will file
12
<PAGE>
a registration statement under the federal securities laws or a post-effective
amendment, use its best efforts to cause the same to become effective, keep such
registration statement current while any of the Warrants are outstanding and
deliver a prospectus which complies with Section 10(a)(3) of the Securities Act
of 1933, as amended, to the Registered Holder exercising the Warrant. The
Company will use its best efforts to maintain appropriate approvals or
registrations under state "blue sky" securities laws in states where the Public
Offering is sold. With respect to any such securities, however, Warrants may not
be exercised by, or shares of Common Stock issued to, any Registered Holder in
any state in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes
and other governmental charges that may be imposed with respect to the issuance
of Warrants, or the issuance or delivery of any shares of Common Stock upon
exercise of the Warrants; provided, however, that if shares of Common Stock are
to be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized as the
Transfer Agent to requisition from time to time certificates representing shares
of Common Stock or other securities required
13
<PAGE>
upon exercise of the Warrants, and the Company will comply with all such
requisitions.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants or may be
transferred in whole or in part. Warrant Certificates to be so exchanged shall
be surrendered to the Warrant Agent at its Corporate Office, and the Company
shall execute and the Warrant Agent shall countersign, issue and deliver in
exchange therefor, the Warrant Certificate or Certificates which the Registered
Holder making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at such office, books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof. Upon due presentment for
registration of transfer of any Warrant Certificate at such office, the Company
shall execute and the Warrant Agent shall issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates representing an equal
aggregate number of Warrants.
(c) With respect to any Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription of
exercise form, as the case may be, on the reverse thereof shall be duly endorsed
or be accompanied by a written instrument or instruments of transfer and
subscription, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Registered Holder thereof or his attorney duly authorized in
writing.
14
<PAGE>
(d) No service charge shall be made for any exchange or
registration of transfer of Warrant Certificates. However, the Warrant Agent may
require payment from the Company of a sum sufficient to cover any tax or other
governmental charge that may be imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for
exchange shall be promptly cancelled by the Warrant Agent.
(f) Prior to due presentment for registration or transfer thereof,
the Company and the Warrant Agent may deem and treat the Registered Holder of
any Warrant Certificate as the absolute owner thereof of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than the Company or the Warrant Agent) for all
purposes and shall not be affected by any notice to the contrary.
(g) The Warrant Agent shall not be required to effect any
registration or transfer or exchange which will result in the issuance of a
warrant certificate for a fraction of a warrant.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the
Warrant Agent of evidence satisfactory to them of the ownership of and the loss,
theft, destruction or mutilation of any Warrant Certificate and (in the case of
loss, theft or destruction) of indemnity satisfactory to them, and (in case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall countersign and deliver in lieu thereof a
15
<PAGE>
new Warrant Certificate representing an equal aggregate number of Warrants.
Applicants for a substitute Warrant Certificate shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
SECTION 8. Adjustment of Purchase Price and Number of Shares of Common
Stock Deliverable. Subject and pursuant to the provisions of this Section 8, the
Purchase Price and number of shares of Common Stock issuable upon exercise of
the Warrants shall be subject to adjustment from time to time as hereinafter set
forth:
(a) (i) In case the Company shall sell or issue either any of its
shares of Common Stock or any rights, options, warrants or obligations or
securities containing the right to subscribe for or purchase any shares of
Common Stock ("Options") or exchangeable for or convertible into shares of
Common Stock ("Convertible Securities"), at a price per share, as determined
pursuant to Section 8(b), less than the higher of either the then current market
price per share as determined pursuant to Section 8(a)(ii), or the Purchase
Price then in effect on the date of such sale or issuance, then the number of
shares of Common Stock thereafter issuable upon exercise of the Warrants shall
be determined by multiplying the number of shares of Common Stock theretofore
obtainable upon exercise of the Warrant by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding on the date of
issuance of such shares of Common Stock, Options or Convertible Securities and
the denominator of which
16
<PAGE>
shall be the number of shares of Common Stock outstanding on the date prior to
the date of issuance of such shares of Common Stock or Convertible Securities
plus the number of shares of Common Stock which the aggregate consideration
received by the Company upon such issuance would purchase on such date at the
higher of either the then current market price of the shares of Common Stock as
determined pursuant to Section 8(a)(ii) or the Purchase Price then in effect on
the date of sale or issuance. The Purchase Price shall be proportionately
adjusted upward or downward based upon the increase or decrease in the number of
shares of Common Stock obtainable under the Warrants then outstanding.
(ii) For the purposes of any computation under this Section 8, the
current market price per share at any date shall be the price of shares of
Common Stock on the business day next preceding the event requiring an
adjustment hereunder and shall be (A) if the principal trading market for such
securities is an exchange, the closing price on such exchange on such day
provided if trading of such shares of Common Stock is listed on any consolidated
tape, the price shall be the closing price set forth on such consolidated tape
or (B) if the principal market for such securities is the over-the-counter
market, the high bid price on such date as set forth by NASDAQ; or if the
security is not quoted on NASDAQ, the high bid price as set forth in the
NATIONAL QUOTATION BUREAU sheet listing such securities, or the NASD's Bulletin
Board for such day. Notwithstanding the foregoing, if there is no reported
closing price or high bid price, as the case
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may be, on a date prior to the event requiring an adjustment hereunder, then the
current market price shall be determined as of the latest date prior to such
date for which such closing price or high bid price is available.
(b) The following provisions, in addition to other provisions of
this Section 8, shall be applicable in determining any adjustment under Section
8(a);
(1) In case of the issuance or sale of shares of Common Stock
part or all of which shall be for cash, the cash consideration received by the
Company therefor shall be deemed to be the amount of cash proceeds of such sale
of shares less any compensation paid or discount allowed in the sale,
underwriting or purchase thereof by underwriters or dealers or others performing
similar services or any expenses incurred in connection therewith, plus the
amounts, if any, determined as provided in Section 8(b)(2).
(2) In case of the issuance or sale of shares of Common Stock
wholly or partly for a consideration other than cash, the amount of the
consideration other than cash received by the Company for such shares shall be
deemed to be the fair value of such consideration as determined by a resolution
adopted by the Board of Directors of the Company acting in good faith, less any
compensation paid or incurred by the Company for any underwriting of, or
otherwise in connection with such issuance, provided, however, the amount of
such consideration other than cash shall in
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no event exceed the cost thereof as recorded on the books of the Company. In
case of the issuance or sale of shares of Common Stock (otherwise than upon
conversion or exchange) together with other stock or securities or other assets
of the Company for a consideration which is received for both such shares of
Common Stock and other securities or assets, the Board of Directors of the
Company acting in good faith shall determine what part of the consideration so
received is to be deemed to be the consideration for the issuance of such shares
of Common Stock, less any compensation paid or incurred by the Company for any
underwriting of, or otherwise in connection with such issuance, provided,
however, the amount of such consideration other than cash shall in no event
exceed the cost thereof as recorded on the books of the Company. In case at any
time the Company shall declare a dividend or make any other distribution upon
any stock of the Company payable in Common Stock, then such Common Stock
issuable in payment of such dividend or distribution shall be deemed to have
been issued or sold without consideration.
(3) The price per share of any shares of Common Stock sold or
issued by the Company (other than pursuant to Options or Convertible Securities)
shall be equal to a price calculated by dividing (A) the amount of the
consideration received by the Company, as determined pursuant to Sections
8(b)(1) and 8(b)(2), upon such sale or issuance by (B) the number of shares of
Common Stock sold or issued.
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(4) In case the Company shall at any time after the date
hereof issue any Options or Convertible Securities the following provisions
shall apply in making any adjustment pursuant to this Section 8.
(i) The price per share for which Common Stock is issuable
upon the exercise of the Options or upon conversion or exchange of the
Convertible Securities shall be determined by dividing (A) the total amount, if
any, received or receivable by the Company as consideration for the issuance of
such Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the exercise of
such Options or the conversion or exchange of such Convertible Securities, by
(B) the aggregate maximum number of shares of Common Stock issuable upon the
exercise of such Option or upon the conversion or exchange of such Convertible
Securities.
(ii) In determining the price per share for which Common
Stock is issuable upon exercise of the Options or conversion or exchange of the
Convertible Securities as set forth in Section 8(b)(4)(i) and in computing any
adjustment pursuant to Section 8(a): (A) the aggregate maximum number of shares
of Common Stock issuable upon the exercise of such Convertible Securities shall
be considered to be outstanding at the time such Options or Convertible
Securities were issued and to have been issued for such price per share as
determined pursuant to Section 8(b)(4)(i) and (B) the consideration for the
issuance of such Options or Convertible Securities and the amount of additional
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consideration payable to the Company upon exercise of such Options or upon the
conversion or exchange of such Convertible Securities shall be determined in the
same manner as the consideration received upon the issuance or sale of shares of
Common stock as provided in paragraphs 8(b)(1) and 8(b)(2).
(iii) On the expiration of such Options or the termination
of any right to convert or exchange any Convertible Securities, the number of
shares of Common Stock subject to the Warrants shall forthwith be readjusted to
such number of shares of Common Stock as would have obtained had the adjustments
made upon the issuance of such Options or Convertible Securities been made upon
the basis of the delivery of only the number of shares of Common Stock actually
delivered upon the exercise of such Options or upon conversion or exchange of
such Convertible Securities.
(iv) If the minimum warrant price per share of Common
Stock provided for in any Option or the rate at which any Convertible Securities
are convertible into or exchangeable for Common Stock shall change, or a
different warrant price or rate shall become effective at any time or from time
to time (other than pursuant to any anti-dilution provisions of such Options or
Convertible Securities), then upon such change becoming effective, the number of
shares of Common Stock subject to the Warrants shall forthwith be increased or
decreased to such number of shares as would have been obtained had the
adjustments made upon the granting or issuance of such Options or Convertible
Securities been made upon the basis of (1) the issuance of the number of shares
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of Common Stock theretofore actually delivered upon the exercise of such Options
or upon the conversion or exchange of such Convertible Securities, and the total
consideration received therefor, and (2) the granting or issuance at the time of
such change of any such Options or Convertible Securities then still outstanding
for the consideration, if any, received by the Company therefore and to be
received on the basis of such changed price or rate of exchange or conversion.
(5) Except as otherwise specifically provided herein the date
of issuance or sale of Common Stock shall be deemed to be the date the Company
is legally obligated to issue such shares of Common Stock, or pursuant to
paragraph 8(b)(4), the date the Corporation is legally obligated to issue any
"Option" or "Convertible Security." In case at any time the Company shall take a
record date for the purpose of determining the Holders of Common Stock entitled
(i) to receive a dividend or other distribution payable in Common Stock or in
Options or Convertible Securities or (ii) to subscribe for or purchase Common
Stock, Options or Convertible Securities then such record date shall be deemed
to be the date of issue or sale of the shares of Common Stock, Options or
Convertible Securities deemed to have been issued or sold upon the declaration
of such dividend or the making of such distribution or the granting of such
right of subscription or purchase, as the case may be.
(6) The number of shares of Common Stock outstanding at any
given time shall not include treasury shares and
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the disposition of any such treasury shares shall be considered an issue or sale
of Common Stock for the purposes of this Section 8.
(7) Anything hereinabove to the contrary notwithstanding, no
adjustment shall be made pursuant to Section 8(a) to the Warrant Price or the
number of shares of Common Stock subject to the Warrants upon:
(i) The issuance or sale by the Company of any shares of
Common Stock, Convertible Securities, Warrants or Options pursuant to (A) the
Warrants, (B) any securities issued and outstanding at the effective date of the
Company's Registration Statement, (C) the issuance of the securities in the
Registration Statement, including the Warrants to Royce and the securities
underlying such Warrants, (D) any shares issuable upon the conversion or
exchange of any security which is outstanding on the effective date of the
Registration Statement which is convertible or exchangeable into shares of
Common Stock, (E) any shares upon the exercise of any right, warrant or option
which is outstanding on the effective date of the Registration Statement and (F)
any shares issuable pursuant to existing Stock Option Plans.
(ii) The issuance or sale of shares of Common Stock
pursuant to the exercise of Options or conversion or exchange of Convertible
Securities hereinafter issued for which an adjustment has been made (or was not
required to be made) pursuant to the provisions of Section 8 hereof.
(iii) The increase in the number of shares of Common Stock
subject to any Option or Convertible Security referred to in subsections (i) and
(ii) hereof pursuant to the provisions of
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such Option or Convertible Securities designed to protect against
dilution.
(c) If the Company shall at any time subdivide its outstanding
shares of Common Stock by recapitalization, reclassification or split-up
thereof, the number of shares of Common Stock subject to the Warrants
immediately prior to such subdivision shall be proportionately increased, and if
the Company shall at any time combine the outstanding shares of Common Stock by
recapitalization, reclassification or combination thereof, the number of shares
of Common Stock subject to the Warrants immediately prior to such combination
shall be proportionately decreased.
(d) If the Company after the date hereof shall distribute to all of
the holders of its shares of Common Stock any securities or other assets (other
than a distribution of shares of Common Stock or a cash distribution made as a
dividend payable out of earnings or out of any earned surplus legally available
for dividends under the laws of the jurisdiction of incorporation of the
Company), the Board of Directors shall be required to make such equitable
adjustment in the Warrant Price or the number of shares of Common Stock which
are subject to the Warrants immediately prior to the record date of such
distribution as may be necessary to preserve to the Holder of the Warrant rights
substantially proportionate to those enjoyed hereunder by such Holder
immediately prior to the happening of such distribution. Any such adjustment
made in good faith by the Board of Directors shall be final and binding upon the
holders and shall become effective as of the record date for such distribution.
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<PAGE>
(e) No adjustment in the number of shares of Common Stock subject
to the Warrants shall be required under this Section 8 hereof unless such
adjustment would require an increase or decrease in such number of shares of at
least 1% of the then adjusted number of shares of Common Stock issuable upon
exercise of the Warrants, provided, however, that any adjustments which by
reason of the foregoing are not required at the time to be made shall be carried
forward and taken into account and included in determining the amount of any
subsequent adjustment; and provided further, however, that in case the Company
shall at any time subdivide or combine the outstanding shares of Common Stock or
issue any additional shares of Common Stock as a dividend, said percentage shall
forthwith be proportionately increased in the case of a combination or decreased
in the case of a subdivision or dividend of shares of Common Stock so as to
appropriately reflect the same. If the Company shall make a record of the
Holders of its shares of Common Stock for the purpose of entitling them to
receive any dividend or distribution and legally abandon its plan to pay or
deliver such dividend or distribution then no adjustment in the number of shares
of Common Stock subject to the Warrants shall be required by reason of the
making of such records.
(f) In case of any reclassification of the outstanding shares of
Common Stock (other than a change covered by Section 8(c) hereof or which solely
affects the par value of such shares of Common Stock) or in the case of any
merger or consolidation of the Company with or into another corporation (other
than a consolidation or merger in which the Company is the continuing
corporation and which does not result in any
25
<PAGE>
reclassification or capital reorganization or the outstanding shares of Common
Stock), or in the case of any sale or conveyance to another corporation of the
property of the Company as an entirety or substantially as an entirety in
connection with which the Company is dissolved, the Holder of the Warrants shall
have the right thereafter (until the expiration of the right of exercise of the
Warrant) to receive upon the exercise hereof, the kind and amount of shares of
stock or other securities or property receivable upon such reclassification,
capital reorganization, merger or consolidation, or upon the dissolution
following any sale or other transfer, by a Holder of the number of shares of
Common Stock of the Company obtainable upon the exercise of the Warrants
immediately prior to such event; and if any reclassification also results in a
change in shares of Common Stock covered by Section 8(c), the such adjustment
shall be made pursuant to both this Section 8(f) and Section 8(c). The
provisions of this Section 8(f) shall similarly apply to successive
reclassifications, or capital reorganizations, mergers or consolidations, sales
or other transfers.
If the Company after the date hereof shall issue or agree to issue
the shares of Common stock, Options or Convertible Securities, other than as
described in this Section 8 and such issuance or agreement would in the opinion
of the Board of Directors of the Company materially affect the rights of the
holders of the Warrants, the number of shares of Common Stock, obtainable upon
exercise of the Warrants shall be adjusted in such manner, if any, and at such
time, as the Board of Directors of the Company, in good faith, may determine to
be equitable in the
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<PAGE>
circumstances. The minutes or unanimous consent approving such action shall set
forth the Board's determination as to whether an adjustment is warranted and the
manner of such adjustment. In the absence of such determination, any Holder may
request in writing that the Board make such determination. Any such
determination made in good faith by the directors shall be final and binding
upon the Holders.
(g) (1) Upon occurrence of each event requiring an adjustment of
the Warrant Price and/or of the number of shares of Common Stock obtainable upon
exercise of the Warrants in accordance with, and as required by, the terms of
this Section 8, the Company shall forthwith employ a firm of certified public
accountants (who may be the regular accountants for the Company) who shall
compute the adjusted number of shares of Common Stock issuable by reason of such
event in accordance with the provisions of this Section 8. The Company may at
its option mail to the Holders of the Warrants a copy of such computation which
shall be conclusive and shall be binding upon such Holders unless contested by
such Holders by written notice to the Company within thirty (30) days after
receipt thereof by such Holders.
(2) In case the Company after the date hereof shall propose (i)
to pay any dividend payable in stock to the Holders of its shares of Common
Stock or to make any other distribution (other than cash dividends) to the
Holders of its shares of Common Stock of rights to subscribe to or purchase any
additional shares of any class or any other rights or options, or (ii) to effect
any reclassification of shares of Common Stock (other than a reclassification
involving merely the subdivision or
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<PAGE>
combination or outstanding shares of Common Stock) or (iii) any capital
reorganization or any consolidation or merger, or any sale, transfer or other
disposition of its property, assets and business substantially as an entirety,
or the liquidation, dissolution or winding up of the Company, then in each such
case, the Company shall obtain the computation described in paragraph 8(g)(1)
hereof and if an adjustment to the number of shares of Common Stock issuable
upon exercise of the Warrants is required under this Section 8, the Company
shall notify the Holders of the Warrants of such proposed action, which shall
specify the record date for any such action or if no record date is established
with respect thereto, the date on which such action shall occur or commence, or
the date of participation therein by the Holders of shares of Common Stock if
any such date is to be fixed, and shall also set forth such facts with respect
thereto as shall be reasonably necessary to indicate the effect of such action
on the number, or kind, or class of shares or other securities or property
obtainable upon exercise of the Warrants after giving effect to any adjustment
which will be required as a result of such action. Such notice shall be given at
least twenty (20) days prior to the record date for determining Holders of the
shares of Common Stock for purposes of any such action, and in the case of any
action for which a record date is not established then such notice shall be
mailed at least twenty (20) days prior to the taking of such proposed action.
(3) Failure to file any certificate or notice or to mail any
notice, or any defect in any certificate or notice, pursuant to this Section
8(g) shall not effect the legality or validity of the adjustment in the number,
or kind, or class or
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<PAGE>
shares or other securities or property obtainable upon exercise of the Warrants
or of any transaction giving rise thereto.
(h) Irrespective of any adjustments pursuant to this Section 8
in the number, or kind, or class of shares or other securities or other property
obtainable upon exercise of the Warrants, the Warrant Certificate and/or this
Agreement may continue to express the number of shares of Common Stock
obtainable upon exercise at the same number of shares of Common Stock as are
stated herein.
SECTION 9. Redemption.
(a) Commencing on or after the Initial Warrant Redemption
Date, the Company may redeem all the Warrants at $.0l per Warrant on at least 30
days prior written notice to the Registered Holders of the Warrants, commencing
on the Initial Warrant Redemption Date; provided, however, that before any such
call for redemption of Warrants can take place, the Market Price of the Common
Stock for fifteen (15) consecutive trading days ending on the third day prior to
the date on which the Company gives the notice of redemption shall have exceeded
the lesser of (x) $9.375 per share and (y) 150% of the then current exercise
price per share, which shall initially be $9.375, subject to adjustment in the
event of any stock splits or other similar events as provided in Section 8
hereof. All Warrants must be redeemed if any are redeemed. For purposes of this
Section 9, the "Market Price" of the Common Stock for any trading day means the
last high bid price for the Common Stock on The Nasdaq SmallCap Market, or if no
longer quoted thereon, on the OTC Electronic Bulletin Board, in either case as
reported by the National
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Quotation Bureau Incorporated, or if the Common Stock is then quoted on the
Nasdaq National Market, the closing sale price thereon, or if the Common Stock
is then traded or admitted to unlisted trading privileges on a national
securities exchange, the closing sale price on that exchange.
(b) In the event the Company exercises its right to redeem all
of the Warrants, it shall give or cause to be given notice to the Registered
Holders of the Warrants, by mailing to such Registered Holders a notice of
redemption, first class, postage prepaid, on the third day after the
aforementioned fifteen (15) consecutive trading days and at least by the
thirtieth (30th) day before the date fixed for redemption, at their last address
as shall appear on the records of the Warrant Agent. Any notice mailed in the
manner provided herein shall be conclusively presumed to have been duly given
whether or not the Registered Holder receives such notice. At the time of the
mailing to the Registered Holders of the Warrants of the notice of redemption,
the Company shall deliver or cause to be delivered to Royce a similar notice
telephonically and confirmed in writing together with a list of the Registered
Holders (including their respective addresses and number of Warrants
beneficially owned) to whom such notice of redemption has been or will be given.
(c) The notice of redemption, which may not be mailed until on
or after the Initial Warrant Redemption Date, shall specify (i) the redemption
price, (ii) the date fixed for redemption, (iii) the place where the Warrant
Certificate shall be delivered and the redemption price shall be paid, (iv) that
Royce is the Company's exclusive warrant solicitation agent and shall
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receive the commission contemplated by Section 4(b) hereof if certain conditions
under Section 4(b) are met, and (v) that the right to exercise the Warrant shall
terminate a 5:00 p.m. (New York City Time) on the business day immediately
preceding the date fixed for redemption. The date fixed for the redemption of
the Warrants shall be the Redemption Date. No failure to mail such notice nor
any defect therein or in the mailing thereof shall affect the validity of the
proceedings for such redemption except as to a Registered Holder (a) to whom
notice was not mailed or (b) whose notice was defective. An affidavit of the
Warrant Agent or the Secretary or Assistant Secretary of the Company that notice
of redemption has been mailed shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 p.m.
(New York City Time) on the business day immediately preceding the Redemption
Date. The redemption price payable to the Registered Holders shall be mailed to
such persons at their addresses of record.
(e) The Company shall indemnify Royce and each person, if any, who
controls Royce within the meaning of Section 15 of the Act or Section 20(a) of
the Exchange Act against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become subject
under the Act, the Exchange Act or otherwise, arising from the registration
statement or prospectus referred to in Section 5(b) hereof to the same extent
and with the same effect (including the provisions regarding contribution) as
the provisions pursuant to which the
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Company has agreed to indemnify Royce contained in Sections 6 and 7 of the
Underwriting Agreement.
(f) The Company shall as soon as practicable after the Redemption
Date, 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 ll(a) of the Act
and covering a period of at least 12 consecutive months beginning after the
Redemption Date.
(g) The Company shall deliver within five (5) business days prior
to the Redemption Date, copies of all correspondence between the Securities and
Exchange Commission ("Commission") and the Company, its counsel or auditors and
all memoranda relating to discussions with the Commission or its staff with
respect to such registration statement and permit Royce to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the NASD. Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable times
and as often as Royce shall reasonably request.
SECTION 10. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company and Royce, and its duties shall be determined solely by
the provisions hereof. The Warrant Agent shall not, by issuing and delivering
Warrant Certificates or
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by any other act hereunder, be deemed to make any representations as to the
validity or value or authorization of the Warrant Certificates or the Warrants
represented thereby or of any securities or other property delivered upon
exercise of any Warrant or whether any stock issued upon exercise of any Warrant
is fully paid and nonassessable.
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Purchase Price provided in this Agreement, or to determine
whether any fact exists which may require any such adjustment, or with respect
to the nature or extent of any such adjustment, when made, or with respect to
the method employed in making the same. It shall not (i) be liable for any
recital or statement of fact contained herein or for any action taken, suffered
or omitted by it in reliance on any Warrant Certificate or other document or
instrument believed by it in good faith to be genuine and to have been signed or
presented by the proper party or parties, (ii) be responsible for any failure on
the part of the Company to comply with any of its covenants and obligations
contained in this Agreement or in any Warrant Certificate, or (iii) be liable
for any act or omission in connection with this Agreement, except for its own
gross negligence or willful misconduct.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
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(d) Any notice, statement, instruction, request, direction, order
or demand of the Company shall be sufficiently evidenced by an instrument signed
by the Chairman of the Board of Directors, Chief Executive Officer or President
(unless other evidence in respect thereof is herein specifically prescribed).
The Warrant Agent shall not be liable for any action taken, suffered or omitted
by it in accordance with such notice, statement, instruction, request,
direction, order or demand.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the Warrant Agent
and save it harmless against any and all losses, expenses and liabilities,
including judgments, costs and counsel fees, for anything done or omitted by the
Warrant Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's gross
negligence or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged from
all further duties and liabilities hereunder (except liabilities arising as a
result of the Warrant Agent's own gross negligence or willful misconduct), after
giving 60 days prior written notice to the Company. At least 30 days prior to
the date such resignation is to become effective, the Warrant Agent shall cause
a copy of such notice of resignation to be mailed to the Registered Holder of
each Warrant Certificate at the Company's expense. Upon such resignation the
Company shall appoint in writing a new warrant agent. If the Company shall fail
to make such appointment within a period of 60 days after it has been notified
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<PAGE>
in writing of such resignation by the resigning Warrant Agent, then the
Registered Holder of any Warrant Certificate may apply to any court of competent
jurisdiction for the appointment of a new warrant agent. Any new warrant agent,
whether appointed by the Company or by such a court, shall be a bank or trust
company having a capital and surplus, as shown by its last published report to
its stockholders, of not less than $10,000,000 or a stock transfer company doing
business in New York, New York. After acceptance in writing of such appointment
by the new warrant agent is received by the Company, such new warrant agent
shall be vested with the same powers, rights, duties and responsibilities as if
it had been originally named herein as the warrant agent, without any further
assurance, conveyance, act or deed; but if for any reason it shall be necessary
or expedient to execute and deliver any further assurance, conveyance, act or
deed, the same shall be done at the expense of the Company and shall be legally
and validly executed and delivered by the resigning Warrant Agent. Not later
than the effective date of any such appointment the Company shall file notice
thereof with the resigning Warrant Agent and shall forthwith cause a copy of
such notice to be mailed to the Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act, provided that such corporation
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<PAGE>
is eligible for appointment as successor to the Warrant Agent under the
provisions of the preceding paragraph. Any such successor warrant agent shall
promptly cause notice of its succession as warrant agent to be mailed to the
Company and to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its Subsidiaries and affiliates, and any of
its or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effect as though it were not Warrant Agent.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a period of three years
from the date of exercise any Warrant Certificate received by it upon such
exercise, marked to indicate its cancellation thereof in accordance with Section
6(e) hereof.
SECTION 11. Modification of Agreement. The Warrant Agent and the
Company may by supplemental agreement make any changes or corrections in this
Agreement without the approval of any holders of Warrants (i) that they shall
deem appropriate to cure any ambiguity or to correct any defective or
inconsistent provision or manifest mistake or error herein contained; (ii) that
they may deem necessary or desirable and which shall not adversely affect the
interests of the holders of Warrant Certificates; (iii) that they deem necessary
or desirable to decrease the Purchase Price as provided for in Section 1(g)
hereof; or (iv) which may be required by law; provided, however, that this
Agreement shall not otherwise be modified, supplemented or altered in any
respect except with the
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<PAGE>
consent in writing of the Registered Holders representing not less than 50% of
the Warrants then outstanding; provided, further, that no change in the number
or nature of the securities purchasable upon the exercise of any Warrant, or the
Purchase Price (other than a decrease in the Purchase Price as provided in
Section l(f) thereof) therefor, shall be made without the consent in writing of
the Registered Holder of the Warrant Certificate, other than such changes as are
specifically permitted or prescribed by this Agreement as originally executed.
In addition, this Agreement may not be modified, amended or supplemented without
the prior written consent of the Underwriter, other than (i) to cure any
ambiguity or to correct any provision which is inconsistent or which is a
manifest mistake or error; (ii) to make any such change that is necessary or
desirable and which shall not adversely affect the interests of the Underwriter;
(iii) to decrease the Purchase Price as provided for in Section 1 (f) hereof; or
(iv) except as may be required by law.
SECTION 12. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made when delivered or mailed first-class postage prepaid, or delivered to a
telegraph office for transmission if to the Registered Holder of a Warrant
Certificate, at the address of such holder as shown on the registry books
maintained by the Warrant Agent; if to the Company at 130 West 10th Street,
Huntington Station, NY 11746, Attention: Chief Executive Officer, or at such
other address as may have been furnished to the Warrant Agent in writing by the
Company, with a copy to Hollenberg Levin Solomon Ross Belsky & Daniels, LLP, 585
Stewart Avenue, Garden City, New York 11530, Attention: Herbert W. Solomon; and
if to the Warrant Agent, at its Corporate Office. Copies of any notice delivered
pursuant to this Agreement shall be delivered to the Underwriter at 199
Crossways Park Drive, Woodbury, NY 11797, Attention: John Higgins, Senior Vice
President, or at such other addresses as may have been furnished to the Company
and the Warrant Agent in writing.
SECTION 13. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York without giving
effect to conflicts of laws.
SECTION 14. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Company, the Warrant Agent and their respective
successors and assigns and the holders from time to time of Warrant Certificates
or any of them. Except as hereinafter stated, nothing in this Agreement is
intended or shall be construed to confer upon any other person any right, remedy
or claim or to impose upon any other person any duty, liability or obligation.
The Underwriter is, and shall at all times irrevocably be deemed to be,
third-party beneficiaries of this Agreement, with full power, authority and
standing to enforce the rights granted to it hereunder.
SECTION 15. Counterparts. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
37
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
[SEAL]
EASTCO INDUSTRIAL AMERICAN STOCK
SAFETY CORP. TRANSFER & TRUST CO.
By: By:
, President (authorized officer)
38
<PAGE>
EXHIBIT 5.01
[LETTERHEAD HOLLENBERG LEVIN SOLOMON ROSS BELSKY & DANIELS, LLP]
September 19, 1996
Division of Corporate Finance
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Eastco Industrial Safety Corp.
Dear Sir/Madam:
We have acted as counsel for Eastco Industrial Safety Corp., a New York
corporation (hereinafter called the "Company") in connection with the proposed
issue and sale by the Company of 703,591 Units of the Company (each Unit to
consist of one (1) share of Common Stock and one (1) Class B Warrant to purchase
an additional share of Common Stock) pursuant to the provisions of the Standby
Agreement between the Company and Royce Investment Group, Inc. (the "Standby
Agreement").
As counsel to the Company, we have examined the Minute Books of the
Company, together with copies of its Certificate of Incorporation and Bylaws. We
have also examined the Registration Statement, Form SB-2, filed with the
Securities and Exchange Commission and the proposed Underwriting Agreement.
Based upon the foregoing, and our examination of such other documents as we
deemed pertinent, we are of the opinion that:
1. The Company is a corporation duly organized and validly existing in
good standing under and by virtue of the laws of the State of New York.
2. The authorized capital of the Company consists of: (i) 20,000,000
shares of Common Stock, par value $.12 per share, of which 879,488 (reflects
estimated adjustment for prior reverse stock splits and estimated rounding for
financial shares) shares of Common Stock are presently legally issued and
outstanding, fully paid and non-assessable; and (ii) 1,000,000 shares of
Preferred Stock, par value $.01 per share, of which 0 shares of Preferred Stock
are presently legally issued and outstanding, fully paid and non-assessable.
<PAGE>
Division of Corporate Finance
September 19, 1996
page 2
3. All securities (Units, shares of Common Stock, Class B Warrants,
shares of Common Stock underlying Class B Warrants, Underwriter's Unit Purchase
Option and underlying Class B Warrants and shares of Common Stock) which are the
subject of the Standby Agreement have been duly authorized.
4. The shares of Common Stock, when issued and delivered against
payment pursuant to the terms of the Standby Agreement, will be legally issued
and outstanding, fully paid and non-assessable shares of the Common Stock of the
Company.
Very truly yours,
/s/ Hollenberg Levin Solomon Ross Belsky & Daniels, LLP
-------------------------------------------------------
Hollenberg Levin Solomon Ross Belsky & Daniels, LLP
<PAGE>
AMENDMENT No. 7 TO FINANCING AGREEMENTS
July 22, 1996
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation ("Congress") and Eastco Industrial
Safety Corp. ("Borrower") have entered into certain financing arrangements
pursuant to the Accounts Financing Agreement [Security Agreement], dated as of
October 1, 1991, between Congress and Borrower, as amended (the "Accounts
Agreement"), and all other agreements, documents and instruments at any time
executed and/or delivered in connection therewith or related thereto (all of the
foregoing, together with the Accounts Agreement, as the same have heretofore or
contemporaneously been or may be hereafter amended, modified, supplemented,
extended, renewed, restated or replaced, collectively, the "Financing
Agreements").
Borrower has requested certain amendments to the Financing Agreements,
and Congress is willing to agree to such amendments, subject to the terms and
conditions contained herein. By this Amendment, Congress and Borrower desire and
intend to evidence such amendments.
In consideration of the foregoing, and the respective agreements and
covenants contained herein, the parties hereto agree as follows:
1. Definitions.
(a) Additional Definitions. As used in this Amendment, the following
terms shall have the respective meanings given to them below and the Accounts
Agreement (including all supplements thereto) shall be deemed and is hereby
amended to include, in addition and not in limitation, the following
definitions:
(i) "Cost of Eligible New Equipment" shall mean the cost of machinery
and equipment constituting Eligible New Equipment hereunder actually paid or to
be paid by Borrower in cash, as shown on the manufacturer's or vendor's invoice
to Borrower therefor, net of all discounts, allowances or credits taken or
available, and excluding all charges for freight, duty, taxes, insurance,
installation, set-up, software, training, engineering, warranty or service fees
or contract expenses, and
<PAGE>
other similar charges and other so-called "soft" costs relating thereto, and
excluding the cost of any molds, dies, accessories and spare parts purchased by
Borrower which may relate to the use or operation of such Eligible New
Equipment.
(ii) "Eligible New Equipment" shall mean New Equipment which is in good
order and repair, and in running and marketable condition, is located at
Borrower's premises, is acceptable to Congress for lending purposes and has not
previously been the subject of a New Equipment Term Loan. Except in Congress'
discretion, Eligible New Equipment shall not include (A) New Equipment at the
premises or in the possession of, or under the control of, any third party, (B)
New Equipment subject to a security interest or lien in favor of any third
party, or (C) New Equipment not intended to be used, at the time of purchase, in
the ordinary course of Borrower's manufacturing operations. Any New Equipment
which Congress determines to be ineligible or unacceptable for lending purposes
shall nevertheless be and remain at all times part of the Collateral.
(iii) "New Equipment" shall mean machinery and equipment, whether new
or used, purchased for all cash by Borrower from non-affiliated parties after
July 22, 1996, as to which title has passed to Borrower and which is in the
possession of Borrower.
(iv) "New Equipment Term Loans" shall mean, collectively, the
outstanding Obligations owed to Congress by Borrower consisting of the secured
term loans hereafter made by Congress to Borrower as provided in Section 2 of
this Amendment, evidenced by the New Equipment Term Notes(s) and subject to the
terms and conditions of the Accounts Agreement, this Amendment and the other
Financing Agreements (each such secured term loan being from time to time
referred to herein individually as a "New Equipment Term Loan").
(v) "New Equipment Term Notes" shall mean, collectively, the term
promissory notes in the form annexed hereto as Exhibit I, which shall be
executed and delivered by Borrower to Congress pursuant to Section 2 of this
Amendment to evidence each New Equipment Term Loan made by Congress to Borrower
(each such term promissory note being from time to time referred to herein
individually as a "New Equipment Term Note").
(vi) "QPO Proceeds" shall mean the net proceeds received by Borrower
upon consummation of a Qualified Public offering.
(vii) "Qualified Public Offering" shall mean any bona fide,
underwritten offering to the public by Borrower of its equity securities
pursuant to an effective registration statement under the Securities Act of
1933, as then in effect, or any
<PAGE>
comparable statement under any similar federal statute then in force.
(b) Amendments to Definitions. All references to the term "Supplemental
Loan Termination Date" in the Accounts Agreement and in any of the other
Financing Agreements shall be deemed and each such reference is hereby amended
to mean the earlier of (A) December 31, 1996 or (B) the date of consummation of
a Qualified Public Offering.
(c) Interpretation. For purposes of this Amendment, unless otherwise
defined herein, all terms used herein, shall have the respective meanings
assigned to such terms in the Financing Agreements.
2. New Equipment Term Loans.
(a) Subject to and upon the terms and conditions contained herein and
in the other Financing Agreements, including the sublimit set forth below in
Section 2(b), Congress shall, in its discretion, make New Equipment Term Loans
to Borrower, from time to time, at Borrower's request, of up to an amount equal
to the lesser of (i) seventy percent (70%) of the Cost of Eligible New
Equipment, or (ii) eighty percent (80%) of the orderly liquidation value of such
Eligible New Equipment (but excluding the value of any goods or services
excluded from the Cost of Eligible New Equipment), as set forth in an appraisal
report prepared for Congress, at Borrower's expense, by an appraiser
satisfactory to Congress.
(b) Except in Congress' discretion, the aggregate original principal
amount of all New Equipment Term Loans made to Borrower shall not exceed
$1,000,000.
(c) Each New Equipment Term Loan shall be (i) evidenced by a New
Equipment Term Note executed and delivered by Borrower to Congress concurrently
with the disbursement of each New Equipment Term Loan, and (ii) repaid, together
with interest and other amounts payable thereunder, in accordance with the
provisions of such New Equipment Term Note, the Accounts Agreement, this
Amendment and the other Financing Agreements, and (iii) secured by all of the
Collateral.
(d) Without limiting the foregoing, the making of each New Equipment
Term Loan shall be subject to the satisfaction of each of the following
additional conditions precedent;
(i) Congress shall have received from Borrower prior written notice
within a reasonable period of time of a requested New Equipment Term Loan, which
notice shall specify the following: (A) the proposed date and amount of the
requested New
<PAGE>
Equipment Term Loan; (B) a list and description of proposed Eligible New
Equipment (by model, make, manufacturer, vendor, serial no. and/or such other
identifying information as may be appropriate, as determined by Congress); (C)
the itemized Cost of Eligible New Equipment paid or to be paid for such proposed
Eligible New Equipment and any additional goods and services, charges, expenses
or fees not included in the Cost of Eligible New Equipment, and the terms of
payment thereof; and (D) such other information and documents as Congress may
from time to time reasonably request related thereto;
(ii) Borrower shall have acquired, or shall acquire,
contemporaneously with the disbursement of such New Equipment Term Loan, good
and marketable title to the Eligible New Equipment, free and clear of all liens,
security interests, claims or other encumbrances, except for a perfected first
priority and only security interest in and lien upon the Eligible New Equipment
in favor of Congress, and Borrower shall have delivered to Congress such
evidence thereof as Congress shall reasonably require;
(iii) Congress shall have received a copy of the invoice(s)
covering the Cost of Eligible New Equipment with respect to the Eligible New
Equipment and all other amounts required to be paid in connection therewith, and
a copy of the appraisal report required under Section 2(a)(ii) above setting
forth the orderly liquidation value of the Eligible New Equipment as provided in
Section 2(a)(ii);
(iv) Congress shall have received copies, or upon Congress'
request, the originals, of all agreements, documents and instruments relating to
the purchase by Borrower of the Eligible New Equipment, including, without
limitation, all purchase orders, bills of sale, contracts and other related
documents;
(v) Congress shall have received an original executed New Equipment
Term Note, as completed inter alia to set forth the date and principal amount of
such New Equipment Term Loan and to set forth the amount of each monthly
principal installment such that the principal amount of each New Equipment Term
Loan is amortized in equal, consecutive monthly installments of principal
commencing on the first day of the month following the date of each such advance
and ending on October 1, 1999, and to set forth the dates of the first monthly
payments of principal and interest as determined by Congress, such New Equipment
Term Note to be duly authorized, executed and delivered by Borrower to Congress,
which note shall thereupon evidence Indebtedness of Borrower unconditionally
owed to Congress, without offset, defense or counterclaim of any kind, nature or
description whatsoever; and
<PAGE>
(vi) no Event of Default, or event, act or condition which with
notice or passage of time or both would constitute an Event of Default, shall
exist or have occurred and be continuing, and, if required by Congress, Borrower
shall deliver a certificate signed on behalf of Borrower by a senior officer of
Borrower certifying to the absence of any such Event of Default, event, act or
condition.
(e) For purposes of Section 2.3 of the Accounts Agreement, the New
Equipment Term Loans made to Borrower shall be considered made pursuant to a
supplement to the Accounts Agreement.
3. Supplemental Loans.
(a) In addition to the loans which may be made by Congress to Borrower
pursuant to the Financing Agreements, at the request of Borrower made at any
time and from time to time prior to the Supplemental Loan Termination Date,
Congress shall, subject to the terms and conditions contained in the Financing
Agreements, make supplemental revolving loans to Borrower in such amounts as
Borrower may request of up to $125,000 in excess of the amounts otherwise
available to Borrower under the Financing Agreements (the "Supplemental Loans").
(b) Except in Congress' discretion, Borrower shall not have any right
to request, and Congress shall not make, any Supplemental Loans at any time on
or after the Supplemental Loan Termination Date. The Supplemental Loans shall be
secured by all Collateral.
(c) Prior to an Event of Default or the termination of the Financing
Agreements, all outstanding and unpaid obligations arising pursuant to the
Supplemental Loans (including, but not limited to, principal, interest, fees,
costs, expenses and other charges with respect thereof payable by Borrower to
Congress) shall automatically, without notice or demand, be absolutely and
unconditionally due and payable and Borrower shall pay to Lender in cash or
other immediately available funds all such Supplemental Loans on the
Supplemental Loan Termination Date.
(d) Borrower hereby acknowledges and agrees that the failure of
Borrower to pay such Supplemental Loans on the Supplemental Loan Termination
Date shall constitute an Event of Default for all purposes in connection with
the Accounts Agreement, and the other Financing Agreements.
4. Maximum Credit. Section 1.7 of the Accounts Agreement is hereby
deleted in its entirety and the following substituted therefor:
<PAGE>
"1.7 "Maximum Credit" shall mean the amount of
$9,000,000."
5. Lending Formulas.
(a) Section 2. 1 of the Accounts Agreement is hereby deleted in its
entirety and the following substituted therefor:
"2. 1 You shall, in your discretion, make loans to us from
time to time, at our request, of up to eighty-five percent (85%) of the
Net Amount of Eligible Accounts (or such greater or lesser percentage
thereof as you shall in your sole discretion determine from time to
time)."
(b) Paragraph 2 of a certain Letter re: Inventory Loans, dated as of
October 1, 1991, as amended, by Borrower in favor of Congress, is hereby deleted
in its entirety and the following substituted therefor:
"2. In addition to loans which may be made by you to us,
pursuant to Section 2 of the Accounts Agreement, you shall, in your
sole discretion, make loans to us from time to time, at our request, of
up to the following percentages of Value of the following categories of
Eligible Inventory (or such greater or lesser percentage thereof as you
shall, in your sole discretion, determine from time to time):
fifty-five (55%) percent of Eligible Inventory consisting of raw
materials, including but not limited to trim (excluding packaging and
labels), and finished goods."
6. Interest. Effective as of July 1, 1996, Section 3.1 of the Accounts
Agreement is hereby deleted in its entirety and replaced by the following:
"3. 1 (a) Interest shall be payable by us to you on the first
day of each month upon the closing daily balances in our loan account
for each day during the immediately proceeding month, at a rate equal
to one and one-quarter percent (1.25%) per annum in excess of the prime
commercial interest rate from time to time publicly announced by
CoreStates Bank, N.A., Philadelphia, Pennsylvania, whether or not such
rate is the best rate available at such bank. The interest rate charged
hereunder shall increase or decrease by an amount equal to each
increase or decrease, respectively, in said prime loan rate, effective
on the first day of the month after any such change in said prime loan
rate based on the prime loan rate in effect on the last day of the
month in which any such change occurs.
<PAGE>
(b) If Borrower receives QPO Proceeds in an amount equal to or
greater than $2,500,000, then interest payable by us to you shall
decrease automatically and without further action to a rate equal to
one percent (1%) per annum in excess of the prime commercial interest
rate from time to time publicly announced by CoreStates Bank N.A.,
Philadelphia, Pennsylvania, whether or not such announced rate is the
best rate available at such bank, any such change to be effective as of
the first day of the month after consummation of the Qualified Public
Offering; provided, that, (i) no Event of Default exists or has
occurred and is continuing, (ii) the rate provided for in Section 3.2
hereof does not otherwise apply, and (iii) such rate shall not apply to
any amounts as to which the rate set forth in Section 3.1(c) shall
apply.
(c) In the event that the outstanding aggregate principal
amount of loans by you to us exceeds the Maximum Credit or the formula
set forth in any supplement hereto (other than with respect to
Supplemental Loans), interest on the entire amount of such excess(es)
shall be payable at the rate set forth in Section 3.2 hereof (whether
or not such excess(es) arise or are made with or without your knowledge
or consent)."
7. Termination.
(a) Section 9.1 of the Accounts Agreement is, hereby deleted in its
entirety and the following substituted therefor:
"9.1 This Agreement shall become effective upon acceptance by
you and shall continue in full force and effect for a term ending
October 1, 1999 (the "Renewal Date") and from year to year thereafter,
unless sooner terminated pursuant to the terms hereof; provided, that,
we hereby agree that you may, at your option, extend the Renewal Date
to October 1, 2000 by giving to us notice by August 1, 1999. Either
party may terminate this Agreement on the Renewal Date or on the
anniversary of the Renewal Date in any year by giving the other party
at least sixty (60) days prior written notice by registered or
certified mail, return receipt requested, and, in addition, you shall
have the right to terminate this Agreement immediately at any time upon
the occurrence of an Event of Default. No termination of this
Agreement, however, shall relieve or discharge us of our duties,
obligations and covenants hereunder until all Obligations have been
paid in full, and your continuing security interest in the Collateral
shall remain in effect until such Obligations have been fully
discharged."
<PAGE>
(b) Section 9.2 of the Accounts Agreement is hereby deleted in its
entirety and the following substituted therefor:
"9.2 If you terminate this Agreement upon the occurrence of an
Event of Default or at our request, in view of the impracticability and
extreme difficulty of ascertaining actual damages and by mutual
agreement of the parties as to a reasonable calculation of your lost
profits as a result thereof, we hereby agree that we shall pay to you,
upon the effective date of such termination, an early termination fee
in an amount equal to: (a) two (2%) percent of the Maximum Credit if
such termination occurs on or prior to October 1, 1997 or (b) one (1%)
percent of the Maximum Credit if such termination occurs after October
1, 1997 but prior to October 1, 1999. Such termination fee shall be
presumed to be the amount of damages sustained by said early
termination and we agree that it is reasonable under the circumstances
currently existing. The early termination fee provided for in this
paragraph 9.2 shall be deemed included in the obligations."
8. Letter of Credit Accommodation Fee. Section 1.8 of the Trade
Financing Agreement Supplement to Accounts Financing Agreement (Security
Agreement), dated December 14, 1992, as amended, is hereby deleted in its
entirety and the following substituted therefor:
"1.8 In addition to all other fees, charges and expenses
payable under the Agreement, this Supplement, and to any bank or other
issuer or correspondent in connection with any Credit, we agree to pay
to you the following commissions for your services hereunder, which
shall be due and payable on the opening or issuance of each Credit or,
if the original term is extended, on the extension thereof: (a) a
charge of .3333 percent (1/3%) of the face amount of any Credit (other
than drafts or acceptances) for up to the initial sixty (60) days of
the term thereof and an additional charge of .1667 percent (1/6%) of
such face amount for each additional thirty (30) days, or any portion
thereof, of the original term or any extension thereof and (b) in
addition to any bank charges, a charge for each thirty (30) day period,
or any portion thereof, of the original or any extended term of any
outstanding drafts or acceptances equal to .1667 percent (1/6%) of the
face amount thereof."
<PAGE>
9. Net Worth Covenant. Section 2.7 of the Covenants Supplement to
Accounts Financing Agreement [Security Agreement], dated as of October 1, 1991,
between Borrower and Congress, as amended (the "Covenants Supplement"), is
hereby deleted in its entirety and the following substituted therefor:
"2.7 Consolidated Tangible Net Worth. Borrower and its
Subsidiaries, shall, at all times, until all Obligations have been
indefeasibly paid in full, maintain a Consolidated Tangible Net worth
of not less than the amount set forth below during the periods set
forth below:
(a) $2,100,000 from July 31, 1996 to the day
immediately prior to the consummation of the
Qualified Public Offering;
(b) the sum of (i) $2,100,000 plus (ii) any QPO
Proceeds received by Borrower, from the date of
consummation of the Qualified Public Offering and at all
times thereafter."
10. Working Capital Covenant. Section 2.8 of the Covenants Supplement
is hereby deleted in its entirety and the following substituted therefor:
"2.7 Consolidated Working Capital. Borrower and its
subsidiaries, shall, at all times, until all Obligations have been
indefeasibly paid in full, maintain a Consolidated Working Capital of
not less than the amount set forth below during the periods set forth
below:
(a) $6,100,000 from July 31, 1996 to the day
immediately prior to the consummation of the
Qualified Public Offering;
(b) the sum of (i) $6,100,000 plus (ii) forty percent
(40%) of any QPO Proceeds received by Borrower, from the
date of consummation of the Qualified Public Offering and
at all times thereafter."
11. Inventory Appraisal. In addition to any rights Congress may
currently have pursuant to the Financing Agreements to obtain written reports or
appraisals as to the Inventory or any other Collateral, Borrower shall, at
Borrower's expense and within thirty (30) days from the date hereof, deliver or
cause to be delivered to Congress a written appraisal as to the Inventory in
form, scope and methodology acceptable to Congress and by an appraiser
acceptable to Congress, addressed to Congress or upon which Congress is
expressly permitted to rely.
<PAGE>
12. Release of Certain Life Insurance as Collateral. Upon the
effectiveness hereof, Congress shall automatically terminate any and all
security interests in and liens upon, and hereby reassigns to Borrower, all
rights of Borrower in any life insurance policies owned by Borrower upon the
life of Alan Densen and previously assigned by Borrower to Congress.
Notwithstanding the foregoing release of certain Collateral, nothing contained
herein shall be deemed to be an acknowledgement that the indebtedness previously
secured by the life insurance policies has been paid or satisfied in full.
13. Extension Fee. In consideration of the amendments set forth herein,
Borrower shall, on the date hereof, pay to Lender, or Lender at its option shall
charge the account of Borrower maintained by Lender, an extension fee in the
amount of $20,000.00, which fee is fully earned as of the date hereof.
14. Conditions Precedent. The effectiveness of the other terms and
provisions contained herein shall be subject to the receipt by Congress of an
original of this Amendment, duly authorized, executed and delivered by Borrower,
Puerto Rico Safety Equipment Corporation, Puerto Rico Safety Corporation,
Disposable Safety Wear Inc. and Safety Wear Corp.
15. Effect of this Amendment. Except as specifically modified pursuant
hereto, no other changes or modifications to the Financing Agreements are
intended or implied and in all other respects the Financing Agreements are
hereby specifically ratified, restated and confirmed by all parties hereto as of
the effective date hereof. To the extent of any conflict between the terms of
this Amendment and the other Financing Agreements, the terms of this Amendment
shall control.
16. Further Assurances. The parties hereto shall execute and deliver
such additional documents and take such additional action as may be requested by
such parties to effectuate the provisions and purposes of this Amendment.
17. Governing Law. The validity, construction and effect of this
Agreement shall be governed by the laws of the State of New York.
18. Binding Effect. This Amendment shall be binding upon and inure to
the benefit of each of the parties hereto and their respective successors and
assigns.
<PAGE>
19. Counterparts. This Amendment may be executed in any number of
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
Very truly yours,
EASTCO INDUSTRIAL SAFETY CORP.
By: /s/ Anthony P. Towell
-------------------------------
Title: Vice President
-------------------------------
ACKNOWLEDGED AND AGREED:
CONGRESS FINANCIAL CORPORATION
By: /s/ Martin J. Machory
-------------------------------
Title: Assistant Vice President
-------------------------------
<PAGE>
CONSENT
The undersigned guarantors hereby consent to the foregoing Amendment
and ratify and confirm the terms of their respective Guarantee and Waivers as
applicable to all present and future indebtedness, liabilities and obligations
of EASTCO INDUSTRIAL SAFETY CORP. to CONGRESS FINANCIAL CORPORATION including,
without limitation, all indebtedness, liabilities and obligations under the
amended financing agreements.
PUERTO RICO SAFETY EQUIPMENT
CORPORATION
By: /s/ Anthony P. Towell
-------------------------------
Title: Vice President
----------------------------
PUERTO RICO SAFETY CORPORATION
By: /s/ Anthony P. Towell
-------------------------------
Title: Vice President
----------------------------
DISPOSABLE SAFETY WEAR INC.
By: /s/ Anthony P. Towell
-------------------------------
Title: Vice President
----------------------------
SAFETY WEAR CORP.
By: /s/ Anthony P. Towell
-------------------------------
Title: Vice President
----------------------------
<PAGE>
EXHIBIT I
NEW EQUIPMENT TERM NOTE
$______________ _______________, 19__
FOR VALUE RECEIVED, EASTCO INDUSTRIAL SAFETY CORP., a_________________
____________________ corporation (the "Debtor"), hereby unconditionally promises
to pay to the order of CONGRESS FINANCIAL CORPORATION, a California corporation
(the "Payee"), at the offices of Payee at 1133 Avenue of the Americas, New York,
New York 10036, or at such other place as the Payee or any holder hereof may
from time to time designate, the principal sum of ______________________ DOLLARS
($______________) in lawful money of the United States of America and in
immediately available funds, in _________________ (__) consecutive monthly
installments (or earlier as hereinafter referred to) on the first day of each
month commencing ___________________, 19___, of which the first
_____________________ (__) installments shall each be in the amount of
________________________________ DOLLARS ($______________), and the last
installment shall be in the amount of the entire unpaid balance of this Note.
Debtor hereby further promises to pay interest to the order of Payee in
like money at said office or place from the date hereof, payable commencing
_____________________, 19___ and on the first day of each month thereafter, on
the unpaid principal balance hereof at the applicable rate, prior to an Event of
Default (as hereinafter defined) or termination or non-renewal of the Financing
Agreements (as hereinafter defined), set forth in Section 3.1 of the Accounts
Agreement (as defined below) and at the applicable rate, upon and after an Event
of Default or termination or non-renewal of the Financing Agreements, set forth
in Section 3.2 of the Accounts Agreement.
This Note is issued pursuant to the terms and provisions of Amendment
No. 7 to Financing Agreements, dated as of July _, 1996 (the "Amendment") to
evidence a "New Equipment Term Loan" (as defined in the Amendment) made by Payee
to Debtor. This Note is secured by the "Collateral" described in the Accounts
Financing Agreement [Security Agreement], dated as of October 1, 1991, by and
between Payee and Debtor, as amended (the "Accounts Agreement") and any
agreement, document or instrument now or at any time hereafter executed and/or
delivered in connection therewith or related thereto (the foregoing, as the same
now exist or may hereafter be amended, modified, supplemented, renewed,
extended, restated or replaced, are hereinafter collectively referred to as the
"Financing Agreements") and is entitled to all of the benefits and rights
thereof and of the Financing Agreements. At the time any payment is due
hereunder,
<PAGE>
at its option, Payee may charge the amount thereof to any account of Debtor
maintained by Payee.
If any principal or interest payment is not made when due hereunder, or
if any other Event of Default (as defined in the Accounts Agreement) shall occur
for any reason, or if the Financing Agreements shall be terminated or not
renewed for any reason whatsoever, then and in any such event, in addition to
all rights and remedies of Payee under the Financing Agreements, applicable law
or otherwise, all such rights and remedies being cumulative, not exclusive and
enforceable alternatively, successively and concurrently, Payee may, at its
option, declare any or all of Debtor's obligations, liabilities and indebtedness
owing to Payee under the Financing Agreements (the "Obligations"), including,
without limitation, all amounts owing under this Note, to be due and payable,
whereupon the then unpaid balance hereof together with all interest accrued
thereon, shall forthwith become due and payable, together with interest accruing
thereafter at the then applicable rate stated above until the indebtedness
evidenced by this Note is paid in full, plus the costs and expenses of
collection hereof, including, but not limited to, reasonable attorneys' fees.
Debtor (i) waives diligence, demand, presentment, protest and notice of
any kind, (ii) agrees that it will not be necessary for any holder hereof to
first institute suit in order to enforce payment of this Note and (iii) consents
to any one or more extensions or postponements of time of payment, release,
surrender or substitution of collateral security, or forbearance or other
indulgence, without notice or consent. Upon the occurrence of any Event of
Default and at any time thereafter, Payee shall have the right, but not the
obligation to setoff against this Note all money owed by Payee to Debtor.
Payee shall not be required to resort to any Collateral for payment,
but may proceed against Debtor and any guarantors or endorsers hereof in such
order and manner as Payee may choose. None of the rights of Payee shall be
waived or diminished by any failure or delay in the exercise thereof.
Debtor hereby waives the right to a trial by jury and all rights of
setoff and rights to interpose counterclaims and cross-claims in any litigation
or proceeding arising in connection with this Note, the Accounts Agreement, the
other Financing Agreements, the Obligations or the Collateral, other than
compulsory counterclaims, the non-assertion of which would result in a permanent
waiver. Debtor hereby irrevocably consents to the non-exclusive jurisdiction of
the Supreme Court of the State of New York and of the United States District
Court for the Southern District of New York for all purposes in connection with
any action or proceeding arising out of or relating to this Note, the Accounts
Agreement, the other Financing Agreements, the
<PAGE>
Obligations or the Collateral and further consents that any process or notice of
motion or other application to said Courts or judge thereof, or any notice in
connection with any proceeding hereunder may be served (i) inside or outside the
State of New York by registered or certified mail, return receipt requested, and
service or notice so served shall be deemed complete five (5) days after the
same shall have been posted or (ii) in such other manner as may be permissible
under the rules of said Courts. Within thirty (30) days after such mailing,
Debtor shall appear in answer to such process or notice of motion or other
application to said Courts, failing which Debtor shall be deemed in default and
judgment may be entered by Payee against Debtor for the amount of the claim and
other relief requested therein.
The execution and delivery of this Note has been authorized by the
Board of Directors and by any necessary vote or consent of the stockholders of
Debtor.
This Note, the other Obligations and the Collateral shall be governed
by and construed in accordance with the laws of the State of New York and shall
be binding upon the successors and assigns of Debtor and inure to the benefit of
Payee and its successors, endorsees and assigns. If any term or provision of
this Note shall be held invalid, illegal or unenforceable, the validity of all
other terms and provisions hereof shall in no way be affected thereby.
This Note may not be changed, modified or terminated orally, but only
by an agreement in writing signed by the Payee or the holder hereof.
Whenever used herein, the terms "Debtor" and "Payee" shall be deemed to
include their respective successors and assigns.
EASTCO INDUSTRIAL SAFETY CORP.
ATTEST:
By:
----------------------------------
- ---------------------------
Secretary Title:
----------------------------------
<PAGE>
Exhibit 10.07
AGREEMENT made this 30th day of June, 1996 by and between EASTCO
INDUSTRIAL SAFETY CORP., a New York corporation having offices at 130 West 10th
Street, Huntington Station, New York 11746 (hereinafter referred to as the
"Employer") and _______________, an individual residing at
______________________, (hereinafter referred to as the "Employee").
WHEREAS, the Employer and Employee have entered into an employment
agreement dated July 1, 1995 (the "Employment Agreement"); and
WHEREAS, the Employer is about to or has raised certain monies pursuant
to two private placements pursuant to which it will be issuing 5,130,000 shares
of common stock and will be entering into a Rights and Standby offering pursuant
to a letter of intent entered into with Royce Investment Group Inc. dated May
14, 1996 all of which are herein referred to as the "Offering"; and
WHEREAS, the Employee is willing to waive certain rights that he has
under the Employment Agreement solely with respect to the Offerings to help and
assist the Employer in obtaining capital to improve its business for the benefit
of the Company's Shareholders; and
WHEREAS, in consideration of the Employee doing so, the Employer has
agreed to reaffirm the terms of the Employment Agreement as set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants set forth
herein, the parties agree as follows:
1. Employee hereby waives his right to bonuses based upon the
Employer's earnings or sales for the fiscal years ended June 30, 1996 and June
30, 1997 and compensation payable in the event of a Change in Control arising
with respect to the Offerings, his right to terminate his relationship with the
Employer as a result of the Offerings and all other rights that he would have
had arising solely from the Offerings.
2. Notwithstanding anything to the contrary contained herein no rights
of the Employee
<PAGE>
to receive compensation or payments or otherwise under the Employment Agreement
shall be deemed waived by the Employee with respect to (a) any subsequent state
of facts that may arise subsequent to the Offerings; (b) should the Employer
otherwise fail to adhere to the terms of the Employment Agreement or (c) should
the Employer terminate the Employment Agreement for any reason other than as
authorized in Section 10(a)(i), (ii) or (iii) of the Employment Agreement.
3. This Agreement shall be binding upon the heirs, successors and
assigns of the parties hereto.
4. Except as modified herein all of the terms and conditions of the
Employment Agreement shall continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals
on the date first above set forth.
EASTCO INDUSTRIAL SAFETY CORP.
By:
----------------------------------
----------------------------------
2
<PAGE>
WAIVER AGREEMENT
The undersigned hereby waive their right to any annual bonuses based
upon the Company's earnings before interest and taxes for each of the fiscal
years ended June 30, 1996 through June 30, 2000 pursuant to their employment
agreements with Eastco Industrial Safety Corp. made as of July 1, 1995. The
provision for the reduction of the exercise price of stock option to $.10 per
share will not be applicable to options granted under any of the Company's
Qualified Incentive Stock Option Plans.
Dated: 24 September 1996
/s/ Alan E. Densen
-------------------------------
Alan E. Densen
/s/ Lawrence Densen
-------------------------------
Lawrence Densen
/s/ Anthony P. Towell
-------------------------------
Anthony P. Towell
<PAGE>
Exhibit 11
EASTCO INDUSTRIAL SAFETY CORP.
AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
Year Ended June 30,
1996 1995
---------- ----------
Primary:
- --------
Net earnings $ 10,037 $ 77,937
========= =========
Average common shares outstanding 362,391 347,738
--------- ---------
Dilutive options and warrants outstanding 613,680 414,245
Less shares attributable to application
of treasury stock method at average
prices of $14.03 and $13.75 per share
for the years ended June 30, 1996 and
1995, respectively (380,313) (369,454)
--------- ---------
Net incremental shares applicable
to common stock equivalents 233,367 44,791
--------- ---------
Number of common and common equivalent
shares outstanding 595,758 392,529
========= =========
Earnings per common and common equivalent
shares outstanding $.017 $.199
===== =====
Rounded $.02 $.20
==== ====
Fully Diluted:
- --------------
Dilutive options and warrants outstanding 613,680 414,245
Less shares applicable to application of
treasury stock method at June 30, 1996
average price of $14.03 and at June 30,
1995 closing price of $17.50 per share (380,313) (290,285)
--------- ---------
Net incremental shares applicable to
common stock equivalents 233,367 123,960
--------- ---------
Number of common and common equivalent
shares outstanding 595,758 471,698
========= =========
Earnings per fully diluted common and
common equivalent shares outstanding $.017 $.165
===== =====
Rounded $.02 $.17
==== ====
*The limitation on shares subject to the treasury stock method, pursuant to the
provisions of Paragraph 38 of Accounting Principles Board Opinion Number 15,
is not applicable because the result of applying such provisions is
anti-dilutive.
All amounts for average common shares outstanding and dilutive options and
warrants have been restated to give retroactive effect to the 1-for-10 reverse
stock split in August 1996.
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of the
Registration Statement on Form SB-2 of our report dated September 11, 1996,
relating to the consolidated financial statements of Eastco Industrial Safety
Corp. and Subsidiaries as at June 30, 1996 and for each of the two years in the
period ended June 30, 1996 and to the reference to our firm under the heading
"Experts" in such Prospectus.
Dated: Uniondale, New York
September 25, 1996
/s/ Cornick, Garber & Sandler, LLP
----------------------------------
CORNICK, GARBER & SANDLER, LLP
<PAGE>
CONSENT OF COUNSEL
We hereby consent to the use of the name wheresoever set forth in this
Registration Statement (SB-2).
Dated: Garden City, New York
September 25, 1996
/s/ Hollenberg Levin Solomon Ross Belsky & Daniels, LLP
-------------------------------------------------------
HOLLENBERG LEVIN SOLOMON ROSS BELSKY & DANIELS, LLP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 646
<SECURITIES> 0
<RECEIVABLES> 4,824
<ALLOWANCES> 155
<INVENTORY> 5,230
<CURRENT-ASSETS> 10,987
<PP&E> 2,626
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<CURRENT-LIABILITIES> 9,434
<BONDS> 434
0
0
<COMMON> 92
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<TOTAL-LIABILITY-AND-EQUITY> 12,472
<SALES> 26,983
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<CGS> 21,496
<TOTAL-COSTS> 4,441
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<INTEREST-EXPENSE> 836
<INCOME-PRETAX> 10
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