<PAGE>
As filed with the Securities and Exchange Commission on July 2, 1996
Registration No. 333-1835
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
AMENDMENT NO 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________________
MICROENERGY, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 3679 36-3262274
- -------------------------- ------- ---------------------------------
(State of Incorporation) (S.I.C) (IRS Employer Identification No.)
ROBERT G. GATZA, CHAIRMAN OF THE BOARD
MicroENERGY, Inc.
350 Randy Road
Carol Stream, Illinois 60188
(708) 653-5900
(ADDRESS AND TELEPHONE OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES,
PRINCIPAL PLACE OF BUSINESS, AND AGENT FOR SERVICE OF PROCESS)
______________________
COPIES TO
ROBERT BRANTL, ESQ. HARTLEY BERNSTEIN,ESQ
Bressler, Amery & Ross Bernstein & Wasserman, LLP
17 State Street 950 Third Avenue
New York, New York 10004 New York, NY 10022
Attorney for Issuer Attorney for Representative
212-425-9300 212-826-0730
212-425-9337 (fax) 212-371-4730 (fax)
______________________
APPROXIMATE DATE OF COMMENCEMENT OF PUBLIC SALE: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or contest basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [x]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration number of the
earlier effective registration statement for the same offering. [ ].
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering[ ]
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box. [x]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===================================================================================================================
Proposed Proposed
Title of each maximum maximum aggre-
class of securities Amount to offering price gate offering Amount of
being registered be registered per share price registration fee
- ------------------- ------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Series A Cumulative
Preferred
Shares, $7.00 par value 494,500 Shares $ 7.00 $3,461,500 $1,193.62
- -------------------------------------------------------------------------------------------------------------------
Class A Preferred Stock
Purchase Warrants 247,250 Warrants $ .10 $ 24,725 $ 8.53
- -------------------------------------------------------------------------------------------------------------------
Class A Preferred Stock
Purchase Warrants (1) 880,000 Warrants $ .10 $ 880. $ .30
- -------------------------------------------------------------------------------------------------------------------
Series A Preferred Stock(2) 1,127,250 Shares $ 7.00 $7,890,750 $2,720.95
- -------------------------------------------------------------------------------------------------------------------
Series A Cumulative
Preferred
Shares, $7.00 par value 49,500 Shares
Class A Preferred Stock
Purchase Warrants (3) 24,725 Warrants $16.92 $ 418,347 $ 144.26
- -------------------------------------------------------------------------------------------------------------------
Series A Preferred Stock (4) 24,725 Shares $ 7.00 $ 173,075 $ 59.68
- -------------------------------------------------------------------------------------------------------------------
Common Shares (5) 144,229 Shares -- -- --
- -------------------------------------------------------------------------------------------------------------------
Total (6)................................................................................$4,127.34
===================================================================================================================
</TABLE>
(1) Represents Class A Warrants to be offered by the Selling Securityholders.
(2) Represents 247,250 Preferred Shares reserved for issuance upon exercise of
Class A Warrants sold by the Company and 880,000 Preferred Shares reserved
for exercise of Class A Warrants sold by the Selling Securityholders.
(3) Represents Securities issuable upon exercise of Underwriters' Warrants.
(4) Represents Preferred Shares reserved for exercise of Class A Warrants
included in Underwriter's Warrants.
(5) Represents the Registrant's good faith estimate of the number of
Common Shares which may be issued as dividends on the Preferred Shares.
(6) Plus an undetermined number of Preferred Shares which may be issued in the
event that the anti-dilution provisions of the Warrants become effective.
================================================================================
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT
THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND
EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE>
CROSS-REFERENCE SHEET
Pursuant to Item 501(b)
Form S-1 Item Number and Heading Prospectus Heading
- -------------------------------- ------------------
1. Forepart of the Registration State- Front Cover of Prospec-
ment and Outside Front Cover Page of tus
Prospectus
2. Inside Front and Outside Back Cover Inside Front and Outside
Pages of Prospectus Back Cover of Prospectus
3. Summary Information, Risk Factors, Prospectus Summary, Risk
Ratio of Earnings to Fixed Charges Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Underwriting
6. Dilution Not Applicable
7. Selling Security Holders Selling Securityholders
8. Plan of Distribution Underwriting
9. Description of the Securities to be Description of the
Registered Company's Securities
10. Interest of Named Experts and Counsel Legal Matters; Experts
11(a) Description of Business Business of the Company
11(b) Description of Property Business of the Company
11(c) Legal Proceedings Not Applicable
11(d) Market Price, Dividends Price Range of Common
Stock, Dividends
11(e) Financial Statements Financial Statements
11(f) Selected Financial Data Selected Financial Infor-
mation
11(g) Supplementary Financial Information Not Applicable
11(h) Management's Discussion Management's Discussion
11(i) Changes in and Disagreements With
Accountants Not Applicable
11(j) Directors and Executive Officers Management
11(k) Executive Compensation Management
11(l) Security Ownership Principal Shareholders
11(m) Certain Relationships and Related
Transactions Certain Transactions
12 Disclosure of Commission Position
on Indemnification Underwriting
4
<PAGE>
SUBJECT TO COMPLETION, DATED JULY 2, 1996
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.
[LOGO OF MICROENERGY]/TM/
MICROENERGY, INC.
494,500 SHARES OF SERIES A CUMULATIVE PREFERRED STOCK AND
247,250 REDEEMABLE CLASS A WARRANTS FOR PREFERRED STOCK
The securities offered hereby consist of 494,500 shares of Series A
Cumulative Preferred Stock, $7.00 par value per share ("Preferred Stock"), of
MicroENERGY, Inc. (the "Company"), and 247,250 Redeemable Class A Warrants for
Series A Preferred Stock ("Class A Warrant"). The Preferred Stock and Class A
Warrants (collectively, the "Securities") may be purchased separately and will
be separately transferable immediately upon issuance. The Preferred Stock is
not convertible into any other security. In the event of the liquidation of the
Company, holders of the Preferred Stock will be entitled to a liquidation
preference of $7.00 per share, plus any accrued but unpaid dividends, and will
thereafter share in the net assets with the holders of the Company's Common
Stock on a 2-to-1 basis. Holders of the Preferred Stock will be entitled to
exercise one vote per share at all meetings of the Company's shareholders. See
"DESCRIPTION OF SECURITIES."
Dividends on the Preferred Stock are cumulative from the date of issue and
are payable semi-annually at a rate of 8% per annum. At the Company's option,
the Company may pay each dividend, in whole or in part, either in cash or in
shares of the Company's Common Stock valued at the average closing bid price
for the ten days preceding the date for payment of the dividend. In addition,
if the Company pays any dividend with respect to a share of its Common Stock,
it will pay twice that amount as an additional dividend on each share of
Preferred Stock.
Each Class A Warrant entitles the holder to purchase one share of the
Company's Series A Preferred Stock at an exercise price of $7.00, subject to
adjustment, from , 1997 through , 2000. At any time that the Class
A Warrants are exercisable, the Warrants are also subject to redemption by the
Company on not less than 30 days notice at $.01 per Warrant, provided the
closing bid price of the Preferred Stock exceeds $9.00 per share for five
consecutive trading days ending within fifteen days prior to the date on which
notice is sent. See "DESCRIPTION OF SECURITIES".
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. AN INVESTMENT IN THESE SECURITIES SHOULD BE CONSIDERED ONLY BY PERSONS
CAPABLE OF SUSTAINING THE LOSS OF THEIR ENTIRE INVESTMENT. SEE: "RISK FACTORS."
The Company's Common Stock is currently quoted on the NASDAQ Bulletin Board.
There is currently no market for either the Preferred Shares or the Class A
Warrants. The Company applied to have the Preferred Stock, the Class A Warrants
and the Company's Common Stock listed on the NASDAQ SmallCap Market. The
Preferred Stock and the Class A Warrants will be listed on the NASDAQ SmallCap
Market on the effective date of this Offering, but the Common Stock will not be
listed because it does not satisfy certain NASDAQ listing requirements.
The registration statement of which this prospectus forms a part also covers
the offering of 880,000 Class A Warrants owned by six securityholders (the
"Selling Securityholders"). These Class A Warrants are identical to the Class A
Warrants being offered by the Company. The Securities held by the Selling
Securityholders may be sold concurrent with or after this Offering. Sales of
such securities or even the potential of such sales at any time may have an
adverse effect on the market prices of the securities offered hereby. See
"SELLING SECURITYHOLDERS".
This Prospectus also relates to the shares of Preferred Stock issuable upon
exercise of the Class A Warrants and shares of Common Stock which may be issued
as dividends on the Preferred Stock. See "DESCRIPTION OF SECURITIES."
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................ $ 7.00 $ .70 $ 6.30
- --------------------------------------------------------------------------------
Per Class A Warrant...................... $ .10 $ .01 $ .09
- --------------------------------------------------------------------------------
Total.................................... $3,486,225 $348,623 $3,137,602
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Notes to table are on page 2)
I.A. RABINOWITZ & CO.
The date of this Prospectus is May , 1996
<PAGE>
(1) Does not include additional underwriting compensation to be paid by the
Company to the Representative in the form of (a) warrants to purchase
49,450 shares of Series A Preferred Stock at $8.40 per share and 24,725
Class A Warrants at $.12 per Warrant, exercisable over a period of four
years commencing one year from the date of this Prospectus (the
"Representative's Purchase Warrants"); (b) a non-accountable expense
allowance (the "Non-Accountable Expense Allowance") equal to three percent
of the aggregate initial public offering price of the Securities, namely
$104,587, $25,000 of which has been advanced to the Representative, and
(c) consulting fees of $48,000 payable to the Representative in full at
the closing of the public offering of the Securities. The Company and the
Representative have agreed to indemnify one another against certain
liabilities, including liabilities arising under the Securities Act of
1933, as amended. See "UNDERWRITING".
(2) Before deducting expenses of this offering payable by the Company
estimated to be $300,000, including the Representative's non-accountable
expense allowance of $104,587 and the $48,000 financial consulting fee
referred to above. After deducting such expenses, the net proceeds to the
Company will be approximately $2,837,602. See "USE OF PROCEEDS".
SHAREHOLDERS' REPORTS
The Company has not furnished its Shareholders with annual, quarterly or
other reports since 1991. The Company may in the future furnish holders of its
Common Stock and Preferred Stock with annual reports containing audited
financial statements examined and reported upon, with an opinion expressed by
the Company's independent certified public accountants, but no determination
to do so has been made.
----------------
THE SECURITIES ARE BEING OFFERED SUBJECT TO PRIOR SALE, WHEN, AS AND IF
DELIVERED TO AND ACCEPTED BY I.A. RABINOWITZ & CO., AND SUBJECT TO CERTAIN
OTHER CONDITIONS. THE REPRESENTATIVE RESERVES THE RIGHT TO WITHDRAW, CANCEL OR
MODIFY SUCH OFFER WITHOUT NOTICE AND TO REJECT ORDERS IN WHOLE OR IN PART. IT
IS EXPECTED THAT DELIVERY OF THE SECURITIES WILL BE MADE ON OR ABOUT ,
1996.
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE SECURITIES TO WHICH THIS PROSPECTUS RELATES OR AN OFFER TO OR SOLICITATION
OF ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE PREFERRED
STOCK OR THE WARRANTS OF THE COMPANY AT A LEVEL ABOVE THAT WHICH OTHERWISE
MIGHT PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed information,
financial statements and notes thereto appearing elsewhere in this Prospectus.
All references herein to a number of shares of Common Stock have been adjusted
to reflect the 1-for-360 reverse stock split of the Company's Common Stock on
May 13, 1996.
THE COMPANY
MicroENERGY, Inc. ("MicroENERGY" or the "Company") has been engaged since
1984 in the business of designing and manufacturing high-frequency power
supplies and DC-to-DC converters for original equipment manufacturers ("OEMs")
who are engaged in the telecommunications, computer, and instrumentation
segments of the electronics industry. Each of the Company's products is custom
designed to meet the specific needs of a customer within a power output range
of 25 watts to 2500 watts.
During the Company's eleven years of operations, the Company has acquired a
reputation in the marketplace for making timely deliveries of high-quality
power supplies which incorporate state-of-the-art engineering. In recent years,
however, the Company's growth has been stagnant, as the Company's ability to
attract new customers has been hampered by the Company's high debt-to-assets
ratio, which has caused some potential customers to question the Company's
financial stability. Since a typical customer order anticipates deliveries over
an extended period of time--often years--to meet the customer's manufacturing
schedule, OEM customers avoid any supplier whose ability to deliver over the
long term is in doubt. Thus, despite eleven years of timely deliveries,
customer doubts about MicroENERGY's financial stability continue to hinder
sales growth.
During the second and third quarters of fiscal 1996, two events occurred
which indicate that the Company may now enter a period of significant growth.
First, the Company received pre-production orders for new product designs from
eight OEM customers. While none of these orders create binding obligations on
the customers, the Company expects to receive production orders from each. If
all eight customers give the Company the production orders they have quoted,
the eight new products will represent $10.2 Million in annual sales beginning
in July, 1996. See "BUSINESS OF THE COMPANY--Marketing."
The second favorable recent event was the agreement of AT&T Global
Information Systems, which was the holder of $2.33 Million of the Company's
long-term debt, to accept an immediate payment of $1.33 Million in satisfaction
of the debt. The Company was able to effectuate that debt compromise by raising
approximately $1.0 Million in debt financing and $330,000 in equity financing
from the officers of the Company and the Selling Securityholders. In exchange
for payment of these sums to AT&T, AT&T forgave the remaining $1 Million of the
debt. See "CAPITALIZATION--Debt Compromise." The effect of the debt compromise
and related financing was to reduce the Company's total debt by $1.34 Million,
reduce the Company's debt-to-assets ratio from .88-to-1 as of December 31, 1995
to .68-to-1, and increase the Company's net worth by $1.3 Million, resulting in
a positive shareholders equity for the first time in several years.
The Company intends to use the net proceeds of this offering to finance the
expansion of operations necessitated by the expected new orders and to repay
some of its debt. See "USE OF PROCEEDS." Management believes that the financial
improvements brought about by this offering and the anticipated sales it will
finance will enable the Company to compete more effectively and facilitate a
period of growth.
3
<PAGE>
The Company's executive offices are located at 350 Randy Road, Carol Stream,
Illinois. Telephone: 708-653-5900.
Capitalization............ Currently Outstanding: Common Stock: 415,143
shares; Series A Preferred Stock: 350,000 shares
THE OFFERING BY THE COMPANY
Securities Offered........ 494,500 shares of Series A Preferred Stock, $7.00
par value and 247,250 Class A Warrants. The
Securities may be purchased separately and will be
separately transferable immediately upon issuance.
See "DESCRIPTION OF SECURITIES."
Representative's
Compensation............. I.A. Rabinowitz & Co. (the "Representative") will
receive as compensation for its services in this
offering a 10% discount on the purchase price of
the Securities, a 3% non-accountable expense
allowance and an option to purchase Securities
equal to ten percent of the Securities sold in this
offering. As part of the underwriting arrangements,
the Company will enter into an agreement retaining
the Representative as a financial consultant to the
Company for a two-year period commencing as of the
close of the sale of the securities offered hereby
at an annual fee of $24,000, for a total of $48,000
payable in full at the closing of the Offering, and
will pay an investment banking fee with respect to
any transaction introduced and consummated, and a
4% warrant solicitation fee. See: "UNDERWRITING."
PREFERRED STOCK
Payment of Dividends...... Dividends are cumulative from the date of issue of
shares of Preferred Stock and are payable semi-
annually at a rate of 8% per annum. The Company
may, at its sole discretion, pay each dividend
either in cash or in shares of Common Stock valued
at the average closing bid price for the ten days
preceding the record date for the dividend or in a
combination of cash and Common Stock. In addition,
if the Company pays any dividend with respect to a
share of its Common Stock, it will pay twice that
amount as an additional dividend on each share of
Preferred Stock. See "RISK FACTORS--Restrictions on
Payment of Dividends."
Tax Consequences of
Dividends................ To the extent that Common Stock is distributed as
dividends on the Preferred Stock, the amount
distributed for federal income tax purposes (and
consequently, subject to certain exceptions, the
amount of dividend income) to the holder of the
Preferred Stock would equal the fair market value
of such Common Stock on the date of distribution
and, accordingly, may be greater or less than the
value of the dividend as calculated in the
preceding section. See "RISK FACTORS--Income Tax
Considerations--Distribution of Common Stock as
Dividends" and "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS TO INVESTORS."
Redemption................ The Preferred Stock is not redeemable.
4
<PAGE>
Conversion................ The Preferred Stock is not convertible into any
other security.
Liquidation Preference.... Upon any liquidation, before distribution is made
to the holders of Common Stock, holders of the
Preferred Stock will be entitled to receive $7.00
per share, plus accrued and unpaid dividends to the
date of distribution. Holders of the Preferred
Stock will then participate with the holders of the
Common Stock in the Company's net assets on a 2-to-
1 basis, such that each share of Preferred Stock
will receive twice as much of the net assets as
each share of Common Stock.
Voting.................... The holders of Preferred Stock will be entitled to
one vote per share at any meeting of the Company's
shareholders.
WARRANTS
Terms of Class A
Warrants................. Each Class A Warrant entitles the holder to
purchase one share of the Company's Series A
Preferred Stock at a price of $7.00, subject to
adjustment, during the three year period beginning
one year after the date of this Prospectus. After
, 1997, the Class A Warrants are subject to
redemption by the Company at any time during the
exercise period on not less than 30 days' notice at
$.01 per Warrant provided the average closing price
of the Preferred Stock exceeds $9.00 per share for
5 consecutive trading days ending within 15 days
prior to the notice.
Proposed NASDAQ SmallCap Preferred Stock--MICRP; Class A Warrants--MICRW
Market Symbols:
Risk Factors.............. The securities are subject to a high degree of
risk. See: "RISK FACTORS."
5
<PAGE>
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
MARCH 31
-----------------------
1996 1995
----------- -----------
<S> <C> <C>
INCOME DATA:
Revenues.............................................. $10,718,611 $10,996,535
Operating Income...................................... 392,630 395,125
Net Income............................................ 1,151,869 146,170
Net Income Per Share.................................. $ 3.29 $ .46
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED
JUNE 30
-----------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
INCOME DATA:
Revenues.................................. $14,588,844 $12,771,067 $15,886,279
Operating Income.......................... 581,685 426,419 433,280
Net Income................................ 249,894 204,845 40,806
Net Income Per Share...................... $ .79 $ .65 $ .14
</TABLE>
<TABLE>
<CAPTION>
AS ADJUSTED TO REFLECT:
----------------------------------- ---
AT MAR. 31, 1996(1) PUBLIC OFFERING
------------------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working Capital/(Deficit) ........... $ (623,869)(2) $ 2,213,733(2)
Total Assets......................... 7,243,714 10,081,316
Long-Term Debt, Net.................. 969,514 969,514
Stockholders Equity.................. 543,389 3,380,991
</TABLE>
- --------
(1) Reflects the effect of $1 Million reduction in debt to AT&T and related
financing transactions from January through March of 1996. See
"CAPITALIZATION--Debt Compromise."
(2) Working capital, as shown, has been reduced by $1,332,000 which the Company
owed on March 31, 1996 to AT&T on a short-term basis as a result of the
Debt Compromise. See "CAPITALIZATION--Debt Compromise." Repayment of that
amount after March 31, 1996 increases working capital to $708,131 (before
Offering) and $3,545,733 (after Offering).
6
<PAGE>
RISK FACTORS
In making comparisons with other investments or in considering the success
of other investments, one should bear in mind that the success of any
investment depends upon many factors including opportunity, general economic
conditions, experience and competence of management. There is no
representation that the same positive factors are present in this Company
which have been present in like ventures that have been successful.
Any person who is considering the purchase of the Securities offered herein
should carefully consider the adverse factors described below. Any one or more
of these factors could have a negative effect on the Company of such impact as
to cause the value of the Company's securities to be greatly diminished.
I. RISKS RELATING TO THE COMPANY
1. POOR FINANCIAL CONDITION; LOW NET WORTH DUE TO LOSSES PRIOR TO 1993. At
March 31, 1996 the Company had a net worth of only $543,389. The debt
compromise that the Company contracted for in late January, 1996 improved the
net worth, which had been a deficit for several years, but in the event of a
liquidation all of that net worth would be allocated to the Preferred Stock
that was issued in connection with the debt compromise.
The balance sheet of the Company at March 31, 1996 shows a working capital
deficit of $623,869. That figure is primarily the result of offsetting
$5,730,811 in current liabilities (including $1,332,000 paid to AT&T after
March 31) against $3,448,466 in inventory. Most of that inventory consists of
raw materials, much of which could not be liquidated immediately, but will be
used in the normal course of production and shipment. The Company's cash
position, therefore, is not good, and the Company must depend on short-term
borrowings to finance its operations. This borrowing then exacerbates the
Company's poor debt-to-asset ratio, which gives the Company an appearance of
instability, which has had a serious negative effect on the Company's ability
to market its products. See "BUSINESS OF THE COMPANY--Marketing."
The Company anticipates that the proceeds of this public offering will be
adequate to finance the Company until cash flow from sales is sufficient for
the operation of the Company. If the Company is mistaken and a shortfall in
cash flow occurs, it will be difficult and perhaps impossible for the Company
to acquire additional financing, without which the Company would most likely
be forced to liquidate.
2. RISKS ATTENDANT TO PLANS FOR GROWTH. The Company intends to utilize a
significant portion of the net proceeds of this offering to make capital
improvements and other investments necessary to expand the Company's sales
volume. Like any business enterprise operating in a specialized and
competitive market, the Company is subject to many business risks which
include, but are not limited to, cancellation of significant orders, failure
of expected orders to be realized, inadequate capital, competition, and
technological advances by the Company's competitors. Many of the risks
inherent in the Company's business may be unforeseeable or beyond the control
of management. There can be no assurance that the Company will successfully
implement its business strategies in a timely or effective manner, or that
management of the Company will be able to generate sufficient sales to produce
significant growth or even maintain the current levels of operations. See:
"BUSINESS OF THE COMPANY".
3. LACK OF FIRM ORDERS. The Company is making this public offering to
acquire funds to enable it to finance an anticipated expansion of operations
based upon orders for newly designed products received from eight OEM
customers. However, as is customary in the electronics industry, none of these
orders constitutes a firm commitment to take delivery of the Company's
products until the customer authorizes a release for shipment. Such releases
are customarily given to cover shipments for a few months only. As of May 20,
1996 the Company's backlog (which consists entirely of released orders)
totalled $5,527,500, a 52% increase from the backlog on June 8, 1995. There
can be no assurance, however, that the Company will receive future orders from
these or other customers. The Company's future sales volume will depend on
follow-on sales of existing designs
7
<PAGE>
and sales of newly designed products now in the pre-production and early
production phases. The Company cannot make any confident prediction as to how
much business it will receive from those sources, and can give no assurance
that sales will equal or exceed current levels.
4. COMPETITION; RAPID TECHNOLOGICAL CHANGE. The electronics industry is
populated by many companies, large and small, with the technical expertise
capable of producing rapid and significant technological advances. These
advances often result in partial or total obsolescence of products within a
relatively short time. The Company sells its products in competition with many
other companies, many of which are substantially larger than the Company and
have far greater financial and other resources. These larger competitors are
capable of committing substantial resources to research and development of new
products, which is crucial in the markets in which the Company will compete.
As technological developments occur in the electronics industry, the Company's
relatively small capital resources may prevent it from making the investments
in research and development necessary to remain at the forefront of power
supply technology. Any technological short-fall in the Company's products
would virtually eliminate its ability to compete successfully. See "BUSINESS
OF THE COMPANY--The Industry."
5. DEPENDENCE ON MAJOR CUSTOMER. The Company has been selling power supplies
to various divisions of AT&T for several years. The relationship expanded when
AT&T acquired NCR Corporation, as the Company had earlier acquired the NCR
power supply division and was a primary supplier of power supplies to NCR. The
Company's sales to AT&T accounted for approximately 41% of the Company's total
revenues in the first nine months of fiscal 1996, 28% of the Company's total
revenues in fiscal 1995, 19% of the Company's total revenues in fiscal 1994,
and 41% of the Company's total revenues in fiscal 1993. Any termination or
significant reduction of this relationship would have a material adverse
effect on the business of the Company. There is no binding contract between
the Company and AT&T other than short-term purchase orders. See "BUSINESS OF
THE COMPANY--Marketing."
6. SCARCITY OF SEMICONDUCTORS. In order to manufacture its power supplies,
the Company must maintain a large inventory of semiconductors. At the present
time, the worldwide supply of certain types of semiconductors does not meet
the worldwide demand for those components. Moreover, the problem portends to
be a factor in the industry for many years to come, as the creation of a wafer
fabrication plant to produce these components entails an investment of $1
Billion to $2 Billion and up to two years for completion. MicroENERGY enjoys a
good relationship with its suppliers of semiconductors. Nevertheless, the
Company has no guaranteed source of semiconductors. Any shortage in the
Company's inventory of semiconductors could delay production of power supplies
and adversely affect the Company's sales and cash flow. See "BUSINESS OF THE
COMPANY--Sources of Components."
7. DEPENDENCE ON KEY PERSONNEL. The success of the Company is dependent upon
the services of its current management, particularly Robert G. Gatza, Chairman
of the Board and Chief Executive Officer, and Robert J. Fanella, Chief
Financial Officer. Although the Company has employment agreements with its
officers, those agreements do not assure the Company of the officers'
continued services. The Company has key man insurance on Mr. Fanella's life,
but has not insured Mr. Gatza's life. There is no assurance that the Company
would be able to locate and retain qualified persons to replace any member of
management. The prolonged unavailability of any current member of senior
management, whether as a result of death, disability or otherwise, could have
an adverse effect upon the business of the Company. See "MANAGEMENT."
The Company will also need to attract and retain technologically-qualified
personnel with backgrounds in engineering, production and marketing. There is
keen competition for such highly qualified personnel. The Company believes
that its current professional employees are of high caliber, and intends to
actively seek out additional highly qualified personnel as needed. But there
can be no assurance that the Company will be successful in recruiting or
retaining personnel of the requisite caliber or in the requisite number to
enable the Company to conduct its business as proposed.
8
<PAGE>
8. RELATED PARTY TRANSACTIONS. At several times throughout its history the
Company has relied upon the financial resources of its officers (Robert G.
Gatza and Robert J. Fanella) to facilitate certain corporate transactions and,
on occasion, to provide working capital. See "CERTAIN TRANSACTIONS." The
Company believes that all of these transactions have been made on terms which
were equal to or more favorable to the Company than terms which might have
been available in arms-length transactions. The Company may borrow funds in
the future from management when needed for operations or in connection with
major transactions, or management may be called upon to provide their personal
guarantees of one or more of the Company's obligations. If it appears to the
Board of Directors that the officers should be compensated for providing such
guarantees, the Company will do so.
9. LACK OF PATENT PROTECTION. The Company has no patents, and it is expected
that most of its switching power supply products will not be patented. The
Company believes that patent protection is not available for an entire power
supply. Although the Company has incorporated certain safeguards into the
designs for its power supplies, which will make them difficult to copy, the
designs can never be absolutely safeguarded.
II. RISKS RELATED TO THE COMPANY'S SECURITIES
10. EFFECT OF ISSUANCE OF SHARES ON TAX ATTRIBUTES. At June 30, 1995, the
Company had net operating loss ("NOL") carryforwards of approximately
$3,700,000 and investment tax credit, research and development credit, and
minimum tax credit ("MTC") carryforwards totalling approximately $233,000,
which, absent an "ownership change" as described below, would generally be
available to offset future taxable income and tax liability of the Company.
The Company believes that it will experience an "ownership change" within the
meaning of Section 382 of the Internal Revenue Code of 1986, as amended, no
later than the closing of this offering, and that, accordingly, a limitation
will be imposed under Section 382 of the Code on the utilization of NOL and
tax credit carryforwards. As a result, the Company does not expect to be able
to utilize its full NOL and tax credit carryforwards to offset future taxable
income and tax liability. See "CERTAIN FEDERAL INCOME TAX EFFECTS UPON THE
COMPANY." This limitation would have a materially adverse effect on the
Company's net income, if the Company were to generate taxable income or tax
liability materially in excess of the limitation.
11. INCOME TAX CONSIDERATIONS--DISTRIBUTION OF COMMON STOCK AS
DIVIDENDS. The receipt of a distribution of Common Stock as a dividend with
respect to Preferred Stock will be taxable to the extent of the fair market
value of the Common Stock distributed on the date of the distribution, subject
to certain exceptions. Accordingly, payment of a dividend in Common Stock may
give rise to taxable income to holders of Preferred Stock, for which taxes may
be payable, notwithstanding that no cash was distributed. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS TO INVESTORS."
12. CONFLICT OF INTEREST IN NEGOTIATION OF TERMS OF SECURITIES. During the
past several years, the Company has from time to time issued securities to
Robert G. Gatza and Robert J. Fanella in exchange for financial considerations
they have provided to the Company. See "CERTAIN TRANSACTIONS." Since Messrs.
Gatza and Fanella represent two of the three members of the Company's Board of
Directors, they had a conflict of interest in connection with each of those
transactions between their interest in obtaining favorable terms for the
Company and their self-interest in obtaining the highest possible
consideration for the debt they undertook. Recently, in connection with the
financing of the Debt Compromise with AT&T, the Company agreed to issue
350,000 shares of Series A Preferred Stock to Messrs Gatza and Fanella in
exchange for their payment of $250,000 and guarantees of $800,000 in debt. See
"CAPITALIZATION." The terms of the Series A Preferred Stock to be issued to
Messrs Gatza and Fanella will be identical to the terms of the Series A
Preferred Stock issued in this offering. Accordingly, while negotiating the
terms of this offering with the Underwriter,
9
<PAGE>
Messrs. Gatza and Fanella had a conflict of interest between their interest in
negotiating the best possible deal for the Company and their interest in
obtaining the most favorable terms for the Series A Preferred Stock. To
ameliorate the effect of that conflict, Messrs. Gatza and Fanella agreed to
waive the semi-annual dividends on the Series A Preferred Stock in excess of
$.40 per share as long as they hold their shares. Messrs Gatza and Fanella
believe that the terms of the transactions between them and the Company have
been equal to or more favorable to the Company than would have occurred in
arms-length transactions, but they have not made any investigation to support
their belief.
13. RESTRICTIONS ON PAYMENT OF DIVIDENDS. As a Delaware corporation, the
Company is permitted to declare and pay dividends only out of either (a)
capital surplus or (b) net profits for the fiscal year in which the dividend
is declared or the preceding fiscal year. If the Company's net worth does not
exceed its stated capital and it has not realized income in the year a
dividend is due or the preceding year, dividends may not be paid by the
Company on the Preferred Stock. Any dividends not paid will accrue. No
interest will be paid on any accrued but unpaid dividends. The Company's
ability to pay dividends will depend on the success of its operations. There
can be no assurance that the Company will realize sufficient financial success
to be able to pay dividends on the Preferred Stock. See "DIVIDENDS" and
"DESCRIPTION OF SECURITIES."
14. POSSIBLE REDEMPTION OF WARRANTS. The Company, at its option, may redeem
the Class A Warrants at $.05 per Warrant if the average bid price of the
Preferred Stock exceeds $7.00 at any time that the Warrants are exercisable.
In the event of the Company's exercise of such option, holders of Warrants
called for redemption would no longer be able to benefit from any increase in
the value of the underlying Preferred Stock unless they exercised their
Warrants at the Warrant exercise price. See "DESCRIPTION OF SECURITIES--
Warrants."
15. CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. Purchasers of the Class A Warrants will have the right to exercise
the Warrants only if a current prospectus relating to the shares underlying
the Warrants is then in effect and only if such shares are qualified for sale
under applicable state securities laws of the states in which the various
holders of the Warrants reside. There is no assurance that the Company will be
able to keep this Prospectus covering such shares current. The Warrants may be
deprived of any value if a current prospectus covering the shares issuable
upon exercise thereof is not kept effective or if such shares are not
registered in the states in which holders of the Warrants reside. See
"DESCRIPTION OF SECURITIES--Warrants".
16. "PENNY STOCK" REGULATIONS. The Securities and Exchange Commission (the
"Commission") has adopted regulations which generally define "penny stock" to
be an equity security that has a market price (as defined) of less than $5.00
per share or an exercise price of less than $5.00 per share, subject to
certain exceptions. Upon authorization of the Securities offered hereby for
quotation on the NASDAQ SmallCap Market, the Securities will initially be
exempt from the definition of "penny stock". The Company's Preferred Stock and
Class A Warrants will be listed on the NASDAQ SmallCap Market upon the
Effective Date of this offering, but its Common Stock will not be listed on
the NASDAQ SmallCap Market. If, however, the Securities offered hereby are
removed from NASDAQ, the Company's securities may become subject to rules that
impose additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and institutional
accredited investors. For transactions covered by these rules, the broker-
dealer must make a special suitability determination for the purchase of such
securities and have received the purchaser's written consent to the
transaction prior to the purchase. Additionally, for any transaction involving
a penny stock, unless exempt, the rules require the delivery, prior to the
transaction, of a disclosure schedule prepared by the Commission relating to
the penny stock market. The broker-dealer also must disclose the commissions
payable to both the broker-dealer and the registered representative, current
quotations for the securities and, if the broker-dealer is the sole market-
maker, the broker-dealer must disclose this fact and the broker-dealer's
presumed control over the market. Finally, monthly statements must be sent
disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stocks. Consequently, the
"penny stock" rules may restrict the ability of broker-dealers to sell the
Company's securities and may affect the ability of purchasers in the offering
to sell the Company's securities in the secondary market.
10
<PAGE>
17. LACK OF PRIOR MARKET FOR PREFERRED STOCK AND WARRANTS. Prior to this
offering, no public trading market existed for the Preferred Stock or the
Warrants. There can be no assurances that a public trading market for the
Securities will develop or that a public trading market, if developed, will be
sustained. Upon completion of this offering, the Preferred Stock and Warrants
will be eligible for inclusion on the National Association of Securities
Dealers Automated Quotation System Small Cap Market ("NASDAQ"). If for any
reason, however, such Securities do not remain listed on NASDAQ or a public
trading market does not develop, purchasers of the Securities may have
difficulty in selling their Securities should they desire to do so. In any
event, due to the price of the Company's securities, many brokerage firms will
not effect transactions in the Securities and it is unlikely that any bank or
financial institution will accept such Securities as collateral, which could
have an adverse effect in developing or sustaining any market for the
Company's Preferred Stock or Warrants. Although it has no legal obligation to
do so, the Representative from time to time may act as market maker and
otherwise effect transactions in the Company's securities. The Representative,
if it participates in the market, may become a dominating influence in any
market that might develop for any of the Company's securities. However, there
is no assurance that the Representative will continue to be a dominating
influence. The prices and liquidity of the Company's securities may be
significantly affected by the degree, if any, of the Representative's
participation in the market, the Representative's dominating influence on any
market that may develop and the fact that a significant number of the
Securities may be sold to existing customers of the Representative. The
Representative may discontinue such activities at any time. Further, the
market for, and liquidity of, the Company's securities may be adversely
effected by the fact that a significant amount of the Securities may be sold
to customers of the Representative. Under the rules of the National
Association of Securities Dealers, Inc. ("NASD"), in order to qualify for
initial quotation of securities on NASDAQ, a company, among other things, must
have at least $4,000,000 in total assets, $2,000,000 in total capital and
surplus, $1,000,000 in market value of public float, a minimum bid price of
$3.00 per share and at least two (2) market makers. For continued listing, a
company, among other things, must have $2,000,000 in total assets, $1,000,000
in total capital and surplus, $1,000,000 in market value of public float and a
minimum bid price of $1.00 per share. If the Company is unable to satisfy the
requirements for quotation on NASDAQ, trading if any, in the Preferred Stock
and Warrants offered hereby would be conducted in the over-the-counter market
in what are commonly referred to as the "pink sheets" or on the NASD's
Electronic Bulletin Board. As a result, an investor may find it more difficult
to dispose of, or to obtain accurate quotations as to the price of, the
Securities offered hereby. The above-described rules may materially adversely
affect the liquidity of the market for the Company's Securities. See:
"UNDERWRITING".
18. RESTRICTIONS ON MARKETMAKING ACTIVITIES DURING WARRANT SOLICITATION. To
the extent that the Representative solicits the exercise of Class A Warrants,
the Representative may be prohibited pursuant to the requirements of Rule 10b-
6 under the Exchange Act from engaging in marketmaking activities during such
solicitation and for a period of up to nine days preceding such solicitation.
As a result, the Representative may be unable to continue to provide a market
for the Company's securities during certain periods while the Class A Warrants
are exercisable. The Representative is not obligated to act as a marketmaker.
See "UNDERWRITING".
19. REPRESENTATIVE'S PURCHASE WARRANT. In connection with this Offering, the
Company will sell to the Representative, for nominal consideration, a warrant
to purchase 49,450 shares of Series A Preferred Stock and 24,725 Class A
Warrants (the "Representative's Warrant"). The Representative's Warrant will
be exercisable commencing one year after the Effective Date and ending four
years after such date, at a price of $8.40 per share and $.12 per warrant,
subject to certain adjustments. The holders of the Representative's Warrants
will have the opportunity to profit from a rise in the market price of the
Company's securities, without assuming the risk of ownership. The Company may
find it more difficult to raise additional capital if it should be needed for
the business of the Company while the Representative's Warrant is outstanding.
At any time when the holders thereof might be expected to exercise them, the
Company would probably be able to obtain additional capital on terms more
favorable than those provided by the Representative's Warrant. See:
"UNDERWRITING."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
Securities being offered hereby, after the deduction of the underwriting
discounts and the expenses of this Offering, are estimated at $2,837,602.
The Company will not receive any proceeds from the sale of Warrants by the
Selling Securityholders.
The Company intends to allocate the net proceeds of this Offering in the
approximate amounts set forth below:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE
APPROXIMATE AMOUNT OF NET PROCEEDS
------------------ ----------------------
<S> <C> <C>
Capital Improvements(1)............... $ 700,000 24.7%
Financing New Sales(1)................ 600,000 21.1%
Repayment of Debt(2).................. 700,000 24.7%
Repayment of Bridge Debt(3)........... 187,000 6.7%
Working Capital(4).................... 650,602 22.9%
----------
Total............................... $2,837,602
</TABLE>
- --------
(1) The Company has received pre-production orders for new designs from 8 OEM
customers which, if they turn into production orders on the terms
proposed by the customers, will represent up to $10.2 Million in annual
sales by the Company. In order to satisfy those orders, should they
occur, the Company will have to purchase additional inventories of raw
material parts, pay labor costs and incur the other upfront expenses of
manufacturing the products. Moreover, although the Company's factories
have sufficient capacity to fill the new orders, the Company will have to
invest in certain new equipment to meet the demands of the increased
sales volume.
(2) The Company will utilize a portion of the proceeds to reduce its
indebtedness on its credit line. The Company pays interest on its credit
line at a rate of prime plus 2.5%. The line of credit is secured by all
of the Company's assets.
(3) Represents repayment of bridge financing consisting of promissory notes
bearing interest at 8% per annum which are payable on the earlier of (a)
April 1, 1997 or (b) the date on which this Offering closes.
See: "CAPITALIZATION--Bridge Financing." The Company used the proceeds of
the Bridge Financing to help finance its compromise of its largest
outstanding debt. See "CAPITALIZATION--Debt Compromise."
(4) Working Capital will be used for general corporate purposes, such as
salaries and purchase of inventory.
The foregoing represents the Company's best estimate of the allocation of
net proceeds of this offering based upon the Company's current business plan
and current economic and industry conditions. The estimate is subject to
reapportionment among the categories listed above or to new categories in
response to, among other things, changes in the Company's plans and changes in
industry conditions.
Pending application of the net proceeds, such proceeds will be invested in
certificates of deposit, government debt instruments, and/or other short-term
investments.
12
<PAGE>
PRICE RANGE OF COMMON STOCK
The following table sets forth the prices for the Company's Common Stock as
quoted on the NASDAQ Bulletin Board. The prices take into account the 1-for-
360 reverse stock split on May 13, 1996, as the actual prices have been
multiplied by 360. It should be noted, however, that quotations for securities
priced in dollars tend to show smaller differentials between bid and asked
prices than quotations for securities priced in pennies. The prices listed
below, therefore, may not constitute an accurate representation of what the
market for the Common Stock would have been if the reverse stock split had
occurred prior to May 13, 1996, but are simply a mathematical extrapolation of
the market as it existed prior to the reverse stock split.
<TABLE>
<CAPTION>
BID ASKED
------------ ------------
QUARTER ENDING HIGH LOW HIGH LOW
-------------- ------ ----- ------ -----
<S> <C> <C> <C> <C>
March 31, 1996........................................ $ 8.10 $ .36 $81.00 $6.84
December 31, 1995..................................... $18.00 $1.80 $36.00 $9.00
September 30, 1995.................................... $16.20 $ .90 $28.80 $3.60
June 30, 1995......................................... $ 2.88 $ .36 $ 9.00 $2.70
March 31, 1995........................................ $ 1.80 $1.08 $ 5.40 $3.24
December 31, 1994..................................... $ 5.40 $ .36 $ 8.10 $3.60
September 30, 1994.................................... $ 7.20 $1.80 $18.00 $5.40
June 30, 1994......................................... $ 4.68 $1.80 $11.25 $5.40
March 31, 1994........................................ $ 4.68 $1.80 $10.80 $5.40
December 31, 1993..................................... $ 7.20 $1.80 $18.00 $5.40
September 30, 1993.................................... $10.80 $3.60 $16.20 $9.90
</TABLE>
The foregoing quotations represent prices between dealers and do not include
retail mark-up, mark-down, or commissions, and may not necessarily represent
actual transactions.
As of July 1, 1996, the Company had 3,133 holders of record of the Common
Stock.
13
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company and its
consolidated subsidiaries. The first column sets forth the capitalization at
March 31, 1996. The second column shows the effect of adjustment to give
effect to the sale of the Securities offered hereby and the intended of the
net proceeds therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1996
-----------------------------
AFTER
ACTUAL OFFERING
----------- -----------
<S> <C> <C> <C>
Long-term Debt (1)............................... $ 969,514 $ 969,514
Shareholders Equity:
Common Stock--Par Value $.01 Per Share,
Authorized--4,000,000 Shares; Outstanding--
415,143 Shares (2)............................ 4,151 4,151
Preferred Stock--No Par Value, Authorized--
4,000,000 Shares; Outstanding--350,000; To Be
Outstanding--844,500 Shares. Liquidation
Preference of $250,000, $3,711,500 after
Offering...................................... 250,000 3,711,500
Additional Paid In Capital..................... 5,837,379 5,188,757
Accumulated Deficit............................ (5,356,650) (5,356,650)
Unearned Restricted Stock Comp................. (1,415,050) (1,415,050)
Stock Purchase Warrants........................ 88,075 112,800
Treasury Stock, at cost........................ (16,386) (16,386)
Current Year Earnings.......................... 1,151,869 1,151,869
----------- -----------
Total Stockholders Equity........................ 543,389 3,380,991
Total Capitalization............................. $ 1,512,903 $ 4,350,505
</TABLE>
- --------
(1) See Note 5 to Consolidated Financial Statements.
(2) Does not include (i) Class C Warrants to purchase 56,944 shares at $22.68
per share held by Robert G. Gatza and Robert J. Fanella (See "CERTAIN
TRANSACTIONS"), (ii) shares of Preferred Stock issuable upon exercise of
the 880,000 Class A Warrants currently outstanding (See "SELLING
SECURITYHOLDERS AND PLAN OF DISTRIBUTION") and the 247,725 Class A
Warrants to be sold in this offering, (iii) 49,450 shares of Preferred
Stock issuable upon exercise of the Representative's Purchase Warrant,
(iv) 24,725 shares of Preferred Stock issuable upon exercise of Class A
Warrants which are issuable upon exercise of Representative's Purchase
Warrants, or (v) 13,292 shares of Common Stock which are issuable upon
the exercise of outstanding stock options.
DEBT COMPROMISE
At December 31, 1995 the Company was indebted to a competitor in the amount
of $2,332,495 arising from the Company's acquisition in 1991 of certain assets
used by that competitor in the manufacture of power supplies. The debt was
non-interest-bearing with monthly payments in ascending amounts extending
through December 1, 2002.
On January 31, 1996 the Company reached an agreement with the debt-holder to
compromise the debt. The Company agreed to pay the debt-holder $1,332,000 in
cash, and the debt-holder agreed to forgive the $1 Million balance of the
obligation. The effect of the debt compromise was to reduce the Company's
debt-load by approximately $1.3 Million (net of loans taken to finance the
debt compromise), increase shareholders equity by approximately $1.3 Million,
and to cause the Company to realize approximately $1.0 Million in
extraordinary income during the third quarter of fiscal 1996.
14
<PAGE>
The Company obtained the funds necessary to pay the debt-holder by (1)
obtaining $275,000 from the Bridge Financing described immediately below, (2)
agreeing to issue 350,000 shares of Series A Preferred Stock to Robert G.
Gatza and Robert J. Fanella, the Company's officers, in exchange for their
payment of $250,000 and their personal guarantees of approximately $800,000 in
loans to the Company, and (3) utilizing $43,750 paid by Messrs Gatza and
Fanella in December of 1995 upon their exercise of Class D Warrants for Common
Stock. "CERTAIN TRANSACTIONS."
BRIDGE FINANCING
In March, 1996 the Company obtained bridge financing from six lenders in the
amount of $275,000. The lenders are the individuals identified in this
Prospectus as "Selling Securityholders." In exchange for the $275,000, the
Company gave the Selling Securityholders non-negotiable promissory notes in
the aggregate principal amount of $187,000 plus 880,000 Class A Warrants. The
notes accrue interest at a rate of 8% per year. Principal and interest are
payable on the earlier of (a) April 1, 1997 or (b) the date on which this
offering closes. The outstanding principal of the notes will be repaid from
the net proceeds of this Offering. The proceeds of the Bridge Financing were
used by the Company to fund the debt compromise described immediately above.
The Company's agreement with the Selling Securityholders provided that the
Company would include in this registration statement a prospectus covering the
Class A Warrants owned by the Selling Securityholders and the underlying
Preferred Stock. Accordingly, the registration statement, of which this
Prospectus is a part, also covers the offering of the Class A Warrants
acquired by the Selling Securityholders in the bridge financing, as well as
the Preferred Stock issuable upon exercise of those Class A Warrants. See:
"SELLING SECURITYHOLDERS."
DIVIDENDS
The Preferred Stock is entitled to cumulative annual dividends of 8% of the
$7.00 issue price per share. The annual dividend requirement on the Preferred
Stock sold in this Offering will be $276,920, and that amount will increase if
any of the Class A Warrants are exercised for Preferred Stock. The dividend on
the 350,000 shares of Preferred Stock issued to Messrs Gatza and Fanella (See
"CAPITALIZATION--Debt Compromise") will total $140,000, as Messrs. Gatza and
Fanella have agreed to waive dividends in excess of $.40 per share. At the
Company's option, all or part of each dividend may be paid in shares of the
Company's Common Stock valued at 100% of the average closing bid price of the
Common Stock as reported on such exchange or quotation service as the Common
Stock may be quoted on, for the ten trading days before the record date for
the dividend. In addition, if the Company pays any dividend with respect to a
share of its Common Stock, it will pay twice that amount as an additional
dividend on each share of Preferred Stock.
The Company is not a party to any agreement or arrangement that restricts or
limits its ability or authority to declare and pay dividends other than as
provided by law. As a Delaware corporation, the Company is permitted to
declare and pay dividends only out of either (a) capital surplus or (b) net
profits for the fiscal year in which the dividend is declared or the preceding
fiscal year. If the Company's net worth does not exceed its stated capital and
it has not realized income in the year a dividend is due or the preceding
year, dividends will not be paid by the Company on the Preferred Stock. Any
dividends not paid will accrue. No interest will be paid on any accrued but
unpaid dividends.
Until the Debt Compromise with AT&T was effected, the Company had no capital
surplus, and at the present time the Company has very little capital surplus.
There can be no assurance that the Company will maintain sufficient capital
surplus to be able to pay dividends on the Preferred Stock. The Company's
ability to pay dividends in the future will depend on whether the Company is
profitable. If the Company incurs large losses which impair its financial
resources, the Company could quickly become unable to pay dividends. In any
case it is likely that the Company will from time-to-time or always determine
that it is in the best interests of the Company to retain its cash assets, and
pay the entirety of a dividend in shares of Common Stock, particularly if the
market value of the Common Stock is high. Such a payment could have an adverse
effect on the market prices of the Company's Common Stock and Preferred Stock.
15
<PAGE>
Holders of Common Stock are entitled to receive such dividends as may be
declared by the Board of Directors of the Company. To date, the Company has
neither declared nor paid any dividends on its Common Stock nor does the
Company anticipate that such dividends will be paid in the foreseeable future.
Rather, the Company intends to apply any earnings to the expansion and
development of its business. Any payment of cash dividends on its Common Stock
in the future will be dependent upon the prior payment of required dividends
on Preferred Stock, the Company's earnings, financial condition, capital
requirements and other factors which the Board of Directors deems relevant.
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED ENDED
OPERATING SUMMARY JUNE 30, '95 JUNE 30, '94 JUNE 30, '93 JUNE 30, '92 JUNE 30, '91
----------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales................... $14,588,844 $12,771,067 $15,886,279 $20,196,925 $ 8,113,451
Interest & Other
Income................. 1,240 100,999 33,845 5,257 5,727
Total Income............ 14,590,084 12,872,066 15,920,124 20,202,182 8,119,178
Cost of Manufacturing &
Facility............... 11,566,567 10,054,423 12,474,737 17,289,099 5,682,209
Research & Development.. 949,002 920,391 1,246,965 2,279,296 1,054,557
Selling General &
Admin.................. 1,491,590 1,369,834 1,731,297 2,026,802 1,271,119
Interest & Other
Expense................ 333,031 322,573 426,319 799,055 309,790
Total Expenses.......... 14,340,190 12,567,221 15,848,634 22,394,252 8,317,675
Net Earnings (Loss)..... 249,894 204,845 40,806 (2,192,070) (198,497)
Net Earnings (Loss) Per
Share.................. .002 .002 .000 (.019) (.002)
Weighted Average Number
of Shares Outstanding.. 114,036,563 115,111,563 114,544,896 113,877,676 113,732,045
</TABLE>
<TABLE>
<CAPTION>
AS AT AS AT AS AT AS AT AS AT
BALANCE SHEET SUMMARY JUNE 30, '95 JUNE 30, '94 JUNE 30, '93 JUNE 30, '92 JUNE 30, '91
--------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Working Capital......... $ 443,359 $ 273,353 $ 411,845 $ (2,261,694) $ 430,591
Total Assets............ 6,148,531 6,301,874 6,089,900 8,916,357 4,065,336
Capitalized Lease....... 581,161 767,053 232,234 315,651 357,729
Long-Term Debt.......... 3,514,009 3,954,150 3,945,068 1,541,780 1,300,691
Total Liabilities....... 7,143,821 7,641,249 7,665,434 10,594,543 3,618,721
Shareholders' Equity
(Deficit).............. (995,290) (1,339,375) (1,575,534) (1,678,186) 446,615
</TABLE>
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Nine Months Ending March 31, 1996 vs. Nine Months Ending March 31, 1995
Net sales for the nine months ended March 31, 1996 totalled $10,718,611, a
reduction of $277,924 (2.5%) from net sales in the first nine months of fiscal
1995. The primary cause of the reduction was the termination of sales to one
particular customer, as that customer downgraded the overall quality of its
product, which permitted it to purchase the lower cost power supplies
available from several manufacturers. This termination was not offset by
increased sales, as the Company's poor financial condition has made it
difficult to generate new OEM customers. See "BUSINESS OF THE COMPANY--
Marketing." Most of the Company's sales during the first nine months of fiscal
1996 were to established customers.
The Company at January 1, 1996 had backlog of $5,013,000, which may be
compared to backlog of $3,550,300 at January 1, 1995. This backlog consisted
entirely of firm released orders. The portion of the backlog, which was
shipped during the third quarter of fiscal 1996 resulted in a 20% increase in
third quarter revenues as compared to the third quarter of fiscal 1995. As of
May 20, 1996 the Company's backlog of released orders was $5,527,500. The
combination of that backlog with non-binding production schedules that the
Company has received on existing customer projects, as well as the
preproduction orders and early production orders for new projects that the
Company received from eight OEM customers near the end of its second quarter,
all indicate that the shortfall in sales compared to fiscal 1995 will be
eliminated in the last quarter of the fiscal year.
Despite the reduction in net sales of $277,924, operating income fell only
$2,495 from the first nine months of fiscal 1995 to the first nine months of
fiscal 1996. The Company was able to offset the drop in revenues by cutting
manufacturing costs significantly. For this reason, facility, preproduction
and production expense in the first half of fiscal 1996 was almost 14% lower
than in the first half of 1995, although the expense increased in the third
quarter of fiscal 1996 as the Company made expenditures in anticipation of new
business. Likewise, selling, general and administrative expense fell by 8%
from the 1995 period to the 1996 period, exceeding the percentage reduction in
net sales and so contributing to the preservation of operating income. The
increased operational efficiency evidenced in the first half of fiscal 1996
should prove beneficial to the Company's operating statements if the
anticipated increase in future net sales is realized, as a larger percentage
of those net sales should survive as net income than has been the Company's
experience in the past.
Year Ending June 30, 1995 vs. Year Ending June 30, 1994
Net sales for the twelve month ended June 30, 1995 were $14,588,844, as
compared to net sales of $12,771,067 in the fiscal year ending June 30, 1994.
This represents a 14% increase in revenues on a year to year basis. The
primary reason for the increase was a $1.8 Million increase in sales to AT&T,
the Company's largest customer, whose orders represented 18% of sales in
fiscal 1994 and 29% of sales in fiscal 1995. The Company continues to do
business with AT&T, with sales to it during the first six months of fiscal
1996 representing 39% of the Company's total net sales. One reason for this
public offering, however, is to provide funds to enable the Company to expand
its customer base, which will reduce the Company's dependence on this one
customer.
Operating income in fiscal 1995 increased by $155,266 from $426,419 to
$581,685, representing an increase of 36%. The primary reason for the increase
was the fact that research and development expense increased by 3% while net
sales increased by 14%. The reason for the small relative increase in research
and development expense was the Company's lack of cash resources to devote to
research and development, and does not represent Company policy. The Company
intends to expand its research and development activities as its business
expands to insure that it remains in the forefront of power supply technology.
The increase in operating income was also due in part to the relatively
small increase in "general and administrative" expense, which rose only 5%
between fiscal 1994 and fiscal 1995. The small increase relative to
17
<PAGE>
net sales is attributable to the fact that the Company has established its
management and accounting systems and other corporate infrastructure, and is
capable of handling expanded operations without a significant expansion of
infrastructure. Indeed, management has estimated that the Company could expand
to a level of $40 Million in sales without major additions to facilities or
senior management. This situation should prove financially advantageous if the
anticipated increase in sales in fiscal 1997 is realized.
The other elements of operating expense necessarily increased in proportion
to the increase in net sales. Facility, preproduction and production expenses
in fiscal 1995 were 79.3% of net sales in that year, as compared to 78.7% of
net sales in the prior year. The change was primarily due to product mix and,
to a smaller extent, increased costs in the electronic component cost areas,
especially semiconductors. Selling & marketing expenses increased by 18% from
$418,830 to $494,392. The increase in sales & marketing was due to the
increased commissions paid to the Company's independent manufacturers
representatives as a result of the higher sales level. Moreover, the Company
spent funds in building and solidifying its network of independent
manufacturer representatives. At the same time, the amount spent on
advertising was reduced slightly.
Net income for the fiscal year ended June 30, 1995 was $249,894, a 22%
increase over the $204,845 recognized in fiscal 1994. In fiscal 1994, however,
the Company's net income had been increased by $100,000 due to the reversal in
1994 of a reserve taken in 1992 in connection with the Company's investment in
an Indian power supply manufacturer. See "Note 4 to the Consolidated Financial
Statements." Accordingly, the increase in net income from fiscal 1994 to
fiscal 1995, excluding the nonrecurring item relating to the India investment,
totalled $145,049 or 138%.
Year Ending June 30, 1994 vs. Year Ending June 30, 1993
Net sales for the fiscal year ended June 30, 1994 were $12,771,067, as
compared to net sales of $15,886,279 in the fiscal year ended June 30, 1993.
The reduction in sales was a result of the Company's continuing effort to
remove low margin business. Specifically the Company's sales to its largest
customer were reduced by almost $4 Million. The Company had been supplying
power supplies in a wide variety of specifications and performance criteria to
six divisions of this customer. The Company is now focusing on selling only
high performance power supplies to one division. That focus will have the
immediate effect of reducing net sales, but the long term effect of increasing
profitability, particularly as increased sales to this division with favorable
margins are expected.
Since the Company reorganized its operational structure in 1992, there has
been an ongoing effort to reduce expenses until a sustainable increase in net
sales justifies expansion. In connection with that program, most of the areas
of indirect expense were reduced. Research & Development was $326,000 less in
fiscal 1994 than in fiscal 1993. Selling & Marketing expense was $97,000 less
in fiscal 1994 than in 1993. And General & Administration expense was $264,000
less, compared to fiscal 1993. Production costs remained stable, representing
78.7% of net sales in the 1994 fiscal year as compared to 78.5% of net sales
in the prior fiscal year.
Since expenses were reduced in proportion to net sales, there was no
significant change in operating income between fiscal 1993 and fiscal 1994.
Net income, however, increased by $164,039 from $40,806 in 1993 to $204,845 in
1994. The two reasons for the increase were (1) the $100,000 reversal of a
reserve against the Company's investment in India (discussed in the preceding
section) and (2) a $101,584 reduction in interest cost achieved by
renegotiating the terms of several of the Company's loans.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had a working capital deficit of $623,869.
Included in current liabilities on that date was $1,332,000 owed to AT&T as a
result of the Debt Compromise, which was to be paid after March 31, 1996. If
that debt is eliminated from the calculation, the Company's working capital
totalled $708,131, which was not significantly different from the $443,359 it
held at June 30, 1995, the end of its last fiscal year. In calculating working
capital, however, the Company includes $3,448,466 of inventory, most of which
consists of raw material parts held for use in manufacturing power supplies.
The current assets which will readily turn into
18
<PAGE>
cash, cash and accounts receivable, were, then, considerably exceeded by the
Company's current liabilities. The debt compromise which the Company effected
during the third quarter of fiscal 1996 had the effect of reducing the
Company's current and long-term liabilities by a total of approximately $1.3
Million. See "CAPITALIZATION--Debt Compromise." Nevertheless, the Company will
require the proceeds of this offering to achieve a cash reserve suitable for
its current plan of operations.
Because of the Company's high debt-to-assets ratio, debt service remains a
significant drain on cash resources. During fiscal 1995 the Company used
$781,831 for debt service, approximately equal to the debt service for fiscal
1994. In the first nine months of fiscal 1996, debt service totalled $612,450.
The debt compromise had the effect of reducing debt service considerably.
Moreover, the Company intends to utilize approximately $887,000 from the
proceeds of this offering to reduce debt (including the Bridge Financing
debt), which will have the effect of further reducing debt service.
Nevertheless, the Company projects that after completion of this offering its
debt service for fiscal 1997 will be approximately $750,000.
The Company's primary source of operating funds has been its credit line.
The primary bank lender, Comerica Bank, has an asset-based loan facility of up
to $2,000,000 dependent on predetermined formulas involving the Company's
accounts receivable and inventories. The balance outstanding on the credit
line at March 31, 1996 was $1,693,731. The total amount available to borrow at
that date was $1,723,885.
The Company's inventory at March 31, 1996 totalled $3,448,466, as compared
to $2,712,224 at June 30, 1995. The 27% increase in inventory was due to the
effect of capacity planning for future orders. In anticipation of the orders
for new customer programs, the Company brought in inventory for existing
programs earlier than normal so that the existing programs could be built
earlier and inventoried, thereby releasing manufacturing capacity to be
utilized in the start-up of the new programs.
The Company's accounts receivable at March 31, 1996 totalled $1,575,385,
which was higher than at any time since 1993. The increase of 32% in the first
nine months of 1996 was primarily a result of the 20% increase in sales
between the third quarter of 1996 and the third quarter of 1995. The Company
expects the growth of accounts receivable to be proportionate to the growth in
net sales in the future.
The Company expects that the available borrowings from the asset-based line
of credit when combined with the cash flow expected from current operations
will be sufficient to service the Company's debt and fund operations for the
following fiscal year.
CERTAIN FEDERAL INCOME TAX EFFECTS UPON THE COMPANY
At June 30, 1995, for United States federal income tax purposes, the Company
had consolidated NOL carryforwards of approximately $3.7 Million due to expire
commencing in 2000. The Company also had investment tax credit ("ITC") and
research and development credit ("RDC") of approximately $221,000 due to
expire commencing in 1999, and AMT credit carryforwards of approximately
$12,000. The availability of these carryforwards to reduce or offset future
taxable income and tax liability of the Company is subject to various
limitations under the Internal Revenue Code of 1986, as amended (the "Code").
In particular, the Company's ability to utilize the carryforwards would be
restricted upon the occurrence of an "ownership change" within the meaning of
section 382 of the Code.
Although the determination of whether an ownership change has occurred is
subject to factual and legal uncertainties, the Company believes that an
ownership change will occur no later than the closing of this Offering. As a
result of the "ownership change," the Company will generally be permitted to
utilize NOL carryforwards (available on the date of such change) in any year
thereafter to reduce its income to the extent that the amount of such income
does not exceed the product of (the "Section 382 Limit") (i) the fair market
value
19
<PAGE>
of the Company's outstanding equity at the time of the ownership change
(reduced by the amount of certain capital contributions such as those received
pursuant to this Offering) and (ii) a long-term tax-exempt rate published by
the Internal Revenue Service (currently 5.78% for ownership changes occurring
in June of 1996). Further, the Company's ability to utilize its ITC, RDC and
MTC carryforwards will also be limited as a result of the ownership change in
an amount determined by reference to the Section 382 limit. As a result, the
Company does not expect to utilize its full NOL and tax credit carryforwards
to offset future taxable income and tax liability. This limitation would have
a materially adverse effect on the Company's net income, if the Company were
to generate taxable income (or tax liability) materially in excess of the
limitation on the utilization of NOL and tax credit carryforwards.
In addition, the issuance of the Preferred Stock in this Offering (if an
ownership change occurred prior to such issuance), the exercise of the Class A
Warrants and the issuance of Common Stock as dividends or any other issuance
of equity securities by the Company may each contribute to the occurrence of
subsequent ownership changes. Any such subsequent ownership changes could have
the effect of further limiting the Company's ability to utilize its NOL, ITC,
RDC and MTC carryforwards.
BUSINESS OF THE COMPANY
MicroENERGY, Inc., was incorporated in Delaware on November 30, 1983. The
Company designs and manufactures high frequency power supplies and DC-to-DC
converters for OEM customers who are engaged in the telecommunications,
computer, and instrumentation segments of the electronics industry. The
Company currently offers single and multiple output switching power supplies
and DC-to-DC converters in the power output range of 25 watts to 2500 watts.
All of the Company's products are customized to satisfy the unique
requirements of each customer's application.
POWER SUPPLIES AND DC-TO-DC CONVERTERS
A power supply is a component of electrically-powered products which
converts alternating current ("AC"), the generally-available form of
electricity, into direct current ("DC"), which is required for electronic
circuits to function. Since the electric energy available is seldom in a form
usable by electrical apparatus, most incorporate a power supply. For example,
modern microprocessors require 5 VDC (volts direct current) to operate, while
120 VAC (volts alternating current) is generally available. Many large
electronics manufacturers maintain "captive" power supply producers to
manufacture what the OEM needs. As the technology has in the past decade
become more and more sophisticated, the percentage of power supplies which are
manufactured "in-house" by captive producers has fallen. Today almost half of
the power supplies used in electronic equipment are purchased from independent
vendors.
A DC/DC converter is an electronic sub-system that converts one DC input
voltage into one or more DC output voltages. DC/DC converters are used in
conjunction with power supplies, such as those manufactured by MicroENERGY.
The principal application for the DC/DC converters designed by MicroENERGY
is the telecommunications industry. For example, a smart telephone (i.e., a
telephone with a memory), will utilize a DC/DC converter to change the 48 VDC
which powers its motor to 5 VDC, the output necessary to power its memory
chips. If a small DC/DC converter were not available in each telephone, it
would be necessary to run a 5 VDC wire from a central location to each
telephone.
A similar application is made in robotics systems. The converter is
installed in each robot sensor and converts the DC voltages used to operate
the robot's motors into the lower voltage needed to power the robot's
microprocessors. The use of DC/DC converters in this fashion facilitates the
development of efficient "intelligence" in robot systems.
20
<PAGE>
THE INDUSTRY
Because of emerging technology, the size and growth of the market, and the
unique design requirements of each customer, the market is fragmented. There
are approximately 100 companies which identify switching power supplies in
their product line portfolio, and no one of them dominates the market. The
largest manufacturer of switchers is Astec, Inc., a subsidiary of the British
company, BSR. Astec manufactures standard and customized switcher units.
Other large U.S. manufacturers include AT&T, Lambda, Delta Products,
Shindengen, and Lorain Products, each of which has annual sales worldwide in
excess of $260 Million. The competitors in this DC-to-DC converter market are
primarily the same as those in the switching power supply market, with the
significant addition of General Instrument Corporation and General Electric
Corporation. All of these manufacturers, however, concentrate on sales of
standardized power supplies. Their strategy is to provide a line of
inexpensive models that are within the range of the existing specifications of
OEMs.
MicroENERGY, on the other hand, provides state-of-the-art custom units to
meet exact specifications on short notice at competitive prices. In that
market the principal method of competing is by emphasis on design ability and
timely delivery. MicroENERGY's technology and reputation for service have
allowed it to compete successfully in this market for over ten years despite
limited financial resources.
MARKETING
MicroENERGY's products are marketed to manufacturers of electronic equipment
by independent manufacturers representatives. At the present time, the
Company's products are offered by 8 representative firms, whose territories
include all or part of 36 states plus Puerto Rico. The lag time from initial
contact with a prospective OEM customer to receipt of a purchase order is
typically 6 months. An additional 3-4 months is usually required before actual
shipment can begin. Since each customer requires a unique customization of one
of the Company's basic product series, much of the lag time from initial
customer contact to purchase order is attributable to customization and
technical review by the customer.
Prior to placing purchase orders, customers evaluate the Company's
technology and other capabilities, as well as their own requirements. At this
point, assuming that their level of interest is high, the firm will send a
request for quotation ("RFQ") for price and delivery of specific power
supplies. The RFQ's generally cover the customer's requirements for 12 months.
The average age of these quotes is 45 days.
Actual orders are received by the Company in two forms. The Company's
customers have generally given the Company a "preproduction" order for several
units for initial evaluation. The entry of preproduction order indicates a
considerable level of interest, since the Company normally includes an upfront
charge for nonrecurring engineering in the cost. Generally some, but not all,
of the Company's preproduction orders result in production orders.
The final stage in the ordering process is the production order. These
orders constitute a firm commitment to take delivery of the Company's products
only when the customer authorizes a release for shipment.
BACKLOG
The Company generally advises customers that the Company can deliver product
within twelve weeks after the production order is placed. Accordingly, most
customers place orders for one quarter at a time, although most customers are
ordering for production programs that will extend over a much longer period of
time. For that reason, the Company's current backlog of released orders of
$5,527,500 is a reliable indication that (1) the Company will deliver a
substantial parties of that amount during the next twelve weeks, and (2) the
programs which its customers are ordering for are approximately 52% larger
than was the case a year earlier, when backlog totalled only $3,639,900. Based
on its extrapolation from backlog as well as the production schedules which
the
21
<PAGE>
Company receives from its customers, the Company is generally able to plan its
production schedules, including purchasing of necessary components and related
engineering, for six to eight months in advance.
Near the end of 1995 the Company received preproduction orders for new power
supply designs from eight customers. The RFQ's received from these customers
projected annual power supply requirements which, if met by the Company, would
represent a total of approximately $10.2 Million in sales. Indications from
four of the customers designated as new projects show that annual production
quantities for these four in fiscal year 1997 should approximate $8.0 Million.
The Company believes that it may be awarded all of these orders, although
there is never a certainty of an order until the release for shipment is given
by the customer. Three of the customers have given the Company production
orders; the remainder are still in the preproduction stage. The Company has
sufficient confidence that it will receive a significant portion of these
orders that it has already begun to increase its raw materials inventory in
anticipation of the expanded business and is allocating the greater portion of
the net proceeds of this offering to financing of the new business. There can
be no assurance, however, that any amount of these orders will be realized and
completed by the Company.
MAJOR CUSTOMER; EXPORT SALES
The Company has only one customer that represented more than 10% of the
Company's net sales during fiscal 1995. The Company's sales to various
divisions of AT&T Inc. accounted for approximately 41% of the Company's total
revenues in the first nine months of fiscal 1996, 28% of the Company's total
revenues in fiscal 1995, 19% of the Company's total revenues in fiscal 1994,
and 41% of the Company's total revenues in fiscal 1993.
During fiscal year 1995, the Company had $5,320,702 in export sales. In the
fiscal year ended June 30, 1995 the Company's export sales amounted to
approximately 36% of the Company's total revenues, compared to 38% in 1994 and
24% in 1993. All export sales by the Company are denominated in U.S. Dollars.
Due to the fact that the Company's products are customized and require a
substantial lead-time for production, short-term foreign currency fluctuations
generally have no effect on the Company's sales. Any long-term strengthening
of the Dollar, however, could adversely affect export sales.
THE MICROENERGY TECHNOLOGY
The Company's research and development efforts have been focused on
advancing the state-of-the-art in the design of power supplies and the method
employed in manufacturing such power supplies. For the immediate future, the
Company's research and development will continue to focus on that subject.
During the fiscal year ended June 30, 1995 the Company spent $949,002 on
Company-sponsored research and development. During the fiscal year ended June
30, 1994 the Company spent $920,391 on Company-sponsored research and
development. During the fiscal year ended June 30, 1993, the Company spent
$1,246,965 on Company-sponsored research and development.
Among the more significant results of this research and development activity
has been the Company's ability to vertically integrate Surface Mounted
Technology ("SMT") into its entire manufacturing operation. SMT, which was
developed by a number of electronics manufacturers in the 1980s, represents a
major miniaturization of electronic components by elimination of the external
packaging of components. A component produced using SMT technology, such as a
transistor, consists of only the device itself with no capsule surrounding it.
The SMT component is placed directly onto the printed circuit board (which
itself is greatly reduced in size). The Company utilizes this technology in
its manufacturing processes, which enables the Company to provide more power
in a smaller power supply, thus expanding the engineering capabilities of our
customer, and facilitating more applications for our power supplies.
Recently the Company's on-going efforts to be at the forefront of its
industry were recognized by the primary accrediting organization for the
industry. The International Standards Organization ("ISO") is based in Geneva,
Switzerland, and was organized to create internationally recognized standards
for design and manufacturing processes. During 1995 the Company was granted
ISO 9001 status by Underwriters Laboratories.
22
<PAGE>
The ISO 9001 designation will indicate to potential customers that MicroENERGY
has achieved the state-of-the-art in power supply design and manufacturing.
SOURCES OF COMPONENTS
The raw materials for the Company's products are primarily standardized
components which are available from an adequate number of suppliers. Those raw
materials which must be customized for the Company are also available from a
number of qualified component manufacturers. During fiscal 1989, the Company
increased its access to components by acquiring all of the capital stock of
Tru-Way, Inc., an Illinois corporation engaged in the business of
manufacturing fabricated metal parts used in the Company's principal product.
One problem in raw material procurement which has caused significant concern
in the power supply industry in recent years is the worldwide shortage of
semi-conductor components. At the present time, the worldwide supply of
certain types of semi-conductors does not meet the worldwide demand for those
components. Moreover, the problem portends to be a factor in the industry for
many years to come, as the creation of a wafer fabrication plant to produce
these components entails an investment of $1 Billion to $2 Billion and up to
two years for completion.
MicroENERGY anticipated the shortage in semi-conductors many years ago, and
has positioned itself well to withstand the effects. Several years ago
MicroENERGY adopted a policy of purchasing its semi-conductors from
distributors rather than manufacturers. That policy occasionally resulted in
increased raw material costs. But as a result, MicroENERGY now enjoys a
priority relationship with its suppliers of semi-conductors. Even if
manufacturers are allocating their production among their customers, thus
causing shortages for all, the distributors from whom MicroENERGY purchases
its semi-conductors have made a practice of meeting all of MicroENERGY's
orders in timely fashion. Indeed, the Company experienced relatively few
component shortages during 1995, which indicates the efficacy of its strategy.
Although there is no contract binding any supplier to continue to satisfy
MicroENERGY'S semi-conductor requirements, the existing relationship, as long
as it continues, provides MicroENERGY the ability to meet the shipment
schedules of its own customers at a time when many of its competitors are
experiencing difficulty doing so due to the shortage of semi-conductors.
EMPLOYEES
The Company is located in a "Research Corridor" west of Chicago, in which a
substantial portion of the Midwest's electronics industry is located. The
presence of Bell Laboratories, Motorola, Inc., and Zenith Corporation, among
others, as well as Illinois Institute of Technology and Northwestern
University, means that the Company can recruit its employees from a large
local pool of talented individuals. Moreover, since experienced technicians
and engineers are generally available, the Company has not experienced any
material "lag time" in training new employees.
The Company currently has 206 full-time employees (including 175 production
employees), two of whom are officers of the Company. During the remainder of
fiscal 1996 the Company expects no substantial increases in the Company's non-
direct labor force. None of the Company's employees belongs to a union. The
Company believes that its relationships with its employees is good.
PROPERTIES
The Company currently has five locations. The Company's general offices are
located in a 3,100 square foot office facility in Carol Stream, Illinois. The
Company's manufacturing operations are located in a leased facility in Quincy,
Illinois and a Company-owned facility in Memphis, Missouri, which are located
approximately 70 miles from each other. The total space in Quincy is 59,555
square feet and in Memphis is 9,600 square feet. The Quincy and Memphis
facilities are located in a good labor market and are large enough to meet the
expected capacity requirements of the Company for the foreseeable future. The
Company's Longwood, Florida facility contains the research and development
center in a 13,002 square foot leased facility. The metal
23
<PAGE>
fabrication business conducted by the Company's subsidiary, Tru-Way, Inc., is
located in a 10,800 square foot facility in Northlake, Illinois.
The table set forth below identifies the properties leased by the Company
and its subsidiaries for an annual rental of $10,000 or more. The Company
believes that these facilities are adequate for its operations as presently
structured.
<TABLE>
<CAPTION>
COMPANY LESSOR PREMISES TERM AND ANNUAL RENTAL
- ------- ------ -------- ----------------------
<S> <C> <C> <C>
MicroENERGY............. Nardi Asset Management 350 Randy Road Through 12/31/97
Carol Stream, IL $38,600
MicroENERGY............. Guardtree Ltd 1400 N. 30th St. Through 8/31/01
Quincy, IL $193,590
MicroENERGY............. Pizzuti Inc. 745 West State Road 434 Through 2/28/97
Suite J $146,628
Longwood, FL
Tru-Way, Inc............ ARQUBE(1) 36 West Lake Street Through 7/30/98
Northlake, IL $54,000
</TABLE>
- --------
(1) ARQUBE is a partnership, whose partners are Robert G. Gatza and Robert J.
Fanella, the officers of the Company. See "CERTAIN TRANSACTIONS."
24
<PAGE>
MANAGEMENT
The following table sets forth certain information regarding the officers
and directors of the Company as of July 1, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert G. Gatza......... 53 Chairman of the Board, President, Chief Executive Officer
Robert J. Fanella....... 45 Chief Financial Officer, Secretary, Director
George M. Bradshaw...... 49 Director
</TABLE>
Directors hold office until the annual meeting of the Company's shareholders
and the election and qualification of their successors. Officers hold office,
subject to removal at any time by the Board, until the meeting of directors
immediately following the annual meeting of shareholders and until their
successors are appointed and qualified.
BACKGROUND OF MANAGEMENT
Robert G. Gatza was a co-founder of MicroENERGY in 1983, and has served as
its Chief Executive Officer since that founding. Prior to forming MicroENERGY,
Mr. Gatza was employed by Motorola, Inc. as Director of Operations for its
cathode ray tube business. Mr. Gatza was awarded a Master of Science degree in
Mathematics and a Master of Science degree in Operations Management, both by
Witchita State University.
Robert J. Fanella was a co-founder of MicroENERGY in 1983, and has served as
its Chief Financial Officer since that founding. Prior to founding
MicroENERGY, Mr. Fanella was employed by Motorola Inc as Controller of a
Business Group. Mr. Fanella was awarded a Master of Business Administration
degree by the University of Chicago, and is a Certified Public Accountant.
George M. Bradshaw has served as an attorney for MicroENERGY since it was
founded. He has served on its Board of Directors since 1988. Mr. Bradshaw is
an attorney with the firm of Huck, Bouma, Martin, Charlton & Bradshaw in
Wheaton, Illinois, specializing in corporate, real estate and commercial law.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid by the Company to the following persons for services rendered in all
capacities to the Company during each of the fiscal years ended June 30, 1995,
1994 and 1993: (1) the Company's Chief Executive Officer, and (2) each of the
other executive officers whose total salary and bonus for the fiscal year
ended June 30, 1995 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
(a) (e) (f)
NAME AND (b) (c) (d) OPTION ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS SHARES COMP. *
- ------------------ ---- -------- ----- ---------- ---------
<S> <C> <C> <C> <C> <C>
Robert G. Gatza........................ 1995 $210,001 -- 21,000,000 $1,500
Chief Executive Officer 1994 $212,281 -- -- $2,100
1993 $208,950 -- -- $2,100
Robert J. Fanella...................... 1995 $203,801 -- 14,000,000 $1,500
Chief Financial Officer 1994 $204,301 -- -- $2,000
1993 $201,150 -- -- $2,000
</TABLE>
- --------
* Represents Company matching contribution to 401(k) Plan.
25
<PAGE>
EMPLOYMENT AGREEMENTS
In 1996 the Company entered into employment agreements with Robert G. Gatza
and Robert J. Fanella. The employment agreements are substantially identical
to each other. The agreements provide for full-time employment and include a
covenant that the officer will not compete with the Company for one year after
his employment terminates. The agreements terminate on January 31, 2000. They
provide that each officer will be paid a salary determined by the Board, but
that his annual salary shall be no less than his average salary for the
preceding two years.
RESTRICTED STOCK GRANT PROGRAM
On May 19, 1989, the shareholders of the Company adopted a Restricted Stock
Grant Program (the "Program"), pursuant to which 58,333 shares of common stock
were reserved for issuance. On July 3, 1989, a portion of the reserved shares
were issued to two "Grantees", namely Robert G. Gatza (34,722 shares) and
Robert J. Fanella (18,056 shares). Messrs. Gatza and Fanella are the Company's
officers.
The shares issued under the terms of the Program are subject to the
following restrictions:
1. The shares granted under the Program cannot be sold, assigned,
pledged, transferred or hypothecated in any manner, by operation of law or
otherwise, other than by writ or the laws of descent and distribution, and
shall not be subject to execution, attachment or similar process. This
restriction shall lapse, with respect to 3% of the number of shares granted
under the Program, and those shares will become unrestricted stock, on the
last day of the Company's 1996 fiscal year. The restriction shall lapse
with respect to each additional 3% of such number of shares on the last day
of each successive fiscal year of the Company, until the 27th year in which
the final 13% will vest.
2. The restriction shall also lapse as to all shares granted to a Grantee
on the first to occur of (i) the termination of that Grantee's employment
with the Company by reason of his disability, (ii) the Grantee's death,
(iii) termination of the Grantee's employment by the Company without good
reason, or (iv) a change of control of the Company. The Program defines
"Change of Control" as an acquisition by a person or group of more than 50%
of the Company's outstanding shares, a transfer of the Company's property
to an entity of which the Company does not own at least 50%, or the
election of directors constituting a majority of the Board who have not
been approved by the existing Board.
3. Shares which have not become unrestricted under the circumstances
referred to in Item 1 or Item 2 above shall be forfeited to the Company
upon termination of the Grantee's employment with the Company.
4. During any tax year in which a Grantee realizes taxable income by
reason of the lapse of the restrictions on the shares granted under the
Program, the Company shall pay to such Grantee a "Gross-Up Bonus" in cash
equal to the aggregate of (i) the additional federal, state and local
income taxes incurred by Grantee as a result of realization of such taxable
income, and (ii) the federal, state and local income tax incurred by the
Grantee as a result of the Gross-Up Bonus. In no event shall the Gross-Up
Bonus exceed the aggregate of (i) the amount of the tax deduction for which
the Company receives a benefit for the tax year of the Company beginning
during the tax year of the Grantee in which he realizes taxable income by
virtue of the lapse of the restrictions referred to in Item 1 above, and
(ii) the amount of the tax deduction for which the Company receives a
benefit for such tax year of the Company by virtue of the Gross-Up Bonus.
INCENTIVE STOCK OPTION PLAN
On December 6, 1984 the shareholders of the Company approved the 1984
Incentive Stock Option Plan and the 1985 Incentive Stock Option Plan. The 1984
and 1985 Plans expired after ten years, but options for 7,736 shares of Common
Stock remain outstanding under those Plans.
On February 24, 1992 the shareholders of the Company approved the 1992
Incentive Stock Option Plan, and on May 7, 1996 the shareholders approved the
1996 Incentive Stock Option Plan. The 1992 Plan and the
26
<PAGE>
1996 Plan, together, are authorized to issue options for a total of 55,555
shares, none of which are presently outstanding.
Options granted under the Plans are intended to qualify as "incentive stock
options", as defined in Section 422A of the Internal Revenue Code. No options
have been issued under any Plan to any present officer or director of the
Company. The average exercise price of the options which are outstanding is
$5.36.
The following tables set forth certain information regarding the stock
options or warrants acquired by the officers of the Company during the year
ended June 30, 1995 and those options or warrants held by them on June 30,
1995.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
-----------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
----------------------------------------- --------------------
PERCENT
OF TOTAL
OPTIONS
NUMBER OF GRANTED
SECURITIES TO
UNDERLYING EMPLOYEES EXERCISE
OPTION IN FISCAL PRICE EXPIRATION
NAME GRANTED (#) YEAR ($/SH) DATE 5% ($) 10% ($)
---- ----------- --------- -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert G. Gatza......... 58,333 60% $.45 12/13/01 $ 3,297 $ 14,673
Robert J. Fanella....... 38,889 40% $.45 12/13/01 $ 2,198 $ 9,782
</TABLE>
<TABLE>
<CAPTION>
AGGREGATED FISCAL YEAR OPTION VALUES
---------------------------------------------------------
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-
UNEXERCISED OPTIONS AT FISCAL THE-MONEY OPTIONS AT
NAME YEAR-END (#) FISCAL YEAR-END ($)
---- -------------------------------- ------------------------
<S> <C> <C> <C>
Robert G. Gatza...... 38,333 Exercisable $ 0
58,333 Unexercisable $141,750
Robert J. Fanella.... 18,611 Exercisable $ 0
38,889 Unexercisable $ 94,500
</TABLE>
REMUNERATION OF DIRECTORS
The Directors of the Company receive no compensation for their services, but
are reimbursed for out-of-pocket expenses incurred on the Company's behalf.
LIMITATION OF LIABILITY
The Company's Articles of Incorporation contain a provision stating that no
officer or director of the Company will be liable personally to the Company
for damages for breach of fiduciary duty as a director or officer unless he is
responsible for payment of an illegal dividend or for acts or omissions which
involve a knowing violation of law, intentional misconduct, or fraud.
REPRESENTATIVE'S RIGHT TO APPOINT DIRECTOR
The Underwriting Agreement between the Company and I.A. Rabinowitz & Co.
(the "Representative") provides that for three years after the completion of
this Offering, the Representative will have the right to nominate one person
to serve on the Company's Board of Directors, and upon such nomination the
Board shall take the action necessary to cause the Representative's nominee to
be elected to the Board. If the Representative does not exercise this right,
it may appoint an advisor, who will be entitled to attend all meeting of the
Board of Directors. To date, the Representative has not advised the Company as
to whether it intends to exercise either right.
27
<PAGE>
CERTAIN TRANSACTIONS
TRANSACTIONS RELATING TO TRU-WAY, INC.
On December 30, 1988, Robert Gatza and Robert Fanella, who are directors and
officers of the Company (together referred to as the "Partners") formed an
Illinois partnership called ARQUBE. Under the terms of their partnership
agreement, the ownership interest of the Partners in ARQUBE is as follows:
Robert Gatza--66%
Robert Fanella--33%
ARQUBE was formed for the purpose of acquiring the land and fixed assets
owned by Tru-Way, Inc. an Illinois corporation engaged in the business of
manufacturing fabricated metal parts used in the Company's products. The
assets purchased by ARQUBE included all of the machinery and equipment and an
industrial building in Stone Park, Illinois. The total purchase price was
$350,000. ARQUBE obtained a loan for the amount of $350,000. The loan is
personally guaranteed by the Partners. The land and industrial building were
placed in trust with the lender and secure ARQUBE's obligation.
Subsequent to ARQUBE's acquisition of Tru-Way's land and fixed assets, the
Company purchased all of the capital stock of TRU-Way, Inc. On July 1, 1990
the Company caused Tru-Way to enter into a lease with ARQUBE for the Stone
Park facility. On July 22, 1993 the Stone Park facility was sold and ARQUBE
purchased a larger facility in Northlake, Illinois (10,800 square feet versus
5,100 square feet). At this date the operations of Tru-Way were consolidated
into this larger facility, the July 1, 1990 lease between ARQUBE and Tru-Way
was terminated and new leases for the facility and equipment were entered
into. The lease for the facility is for a five year period, with monthly
rental payments of $4,500, and the equipment lease is for a five year period,
with monthly payments of $12,000. The two leases will expire on July 30, 1998.
On December 1, 1993, a lease for additional metal fabricating equipment was
entered into between ARQUBE and Tru-Way. The terms of this lease were $3,025
per month, for a period of three years. The Company has recorded these three
leases as capital leases.
TRANSACTIONS RELATING TO ACQUISITION OF POWER SUPPLY ASSETS
On July 1, 1991 the Company acquired from a competitor certain assets used
in the manufacture and sale of power supplies. The total purchase price for
the assets consisted of $3,533,327 plus a 3% royalty on certain sales. In
order to finance the acquisition, the Company increased its bank line of
credit, and borrowed $750,000 from the Illinois Department of Commerce and
Community Affairs ("DCCA") and $400,000 from the City of Quincy, Illinois.
DCCA and the City of Quincy each required that Robert Gatza and Robert Fanella
personally guarantee the Company's debt, and DCCA also required that Messrs.
Gatza and Fanella guarantee a previously outstanding debt of $115,600.
In order to induce Messrs. Gatza and Fanella to provide the personal
guarantees, the Board of Directors granted to Mr. Gatza a Class C Warrant to
purchase up to 38,333 shares of common stock between April 10, 1992 and April
10, 1998, and granted to Mr. Fanella a Class C Warrant to purchase up to
18,611 shares of common stock during the same period. The Class C Warrants
were exercisable at $22.68 per share, which was 101% of the market bid price
on April 10, 1991, the date of grant.
TRANSACTIONS RELATING TO DEBT RENEGOTIATION
In 1994 the Company was forced to renegotiate the terms of all of its term
debt due to cash flow inadequacies. The renegotiated debt included the debts
to the City of Quincy and the DCCA, both of which were personally guaranteed
by Messrs. Gatza and Fanella. The City of Quincy loan payout was extended
approximately two years and the DCCA loan one year beyond the original term.
The total amount outstanding at the time of renegotiation was $357,000 for the
City of Quincy loan and $681,000 for the DCCA loan. As part of the
renegotiations, the personal guarantees needed to be extended for the
additional time.
28
<PAGE>
In order to induce Messrs. Gatza and Fanella to provide the extension of the
personal guarantees, the Board of Directors granted to Mr. Gatza a Class D
Warrant to purchase up to 58,333 shares of common stock between December 13,
1995 and December 13, 2001, and granted to Mr. Fanella a Class D warrant to
purchase up to 38,889 shares of common stock during the same period. The Class
D Warrants are exercisable at $.45 per share, which was 125% of the market bid
price on December 13, 1994, the date of grant. The market value at the date of
grant was equal to approximately 6% of the amount guaranteed at the time of
renegotiation.
In December of 1995 Messrs Gatza and Fanella exercised their Class D
Warrants, purchasing a total of 97,222 shares of Common Stock for a total
purchase price of $43,750.
TRANSACTION RELATING TO DEBT COMPROMISE
In January, 1996 the Company reached agreement with its major creditor to
compromise a long-term debt of $2,323,000 by the immediate payment of
$1,323,000. The compromise was intended to improve the Company's financial
condition, and to increase the net worth of the Company sufficiently that upon
the completion of this offering the Company will be eligible to have the
securities sold in this Offering listed on the NASDAQ SmallCap Market.
In order to obtain the funds needed to finance the debt compromise, the
Company raised $275,000 in the Bridge Financing. See "CAPITALIZATION--Bridge
Financing." The Company also sold 350,000 shares of Series A Preferred Stock
in equal parts to Messrs Gatza and Fanella in exchange for their cash payment
of $250,000 and their personal guarantees of a loan of $800,000. The Series A
Preferred Stock issued to Messrs Gatza and Fanella is identical to that which
is being sold in this offering. Messrs. Gatza and Fanella have agreed,
however, that while they hold the Series A Preferred Stock they will waive the
semi-annual dividends in excess of $.40 per share (the Series A Preferred
Stock will pay $.56 per share).
The Company believes that the terms of all of the transactions discussed in
this section were no less favorable to the Company than those which could have
been obtained from non-affiliated parties.
29
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth the equity securities of the Company
beneficially owned by any person who, to the knowledge of the Company, owned
beneficially more than 5% of either class of voting stock as of July 1, 1996,
by all directors of the Company, and by the directors and officers of the
Company as a group. The table also indicates the number of votes to which each
person would be entitled in the event of a shareholders meeting and the
percentage of the total voting power represented thereby. None of the persons
identified below owns any securities of the Company other than the Common
Stock and the Series A Preferred Stock listed below.
<TABLE>
<CAPTION>
AMOUNT AND
NAME AND BUSINESS NATURE OF PERCENTAGE PERCENTAGE
ADDRESS OF BENEFICIAL OF OF VOTING
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP CLASS(1) VOTES POWER(1)
- -------------- -------------------- ---------------- ---------- ------- ----------
<S> <C> <C> <C> <C> <C>
Common Robert G. Gatza(4) 134,407 shares 29.6% 134,407 16.7%
Stock..... of record(2)(3)
Series A Robert G. Gatza(4) 175,000 shares 50.0% 175,000 21.8%
Preferred of record
Stock.....
Common Robert J. Fanella(4) 87,662 shares 20.2% 87,662 11.2%
Stock..... of record(2)
Series A Robert J. Fanella(4) 175,000 shares 50.0% 175,000 22.3%
Preferred of record
Stock.....
Common George M. Bradshaw 7,699 shares 1.9% 7,699 1.0%
Stock..... 550 Pennsylvania of record
Glen Ellyn, IL
Common All officers and 229,767 shares 48.1% 229,767 27.8%
Stock..... directors as a of record(2)
group (3 persons)
Series A All officers and 350,000 shares 100.0% 350,000 42.3%
Preferred directors as a of record
Stock..... group (3 persons)
</TABLE>
- --------
(1) In determining the percentage of outstanding shares or the percentage of
voting power, all presently-exercisable options owned by the shareholder
or the group are treated as having been exercised.
(2) Include shares of Common Stock issued pursuant to the Restricted Stock
Grant Program as follows: Robert G. Gatza--34,722 shares, Robert J.
Fanella--18,056 shares. See "MANAGEMENT--Restricted Stock Grant Program."
Also includes Class C Warrants to purchase shares of Common Stock at
$22.68 per share as follows: Robert G. Gatza--38,333 shares, Robert J.
Fanella--18,611 shares. See "CERTAIN TRANSACTIONS."
(3) Does not include 18,192 shares owned by Carol Ann Gatza, Mr. Gatza's wife.
Mr. Gatza does not share voting power or investment power with respect to
those shares and, accordingly, disclaims beneficial ownership of them.
(4) The business address of Messrs. Gatza and Fanella is c/o MicroENERGY,
Inc., 350 Randy Road, Carol Stream, Illinois 60188.
30
<PAGE>
DESCRIPTION OF THE COMPANY'S SECURITIES
The authorized capital stock of the Company consists of 4,000,000 shares of
Common Stock and 4,000,000 shares of Preferred Stock. On the date of this
Prospectus, the Company had 415,143 shares of Common Stock outstanding and
350,000 shares of Preferred Stock outstanding.
COMMON STOCK
Holders of the Common Stock are entitled to one vote for each share in the
election of directors and in all other matters to be voted on by the
stockholders. There is no cumulative voting in the election of directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors with respect to the
Common Stock out of funds legally available therefor and, in the event of
liquidation, dissolution or winding up of the Company, to share ratably in all
assets remaining after payment of liabilities. The holders of Common Stock
have no preemptive or conversion rights and are not subject to further calls
or assessments. There are no redemption or sinking fund provisions applicable
to the Common Stock. The Common Stock currently outstanding is validly issued,
fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized to issue 4,000,000 shares of preferred stock, no
par value. The preferred stock could, without action by the shareholders of
the Company, be issued by the Board of Directors from time to time in one or
more series for such consideration and with such relative rights, privileges
and preferences as the Board may determine. Accordingly, the Board has the
power to fix the dividend rate and to establish the provisions, if any,
relating to voting rights, redemption rate, sinking fund, liquidation
preferences and conversion rights for any series of preferred stock issued in
the future. It is not possible to state the actual effect of the authorization
of any other series of preferred stock upon the rights of holders of the
Common Stock or the Series A Cumulative Convertible Preferred Stock until the
Board determines the specific rights of the holders of any series of preferred
stock.
The only series of Preferred Stock presently outstanding is the Series A
Preferred Stock, of which 350,000 shares were issued by the Company to Robert
G. Gatza and Robert J. Fanella in connection with its financing of the recent
debt compromise. See "CAPITALIZATION--Debt Compromise." The Company has no
present plans to issue any shares of preferred stock other than the Series A
Cumulative Preferred Stock being sold in this offering.
SERIES A CUMULATIVE PREFERRED STOCK
This offering includes shares of Series A Cumulative Preferred Stock (the
"Preferred Stock"). The Board of Directors of the Company has designated the
following rights, privileges and preferences for the Series A Cumulative
Preferred Stock.
Dividend Rights
Holders of shares of Preferred Stock are entitled to receive, out of the
assets of the Company legally available for the payment of dividends,
dividends payable semi-annually on the 1st day of each January and July after
issuance at a rate of $.56 per share per annum. Dividends upon the Preferred
Stock are cumulative and accrue from the date of original issue. No cash
dividend may be declared and paid or set apart for payment upon the Common
Stock until any past quarterly dividend on any outstanding series of Preferred
Stock has been fully paid or declared and set apart for payment. In addition,
if the Company pays any dividend with respect to a share of its Common Stock,
it will pay twice that amount as an additional dividend on each share of
Preferred Stock. See "RISK FACTORS--Restrictions on Payment of Dividends."
At the Company's option, the Company may pay all or part of each semi-annual
dividend in shares of Common Stock. The Common Stock so issued will be valued
based on 100% of the average closing bid price of
31
<PAGE>
the Common Stock as reported on such exchange or quotation service as the
Common Stock may be quoted on for the ten trading days before the record date
for the dividend.
Voting Rights
The holder of each share of Preferred Stock will be entitled to cast one
vote at any meeting of the shareholders of the Company, as will the holder of
each share of Common Stock. Upon completion of this offering there will be
415,143 shares of Common Stock outstanding and 844,500 shares of Preferred
Stock. Accordingly, at a shareholders meeting held immediately after
completion of this offering, there would be 1,259,643 votes authorized, of
which the holders of Preferred Stock would be entitled to cast 844,500.
Liquidation Preference
In the event of a voluntary or involuntary liquidation or winding up of the
Company, the holders of Preferred Stock will be entitled to receive out of the
assets of the Company available for distribution to shareholders $7.00 per
share plus all accrued and unpaid dividends before any distribution is made to
the holders of Common Stock or any other class or series of stock ranking
junior to the Preferred Stock as to distribution of assets. After payment of
the full amount of the preferential liquidating distribution to which they are
entitled, the holders of shares of Preferred Stock will be entitled to share
in the distribution of the remaining assets of the Company with the holders of
the Common Stock on a 2-to-1 basis, such that the holder of each share of
Preferred Stock will receive twice as much of the remaining assets as is
distributed to the holder of each share of Common Stock.
The foregoing liquidation rights shall not be operative in the event of (i)
any consolidation or merger of the Company with or into any other corporation,
(ii) any dissolution, liquidation, winding up or reorganization of the Company
immediately followed by reincorporation of a successor corporation or creation
of a successor partnership or (iii) a sale or other disposition of all or
substantially all of the Company's assets to another corporation or a
partnership if, in each case, effective provision is made in the certificate
of incorporation of the resulting or surviving corporation or the articles of
partnership of the resulting partnership or otherwise, for the protection of
the rights of the holders of the Preferred Stock.
Preemptive Rights
Holders of Preferred Stock shall have no preemptive right to purchase any
securities of the Company.
WARRANTS
The Redeemable Class A Warrants are immediately transferable. Each
Redeemable Class A Warrant entitles the holder thereof to purchase one share
of Series A Preferred Stock at an exercise price of $7.00 from , 1997
until , 2000, subject to certain adjustments. The Redeemable Warrants
may be exercised in whole or in part.
The Redeemable Warrants will be issued under a warrant agreement dated as of
the closing date of this offering (the "Warrant Agreement") between the
Company and American Stock Transfer & Trust Company (the "Warrant Agent"). The
following is a general summary of certain provisions contained in the Warrant
Agreement and is qualified in its entirety by reference to the Warrant
Agreement, a copy of which as been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
The Board of Directors of the Company has the right to amend the terms of
the Warrant Agreement at its discretion to, among other things, reduce the
exercise price or extend the exercise period of the Warrants; provided,
however, that no amendment adversely affecting the rights of the holders of
Warrants may be made without the approval of the holders of a majority of the
affected Warrants.
At any time during the exercise period (but not before , 1997) the
Company has the right to redeem all the Class A Warrants at a price of $.05
per Warrant upon not less than 30 days' prior written notice; provided that
before any redemption of Class A Warrants can take place, the average closing
bid price of the Company's Preferred Stock as reported on NASDAQ shall have
been $9.00 per share for 5 consecutive trading days ending within 15 days
prior to the date on which notice of redemption is sent.
32
<PAGE>
In order for a holder to exercise his or her Redeemable Warrants, and as
required in the Warrant Agreement, there must be a current registration
statement on file with the Securities and Exchange Commission and various
state securities commissions to continue registration of the shares of Common
Stock underlying such warrants. The Company will be required to file post-
effective amendments when events require such amendments. There can be no
assurance that the registration statement can be kept current. If it is not
kept current for any reason, the Redeemable Warrants will not be exercisable
and will be deprived of any value. The Company has agreed to use its best
efforts to maintain a current registration statement to permit the issuance of
the Preferred Stock upon exercise of the Redeemable Warrants.
Holders of the Redeemable Warrants will be protected against dilution of the
interest represented by the underlying shares of Preferred Stock upon the
occurrence of certain events, including, but not limited to, stock dividends,
stock-splits, reclassifications and mergers. In the event of the complete
liquidation and dissolution of the Company, the Redeemable Warrants terminate.
Holders of the Redeemable Warrants will not have voting power and will not be
entitled to dividends. In the event of liquidation, dissolution or winding up
of the Company, holders of the Redeemable Warrants will not be entitled to
participate in the Company's assets.
Pursuant to the Underwriting Agreement, the Company has agreed to pay to the
Representative and/or any registered broker-dealer which is a member of the
National Association of Securities Dealers, Inc. ("NASD") a commission equal
to four percent of the exercise price of each Redeemable Warrant exercised
provided:
(1) at least one year has elapsed from the date of this Prospectus; (2)
the market price for the Preferred Stock is greater than the exercise price
of the Redeemable Warrants; (3) the Representative or such other NASD
broker-dealer member has solicited the holder to exercise the Redeemable
Warrant with such solicitation being confirmed in writing by each holder;
and (4) the compensation arrangements were disclosed to the holder at the
time of exercise, such disclosure being confirmed in writing by said
holder. The commission is further conditioned upon the Company's warrant
agent being furnished by the Representative or NASD broker-dealer member
with a certificate stating that:
(i) the Redeemable Warrants exercised were not held in a discretionary
account;
(ii) the Representative or the NASD member did not, within 10 business
days immediately preceding the solicitation of the exercise of the
Redeemable Warrant or the date of such exercise, bid for or purchase the
Preferred Stock of the Company or any securities of the Company immediately
convertible into or exchangeable for the Preferred Stock (including the
Redeemable 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; and
(iii) in connection with the solicitation, the Representative and/or the
NASD member disclosed the compensation it would receive upon exercise of
the Redeemable Warrant.
TRANSFER AGENT/WARRANT AGENT
The Company's transfer agent for the Preferred Stock, Common Stock and the
Warrants is American Stock Transfer & Trust Company, 40 Wall Street, New York,
New York 10005. American Stock Transfer & Trust Company also serves as the
Warrant Agent for the Warrants.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS TO INVESTORS
The following discussion is a summary of the opinion of Bressler, Amery &
Ross, counsel to the Company, regarding the material federal income tax
consequences of acquiring, holding and disposing of the Securities, based on
the law as it exists on the date hereof. It does not purport to be a complete
discussion of all tax considerations possibly relevant to potential investors.
33
<PAGE>
The term "Common Stock" as hereinafter used in this "Certain Federal Income
Tax Considerations" section refers only to the Common Stock issued as
dividends with respect to the Preferred Stock. This discussion does not
address federal income tax considerations relevant to persons in special tax
situations including life insurance companies, banks, tax-exempt entities,
securities dealers, S corporations, foreign corporations and nonresident alien
individuals. This discussion is addressed to investors who will hold the
Preferred Stock, the Common Stock and the Class A Warrants as "capital assets"
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"). This discussion does not address any state, local or
foreign tax considerations which may be relevant to an investor and is based
on relevant provisions of the Code, the Treasury Regulations promulgated
thereunder (the "Regulations"), and administrative and judicial
interpretations thereof, as in effect at the date of this Registration
Statement.
There can be no assurance that future changes in applicable law, including
changes in applicable law pursuant to legislative proposals currently under
consideration, or administrative and judicial interpretations thereof will not
adversely affect the tax consequences described herein. TAX CONSEQUENCES OF AN
INVESTMENT IN THE SECURITIES MAY VARY DEPENDING ON EACH HOLDER'S PARTICULAR
SITUATION. POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF THE PREFERRED STOCK, THE
COMMON STOCK OR THE WARRANTS IN THEIR PARTICULAR CIRCUMSTANCES, INCLUDING THE
APPLICATION AND EFFECT OF FOREIGN, STATE OR LOCAL TAX LAWS AND ESTATE AND GIFT
TAX CONSIDERATIONS.
DISTRIBUTIONS ON PREFERRED STOCK
Distributions by the Company with respect to the Preferred Stock will be
characterized as dividends for federal income tax purposes to the extent of
the Company's current or accumulated earnings and profits allocable to such
distributions. To the extent that Common Stock is distributed with respect to
the Preferred Stock ("Distributed Common Stock"), the amount distributed shall
be the fair market value of the Distributed Common Stock on the date of such
distribution and such amount distributed would be characterized as a dividend
for federal income tax purposes to the extent of the Company's current or
accumulated earnings and profits allocable to such distribution. Since the
amount distributed with respect to a distribution of Distributed Common Stock
is based on the fair market value of such Distributed Common Stock on the date
of such distribution, and is not based on the pre-record date average trading
price of the Common Stock, such amount distributed (and, subject to the
existence of earnings and profits allocable to such distribution, the amount
of dividend income) may be greater or less than $.56 per share which is stated
as the amount of the annual dividend. See "Dividends." In general,
distributions classified as dividends for federal income tax purposes
constitute ordinary income and are taxable in the year of receipt. A
distribution in excess of the Company's current or accumulated earnings and
profits allocable to such distribution (including the fair market value of any
Distributed Common Stock in excess of the Company's current or accumulated
earnings and profits allocable to such distribution) would be treated first as
a nontaxable recovery of any basis in the stock with respect to which such
distribution was made and then would be treated as capital gain from the sale
or exchange of such stock. Any such gain would be long-term capital gain if
the taxpayer's holding period for such stock exceeds one year. The amount of
the Company's current or accumulated earnings and profits depends, in part,
upon the Company's results of operations and cannot be predicted. Accordingly,
there can be no assurance that all or any portion of a distribution with
respect to the Preferred Stock would be classified as a dividend for federal
income tax purposes.
DIVIDENDS RECEIVED DEDUCTION--CORPORATE SHAREHOLDERS
Dividends received by corporate holders with respect to the Preferred Stock
may be eligible for the 70% dividends received deduction (80%, if the Company
is a "20% owned corporation" with respect to the corporate stockholder, within
the meaning of Section 243 of the Code). To be eligible for the dividends
received deduction, a corporate holder must hold its shares of Preferred Stock
with respect to which dividend distributions are made for certain minimum
periods (generally 46 days) and must meet certain other requirements. A
holder's holding period, for this purpose, is generally reduced for periods
during which the holder's risk of loss with respect to
34
<PAGE>
the stock on which dividend distributions are made is diminished. The
dividends received deduction may be reduced or eliminated if a holder's shares
of Preferred Stock are deemed to be debt-financed portfolio stock within the
meaning of Section 246A of the Code. Under the adjusted current earnings rules
of the alternative minimum tax provisions of the Code, and depending upon a
corporate holder's particular tax situation, up to 75% of any dividends
received deduction may be added back in the computation of alternative minimum
taxable income.
Under Section 1059 of the Code, a corporate holder may be required to reduce
its adjusted basis (or, upon disposition, recognize additional gain) for a
share of stock in an amount generally equal to the dividends received
deduction allowable with respect to an "extraordinary dividend" on such share
of stock, if such share were held for not more than 2 years before the
"dividend announcement date" for such extraordinary dividend. An extraordinary
dividend is, generally, a dividend in excess of 5% of a holder's basis for
(or, at the holder's election, the fair market value of) a share of Preferred
Stock. For this purpose, dividends having ex-dividend dates within the same 85
day period are aggregated. Additionally, dividends with respect to a share of
stock having ex-dividend dates within the same 365 day period are treated as
extraordinary if such dividends exceed 20% of a holder's basis for (or,
electively, the fair market value determined on a weighted average basis, of)
such share of stock. Due to the uncertainty as to what a holder's basis in the
Preferred Stock will be, no opinion can be given as to whether the rules
applicable under Section 1059 of the Code to preferred stock would be
applicable to dividends on the Preferred Stock.
If, in the event of a redemption of Preferred Stock, a holder is treated as
having received a distribution taxable as a dividend (see discussion of Sale
or Redemption of Preferred Stock, below), such holder may be subject to the
basis reduction requirements of Section 1059 of the Code without regard to the
amount of such deemed distribution or the holder's holding period for the
redeemed Preferred Stock.
Recently proposed legislation would, if enacted into law, reduce the
dividends received deduction percentage. It cannot be known at the present
time whether such legislation will be enacted or, if enacted, the form such
legislation will ultimately take. A corporation considering an investment in
the Securities is urged to consult its tax advisor regarding the application
of the dividends received deduction and related rules to its particular
situation, and the effect of any potential legislation on such application.
SALE OR REDEMPTION OF PREFERRED STOCK
A sale or redemption of Preferred Stock for cash would be a taxable event.
The sale of Preferred Stock would generally be treated as a taxable sale or
exchange resulting in the recognition of capital gain or loss equal to the
difference between the amount realized and the holder's adjusted tax basis for
the Preferred Stock sold. The redemption of Preferred Stock for cash may be
treated as a taxable sale or exchange resulting in the recognition of capital
gain or loss in an amount equal to the difference between the amount of cash
received and the holder's adjusted tax basis for the Preferred Stock redeemed.
Gain or loss resulting from the redemption (if treated as a sale or exchange)
or sale of Preferred Stock would be long-term capital gain or loss if the
holding period for the Preferred Stock were to exceed one year at the time of
such redemption or sale. Under certain circumstances, however (such as where a
stockholder's interest in the Company is not sufficiently reduced), a
redemption of Preferred Stock would not be treated as a sale or exchange, and
the entire amount of the cash received upon redemption of the Preferred Stock
would be treated as a distribution by the Company. Such distribution would be
subject to the rules described above with respect to distributions on
Preferred Stock. A redemption of Preferred Stock would be treated as a sale or
exchange and not as a distribution as to a stockholder who completely
terminates his interest in the Company (taking into account shares deemed
owned by the stockholder by reason of the constructive ownership rules set
forth in Section 302(c) of the Code) as a result of such redemption. A
redemption of Preferred Stock would generally be treated as a sale or exchange
and not as a distribution as to a stockholder who, after the redemption
(taking into account such constructive ownership rules) owns less than (i) 50%
of the total combined voting power of all classes of stock of the Company,
(ii) 80% of the percentage of the voting stock of the Company that such
stockholder owned immediately before the redemption, and (iii) 80% of the
percentage of the common stock of the Company that such stockholder owned
35
<PAGE>
immediately before the redemption. Further, a redeemed holder of Preferred
Stock whose relative stock interest in the Company is minimal (for example, an
interest of less than 1%) and who exercises no control over the Company's
affairs, should be treated as having sold or exchanged his stock if such
holder experiences an actual reduction in his proportionate interest in the
Company (taking into account the constructive ownership rules mentioned
above). Additionally, sale or exchange treatment may be available to a
redeeming holder of Preferred Stock under other circumstances.
DISTRIBUTED COMMON STOCK
A holder's initial tax basis in Distributed Common Stock would be the fair
market value thereof on the date of distribution and a holder's holding period
for such Distributed Common Stock would commence on the date after the date of
distribution.
TAX TREATMENT OF CLASS A WARRANTS; BASIS OF PREFERRED STOCK AND WARRANTS
The exercise of a Class A Warrant would not be taxable. The tax basis of the
shares of Preferred Stock received upon such exercise would equal the adjusted
tax basis of the Class A Warrants exercised, plus the exercise price paid. The
holding period of the Preferred Stock received would begin upon the date of
exercise. On redemption, sale or expiration of a Warrant, the holder would
recognize gain or loss equal to the difference between the amount realized on
the redemption, sale or expiration and the holder's tax basis in the Warrant.
Such gain or loss generally would be capital gain or loss and would be long-
term capital gain or loss if the holding period for the Warrant were to exceed
one year.
Although the Offering provides that the offering price of a share of
Preferred Stock is $7.00 and the offering price of a Class A Warrant is $.10,
no assurance can be given that the Internal Revenue Service would not
challenge such allocation. If the Internal Revenue Service were to challenge
such allocation and were to prevail with respect to such challenge, then a
holder would be required to adjust the tax basis for the Preferred Stock and
the Class A Warrants accordingly.
BACKUP WITHHOLDING
Under Section 3406 of the Code and applicable Regulations, a holder of
Preferred Stock or Common Stock may be subject to backup withholding at the
rate of 31% with respect to dividends paid on, or the proceeds of a sale,
exchange or redemption of, the Preferred Stock or Common Stock. If (i) the
holder ("payee") fails to furnish a taxpayer identification number ("TIN") to
the Company (or other payor), (ii) the Internal Revenue Service notifies the
Company (or other payor) that the TIN furnished by the payee is incorrect,
(iii) there has been a "notified payee underreporting" described in Section
3406 of the Code or (iv) there has been a failure of the payee to certify
under penalty of perjury that the payee is not subject to withholding under
Section 3406(a)(1)(C) of the Code, the Company (or other payor) will be
required to withhold an amount equal to 31% of any dividend or redemption
payment made with respect to the Preferred Stock or Common Stock. Amounts paid
as backup withholding do not constitute an additional tax and can be credited
against the holder's federal income tax liabilities.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
by and between the Company and the Representative ("Underwriting Agreement"),
the Company has agreed to sell to the Underwriters, as set forth below, for
whom I.A. Rabinowitz & Co. is the Representative, on a "firm commitment"
basis, a total of 494,500 shares of Preferred Stock, $7.00 par value, and
247,250 Class A Redeemable Common Stock Purchase Warrants, as follows:
<TABLE>
<CAPTION>
UNDERWRITERS PREFERRED SHARES CLASS A WARRANTS
------------ ---------------- ----------------
<S> <C> <C>
I.A. Rabinowitz & Co. ........................
---- ----
Total.......................................
==== ====
</TABLE>
36
<PAGE>
The Company has agreed to sell the Securities to the Underwriters at a
discount of ten percent of the public offering price thereof. The Company has
also agreed to pay the Representative a nonaccountable expense allowance in
the amount of 3% of the offering price of the Securities, of which $25,000 has
been advanced to the Representative. In addition, the Company has agreed to
pay all costs of issuance of the Securities, including blue sky fees and
related counsel fees but not including fees and expenses of the
Representative's counsel. The Company estimates that it will incur costs of
$147,000 in connection with this Offering, not including the Representative's
3% non-accountable expense allowance and the $48,000 financial consulting fee
payable to the Representative. As part of the underwriting arrangements, the
Company will enter into a contract to retain the Representative as a financial
consultant to the Company for a two-year period commencing as of the close of
the sale of the Securities offered hereby at an annual fee of $24,000, for a
total of $48,000, payable in full at the closing of this offering. The Company
has agreed to pay the Representative an investment banking fee for future
consummated transactions, if any, introduced by the Representative including
mergers, acquisitions and joint ventures during the five years following the
completion of the Offering equal to 5% of the first $4,000,000 of
consideration involved in the transaction, 4% of the next $1,000,000, 3% of
the next $1,000,000, and 2% of the excess, if any, over $6,000,000.
The Company has agreed to indemnify the Representative against certain
liabilities which may be incurred in connection with this offering, including
certain civil liabilities under the Securities Act of 1933, as amended, and
where such indemnification is not available, to contribute to the payments the
Representative may be required to make in respect of such liabilities. Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
The Underwriting Agreement further provides that for three years after the
completion of this Offering, the Representative will have the right to
nominate one person to serve on the Company's Board of Directors, and upon
such nomination the Board shall take the action necessary to cause the
Representative's nominee to be elected to the Board. If the Representative
does not exercise this right, it may appoint an advisor, who will be entitled
to attend all meetings of the Board of Directors.
The Company's officers and directors have agreed not to issue, sell, offer
to sell or otherwise dispose of any of the Company's Securities owned by them
for a period of 24 months from the date of this Prospectus without the prior
written consent of the Representative.
The Representative has advised the Company that sales to certain dealers may
be made at a public offering price less a concession not in excess of 5%. The
Representative does not intend to confirm sales of more than one percent of
the Securities offered hereto to any accounts over which it exercises
discretionary authority.
There has been no previous established trading market for the Preferred
Stock or the Class A Warrants. The major factors considered by the Company and
the Representative in determining the public offering price of the Securities
and the exercise price of the Class A Warrants, in addition to prevailing
market conditions, were the existing market for the Common Stock, the
Company's financial condition, historical performance and growth rates; an
assessment of the Company's management, technology, business potential and
earnings prospects; the present state of the Company's development and the
above factors in relation to market valuations of other similar technology-
based companies. The public offering price may not bear any relationship to
the assets or book value, net worth or other criteria of value of or
applicable to the Company.
The Company has agreed, upon completion of this offering, to sell to the
Representative or its nominee for a total of $74.18 Representative's Purchase
Warrants to purchase 49,450 shares of Series A Preferred Stock and 24,725
Class A Warrants. The Representative's Warrants will be exercisable for a
four-year term, commencing one year after the date of this Prospectus, at an
exercise price of $8.40 per share and $.12 per warrant, i.e. 120% of the
public offering price of the Securities. The Class A Warrants underlying the
Representative's Warrants
37
<PAGE>
will have the same terms as the Class A Warrants offered hereby to the public.
The Representative's Warrants will be restricted from exercise, sale, transfer
(except to officers of the Representative or of any other broker-dealer which
participates in this Offering), assignment or hypothecation, for a period of
one year from the date of this Prospectus. The Representative's Warrants also
provide that on two occasions, upon the request of the Representative or
holders of a majority of the Representative's Warrants or underlying
securities, at any time during the four-year period commencing one year after
the Effective Date, the Company will prepare and file a post-effective
amendment or new registration statement permitting the sale of the
Representative's Warrants and/or underlying securities and use its best
efforts to keep the registration statement effective for a nine-month period
following the effective date of such post-effective amendment or new
registration statement. The Company will bear the cost of the first such
registration statement, but the holders will bear all costs incident to the
second such registration statement. If the Company files a registration
statement relating to an equity offering under the provisions of the
Securities Act at any time during the five-year period commencing on the date
of this Prospectus, the holders of the Representative's Warrants or underlying
securities will have the right, subject to certain conditions, to include in
such registration statement, at the Company's expense, all or part of the
underlying securities at the request of the holders. The number of securities
covered by the Representative's Warrants and the exercise price are subject to
adjustment upon certain events to prevent dilution.
For the life of the Representative's Warrants, the holders thereof will have
the opportunity to profit from a rise in the market price of the Securities
with a resulting dilution in the interests of other stockholders. The
Representative's registration rights may result in substantial expense to the
Company at a time when it may not be able to afford such expense and may
impede future financing. The Company may find that the terms on which it could
obtain additional capital may be adversely affected while the Representative's
Warrants are outstanding.
The Company has also agreed to pay the Representative a warrant solicitation
fee equal to 4% of the Warrant exercise price for any of the publicly held
Warrants, when exercised, at any time commencing one year after the date of
this Prospectus, provided that the Representative or any NASD member firm has
solicited such exercise, as evidenced in writing signed by the warrant holder,
and that (a) the market price of the Preferred Stock on the date that any such
Warrant is exercised is greater than the exercise price of the Warrant; (b)
the Warrantholder represents in writing that the Representative or NASD member
firm solicited the exercise of such Warrant; (c) prior specific written
approval for exercise is received from the customer if the Warrant is held in
a discretionary account; (d) disclosure of this compensation arrangement is
made prior to or upon the exercise of such Warrant; (e) solicitation of the
exercise is not in violation of Rule 10b-6 of the Exchange Act; and
(f) solicitation of the exercise is in compliance with NASD Notice to Members
81-38. In addition, unless granted an exemption by the Commission from Rule
10b-6 under the Exchange Act, the Representative will be prohibited from
engaging in any market making activities or solicited brokerage activities
with respect to the Company's Securities for the period from nine business
days prior to any solicitation of the exercise of any Warrant or nine business
days prior to the exercise of any Warrant based on a prior solicitation until
the later of the termination of such solicitation activity or the termination
(by waiver or otherwise) of any right the Representative may have to receive a
fee for the exercise of the Warrants following such solicitation. As a result,
the Representative may be unable to continue to provide a market for the
Company's Securities during certain periods while the Warrants are
exercisable. See: "DESCRIPTION OF SECURITIES--Warrants".
SELLING SECURITYHOLDERS
The Registration Statement of which this Prospectus is a part also relates
to the offer and sale of 880,000 Class A Warrants (the "Bridge Securities") to
be offered by the Selling Securityholders. All of such securities are expected
to become tradeable on or about the date of this Prospectus. Sales of the
Warrants being offered by Selling Securityholders, or even the potential of
such sales, would likely have an adverse effect on the market prices of the
Securities being offered for sale by the Company.
38
<PAGE>
The following table sets forth the beneficial ownership of the securities of
the Company held by each person who is a Selling Securityholder and by all
Selling Securityholders as a group prior to the Offering and after the
Offering, assuming all of the Warrants owned by the Selling Securityholders
are sold.
<TABLE>
<CAPTION>
CLASS A PERCENT OF CLASS A
WARRANTS OWNED WARRANTS OWNED
----------------- ----------------------
NAME OF PRIOR TO AFTER PRIOR TO AFTER
BEEFICIAL OWNERN OFFERING OFFERING OFFERING OFFERING
- ---------------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C>
Michael Lulkin...................... 400,000 -- 45.5% 0%
Rifky Weiner........................ 208,000 -- 23.6% 0%
James R. Solakian................... 128,000 -- 14.5% 0%
Harold Pretter...................... 48,000 -- 5.5% 0%
JM Holdings......................... 48,000 -- 5.5% 0%
Robert Brantl....................... 48,000 -- 5.5% 0%
------- --- ---------- -------
Total............................. 880,000 0 100.00% 0%
</TABLE>
None of the Selling Securityholders is affiliated with the Company in any
capacity or has had any business relationship with the Company at any time,
except that Robert Brantl is of counsel to the firm of Bressler, Amery & Ross,
which has served as legal counsel to the Company since it was founded.
PLAN OF DISTRIBUTION
The securities offered thereby may be sold from time to time directly by the
Selling Securityholders. Alternatively, the Selling Securityholders may from
time to time offer such securities through underwriters, dealers or agents.
The distribution of securities by the Selling Securityholders may be effected
in one or more transactions that may take place on the over-the-counter
market, including ordinary broker's transactions, privately-negotiated
transactions or through sales to one or more broker-dealers for resale of such
securities as principals, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. Usual
and customary or specifically negotiated brokerage fees or commissions may be
paid by the Selling Securityholders in connection with such sales of
securities. The Selling Securityholders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the Act
with respect to the securities offered, and any profits realized or
commissions received may be deemed underwriting compensation.
At the time a particular offer of securities is made by or on behalf of a
Selling Securityholder, to the extent required, a prospectus will be
distributed which will set forth the number of securities being offered and
the terms of the offering, including the name or names of any underwriters,
dealers or agents, if any, the purchase price paid by any underwriter for
securities purchased from the Selling Securityholder and any discounts,
commissions or concessions allowed or reallowed or paid to dealers, and the
proposed selling price to the public.
Under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the regulations thereto, any person engaged in a distribution of the
securities of the Company offered by the Selling Securityholders may not
simultaneously engage in market-making activities with respect to such
securities of the Company during the applicable "cooling off" period (9 days)
prior to the commencement of such distribution. In addition, and without
limiting the foregoing, the Selling Securityholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation, Rule 10b-6 and 10b-7, in connection
with transactions in such securities, which provisions may limit the timing of
purchases and sales of such securities by the Selling Securityholders.
LEGAL MATTERS
The validity of the Securities offered hereby and of the Preferred Stock
issuable upon exercise of the Warrants has been passed upon for the Company by
Bressler, Amery & Ross, 17 State Street, New York, New York. Robert Brantl,
who is of counsel to Bressler Amery & Ross, is one of the Selling
Securityholders in this Offering. Certain legal matters in connection with
this Offering will be passed upon for the Underwriter by Bernstein &
Wasserman, LLP, 950 Third Avenue, New York, New York.
39
<PAGE>
EXPERTS
The Company's audited financial statements included herein and elsewhere in
the Registration Statement, of which this Prospectus is a part, are included
in reliance upon the report of Selden Fox and Associates, Ltd., independent
certified public accountants, with respect to the financial statements as of
and for the years ended June 30, 1995, 1994 and 1993, and upon the authority
of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed at the office of the Securities and Exchange
Commission (the "Commission") in Washington, D.C. a Registration Statement on
Form S-1 under the Act with respect to the Securities offered hereby. This
Prospectus, which is part of said Registration Statement, does not contain all
of the information set forth in the Registration Statement, as permitted by
the rules and regulations of the Commission. For further information with
respect to the Company and the Securities, reference is made to the
Registration Statement (including amendments) and the exhibits and schedules
filed therewith, which may be inspected without charge and copied at
prescribed rates at the Commission's Public Reference Section, 450 Fifth
Street, N.W., Washington, D.C. 20549. Statements contained in this Prospectus
as to the contents of any contract or other document are not necessarily
complete, and in each instance reference is made to the copy of such contract
or document filed as an exhibit to the Registration Statement, each such
statement being qualified in all respects by such reference.
40
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Certified Public Accountants dated September 7, 1995............ F-2
Consolidated Balance Sheet................................................ F-3
Consolidated Statements of Operations..................................... F-4
Consolidated Statements of Changes in Stockholders' Equity................ F-5
Consolidated Statements of Cash Flows..................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and
Shareholders of MicroENERGY, Inc.
We have audited the accompanying consolidated balance sheet of MicroENERGY,
Inc. and Subsidiary as of June 30, 1995 and 1994, and the related consolidated
statements of operations, changes in stockholders' equity (deficit) and cash
flows for the years ended June 30, 1995, 1994 and 1993. 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, assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
MicroENERGY, Inc. and its Subsidiary at June 30, 1995 and 1994, and the
results of their operations and cash flows for the years ended June 30, 1995,
1994 and 1993, in conformity with generally accepted accounting principles.
Selden, Fox and Associates, Ltd.
Certified Public Accountants
September 7, 1995
F-2
<PAGE>
MICROENERGY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1995 AND 1994,
AND MARCH 31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, JUNE 30,
1996 1995 1994
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash................................... $ 10,000 $ 113,227 $ 45,792
Accounts receivable.................... 1,575,385 1,193,995 1,253,619
Inventories............................ 3,448,466 2,712,224 2,594,549
Other current assets................... 73,091 53,725 66,492
---------- ----------- -----------
Total current assets................. 5,106,942 4,073,171 3,960,452
Property and equipment................... 4,842,737 4,390,516 4,217,383
Accumulated depreciation................. (3,035,215) (2,604,333) (2,031,852)
---------- ----------- -----------
1,807,522 1,786,183 2,185,531
Other assets, net........................ 329,250 289,177 155,891
---------- ----------- -----------
$7,243,714 $ 6,148,531 $ 6,301,874
========== =========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable.......................... $1,693,731 $ 1,165,211 $ 1,200,849
Current portion of long-term
obligations........................... 2,240,958 858,808 1,164,860
Accounts payable....................... 1,539,010 1,149,587 803,554
Amounts due related parties............ 87,675 -- 109,770
Accrued expenses....................... 169,437 456,206 408,066
---------- ----------- -----------
Total current liabilities............ 5,730,811 3,629,812 3,687,099
Long-term obligations.................... 969,514 3,514,009 3,954,150
---------- ----------- -----------
Total liabilities.................... 6,700,325 7,143,821 7,641,249
---------- ----------- -----------
Stockholders' deficit:
Convertible preferred stock, no par
value--800 shares authorized; 769
issued and converted
Preferred Stock Subscription........... 250,000 -- --
Common stock, $.001 par value--
180,000,000 shares authorized;
113,961,563 shares issued in 1995,
114,111,563 in 1994, and 149,451,563
at
March 31, 1996........................ 149,452 113,961 114,111
Additional paid-in capital............. 5,692,079 5,678,919 5,678,919
Accumulated deficit.................... (5,356,650) (5,356,650) (5,606,544)
Unearned restricted stock
compensation.......................... (1,415,050) (1,455,550) (1,509,550)
Stock purchase warrants................ 88,075 75 75
Treasury stock, at cost, 683,159
shares................................ (16,386) (16,386) (16,386)
Unrealized gain on marketable
securities............................ -- 40,341 --
Current year earnings.................. 1,151,869 -- --
---------- ----------- -----------
Total stockholders'
equity/(deficit).................... 543,389 (995,290) (1,339,375)
---------- ----------- -----------
$7,243,714 $ 6,148,531 $ 6,301,874
========== =========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
MICROENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993; AND
THE NINE MONTHS ENDED MARCH 31, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
MARCH 31, JUNE 30,
------------------------ ------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............... $10,718,611 $10,996,535 $14,588,844 $12,771,067 $15,886,279
----------- ----------- ----------- ----------- -----------
Expenses:
Facility,
preproduction and
production........... 8,713,503 8,983,789 11,566,567 10,054,423 12,474,737
Research and
development.......... 642,290 558,743 949,002 920,391 1,246,965
Selling and
marketing............ 244,398 359,858 494,392 418,830 515,679
General and
administrative....... 725,790 699,020 997,198 951,004 1,215,618
----------- ----------- ----------- ----------- -----------
10,325,981 10,601,410 14,007,159 12,344,648 15,452,999
----------- ----------- ----------- ----------- -----------
Operating income.... 392,630 395,125 581,685 426,419 433,280
Interest expense, net... 241,322 248,955 331,791 321,574 423,158
Foreign investment
income................. -- -- -- (100,000) --
Gain on debt
restructuring, net..... -- -- -- -- (30,684)
Debt compromise......... (1,000,561) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net income.......... $ 1,151,869 $ 146,170 $ 249,894 $ 204,845 $ 40,806
=========== =========== =========== =========== ===========
Net income per
share.............. $ .009 $ .001 $ .0022 $ .0018 $ .0004
=========== =========== =========== =========== ===========
Weighted average number
of shares of common
stock outstanding...... 126,050,810 114,111,563 114,036,563 115,111,563 114,544,896
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes
F-4
<PAGE>
MICROENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993, AND NINE MONTHS ENDED MARCH
31, 1996 (UNAUDITED)
<TABLE>
<CAPTION>
UNEARNED
PREFERRED STOCK ADDITIONAL RESTRICTED UNREALIZED STOCKHOLDERS'
COMMON STOCK PURCHASE PAID-IN STOCK TREASURY ACCUMULATED GAIN ON TOTAL EQUITY
STOCK SUBSCRIPTION WARRANTS CAPITAL COMPENSATION STOCK DEFICIT INVESTMENTS (DEFICIT)
-------- ------------ -------- ---------- ------------ -------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net balance at
June 30, 1992.. $113,761 $ -- $ 75 $5,866,154 $(1,789,763) $(16,386) $(5,852,195) $ -- $(1,678,354)
Amortization of
restricted
stock awards... -- -- -- -- 59,664 -- -- -- 59,664
Issuance of
restricted
stock.......... 2,350 -- -- -- -- -- -- -- 2,350
Net income...... -- -- -- -- -- -- 40,806 -- 40,806
-------- -------- ------- ---------- ----------- -------- ----------- ------- -----------
Net balance at
June 30, 1993.. 116,111 -- 75 5,866,154 (1,730,099) (16,386) (5,811,389) -- (1,575,534)
Amortization of
restricted
stock awards... -- -- -- -- 54,000 -- -- -- 54,000
Forfeiture of
restricted
stock award.... (2,000) -- -- (187,235) 166,549 -- -- -- (22,686)
Net income...... -- -- -- -- -- -- 204,845 -- 204,845
-------- -------- ------- ---------- ----------- -------- ----------- ------- -----------
Net balance at
June 30, 1994.. 114,111 -- 75 5,678,919 (1,509,550) (16,386) (5,606,544) -- 1,339,375
Amortization of
restricted
stock awards... -- -- -- -- 54,000 -- -- -- 54,000
Cancellation of
150,000
shares......... (150) -- -- -- -- -- -- -- (150)
Net income...... -- -- -- -- -- -- 249,894 -- 249,894
Change in
unrealized gain
on investment.. -- -- -- -- -- -- -- 40,341 40,341
-------- -------- ------- ---------- ----------- -------- ----------- ------- -----------
Net balance at
June 30, 1995.. $113,961 -- $ 75 $5,678,919 $(1,455,550) $(16,386) $(5,356,650) $40,341 $ (995,290)
Class D Warrant
and Employee
stock options
exercised...... 35,491 -- -- 13,160 -- -- -- -- 48,651
Amortization of
restricted
stock awards... -- -- -- -- 40,500 -- -- -- 40,500
Change in
unrealized gain
on investment.. -- -- -- -- -- -- -- (40,341) (40,341)
Preferred Stock
Purchase
Warrants....... -- -- 88,000 -- -- -- -- -- 88,000
Preferred Stock
Subscription... -- 250,000 -- -- -- -- -- -- 250,000
Net Income...... -- -- -- -- -- -- 1,151,869 -- 1,151,869
-------- -------- ------- ---------- ----------- -------- ----------- ------- -----------
Net balance at
March 31, 1996
(unaudited).... $149,452 $250,000 $88,075 $5,692,079 $(1,415,050) $(16,386) $(4,204,781) $ 0 $ 543,389
======== ======== ======= ========== =========== ======== =========== ======= ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
MICROENERGY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 1995, 1994 AND 1993 AND THE NINE MONTHS ENDED
MARCH 31, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
MARCH 31, JUNE 30,
------------------------ --------------------------------
1996 1995 1995 1994 1993
----------- ----------- --------- --------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operat-
ing activities:
Net income........... $1,151,869 $146,170 $ 249,894 $ 204,845 $ 40,806
Adjustments to
reconcile net income
to net cash from
operating
activities:
Debt Compromise.... (1,000,561) -- -- -- --
Depreciation....... 430,882 430,083 572,481 536,121 452,228
Property and
equipment write-
off............... -- -- -- 7,194 --
Amortization....... -- -- -- 16,052 16,800
Foreign investment
income............ -- -- -- (100,000) --
Compensation paid
in common stock,
net of
forfeiture........ 40,500 40,500 53,850 31,315 62,014
Interest added to
debt principal.... -- -- -- -- 50,577
Changes in assets and
liabilities:
Accounts
receivable........ (381,390) (410,496) 59,624 494,487 1,087,140
Inventories........ (736,242) (74,045) (117,675) (306,271) 1,421,313
Other current
assets............ (99,780) (51,950) 12,767 (24,399) (18,761)
Other assets....... -- -- (33,946) 2,206 (857)
Accounts payable... 389,423 280,732 346,034 121,658 (1,349,957)
Accrued expenses... (199,094) (90,225) (61,630) (74,585) (132,889)
---------- -------- --------- --------- ----------
Net cash from
operating
activities...... (404,393) 270,769 1,081,399 908,623 1,628,414
---------- -------- --------- --------- ----------
Cash flows from invest-
ing activities:
Additions to property
and equipment....... (331,622) (141,709) (173,133) (152,392) (290,024)
Increase in foreign
investment.......... -- -- (59,000) -- --
---------- -------- --------- --------- ----------
Net cash from
investing
activities...... (331,622) (141,709) (232,133) (152,392) (290,024)
---------- -------- --------- --------- ----------
Cash flows from financ-
ing activities:
Issuance of long-term
obligations......... 330,070 -- -- -- 1,104,108
Payment of long-term
obligations......... (612,452) (528,656) (746,193) (498,432) (251,318)
Net payments of notes
payable............. 528,520 363,804 (35,638) (265,741) (2,360,346)
Preferred stock
subscription........ 250,000 -- -- -- --
Preferred stock
warrants............ 88,000 -- -- -- --
Class D Warrants and
Stock Options
exercised........... 48,650 -- -- -- --
---------- -------- --------- --------- ----------
Net cash from
financing
activities...... 632,788 (164,852) (781,831) (764,173) (1,507,556)
---------- -------- --------- --------- ----------
Net increase
(decrease) in
cash............ (103,227) (35,792) 67,435 (7,942) (169,166)
Cash at beginning of
year.................. 113,227 45,792 45,792 53,734 222,900
---------- -------- --------- --------- ----------
Cash at end of year.... $ 10,000 $ 10,000 $ 113,227 $ 45,792 $ 53,734
========== ======== ========= ========= ==========
</TABLE>
Supplemental schedule of non-cash investing and financing activities:
Capital Leases
In 1994, the Company entered into capital leases for a building and certain
equipment (see Note 6). In connection with the capital leases, the Company
recorded property, equipment and long-term obligations of $889,861 in 1994.
Other Supplemental Disclosures
Actual interest payments were $331,667, $357,218 and $368,531 for the years
ended June 30, 1995, 1994 and 1993, respectively.
See accompanying notes.
F-6
<PAGE>
MICROENERGY, INC. AND SUBSIDIARY
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
MicroENERGY, Inc. (MicroENERGY) designs, manufactures and markets switching
power supplies which are used as components in the electronics systems market.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of MicroENERGY and its wholly-owned subsidiary, Tru-Way, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Cash and Cash Equivalents--MicroENERGY considers all short-term deposits
with initial maturities of three months or less to be cash equivalents.
Accounts Receivable--Accounts receivable for sales to customers are
unsecured and consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Accounts receivable................................ $1,243,995 $1,303,619
Less allowance for doubtful accounts............... (50,000) (50,000)
---------- ----------
$1,193,995 $1,253,619
========== ==========
</TABLE>
Inventories--Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first- out method. The components of
inventories are:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Raw materials...................................... $1,852,373 $1,686,024
Work in process.................................... 937,533 963,733
Finished goods..................................... 372,854 395,328
---------- ----------
3,162,760 3,045,085
Less excess and obsolete reserve................... (450,536) (450,536)
---------- ----------
$2,712,224 $2,594,549
========== ==========
</TABLE>
Property and Equipment--Property and equipment is stated at cost.
Depreciation is calculated using the straight-line method over the estimated
useful lives of the assets for financial reporting purposes and the
accelerated cost recovery methods for tax reporting purposes. Expenditures for
repairs and maintenance are expensed as incurred. The components of property
and equipment are:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Machinery and equipment............................ $3,072,601 $2,938,654
Leasehold improvements............................. 386,496 347,310
Capitalized leases:
Building.......................................... 216,780 216,780
Equipment......................................... 714,639 714,639
---------- ----------
$4,390,516 $4,217,383
========== ==========
</TABLE>
F-7
<PAGE>
MICROENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Research and Development--Expenditures for research and development
activities are charged to expense as incurred.
Income Taxes--Effective July 1, 1993, MicroENERGY adopted the asset-
liability approach of accounting for income taxes (Note 9). In 1993 and prior,
income taxes were recognized for all items included in the income statement.
Earnings Per Share--Earnings per common share are computed based on the
weighted average number of common shares outstanding during each period plus
the dilutive effect, if any, of outstanding common stock equivalents.
3. MANAGEMENT REVIEW OF FISCAL 1995
In fiscal year 1995, management finalized the renegotiation of its debt
agreement from the acquisition of a power systems division from a major
customer (Note 10) and note payable to the State of Illinois as discussed in
Note 5. These agreements complete the restructuring management initiated in
1993. MicroENERGY remains current with all of its notes payable and long-term
obligations.
As a result of management's plan to grow the business by expanding the
independent sales representative organization, sales grew by $1,817,777 or 14%
over fiscal 1994. Profitability increased by 22% due to the increase in sales
as well as management's philosophy of continuous improvement in conjunction
with cost containment.
Based upon the history of profitable operating results for 1993, 1994 and
1995 and current sales levels, management believes that the Company has the
ability to continue to meet its current obligations as they become due
including all scheduled debt repayments without further renegotiation of debt
or disposition of assets outside the ordinary course of business.
4. FOREIGN INVESTMENT
In July 1988, MicroENERGY entered into an agreement with MicroENERGY (India)
Limited (INDIA), a Private Limited Company registered under the Indian
Companies Act. MicroENERGY was to provide the technical and manufacturing
knowledge and training with regards to the manufacture of power supply
products in exchange for $150,000. MicroENERGY was to purchase a 20% equity
interest in INDIA with $50,000 of the proceeds. The net amount of $100,000 had
been recorded as a miscellaneous receivable from INDIA in 1989. During 1992, a
$100,000 reserve was recorded as no activity under the agreement had yet taken
place.
On January 14, 1994, MicroENERGY entered into a revised agreement with INDIA
to again provide the technical and manufacturing knowledge and training in
exchange for $150,000 to be received when certain stipulations had taken
place. The proceeds are to be used to purchase a 7.9% equity interest after
the public offering of the stock of INDIA. The public offering took place in
August 1994 and the issue was oversubscribed.
Coincident with the above, the allowance on the original $100,000 INDIA
receivable, classified under long-term assets, had been eliminated and income
from foreign investment had been recorded during 1994.
During 1995, MicroENERGY received 5,007,000 shares of stock at a purchase
price of $159,000. This investment, included in noncurrent other assets, is
classified as an available for sale security and accordingly recorded at fair
value. The gross unrealized gain of $40,341 is recorded as a separate
component of stockholders' equity (deficit).
Once production commences, MicroENERGY will be paid a commission of 5% of
the export sales of INDIA or 3% of their total sales, whichever is greater.
During 1995, MicroENERGY received $74,000 of revenue for consulting services
performed for INDIA.
F-8
<PAGE>
MICROENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. NOTES PAYABLE AND LONG-TERM OBLIGATIONS
Notes payable--MicroENERGY has a line of credit agreement with a bank at an
interest rate of prime (9% at June 30, 1995) plus 2.5%. In 1994, the interest
rate was at prime (7.25% at June 30, 1994) plus 3%. The agreement permits the
Company to borrow the lesser of defined percentages of outstanding accounts
receivable and inventory or $2,000,000. Borrowings under the line of credit at
June 30, 1995 and 1994 aggregated $1,165,211 and $1,200,849, respectively. At
June 30, 1995, $250,175 was available to borrow. The line of credit is payable
on demand, and secured by a primary interest in accounts receivable and
inventory and a subordinate interest in all other assets.
Long-term Obligations--The components of debt obligations are as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------
1995 1994
---------- ----------
<S> <C> <C>
Note payable to bank with interest at prime plus 2%,
originally due in quarterly installments of $31,500,
including interest, through March 1995. During 1994,
the terms were renegotiated to monthly payments of in-
terest through December 15, 1993 and monthly payments
of $5,250 principal plus interest from January 15, 1994
through December 15, 1998. The note is secured by a
primary interest in certain machinery and equipment and
a subordinate interest in accounts receivable and in-
ventories and all other equipment. The City of Quincy,
Illinois has guaranteed the lesser of $230,000 or 36.5%
of the indebtedness.................................... $ 220,500 $ 283,500
Note payable to bank with interest at prime plus 2%,
originally due in monthly installments of $5,000, plus
interest. During 1994, the terms were renegotiated to
monthly payments of $2,000 principal plus interest
through December 15, 1993 and $5,000 principal plus in-
terest from January 15, 1994 through April 15, 1996.
The note is secured by a primary interest in certain
machinery and equipment and a subordinate interest in
accounts receivable, inventories and all other equip-
ment................................................... 65,000 125,000
3% note payable to the City of Quincy, Illinois, origi-
nally due in quarterly installments of $27,015, includ-
ing interest. During 1994, the terms were renegotiated
to monthly interest payments through December 31, 1993,
and monthly principal and interest payments of $4,660
from January 1, 1994 through December 1, 1998. The note
is secured by a subordinate interest in accounts re-
ceivable, inventories and equipment.................... 185,572 235,115
3% note payable to the City of Quincy, Illinois, origi-
nally due in monthly installments of $4,625, including
interest. During 1994, the terms were renegotiated to
monthly interest payments through December 31, 1993,
and monthly principal and interest payments of $4,265
from January 1, 1994 through December 1, 1988. The note
is secured by a subordinate interest in accounts re-
ceivable, inventories and equipment.................... 169,852 215,198
3% note payable to the City of Quincy, Illinois, origi-
nally due in monthly installments of $7,187, including
interest. During 1994, the terms were renegotiated to
monthly interest payments through December 31, 1993 and
monthly principal and interest payments of $6,516 from
January 1, 1994 through December 1, 1998. The note is
secured by a subordinate interest in accounts receiv-
able, inventories and equipment and guaranteed by cer-
tain shareholders...................................... 259,495 328,773
</TABLE>
F-9
<PAGE>
MICROENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Note payable to the State of Illinois, originally due
in monthly installments of $17,842, including inter-
est at 15%, through August 21, 1996. During 1994, the
terms were renegotiated to add $50,577 of accrued in-
terest to the loan balance and decrease the interest
rate to 5%. Monthly payments of principal and inter-
est of $13,053 were due with a balloon payment of
$446,711 due in May 1995. In May 1995, the balloon
payment was renegotiated to be paid over a two year
period at monthly payments of $19,997 which includes
interest at 9.5% for the first year and at prime rate
thereafter. The note is secured by a subordinate in-
terest in accounts receivable, inventories and equip-
ment and guaranteed by certain shareholders.......... $ 418,970 $ 556,104
Note payable to bank at prime plus 2%, due in monthly
installments of $3,833 principal plus interest,
through June 25, 1997, secured by a primary interest
in certain equipment and the assignment of certain
rents and leases paid to the Quincy landlord......... 99,772 145,772
Notes payable, acquisition of power systems division.
MicroENERGY had an oral agreement for the note to be
non-interest bearing with monthly non-interest bear-
ing with monthly payments of $41,042 for a five year
period beginning in August 1993. non-interest bearing
with monthly non-interest bearing with monthly pay-
ments of $41,042 for a five year period beginning in
August 1993. However, final documents had not been
received and no payments were made during 1994. On
September 20, 1994, the repayment terms were again
renegotiated to payments of $10,000 per month from
October 1, 1994 through June 1, 1998; $37,824 per
month from July 1, 1998 through September 1, 2002 and
$27,824 per month from October 1, 2002 through Decem-
ber 1, 2002. The notes remain non-interest bearing.
These notes were classified at June 30, 1994 accord-
ing to their revised terms. The notes are secured by
equipment purchased from the creditor and a subordi-
nate interest in inventory and other equipment....... 2,372,495 2,462,495
Capital lease obligations............................. 581,161 767,053
---------- ----------
Total debt............................................ 4,372,817 5,119,010
Less current portion.................................. (858,808) (1,164,860)
---------- ----------
Long-term obligations................................. $3,514,009 $3,954,150
========== ==========
</TABLE>
Future maturities of debt obligations are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
JUNE 30 AMOUNT
----------- ----------
<S> <C>
1996........................................................... $ 858,808
1997........................................................... 804,137
1998........................................................... 557,661
1999........................................................... 593,608
2000........................................................... 453,888
Thereafter..................................................... 1,104,715
----------
$4,372,817
==========
</TABLE>
F-10
<PAGE>
MICROENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LEASED PROPERTY
Capital Leases--MicroENERGY has capital lease arrangements for certain
machinery and equipment, including certain leases for its Tru-Way
manufacturing facility, machinery and equipment. The majority of the lease
agreements are with a partnership consisting of officers of the Company.
During 1994, the partnership sold the facility occupied by Tru-Way and
purchased a new building for $390,000. The net book value of the old building
approximated the remaining balance of the obligation under capital lease. The
new building is leased by Tru-Way over a five-year term. The prior equipment
lease was rewritten for a new five year term. Minimum monthly lease payments
for the real estate and equipment total $16,500. In addition, another
equipment lease was entered into with the partnership in December 1993 for a
three year term with minimum monthly lease payments of $3,025.
Actual payments to the partnership totalled $351,587 in 1995 and $259,600 in
1994. In 1993, lease payments to the partnership totalled $162,000 which
included $36,000 of contingent rent paid based on sales volume.
Property and equipment and related accumulated depreciation under these
capital leases was $931,419 and $374,115, respectively, at June 30, 1995 and
$931,419 and $177,535, respectively, at June 30, 1994. Amortization charges
related to capitalized assets are included in depreciation expense.
Operating Leases--MicroENERGY leases its manufacturing facility space under
a ten year operating lease and its office space under two five year operating
leases.
Total rent expense under operating lease agreements approximated $377,128,
$355,534, and $406,265 in 1995, 1994 and 1993, respectively.
Future minimum lease payments under capital and operating leases with
commitments beyond one year are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING JUNE 30 LEASES LEASES
------------------- -------- ----------
<S> <C> <C>
1996................................................... $236,331 $ 375,792
1997................................................... 213,125 328,980
1998................................................... 198,000 212,567
1999................................................... 16,500 191,838
2000................................................... -- 191,838
Thereafter............................................. -- 223,811
-------- ----------
Total minimum lease payments........................... 663,956 $1,524,826
==========
Imputed interest....................................... (82,795)
--------
$581,161
========
</TABLE>
Subsequent to June 30, 1995, MicroENERGY entered into a capital lease for
certain equipment. The equipment and related obligation will be recorded at
$141,710. The lease has an initial payment of $21,257 and thirty-five monthly
payments of $4,134 thereafter.
7. STOCKHOLDERS' EQUITY
Restricted Stock Grant Program--The Company maintains a restricted stock
grant program. In 1990, certain key employees received 21,000,000 shares of
restricted stock of the Company. The restricted stock vests ratably
F-11
<PAGE>
MICROENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
beginning July 1, 1993 through 2026. The restrictions lapse in the event of
the key employee's death, permanent disability or termination of employment by
the Company without good reason, or a change in control of the Company (as
defined). The total market value of the shares awarded under the plan as of
the grant date aggregating $1,968,750 was recorded as unearned restricted
stock award compensation and reported as a separate component of stockholders'
equity. 2,000,000 shares were forfeited in 1994 as one of the employees
resigned.
Compensation expense is being amortized over the period in which
participants perform services and the restrictions on the stock awards lapse.
In 1993, an additional 2,350,000 shares of restricted stock were issued to
employees and an independent contractor. The total market value approximated
par value at the date of grant and was recorded as compensation expense during
the year.
Stock Purchase Warrants--Stock purchase warrants were issued to certain
officers of the Company in consideration for personal guarantees provided on
certain debt. On April 10, 1991, MicroENERGY issued Class C warrants which
give certain officers the right to convert such warrants to 20,500,000 shares
of common stock at an exercise price ($.063) approximating market value at the
date of grant. The warrants became exercisable on April 10, 1992, and expire
April 10, 1998. In addition, the Company entered into a contingent loan
agreement with the warrant holders pursuant to which the Company will lend the
holders funds necessary to exercise the Class C warrants in the event that a
person or group acquired 10% of the Company's common stock. None of the
warrants have been exercised to date.
On December 13, 1994, MicroENERGY issued Class D warrants which give certain
officers the right to convert such warrants to 35,000,000 shares of common
stock at an exercise price of $.00125, which approximated 125% of market value
at date of grant. The warrants become exercisable on December 13, 1995 and
expire December 13, 2001. None of the warrants have been exercised to date.
Stock Option Plans--The stockholders of MicroENERGY have approved three
Incentive Stock Option Plans (the "plans"). Options granted under these plans
are intended to qualify as "incentive stock options," as defined by the
Internal Revenue Code. A total of 5,000,000 shares of common stock are
reserved for issuance upon exercise of options granted under the plans.
Options for 2,785,000, 1,755,000 and 2,005,000 shares were outstanding at June
30, 1995, 1994 and 1993, respectively. During 1995, options for 1,120,000
shares were granted, no options were exercised and 90,000 options were
cancelled. During 1994, options for 250,000 shares were cancelled. During
1993, 1,430,000 options were granted, no options exercised, and 1,000,000
options were cancelled. The options have exercise prices ranging from $.01 to
$.0450, with an average exercise price of the options outstanding of $.0149.
Options granted under the plans are not exercisable until one year after the
date of the grant, vest ratably over a five year period and may only be
exercised while the holder is an employee of MicroENERGY. Options expire no
later than ten years after the date of grant. At June 30, 1995, 2,785,000
shares are exercisable.
On November 12, 1990, the Board of Directors of the Company also approved a
nonqualified stock option plan which granted an outside Director the option to
purchase up to 2,000,000 shares of common stock at an exercise price of $.033
which exceeded market value at the date of grant. The options were exercisable
upon award and expire ten years from the date of grant. At June 30, 1995, no
options have been exercised.
8. EMPLOYEE BENEFIT PLAN
The Company sponsors the MicroENERGY, Inc. Savings and Investment Plan, a
defined contribution 401(k) plan covering all full-time employees who meet
certain age and length of service requirements. Employer matching
contributions are at the Company's sole discretion. Employer contributions
expensed for the year ended June 30, 1995, 1994 and 1993 totaled $26,211,
$22,326 and $19,805, respectively.
F-12
<PAGE>
MICROENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES
During 1994, the Company adopted FASB Statement Number 109, "Accounting for
Income Taxes". The statement requires the use of an asset and liability
approach for financial accounting and reporting for income taxes. A valuation
allowance is recognized if it is more likely than not that a deferred tax
asset will not be realized. The adoption of this statement had no effect on
1994 net income, nor was there a cumulative effect of a change in accounting
because no provision had been recorded for federal or state income taxes for
the years ended June 30, 1993 and 1992 due to net operating losses incurred in
those years.
The following is a reconciliation of income taxes at the federal statutory
rate:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
JUNE 30,
-------------------
1995 1994
--------- --------
<S> <C> <C>
Computed income taxes at federal statutory rate of 34%... $ 84,964 $ 69,647
State taxes, net of federal benefit...................... 16,872 7,088
Effect of graduated rates................................ (469) (9,882)
Permanent differences.................................... 9,573 12,052
Temporary differences for which deferred taxes had not
been recognized......................................... 24,868 (31,342)
Benefit of tax loss carryforward......................... (135,808) (47,563)
--------- --------
Total provision for income taxes....................... $ -- $ --
========= ========
Provision for income taxes:
Current................................................ $ 135,808 $ 47,563
Benefit of tax loss carryforward....................... (135,808) (47,563)
--------- --------
$ -- $ --
========= ========
</TABLE>
At June 30, 1995, the cumulative net operating loss carryforward available
to MicroENERGY for income tax purposes was approximately $3,700,000. If not
used to offset future taxable income, the net operating loss carryforwards
will expire in various years beginning in 2000 and continuing through 2008. In
the event of a change in ownership of the Company, these net operating loss
carryforwards may be limited. In addition, the Company has investment tax
credit, research and development credit and AMT credit carryforwards of
approximately $18,000, $203,000 and $12,000, respectively, at June 30, 1995.
If not used to offset future taxes, the carryforwards expire in years
beginning in 1999 and continuing through 2006. A deferred tax asset for these
carryforwards of approximately $1,660,000 at June 30, 1995 and $1,510,000 at
June 30, 1994 has been offset by a valuation allowance in an equal amount.
In addition to the benefit of tax carryforward items, deferred taxes are
also recorded based upon temporary differences between the financial statement
and tax basis of assets and liabilities.
F-13
<PAGE>
MICROENERGY, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Temporary differences as of June 30, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------------------
1995 1994
-------------------- --------------------
TOTAL DEFERRED TOTAL DEFERRED
AMOUNT TAX AMOUNT TAX
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Current:
Inventory:
Uniform capitalization............ $ 391,300 $151,300 $ 407,200 $130,300
Obsolescence and excess reserve... 732,600 283,300 732,600 234,500
Allowance for bad debts............ 50,000 19,300 50,000 16,000
Accrued expenses................... 132,800 51,300 132,200 42,300
Long-term:
Depreciation....................... (105,200) (40,700) (122,200) (39,100)
Capital lease...................... 44,500 17,200 26,900 8,600
Stock benefit plans................ 324,000 125,300 270,100 86,400
---------- -------- ---------- --------
$1,570,000 $607,000 $1,496,800 $479,000
========== ======== ========== ========
</TABLE>
The deferred tax assets totalling $607,000 at June 30, 1995 and $479,000 at
June 30, 1994 have been offset by a valuation allowance in an equal amount.
10. MAJOR CUSTOMERS
Revenues are generated from sales to OEM customers who are engaged in the
telecommunications, computer, and instrumentation segments of the electronics
industry.
During 1995, net sales to one customer was 28% of total net sales. However,
the major customer is comprised of five autonomous purchasing units. If
considered separately, one unit would be considered a major customer with 26%
of total net sales.
During 1994, net sales to two customers were 19% and 11%, respectively.
However the first major customer is comprised of ten autonomous purchasing
units. If considered separately, one unit would be considered a major customer
with 14% of total net sales. During 1993, net sales to one customer totaled
41% of total net sales. The major customer was comprised of eight autonomous
purchasing units. If considered separately, one unit would be considered a
major customer, with 10.6% of total net sales. Accounts receivable from these
customers totaled $470,341 and $376,045 at June 30, 1995 and 1994,
respectively.
During 1995, 1994 and 1993, export sales, principally to Europe and Canada,
were 36%, 38% and 24%, respectively, of total net sales.
F-14
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY REPRESENTATIVE. THIS PROSPEC-
TUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS COR-
RECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF, OR THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
----------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY.......................................................... 3
RISK FACTORS................................................................ 7
USE OF PROCEEDS............................................................. 12
PRICE RANGE OF COMMON STOCK................................................. 13
CAPITALIZATION.............................................................. 14
DIVIDENDS................................................................... 15
SELECTED FINANCIAL
INFORMATION................................................................ 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF
OPERATIONS................................................................. 17
CERTAIN FEDERAL INCOME TAX
EFFECTS UPON THE COMPANY................................................... 19
BUSINESS OF THE COMPANY..................................................... 20
MANAGEMENT.................................................................. 25
CERTAIN TRANSACTIONS........................................................ 28
PRINCIPAL SHAREHOLDERS...................................................... 30
DESCRIPTION OF THE COMPANY'S
SECURITIES................................................................. 31
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS TO INVESTORS...................... 35
UNDERWRITING................................................................ 36
SELLING SECURITYHOLDERS..................................................... 38
LEGAL MATTERS............................................................... 39
EXPERTS..................................................................... 40
ADDITIONAL INFORMATION...................................................... 40
INDEX TO FINANCIAL STATEMENTS............................................... F-1
</TABLE>
UNTIL JULY , 1996 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MICROENERGY, INC.
--------------
PROSPECTUS
--------------
I.A. RABINOWITZ & CO.
99 WALL STREET
NEW YORK, NEW YORK 10005
(212) 425-0037
JULY , 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ALTERNATIVE PROSPECTUS
----------------------
MICROENERGY, INC.
880,000 REDEEMABLE CLASS A PREFERRED STOCK PURCHASE WARRANTS
The securities offered hereby are 880,000 Redeemable Class A Preferred
Stock Purchase Warrants ("Class A Warrant") of MicroENERGY, Inc., a Delaware
corporation, ("MicroENERGY" or the "Company") held by certain securityholders of
the Company identified herein (the "Selling Securityholders"). See: "THE
SELLING SECURITYHOLDERS." Each Class A Warrant entitles the holder to purchase
one share of the Company's Series A Preferred Stock, at an exercise price of
$7.00, subject to adjustment, from ____________, 1997 through ___________,
2000. The Class A Warrants are subject to redemption by the Company at any time
after ______________, 1997 on not less than 30 days' notice at $.05 per Warrant,
provided the average closing price of the Preferred Stock for 5 consecutive
trading days ending within 15 days prior to the notice exceeds $9.00 per share.
See "DESCRIPTION OF SECURITIES".
The Class A Warrants offered by this Prospectus may be sold from time to
time by the Selling Securityholders or their transferees. No underwriting
arrangements have been entered into by the Selling Securityholders. The
distribution of the Class A Warrants by the Selling Securityholders may be
effected in one or more transactions that take place in the over-the-counter
market including ordinary broker's transactions, privately negotiated
transactions, or through sales to one or more dealers for resale of such shares
as principals at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary
or specially negotiated brokerage fees may be paid by the Selling
Securityholders in connection with the sale of the Class A Warrants.
On the date hereof the Company commenced a public offering of 494,500
shares of Series A Preferred Stock, $7.00 par value, and 247,250 Class A
Warrants. See: "CONCURRENT SALES."
The Company will not receive any of the proceeds from the sale of the Class
A Warrants offered hereby by the Selling Securityholders. All costs incurred in
the registration of the Class A Warrants being offered by the Selling
Securityholders are being borne by the Company. See: "SELLING
SECURITYHOLDERS."
The Company's Common Stock is currently quoted on the NASDAQ Bulletin
Board. There is currently no market for either the Preferred Shares or the
Class A Warrants. The Company applied to have the Preferred Stock, the Class A
Warrants and the Company's Common Stock listed on the NASDAQ SmallCap Market.
The Company has been advised that the Preferred Stock and the Class A Warrants
will be listed on the NASDAQ SmallCap Market on the effective date of
this Offering, but the Common Stock will not be listed because it does not
satisfy certain NASDAQ listing requirements.
An investment in the securities offered hereby involves a high degree of
risk and immediate substantial dilution. An investment in these securities
should be considered only by persons capable of sustaining the loss of their
entire investment. See "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE 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 JULY __, 1996
<PAGE>
THE OFFERING
SECURITIES OFFERED 880,000 Class A Warrants. The Class A
Warrants offered hereby are identical to the
Class A Warrants being offered by the
Company to the public in its initial public
offering. See "DESCRIPTION OF SECURITIES".
SECURITIES TO BE OUTSTANDING 415,143 shares of Common Stock
AFTER COMPLETION OF THE OFFERING 844,500 shares of Series A
Preferred Stock
1,127,250 Class A Warrants
(including 880,000 being offered
by Selling Securityholders).
TERMS OF CLASS A WARRANTS Each Class A Warrant entitles the holder to
purchase one share of the Company's Series A
Preferred Stock at a price of $7.00, subject
to adjustment, during the three year period
beginning one year after the date of this
Prospectus. After _________, 1997, the
Class A Warrants are subject to redemption
by the Company at any time during the
exercise period, on not less than 30 days'
notice at $.05 per Warrant provided the
average closing bid price of the Preferred
Stock exceeds $9.00 per share for 5
consecutive trading day ending within 15
days prior to the notice.
PROPOSED NASDAQ SMALLCAP
MARKET SYMBOLS: Preferred Stock - MICRP
Class A Warrants - MICRW
RISK FACTORS The securities are subject to a high degree
of risk. See: "Risk Factors."
<PAGE>
SELECTED FINANCIAL INFORMATION
NINE MONTHS ENDED
MARCH 31
--------------------------------------------
1996 1995
---- ----
Income Data:
Revenues...............$10,718,611 $10,996,535
Operating Income...... 392,630 395,125
Net Income............. 1,151,869 146,170
Net Income Per Share.. $3.29 $ .46
YEARS ENDED
JUNE 30
------------------------------------------------
1995 1994 1993
---- ---- ----
Income Data:
Revenues.............. $14,588,844 $12,771,067 $15,886,279
Operating Income...... 581,685 426,419 433,280
Net Income............ 249,894 204,845 40,806
Net Income Per Share.. $.79 $ .65 $ .14
Balance Sheet Data:
AS ADJUSTED TO REFLECT
AT MARCH 31, 1996/(1)/ PUBLIC OFFERING/(2)/
---------------------- ----------------------
Working Capital....... $ 708,131 $ 2,658,733
Total Assets.......... 7,243,714 9,194,316
Long-Term Debt, Net... 2,301,514 1,601,514
Stockholders Equity... 543,389 3,376,518
______________________________
/(1)/ Reflects the effect of $1 Million reduction in debt to AT&T and
related financing transactions from January through March of 1996.
See "CAPITALIZATION - Debt Compromise."
/(2)/ Assumes the use of $887,000 of net proceeds to reduce long-term debt.
See "USE OF PROCEEDS."
CONCURRENT SALES
On the date of this Prospectus, a Registration Statement under the
Securities Act with respect to an underwritten public offering (the "Offering")
of Securities by the Company was declared effective by the Securities and
Exchange Commission ("SEC") and the Company commenced the sale of the Securities
offered thereby. The Securities consist of 494,500 shares of Series A Preferred
Stock, $7.00 par value, and 247,250 Class A Warrants to purchase Series A
Preferred Stock. Sales of securities under this Prospectus by the Selling
Security-holders or even the potential of such sales would likely have an
adverse effect on the market price of the Company's securities.
<PAGE>
SELLING SECURITYHOLDERS
The Registration Statement of which this Prospectus is a part also
relates to the offer and sale of 880,000 Class A Warrants (the "Bridge
Securities") to be offered by the Selling Securityholders. All of such
securities are expected to become tradeable on or about the date of this
Prospectus. Sales of the Warrants being offered by Selling Securityholders, or
even the potential of such sales, would likely have an adverse effect on the
market prices of the Securities being offered for sale by the Company.
The following table sets forth the beneficial ownership of the
securities of the Company held by each person who is a Selling Securityholder
and by all Selling Securityholders as a group prior to the Offering and after
the Offering, assuming all of the Warrants owned by the Selling Securityholders
are sold.
<TABLE>
<CAPTION>
Class A Percent of Class A
Warrants Owned Warrants Owned
---------------- -------------------
Name of Prior to After Prior to After
Beneficial Owner Offering Offering Offering Offering
- ---------------- -------- -------- --------- ---------
<S> <C> <C> <C> <C>
Dune Holdings 400,000 -- 45.5% 0%
Rifky Weiner 208,000 -- 23.6% 0%
James R. Solakian 128,000 -- 14.5% 0%
Harold Pretter 48,000 -- 5.5% 0%
JM Holdings 48,000 -- 5.5% 0%
Robert Brantl 48,000 -- 5.5% 0%
------- ------ ------ -
Total 880,000 0 100.00% 0%
</TABLE>
None of the Selling Securityholders is affiliated with the Company in
any capacity or has had any business relationship with the Company at any time,
except that Robert Brantl is of counsel to the firm of Bressler, Amery & Ross,
which has served as legal counsel to the Company since it was founded.
PLAN OF DISTRIBUTION
The securities offered hereby may be sold from time to time directly
by the Selling Securityholders. Alternatively, the Selling Securityholders may
from time to time offer such securities through underwriters, dealers or agents.
The distribution of securities by the Selling Securityholders may be effected in
one or more transactions that may take place on the over-the-counter market,
including ordinary broker's transactions, privately-negotiated transactions or
through sales to one or more broker-dealers for resale of such securities as
principals, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. Usual and customary
or specifically negotiated brokerage fees or commissions may be paid by the
Selling Securityholders in connection with such sales of securities. The
Selling Securityholders and intermediaries through whom such securities are sold
may be deemed "underwriters" within the meaning of the Act with respect to the
securities
<PAGE>
offered, and any profits realized or commissions received may be deemed
underwriting compensation.
At the time a particular offer of securities is made by or on behalf
of a Selling Securityholder, to the extent required, a prospectus will be
distributed which will set forth the number of securities being offered and the
terms of the offering, including the name or names of any underwriters, dealers
or agents, if any, the purchase price paid by any underwriter for securities
purchased from the Selling Securityholder and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
Under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the regulations thereto, any person engaged in a distribution of the
securities of the Company offered by the Selling Securityholders may not
simultaneously engage in market-making activities with respect to such
securities of the Company during the applicable "cooling off" period (9 days)
prior to the commencement of such distribution. In addition, and without
limiting the foregoing, the Selling Securityholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including without limitation, Rule 10b-6 and 10b-7, in connection
with transactions in such securities, which provisions may limit the timing of
purchases and sales of such securities by the Selling Securityholders.
<PAGE>
Part II. INFORMATION NOT REQUIRED IN PROSPECTUS
--------------------------------------
Item 13. Other Expenses of Issuance and Distributions
--------------------------------------------
The following are the estimated expenses in connection with the
distribution of the securities being registered here under:
S.E.C. Registration Fee. . . . . .$ 3,432
N.A.S.D. Filing Fee. . . . . . . . 1,495
Blue Sky fees. . . . . . . . . . . 25,000 *
Representative's Non-Accountable
Expense Allowance. . . . . . . . 104,587
Representative's Financial
Consulting Fee . . . . . . . . . 48,000
Accounting fees. . . . . . . . . . 24,000 *
Transfer Agent . . . . . . . . . . 2,000 *
Legal fees . . . . . . . . . . . . 55,000 *
Printing expenses. . . . . . . . . 35,000 *
Miscellaneous. . . . . . . . . . . 1,486 *
--------
TOTAL . . . . . . . . . $300,000 *
____________________
* Estimated
Item 14. Indemnification of Directors and Officers
-----------------------------------------
Section 145 of the General Corporation Law of the State of Delaware
authorizes a corporation to provide indemnification to a director, officer,
employee or agent of the corporation, including attorneys' fees, judgments,
fines and amounts paid in settlement, actually and reasonably incurred by him in
connection with such action, suit or proceeding, if such party acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful as
determined in accordance with the statute, and except that with respect to any
action which results in a judgment against the person and in favor of the
corporation the corporation may not indemnify unless a court determines that the
person is fairly and reasonably entitled to the indemnification.
Section 145 further provides that indemnification shall be provided if
the party in question is successful on the merits.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
If a claim for indemnification against such liabilities
<PAGE>
(other than the payment by the Registrant of expenses incurred or paid by a
Director, officer or controlling person in connection with the securities being
registered) the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
Item 15. Recent Sales of Unregistered Securities.
---------------------------------------
In February and March of 1996, the Company sold 880,000 Class A
Warrants to the Selling Securityholders identified elsewhere in this
Registration Statement. The sale was exempt pursuant to Section 4(2) of the Act
since the sale was not made in a public offering and was made to individuals who
had access to detailed information about the Company and were buying for their
own account. There were no underwriters.
In February of 1996, the Company sold 350,000 shares of Series A
Preferred Stock to Robert G. Gatza and Robert J. Fanella on terms set forth
elsewhere in this Registration Statement. The sale was exempt pursuant to
Section 4(2) of the Act since the sale was not made in a public offering and was
made to individuals who had access to detailed information about the Company and
were buying for their own account. There were no underwriters.
Item 16. Exhibits and Financial Statement Schedules
------------------------------------------
Exhibits
- --------
1-a. Form of Underwriting Agreement.
1-b Form of Agreement Among Underwriters. (1)
1-c Form of Selected Dealers Agreement. (1)
3-a. Certificate of Incorporation, as amended - filed as an Exhibit to the
Company's S-18 Registration Statement dated February 2, 1984 and
incorporated by reference herein as an exhibit hereto.
3-a(1) Certificate of Amendment to Certificate of Incorporation dated February
12, 1987 - filed as an Exhibit to the Company's Annual Report on Form
10K for the fiscal year ended June 30, 1987 and incorporated by
reference as an exhibit hereto.
3-a(2) Certificate of Amendment to Certificate of Incorporation dated December
20, 1990 - filed as an Exhibit to the Company's Annual Report on Form
10K for the fiscal year ended June 30, 1991 and incorporated by
reference as an exhibit hereto.
<PAGE>
3-a(3) Form of Certificate of Amendment to Certificate of Incorporation (1)
3-a(4) Form of Certificate of Designation of Series A Preferred Stock. (1)
3-b. By-laws, as amended, have been filed as an Exhibit to the Company's
Annual Report on Form 10K for the fiscal year ended June 30, 1984 and
are incorporated by reference as an exhibit hereto.
4-a. Specimen of Common Stock Certificate (1)
4-b Specimen of Series A Preferred Stock Certificate (1)
4-c. Specimen of Class A Warrant (1)
4-d. Form of Warrant Agreement
4-e. Form of Representative's Purchase Warrant
5 Opinion of Bressler, Amery & Ross. (1)
7 Opinion of Bressler Amery & Ross on Liquidation Preference (1)
8 Tax opinion of Bressler, Amery & Ross (1)
10-a Lease for premises at 350 Randy Road, Carol Steam, Illinois - filed as
an exhibit to the Company's Annual Report on Form 10K for the year ended
June 30, 1993 and incorporated by reference as an exhibit hereto.
10-b 1992 Incentive Stock Option Plan and form of Stock Option -- filed with
the Company's proxy materials used in connection with the Annual Meeting
on February 24, 1992 and incorporated herein by reference.
10-c Lease dated August 20, 1986 for premises in Quincy, Illinois - filed as
an Exhibit to the Company's Report on Form 10K for the year ended June
30, 1986 and incorporated by reference as an exhibit hereto.
10-c(1) Amendment to Lease for premises in Quincy, Illinois - filed as an
Exhibit to the Company's Report on Form 10K for the year ended June 30,
1993 and incorporated by reference as an exhibit hereto.
10-d Loan and Development Agreement with Promissory Note dated August 20,
1986 between the Company and the City of Quincy, Illinois - filed as an
Exhibit to the Company's Report on Form 10K for the year ended June 30,
1986 and incorporated by reference as an exhibit hereto.
<PAGE>
10-e Promissory Note and Collateral Security Agreement dated August 20, 1986
between the Company and Boatmen's Bank of Quincy - filed as an Exhibit
to the Company's Report on Form 10K for the year ended June 30, 1986 and
incorporated by reference as an exhibit hereto.
10-f Credit Agreement between the Company and Boatmen's Bank of Quincy -
filed as an Exhibit to the Company's Annual Report on Form 10K for the
fiscal year ended June 30, 1988 and incorporated by reference as an
exhibit hereto.
10-g 1991 financing documents relating to the State of Illinois, City of
Quincy and Comerica Bank - filed as an Exhibit to the Company's Annual
Report on Form 10K for the fiscal year ended June 30, 1991 and
incorporated by reference as an exhibit hereto.
10-g(1) 1994 and 1995 amendments to 1991 financing documents relating to the
State of Illinois, City of Quincy and Comerica Bank - filed as an
Exhibit to the Company's Annual Report on Form 10K for the fiscal year
ended June 30, 1995 and incorporated by reference as an exhibit hereto.
10-h Restricted Stock Grant Program - filed with the Company's proxy
materials used in connection with the Annual Meeting on May 19, 1989 and
incorporated by reference as an exhibit hereto.
10-i Asset Purchase Agreement between the Company and NCR Corporation dated
July 1, 1990 - filed as an Exhibit to the Company's Report on Form 10K
for the year ended June 30, 1991 and incorporated by reference as an
exhibit hereto.
10-i(1) Amendment to Agreement between the Company and NCR Corporation relating
to Debt and Licensing Agreement contained in the Asset Purchase
Agreement - filed as an Exhibit to the Company's Report on Form 10K for
the year ended June 30, 1993 and incorporated by reference as an exhibit
hereto.
10-i(2) Amendment to Agreement between the Company and NCR Corporation relating
to payment terms - filed as an Exhibit to the Company's Report on Form
10K for the year ended June 30, 1994 and incorporated by reference as an
exhibit hereto.
10-i(3) Amendment to Agreement between the Company and NCR Corporation relating
to payment terms dated January 31, 1996. (1)
10-j Class C Warrants - filed with the Company's proxy materials used in
connection with the Annual Meeting on February 24, 1992 and incorporated
by reference as an exhibit hereto.
10-k Class D Warrants - filed as an Exhibit to the Company's Report on Form
10K for the year ended June 30, 1995 and incorporated by reference as an
exhibit hereto.
<PAGE>
10-l Employment Agreement with Robert G. Gatza dated February 1, 1996. (1)
10-m Employment Agreement with Robert J. Fanella dated February 1, 1996. (1)
10-n Leases for premises and equipment in Northlake, Illinois -filed as an
Exhibit to the Company's Report on Form 10K for the year ended June 30,
1993 and incorporated by reference as an exhibit hereto.
10-o Form of Financial Consulting Agreement (1)
10-p(1) Subscription Agreement dated February 1, 1996 between the Company and
Robert G. Gatza (1)
10-p(2) Subscription Agreement dated February 1, 1996 between the Company and
Robert J. Fanella (1)
22 Subsidiaries - Tru-Way, Inc., an Illinois corporation.
24 Consent of Selden Fox & Associates, Ltd. (1)
__________________
(1) Previously filed as an exhibit hereto.
Item 28. Undertakings
- -------- ------------
See Item 14 for the undertaking regarding the indemnification of officers,
directors and controlling persons.
The Company hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, post-effective amendments to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggre-gate, represent a fundamental change in the information set
forth in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amend-ment shall be deemed to
be a new registration statement relating
<PAGE>
to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a Post-Effective Amendment
any of the securities being registered which remain unsold at the termination of
the offering.
<PAGE>
SIGNATURES
----------
In accordance with the requirements of the Securities Act of 1933, the
Company has duly caused this registration statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the Town of Carol Stream and
the State of Illinois on the 1st day of July, 1996.
MICROENERGY, INC.
By:/s/Robert G. Gatza
-------------------------
Robert G. Gatza, Chief
Executive Officer
In accordance with to the requirements of the Securities Act of 1933,
this registration statement has been signed below by the following persons in
the capacities indicated on July 1, 1996.
Name Title
---- -----
/s/Robert G. Gatza Chief Executive Officer and
- --------------------------
Robert G. Gatza Chairman of the Board
/s/Robert J. Fanella Chief Financial Officer and
- --------------------------
Robert J. Fanella Director
/s/George M. Bradshaw Director
- --------------------------
George M. Bradshaw
<PAGE>
INDEX TO EXHIBITS
-----------------
1-a. Form of Underwriting Agreement.
4-d. Form of Warrant Agreement.
4-e. Form of Representative's Purchase Warrant.
<PAGE>
EXHIBIT 1(a)
494,500 Shares of Series A Cumulative Preferred Stock,
par value $7.00 per share
and
247,250 Redeemable Class A Warrants for Preferred Stock
MICROENERGY, INC.
UNDERWRITING AGREEMENT
----------------------
New York, New York
___________, 1996
I. A. Rabinowitz & Co.
99 Wall Street
New York, New York 10005
MicroEnergy, Inc., a Delaware corporation (the "Company"), proposes to
issue and sell to you, as representative of the several underwriters referred to
in the Prospectus (as defined below) (the "Representative"), an aggregate of
494,500 shares of Series A Cumulative Preferred Stock, par value $7.00 per share
("Preferred Stock" or "Shares"), and 247,250 Redeemable Class A Warrants for
Preferred Stock ("Warrants"). The Preferred Stock and Warrants may be
collectively referred to hereinafter as the "Securities". Each Warrant entitles
the registered holder thereof to purchase one (1) share of Preferred Stock at an
exercise price of $7.00 per share for a period of three (3) years, commencing
___________, 1997 (one (1) year from the Effective Date) through ___________,
2000. The Warrants are subject to redemption by the Company at any time after
___________, 1997 at $.01 per warrant, if the closing bid price per share of
Preferred Stock has equaled or exceeded $9.00 per share for any 5 consecutive
trading days ending within 15 days of the written notice of redemption.
You have advised the Company that you desire to purchase the
Securities. The Company confirms the agreements made by it with respect to the
purchase of the Securities by the Representative as follows:
<PAGE>
1. Representations and Warranties of the Company. The Company represents
---------------------------------------------
and warrants to, and agrees with you that:
(a) A registration statement (File No. 333-1835) on Form S-1 relating
to the public offering of the Securities, including a form of prospectus subject
to completion, copies of which have heretofore been delivered to you, has been
prepared in conformity with the requirements of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission under the Act and one or more amendments to such
registration statement may have been so filed. After the execution of this
Agreement, the Company will file with the Commission either (i) if such
registration statement, as it may have been amended, has been declared by the
Commission to be effective under the Act, a prospectus in the form most recently
included in an amendment to such registration statement (or, if no such
amendment shall have been filed in such registration statement), with such
changes or insertions as are required by Rule 430A under the Act or permitted by
Rule 424(b) under the Act and as have been provided to and approved by you prior
to the execution of this Agreement, or (ii) if such registration statement, as
it may have been amended, has not been declared by the Commission to be
effective under the Act, an amendment to such registration statement, including
a form of prospectus, a copy of which amendment has been furnished to and
approved by you prior to the execution of this Agreement. As used in this
Agreement, the term "Company" means MicroEnergy, Inc. and/or each of its
subsidiaries; the term "Registration Statement" means such registration
statement, as amended at the time when it was or is declared effective,
including all financial schedules and exhibits thereto and including any
information omitted therefrom pursuant to Rule 430A under the Act and included
in the Prospectus (as hereinafter defined); the term "Preliminary Prospectus"
means each prospectus subject to completion filed with such registration
statement or any amendment thereto (including the prospectus subject to
completion, if any, included in the Registration Statement or any amendment
thereto at the time it was or is declared effective); and the term "Prospectus"
means the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act, or, if no prospectus is required to be filed pursuant to said
Rule 424(b), such term means the prospectus included in the Registration
Statement; except that if such registration statement or prospectus is amended
or such prospectus is supplemented, after the effective date of such
registration statement, the terms "Registration Statement" and "Prospectus"
shall include such registration statement and prospectus as so amended, and the
term "Prospectus" shall include the prospectus as so supplemented, or both, as
the case may be.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus. At the time the Registration Statement
becomes effective and at all times subsequent thereto up to and on the First
Closing Date (as hereinafter defined) (i) the Registration Statement and
Prospectus will in all respects conform to the requirements of the Act and the
Rules and Regulations; and (ii) neither the Registration Statement nor the
Prospectus will
2
<PAGE>
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make statements therein not
misleading; provided, however, that the Company makes no representations,
warranties or agreements as to information contained in or omitted from the
Registration Statement or Prospectus in reliance upon, and in conformity with,
written information furnished to the Company by or on behalf of the
Representative specifically for use in the preparation thereof. It is
understood that the statements set forth in the Prospectus with respect to
stabilization, under the heading "Underwriting", and the identity of counsel to
the Representative under the heading "Legal Matters" constitute for purposes of
this Section and Section 6(b) the only information furnished in writing by or on
behalf of the Representative for inclusion in the Registration Statement and
Prospectus, as the case may be.
(c) The Company and its subsidiaries ("Subsidiaries"), have been duly
incorporated and are validly existing as corporations in good standing under the
laws of their respective jurisdictions of incorporation with full corporate
power and authority to own its properties and conduct its business as described
in the Prospectus and are duly qualified or licensed to do business as a foreign
corporation and is in good standing in the State of Illinois and each other
jurisdiction in which the nature of its business or the character or location of
its properties requires such qualification, except where the failure to so
qualify will not materially adversely affect the Company's business, properties
or financial condition. The Company owns all of the issued and outstanding
capital stock of the Subsidiaries.
(d) The authorized, issued and outstanding capital stock of the
Company, including the predecessors of the Company, is as set forth the
Company's financial statements contained in the Registration Statement; the
shares of issued and outstanding capital stock of the Company set forth therein
have been duly authorized, validly issued and are fully paid and nonassessable;
except as set forth in the Prospectus, no options, warrants, or other rights to
purchase, agreements or other obligations to issue, or agreements or other
rights to convert any obligation into, any shares of capital stock of the
Company have been granted or entered into by the Company; and the capital stock
conforms to all statements relating thereto contained in the Registration
Statement and Prospectus.
(e) The shares of Preferred Stock, when paid for, issued and delivered
pursuant to this Agreement, will have been duly authorized, issued and delivered
and will constitute valid and legally binding obligations of the Company
enforceable in accordance with their terms, except as enforceability may be
limited by bankruptcy, insolvency or other laws affecting the right of creditors
generally or by general equitable principles, and entitled to the rights and
preferences provided by the Certificate of Incorporation, which will be in the
form filed as an exhibit to the Registration Statement. The terms of the
Preferred Stock conform to the description thereof in the Registration Statement
and Prospectus.
3
<PAGE>
The Warrants, when paid for, issued and delivered pursuant to this
Agreement, will have been duly authorized, issued and delivered and will
constitute valid and legally binding obligations of the Company enforceable in
accordance with their terms, except as enforceability may be limited by
bankruptcy, insolvency or other laws affecting the right of creditors generally
or by general equitable principles, and entitled to the benefits provided by the
warrant agreement pursuant to which such Warrants are to be issued (the "Warrant
Agreement"), which will be substantially in the form filed as an exhibit to the
Registration Statement. The shares of Preferred Stock issuable upon exercise of
the Warrants have been reserved for issuance upon the exercise of the Warrants
and when issued in accordance with the terms of the Warrants and Warrant
Agreement, will be duly and validly authorized validly issued, fully paid and
non-assessable and free of preemptive rights. The Warrant Agreement has been
duly authorized and, when executed and delivered pursuant to this Agreement,
assuming due authorization, execution and delivery by the transfer agent, will
have been duly executed and delivered and will constitute the valid and legally
binding obligation of the Company enforceable in accordance with its terms,
except as enforceability may be limited by bankruptcy, insolvency or other laws
affecting the rights of creditors generally or by general equitable principles.
The Warrants and Warrant Agreement conform to the respective descriptions
thereof in the Registration Statement and Prospectus.
The Shares and Warrants contained in the Underwriter's Purchase Option
(as defined in the Registration Statement) have been duly authorized and, when
paid for, issued and delivered pursuant to this Agreement, will constitute valid
and legally binding obligations of the Company enforceable in accordance with
their terms and entitled to the benefits provided by the Purchase Option, except
as enforceability may be limited by bankruptcy, insolvency or other laws
affecting the rights of creditors generally or by general equitable principles.
The Securities issuable upon exercise of the Purchase Option (and the shares of
Preferred Stock issuable upon exercise of the Warrants when issued and paid for
in accordance with this Agreement, the Purchase Option and the Warrant
Agreement, will be duly authorized, validly issued, fully paid and non-
assessable and free of preemptive rights.
(f) This Agreement and the Purchase Option have been duly and validly
authorized, executed and delivered by the Company. The Company has full power
and authority to authorize, issue and sell the Securities to be sold by it
hereunder on the terms and conditions set forth herein, and no consent,
approval, authorization or other order of any governmental authority is required
in connection with such authorization, execution and delivery or in connection
with the authorization, issuance and sale of the Securities or the Purchase
Option, except such as may be required under the Act or state securities laws.
(g) Except as described in the Prospectus, or which would not have a
material adverse effect on the condition (financial or otherwise), business
prospects, net worth or properties of the Company and the Subsidiaries taken as
a whole (a "Material Adverse Effect"),
4
<PAGE>
neither the Company nor its Subsidiaries is in violation, breach or default of
or under, and consummation of the transactions herein contemplated and the
fulfillment of the terms of this Agreement will not conflict with, or result in
a breach or violation of, any of the terms or provisions of, or constitute a
default under, or result in the creation or imposition of any lien, charge or
encumbrance upon any of the property or assets of the Company or its
Subsidiaries pursuant to the terms of any material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the Company or
its Subsidiaries is a party or by which the Company or its Subsidiaries may be
bound or to which any of the property or assets of the Company or its
Subsidiaries is subject, nor will such action result in any violation of the
provisions of the certificate of incorporation or the by-laws of the Company or
its Subsidiaries, as amended, or any statute or any order, rule or regulation
applicable to the Company or its Subsidiaries of any court or of any regulatory
authority or other governmental body having jurisdiction over the Company or its
Subsidiaries.
(h) Subject to the qualifications stated in the Prospectus, the
Company and its Subsidiaries have good and marketable title to all properties
and assets described in the Prospectus as owned by them, free and clear of all
liens, charges, encumbrances or restrictions, except such as are not materially
significant or important in relation to their business; all of the material
leases and subleases under which the Company or its Subsidiaries is the lessor
or sublessor of properties or assets or under which the Company or its
Subsidiaries hold properties or assets as lessee or sublessee as described in
the Prospectus are in full force and effect, and, except as described in the
Prospectus, the Company and its Subsidiaries are not in default in any material
respect with respect to any of the terms or provisions of any of such leases or
subleases, and, to the best knowledge of the Company, no claim has been asserted
by anyone adverse to rights of the Company or its Subsidiaries, as lessor,
sublessor, lessee or sublessee under any of the leases or subleases mentioned
above, or affecting or questioning the right of the Company or its Subsidiaries
to continued possession of the leased or subleased premises or assets under any
such lease or sublease except as described or referred to in the Prospectus; and
the Company and its Subsidiaries own or lease all such properties described in
the Prospectus as are necessary to their operations as now conducted and, except
as otherwise stated in the Prospectus, as proposed to be conducted as set forth
in the Prospectus.
(i) Selden, Fox and Associates, Ltd., which has given its report on
certain financial statements filed with the Commission as a part of the
Registration Statement, is with respect to the Company, independent public
accountants as required by the Act and the Rules and Regulations.
(j) The financial statements, and schedules together with related
notes, set forth in the Prospectus or the Registration Statement present fairly
the financial position and results of operations and changes in cash flow
position of the Company and its Subsidiaries on the basis
5
<PAGE>
stated in the Registration Statement, at the respective dates and for the
respective periods to which they apply. Said statements and schedules and
related notes have been prepared in accordance with generally accepted
accounting principles applied on a basis which is consistent during the periods
involved except as disclosed in the Prospectus and Registration Statement.
(k) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus and except as otherwise
disclosed or contemplated therein, the Company and its Subsidiaries have not
incurred any liabilities or obligations, direct or contingent, not in the
ordinary course of business, or entered into any transaction not in the ordinary
course of business, which would have a Material Adverse Effect, and there has
not been any change in the capital stock of, or any incurrence of short-term or
long-term debt by, the Company or its Subsidiaries, or any issuance of options,
warrants or other rights to purchase the capital stock of the Company or its
Subsidiaries, or any material adverse change or any development involving, so
far as the Company or its Subsidiaries can now reasonably foresee a prospective
adverse change in the condition (financial or otherwise), net worth, results of
operations, business, key personnel or properties of it which would have a
Material Adverse Effect.
(l) Except as set forth in the Prospectus, there is not now pending
or, to the knowledge of the Company, threatened, any action, suit or proceeding
to which the Company or its Subsidiaries are a party before or by any court or
governmental agency or body, which might result in any material adverse change
in the financial condition, business prospects, net worth, or properties of the
Company or its Subsidiaries, nor are there any actions, suits or proceedings
related to environmental matters or related to discrimination on the basis of
age, sex, religion or race; and no labor disputes involving the employees of the
Company or its Subsidiaries exist or to the knowledge of the Company, are
threatened which might be expected to have a Material Adverse Effect.
(m) Except as disclosed in the Prospectus, the Company and its
Subsidiaries have filed all necessary federal, state and foreign income and
franchise tax returns required to be filed as of the date hereof and have paid
all taxes shown as due thereon; and there is no tax deficiency which has been,
or to the knowledge of the party, may be asserted against the Company or its
Subsidiaries.
(n) Except as disclosed in the Registration Statement or Prospectus,
the Company and its Subsidiaries have sufficient licenses, permits and other
governmental authorizations currently necessary for the conduct of their
business or the ownership of their properties as described in the Prospectus and
is in all material respects complying therewith and owns or possesses adequate
rights to use all material patents, patent applications, trademarks, service
marks, trade-names, trademark registrations, service mark registrations,
copyrights and
6
<PAGE>
licenses necessary for the conduct of such businesses and have not received any
notice of conflict with the asserted rights of others in respect thereof. To
the best knowledge of the Company, none of the activities or business of the
Company or its Subsidiaries are in violation of, or cause the Company or its
Subsidiaries to violate, any law, rule, regulation or order of the United
States, any state, county or locality, or of any agency or body of the United
States or of any state, county or locality, the violation of which would have a
Material Adverse Effect.
(o) Neither the Company nor its Subsidiaries have, directly or
indirectly, at any time (i) made any contributions to any candidate for
political office, or failed to disclose fully any such contribution in violation
of law or (ii) made any payment to any state, federal or foreign governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments or contributions required or allowed by applicable
law. The Company's internal accounting controls and procedures are sufficient
to cause the Company to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, as amended.
(p) On the Closing Dates (hereinafter defined) all transfer or other
taxes, (including franchise, capital stock or other tax, other than income
taxes, imposed by any jurisdiction) if any, which are required to be paid in
connection with the sale and transfer of the Securities to the Representative
hereunder will have been fully paid or provided for by the Company and all laws
imposing such taxes will have been complied with in all material respects.
(q) All contracts and other documents of the Company and its
Subsidiaries which are, under the Rules and Regulations, required to be filed as
exhibits to the Registration Statement have been so filed.
(r) Except as disclosed in the Registration Statement, the Company has
no subsidiaries.
(s) Except as disclosed in the Registration Statement, the Company has
not entered into any agreement pursuant to which any person is entitled either
directly or indirectly to compensation from the Company for services as a finder
in connection with the proposed public offering.
(t) Except as previously disclosed in writing by the Company to
counsel to the Representative or as disclosed in the Registration Statement, no
officer, director or stockholder of the Company has any National Association of
Securities Dealers, Inc. (the "NASD") affiliation.
(u) The Company is a reporting company under Section 12(g) of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and as such, since
becoming a reporting company thereunder, the Company and all directors, officers
and principal securityholders made
7
<PAGE>
all required filings, and done so on a timely basis, and all of such filings
conform to the requirements of the Exchange Act and the rules and regulations
thereunder and none of such filings contains any untrue statement of a material
fact or omits to state any material fact required to be stated therein or
necessary to make statements therein not misleading.
2. Purchase, Delivery and Sale of the Securities.
---------------------------------------------
(a) Subject to the terms and conditions of this Agreement, and upon
the basis of the representations, warranties, and agreements herein contained,
the Company agrees to issue and sell to the Representative and the
Representative agrees to buy from the Company at $6.30 per share of Preferred
Stock and $.09 per Warrant, at the place and time hereinafter specified, 494,500
shares of Preferred Stock and 247,250 Warrants (the "First Securities").
Delivery of the First Securities against payment therefor shall take
place at the offices of Bernstein & Wasserman, LLP, 950 Third Avenue, New York,
New York (or at such other place as may be designated by agreement between the
Representative and the Company) at 10:00 a.m., New York time, on _______, 1996,
or at such later time and date as the Representative may designate in writing to
the Company at least two business days prior to such purchase, but not later
than _______, 1996 such time and date of payment and delivery for the First
Securities being herein called the "First Closing Date."
(b) Intentionally omitted.
(c) The Company will make the certificates for the Securities to be
purchased by the Representative hereunder available to you for checking at least
two full business days prior to the First Closing Date or the Option Closing
Date. The certificates shall be in such names and denominations as you may
request, at least three full business days prior to the Closing Date. Delivery
of the certificates at the time and place specified in this Agreement is a
further condition to the obligations of the Representative.
Definitive certificates in negotiable form for the Securities to be
purchased by the Representative hereunder will be delivered by the Company to
you for the account of the Representative against payment of the respective
purchase prices by the Representative, by wire transfer or certified or bank
cashier's checks in New York Clearing House funds, payable to the order of the
Company.
It is understood that the Representative proposes to offer the
Securities to be purchased hereunder to the public upon the terms and conditions
set forth in the Registration Statement, after the Registration Statement
becomes effective.
8
<PAGE>
3. Covenants of the Company. The Company covenants and agrees with
------------------------
the Representative that:
(a) The Company will use its best efforts to cause the Registration
Statement to become effective. If required, the Company will file the
Prospectus and any amendment or supplement thereto with the Commission in the
manner and within the time period required by Rule 424(b) under the Act. Upon
notification from the Commission that the Registration Statement has become
effective, the Company will so advise you and will not at any time, whether
before or after the effective date, file any amendment to the Registration
Statement or supplement to the Prospectus of which you shall not previously have
been advised and furnished with a copy or to which you or your counsel shall
have reasonably objected in writing or which is not in compliance with the Act
and the Rules and Regulations. At any time prior to the later of (A) the
completion by the Representative of the distribution of the Securities
contemplated hereby (but in no event more than nine months after the date on
which the Registration Statement shall have become or been declared effective)
and (B) 25 days after the date on which the Registration Statement shall have
become or been declared effective, the Company will prepare and file with the
Commission, promptly upon your request, any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel to the
Company and the Representative, may be reasonably necessary or advisable in
connection with the distribution of the Securities.
As soon as the Company is advised thereof, the Company will advise
you, and provide you copies of any written advice, of the receipt of any
comments of the Commission, of the effectiveness of any post-effective amendment
to the Registration Statement, of the filing of any supplement to the Prospectus
or any amended Prospectus, of any request made by the Commission for an
amendment of the Registration Statement or for supplementing of the Prospectus
or for additional information with respect thereto, of the issuance by the
Commission or any state or regulatory body of any stop order or other order or
threat thereof suspending the effectiveness of the Registration Statement or any
order preventing or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering in any
jurisdiction, or of the institution of any proceedings for any of such purposes,
and will use its best efforts to prevent the issuance of any such order, and, if
issued, to obtain as soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each
Preliminary Prospectus, and the Company has consented and hereby consents to the
use of such copies for the purposes permitted by the Act. The Company
authorizes the Representative and dealers to use the Prospectus in connection
with the sale of the Securities for such period as in the opinion of counsel to
the Representative and the Company the use thereof is required to comply with
the applicable provisions of the Act and the Rules and Regulations. In case of
the happening, at any time within such period as a Prospectus is required under
the Act to be delivered in connection
9
<PAGE>
with sales by the Representative or dealer of any event of which the Company has
knowledge and which materially affects the Company or the securities of the
Company, or which in the opinion of counsel for the Company and counsel for the
Representative should be set forth in an amendment of the Registration Statement
or a supplement to the Prospectus in order to make the statements therein not
then misleading, in light of the circumstances existing at the time the
Prospectus is required to be delivered to a purchaser of the Securities or in
case it shall be necessary to amend or supplement the Prospectus to comply with
law or with the Rules and Regulations, the Company will notify you promptly and
forthwith prepare and furnish to you copies of such amended Prospectus or of
such supplement to be attached to the Prospectus, in such quantities as you may
reasonably request, in order that the Prospectus, as so amended or supplemented,
will not contain any untrue statement of a material fact or omit to state any
material facts necessary in order to make the statements in the Prospectus, in
the light of the circumstances under which they are made, not misleading. The
preparation and furnishing of any such amendment or supplement to the
Registration Statement or amended Prospectus or supplement to be attached to the
Prospectus shall be without expense to the Representative, except that in case
the Representative is required, in connection with the sale of the Securities to
deliver a Prospectus nine months or more after the effective date of the
Registration Statement, the Company will upon request of and at the expense of
the Representative, amend or supplement the Registration Statement and
Prospectus and furnish the Representative with reasonable quantities of
prospectuses complying with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules and Regulations and
the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and
regulations thereunder in connection with the offering and issuance of the
Securities.
(b) The Company will furnish such information as may be required and
to otherwise cooperate and use its best efforts to qualify or register the
Securities for sale under the securities or "blue sky" laws of such
jurisdictions as you may designate and will make such applications and furnish
such information as may be required for that purpose and to comply with such
laws, provided the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or to execute a general consent of service
of process in any jurisdiction in any action other than one arising out of the
offering or sale of the Securities. The Company will, from time to time,
prepare and file such statements and reports as are or may be required to
continue such qualification in effect for so long a period as the counsel to the
Company and the Representative deem reasonably necessary.
(c) If the sale of the Securities provided for herein is not
consummated as a result of the Company not performing its obligations hereunder
in all material respects, the Company shall pay all costs and expenses incurred
by it which are incident to the performance of the Company's obligations
hereunder, including but not limited to, all of the expenses itemized
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<PAGE>
in Section 8, including the out-of-pocket accountable expenses of the
Representative, up to $100,000 (including the reasonable fees and expenses of
counsel to the Representative).
(d) The Company will use its best efforts to (i) cause a registration
statement under the Exchange Act to be declared effective concurrently with the
completion of this offering and will notify you in writing immediately upon the
effectiveness of such registration statement, and (ii) if requested by you, to
obtain and keep current a listing in the Standard & Poors or Moody's OTC
Industrial Manual.
(e) For so long as the Company is a reporting company under either
Section 12(g) or 15(d) of the Exchange Act, the Company, at its expense, will
furnish to you during the period ending five (5) years from the date hereof, (i)
as soon as practicable after the end of each fiscal year, but no earlier than
the filing of such information with the Commission a balance sheet of the
Company and any of its subsidiaries as at the end of such fiscal year, together
with statements of income, surplus and cash flow of the Company and any
subsidiaries for such fiscal year, all in reasonable detail and accompanied by
a copy of the certificate or report thereon of independent accountants; (ii) as
soon as practicable after the end of each of the first three fiscal quarters of
each fiscal year, but no earlier than the filing of such information with the
Commission, consolidated summary financial information of the Company for such
quarter in reasonable detail; (iii) as soon as they are publicly available, a
copy of all reports (financial or other) mailed to security holders; (iv) as
soon as they are available, a copy of all non-confidential reports and financial
statements furnished to or filed with the Commission or any securities exchange
or automated quotation system on which any class of securities of the Company is
listed; and (v) such other information as you may from time to time reasonably
request.
(f) In the event the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will deliver to you at or before the First Closing
Date two signed copies of the Registration Statement including all financial
statements and exhibits filed therewith, and of all amendments thereto, and will
deliver to the Representative such number of conformed copies of the
Registration Statement, including such financial statements but without
exhibits, and of all amendments thereto, as the Representative may reasonably
request. The Company will deliver to or upon your order, from time to time
until the effective date of the Registration Statement, as many copies of any
Preliminary Prospectus filed with the Commission prior to the effective date of
the Registration Statement as you may reasonably request. The Company will
deliver to the Representative on the effective date of the Registration
Statement and thereafter for so long as a Prospectus is required to be delivered
under the Act, from time to time,
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<PAGE>
as many copies of the Prospectus, in final form, or as thereafter amended or
supplemented, as the Representative may from time to time reasonably request.
(h) The Company will make generally available to its security holders
and to the registered holders of its Warrants and deliver to you as soon as it
is practicable to do so but in no event later than 90 days after the end of
twelve months after its current fiscal quarter, an earnings statement (which
need not be audited) covering a period of at least twelve consecutive months
beginning after the effective date of the Registration Statement, which shall
satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of the
Securities substantially for the purposes set forth under "Use of Proceeds" in
the Prospectus.
(j) The Company will promptly prepare and file with the Commission any
amendments or supplements to the Registration Statement, Preliminary Prospectus
or Prospectus and take any other action, which in the opinion of counsel to the
Representative and counsel to the Company, may be reasonably necessary or
advisable in connection with the distribution of the Securities, and will use
its best efforts to cause the same to become effective as promptly as possible.
(k) The Company will reserve and keep available that maximum number of
its authorized but unissued securities which are issuable upon exercise of the
Purchase Option outstanding from time to time.
(l) (1) For a period of twenty-four (24) months from the First Closing
Date, no officer or director of any securities prior to the offering will,
directly or indirectly, offer, sell (including any short sale), grant any option
for the sale of, acquire any option to dispose of, or otherwise dispose of any
shares of capital stock or securities convertible into capital stock without the
prior written consent of the Representative, other than as set forth in the
Registration Statement. In order to enforce this covenant, the Company shall
impose stop-transfer instructions with respect to the securities owned by such
individuals prior to the offering until the end of such period (subject to any
exceptions to such limitation on transferability set forth in the Registration
Statement). If necessary to comply with any applicable Blue-sky Law, the shares
held by such individuals will be escrowed with counsel for the Company or
otherwise as required.
(2) Except for the issuance of shares of capital stock by the Company
in connection with a dividend, recapitalization, reorganization or similar
transactions or as result of the exercise of warrants or options disclosed in or
issued or granted pursuant to plans disclosed in the Registration Statement, the
Company shall not, for a period of twenty-four (24) months following the First
Closing Date, directly or indirectly, offer, sell, issue or transfer any shares
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of its capital stock, or any security exchangeable or exercisable for, or
convertible into, shares of the capital stock or register any of its capital
stock without the prior written consent of the Representative, which shall not
be unreasonably withheld.
(m) Upon completion of this offering, the Company will make all
filings required, including registration under the Exchange Act, to obtain the
listing of the Preferred Stock and the Warrants in the NASDAQ Small Cap Market,
and will use its best efforts to effect and maintain such listing for at least
five years from the date of this Agreement.
(n) Except for the transactions contemplated by this Agreement and as
disclosed in the Prospectus, the Company represents that it has not taken and
agrees that it will not take, directly or indirectly, any action designed to or
which has constituted or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of any of the Securities.
(o) On the First Closing Date and simultaneously with the delivery of
the Securities, the Company shall execute and deliver to you the Purchase
Option. The Purchase Option will be substantially in the form filed as an
Exhibit to the Registration Statement.
(p) On the First Closing Date, the Company will have in force key
person life insurance on the life of Mr. Fanella in an amount of not less than
$1,000,000, payable to the Company, and will use its best efforts to maintain
such insurance during the three year period commencing with the First Closing
Date.
(q) So long as any Warrants are outstanding and the exercise price of
the Warrants is less than the market price of the Preferred Stock, the Company
shall use its best efforts to cause post-effective amendments to the
Registration Statement to become effective in compliance with the Act and
without any lapse of time between the effectiveness of any such post-effective
amendments and cause a copy of each Prospectus, as then amended, to be delivered
to each holder of record of a Warrant and to furnish to the Representative as
many copies of each such Prospectus as such Representative or dealer may
reasonably request. The Company shall not call for redemption of any of the
Warrants unless a registration statement covering the securities underlying the
Warrants has been declared effective by the Commission and remains current at
least until the date fixed for redemption.
(r) For a period of five (5) years following the Effective Date, the
Company will maintain registration with the Commission pursuant to Section 12(g)
of the Exchange Act and will provide to the Representative copies of all filings
made with the Commission pursuant to the Exchange Act. In the event that the
Company fails to maintain registration with the Commission pursuant to Section
12(g) during such five year period, the Company will provide reasonable
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access to an independent accountant designated by the Representative, to all
books, records and other documents or statements that reflect the Company's
financial status at least once each quarter, at the Company's expense.
(s) The Company agrees to pay the Representative a warrant
solicitation fee of 4.0% of the exercise price of any of the Warrants exercised
beginning one (1) year after the Effective Date (not including warrants
exercised by the Representative) if (a) the market price of the Company's
Preferred Stock on the date the Warrant is exercised is greater than the
exercise price of the Warrant, (b) the exercise of the Warrant was solicited by
the Representative and the holder of the warrant designates the Representative
in writing as having solicited such Warrant, (c) the Warrant is not held in a
discretionary account, (d) disclosure of the compensation arrangement is made
upon the sale and exercise of the Warrants, (e) soliciting the exercise is not
in violation of Rule 10b-6 under the Securities Exchange Act of 1934, and (f)
solicitation of the exercise is in compliance with the NASD Notice to Members
81-38 (September 22, 1981).
(t) For a period of three years from the Effective Date, at the
request of the Representative, the Company shall provide promptly, at the
expense of the Company, copies of the Company's daily transfer sheets furnished
to it by its transfer agent and copies of the securities position listings
provided to it by the Depository Trust Company.
(u) The Company hereby agrees that it will pay a finder's fee to the
Representative, equal to five percent (5%) of the first $4,000,000 of the
consideration involved in any transaction, 4% of the next $1,000,000 of
consideration involved in the transaction, 3% of the next $1,000,000, 2% of the
excess, if any, over $6,000,000, for future consummated transactions, if any,
introduced by the Representative (including mergers, acquisitions, joint
ventures, and any other business for the Company introduced by the
Representative) consummated by the Company (an "Introduced, Consummated
Transaction"), in which the Representative introduced the other party to the
Company during a period ending five years following the First Closing Date.
(v) Upon the First Closing Date and simultaneously with the delivery
of the Securities, the Company shall execute and deliver to the Representative,
a two year financial consulting agreement in the form attached as an Exhibit to
the Registration Statement which shall require the Company to pay the
Representative $48,000 on the First Closing Date (the "Financial Consulting
Agreement").
(w) For a period of five (5) years following the Effective Date the
Company, at its expense, shall cause its regularly engaged independent certified
public accountants to review (but not audit) the Company's financial statements
for each of the first three (3) fiscal quarters prior to the announcement of
quarterly financial information, the filing of the Company's 10-Q
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quarterly report and the mailing of quarterly financial information to
stockholders, provided that the Company shall not be required to file a report
of such accountants relating to such review with the Commission. The Company
will retain its present legal counsel and independent certified public
accountants for at least one year from the Closing Date.
(x) For the three (3) year period commencing on the First Closing
Date, the Representative shall have the right to nominate a member of the
Company's Board of Directors. If the Representative does not exercise this
right, it may appoint an advisor who will be able to attend all meetings of the
Board of Directors. However, if the Board of Directors determines that
confidential information is to be discussed during any part of any meeting
attended by such advisor, it shall have the right to exclude the advisor from
the meeting during such discussion. The Representative shall also have the right
to obtain copies of the minutes, if requested, from all Board of Directors
meetings for three (3) years following the Effective Date of the Registration
Statement, whether or not a nominee of the Representative attends or
participates in any such Board meeting. The Company agrees to reimburse the
Representative immediately upon the Representative's request therefor of any
reasonable travel and lodging expenses directly incurred by the Representative
in connection with its representative attending Company Board meetings on the
same basis for other Board members.
4. Conditions of Representative's Obligation. The obligations of
-----------------------------------------
the Representative to purchase and pay for the Securities which it has agreed to
purchase hereunder, are subject to the accuracy (as of the date hereof, and as
of the Closing Date) of and compliance with the representations and warranties
of the Company herein, to the performance by the Company of its obligations
hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and you
shall have received notice thereof not later than 10:00 A.M., New York time, on
the day following the date of this Agreement, or at such later time or on such
later date as to which you may agree in writing; on or prior to the Closing Date
no stop order suspending the effectiveness of the Registration Statement shall
have been issued and no proceedings for that or a similar purpose shall have
been instituted or shall be pending or, to your knowledge or to the knowledge of
the Company, shall be contemplated by the Commission; any request on the part of
the Commission for additional information shall have been complied with to the
satisfaction of the Commission; and no stop order shall be in effect denying or
suspending effectiveness of such qualification nor shall any stop order
proceedings with respect thereto be instituted or pending or threatened. If
required, the Prospectus shall have been filed with the Commission in the manner
and within the time period required by Rule 424(b) under the Act.
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(b) At the First Closing Date, you shall have received the opinion,
dated as of the First Closing Date, of Bressler, Amery & Ross, counsel for the
Company, in form and substance satisfactory to counsel for the Representative,
to the effect that:
(i) the Company and the Subsidiaries have been duly incorporated and
are validly existing as corporations in good standing under the laws of their
respective jurisdictions of incorporation, with all requisite corporate power
and authority to own their properties and conduct their business as described in
the Registration Statement and Prospectus and are duly qualified or licensed to
do business as a foreign corporation and are in good standing in Illinois and
each other jurisdiction in which the ownership or leasing of its properties or
conduct of its business requires such qualification except where the failure to
qualify or be licensed will not have a Material Adverse Effect. The Company
owns all of the issued and outstanding capital stock of the Subsidiaries;
(ii) the authorized capitalization of the Company as of _____________,
1996 is as set forth in the Registration Statement; the Securities as set forth
in the Registration Statement have been duly authorized and upon payment of
consideration therefor, will be validly issued, fully paid and non-assessable
and conform in all material respects to the description thereof contained in the
Prospectus; to such counsel's knowledge the outstanding shares of capital stock
of the Company have not been issued in violation of the preemptive rights of any
shareholder and to such counsel's knowledge the shareholders of the Company do
not have any preemptive rights or other rights to subscribe for or to purchase,
nor are there any restrictions upon the voting or transfer of any of the capital
stock except as provided in the Prospectus or as required by law. The
Securities, the Purchase Option and the Warrant Agreement conform in all
material respects to the respective descriptions thereof contained in the
Prospectus; the shares of Preferred Stock, and the shares of Preferred Stock
issuable upon exercise of Warrants, the Purchase Option, and the Warrant
Agreement will have been duly authorized and, when issued and delivered in
accordance with their respective terms, will be duly and validly issued, fully
paid, non-assessable, free of preemptive rights; to the best of their knowledge,
all prior sales by the Company of the Company's securities have been made in
compliance with or under an exemption from registration under the Act and
applicable state securities laws; a sufficient number of shares of Preferred
Stock has been reserved for issuance upon exercise of the Warrants, the Purchase
Option and to the best of such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Securities as
contemplated by this Agreement gives rise to any registration rights other than
those which have been waived or satisfied;
(iii) this Agreement, the Purchase Option, and the Warrant
Agreement have been duly and validly authorized, executed and delivered by the
Company;
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(iv) the certificates evidencing the Securities as described in the
Registration Statement comply in all material respects with the descriptions set
forth therein, and comply with the Delaware General Corporation Law, as in
effect on the date hereof; each Warrant will be exercisable for one share of the
Preferred Stock of the Company, respectively, and at the prices provided for in
the Warrant Agreement;
(v) except as otherwise disclosed in the Registration Statement, such
counsel knows of no pending or threatened legal or governmental proceedings to
which the Company or its Subsidiaries is a party which would materially
adversely affect the business, property, financial condition or operations of
the Company or its Subsidiaries; or which question the validity of the
Securities, this Agreement, the Warrant Agreement or the Purchase Option, or of
any action taken or to be taken by the Company pursuant to this Agreement, the
Warrant Agreement or the Purchase Option; to such counsel's knowledge there are
no governmental proceedings or regulations required to be described or referred
to in the Registration Statement which are not so described or referred to;
(vi) the execution and delivery of this Agreement, the Purchase
Option or the Warrant Agreement and the incurrence of the obligations herein and
therein set forth and the consummation of the transactions herein or therein
contemplated, will not result in a breach or violation of, or constitute a
default under the certificate of incorporation or by-laws of the Company or its
Subsidiaries, or to the best knowledge of counsel after due inquiry, in the
performance or observance of any material obligations, agreement, covenant or
condition contained in any bond, debenture, note or other evidence of
indebtedness or in any material contract, indenture, mortgage, loan agreement,
lease, joint venture or other agreement or instrument to which the Company or
its Subsidiaries is a party or by which it or any of its properties is bound or
in violation of any order, rule, regulation, writ, injunction, or decree of any
government, governmental instrumentality or court, domestic or foreign the
result of which would have a Material Adverse Effect;
(vii) the Registration Statement has become effective under the Act,
and to the best of such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement is in effect, and no proceedings
for that purpose have been instituted or are pending before, or threatened by,
the Commission; the Registration Statement and the Prospectus (except for the
financial statements and other financial data contained therein, or omitted
therefrom, as to which such counsel need express no opinion) as of the Effective
Date comply as to form in all material respects with the applicable requirements
of the Act and the Rules and Regulations;
(viii) in the course of preparation of the Registration
Statement and the Prospectus such counsel has participated in conferences with
the Chief Financial Officer of the
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Company with respect to the Registration Statement and Prospectus and such
discussions did not disclose to such counsel any information which gives such
counsel reason to believe that the Registration Statement or any amendment
thereto at the time it became effective contained any untrue statement of a
material fact required to be stated therein or omitted to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectus or any supplement thereto contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make statements therein, in light of the circumstances under which
they were made, not misleading (except, in the case of both the Registration
Statement and any amendment thereto and the Prospectus and any supplement
thereto, for the financial statements, notes thereto and other financial
information (including without limitation, the pro forma financial information)
and schedules contained therein, as to which such counsel need express no
opinion);
(ix) all descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of contracts and other
agreements to which the Company or its Subsidiaries is a party are accurate and
fairly present in all material respects the information required to be shown,
and such counsel is familiar with all contracts and other agreements referred to
in the Registration Statement and the Prospectus and any such amendment or
supplement or filed as exhibits to the Registration Statement, and such counsel
does not know of any contracts or agreements to which the Company or its
Subsidiaries is a party of a character required to be summarized or described
therein or to be filed as exhibits thereto which are not so summarized,
described or filed;
(x) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in connection with
the authorization, issuance, transfer, sale or delivery of the Securities by the
Company, in connection with the execution, delivery and performance of this
Agreement by the Company or in connection with the taking of any action
contemplated herein, or the issuance of the Purchase Option or the Securities
underlying the Purchase Option, other than registrations or qualifications of
the Securities under applicable state or foreign securities or Blue Sky laws and
registration under the Act;
(xi) the shares of Preferred Stock and the Warrants have been duly
authorized for quotation on the NASDAQ Small Cap Market ("NASDAQ"); and
(xii) The Company is a reporting Company under Section 12(g)
of the Securities Exchange Act of 1934, as amended ("Exchange Act") and as such,
since becoming a reporting company thereunder the Company and all directors,
officers and principal stockholders have made all required filings, and to the
best knowledge of counsel, all of such filings conform to the requirements of
the Exchange Act and the rules and regulations thereunder and none of such
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filings contains any untrue statement of a material fact or omits to state any
material fact required to be stated therein or necessary to make statement
therein not misleading.
Such opinion shall also cover such matters incident to the
transactions contemplated hereby as the Representative or counsel for the
Representative shall reasonably request. In rendering such opinion, such
counsel may rely upon certificates of any officer of the Company or public
officials as to matters of fact; and may rely as to all matters of law other
than the law of the United States or of the State of New York or Delaware upon
opinions of counsel satisfactory to you, in which case the opinion shall state
that they have no reason to believe that you and they are not entitled to so
rely.
(c) Intentionally Omitted.
(d) All corporate proceedings and other legal matters relating to this
Agreement, the Registration Statement, the Prospectus and other related matters
shall be satisfactory to or approved by Bernstein & Wasserman, LLP, counsel to
the Representative.
(e) You shall have received a letter prior to the Effective Date and
again on and as of the First Closing Date from Selden, Fox and Associates, Ltd.,
independent public accountants for the Company, substantially in the form
reasonably acceptable to you, providing you with such "cold comfort" as you may
reasonably require.
(f) At the Closing Date, (i) the representations and warranties of the
Company contained in this Agreement shall be true and correct in all material
respects with the same effect as if made on and as of the Closing Date and the
Company shall have performed all of its obligations hereunder and satisfied all
the conditions on its part to be satisfied at or prior to such Closing Date;
(ii) the Registration Statement and the Prospectus and any amendments or
supplements thereto shall contain all statements which are required to be stated
therein in accordance with the Act and the Rules and Regulations, and shall in
all material respects conform to the requirements thereof, 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; (iii) there shall have been, since the
respective dates as of which information is given, no material adverse change,
or to the Company's knowledge, any development involving a prospective material
adverse change, in the business, properties, condition (financial or otherwise),
results of operations, capital stock, long-term or short-term debt or general
affairs of the Company or its Subsidiaries from that set forth in the
Registration Statement and the Prospectus, except changes which the Registration
Statement and Prospectus indicate might occur after the effective date of the
Registration Statement, and the Company and its Subsidiaries shall not have
incurred any material liabilities or entered into any material agreement not in
the
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ordinary course of business other than as referred to in the Registration
Statement and Prospectus; (iv) except as set forth in the Prospectus, no action,
suit or proceeding at law or in equity shall be pending or threatened against
the Company or its Subsidiaries which would be required to be set forth in the
Registration Statement, and no proceedings shall be pending or threatened
against the Company and its Subsidiaries before or by any commission, board or
administrative agency in the United States or elsewhere, wherein an unfavorable
decision, ruling or finding would materially and adversely affect the business,
property, condition (financial or otherwise), results of operations or general
affairs of the Company and its Subsidiaries, and (v) you shall have received, at
the First Closing Date, a certificate signed by each of the President and the
principal operating officer of the Company, dated as of the First Closing Date,
evidencing compliance with the provisions of this subsection (f).
(g) Intentionally omitted.
(h) No action shall have been taken by the Commission or the NASD the
effect of which would make it improper, at any time prior to the Closing Date,
for members of the NASD to execute transactions (as principal or agent) in the
Securities and no proceedings for the taking of such action shall have been
instituted or shall be pending, or, to the knowledge of the Representative or
the Company and its Subsidiaries, shall be contemplated by the Commission or the
NASD. The Company and the Representative represent that at the date hereof each
has no knowledge that any such action is in fact contemplated against it by the
Commission or the NASD.
(i) If any of the conditions herein provided for in this Section shall
not have been fulfilled in all material respects as of the date indicated, this
Agreement and all obligations of the Representative under this Agreement may be
canceled at, or at any time prior to, the Closing Date by the Representative
notifying the Company of such cancellation in writing or by telegram at or prior
to the Closing Date. Any such cancellation shall be without liability of the
Representative to the Company.
5. Conditions of the Obligations of the Company, The obligation of
--------------------------------------------
the Company to sell and deliver the Securities is subject to the following
conditions:
(a) The Registration Statement shall have become effective not later
than 10:00 A.M. New York time, on the day following the date of this Agreement,
or on such later date as the Company and the Representative may agree in
writing.
(b) At the Closing Date, no stop orders suspending the effectiveness
of the Registration Statement shall have been issued under the Act or any
proceedings therefor initiated or threatened by the Commission.
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6. Indemnification.
---------------
(a) The Company agrees (i) to indemnify and hold harmless the
Representative and each person, if any, who controls the Representative within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act
against any losses, claims, damages or liabilities, joint or several (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), to which such Representative or such controlling person may become
subject, under the Act or otherwise, and (ii) to reimburse, as incurred, the
Representative and such controlling persons for any legal or other expenses
reasonably incurred in connection with investigating, defending against or
appearing as a third party witness in connection with any losses, claims,
damages or liabilities; insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) relating to (i) and (ii) arise out of or are
based upon any untrue statement or alleged untrue statement of any material fact
contained in (A) the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, (B) any blue sky application
or other document executed by the Company specifically for that purpose
containing written information specifically furnished by the Company and filed
in any state or other jurisdiction in order to qualify any or all of the
Securities under the securities laws thereof (any such application, document or
information being hereinafter called a "Blue Sky Application"), or arise out of
or are based upon the omission or alleged omission to state in the Registration
Statement, any Preliminary Prospectus, Prospectus, or any amendment or
supplement thereto, or in any Blue Sky Application, a material fact required to
be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be required to indemnify the
Representative and any controlling person or be liable in any such case to the
extent, but only to the extent, that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the
Representative specifically for use in the preparation of the Registration
Statement or any such amendment or supplement thereof or any such Blue Sky
Application or any such preliminary Prospectus or the Prospectus or any such
amendment or supplement thereto, provided, further that the indemnity with
respect to any Preliminary Prospectus shall not be applicable on account of any
losses, claims, damages, liabilities or litigation arising from the sale of
Securities to any person if a copy of the Prospectus was not delivered to such
person at or prior to the written confirmation of the sale to such person. This
indemnity will be in addition to any liability which the Company may otherwise
have.
(b) The Representative will indemnify and hold harmless the Company,
each of its directors, each nominee (if any) for director named in the
Prospectus, each of its officers who have signed the Registration Statement and
each person, if any, who controls the Company within the meaning of the Act,
against any losses, claims, damages or liabilities (which shall, for
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all purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and reasonable attorneys' fees) to which the Company
or any such director, nominee, officer or controlling person may become subject
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or the alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or any Blue Sky Application in reliance upon and in
conformity with written information furnished to the Company by the
Representative specifically for use in the preparation thereof and for any
violation by the Representative in the sale of such Securities of any applicable
state or federal law or any rule, regulation or instruction thereunder relating
to violations based on unauthorized statements by Representative or its
representative; provided that such violation is not based upon any violation of
such law, rule or regulation or instruction by the party claiming
indemnification or inaccurate or misleading information furnished by the Company
or its representatives, including information furnished to the Representative as
contemplated herein. This indemnity agreement will be in addition to any
liability which the Representative may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify in writing the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that the reasonable fees and expenses of such
counsel shall be at the expense of the indemnifying party if (i) the employment
of such counsel has been specifically authorized in
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writing by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both the indemnified party and the
indemnifying party and in the reasonable judgment of the counsel to the
indemnified party, it is advisable for the indemnified party to be represented
by separate counsel (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of such indemnified party,
it being understood, however, that the indemnifying party shall not, in
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and expenses of
more than one separate firm of attorneys for the indemnified party, which firm
shall be designated in writing by the indemnified party). No settlement of any
action against an indemnified party shall be made without the consent of the
indemnified party, which shall not be unreasonably withheld in light of all
factors of importance to such indemnified party. If it is ultimately determined
that indemnification is not permitted, then an indemnified party will return all
monies advanced to the indemnifying party.
7. Contribution.
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In order to provide for just and equitable contribution under the Act
in any case in which the indemnification provided in Section 6 hereof is
requested 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 6 provide for indemnification in such case, then the Company and each
person who controls the Company, in the aggregate, and the Representative 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) (after contribution from others) in such proportions
that the Representative is responsible in the aggregate for that portion of such
losses, claims, damages or liabilities represented by the percentage that the
underwriting discount for each of the Securities appearing on the cover page of
the Prospectus bears to the public offering price appearing thereon and the
Company shall be responsible for the remaining portion; provided, however, that
if such allocation is not permitted by applicable law then allocated in such
proportion as is appropriate to reflect relative benefits but also the relative
fault of the Company and the Representative and controlling persons, in the
aggregate, in connection with the statements or omissions which resulted in such
damages and other relevant equitable considerations shall also be considered.
The relative fault shall be determined by reference to, among other things,
whether in the case of an untrue statement of a material fact or the omission to
state a material fact, such statement or omission relates to information
supplied by the Company or the Representative and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The Company and the Representative agree that it
would not be just and
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equitable if the respective obligations of the Company and the Representative to
contribute pursuant to this Section 7 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 this
Section 7. No person guilty of a fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who is not guilty of such fraudulent misrepresentation. As used in this
paragraph, the word "Company" includes any officer, director, or person who
controls the Company within the meaning of Section 15 of the Act. If the full
amount of the contribution specified in this paragraph is not permitted by law,
then the Representative and each person who controls the Representative shall be
entitled to contribution from the Company, its officers, directors and
controlling persons, and the Company, its officers, directors and controlling
persons shall be entitled to contribution from the Representative to the full
extent permitted by law. The foregoing contribution agreement shall in no way
affect the contribution liabilities of any persons having liability under
Section 11 of the Act other than the Company and the Representative. 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 shall not be unreasonably withheld in light of all factors of importance
to such party.
8. Costs and Expenses.
------------------
(a) Whether or not this Agreement becomes effective or the sale of the
Securities to the Representative is consummated, the Company will pay all costs
and expenses incident to the performance of this Agreement by the Company
including, but not limited to, the fees and expenses of counsel to the Company
and of the Company's accountants; the costs and expenses incident to the
preparation, printing, filing and distribution under the Act of the Registration
Statement (including the financial statements therein and all amendments and
exhibits thereto), Preliminary Prospectus and the Prospectus, as amended or
supplemented, the fee of the NASD in connection with the filing required by the
NASD relating to the offering of the Securities contemplated hereby; all
expenses, including reasonable fees and disbursements of counsel to the
Representative, in connection with the qualification of the Securities under the
state securities or blue sky laws which the Representative shall designate; the
cost of printing and furnishing to the Representative copies of the Registration
Statement, each Preliminary Prospectus, the Prospectus, this Agreement, and the
Blue Sky Memorandum, any fees relating to the listing of the Common Stock and
Warrants on NASDAQ or any other securities exchange, the cost of printing the
certificates representing the Securities; fees for bound volumes and prospectus
memorabilia and the fees of the transfer agent and warrant agent. The Company
shall pay any and all taxes (including any transfer, franchise, capital stock or
other tax imposed by any
24
<PAGE>
jurisdiction) on sales to the Representative hereunder. The Company will also
pay all costs and expenses incident to the furnishing of any amended Prospectus
or of any supplement to be attached to the Prospectus as called for in Section
3(a) of this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses, the Company shall at the
First Closing Date pay to the Representative a non-accountable expense allowance
of $104,587. In the event the transactions contemplated hereby are not
consummated by reason of any action by the Representative (except if such
prevention is based upon a breach by the Company of any covenant, representation
or warranty contained herein or because any other condition to the
Representative's obligations hereunder required to be fulfilled by the Company
is not fulfilled) the Company shall not be liable for any expenses of the
Representative, including the Representative's legal fees. In the event the
transactions contemplated hereby are not consummated by reason of the Company
being unable to perform its obligations hereunder in all material respects, the
Company shall be liable for the actual accountable out-of-pocket expenses of the
Representative, including reasonable legal fees, not to exceed in the aggregate
$100,000.
(c) Except as disclosed in the Registration Statement, no person is
entitled either directly or indirectly to compensation from the Company, from
the Representative or from any other person for services as a finder in
connection with the proposed offering, and the Company agrees to indemnify and
hold harmless the Representative, against any losses, claims, damages or
liabilities, joint or several (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
reasonable attorneys' fees), to which the Representative or person may become
subject insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon the claim of any person (other
than an employee of the party claiming indemnity) or entity that he or it is
entitled to a finder's fee in connection with the proposed offering by reason of
such person's or entity's influence or prior contact with the indemnifying
party.
9. Effective Date.
--------------
The Agreement shall become effective upon its execution except that
you may, at your option, delay its effectiveness until 11:00 A.M., New York time
on the first full business day following the effective date of the Registration
Statement, or at such earlier time on such business day after the effective date
of the Registration Statement as you in your discretion shall first commence the
public offering of the Securities. The time of the initial public offering
shall mean the time of release by you of the first newspaper advertisement with
respect to the Securities, or the time when the Securities are first generally
offered by you to dealers by letter or telegram, whichever shall first occur.
This Agreement may be terminated by you at any time
25
<PAGE>
before it becomes effective as provided above, except that Sections 3(c), 6, 7,
8, 12, 13, 14 and 15 shall remain in effect notwithstanding such termination.
10. Termination.
-----------
(a) After this Agreement becomes effective, this Agreement, except for
Sections 3(c), 6, 7, 8, 12, 13, 14 and 15 hereof, may be terminated at any time
prior to the First Closing Date, by you if in your judgment (i) the Company or
its Subsidiaries have sustained a material loss, whether or not insured, by
reason of fire, earthquake, flood, accident or other calamity, or from any labor
dispute or court or government action, order or decree, (ii) trading in
securities on the New York Stock Exchange or the American Stock Exchange having
been suspended or limited, (iii) material governmental restrictions have been
imposed on trading in securities generally (not in force and effect on the date
hereof), (iv) a banking moratorium has been declared by federal or New York
state authorities, (v) an outbreak of major international hostilities involving
the United States or other substantial national or international calamity has
occurred, (vi) a pending or threatened legal or governmental proceeding or
action relating generally to the Company's or its Subsidiaries' business, or a
notification has been received by the Company or its Subsidiaries of the threat
of any such proceeding or action, which would materially adversely affect the
Company or its Subsidiaries; (vii) except as contemplated by the Prospectus, the
Company or its Subsidiaries is merged or consolidated into or acquired by
another company or group or there exists a binding legal commitment for the
foregoing or any other material change of ownership or control occurs; (viii)
the passage by the Congress of the United States or by any state legislative
body of similar impact, of any act or measure, or the adoption of any orders,
rules or regulations by any governmental body or any authoritative accounting
institute or board, or any governmental executive, which is reasonably believed
likely by the Representative to have a material adverse impact on the business,
financial condition or financial statements of the Company or its Subsidiaries;
(ix) any material adverse change in the financial or securities markets beyond
normal market fluctuations having occurred since the date of this Agreement, or
(x) any material adverse change having occurred, since the respective dates of
which information is given in the Registration Statement and Prospectus, in the
earnings, business prospects or general condition of the Company or its
Subsidiaries, financial or otherwise, whether or not arising in the ordinary
course of business.
(b) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 10, the Company shall be
promptly notified by you, by telephone or telegram, confirmed by letter.
26
<PAGE>
11. Purchase Option.
---------------
At or before the First Closing Date, the Company will sell the
Representative or its designees for a consideration of $79.18, and upon the
terms and conditions set forth in the form of Purchase Option annexed as an
exhibit to the Registration Statement, a Purchase Option to purchase an
aggregate of 49,450 shares of Preferred Stock and 24,725 Warrants. In the event
of conflict in the terms of this Agreement and the Purchase Option with respect
to language relating to the Purchase Option, the language of the Purchase
Option shall control.
12. Representations and Warranties of the Representative.
----------------------------------------------------
The Representative represents and warrants to the Company that it is
registered as a broker-dealer in all jurisdictions in which it is offering the
Securities and that it will comply with all applicable state or federal laws
relating to the sale of the Securities, including but not limited to, violations
based on unauthorized statements by the Representative or its representatives.
13. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
The respective indemnities, agreements, representations, warranties
and other statements of the Company and the Representative and the undertakings
set forth in or made pursuant to this Agreement will remain in full force and
effect until three years from the date of this Agreement, regardless of any
investigation made by or on behalf of the Representative, the Company or any of
its officers or directors or any controlling person and will survive delivery of
and payment of the Securities and the termination of this Agreement.
14. Notice.
------
Any communications specifically required hereunder to be in writing,
if sent to the Representative, will be mailed, delivered or telecopied and
confirmed to them at I. A. Rabinowitz & Co., 99 Wall Street, New York, NY
10005, with a copy sent to Bernstein & Wasserman, LLP, 950 Third Avenue, New
York, New York 10022, Attention: Hartley T. Bernstein, or if sent to the
Company, will be mailed, delivered or telecopied and confirmed to it at 350
Randy Road, Carol Stream, Illinois 60188, with a copy sent to Bressler, Amery &
Ross, 17 State Street, New York, NY 10004, Attn: Robert Brantl, Esq. Notice
shall be deemed to have been duly given if mailed or transmitted by any standard
form of telecommunication.
15. Parties in Interest.
-------------------
The Agreement herein set forth is made solely for the benefit of the
Representative, the Company, any person controlling the Company or the
Representative, and directors of the
27
<PAGE>
Company, nominees for directors (if any) named in the Prospectus, its officers
who have signed the Registration Statement, and their respective executors,
administrators, successors, assigns and no other person shall acquire or have
any right under or by virtue of this Agreement. The term "successors and
assigns" shall not include any purchaser, as such purchaser, from the
Representative of the Securities.
16. Applicable Law.
--------------
This Agreement will be governed by, and construed in accordance with,
of the laws of the State of New York applicable to agreements made and to be
entirely performed within New York.
17. Counterparts.
------------
This agreement may be executed in one or more counterparts each of
which shall be deemed to constitute an original and shall become effective when
one or more counterparts have been signed by each of the parties hereto and
delivered to the other parties (including by fax, followed by original copies by
overnight mail).
18. Entire Agreement; Amendments.
-----------------------------
This Agreement constitutes the entire agreement of the parties hereto
and supersedes all prior written or oral agreements, understandings and
negotiations with respect to the subject matter hereof. This Agreement may not
be amended except in writing, signed by the Representative and the Company.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement between the Company and the Representative in accordance with
its terms.
Very truly yours,
MICROENERGY, INC.
By:_______________________________________
Name: Robert G. Gatza
Title: Chairman
28
<PAGE>
The foregoing Underwriting Agreement is hereby confirmed and accepted
as of the date first above written.
I. A. RABINOWITZ & CO.
By:_______________________________________
Name:
Title:
The undersigned agree to be bound by the provisions of Section
3(l)(l).
___________________________________
Robert G. Gatza
___________________________________
Robert J. Fanella
___________________________________
George M. Bradshaw
29
<PAGE>
EXHIBIT 4(d)
WARRANT AGREEMENT
AGREEMENT, dated as of this _____ day of _____________________, 1996, by
and between MICROENERGY, INC., a Delaware corporation ("Company"), and AMERICAN
STOCK TRANSFER & TRUST COMPANY, as Warrant Agent (the "Warrant Agent").
WITNESSETH:
WHEREAS, in connection with a public offering of up to 494,500 shares of
Series A Cumulative Preferred Stock, $7.00 par value of the Company ("Shares"),
and 247,250 Class A Redeemable Preferred Stock Purchase Warrants ("Warrants")
pursuant to an underwriting agreement (the "Underwriting Agreement") dated
_____________________, 1996 between the Company and I. A. Rabinowitz & Co.
("Rabinowitz") and the issuance to Rabinowitz or its designees of a Purchase
Option to purchase 49,450 Shares and 24,725 Warrants (the "Purchase Option"),
and the issuance to certain bridge lenders of 880,000 Warrants, the Company will
issue up to 1,151,975 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, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the holders thereof;
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 certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
1. Definitions. As used herein, the following terms shall have the
-----------
following meanings, unless the context shall otherwise require:
(a) "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 at the date hereof at 40 Wall Street, New
York, New York 10005.
(b) "Exercise Date" shall mean, as to any Warrant, the date on which
the Warrant Agent shall have received both (a) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, and (b)
payment in cash, or by official bank or certified check made payable to the
Company, of an amount in lawful money of the United States of America equal to
the applicable Purchase Price.
(c) "Initial Warrant Exercise Date" shall mean _____________________,
1997.
(d) "Preferred Stock" shall mean Series A Cumulative Preferred Stock
of the Company, $7.00 par value.
<PAGE>
(e) "Purchase Price" shall mean the purchase price per share to be
paid upon exercise of each Warrant in accordance with the terms hereof, which
price shall be $7.00 per share, subject to adjustment from time to time pursuant
to the provisions of Section 9 hereof, and subject to the Company's right, in
its sole discretion, to reduce the Purchase Price upon notice to all
warrantholders.
(f) "Redemption Price" shall mean the price at which the Company may,
at its option, redeem the Warrants, in accordance with the terms hereof, which
price shall be $0.01 per Warrant.
(g) "Registered Holder" shall mean as to any Warrant and as of any
particular date, the person in whose name the certificate representing the
Warrant shall be registered on that date on the books maintained by the Warrant
Agent pursuant to Section 6.
(h) "Transfer Agent" shall mean American Stock Transfer & Trust
Company, as the Company's transfer agent, or its authorized successor, as such.
(i) "Warrant Expiration Date" shall mean 5:00 P.M. (New York time) on
_____________________, 2000 or the Redemption Date as defined in Section 8,
whichever is earlier; provided that if such date shall in the State of New York
be a holiday or a day on which banks are authorized or required to close, then
5:00 P.M. (New York time) on the next following day which in the State of New
York is not a holiday or a day on which banks are authorized or required to
close. Upon notice to all warrantholders the Company shall have the right to
extend the warrant expiration date.
2. Warrants and Issuance of Warrant Certificates.
---------------------------------------------
(a) A Warrant initially shall entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase one (1) share of
Preferred Stock upon the exercise thereof, in accordance with the terms hereof,
subject to modification and adjustment as provided in Section 9.
(b) Upon execution of this Agreement, Warrant Certificates
representing the number of Warrants sold pursuant to the Underwriting Agreement
shall be executed by the Company and delivered to the Warrant Agent. Upon
written order of the Company signed by its President or Chairman or a Vice
President and by its Secretary or an Assistant Secretary, the Warrant
Certificates shall be countersigned, issued, and delivered by the Warrant Agent.
(c) From time to time, up to the Warrant Expiration Date, the Transfer
Agent shall countersign and deliver stock certificates in required whole number
denominations representing up to an aggregate of 1,151,975 shares of Preferred
Stock, subject to adjustment as described herein, upon the exercise of Warrants
in accordance with this Agreement.
(d) From time to time, up to the Warrant Expiration Date, the Warrant
Agent shall countersign and deliver Warrant Certificates in required whole
number denominations to the persons entitled thereto in connection with any
transfer or exchange permitted under this Agreement; provided that no Warrant
Certificates shall be issued except (i) those initially issued hereunder, (ii)
those issued on or after the Initial Warrant Exercise Date, upon the exercise of
fewer than all Warrants represented by any Warrant Certificate, to evidence any
unexercised warrants held by the exercising Registered Holder, (iii) those
issued upon any transfer or exchange pursuant to Section 6; (iv) those issued in
replacement of lost, stolen, destroyed, or mutilated Warrant Certificates
pursuant to Section 7; (v) those issued pursuant to the Purchase Option; and
(vi) those issued at the option of the Company, in such form as may be
2
<PAGE>
approved by the its Board of Directors, to reflect any adjustment or change in
the Purchase Price, the number of shares of Preferred Stock purchasable upon
exercise of the Warrants or the Redemption Price therefor made pursuant to
Section 9 hereof.
(e) Pursuant to the terms of the Purchase Option, Rabinowitz may
purchase up to 24,725 Warrants.
3. Form and Execution of Warrant Certificates.
------------------------------------------
(a) The Warrant Certificates 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 or to the requirements of Section 2(b). The
Warrant Certificates shall be dated the date of issuance thereof (whether upon
initial issuance, transfer, exchange, or in lieu of mutilated, lost, stolen, or
destroyed Warrant Certificates) and issued in registered form. Warrant
Certificates shall be numbered serially with the letters WA.
(b) Warrant Certificates shall be executed on behalf of the Company by
its Chairman of the Board, President, or any Vice President and by its Secretary
or an Assistant Secretary, by manual signatures or by facsimile signatures
printed thereon, and shall have imprinted thereon a facsimile of the Company's
seal. 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 an officer of the Company or to hold the particular office
referenced in the Warrant Certificate before the date of issuance of the Warrant
Certificates or before countersignature by the Warrant Agent and issue and
delivery thereof, such Warrant Certificates may nevertheless 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 an officer
of the Company or to hold such office. After countersignature by the Warrant
Agent, Warrant Certificates shall be delivered by the Warrant Agent to the
Registered Holder without further action by the Company, except as otherwise
provided by Section 4 hereof.
4. Exercise. Each Warrant may be exercised by the Registered Holder
--------
thereof at any time on or after the Initial Exercise Date, but not after the
Warrant Expiration Date, upon the terms and subject to the conditions set forth
herein 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 and the person entitled to receive the securities deliverable upon such
exercise shall be treated for all purposes as the holder of those securities
upon the exercise of the Warrant as of the close of business on the Exercise
Date. As soon as practicable on or after the Exercise Date the Warrant Agent
shall deposit the proceeds received from the exercise of a Warrant and shall
notify the Company in writing of the exercise of the Warrant. Promptly
following, and in any event within five days after the date of such notice from
the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause to
be issued and delivered by the Transfer Agent, to the person or persons entitled
to receive the same, a certificate or certificates for the securities
deliverable upon such exercise (plus a certificate for any remaining unexercised
Warrants of the Registered Holder), provided that the Warrant Agent shall
refrain from causing such issuance of certificates pending clearance of checks
received in payment of the Purchase Price pursuant to such Warrants. Upon the
exercise of any Warrant and clearance of the funds received, the Warrant Agent
3
<PAGE>
shall promptly remit the payment received for the Warrant (the "Warrant
Proceeds") to the Company or as the Company may direct in writing.
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 Preferred Stock, solely for the purpose of issue
upon exercise of Warrants, such number of shares of Preferred Stock as shall
then be issuable upon the exercise of all outstanding Warrants. The Company
covenants that all shares of Preferred Stock which shall be issuable upon
exercise of the Warrants shall, at the time of delivery, be duly and validly
issued, fully paid, nonassessable, and free from all taxes, liens, and charges
with respect to the issue thereof, (other than those which the Company shall
promptly pay or discharge) and that upon issuance such shares shall be listed on
each national securities exchange or eligible for inclusion in each automated
quotation system, if any, on which the other shares of outstanding Preferred
Stock of the Company are then listed or eligible for inclusion.
(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, to the extent the Purchase Price is less than the Market Price (as
hereinafter defined), in good faith and as expeditiously as reasonably possible,
endeavor to secure such registration or approval and will use its reasonable
efforts to obtain appropriate approvals or registrations under state "blue sky"
securities laws. With respect to any such securities, however, Warrants may not
be exercised by, or shares of Preferred 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 upon exercise of the
Warrants; provided, however, that if the shares of Preferred 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 to requisition
the Company's Transfer Agent from time to time for certificates representing
shares of Preferred Stock and Common Stock issuable upon exercise of the
Warrant, and the Company will authorize the Transfer Agent to comply with all
such proper requisitions. The Company will file with the Warrant Agent a
statement setting forth the name and address of the Transfer Agent of the
Company for shares of Preferred Stock issuable upon exercise of the Warrants.
(e) Intentionally omitted.
6. Exchange and Registration of Transfer.
-------------------------------------
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants of the same
class or may be transferred in whole or in part. Warrant Certificates to be
exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and
upon satisfaction of the terms and provisions hereof, the Company shall execute
and the
4
<PAGE>
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 its office books in which, subject
to such reasonable regulations as it may prescribe, it shall register Warrant
Certificates and the transfer thereof in accordance with its regular practice.
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 all Warrant Certificates presented for
registration or transfer, or for exchange or exercise, the subscription form 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 or his
attorney-in-fact duly authorized in writing.
(d) A service charge may be imposed by the Warrant Agent for any
exchange or registration of transfer of Warrant Certificates. In addition, the
Company may require payment by such holder 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
in case of mutilated Warrant Certificates shall be promptly cancelled by the
Warrant Agent and thereafter retained by the Warrant Agent until termination of
this Agreement or resignation as Warrant Agent, or disposed of or destroyed, at
the direction of the Company.
(f) Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of any
Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon 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. The Warrants which are being publicly offered with shares of
Preferred Stock pursuant to the Underwriting Agreement are being offered
separately from the Preferred Stock and transferable separately therefrom.
7. Loss or Mutilation. Upon receipt by the Company and the Warrant Agent
------------------
of evidence satisfactory to them of the ownership of and loss, theft,
destruction, or mutilation of any Warrant Certificate and (in case of loss,
theft, or destruction) of indemnity satisfactory to them, and (in the case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall (in the absence of notice to the Company and/or
Warrant Agent that the Warrant Certificate has been acquired by a bona fide
purchaser) countersign and deliver to the Registered Holder in lieu thereof a
new Warrant Certificate of like tenor representing an equal aggregate number of
Warrants. Applicants for a substitute Warrant Certificate shall comply with
such other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe.
8. Redemption.
----------
(a) Subject to the provisions of paragraph 2(e) hereof, on not less
than thirty (30) days notice given at any time after the Initial Warrant
Exercise Date, the Warrants may be redeemed, at the option of the Company, at a
redemption price of $0.01 per Warrant, provided the Market Price of the
5
<PAGE>
Preferred Stock receivable upon exercise of the Warrant shall equal or exceed
$9.00 (the "Target Price"), subject to adjustment as set forth in Section 8(f)
below. Market Price for the purpose of this Section 8 shall mean the average
closing bid price for any five (5) consecutive trading days ending within
fifteen (15) days prior to the date of the notice of redemption, which notice
shall be mailed no later than five days thereafter, of the Preferred Stock as
reported by the National Association of Securities Dealers, Inc., Automatic
Quotation System, or the National Quotation Bureau Incorporated.
(b) If the conditions set forth in Section 8(a) are met, and the
Company desires to exercise its right to redeem the Warrants, it shall mail a
notice of redemption to each of the Registered Holders of the Warrants to be
redeemed, first class, postage prepaid, not later than the thirtieth day before
the date fixed for redemption, at such holder's last address as shall appear on
the records maintained pursuant to Section 6(b). 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.
(c) The notice of redemption shall specify (i) the redemption price,
(ii) the date fixed for redemption, (iii) the place where the Warrant
Certificates shall be delivered and the redemption price paid, and (iv) that the
right to exercise the Warrant shall terminate at 5:00 p.m. (New York time) on
the business day immediately preceding the date fixed for redemption. The date
fixed for the redemption of the Warrant 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 of the Secretary or an
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 time) on the business day immediately preceding the Redemption Date. On
and after the Redemption Date, Holders of the Warrants shall have no further
rights except to receive, upon surrender of the Warrant, the Redemption Price.
(e) From and after the Redemption Date, the Company shall, at the
place specified in the notice of redemption, upon presentation and surrender to
the Company by or on behalf of the Registered Holder thereof of one or more
Warrant Certificates evidencing Warrants to be redeemed, deliver or cause to be
delivered to or upon the written order of such Holder a sum in cash equal to the
redemption price of each such Warrant. From and after the Redemption Date and
upon the deposit or setting aside by the Company of a sum sufficient to redeem
all the Warrants called for redemption, such Warrants shall expire and become
void and all rights hereunder and under the Warrant Certificates, except the
right to receive payment of the redemption price, shall cease.
(f) If the shares of the Company's Preferred Stock are subdivided or
combined into a greater or smaller number of shares of Preferred Stock, the
Target Price shall be proportionally adjusted by the ratio which the total
number of shares of Preferred Stock outstanding immediately prior to such event
bears to the total number of shares of Preferred Stock to be outstanding
immediately after such event.
9. Adjustment of Exercise Price and Number of Shares of Preferred Stock,
---------------------------------------------------------------------
Preferred Stock, or Warrants.
- ----------------------------
6
<PAGE>
(a) Subject to the exceptions referred to in Section 9(g) below, in
the event the Company shall, at any time or from time to time after the date
hereof, sell any shares of Preferred Stock for a consideration per share less
than the Market Price of the Preferred Stock (as defined in Section 8) on the
date of the sale or issue of any shares of Preferred Stock as a stock dividend
to the holders of Preferred Stock, or subdivide or combine the outstanding
shares of Preferred Stock into a greater or lesser number of shares (any such
sale, issuance, subdivision, or combination being herein called a "Change of
Shares"), then, and thereafter upon each further Change of Shares, the Purchase
Price in effect immediately prior to such Change of Shares shall be changed to a
price (including any applicable fraction of a cent) determined by multiplying
the Purchase Price in effect immediately prior thereto by a fraction, the
numerator of which shall be the sum of the number of shares of Preferred Stock
outstanding immediately prior to the issuance of such additional shares and the
number of shares of Preferred Stock which the aggregate consideration received
(determined as provided in subsection 9(f) below) for the issuance of such
additional shares would purchase at such current market price per share of
Preferred Stock, and the denominator of which shall be the sum of the number of
shares of Preferred Stock outstanding immediately after the issuance of such
additional shares. Such adjustment shall be made successively whenever such an
issuance is made.
Upon each adjustment of the Purchase Price pursuant to this Section 9,
the total number of shares of Preferred Stock purchasable upon the exercise of
each Warrant shall (subject to the provisions contained in Section 9(b) hereof)
be such number of shares (calculated to the nearest tenth) purchasable at the
Purchase Price in effect immediately prior to such adjustment multiplied by a
fraction, the numerator of which shall be the Purchase Price in effect
immediately prior to such adjustment and the denominator of which shall be the
Purchase Price in effect immediately after such adjustment.
(b) The Company may elect, upon any adjustment of the Purchase Price
hereunder, to adjust the number of Warrants outstanding, in lieu of the
adjustment in the number of shares of Preferred Stock purchasable upon the
exercise of each Warrant as hereinabove provided, so that each Warrant
outstanding after such adjustment shall represent the right to purchase one
share of Preferred Stock. Each Warrant held of record prior to such adjustment
of the number of Warrants shall become that number of Warrants (calculated to
the nearest tenth) determined by multiplying the number one by a fraction, the
numerator of which shall be the Purchase Price in effect immediately prior to
such adjustment and the denominator of which shall be the Purchase Price in
effect immediately after such adjustment. Upon each adjustment of the number of
Warrants pursuant to this Section 9, the Company shall, as promptly as
practicable, cause to be distributed to each Registered Holder of Warrant
Certificates on the date of such adjustment Warrant Certificates evidencing,
subject to Section 10 hereof, the number of additional Warrants to which such
Holder shall be entitled as a result of such adjustment or, at the option of the
Company, cause to be distributed to such Holder in substitution and replacement
for the Warrant Certificates held by him prior to the date of adjustment (and
upon surrender thereof, if required by the Company) new Warrant Certificates
evidencing the number of Warrants to which such Holder shall be entitled after
such adjustment.
(c) In case of any reclassification, capital reorganization, or other
change of outstanding shares of Preferred Stock, or in case of any consolidation
or merger of the Company with or into another corporation (other than a
consolidation or merger in which the Company is the continuing corporation and
which does not result in any reclassification, capital reorganization, or other
change of outstanding shares of Preferred Stock), or in case of any sale or
conveyance to another corporation of the property of the Company as, or
substantially as, an entirety (other than a sale/leaseback, mortgage, or other
financing transaction), the Company shall cause effective provision to be made
so that each holder of a warrant then outstanding shall have the right
thereafter, by exercising such Warrant, to purchase the
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<PAGE>
kind and number of shares of stock or other securities or property (including
cash) receivable upon such reclassification, capital reorganization, or other
change, consolidation, merger, sale, or conveyance by a holder of the number of
shares of Preferred Stock that might have been purchased upon exercise of such
Warrant immediately prior to such reclassification, capital reorganization, or
other change, consolidation, merger, sale, or conveyance. Any such provision
shall include provision for adjustments that shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 9. The
Company shall not effect any such consolidation, merger, or sale unless prior to
or simultaneously with the consummation thereof the successor (if other than the
Company) resulting from such consolidation or merger or the corporation
purchasing assets or other appropriate corporation or entity shall assume, by
written instrument executed and delivered to the Warrant Agent, the obligation
to deliver to the holder of each Warrant such shares of stock, securities, or
assets as, in accordance with the foregoing provisions, such holders may be
entitled to purchase and the other obligations under this Agreement. The
foregoing provisions shall similarly apply to successive reclassifications,
capital reorganizations, and other changes of outstanding shares of Preferred
Stock and to successive consolidations, mergers, sales, or conveyances.
(d) Irrespective of any adjustments or changes in the Purchase Price
or the number of shares of Preferred Stock purchasable upon exercise of the
Warrants, the Warrant Certificates theretofore and thereafter issued shall,
unless the Company shall exercise its option to issue new Warrant Certificates
pursuant to Section 2(d) hereof, continue to express the Purchase Price per
share, the number of shares purchasable thereunder, and the Redemption Price
therefor as the Purchase Price per share, the number of shares purchasable
thereunder and the Redemption Price therefor were expressed in the Warrant
Certificates when the same were originally issued.
(e) After each adjustment of the Purchase Price pursuant to this
Section 9, the Company will promptly prepare a certificate signed by the
Chairman or President, and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary, of the Company setting forth: (i) the
Purchase Price as so adjusted, (ii) the number of shares of Preferred Stock
purchasable upon exercise of each Warrant after such adjustment, and, if the
Company shall have elected to adjust the number of Warrants, the number of
Warrants to which the registered holder of each Warrant shall then be entitled,
and the adjustment in Redemption Price resulting therefrom, and (iii) a brief
statement of the facts accounting for such adjustment. The Company will promptly
file such certificate with the Warrant Agent and cause a brief summary thereof
to be sent by ordinary first class mail to Rabinowitz and to each registered
holder of Warrants at his last address as it shall appear on the registry books
of the Warrant Agent. No failure to mail such notice nor any defect therein or
in the mailing thereof shall affect the validity thereof except as to the holder
to whom the Company failed to mail such notice, or except as to the holder whose
notice was defective. The affidavit of an officer of the Warrant Agent or the
Secretary or an Assistant Secretary of the Company that such notice has been
mailed shall, in the absence of fraud, be prima facie evidence of the facts
stated therein.
(f) For purposes of Section 9(a) and 9(b) hereof, the following
provisions (i) to (vii) shall also be applicable:
(i) The number of shares of Preferred Stock outstanding at any given
time shall include shares of Preferred Stock owned or held by or for the account
of the Company, and the sale or issuance of such treasury shares or the
distribution of any such treasury shares shall not be considered a Change of
Shares for purposes of said sections.
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<PAGE>
(ii) No adjustment of the Purchase Price shall be made unless such
adjustment would require an increase or decrease of at least $.10 in such price;
provided that any adjustments which by reason of this subsection (ii) are not
required to be made shall be carried forward and shall be made at the time of
and together with the next subsequent adjustment which, together with any
adjustment(s) so carried forward, shall require an increase or decrease of at
least $.10 in the Purchase Price then in effect hereunder.
(iii) In case of (1) the sale by the Company for cash of any rights
or warrants to subscribe for or purchase, or any options for the purchase of,
Preferred Stock or any securities convertible into or exchangeable for Preferred
Stock without the payment of any further consideration other than cash, if any
(such convertible or exchangeable securities being herein called "Convertible
Securities"), or (2) the issuance by the Company, without the receipt by the
Company of any consideration therefor, of any rights or warrants to subscribe
for or purchase, or any options for the purchase of, Preferred Stock or
Convertible Securities, in each case, if (and only if) the consideration payable
to the Company upon the exercise of such rights, warrants, or options shall
consist of cash, whether or not such rights, warrants, or options, or the right
to convert or exchange such Convertible Securities, are immediately exercisable,
and the price per share for which Preferred Stock is issuable upon the exercise
of such rights, warrants, or options or upon the conversion or exchange of such
Convertible Securities (determined by dividing (x) the minimum aggregate
consideration payable to the Company upon the exercise of such rights, warrants,
or options, plus the consideration received by the Company for the issuance or
sale of such rights, warrants, or options, plus, in the case of such Convertible
Securities, the minimum aggregate amount of additional consideration, if any,
other than such Convertible Securities, payable upon the conversion or exchange
thereof, by (y) the total maximum number of shares of Preferred Stock issuable
upon the exercise of such rights, warrants, or options or upon the conversion or
exchange of such Convertible Securities issuable upon the exercise of such
rights, warrants, or options) is less than the fair market value of the
Preferred Stock on the date of the issuance or sale of such rights, warrants, or
options, then the total maximum number of shares of Preferred Stock issuable
upon the exercise of such rights, warrants, or options or upon the conversion or
exchange of such Convertible Securities (as of the date of the issuance or sale
of such rights, warrants, or options) shall be deemed to be outstanding shares
of Preferred Stock for purposes of Sections 9(a) and 9(b) hereof and shall be
deemed to have been sold for cash in an amount equal to such price per share.
(iv) In case of the sale by the Company for cash of any Convertible
Securities, whether or not the right of conversion or exchange thereunder is
immediately exercisable, and the price per share for which Preferred Stock is
issuable upon the conversion or exchange of such Convertible Securities
(determined by dividing (x) the total amount of consideration received by the
Company for the sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, other than such Convertible
Securities, payable upon the conversion or exchange thereof, by (y) the total
maximum number of shares of Preferred Stock issuable upon the conversion or
exchange of such Convertible Securities) is less than the fair market value or
the Preferred Stock on the date of the sale of such Convertible Securities, then
the total maximum number of shares of Preferred Stock issuable upon the
conversion or exchange of such Convertible Securities (as of the date of the
sale of such Convertible Securities) shall be deemed to be outstanding shares of
Preferred Stock for purposes of Sections 9(a) and 9(b) hereof and shall be
deemed to have been sold for cash in an amount equal to such price per share.
(v) In case the Company shall modify the rights of conversion,
exchange, or exercise of any of the securities referred to in subsection (iii)
above or any other securities of the Company convertible, exchangeable, or
exercisable for shares of Preferred Stock, for any reason other
9
<PAGE>
than an event that would require adjustment to prevent dilution, so that the
consideration per share received by the Company after such modification is less
than the market price on the date prior to such modification, the Purchase Price
to be in effect after such modification shall be determined by multiplying the
Purchase Price in effect immediately prior to such event by a fraction, of which
the numerator shall be the number of shares of Preferred Stock outstanding
multiplied by the market price on the date prior to the modification plus the
number of shares of Preferred Stock which the aggregate consideration receivable
by the Company for the securities affected by the modification would purchase at
the market price and of which the denominator shall be the number of shares of
Preferred Stock outstanding on such date plus the number of shares of Preferred
Stock to be issued upon conversion, exchange, or exercise of the modified
securities at the modified rate. Such adjustment shall become effective as of
the date upon which such modification shall take effect.
(vi) On the expiration of any such right, warrant, or option or the
termination of any such right to convert or exchange any such Convertible
Securities, the Purchase Price then in effect hereunder shall forthwith be
readjusted to such Purchase Price as would have obtained (a) had the adjustments
made upon the issuance or sale of such rights, warrants, options, or Convertible
Securities been made upon the basis of the issuance of only the number of shares
of Preferred Stock theretofore actually delivered (and the total consideration
received therefor) upon the exercise of such rights, warrants, or options or
upon the conversion or exchange of such Convertible Securities and (b) had
adjustments been made on the basis of the Purchase Price as adjusted under
clause (a) for all transactions (which would have affected such adjusted
Purchase Price) made after the issuance or sale of such rights, warrants,
options, or Convertible Securities.
(vii) In case of the sale for cash of any shares of Preferred Stock,
any Convertible Securities, any rights or warrants to subscribe for or purchase,
or any options for the purchase of, Preferred Stock or Convertible Securities,
the consideration received by the Company therefore shall be deemed to be the
gross sales price therefor without deducting therefrom any expense paid or
incurred by the Company or any underwriting discounts or commissions or
concessions paid or allowed by the Company in connection therewith.
(g) No adjustment to the Purchase Price of the Warrants or to the
number of shares of Preferred Stock purchasable upon the exercise of each
Warrant will be made, however,
(i) upon the sale or exercise of the Warrants, including without
limitation the sale or exercise of any of the Warrants comprising the Purchase
Option; or
(ii) upon the sale of any shares of Preferred Stock in the Company's
initial public offering, including, without limitation, shares sold upon the
exercise of any over-allotment option granted to Rabinowitz in connection with
such offering; or
(iii) upon the issuance or sale of Preferred Stock or Convertible
Securities upon the exercise of any rights or warrants to subscribe for or
purchase, or any options for the purchase of, Preferred Stock or Convertible
Securities, whether or not such rights, warrants, or options were outstanding on
the date of the original sale of the Warrants or were thereafter issued or sold;
or
(iv) upon the issuance or sale of Preferred Stock upon conversion or
exchange of any Convertible Securities, whether or not any adjustment in the
Purchase Price was made or required to be made upon the issuance or sale of such
Convertible Securities and whether or not such
10
<PAGE>
Convertible Securities were outstanding on the date of the original sale of the
Warrants or were thereafter issued or sold; or
(v) upon the issuance or sale of Preferred Stock or Convertible
Securities in a private placement unless the issuance or sale price is less than
85% of the fair market value of the Preferred Stock on the date of issuance, in
which case the adjustment shall only be for the difference between 85% of the
fair market value and the issue or sale price; or
(vi) upon the issuance or sale of Preferred Stock or Convertible
Securities to shareholders of any corporation which merges into the Company, or
from which the Company acquires assets and some or all of the consideration
consists of equity securities of the Company if such issuance or sale to such
shareholders is in proportion to their stock holdings of such corporation
immediately prior to the acquisition but only if no adjustment is required
pursuant to any other provision of this Section 9.
(h) Intentionally omitted.
(i) Any determination as to whether an adjustment in the Purchase
Price in effect hereunder is required pursuant to Section 9, or as to the amount
of any such adjustment, if required, shall be binding upon the holders of the
Warrants and the Company if made in good faith by the Board of Directors of the
Company.
(j) If and whenever the Company shall grant to the holders of
Preferred Stock, as such, rights or warrants to subscribe for or to purchase, or
any options for the purchase of, Preferred Stock or securities convertible into
or exchangeable for or carrying a right, warrant, or option to purchase
Preferred Stock, the Company shall concurrently therewith grant to each
Registered Holder as of the record date for such transaction of the Warrants
then outstanding, the rights, warrants, or options to which each Registered
Holder would have been entitled if, on the record date used to determine the
stockholders entitled to the rights, warrants, or options being granted by the
Company, the Registered Holder were the holder of record of the number of whole
shares of Preferred Stock then issuable upon exercise (assuming, for purposes of
this section 9(j), that exercise of warrants is permissible during periods prior
to the Initial Warrant Exercise Date) of his Warrants. Such grant by the
Company to the holders of the Warrants shall be in lieu of any adjustment which
otherwise might be called for pursuant to this Section 9.
(k) Intentionally omitted.
10. Reduction of Purchase Price and Extension of Expiration Date
------------------------------------------------------------
Notwithstanding anything herein to the contrary, the Company shall have the
right, subject to compliance with Rule 13e-4 promulgated under the Securities
Exchange Act of 1934 and the filing of Schedule 13e-4 with the Securities and
Exchange Commission, and upon not less than thirty (30) days' written notice
given to every holder of a Warrant, to reduce the Purchase Price and/or to
extend the Warrant Expiration Date.
11. Fractional Warrants and Fractional Shares.
-----------------------------------------
(a) If the number of shares of Preferred Stock purchasable upon the
exercise of each Warrant is adjusted pursuant to Section 9 hereof, the Company
nevertheless shall not be required to issue fractions of shares, upon exercise
of the Warrants or otherwise, or to distribute certificates that evidence
fractional shares. With respect to any fraction of a share called for upon any
exercise hereof, the
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<PAGE>
Company shall pay to the Holder an amount in cash equal to such fraction
multiplied by the current market value of such fractional share, determined as
follows:
(i) If the Preferred Stock is listed on a National Securities Exchange
or admitted to unlisted trading privileges on such exchange or listed for
trading on the NASDAQ Quotation System, the current value shall be the last
reported sale price of the Preferred Stock on such exchange on the last business
day prior to the date of exercise of this Warrant or if no such sale is made on
such day, the average of the closing bid and asked prices for such day on such
exchange; or
(ii) If the Preferred Stock is not listed or admitted to unlisted
trading privileges, the current value shall be the mean of the last reported bid
and asked prices reported by the National Quotation Bureau, Inc. on the last
business day prior to the date of the exercise of this Warrant; or
(iii) If the Preferred Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the current
value shall be an amount determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
12. Warrant Holders Not Deemed Stockholders. No holder of Warrants shall,
---------------------------------------
as such, be entitled to vote or to receive dividends or be deemed the holder of
Preferred Stock that may at any time be issuable upon exercise of such Warrants
for any purpose whatsoever, nor shall anything contained herein be construed to
confer upon the holder of Warrants, as such, any of the rights of a stockholder
of the Company or any right to vote for the election of directors or upon any
matter submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issue or
reclassification of stock, change of par value or change of stock to no par
value, consolidation, merger, or conveyance or otherwise), or to receive notice
of meetings, or to receive dividends or subscription rights, until such Holder
shall have exercised such Warrants and been issued shares of Preferred Stock in
accordance with the provisions hereof.
13. Rights of Action. All rights of action with respect to this Agreement
----------------
are vested in the respective Registered Holders of the Warrants, and any
Registered Holder of a Warrant, without consent of the Warrant Agent or of the
holder of any other Warrant, may, in his own behalf and for his own benefit,
enforce against the Company his right to exercise his Warrants for the purchase
of shares of Preferred Stock in the manner provided in the Warrant Certificate
and this Agreement.
14. Agreement of Warrant Holders. Every holder of a Warrant, by his
----------------------------
acceptance thereof, consents and agrees with the Company, the Warrant Agent and
every other holder of a warrant that:
(a) The Warrants are transferable only on the registry books of the
Warrant Agent by the Registered Holder thereof in person or by his attorney duly
authorized in writing and only if the Warrant Certificates representing such
Warrants are surrendered at the office of the Warrant Agent, duly endorsed or
accompanied by a proper instrument of transfer satisfactory to the Warrant Agent
and the Company in their sole discretion, together with payment of any
applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the person in
whose name the Warrant Certificate is registered as the holder and as the
absolute, true, and lawful owner of the Warrants represented thereby for all
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice or knowledge to the contrary, except as otherwise expressly provided in
Section 7 hereof.
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15. Cancellation of Warrant Certificates. If the Company shall purchase
------------------------------------
or acquire any Warrant or Warrants, the Warrant Certificate or Warrant
Certificates evidencing the same shall thereupon be delivered to the Warrant
Agent and cancelled by it and retired. The Warrant Agent shall also cancel
Preferred Stock following exercise of any or all of the Warrants represented
thereby or delivered to it for transfer, splitup, combination, or exchange.
16. Concerning the Warrant Agent. The Warrant Agent acts hereunder as
----------------------------
agent and in a ministerial capacity for the Company, and its duties shall be
determined solely by the provisions hereof. The Warrant Agent shall not, by
issuing and delivering Warrant Certificates or by any other act hereunder be
deemed to make any representations as to the validity, 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.
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 or the Redemption Price provided in this
Agreement, or to determine whether any fact exists which may require any such
adjustments, 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 facts 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 negligence or wilful misconduct.
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.
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, President, any Vice President, its Secretary, or
Assistant Secretary, (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 believed by it to be genuine.
The Company agrees to pay the Warrant Agent reasonable compensation
for its services hereunder and to reimburse it for its reasonable expenses
hereunder; it 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 negligence or wilful
misconduct.
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 negligence or wilful misconduct), after giving 30
days' prior written notice to the Company. At least 15 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.
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<PAGE>
Upon such resignation, or any inability of the Warrant Agent to act as such
hereunder, the Company shall appoint a new warrant agent in writing. If the
Company shall fail to make such appointment within a period of 15 days after it
has been notified 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. 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.
Any corporation into which the Warrant Agent or any new warrant agent
may be converted or merged or 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 trust business of the Warrant Agent shall be a
successor warrant agent under this Agreement without any further act, provided
that such corporation 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 Holder of each Warrant
Certificate.
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 effects 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.
17. Modification of Agreement. The Warrant Agent and the Company may by
-------------------------
supplemental agreement make any changes or corrections in this Agreement (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; or (ii) that they may deem necessary or desirable and which shall not
adversely affect the interests of the holders of Warrant Certificates; provided,
however, that this Agreement shall not otherwise be modified, supplemented, or
altered in any respect except with the consent in writing of the Registered
Holders of Warrant Certificates representing not less than 50% of the Warrants
then outstanding; and provided, further, that no change in the number or nature
of the securities purchasable upon the exercise of any Warrant, or the Purchase
Price therefor, or the acceleration of the Warrant Expiration Date, shall be
made without the consent in writing of the Registered Holder of the Warrant
Certificate representing such Warrant, other than such changes as are
specifically prescribed by this Agreement as originally executed or are made in
compliance with applicable law.
18. 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, registered or certified mail, postage prepaid
as follows: 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, 350 Randy Road, Carol Stream, Illinois 60188, Attention:
President, with a copy sent to Bressler, Amery & Ross, 17 State Street, New
York, NY 10004, Attention: Robert Brantl, Esq.; or at
14
<PAGE>
such other address as may have been furnished to the Warrant Agent in writing by
the Company; and if to the Warrant Agent, at its Corporate office.
19. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York, without reference to
principles of conflict of laws.
20. 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. Nothing in
this Agreement is intended or shall be construed to confer upon any other person
any right, remedy, or claim, in equity or at law, or to impose upon any other
person any duty, liability, or obligation.
21. Termination. This Agreement shall terminate at the close of business
-----------
on the Warrant Expiration Date of all the Warrants or such earlier date upon
which all Warrants have been exercised, except that the Warrant Agent shall
account to the Company for cash held by it and the provisions of Section 15
hereof shall survive such termination.
22. Counterparts. This Agreement may be executed in several counterparts,
------------
which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
MICROENERGY, INC.
By: ______________________________
Its
AMERICAN STOCK TRANSFER & TRUST
COMPANY
By: ______________________________
Its
Authorized Officer
15
<PAGE>
EXHIBIT A
---------
[Form of Face of Class A Warrant Certificate]
No.
VOID AFTER _____________________, 2000
CLASS A REDEEMABLE PREFERRED STOCK PURCHASE WARRANT CERTIFICATE
FOR PURCHASE OF PREFERRED STOCK
MICROENERGY, INC.
This certifies that FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Class A Redeemable Preferred Stock Purchase Warrants ("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 (1) fully paid and nonassessable
share of Series A Cumulative Preferred Stock, $7.00 par value, of MICROENERGY,
INC., a Delaware corporation (the "Company"), at any time after
_____________________, 1997 (the "Separation Date") 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 as
Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of
$5.25 (the "Purchase Price") in lawful money of the United States of America in
cash or by official bank or certified check made payable to MicroEnergy, Inc.
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 or the number of shares of Preferred Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modifications or adjustment.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Preferred Stock 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
_____________________, 2000, or such earlier date as the Warrants shall be
redeemed. If such date shall in the State of New York be 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 a holiday or a day on which banks are authorized to close.
<PAGE>
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, as amended, with respect to such securities is effective. The
Company has covenanted and agreed that it will file a registration statement and
will use its best efforts to cause the same to become effective and to keep such
registration statement current while any of the Warrants are outstanding. This
Warrant shall not be exercisable by a Registered Holder in any state in which it
would be unlawful for the Company to deliver the shares of Preferred Stock upon
exercise of this Warrant.
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 of this Warrant Certificate at
such office for registration of transfer, together with any transfer fee in
addition to any tax or other governmental charge imposed in connection with such
transfer, a new Warrant Certificate or Warrant Certificates representing an
equal aggregate number of Warrants will be issued to the transferee in exchange
therefor, subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder 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.
This Warrant may be redeemed at the option of the Company, at a redemption
price of $.01 per Warrant at any time after _____________________, 1997,
provided the Market Price (as defined in the Warrant Agreement) for the
Company's Preferred Stock shall exceed $7.00 per share (as provided for in the
Warrant Agreement). Notice of redemption shall be given not later than the
thirtieth day before the date fixed for redemption, all as provided in the
Warrant Agreement. On and after the date fixed for redemption, the Registered
Holder shall have no rights with respect to this Warrant except to receive the
$.01 per Warrant upon surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the Company and
the Warrant Agent may deem and treat the Registered Holder as the absolute owner
hereof and of each Warrant represented hereby (notwithstanding any notations of
ownership or writing hereon made by anyone other than a duly authorized officer
of the Company or the Warrant Agent) for all purposes and shall not be affected
by any notice to the contrary.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized, and a facsimile of its corporate seal to be imprinted hereon.
MICROENERGY, INC.
By ______________________________
Its
By ______________________________
Its
Date: ______________________________
[Seal]
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By ______________________________
Its
Authorized Officer
3
<PAGE>
[Form of Reverse of Class A Warrant Certificate]
SUBSCRIPTION FORM
To Be Executed by the Registered Holder in Order to Exercise Warrants
THE UNDERSIGNED REGISTERED HOLDER hereby irrevocably elects to
exercise _____ Warrants represented by this Warrant Certificate, and to purchase
the securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
____________________________________________
(please insert social security or other identifying number)
and be delivered to
____________________________________________
____________________________________________
____________________________________________
____________________________________________
(please print or type name and address)
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 Registered Holder
at the address stated below:
____________________________________________
____________________________________________
____________________________________________
(Address)
_________________________________
(Date)
_________________________________
(Taxpayer Identification Number)
<PAGE>
SIGNATURE GUARANTEED
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, the undersigned registered
holder hereby sells, assigns, and transfers unto
____________________________________________
(please insert social security or other identifying number)
____________________________________________
____________________________________________
____________________________________________
____________________________________________
(please print or type name and address)
all (if not all, insert number of Warrants to be transferred _________) 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 Company, with full power of
substitution in the premises.
_________________________________
(Date)
_________________________________
Signature of Registered Holder
SIGNATURE GUARANTEED
The signature to 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 a commercial bank or trust company or a member firm of the
American Stock Exchange, New York Stock Exchange, Pacific Stock Exchange or
Midwest Stock Exchange.
2
<PAGE>
EXHIBIT 4(e)
Option to Purchase
49,450 Shares of Preferred Stock
and
24,725 Warrants
MICROENERGY, INC.
PURCHASE OPTION
Dated: ___________, 1996
THIS CERTIFIES that ___________, 99 Wall Street, New York, NY
10005(hereinafter sometimes referred to as the "Holder"), is entitled to
purchase from MICROENERGY, INC. (hereinafter referred to as the "Company"), at
the prices and during the periods as hereinafter specified, up to 49,450 shares
of Series A Cumulative Preferred Stock, par value $7.00 per share ("Preferred
Stock"), and 24,725 Redeemable Class A Warrants ("Warrants"). Each Warrant
entitles the registered holder thereof to purchase one (1) share of Preferred
Stock at an exercise price of $7.00 per share. The Warrants (hereinafter, the
"Warrants") are exercisable for a three year period, commencing ___________,
1997 (one (1) year from the Effective Date). The Preferred Stock and Warrants
shall collectively be referred to as the "Securities." Hereinafter, the shares
of Preferred Stock and Warrants shall be referred to as an "Option Securities"
or "Securities."
The Securities have been registered under a Registration Statement on Form
SB-2 (File No. 333-1835) declared effective by the Securities and Exchange
Commission on ___________, 1996 (the "Registration Statement"). This Option
(the "Option") to purchase 49,450 shares of Preferred Stock and 24,725 Warrants
was originally issued pursuant to an underwriting agreement between the Company
and I. A. Rabinowitz & Co., as representative of the several underwriters (the
"Representative"), in connection with a public offering of 494,500 shares of
Preferred Stock and 247,250 Warrants (collectively, the "Public Securities")
through the Representative, in consideration of $74.18 received for the Option.
<PAGE>
Except as specifically otherwise provided herein, the Preferred Stock and
the Warrants issued pursuant to this Option shall bear the same terms and
conditions as described under the caption "Description of Securities" in the
Registration Statement, and the Warrants shall be governed by the terms of the
Warrant Agreement dated as of ___________, 1996, executed in connection with
such public offering (the "Warrant Agreement"), except that the holder shall
have registration rights under the Securities Act of 1933, as amended (the
"Act"), for the Option, the Preferred Stock and the Warrants included in the
Option, the shares of Preferred Stock underlying the Warrants, as more fully
described in paragraph 6 of this Option. In the event of any reduction of the
exercise price of the Warrants included in the Public Securities, the same
changes to the Warrants included in the Option and the components thereof shall
be simultaneously effected.
1. The rights represented by this Option shall be exercised at the
prices, subject to adjustment in accordance with paragraph 8 of this Option, and
during the periods as follows:
(a) Between ___________, 1997 (one (1) year from the Effective Date)
and ___________, 2001, inclusive, the Holder shall have the option to purchase
Preferred Stock and Warrants hereunder at prices of $8.40 and $.12, respectively
(subject to adjustment pursuant to paragraph 8 hereof) (the "Exercise Price").
(b) After __________ 2001, the Holder shall have no right to purchase
any Option Securities hereunder.
2. The rights represented by this Option may be exercised at any time
within the period above specified, in whole or in part, by (i) the surrender of
this Option (with the purchase form at the end hereof properly executed) at the
principal executive office of the Company (or such other office or agency of the
Company as it may designate by notice in writing to the Holder at the address of
the Holder appearing on the books of the Company); (ii) payment to the Company
of the Exercise Price then in effect for the number of Option Securities
specified in the above-mentioned purchase form together with applicable stock
transfer taxes, if any; and (iii) delivery to the Company of a duly executed
agreement signed by the person(s) designated in the purchase form to the effect
that such person(s) agree(s) to be bound by the provisions of paragraph 6 and
subparagraphs (b), (c) and (d) of paragraph 7 hereof. This Option
2
<PAGE>
shall be deemed to have been exercised, in whole or in part to the extent
specified, immediately prior to the close of business on the date this Option is
surrendered and payment is made in accordance with the foregoing provisions of
this paragraph 2, and the person or persons in whose name or names the
certificates for shares of Preferred Stock and Warrants shall be issuable upon
such exercise shall become the holder or holders of record of such Preferred
Stock and Warrants at that time and date. The Preferred Stock and Warrants and
the certificates for the Preferred Stock and Warrants so purchased shall be
delivered to the Holder within a reasonable time, not exceeding ten (10) days,
after the rights represented by this Option shall have been so exercised.
3. This Option shall not be transferred, sold, assigned, or hypothecated
for a period of one (1) year from the Effective Date, except that it may be
transferred to successors of the Holder, and may be assigned in whole or in part
to any person who is an officer of the Holder during such period. Any such
assignment shall be effected by the Holder (i) executing the form of assignment
at the end hereof and (ii) surrendering this Option for cancellation at the
office or agency of the Company referred to in paragraph 2 hereof, accompanied
by a certificate (signed by an officer of the Holder if the Holder is a
corporation), stating that each transferee is a permitted transferee under this
paragraph 3 hereof; whereupon the Company shall issue, in the name or names
specified by the Holder (including the Holder) a new Option or Options of like
tenor and representing in the aggregate rights to purchase the same number of
Option Securities as are purchasable hereunder.
4. The Company covenants and agrees that all shares of Preferred Stock
which may be issued as part of the Option Securities purchased hereunder, the
Preferred Stock which may be issued upon exercise of the Warrants will, upon
issuance, be duly and validly issued, fully paid and nonassessable. The Company
further covenants and agrees that during the periods within which this Option
may be exercised, the Company will at all times have authorized and reserved a
sufficient number of shares of its Preferred Stock to provide for the exercise
of this Option, and that it will have authorized and reserved a sufficient
number of shares of Preferred Stock for issuance upon exercise of the Warrants
included in the Option Securities.
3
<PAGE>
5. This Option shall not entitle the Holder to any voting, dividend, or
other rights as a stockholder of the Company.
6. (a) During the period set forth in paragraph l(a) hereof, the Company
shall advise the Holder or its transferee, whether the Holder holds the Option
or has exercised the Option and holds Option Securities or any of the securities
underlying the Option Securities, by written notice at least 30 days prior to
the filing of any post-effective amendment to the Registration Statement or of
any new registration statement or post-effective amendment thereto under the Act
covering any securities of the Company, for its own account or for the account
of others (other than a registration statement on Form S-4 or S-8 or any
successor forms thereto), and will for a period of five years from the effective
date of the Registration Statement, upon the request of the Holder, include in
any such post-effective amendment or registration statement, such information as
may be required to permit a public offering of the Option, all or any of the
Preferred Stock, or Warrants included in the Securities or the Preferred Stock
issuable upon the exercise of the Warrants (the "Registrable Securities"). The
Company shall supply prospectuses and such other documents as the Holder may
request in order to facilitate the public sale or other disposition of the
Registrable Securities, use its best efforts to register and qualify any of the
Registrable Securities for sale in such states as such Holder designates
provided that the Company shall not be required to qualify as a foreign
corporation or a dealer in securities or execute a general consent to service of
process in any jurisdiction in any action and do any and all other acts and
things which may be reasonably necessary or desirable to enable such Holders to
consummate the public sale or other disposition of the Registrable Securities,
and furnish indemnification in the manner provided in paragraph 7 hereof. The
Holder shall furnish information and indemnification as set forth in paragraph 7
except that the maximum amount which may be recovered from the Holder shall be
limited to the amount of proceeds received by the Holder from the sale of the
Registrable Securities. The Company shall use its best efforts to cause the
managing underwriter or underwriters of a proposed underwritten offering to
permit the holders of Registrable Securities requested to be included in the
registration to include such securities in such underwritten offering on the
same terms and conditions as any similar securities of the Company included
therein. Notwithstanding the foregoing, if the managing underwriter or
4
<PAGE>
underwriters of such offering advises the holders of Registrable Securities that
the total amount of securities which they intend to include in such offering is
such as to materially and adversely affect the success of such offering, then
the amount of securities to be offered for the accounts of holders of
Registrable Securities shall be eliminated, reduced, or limited to the extent
necessary to reduce the total amount of securities to be included in such
offering to the amount, if any, recommended by such managing underwriter or
underwriters (any such reduction or limitation in the total amount of
Registrable Securities to be included in such offering to be borne by the
holders of Registrable Securities proposed to be included therein pro rata).
The Holder will pay its own legal fees and expenses and any underwriting
discounts and commissions on the securities sold by such Holder and shall not be
responsible for any other expenses of such registration.
(b) If any 50% holder (as defined below) shall give notice to the
Company at any time during the period set forth in paragraph l(a) hereof to the
effect that such holder desires to register under the Act this Option or any of
the underlying securities contained in the Option Securities underlying the
Option under such circumstances that a public distribution (within the meaning
of the Act) of any such securities will be involved then the Company will
promptly, but no later than 60 days after receipt of such notice, file a post-
effective amendment to the current Registration Statement or a new registration
statement pursuant to the Act, to the end that the Option and/or any of the
Securities underlying the Option Securities may be publicly sold under the Act
as promptly as practicable thereafter and the Company will use its best efforts
to cause such registration to become and remain effective for a period of 120
days (including the taking of such steps as are reasonably necessary to obtain
the removal of any stop order); provided that such holder shall furnish the
Company with appropriate information in connection therewith as the Company may
reasonably request in writing. The 50% holder (which for purposes hereof shall
mean any direct or indirect transferee of such holder) may, at its option,
request the filing of a post-effective amendment to the current Registration
Statement or a new registration statement under the Act with respect to the
Registrable Securities on only two occasions during the term of this Option.
The Holder may at its option request the registration of the Option and/or any
of the securities underlying the Option in a registration statement made by the
Company as contemplated by
5
<PAGE>
Section 6(a) or in connection with a request made pursuant to this Section 6(b)
prior to acquisition of the Securities issuable upon exercise of the Option and
even though the Holder has not given notice of exercise of the Option. The 50%
holder may, at its option, request such post-effective amendment or new
registration statement during the described period with respect to the Option or
separately as to the Preferred Stock and/or Warrants included in the Option
and/or the Preferred Stock issuable upon the exercise of the Warrants, and such
registration rights may be exercised by the 50% holder prior to or subsequent to
the exercise of the Option. Within ten business days after receiving any such
notice pursuant to this subsection (b) of paragraph 6, the Company shall give
notice to the other holders of the Options, advising that the Company is
proceeding with such post-effective amendment or registration statement and
offering to include therein the securities underlying the Options of the other
holders. Each holder electing to include its Registrable Securities in any such
offering shall provide written notice to the Company within twenty (20) days
after receipt of notice from the Company. The failure to provide such notice to
the Company shall be deemed conclusive evidence of such holder's election not to
include its Registrable Securities in such offering. Each holder electing to
include its Registrable Securities shall furnish the Company with such
appropriate information (relating to the intentions of such holders) in
connection therewith as the Company shall reasonably request in writing. All
costs and expenses of only one such post-effective amendment or new registration
statement shall be borne by the Company, except that the holders shall bear the
fees of their own counsel and any underwriting discounts or commissions
applicable to any of the securities sold by them.
The Company shall be entitled to postpone the filing of any
registration statement pursuant to this Section 6(b) otherwise required to be
prepared and filed by it if (i) the Company is engaged in a material
acquisition, reorganization, or divestiture, (ii) the Company is currently
engaged in a self-tender or exchange offer and the filing of a registration
statement would cause a violation of Rule 10b-6 under the Securities Exchange
Act of 1934, (iii) the Company is engaged in an underwritten offering and the
managing underwriter has advised the Company in writing that such a registration
statement would have a material adverse effect on the consummation of such
offering or (iv) the Company is subject to an underwriter's lock-up as a result
of an underwritten
6
<PAGE>
public offering and such underwriter has refused in writing, the Company's
request to waive such lock-up. In the event of such postponement, the Company
shall be required to file the registration statement pursuant to this Section
6(b), within 60 days of the consummation of the event requiring such
postponement.
The Company will use its best efforts to maintain such registration
statement or post-effective amendment current under the Act for a period of at
least six months (and for up to an additional three months if requested by the
Holder) from the effective date thereof. The Company shall supply prospectuses,
and such other documents as the Holder may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Securities,
use its best efforts to register and qualify any of the Registrable Securities
for sale in such states as such holder designates, provided that the Company
shall not be required to qualify as a foreign corporation or a dealer in
securities or execute a general consent to service of process in any
jurisdiction in any action and furnish indemnification in the manner provided in
paragraph 7 hereof.
(c) The term "50% holder" as used in this paragraph 6 shall mean the
holder of at least 50% of the Preferred Stock and the Warrants underlying the
Option (or the Preferred Stock issuable upon exercise of the Warrants)
(considered in the aggregate) and shall include any owner or combination of
owners of such securities, which ownership shall be calculated by determining
the number of shares of Preferred Stock held by such owner or owners as well as
the number of shares then issuable upon exercise of the Warrants (or the
Preferred Stock issuable upon exercise of the Warrants).
7. (a) Whenever pursuant to paragraph 6 a registration statement
relating to the Option or any shares or warrants issued or issuable upon the
exercise of any Options, is filed under the Act, amended or supplemented, the
Company will indemnify and hold harmless each holder of the securities covered
by such registration statement, amendment, or supplement (such holder being
hereinafter called the "Distributing Holder"), and each person, if any, who
controls (within the meaning of the Act) the Distributing Holder, and each
underwriter (within the meaning of the Act) of such securities and each person,
if any, who controls (within the meaning of the Act) any such underwriter,
against any losses,
7
<PAGE>
claims, damages, or liabilities, joint or several, to which the Distributing
Holder, any such controlling person or any such underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any such registration statement or any preliminary prospectus or final
prospectus constituting a part thereof or any amendment or supplement thereto,
or arise out of or are based upon the omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; and will reimburse the Distributing Holder and each such controlling
person and underwriter for any legal or other expenses reasonably incurred by
the Distributing Holder or such controlling person or underwriter in connection
with investigating or defending any such loss, claim, damage, liability, or
action; provided, however, that the Company will not be liable in any such case
to the extent that any such loss, claim, damage, or liability arises out of or
is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in said registration statement, said preliminary
prospectus, said final prospectus, or said amendment or supplement in reliance
upon and in conformity with written information furnished by such Distributing
Holder or any other Distributing Holder, for use in the preparation thereof.
(b) The Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its officers who have signed said
registration statement and such amendments and supplements thereto, each person,
if any, who controls the Company (within the meaning of the Act) against any
losses, claims, damages, or liabilities, joint and several, to which the Company
or any such director, officer, or controlling person may become subject, under
the Act or otherwise, insofar as such losses, claims, damages, or liabilities
arise out of or are based upon any untrue or alleged untrue statement of any
material fact contained in said registration statement, said preliminary
prospectus, said final prospectus, or said amendment or supplement, or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in said registration statement, said preliminary prospectus,
said
8
<PAGE>
final prospectus, or said amendment or supplement in reliance upon and in
conformity with written information furnished by such Distributing Holder for
use in the preparation thereof; and will reimburse the Company or any such
director, officer, or controlling person for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability, or action.
(c) Promptly after receipt by an indemnified party under this
paragraph 7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying
party, give the indemnifying party notice of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Paragraph 7.
(d) In case any such action is brought against any indemnified party,
and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
paragraph 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof.
8. The Exercise Price in effect at any time and the number and kind of
securities purchasable upon the exercise of this Option shall be subject to
adjustment from time to time upon the happening of certain events as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Preferred Stock in shares of Preferred
Stock, (ii) subdivide or reclassify its outstanding shares of Preferred Stock
into a greater number of shares, or (iii) combine or reclassify its outstanding
shares of Preferred Stock into a smaller number of shares, the Exercise Price in
effect at the time of the record date for such dividend or distribution or of
the effective date of such subdivision,
9
<PAGE>
combination or reclassification shall be adjusted so that it shall equal the
price determined by multiplying the Exercise Price by a fraction, the
denominator of which shall be the number of shares of Preferred Stock
outstanding after giving effect to such action, and the numerator of which shall
be the number of shares of Preferred Stock outstanding immediately prior to such
action. Notwithstanding anything to the contrary contained in the Warrant
Agreement, in the event an adjustment to the Exercise Price is effected pursuant
to this Subsection (a) (and a corresponding adjustment to the number of Option
Securities is made pursuant to Subsection (d) below), the exercise price of the
Warrants shall be adjusted so that it shall equal the price determined by
multiplying the exercise price of the Warrants by a fraction, the denominator of
which shall be the number of shares of Preferred Stock outstanding immediately
after giving effect to such action and the numerator of which shall be the
number of shares of Preferred Stock outstanding immediately prior to such
action. In such event, there shall be no adjustment to the number of shares of
Preferred Stock or other securities issuable upon exercise of the Warrants.
Such adjustment shall be made successively whenever any event listed above shall
occur.
(b) In case the Company shall fix a record date for the issuance of
rights or warrants to all holders of its Preferred Stock entitling them to
subscribe for or purchase shares of Preferred Stock (or securities convertible
into Preferred Stock) at a price (the "Subscription Price") (or having a
conversion price per share) less than the current market price of the Preferred
Stock (as defined in Subsection (e) below) on the record date mentioned below,
the Exercise Price shall be adjusted so that the same shall equal the price
determined by multiplying the number of shares then comprising an Option
Securities by the product of the Exercise Price in effect immediately prior to
the date of such issuance multiplied by a fraction, the numerator of which shall
be the sum of the number of shares of Preferred Stock outstanding on the record
date mentioned below and the number of additional shares of Preferred Stock
which the aggregate offering price of the total number of shares of Preferred
Stock so offered (or the aggregate conversion price of the convertible
securities so offered) would purchase at such current market price per share of
the Preferred Stock, and the denominator of which shall be the sum of the number
of shares of Preferred Stock outstanding on such record date and the number of
additional shares of Preferred Stock offered for
10
<PAGE>
subscription or purchase (or into which the convertible securities so offered
are convertible). Such adjustment shall be made successively whenever such
rights or warrants are issued and shall become effective immediately after the
record date for the determination of shareholders entitled to receive such
rights or warrants; and to the extent that shares of Preferred Stock are not
delivered (or securities convertible into Preferred Stock are not delivered)
after the expiration of such rights or warrants the Exercise Price shall be
readjusted to the Exercise Price which would then be in effect had the
adjustments made upon the issuance of such rights or warrants been made upon the
basis of delivery of only the number of shares of Preferred Stock (or securities
convertible into Preferred Stock) actually delivered.
(c) In case the Company shall hereafter distribute to the holders of
its Preferred Stock evidences of its indebtedness or assets (excluding cash
dividends or distributions and-dividends or distributions referred to in
Subsection (a) above) or subscription rights or warrants (excluding those
referred to in Subsection (b) above), then in each such case the Exercise Price
in effect thereafter shall be determined by multiplying the number of shares
then comprising an Option Securities by the product of the Exercise Price in
effect immediately prior thereto multiplied by a fraction, the numerator of
which shall be the total number of shares of Preferred Stock outstanding
multiplied by the current market price per share of Preferred Stock (as defined
in Subsection (e) below), less the fair market value (as determined by the
Company's Board of Directors) of said assets or evidences of indebtedness so
distributed or of such rights or warrants, and the denominator of which shall be
the total number of shares of Preferred Stock outstanding multiplied by such
current market price per share of Preferred Stock. Such adjustment shall be
made successively whenever such a record date is fixed. Such adjustment shall
be made whenever any such distribution is made and shall become effective
immediately after the record date for the determination of shareholders entitled
to receive such distribution.
(d) Whenever the Exercise Price payable upon exercise of this Option
is adjusted pursuant to Subsections (a), (b) or (c) above, the number of Option
Securities purchasable upon exercise of this Option shall simultaneously be
adjusted by multiplying the number of Option Securities initially issuable upon
exercise of this Option by the Exercise Price in effect on the date hereof and
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dividing the product so obtained by the Exercise Price, as adjusted.
(e) For the purpose of any computation under Subsections (b) or (c)
above, the current market price per share of Preferred Stock at any date shall
be deemed to be the average of the daily closing prices for 20 consecutive
business days before such date. The closing price for each day shall be the last
sale price regular way or, in case no such reported sale takes place on such
day, the average of the last reported bid and asked prices regular way, in
either case on the principal national securities exchange on which the Preferred
Stock is admitted to trading or listed, or if not listed or admitted to trading
on such exchange, the average of the highest reported bid and lowest reported
asked prices as reported by NASDAQ, or other similar organization if NASDAQ is
no longer reporting such information, or if not so available, the fair market
price as determined by the Board of Directors.
(f) No adjustment in the Exercise Price shall be required unless such
adjustment would require an increase or decrease of at least fifteen cents
($0.15) in such price; provided, however, that any adjustments which by reason
of this Subsection (i) are not required to be made shall be carried forward and
taken into account in any subsequent adjustment required to be made hereunder.
All calculations under this Section 8 shall be made to the nearest cent or to
the nearest one-hundredth of a share, as the case may be. Anything in this
Section 8 to the contrary notwithstanding, the Company shall be entitled, but
shall not be required, to make such changes in the Exercise Price, in addition
to those required by this Section 8, as it shall determine, in its sole
discretion, to be advisable in order that any dividend or distribution in shares
of Preferred Stock, or any subdivision, reclassification or combination of
Preferred Stock, hereafter made by the Company shall not result in any Federal
Income tax liability to the holders of Preferred Stock or securities convertible
into Preferred Stock (including Warrants issuable upon exercise of this Option).
(g) Whenever the Exercise Price is adjusted, as herein provided, the
Company shall promptly, but no later than 10 days after any request for such an
adjustment by the Holder, cause a notice setting forth the adjusted Exercise
Price and adjusted number of Option Securities issuable upon exercise of this
Option
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and, if requested, information describing the transactions giving rise to such
adjustments, to be mailed to the Holder, at the address set forth herein, and
shall cause a certified copy thereof to be mailed to its transfer agent, if any.
The Company may retain a firm of independent certified public accountants
selected by the Board of Directors (who may be the regular accountants employed
by the Company) to make any computation required by this Section 8, and a
certificate signed by such firm shall be conclusive evidence of the correctness
of such adjustment.
(h) In the event that at any time, as a result of an adjustment made
pursuant to Subsection (a) above, the Holder thereafter shall become entitled to
receive any shares of the Company, other than Preferred Stock, thereafter the
number of such other shares so receivable upon exercise of this Option shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Preferred Stock
contained in Subsections (a) to (g), inclusive above.
9. This Agreement shall be governed by and in accordance with the laws of
the State of New York.
IN WITNESS WHEREOF, MicroEnergy, Inc., has caused this Option to be signed
by its duly authorized officers under its corporate seal, and this Option to be
dated ___________, 1996.
MICROENERGY, INC.
By: ______________________________
Robert G. Gatza
Chairman
(Corporate Seal)
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PURCHASE FORM
(To be signed only upon exercise of option)
THE UNDERSIGNED, the holder of the foregoing Option, hereby
irrevocably elects to exercise the purchase rights represented by such Option
for, and to purchase thereunder,
____ Shares of Preferred Stock, $7.00 par value per share, of MicroEnergy, Inc.
and _____ Warrants and herewith makes payment of $______________ therefor, and
requests that the Warrants and certificates for shares of Preferred Stock be
issued in the name(s) of, and delivered to _________________________ whose
address(es) is (are) _____________________________________________.
Dated:
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns, and
transfers unto _________________________________ the right to purchase
Securities, consisting of Preferred Stock and Warrants of MicroEnergy, Inc., in
the numbers set forth below represented by the foregoing Option to the extent of
_____ shares of Preferred Stock and _________ Warrants, and appoints
_________________________________ attorney to transfer such rights on the books
of MicroEnergy, Inc., with full power of substitution in the premises.
Dated:
By: ______________________________
Address:
______________________________
______________________________
______________________________
In the presence of:
