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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 1997
REGISTRATION NO. 333-26543
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 3 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
DISCAS, INC.
(Exact name of registrant as specified in its charter)
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<CAPTION>
DELAWARE 3087 06-1175400
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employee
incorporation or organization) Classification Code Number) Identification Number)
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567-1 SOUTH LEONARD STREET
WATERBURY, CT 06708
(203) 753-5147
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
MR. PATRICK A. DEPAOLO
DISCAS, INC.
567-1 SOUTH LEONARD STREET
WATERBURY, CT 06708
(203) 753-5147
(Name, address, including
zip code, and
telephone number,
including area code,
of agent for service)
COPIES TO:
Joseph A. Smith, Esq. Alexander Bienenstock, Esq.
Epstein Becker & Green, P.C. Gusrae, Kaplan & Bruno
250 Park Avenue 120 Wall Street
New York, New York 10177 New York, New York 10005
(212) 351-4924 (212) 269-1400
fax (212) 351-4928 fax (212) 809-5449
Approximate date of commencement of proposed sale to the public: As
soon as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, please 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 statement number of the
earlier effective registration statement for the same offering [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE OR WARRANT(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.0001 par value(2) 920,000 $5.00 $4,600,000 $1,393.94
Warrants to purchase one share
of Common Stock (3)(4) 920,000 $ .10 $92,000 $27.87
Common Stock, $.0001 par value (5) 920,000 $6.25 $5,750,000 $1,742.42
Selling Securityholder Warrants to
purchase Common Stock, $.0001 par value (6) 800,000 $.10 $80,000 $24.24
Common Stock, $.0001 par value, issuable upon
exercise of the Selling Securityholder 800,000 $6.25 $5,000,000 $1,515.15
Warrants(6)
Underwriters' Warrants to purchase one
share of Common Stock, $.0001 par value, and 80,000 $10 (9)
one Warrant to purchase one share of Common Stock
Common Stock, $.0001 par value, issuable upon
exercise of Underwriters' Warrants 80,000 $8.25 $660,000 $200.00
Warrants to purchase one share of Common Stock (7) 80,000 $.165 13,200 $4.00
Common Stock, $.0001 par value (8) 80,000 $6.25 $500,000 $151.51
Total $5,059.13*
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(b).
(2) Includes 120,000 shares of Common Stock which the Underwriters have the
option to purchase to cover over-allotments.
(3) Includes 120,000 Warrants to purchase one share of Common Stock which the
Underwriters have the option to purchase to cover over-allotments.
(4) Together with such indeterminate number of additional securities as may
be issued pursuant to the anti-dilution provisions of the Warrants
pursuant to Rule 416(a).
(5) Issuable upon exercise of the Warrants.
(6) Together with such indeterminate number of additional securities as may
be issued pursuant to the anti-dilution provisions of the Selling
Securityholder Warrants pursuant to Rule 416(a).
(7) Together with such indeterminate number of additional securities as may
be issued pursuant to the anti-dilution provisions of the
Underwriters' Warrants pursuant to rule 416(a).
(8) Issuable upon exercise of the Warrants issuable upon exercise of the
Underwriters' Warrants.
(9) No registration fee required pursuant to Rule 457(g).
* Previously Paid
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EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to
be used in connection with an offering of 800,000 shares of Common Stock and
800,000 Redeemable Common Stock Purchase Warrants (the "Offering Prospectus"),
and one to be used in connection with the sale of 800,000 Selling
Securityholder Warrants by certain securityholders of the Company (the
"Selling Securityholders' Prospectus"). The Offering Prospectus and the
Selling Securityholders' Prospectus will be identical in all respects except
for the alternate pages for the Selling Securityholders' Prospectus and
conforming grammatical changes.
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ITEM NUMBER ITEM CAPTION IN FORM SB-2 CAPTION IN PROSPECTUS
IN FORM SB-2
<S> <C> <C>
1.00 Front of the Registration Statement and Outside Front Cover
Page of Prospectus Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus Inside Front Cover Page; Back Cover Page
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Front Cover Page; Risk Factors;
Underwriting
6. Dilution Dilution
7. Selling Security Holders Concurrent Offering
8. Plan of Distribution Front Cover Page; Underwriting
9. Legal Proceedings Business
10. Directors, Executive Officers, Promoters, and Control Persons Management; Certain Transactions
11. Security Ownership of Certain Beneficial Owners and Management Principal Stockholders
12. Description of Securities Description of Securities
13. Interests of Named Experts and Counsel Experts, Legal Matters
14. Disclosure of Commission Position on Inapplicable
Indemnification for Securities Act Liabilities
15. Organization Within Last Five Years Inapplicable
16. Description of Business Front Cover Page; Prospectus Summary; Use of
Proceeds; Capitalization;
Management's Discussion and Analysis of Financial
Condition and Results of Operations; Business;
Management; Principal Stockholders; Description of
Securities; Financial Statements
17. Management's Discussion and Analysis or Plan of Operation Management's Discussion and Analysis of Financial
Condition and Results of Operations
18. Description of Property Business
19. Certain Relationships and Related Transactions Certain Transactions
20. Market for Common Equity and Related Stockholder Matters Risk Factors; Description of Securities;
Shares Eligible for Future Sale;
Dividend Policy
21. Executive Compensation Management
22. Financial Statements Financial Statements
23. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure Inapplicable
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5
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PROSPECTUS
DISCAS, INC.
800,000 SHARES OF COMMON STOCK AND
800,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
Discas, Inc., a Delaware corporation (the "Company"), hereby offers
800,000 shares of common stock (the "Common Stock"), par value $.0001 per
share (the "Shares"), and 800,000 Redeemable Common Stock Purchase Warrants
("Warrants"). The Shares and Warrants are being offered and sold separately
and will be separately transferable immediately upon issuance. Each Warrant
entitles the registered holder thereof to purchase, at any time over a
four-year period commencing 13 months from the date of this Prospectus, one
share of Common Stock at a price of $6.25 (the "Warrant Exercise Price"). The
Warrant Exercise Price is subject to anti-dilution adjustments under certain
circumstances. The Warrants are subject to redemption by the Company at $.10
per Warrant on 30 days' written notice commencing 13 months after the date of
this Prospectus, provided that the average closing bid price of the Common
Stock for 20 consecutive trading days, ending not more than fifteen days prior
to the date on which the Company gives notice, exceeds 150% ($9.375 per share)
of the current Warrant Exercise Price.
Prior to this offering, there has been no public market for the
Common Stock or the Warrants, and there can be no assurance that such a market
will develop after the completion of this offering, or if developed, that it
will be sustained. For information regarding the factors considered in
determining the initial public offering price of the Common Stock, see "Risk
Factors" and "Underwriting." The initial public offering price is $5.00 per
share of Common Stock and $.10 per Warrant. The Common Stock and the Warrants
have been approved for listing upon notice of issuance on The NASDAQ SmallCap
Market under the symbols "DSCS" and "DSCSW", respectively and on the Boston
Stock Exchange under the symbols "DSS" and "DSSW", respectively.
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" (PAGE 6) AND
"DILUTION" (PAGE 16) FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
6
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT AND COMPANY(2)(3)
COMMISSIONS(1)
Common Stock $5.00 $0.50 $4.50
Warrant $.10 $.01 $.09
Total(3) $4,080,000 $408,080 $3,671,920
(1) In addition, the Company has agreed to pay Roan Capital Partners L.P.
and Merit Capital Associates, Inc. (the "Underwriters") a non-accountable
expense allowance equal to 3% of the gross proceeds of this offering, and
80,000 Underwriters' Warrants to purchase 80,000 shares of Common Stock
and 80,000 Warrants, exercisable for a price of $8.25 per share of
Common Stock and $.165 per Warrant. The Company has agreed to indemnify
the Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended. For indemnification
arrangements with the Underwriters and additional compensation payable to
the Underwriters, see "Underwriting."
(2) Before deducting estimated offering expenses of $558,000, including the
Underwriters' 3% non-accountable expense allowance of $122,400 and
Underwriters' consulting fee of $85,300, payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within
45 days after the date of this Prospectus, to purchase up to an aggregate
of 120,000 additional shares of Common Stock and 120,000 additional
Warrants upon the same terms and conditions set forth above, solely to
cover over-allotments, if any (the "Over-allotment Option"). If such
Over-allotment Option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to the Company will be $4,692,000,
$469,200 and $4,222,800, respectively.
The shares of Common Stock and the Warrants are being offered by the
several Underwriters, subject to prior sale, when, as and if accepted by them,
and subject to certain conditions. It is expected that certificates for the
shares of Common Stock and the Warrants offered hereby will be available for
delivery on or about August 21, 1997 at the offices of Roan Capital Partners
L.P., 40 East 52nd Street, Tenth Floor, New York, New York 10022.
ROAN CAPITAL PARTNERS L.P. MERIT CAPITAL ASSOCIATES, INC.
The date of this Prospectus is August 13, 1997
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
SHARES OF COMMON STOCK OR THE WARRANTS OFFERED HEREBY, INCLUDING PURCHASES OF
THE SHARES OF COMMON STOCK OR THE WARRANTS TO STABILIZE THEIR MARKET PRICES OR
PURCHASES OF THE COMMON STOCK OR THE WARRANTS TO COVER SOME OR ALL OF A SHORT
POSITION IN THE COMMON STOCK OR WARRANTS MAINTAINED BY THE UNDERWRITERS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
The registration statement of which this Prospectus is a part also
covers the offering for resale by certain securityholders (the "Selling
Securityholders") of 800,000 bridge warrants (the "Selling Securityholder
Warrants"), which are identical to the Warrants being offered by the Company
herein, and the Common Stock issuable upon the exercise of the Selling
Securityholder Warrants. See "Concurrent Offering." The Selling Securityholder
Warrants and the Common Stock underlying such Selling Securityholder Warrants
are sometimes collectively referred to as the "Selling Securityholder
Securities." The Selling Securityholder Warrants are issuable to the Selling
Securityholders upon the closing of this offering upon the automatic
conversion of warrants (the "Bridge Warrants") acquired by them in the
Company's private placement in April 1997 (the "Bridge Financing"). See "Use
of Proceeds." Sales of the Selling Securityholder Warrants or the underlying
Common Stock, or the potential of such sales, may have an adverse effect on
the market price of the securities offered hereby. The Selling Securityholder
Securities may not be sold for a period of two years from the date of this
Prospectus (or earlier, commencing 13 months from the date of this Prospectus,
with the prior approval of Roan Capital Partners L.P.).
PROSPECTUS SUMMARY
The following is a summary of certain information contained in this
Prospectus and is qualified in its entirety by the more detailed information
and financial statements (including the notes thereto) appearing elsewhere in
this Prospectus. Except as otherwise noted, all information in this Prospectus
reflects a 1.35-for-1 split of the Common Stock of the Company effected on
December 31, 1996, and assumes no exercise of the Underwriters' Over-allotment
Option to purchase an additional 120,000 shares of Common Stock and 120,000
Warrants from the Company. Investors should consider carefully the information
set forth in this Prospectus under the heading "Risk Factors."
THE COMPANY
Discas, Inc. ("Discas" or the "Company"), based in Waterbury,
Connecticut, produces proprietary plastic and rubber compounds using a variety
of recycled and prime (virgin) materials. The Company has extensive expertise
in polymer technology, and has commercialized proprietary formulations used in
the manufacturing of products in the footwear, aeronautic, military,
automotive and consumer products sectors. In November 1996, the Company
acquired a manufacturer of plastic containers in New Jersey as part of its
strategy to vertically integrate its operations from raw material supply
through end product manufacturing. See "Business -- Expansion Strategy."
Historically, the Company's core business focused on the development
and marketing of niche synthetic rubber compounds such as thermoplastic
elastomers ("TPE"). In addition, Discas provides contract testing and research
services for industrial accounts, which has resulted in the development of new
materials and market applications. In recent years, Discas has extended this
technology to industrial-source scrap polymer feedstock to produce marketable
value-added plastic compounds, and management is now focused on increasing
growth in plastics through market penetration and acquisitions. See "Business
- -- Expansion Strategy."
Discas is currently using industrial scrap material to manufacture
high quality recycled polypropylene-based compounds that are used by
manufacturers in place of more expensive virgin plastics. The Company secures
its feedstock from industrial waste streams as well as limited amounts of
feedstock from post-consumer waste streams and works closely with several
regional firms that collect and process industrial scrap material for reuse.
Discas has the technological capability to modify this feedstock into
higher-value material and management believes that it can lead an industry
consolidation by continuing to build on established supplier and customer
relationships.
The Company was organized under the laws of Delaware on December 11,
1985. Its principal business address is 567-1 South Leonard Street, Waterbury,
Connecticut 06708 and its telephone number is (203) 753-5147.
8
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THE OFFERING
SECURITIES BEING OFFERED
800,000 shares of Common Stock, par value $.0001 per share, and 800,000
Redeemable Common Stock Purchase Warrants ("Warrants"). Each Warrant entitles
the holder thereof to purchase one share of Common Stock of the Company at a
Warrant Exercise Price of $6.25 per share at any time over a four year period
commencing 13 months from the date of this Prospectus. The Warrants may be
redeemed by the Company commencing 13 months from the date of this Prospectus
at a price of $.10 per Warrant on 30 days' written notice, provided the
average closing bid price of the Common Stock for 20 consecutive trading days,
ending not more than 15 days prior to the date on which the Company gives
notice, exceeds 150% ($9.375 per share) of the current Warrant Exercise Price.
The Shares and the Warrants are being offered and sold separately and will be
separately transferable immediately upon issuance. See "Description of
Securities."
SECURITIES OFFERED CONCURRENTLY BY SELLING SECURITYHOLDERS
800,000 Selling Securityholder Warrants and 800,000 shares of Common Stock
issuable upon the exercise of the Selling Securityholder Warrants. See
"Concurrent Offering." All of such Selling Securityholder Securities are
subject to a two-year "lockup" agreement in favor of Roan Capital Partners
L.P.
COMMON STOCK OUTSTANDING BEFORE
THE OFFERING
2,254,500 shares of Common Stock(1)
COMMON STOCK TO BE OUTSTANDING
AFTER OFFERING
3,214,500 shares of Common Stock(2)
USE OF PROCEEDS
The Company intends to utilize the net proceeds from this offering, estimated
at approximately $3,114,000, for repayment of $370,000 in Bridge Financing
debt, capital expenditures, working capital, future acquisitions and general
corporate purposes including sales and marketing. See "Use of Proceeds."
RISK FACTORS
The securities offered hereby involve a high degree of risk and immediate
substantial dilution. See "Risk Factors" and "Dilution."
PROPOSED NASDAQ SMALLCAP
MARKET SYMBOLS
Common Stock "DSCS"
Warrants "DSCSW"
PROPOSED BOSTON STOCK
EXCHANGE MARKET SYMBOLS
Common Stock "DSS"
Warrants "DSSW"
(1) Does not include (i) shares issuable upon exercise of outstanding warrants
held by Mr. Patrick A. DePaolo and Mantis V, L.L.C. to purchase 50,000 and
85,000 shares of Common Stock, respectively, at a price per share equal to
$2.25, (ii) shares issuable upon exercise of outstanding Selling
Securityholder Warrants to purchase an aggregate of 800,000 shares of Common
Stock at a price per share equal to $6.25 or (iii) 160,000 shares of Common
Stock into which a $1,000,000 note payable to Christie Enterprises, Inc. is
automatically convertible upon the closing of this offering.
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(2) Does not include (i) shares issuable upon exercise of outstanding warrants
held by Mr. Patrick A. DePaolo and Mantis V, L.L.C. to purchase 50,000 and
85,000 shares of Common Stock, respectively, at a price per share equal to
$2.25, (ii) shares issuable upon exercise of outstanding Selling
Securityholder Warrants to purchase an aggregate of 800,000 shares of Common
Stock at a price per share equal to $6.25 or (iii) up to an additional 240,000
shares issuable upon exercise of the Underwriters' Over-allotment Option and
underlying Warrants. Also does not include up to 160,000 shares of Common
Stock issuable upon exercise of the Underwriters' Warrants and underlying
Warrants. Includes 160,000 shares of Common Stock into which a $1,000,000 note
payable to Christie Enterprises, Inc. is automatically convertible upon the
closing of this offering. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Underwriting" and
"Description of Securities -- Underwriters' Warrants."
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SUMMARY FINANCIAL DATA
The following summary financial data should be read in conjunction
with the consolidated financial statements of the Company and of Christie
Enterprises, Inc. and related notes thereto appearing elsewhere in this
Prospectus. The Company purchased substantially all of the assets of Christie
Enterprises, Inc. in November 1996. The audited financial statements of
Christie Enterprises, Inc. are included in "Financial Statements" elsewhere in
this Prospectus. The Consolidated Statement of Operations Data for the Company
for the year ended April 30, 1997 reflects the operations of the Company
including the former Christie Enterprises, Inc. lines of business from the
date of acquisition, and the Consolidated Balance Sheet Data at April 30, 1997
includes the purchased assets. All other periods shown reflect only the
operations of the Company. See the pro forma financial statements of the
Company and of Christie Enterprises, Inc. included in "Financial Statements."
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YEAR ENDED
APRIL 30,
1997 1996
<S> <C> <C>
Consolidated Statement of Operations Data:
Sales $5,179,668 3,858,205
Cost of Sales 3,982,066 3,012,125
Gross Profit 1,197,602 846,080
Selling general and administrative expenses 1,300,859 710,302
Income (Loss) from Operations (103,257) 135,778
Net other income (expense)(1) (282,114) (56,363)
Minority interest 36,705 23,841
Earnings (Loss) before income taxes (348,666) 103,256
Income tax benefit 36,000 --
Net income (loss) $(312,666) 103,256
-------------------------------------
Pro forma net income (loss) per share(2) $(.13) $.04
Pro forma weighted average number of common 2,408,710 2,328,710(2)
and common equivalent shares outstanding
</TABLE>
APRIL 30, 1997
ACTUAL(3) AS ADJUSTED(4)
Consolidated Balance Sheet Data:
Working capital $ 90,948 3,204,948
Total assets 5,544,989 8,388,784
Total liabilities 4,693,436 3,693,436
Stockholders' equity 851,553 4,695,348
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(1) Includes a non-cash charge of $176,037 to interest expense in 1997 which
represents approximately eight months of amortization of deferred financing
costs (See Note 1(L) of Notes to the Company's audited financial
statements) in connection with the loans made to the Company by Mantis V,
L.L.C. Future amortization will approximate $29,000 per month through
July, 1998, or be expensed in full upon the early retirement of the loan.
(2) Does not include 160,000 shares of Common Stock into which a $1,000,000
note payable to Christie Enterprises, Inc. is convertible upon the
closing of this offering.
(3) Does not include (i) outstanding warrants held by Mr. Patrick A. DePaolo
and Mantis V, L.L.C. to purchase 50,000 and 85,000 shares of Common
Stock, respectively, at a price per share equal to $2.25, or (ii) 160,000
shares of Common Stock into which a $1,000,000 note payable to Christie
Enterprises, Inc. is convertible upon the closing of this offering.
(4) Includes 160,000 shares of Common Stock into which a $1,000,000 note
payable to Christie Enterprises, Inc. is convertible upon closing of this
offering, and the estimated net proceeds from this offering, but does not
include (i) outstanding warrants held by Mr. Patrick A. DePaolo and
Mantis V, L.L.C. to purchase 50,000 and 85,000 shares of Common Stock,
respectively, at a price per share equal to $2.25 or (ii) outstanding
Selling Securityholder Warrants to purchase an aggregate of 800,000
shares of Common Stock at a price per share equal to $6.25.
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RISK FACTORS
The securities offered hereby involve a high degree of risk,
including, but not limited to, the several factors described below. These
securities should be purchased only by persons who can afford a loss of their
entire investment. Investors should consider carefully the following risk
factors inherent in and affecting the business of the Company and this
offering in evaluating an investment in the securities offered hereby.
POSSIBLE NEED FOR ADDITIONAL FINANCING.
The Company is dependent on and intends to use the proceeds of this
offering to implement its plans for further growth and expansion of the
Company's business. Based on currently proposed plans and assumptions relating
to its operations, the Company anticipates that the proceeds of this offering,
together with projected cash flow from operations and available cash
resources, including its anticipated bank financing, will be sufficient to
satisfy its contemplated cash requirements for at least twelve months
following the consummation of this offering. In the event that the Company's
assumptions change or prove to be inaccurate or if the proceeds of this
offering, cash flow and available cash resources prove to be insufficient to
fund operations (due to unanticipated expenses, difficulties, problems or
otherwise including failure to obtain additional bank financing), the Company
may be required to seek additional financing or curtail its expansion
activities. The Company may in the future, depending upon the opportunities
available to it, determine to seek additional debt or equity financing to fund
the cost of continuing expansion. To the extent that the Company obtains
equity financing or finances an acquisition with equity securities, any such
issuance of equity securities could result in dilution to the interests of the
Company's stockholders. Additionally, to the extent that the Company incurs
additional indebtedness or issues debt securities in connection with an
acquisition, the Company will be subject to risks associated with incurring
substantial additional indebtedness including the possibility that cash flow
may be insufficient to pay principal and interest on any such indebtedness.
There can be no assurance that additional financing will be available to the
Company on acceptable terms, or at all. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity, Capital Resources and Other Matters."
EXPANSION STRATEGY; UNSPECIFIED ACQUISITIONS.
Management believes that future net sales and profit growth are
substantially dependent upon its ability to expand beyond its existing
supplier and customer base by obtaining additional sources of supply and
customers, through a combination of acquisitions of businesses in the recycled
plastics industry, capital investment in additional processing machinery,
developing additional facilities in new market areas and marketing within its
existing service areas. The Company may, but is not required to, expend up to
the entire $2,000,000 of otherwise unallocated net offering proceeds for this
purpose. See "Use of Proceeds." This strategy entails the risks inherent in
assessing the value, strengths, weaknesses and potential profitability of
acquisition candidates and of new facilities as well as integrating the
operations of acquired companies and newly opened facilities. There can be no
assurance that acquisition opportunities will continue to be available, that
the Company will have access to the capital required to finance potential
acquisitions or open new facilities, that the Company will continue to acquire
businesses or that any business acquired or new facilities opened will be
integrated successfully into the Company's operations or prove profitable. The
Company may finance future acquisitions by using shares of the Company's
Common Stock for all or a portion of the consideration to be paid. Such future
issuances of Common Stock, if any, could result in substantial dilution to
existing stockholders, depending upon the terms of the particular acquisition
or acquisitions. Further, stockholders will generally not have any right to
vote upon any such acquisitions unless a vote is required under Delaware law
or under proposed Nasdaq Stock Market rules which have not yet been approved
by the Securities and Exchange Commission (the "Commission"). If the Company
does not have sufficient cash resources, its growth could be limited, unless
it is able to obtain additional capital through subsequent debt or equity
financings. There can be no assurance that the Company will be able to obtain
such financing or that, if available, such financing will be on terms
acceptable to the Company. As a result, there can be no assurance that the
Company will be able to successfully implement its acquisition strategy. The
Company does not currently have any plans, proposals, arrangements or
understandings with respect to any particular acquisitions. See "Business --
Expansion Strategy."
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NO LONG-TERM AGREEMENTS WITH SUPPLIERS OR CUSTOMERS AND DEPENDENCE ON
SIGNIFICANT SUPPLIERS AND CUSTOMERS.
The Company is dependent on third party relationships with several
suppliers of scrap polymer feedstocks, the raw materials necessary to the
business of the Company. The Company does not presently have any long term
agreements with these suppliers and does not anticipate the execution of any
long term agreements in the future. The two largest suppliers, Ash-Kourt
Industries, Inc. and Borden, Inc., currently provide approximately 40% of the
Company's feedstock. The Company's existing operations and plans for future
growth anticipate the continued existence of these relationships. There can be
no assurance, however, that these relationships will be preserved. The Company
believes that it has alternative sources of supply available to it in the
event that its requirements change or its current suppliers are unable or
unwilling to fulfill the Company's needs. Nevertheless, there can be no
assurance that alternative suppliers will be available upon terms comparable
to the Company's existing arrangements.
The Company also does not presently have any long term agreements
with its customers and does not anticipate the execution of any long term
agreements in the future. Although the Company's two largest customers
accounted for approximately 74% of the Company's sales in fiscal 1996, the
Company has subsequently diversified its customer base such that in fiscal
1997, the Company's two largest customers accounted for approximately 32% of
sales and no other customer accounted for more than 10% of sales. The
Company's existing operations and plans for future growth anticipate the
continued existence of relationships with its current customers. There can be
no assurance, however, that these relationships will be preserved. See
"Business - Product Lines, Customers and Suppliers."
COMPETITION.
The compounding of polymers is a highly competitive industry. The
Company's prime and recycled products compete with a variety of polymer
materials from other companies, many of which are larger, better financed
manufacturers of prime compounds. The Company must competitively price its
products against both prime and recycled compounds if it is to successfully
build its sales volume. While the Company believes that its technical
expertise, modern facility and advanced quality control are attractive
features to potential customers, there can be no assurance that the Company
can capture adequate competitive contracts to sustain profitability, or that
other companies will not provide superior products in both price and quality.
See "Business - Competition."
RAW MATERIALS AVAILABILITY AND COMMODITY PRICING.
The scrap and prime (virgin) polymer feedstocks used by the Company
as a raw material are subject to substantial price fluctuations. Prices for
scrap feedstocks generally conform to fluctuations in prices for virgin
material, but usually remain below virgin material prices. While the Company
expects that there will continue to be an abundance of industrial scrap
polymer feedstock for use in the production of its compounds, there can be no
assurance that adequate quantities will be available or that prices the
Company may be required to pay for raw materials will allow the Company to
operate at a profit. The Company does not have any long-term contracts with
either suppliers or customers. See "Business - Product Lines, Customers and
Suppliers."
RELIANCE ON TRADE SECRETS, EVOLVING TECHNOLOGY AND COMPETITION; ABSENCE OF
PATENT PROTECTION.
The Company holds no patents to its processes nor has it applied for
any patents, although it attempts to keep proprietary the processes and
formulations it uses through confidentiality agreements with employees and
third parties. However, there can be no assurance that competitors will not
develop processes or products of comparable efficiency and quality.
Furthermore, rapid technological development may result in the Company's
processes or systems becoming obsolete. Technological competition from other
companies is expected to increase, and many of these potential competitors
have substantially greater capital resources, research and development
capabilities and marketing resources than the Company. The Company has
registered trademarks for certain of its products, but in the opinion of
management, such trademarks are not material to the Company's business as a
whole. See "Business - Competition."
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SUBSTANTIAL PORTION OF PROCEEDS ALLOCATED FOR REPAYMENT OF INDEBTEDNESS.
Approximately 12% ($370,000) of the estimated net proceeds from the
sale of the Common Stock and the Warrants has been allocated for repayment of
principal and accrued interest on the Bridge Financing subordinated notes to
the lenders of the Bridge Financing, none of whom are officers, directors or
affiliates of the Company. See "Use of Proceeds."
SUBSTANTIAL PORTION OF PROCEEDS ALLOCATED TO UNSPECIFIED GENERAL CORPORATE AND
WORKING CAPITAL PURPOSES.
Approximately 63% ($1,958,700) of the estimated net proceeds from the sale of
the Common Stock and the Warrants has been allocated to general corporate and
working capital purposes, including inventory purchases, acquisitions, sales
and marketing. Proceeds allocated to general corporate and working capital
purposes may be utilized in the discretion of the Board of Directors. As a
result, investors will not know in advance how such net proceeds will be
utilized by the Company. See "Use of Proceeds" and "Business - Expansion
Strategy." Additionally, in the event the Underwriters' Over-allotment Option
is exercised or to the extent the Warrants are exercised, the Company will
realize additional net proceeds, which will be added to working capital.
Notwithstanding its plan to develop its business as described in this
Prospectus, future events, including the problems, expenses, difficulties,
complications and delays frequently encountered by businesses, as well as
changes in the economic climate or changes in government regulations, may make
the reallocation of funds necessary or desirable. Any such reallocation will
be at the discretion of the Board of Directors. See "Use of Proceeds."
DEFERRED FINANCING COSTS.
The Company incurred deferred financing costs in connection with the
loans made to the Company by Mantis V, L.L.C. in September and December 1996.
Such costs are charged against income over the term of such loan. Such costs
amounted to $176,037 in the year ended April 30, 1997 and will equal
approximately $29,000 per month through the term of such loans in July, 1998,
or will be expensed upon earlier prepayment of such loans. Such charges are
non-cash items, and are determined by measuring the fair market value of the
270,000 shares of the Company's Common Stock at September, 1996 issued in
connection with the loan made by Mantis V, L.L.C.
DEPENDENCE UPON KEY PERSONNEL.
The success of the Company is substantially dependent upon the
efforts of its founder, Chairman of the Board, Chief Executive Officer and
President, Mr. Patrick A. DePaolo, Sr. The loss of the services of Mr.
DePaolo, or the inability to attract and retain other qualified personnel, may
adversely affect the Company's business. There is no assurance that the
Company will successfully recruit or retain personnel of the requisite caliber
or in adequate numbers to enable it to execute its business growth strategy.
The Company has a five year employment agreement with Mr. DePaolo. The Company
has a $500,000 key man life insurance policy on Mr. DePaolo. See "Management."
POSSIBLE CONFLICTS OF INTEREST.
Patrick A. DePaolo, Sr., the Company's Chairman of the Board, Chief
Executive Officer and President, and John Carroll, a director, are both
members of J-Von Group, L.L.C. ("J-Von"), a manufacturer of thermoplastic
elastomer compounds ("TPE") for the footwear and industrial markets. J-Von is
both a significant customer for the Company's raw materials and a significant
supplier of finished compounds to the Company. Further, Mr. DePaolo has
executed a non-competition agreement with J-Von whereby J-Von and Mr. DePaolo
have agreed not to sell certain specified TPE compounds to specified customers
of the other. Mr. Carroll is also a principal of several other businesses in
the plastics fabrication industry. Mr. DePaolo's employment agreement with the
Company requires that Mr. DePaolo not engage in any activities competitive
with those of the Company during the term of his employment. See "Certain
Transactions" and "Management." The Company has adopted a policy that all
future transactions, including loans, between the Company and its officers,
directors, principal stockholders and their affiliates will be approved by a
majority of the Board of Directors, including a majority of the independent
and disinterested outside directors on the Board of Directors, and will
continue to be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and be made for bona fide business
purposes.
ENVIRONMENTAL REGULATION.
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Federal, state and local environmental laws and regulations apply to
the activities of the Company and to the products it intends to produce.
Violations of statutes, regulations or environmental permit requirements, even
if unintentional, can result in significant fines, costs, revocation of
required licenses or permits or requirements for remedial work. The Company's
present and planned activities are, or may become, subject to regulation under
various federal, state and local environmental laws and regulations, including
laws and regulations that may be adopted in the future. Such regulations may
materially adversely affect the Company's existing or planned operations. Any
failure of the Company to comply with the requirements of these environmental
laws and regulations, even if unintentional, could give rise to liabilities,
penalties or fines which could have a material adverse effect on the business
or financial condition of the Company. See "Business -- Environmental and
Other Governmental Regulation."
CONTROL BY OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS.
The election of directors of the Company is controlled solely by the
Company's founder, Chairman of the Board, Chief Executive Officer and
President, Mr. Patrick A. DePaolo, Sr., who owns or has voting rights with
respect to 93.9% of the outstanding voting stock prior to this offering and
will continue to beneficially own or vote 66.3% of the outstanding voting
stock following completion of this offering. See "Principal Stockholders."
LIMITED EXPERIENCE OF UNDERWRITERS.
Roan Capital Partners L.P., including its predecessor, has been in
existence since 1993 and is principally engaged in retail brokerage, market
making activities and various corporate finance projects. Although certain
officers of Roan have corporate finance experience from previous employment,
Roan has not acted as an underwriter or placement agent of any public
offerings of securities to date. Merit Capital Associates, Inc. has
acted as underwriter for one public offering. No assurance can be given
that the Underwriters' lack of experience as underwriters will not
adversely affect this offering and the subsequent development of a liquid
public trading market in the Common Stock. See "Risk Factors -- No Assurance
of Public Market; Arbitrary Determination of Offering Price."
GENERAL ECONOMIC CONDITIONS.
The operations of the Company are subject to general economic
conditions which affect the plastics industry, particularly as a result of
fluctuating petroleum prices and the demand for virgin feedstock. Resin
prices, global competition and other economic factors affect the location and
quantity of goods produced, which consequently affect the availability and
price of recycled feedstock in North America. The Company may not have
sufficient capitalization to survive such economic exigencies. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity, Capital Resources and Other Matters."
PRODUCTS LIABILITY AND OTHER CLAIMS.
The Company may be subject to substantial products liability costs if
claims arise out of problems associated with the products of the Company. The
Company will seek to maintain the products liability coverage it currently has
in place for the benefit of the Company to protect the Company against such
liabilities, but there can be no assurance that such arrangements can be made,
or if made, will be effective to insulate the assets of the Company from such
claims. The Company will attempt to maintain insurance against such
contingencies, in scope and amount which it believes to be adequate. However,
there can be no assurance that such product liability insurance will continue
to be available, or if available, that it will adequately insure against such
claim. See "Business."
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SYSTEM.
The Company's Common Stock and Warrants have been approved for
quotation on the NASDAQ SmallCap Market upon notice of issuance. In order to
continue to qualify for listing on the NASDAQ SmallCap Market, however, a
company must have, among other things, at least $2,000,000 in total assets,
$1,000,000 in capital and surplus and a minimum bid price for its common
stock of $1.00 per share. NASDAQ has recently proposed new maintenance criteria
which, if implemented, would eliminate certain market capitalization exceptions
to the $1.00 per share minimum bid price and require, among other things
(i) either at least $2,000,000 in net tangible assets, a $35,000,000 market
capitalization or net income of at least $500,000 in two of the three prior
years, (ii)
16
<PAGE>
at least 500,000 shares in the public float valued at $1,000,000 or more,
(iii) at least two active market makers, (iv) at least 300 holders of the
Company's Common Stock and (v) adherence to certain corporate governance
provisions. However, upon completion of the offering, if the Company is
thereafter unable to continue to satisfy the listing criteria under the NASDAQ
rules, any listed security will be subject to delisting. In such an event, the
Common Stock and the Warrants may not be eligible for continued listing on the
NASDAQ SmallCap Market. As a result of delisting, trading, if any, in the
securities would be conducted on the Boston Stock Exchange if the Company's
securities are then listed thereon, or on the over-the-counter market in what
are commonly referred to as the "pink sheets," or in the "OTC Bulletin Board."
If such result occurs, an investor may find it more difficult to dispose of,
or to obtain accurate quotations as to the prices of, the Common Stock and
Warrants.
SECURITIES SUBJECT TO "PENNY STOCK" RULES IF DELISTED FROM NASDAQ AND BOSTON
STOCK EXCHANGE; RISKS OF PENNY STOCKS.
If the Company's securities are not listed on the NASDAQ SmallCap
Market or on the Boston Stock Exchange, they are subject to Rule 15g-9 under
the Exchange Act that imposes additional sales practice requirements on
broker-dealers which sell such securities to persons other than established
customers and accredited investors (generally persons with net assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse). If the Common Stock were delisted from the NASDAQ SmallCap
Market and the Boston Stock Exchange, and the Company's stock price should
fall below $5.00 per share and no other exclusion from the definition of
"penny stock" under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") were available, then the Company's Common Stock and Warrants
would be deemed "penny stock" and transactions in the Common Stock and
Warrants would be subject to the penny stock regulations which impose
significant sales practice requirements on broker-dealers, including (a)
delivering to customers the Commission's standardized disclosure statement
about "penny stocks", (b) providing to customers current bid and ask prices
for the stock, (c) disclosing to customers the broker-dealer's and sales
representative's compensation with respect to trades in the stock, and (d)
providing to customers monthly account statements reflecting the stock's then
current price. For transactions covered by this rule, the broker-dealer must
make a special suitability determination for the purchaser and have received
the purchaser's written consent to the transaction prior to purchase.
Consequently, the rule may restrict the ability of broker-dealers to sell the
Company's securities and may affect the ability of stockholders to sell their
securities in the secondary market. The loss of continued listing on the
NASDAQ SmallCap Market may also cause a decline in share price, loss of news
coverage of the Company and difficulty in obtaining subsequent financing. The
foregoing penny stock restrictions will not apply to the Company's securities
if such securities are listed on the Nasdaq SmallCap Stock Market or on a
national securities exchange such as the Boston Stock Exchange.
POTENTIAL ADVERSE IMPACT OF PREFERRED STOCK ON RIGHTS OF HOLDERS OF
COMMON STOCK.
The Company is currently authorized to issue up to a total of
20,000,000 shares of Common Stock and 5,000,000 shares of preferred stock.
There are currently 2,254,500 shares of Common Stock outstanding and no
preferred stock outstanding.
The Company's Board of Directors is authorized to issue preferred
stock in one or more series and to fix the voting powers and the designations,
preferences and relative, participating, optional or other rights and
restrictions thereof. Accordingly, the Company may issue series of preferred
stock in the future that will have preference over the Common Stock with
respect to the payment of dividends and proceeds from the Company's
liquidation, dissolution or winding up or have voting or conversion rights
which could adversely effect the voting power and percentage ownership of the
holders of the Common Stock. The Company has no plans, arrangements,
understandings or commitments to issue any preferred stock. However, the
ability of the Company to issue such additional shares and the possible
exercise of the Warrants, the Selling Securityholder Warrants and the
Underwriters' Warrants may prove to be a hindrance to future financings by
the Company since the holders of such warrants may be expected to exercise
them at times when the Company would otherwise be able to obtain additional
equity capital on terms more favorable to the Company. Also, rights granted to
future holders of preferred stock could be used to restrict the Company's
ability to merge with, or sell its assets to, a third party, and the ability
of the Board of Directors to issue preferred stock could discourage, delay or
prevent a takeover of the Company, thereby preserving control of the Company
by the current stockholders. See "Description of Securities -- Preferred
Stock."
SHARES ELIGIBLE FOR FUTURE SALE.
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<PAGE>
Upon the completion of this offering, the Company will have 3,214,500
shares of Common Stock outstanding. Of these shares, the 800,000 shares sold
by the Company in this offering will be freely-tradeable without restriction
or further registration under the Securities Act, except for any shares
purchased by an "affiliate" of the Company (as defined in the Securities Act
and the rules and regulations thereunder) which will be subject to the
limitations of Rule 144 promulgated under the Securities Act. Of the remaining
2,414,500 shares, subject to the holders' compliance with the provisions of
Rule 144, (i) 34,504 shares beneficially owned by four non-affiliates of the
Company will become tradeable in August 1997, (ii) 364,500 shares beneficially
owned by Mantis V, L.L.C., an affiliate of the Company, will become tradeable
in September 1997, (iii) 160,000 shares of Common Stock issuable upon
conversion of a note in the principal amount of $1,000,000 payable to Christie
Enterprises, Inc. upon the closing of this offering will become tradeable in
November 1997 and (iv) 1,848,646 shares beneficially owned by Patrick A.
DePaolo, Sr., Steven DePaolo and a DePaolo family limited liability company,
all affiliates of the Company, are tradeable as of the date of this
Prospectus, although all of the aforementioned shares with the exception of
those set forth in (i) and (iii) will not be freely tradeable for two years
from the date of this Prospectus pursuant to "lock-up" agreements each
shareholder has entered into with Roan Capital Partners L.P., which lock-up
may not be waived for a period of 13 months from the date of this Prospectus as
to the shares listed in (ii) above. These securities were deemed to be
"restricted securities" at the time they were purchased, as that term is
defined under Rule 144 promulgated under the Securities Act, as such shares
were issued in private transactions not involving a public offering.
In general, under Rule 144 as recently modified (which modifications
became effective April 29, 1997), subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company (or persons whose
shares are aggregated), who has beneficially owned the restricted shares of
Common Stock to be sold for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1%
of the total number of outstanding shares of the same class or, if the Common
Stock is quoted on an exchange or NASDAQ, the average weekly trading volume
during the four calendar weeks preceding the sale. A person who has not been
an affiliate of the Company for at least the three months immediately
preceding the sale and who has beneficially owned the shares of Common Stock
to be sold for at least two years is entitled to sell such shares under Rule
144 without regard to any of the limitations described above.
No prediction can be made as to the effect, if any, that sales of
shares of Common Stock or the availability of shares for sale will have on the
market prices prevailing from time to time. The possibility that substantial
amounts of Common Stock may be sold in the public market in the future may
adversely affect prevailing market prices for the Common Stock and could
impair the Company's ability to raise capital through the sale of its equity
securities. See "Shares Eligible for Future Sale."
NO ASSURANCE OF PUBLIC MARKET; ARBITRARY DETERMINATION OF OFFERING PRICE.
Prior to this offering, there has been no public market for the
shares of Common Stock or the Warrants. The initial public offering price of
the Warrants and Shares and the exercise price and other terms of the Warrants
were established by negotiations between the Company and the Underwriters and
bear no relationship to such established valuation criteria such as assets,
book value or prospective earnings. Further, given the comparatively small
size of this offering, there can be no assurance that an active public market
for the Company's securities will ever develop.
IMMEDIATE SUBSTANTIAL DILUTION; DISPARITY OF CONSIDERATION.
This offering involves an immediate and substantial dilution of $3.74
per share (75%) between the pro forma net tangible book value per share after
the offering of $1.26 and the offering price of $5.00 per share of Common
Stock. The existing stockholders of the Company, including an affiliate of
certain of its executive officers and directors, acquired their shares of
Common Stock at prices substantially lower than the initial public offering
price and, accordingly, new investors will bear substantially all of the risks
inherent in an investment in the Company. See "Dilution."
ANTI-TAKEOVER PROVISIONS.
Certain provisions of Delaware law, the Amended and Restated
Certificate of Incorporation and the Company's By-laws, as amended (the
"By-laws"), could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
control of the Company. These provisions and the prohibition against certain
business combinations could have the effect of delaying, deferring or
preventing a change in control or the removal of existing management of the
Company. See "Description of Securities." Further, the non-competition
provisions of Mr.
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DePaolo's employment agreement will not apply if he is terminated following an
involuntary change in control as defined in Section 203 of the Delaware
General Corporation Law. See "Management-Employment Agreements."
LIMITED LIABILITY OF DIRECTORS.
As permitted by the Delaware Corporation Law, the Company's Amended
and Restated Certificate of Incorporation eliminates personal liability of a
director to the Company and its stockholders for monetary damages for breach
of fiduciary duty as a director except under certain circumstances.
Accordingly, except in certain circumstances, the Company's directors will not
be liable to the Company or its stockholders for breach of such duty. See
"Management -- Indemnification and Exculpation Provisions."
UNDERWRITERS' WARRANTS.
The Company has agreed to sell to the Underwriters, at a price of $10,
the right to purchase up to 80,000 shares of Common Stock and up to 80,000
Warrants (the "Underwriters' Warrants"). Such Warrants will be exercisable for
a four-year period commencing one year from the date of this Prospectus, at
exercise prices equal to 165% of the initial public offering prices of the
Common Stock and Warrants set forth on the cover page of this Prospectus.
For the life of the Underwriters' Warrants, the holders thereof are
given the opportunity to profit from a rise in the market price of the Common
Stock and Warrants, which may result in a dilution of the interests of other
stockholders. As a result, the Company may find it more difficult to raise
additional equity capital if it should be needed for its business while such
Warrants are outstanding. See "Underwriting."
POSSIBLE RESTRICTIONS ON MARKET-MAKING ACTIVITIES IN THE COMPANY'S SECURITIES.
The Underwriters have advised the Company that they intend to make a
market in the Company's securities. Regulation M, which was recently adopted
to replace Rule 10b-6 and certain other rules promulgated under the Exchange
Act, may prohibit the Underwriters from engaging in any market-making
activities regarding the Company's securities for a period from five days (or
such applicable period as Regulation M may provide) prior to any solicitation
by either of the Underwriters of the exercise of the Warrants until the later
of the termination of such solicitation activity or the termination (by waiver
or otherwise) of any right that either of the Underwriters may have to receive
a fee for the exercise of Warrants following such solicitation. As a result,
either or both of the Underwriters may be unable to provide a market for the
Company's securities during certain periods while the Warrants are exercisable.
In addition, under applicable rules and regulations under the Exchange Act,
any person engaged in the distribution of the Selling Securityholder Securities
may not simultaneously engage in market-making activities with respect to any
securities of the Company for the applicable "cooling off" period prior to the
commencement of such distribution. Accordingly, in the event either of the
Underwriters is engaged in a distribution of the Selling Securityholder
Securities, it will not be able to make a market in the Company's securities
during the applicable restrictive period. Any temporary cessation of such
market-making activities could have an adverse effect on the market price of
the Company's securities. See "Underwriting."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS.
The Warrants may be redeemed by the Company commencing 13 months from
the date of this Prospectus, at a redemption price of $.10 per Warrant upon
not less than 30 days' prior written notice provided the average closing bid
price of the Common Stock on NASDAQ (or the last sales price if traded on a
national securities exchange) for 20 consecutive trading days, ending not more
than 30 days prior to the date of the notice of redemption, exceeds 150% of
the current Warrant Exercise Price, subject to adjustment. Redemption of the
Warrants could force the holders to exercise the Warrants and pay the exercise
price at a time when it may be disadvantageous for the holders to do so, sell
the Warrants at the then current market price when they might otherwise wish
to hold the Warrants, or to accept the redemption price, which is likely to be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities -- Warrants."
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS.
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This Prospectus contains certain forward-looking statements regarding
the plans and objectives of management for future operations, including plans
and objectives relating to the development of the Company. The forward-looking
statements included herein are based on current expectations that involve
numerous risks and uncertainties. The Company's plans and objectives are based
on a successful execution of the Company's expansion strategy and assumptions
that the Company will be profitable, that the industry will not change
materially or adversely, and that there will be no unanticipated material
adverse change in the Company's operations or business. Assumptions relating
to the foregoing involve judgments with respect to, among other things, future
economic, competitive and market conditions and future business decisions, all
of which are difficult or impossible to predict accurately and many of which
are beyond the control of the Company. Although the Company believes that its
assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could prove inaccurate and, therefore, there can be no
assurance that the forward-looking statements included in this Prospectus will
prove to be accurate. In light of the significant uncertainties inherent in
the forward-looking statements included herein, particularly in view of the
Company's recent and planned expansion, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
DIVIDENDS.
The Company has never paid cash dividends and it does not anticipate
that it will pay cash dividends on its Common Stock or alter its dividend
policy in the foreseeable future. The payment of dividends on the Common Stock
by the Company will depend on its earnings and financial condition and such
other factors as the Board of Directors of the Company may consider relevant.
The Company currently intends to retain its earnings to assist in financing
the development of its business. In addition, the Company's current senior
credit agreement prohibits the payment of cash dividends and the Company
expects that any new senior lender will similarly prohibit the payment of cash
dividends. Investors who anticipate the need for dividends on their
investments should refrain from purchasing any of the shares of Common Stock
and the Warrants offered hereby.
FOR ALL OF THE FOREGOING REASONS AND OTHERS SET FORTH IN THIS
PROSPECTUS, THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. ANY
PERSON CONSIDERING AN INVESTMENT IN THE SECURITIES OFFERED HEREBY SHOULD BE
AWARE OF THESE AND OTHER FACTORS SET FORTH IN THIS PROSPECTUS. THESE
SECURITIES SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD A TOTAL LOSS OF
THEIR INVESTMENT IN THE COMPANY.
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USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
shares of Common Stock and the Warrants offered hereby, after deducting
offering expenses payable by the Company, are estimated at approximately
$3,114,000. The Company presently intends to use the net proceeds over the 12
month period following this offering as follows:
APPROXIMATE
DOLLAR
APPLICATION OF PROCEEDS AMOUNT
Payment of consulting fee to Underwriters $85,300 (3%)
Repayment of Bridge Financing (1) 370,000 (12%)
Capital Expenditures (2) 700,000 (22%)
Working Capital (including acquisitions)(3) 1,958,700 (63%)
---------------
Total $3,114,000 (100%)
(1) Repayment of unsecured promissory notes totalling $360,000 issued to
Bridge Financing investors, plus accrued interest at the rate of 11% per
annum. All of such notes are due upon the earlier of the closing of this
offering or October 14, 1998. Approximately one-half of the net proceeds
from the sale of such notes and the simultaneous sale of 800,000 Warrants
for $40,000 (see "Interim Financing") were utilized for working capital
to support the Company's accounts receivable, and the balance was used to
pay certain of the expenses of conducting this offering. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity, Capital Resources and Other Matters."
(2) Includes extruders, densifiers, mixers and materials handling equipment.
(3) The Company purchases raw materials on an opportunistic basis and will
from time to time use a portion of the proceeds to purchase quantities of
feedstock materials. The Company has no agreement in principle with any
potential acquisition candidate and therefore cannot at this time
accurately state what percentage of the proceeds will be allocated to
acquisitions. See "Risk Factors -- Expansion Strategy; Unspecified
Acquisitions." A portion of working capital will be used to self-finance
accounts receivable (up to $500,000, assuming no increase in the Company's
existing credit facilities), and a further portion of approximately
$200,000-$300,000 will be utilized for additional sales and marketing
efforts, including the addition of sales personnel.
The allocation of the net proceeds of the offering set forth above
represents the Company's best estimate based upon its present plans. If any of
these plans change, the Company may find it necessary or advisable to
reallocate some of the proceeds within the above-described categories or to
other purposes.
Pending expenditure of the proceeds from the offering, the Company
may make temporary investments in insured interest bearing savings accounts,
insured certificates of deposit, or short term United States government
obligations. In the opinion of management, the above proceeds should be
sufficient for the Company's operations for at least the next 12 months from
the date of this offering.
DIVIDEND POLICY
The Company has never declared or paid any dividends on its Common
Stock. The present policy of its Board of Directors is to retain earnings, if
any, for use in business operations, and the Company, therefore, does not
anticipate paying any cash dividends on its Common Stock in the foreseeable
future. Further, the Company's current senior credit agreement prohibits the
payment of cash dividends and management of the Company expects that any new
lender will prohibit the payment of cash dividends.
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CAPITALIZATION
The following table sets forth the unaudited capitalization of the
Company as of April 30, 1997 and as adjusted on a pro forma basis to reflect:
(i) the conversion of the $1,000,000 convertible promissory note payable to
Christie Enterprises, Inc. into 160,000 shares of the Company's Common Stock
and (ii) the offering and the application of the net proceeds therefrom as
described under "Use of Proceeds." This table should be read in conjunction
with the historical and pro forma financial statements of the Company,
including the notes thereto, and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
APRIL 30, 1997 APRIL 30, 1997
PRO FORMA
ACTUAL AS ADJUSTED
------ -----------
<S> <C> <C>
Short-term debt, including current portion of Long-term debt $903,485 $903,485
------------------- ----------------------
Long-term debt, excluding current portion(1)(2) 2,210,878 850,878
Notes payable to related parties 123,734 123,734
Stockholders' equity:
Common Stock, $.0001 par value, 12,000,000 authorized, 225 321
2,254,500 shares issued and outstanding and 20,000,000
authorized and 3,214,500 shares issued and
outstanding proforma as adjusted (3)(4)(5)
Additional paid in capital 822,677 4,666,376
Accumulated deficit 28,651 28,651
Total stockholders' equity 851,553 4,695,348
Total capitalization $3,186,165 $5,669,960
------------------- ----------------------
</TABLE>
(1) For a description of the Company's long-term debt, see Note 9 to the
Company's consolidated financial statements.
(2) $1,000,000 in convertible promissory note payable will be converted into
160,000 shares of Common Stock upon closing of the offering.
(3) Assumes no exercise of the Underwriters' Over-allotment Option. If the
Underwriters' Over-Allotment Option is exercised in full, the adjusted
capitalization of the Company would be: Common Stock $333; Additional paid
in capital $5,198,804; Total stockholders' equity $5,227,788; Total
capitalization $6,202,400.
(4) Excludes shares issuable upon exercise of (i) the Underwriters'
Warrants to acquire up to 80,000 shares of Common Stock at a price of
$8.25 per share, and 80,000 Warrants at a price of $.165 per Warrant and
exercisable at $6.25 per share, (ii) the Underwriters' Over-Allotment
Option to purchase up to 120,000 additional shares of Common Stock and
120,000 additional Warrants, (iii) outstanding warrants held by Mr.
Patrick A. DePaolo, Sr. and Mantis V, L.L.C. to purchase 50,000 and 85,000
shares of Common Stock, respectively, at a price per share equal to $2.25
and (iv) outstanding Selling Securityholder Warrants granting holders the
right to purchase an aggregate of 800,000 shares of Common Stock at a
price per share equal to $6.25. See "Management," "Certain Transactions"
and "Underwriting."
(5) Excludes Common Stock reserved for issuance upon the exercise of
outstanding warrants or the Underwriters' Warrants. See
"Underwriting."
22
<PAGE>
DILUTION
The difference between the initial public offering price per share of
Common Stock and the pro forma net tangible book value per share after the
offering constitutes the dilution to investors in the offering. Pro forma net
tangible book value per share (after giving effect to pro forma adjustments)
is determined by dividing the pro forma net tangible book value of the Company
(total pro forma tangible assets less total liabilities) by the number of
outstanding shares of Common Stock.
The net tangible book value of the Company (total assets less total
liabilities and intangible assets) on April 30, 1997 was ($329,135) or ($.15)
per share of the outstanding 2,254,500 shares of the Company's Common Stock.
After (i) conversion of the $1,000,000 convertible promissory note
payable to Christie Enterprises, Inc. and after giving effect to (ii) the
anticipated expenses of the offering, the adjusted net tangible book value of
the Company at April 30, 1997 would have been $4,046,808 or $1.26 per share,
representing an immediate increase in net tangible book value of $1.41 to
existing stockholders and an immediate dilution of $3.74 to the purchasers of
Common Stock in the offering. The following table illustrates the per share
dilution to investors in the offering:
Initial public offering price per share (1) $5.00
Net tangible book value per share before the offering $(.15)
Increase per share attributable to conversion of
convertible promissory note payable .43
Increase per share attributable to the sale of
Common Stock in the offering (2) .98
Net tangible book value per share (2) 1.26
Dilution to new investors $3.74 (75%)
(1) Before deductions of underwriting discounts and estimated offering
expenses payable by the Company.
(2) After deduction of underwriting discounts and estimated offering expenses
payable by the Company, estimated at $704,057.
The following table sets forth as of April 30, 1997, the number of shares
of Common Stock issued by the Company, the total consideration to the Company
(excluding the non-cash effect of debt issue costs ($580,500), the
contribution of minority interest in excess of related book value ($126,128)
and without deduction of selling discounts and commissions or offering
expenses and assuming a value of $.10 per Warrant) and the average price per
share paid by existing stockholders and by the investors in the offering:
<TABLE>
<CAPTION>
AVERAGE
PRICE
SHARES ACQUIRED TOTAL CONSIDERATION PER SHARE
------------------------ ------------------------- ----------
NUMBER PERCENT AMOUNT PERCENT
- ------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1) 2,414,500 75.1% $1,116,000 21.8% $.46
Investors in offering 800,000 24.9 4,000,000 78.2 $5.00
Total 3,214,500 100.0% $5,116,000 100.0% $1.59
</TABLE>
----------------------------------------------
(1) Total consideration from existing stockholders represents the total
amounts paid after conversion of the convertible promissory note payable
but before the offering and the Concurrent Offering.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The Company produces proprietary plastic and rubber compounds using a
variety of recycled and prime (virgin) materials. The Company has extensive
experience in polymer technology, and has commercialized proprietary
formulations used in the manufacturing of plastics in the footwear,
aeronautic, military, automotive and consumer products sectors.
On November 1, 1996, the Company acquired substantially all of the assets
of Christie Enterprises, Inc. (the "Christie Acquisition"), a plastic
container manufacturer in New Jersey, which was a customer of the Company. The
purpose of the purchase was to initiate the implementation of a strategy to
integrate into businesses where the Company believes it can increase its
margins. Although the Christie operations had a recent history of losses from
operations, the Company believes that economies associated with larger
quantity buying of raw material, expansion of the Christie customer base
through new marketing programs and other economies associated with the
Company's vertical integration strategy will allow the Christie operations
to be a source of both profits and positive cash flows to the Company. Since
completion of the Christie Acquisition, its customer base has been increased
by approximately 15% and the gross profit margin on Christie operations has
been increased to approximate that of the Company's other operations.
RESULTS OF OPERATIONS
Years Ended April 30, 1997 and 1996
Sales increased by $1,321,463, or approximately 34.3%, to $5,179,668 for the
year ended April 30, 1997, as compared to $3,858,205 for the year ended April
30, 1996. The 1997 sales include $1,212,477 related to the Christie
Acquisition since the November 1, 1996 date of acquisition (approximately
23.4% of 1997 sales). The accounts receivable turnover ratio was 6.0X in
fiscal 1997 and 6.5X in fiscal 1996. The decrease is attributable to the
seasonal nature and payment pattern associated with the nursery growing
container business acquired from Christie.
Cost of goods sold increased by $969,941, or approximately 32.2%, to
$3,982,066 for the year ended April 30, 1997, compared to $3,012,125 for the
year ended April 30, 1996. The increase in cost of goods sold was attributable
to increased sales volume, principally due to the Christie Acquisition; cost
of goods sold as a percentage of sales was 76.9% for the year ended April 30,
1997 as compared to 78.1% in 1996. The decrease in cost of sales as a percent
of sales is primarily due to reductions in the cost of raw material purchases
because of the effect of buying larger quantities of raw materials. The
inventory turnover ratio was 5.1X in fiscal 1997 and 5.5X in fiscal 1996. The
decrease is attributable to the need to build inventories prior to the
principal selling season of the Christie business. Gross profit increased by
$351,522, or approximately 41.5%, to $1,197,602 for the year ended April 30,
1997, as compared to $846,080 for the year ended April 30, 1996. Such increase
was primarily attributable to the increase in sales volume and reductions in
raw material costs.
Selling, general and administrative costs increased by $590,557, or
approximately 83.1%, to $1,300,859 for the year ended April 30, 1997 as
compared to $710,302 for the year ended April 30, 1996. Such increase is
attributable to the hiring of additional personnel and associated costs for
employee benefit programs, travel and marketing as the Company started to
implement its strategy for growth. In fiscal 1997 selling, general and
administrative costs related to the Christie Acquisition amounted to
approximately $308,000, costs for new product approvals and development of a
larger and more diversified customer base amounted to approximately $94,300
and facilities expense increased approximately $60,000 because of additional
space taken by the Company. Such costs may continue to increase in the future
as the Company continues to seek growth by acquisitions. For the year ended
April 30, 1997, two customers accounted for approximately 32% of sales while
in fiscal 1996 they accounted for approximately 74% of sales. No other
customer accounted for more than 10% of the Company's sales in fiscal 1997 or
1996.
Operating income decreased by $239,035 to a loss of $103,257 for the year
ended April 30, 1997 as compared to income of $135,778 for the year ended
April 30, 1996. The decrease was primarily attributable to the additional
personnel and associated costs for employee benefit programs, travel and
marketing incurred to commence the implementation of the growth strategy of
the Company.
Deferred financing costs of $176,037 (a non-cash charge to earnings) were
incurred in fiscal 1997 (none in fiscal 1996) as a result of the stock
issuance to Mantis V, L.L.C. in connection with its $375,000 loan to the
Company. See "Business- Expansion Strategy." The debt proceeds were used to
implement significant parts of the Company's vertical integration growth
strategy, including the expansion of management, the increase and
diversification of the Company's customer base, the consummation of the
Christie Acquisition and the recapitalization of the Company. In addition,
interest costs associated with bank borrowings and equipment financing
increased by $54,064, or approximately 61.9%, to $141,356 for the year ended
April 30, 1997 as compared to $87,292 for the year ended April 30, 1996.
\
<PAGE>
Income tax benefit amounted to $36,000 for the year ended April 30, 1997
as compared to no charge or benefit in 1996. The benefit is attributable to
the net loss incurred in 1997. There was no tax charge in 1996 because of the
effect of surtax exemptions and permanent tax differences.
24
<PAGE>
As a result of the foregoing, net loss amounted to $312,666 for the year
ended April 30, 1997 as compared to net income of $103,256 for the year ended
April 30, 1996.
LIQUIDITY, CAPITAL RESOURCES AND OTHER MATTERS
The Company's primary source of liquidity has been cash flow from
operations, supplemented by borrowings under its bank credit facilities.
Additional sources of liquidity have been equipment lease financing,
borrowings from stockholders and the issuance of a convertible promissory note
in connection with the Christie Acquisition.
The Company raised gross proceeds of $400,000 (net proceeds of $318,000)
in a private placement of units in April 1997. The units sold consisted of
$360,000 11% unsecured subordinated promissory notes, all of which will be
repaid from the proceeds of this offering, and 800,000 Bridge Warrants. See
"Concurrent Offering". The exercise price for the 800,000 shares of Common
Stock associated with the Bridge Warrants is $6.25 per share. The Bridge
Warrants were valued at $.05 each, an aggregate of $40,000.
Cash flow. Net cash provided (used) by operations was ($80,240) for fiscal
1997 and $118,634 for fiscal 1996. The decrease in cash flow from operations
of $198,874 is principally attributable to the increase in the number of
employees, the requirement to build inventory levels and an increase in
interest costs as the Company positioned itself for the anticipated impact
of its growth strategy. Net cash used for the direct purchase of fixed assets
and other assets was $216,477 for fiscal 1997 and $41,450 for fiscal 1996.
In fiscal 1997, the Company financed the $1,500,000 cost of the Christie
Acquisition by a combination of borrowing $500,000 from Textron Financial
(described below) and by the issuance to the seller of a $1,000,000
convertible promissory note payable. Net short-term bank borrowings provided
funds of $210,000 for fiscal 1997 and $170,000 for fiscal 1996.
Bank Credit Facilities. At April 30, 1997 the Company had borrowing
arrangements with a commercial bank. The arrangements provided for a credit
line of up to $500,000 ($490,000 outstanding at April 30, 1997) collateralized
by substantially all of the Company's assets. The credit line called for
interest at the bank's prime rate plus 1.75%. The Company also had a term loan
with the bank with a principal balance of $224,359 at April 30, 1997 which
called for monthly principal payments of $6,173 plus interest at the bank's
prime rate plus 2%.
In June 1997, the Company concluded a credit arrangement with a new bank
which provides for a credit line of up to $700,000 on a borrowing base
consisting of 80% of eligible accounts receivable and 50% of eligible
inventory. This new credit line bears interest at the bank's prime rate plus
1%. This arrangement also provided a five-year term loan of $353,000 which was
used to pay off the old term loan and certain other term debt. The new term
loan calls for monthly principal payments of approximately $5,300 plus
interest. The term loan bears interest at the bank's prime rate plus 1%.
The Company has received a proposal from its new bank (subject to the
successful completion of this offering) to increase the line of credit
availability to $1,500,000, subject to availability, and to also provide
term loans from time to time for the purpose of the acquisition of machinery
and equipment. Interest rates pursuant to this new credit facility will
approximate those of the current arrangement. The new facilities, the proceeds
from this offering and cash flow from operations should provide sufficient
funds for the Company to meet its working capital, capital expenditure and
debt service requirement needs for the foreseeable future. Additional funds
may be required if the Company is successful in expanding its business through
internal growth and/or by acquisitions of businesses in related industries.
The current credit facilities are secured by substantially all assets of
the Company and the personal guarantee of its Chief Executive Officer, Patrick
A. DePaolo. The new credit facilities contain financial covenants which will
require the Company to maintain certain tangible net worth and debt service
coverage ratios; however, subsequent to the consummation of the offering, the
personal guarantee of Mr. DePaolo will be canceled.
In connection with the Christie Acquisition, the Company borrowed $500,000
from Textron Financial. The loan is secured by the machinery and equipment of
Christie and carries interest of 9.75% per annum and requires monthly payments
of principal and interest of $12,600 through November 2000.
The Company also had a note payable to the Connecticut Development
Authority with a principal balance of $108,407 at April 30, 1997. A portion of
the term loan included in the new credit facility was used to repay this note.
Working Capital. The Company's working capital decreased from $489,434 at
April 30, 1996 to $90,948 at April 30, 1997 or by $398,486. The decrease
relates to the due date of its prior bank term loan being accelerated to June
1997, the current portion of the note payable to Textron Financial and working
capital used to finance a portion of the costs associated with this offering.
The consummation of this offering and the execution of the new commercial bank
credit facilities will significantly improve the working capital position of
the Company.
25
<PAGE>
BUSINESS
Discas, Inc., based in Waterbury, Connecticut, produces proprietary
plastic and rubber compounds using a variety of recycled and prime (virgin)
materials. The Company has extensive expertise in polymer technology, and has
commercialized proprietary formulations used in the manufacturing of products
in the footwear, aeronautic, military, automotive and consumer products
sectors. In November 1996, the Company acquired a plastic container
manufacturer in New Jersey as part of its strategy to vertically integrate its
operations from raw material supply through end product manufacturing. See
"--Expansion Strategy."
Historically, the Company's core business focused on the development and
marketing of niche synthetic rubber compounds such as thermoplastic elastomers
("TPE"). In addition, the Company has built a portion of its business around
providing contract testing and research services for industrial accounts,
which has resulted in the development of new materials and market
applications, although revenues from such line have not been material to date.
In recent years, Discas has extended this technology to industrial-source
scrap plastic to produce marketable value-added plastic compounds, and
management is now focused on increasing growth in plastics through market
penetration and acquisitions. See "--Expansion Strategy."
Discas is currently using industrial scrap material to manufacture high
quality recycled polypropylene-based compounds that are used by manufacturers
in place of more expensive virgin plastics. The Company secures its feedstock
(raw material supply) from industrial waste streams as well as limited amounts
of feedstock from post-consumer waste streams (such as curbside recycling
programs) and works closely with several regional firms that collect and
process industrial scrap material for reuse. Discas has the technological
capability to modify this feedstock into higher-value material and management
believes that it can lead an industry consolidation by continuing to build on
established supplier and customer relationships.
THE RECYCLED PLASTICS INDUSTRY
The use of materials recycled from industrial and commercial waste streams
has begun to expand in recent years. Increasingly restrictive regulatory
requirements and higher disposal costs have focused efforts on reclaiming
scrap materials. The availability of recycled raw materials has catalyzed the
development of technology to cost-effectively incorporate their use in
existing markets alongside or in place of virgin materials. This market-driven
use of recycled materials is established within the steel, paper and aluminum
industries and, for certain polymers, is now developing into a commercially
viable sector of the plastics industry.
The market potential for compounds using recycled polymers is large.
Reclaimed plastic accounts for a small fraction of the estimated annual 70
billion pound United States plastics market, although recent trends are toward
increasingly greater market demand, according to The Society of the Plastics
Industry, Inc. Most of the existing recycled plastic is derived from the
municipal solid waste stream which yields Polyethylene Terephthalate ("PET")
and High Density Polyethylene ("HDPE") plastics from curbside and drop off
collection programs. Companies such as Wellman Inc., Eaglebrook Industries and
Pure-Tech Plastics, Inc. developed by focusing on the processing of these
post-consumer plastics into reusable commodity virgin resin substitutes.
In addition to the reuse of PET and HDPE, certain polymer compounders
including Discas have succeeded in converting scrap feedstocks such as
polypropylene, polystyrene, nylon, ground tires and other polymers into hybrid
value-added proprietary compounds. In North America, polypropylene alone is
estimated by Crain's Plastics News (Crain's International), December 30, 1996,
to be a $4 billion annual industry using primarily virgin resins. These virgin
grades are typically priced between $.35 and $.55 per pound, ranging from
commodity grades to more sophisticated custom compounds.
Discas believes there is a major opportunity in polypropylene-based
recycled materials and has developed a wide range of product lines to compete
with virgin resins offered by major polypropylene producers. Much of the raw
material used in the Discas formulations is based on polypropylene industrial
scrap that until recently had little perceived value. The waste materials used
by Discas are generated in large volumes during various manufacturing
processes and can be reprocessed for reuse or further enhanced to produce
higher value compounds for other manufacturers. Industries generating large
quantities of scrap material include the textile, carpet, molded products and
packaging sectors. One challenge facing recyclers is a perception that the use
of scrap materials entails the acceptance of lower quality standards. Thus,
the Company is particularly focused on material performance specifications in
the formulation and testing of its compounds. Management has found that the
use of less expensive recycled material as a base for its compounds results in
pricing advantages which can be passed along to the manufacturer while still
maintaining necessary quality required to meet customer technical
specifications.
26
<PAGE>
Discas has the technology and materials expertise to blend industrial
scrap feedstocks, prime material, and a variety of additives and enhancers to
produce value-added compounds for product manufacturers.
COMPANY HISTORY
In 1974, Mr. Patrick A. DePaolo, Sr. the founder, Chairman, Chief
Executive Officer, President and controlling stockholder of the Company, left
Uniroyal Chemical Corp. and established Prolastomer, Inc. ("Prolastomer") to
develop TPE custom compounds for the footwear, sporting goods, appliance and
automotive industries. Production was sub-contracted to toll compounders until
1980 when Prolastomer purchased large scale compounding equipment and became a
processor of proprietary TPE compounds. Due to market and financial
constraints, Prolastomer entered the toll compounding business in 1985 with a
large footwear contract from Shell Chemical Company. Toll compounders process
material for a client to the client's specifications, rather than for direct
sale by such compounder, and without acquiring any proprietary rights in the
material processed. Mr. DePaolo established Discas, Inc. in December, 1985 as
a separate, commonly owned corporation to separate the TPE technology and
marketing activities from Prolastomer's toll compounding business with Shell
Chemical Company. Prolastomer exited the toll manufacturing business upon
completion of the Shell contract in 1988 and ceased operations at that time.
In July 1993, Discas created a 69%-owned subsidiary, Discas Recycled Products
Corp., with four minority stockholders who were in related disciplines, in
order to manufacture products based on recycled plastics. DRPC was merged into
Discas in August, 1996, and the four minority stockholders were issued an
aggregate of 76,623 shares of Discas Common Stock (subsequently reduced to
34,504 shares by separate agreement with Mr. DePaolo).
Focused on new product development and marketing, Discas established the
REPAR Division in 1988 to apply its compounding technology to in-house and
contract research to find commercial uses for low cost scrap feedstocks.
During this period Discas expanded marketing programs and won a contract from
British Petroleum Corp. to distribute TPE. Within two years Discas increased
sales 100% and earned honors as the 128th fastest growing company in the INC
500 survey. British Petroleum Corp. subsequently sold the division purchasing
Company product to Monsanto Company, and the contract was terminated at that
time.
In 1989, Discas began supplying TPE compounds to a major footwear
manufacturer that continues to be a large customer, accounting for 20% of
fiscal 1997 sales. This relationship involved outside toll compounding
arrangements whereby the actual mixing was performed by two other companies.
In 1991, J-Von was contracted as the compounder for Discas as part of a
transaction whereby Mr. DePaolo participated in a management buyout of J-Von
from its parent. The Company now sells proprietary components of its footwear
formulations to J-Von. After mixing oil and other common ingredients into such
footwear formulations, J-Von compounds large volumes of material, tests the
batches in accordance with the Company's specifications, and ships the
finished compounds to the Company. The finished compounds, in the form of
pellets ready for molding, are then shipped to the footwear manufacturer. This
arrangement alleviates the need for the Company to purchase and maintain large
specialized mixing equipment, additional plant space and personnel dedicated
to this customer. Mr. DePaolo has entered into a non-competition agreement
with J-Von pursuant to which neither can sell certain types of virgin TPE to a
limited list of customers of the other. See "Certain Transactions" and "Risk
Factors-Possible Conflicts of Interest."
In early 1990, the Company signed a joint venture agreement with a major
international diaper manufacturer to develop technology to convert factory
polymer and cellulose diaper scrap into reusable plastic compounds. This
corporation was searching for an economically viable alternative to its costly
solid waste disposal of millions of pounds of scrap. Discas provided the
technical and manufacturing expertise for this program which included joint
investment in formulation, production process development and test marketing.
The initial marketing program was successful and resulted in the
commercialization of several compounds for applications such as containers,
VHS cassettes, footwear components, fast food trays and other consumer items.
This arrangement was completed in March 1993 and the Company exercised its
option to manufacture and market compounds using raw materials from such
corporation as well as from other suppliers.
Effective November 1, 1996, the Company acquired substantially all of the
operating assets of Christie Enterprises, Inc., a plastic container
manufacturer, through a wholly-owned subsidiary, Christie Products, Inc. See
"-- Expansion Strategy."
Discas has developed an extensive program to source a wide variety of
polymer waste feedstocks from post-consumer and post-industrial scrap
suppliers, and has formulated a broad range of high quality, competitively
priced recycled plastics and prime and recycled thermoplastic elastomers using
these materials.
PRODUCT LINES, CUSTOMERS AND SUPPLIERS
27
<PAGE>
The recent addition of new polymer sources, and increased formulation and
compounding process development has enabled Discas to expand its product
lines. The following product types give Discas a broad recycled product line
with margins that reflect the use of lower cost feedstocks in several premium
quality/higher priced applications:
--Standard Polypropylene Grades including a range of grades for serving
trays and injection molded products.
--Impact Modified Polypropylene, including rubber alloys and polymer
blends designed for applications such as automotive parts and rigid packaging.
--Custom Compounds, including color matched pre-colored and made-to-order
compounds.
--Filled and Reinforced Polypropylenes, from scrap feedstocks containing
mineral fillers and cellulose and glass reinforcing fibers for automotive and
furniture applications.
--Standard Precolored Polypropylene, including black, white, and
standardized colors available from scrap feedstocks.
--Thermoplastic Elastomers, including compounds from recycled
polypropylene and polystyrene, ground tires, scrap TPE (e.g., footwear, auto
bumpers) and other industrial waste feedstocks. Product line applications
include footwear, automotive and consumer/industrial products. The Company
also produces a substantial quantity of proprietary formulations for the
footwear industry from prime TPE feedstocks.
Discas has also developed several proprietary compounds based on recycled
scrap tires and other vulcanized rubber waste materials which can be used by
footwear manufacturers and in industrial applications. Additional product
lines currently under development include other polyolefin based compounds
such as low, linear and high density polyethylene and styrene based compounds
from recycled expanded polystyrene, engineered plastics such as Acrylonitrile
Butadiene Styrene ("ABS") and other high performance plastics for industrial
applications.
Discas has developed compounds that have been used in a range of products
representing a large number of industries. Current applications and industrial
development programs include:
VHS cassettes Writing instruments
Agriculture containers Furniture
Fast food serving trays Shelving
Color concentrates Footwear
Coat hangers Electrical connectors
Caster wheels Office products
Disposable medical products Handles and grips
Automotive components Personal care products
Flashlights Machine housings
Discas is the primary supplier of recycled material to one of the largest
manufacturers of polypropylene VHS cassettes in the world. Continued pricing
pressure from competitive Asian manufacturers of polystyrene cassettes is
forcing other North American cassette producers to consider converting to
lower cost technologies, including the use of recycled polypropylene
feedstocks. Other market driven applications include the supply of precolored
recycled polypropylene for a new line of nationally marketed writing
instruments and proprietary precolored compounds developed for the major
plastics molders supplying serving trays to McDonald's Corp. and other
fast-food chains. Recently, a Discas compound was approved by a "Big Three"
automotive company and this successful application has led to additional
opportunities for qualification of Discas materials for other automotive
interior and exterior parts. As is customary in the industry, in the
experience of management, Discas does not have ongoing supply contracts with
any of its customers. All sales made by Discas are initiated by a purchase
order at the request of a customer which may be in the form of a blanket order
covering several months' requirements.
Management of Discas believes that its focus on quality and innovation
provides one of its primary competitive advantages. Discas incorporates extra
blending steps in its manufacturing process and performs numerous sample
testings, enabling it to ensure product consistency and homogeneity. Discas is
also able, through the technical expertise and creative
28
<PAGE>
ability of its management, to create and manufacture products tailored to its
customers' unique specifications, providing the highest level of flexibility
and service.
Resulting from this reputation for quality and innovation, Discas
currently has development and testing programs in place with several leading
manufacturers of consumer products, industrial products, medical products,
footwear and automobiles in the United States. These corporations typically
fund initial research and development by Discas to create and produce
compounds which can be used in the manufacture of consumer products using
their industrial waste which has been previously unrecyclable and sent to
landfills. Such projects, if successful in creating a commercially viable
product, will enable Discas to obtain reliable sources of supply of raw
materials at a relatively low cost while maintaining the formulation as
proprietary or the rights to the new formulations or technology created, and
affording the suppliers an opportunity to earn revenue from the sale of their
waste material rather than paying for its disposal. Through fiscal 1997,
revenues from these programs have not been significant.
The Company currently depends on third party relationships with
several suppliers of scrap polymer feedstocks, the raw materials necessary to
the business of the Company. The Company does not presently have any long term
agreements with these suppliers and does not anticipate the execution of any
long term agreements in the future. The two largest suppliers, Ash-Kourt
Fabrics, Inc. and Borden, Inc., currently provide approximately 40% of the
Company's feedstock. The Company believes that it has alternative sources of
supply available to it in the event that its requirements change or its
current suppliers are unable or unwilling to fulfill the Company's needs. The
Company does not have any material backlog of orders for product.
COMPETITION
The compounding of polymers is a highly competitive industry. The
Company's prime and recycled products compete with a variety of polymer
materials from other companies, many of which are larger, better financed
manufacturers of prime compounds, including many of the major multinational
chemical manufacturers. The Company must continue to competitively price its
products against both prime and recycled compounds and meet required
performance specifications if it is to successfully build its sales volume. In
addition to pricing and material quality, the Company also competes to meet
customer volume requirements on a timely basis. The Company's capability of
using lower cost feedstocks from scrap material provides the Company with a
pricing advantage which increases with its higher-priced custom and
proprietary compounds which have higher margins than commodity products.
While the Company believes that its technical expertise, modern
facility and advanced quality control are attractive features to potential
customers, there can be no assurance that the Company can capture adequate
competitive contracts to sustain profitability, or that other companies will
not provide superior products in both price and quality.
EXPANSION STRATEGY
The Company intends to continue expanding its operations through a
combination of internal growth and vertical integration into raw material
procurement and end-product manufacturing.
In implementing this strategy in the past year, the Company has
commercialized new compounds from scrap feedstocks, increased production
capacity and diversified its customer base. New compounds include high impact
custom formulations for appliance caster wheels, custom colored compounds for
flower pots, and reinforced compounds for retail store shelving.
Company-funded research and development expenses in connection with this
product expansion has been minimal in each of the last two fiscal years. Sales
diversification is evident by a growth in the number of customers, the number
of industrial sectors and the number of formulations available to customers.
Although the Company's two largest customers accounted for approximately 74%
of the Company's sales in fiscal 1996, the Company has subsequently
diversified its customer base such that in fiscal 1997, the Company's two
largest customers accounted for approximately 32% of sales and no other
customer accounted for more than 10% of sales. The Company recently increased
compounding capacity by 25% and management believes that Discas can best
continue its growth by further expanding capacity at existing facilities as
well as through acquisitions. With its Waterbury, Connecticut facility
approaching full capacity, Discas has begun expanding and upgrading its
equipment to increase production and efficiency. A portion of the proceeds
from this offering will be used to purchase capital equipment. See "Use of
Proceeds."
With a view towards building the Company's capabilities in the area
of acquisitions, the Company added two directors to its board in November
1996, Mr. Alan Milton and Mr. Asher Bernstein, both representatives of Mantis
V, L.L.C. ("Mantis"). Mantis is an investment vehicle for Mantis Holdings,
Inc., which is an investment and business advisory firm specializing in the
environmental and recycling industries. See "Management." The principals of
Mantis, experienced in
29
<PAGE>
acquisitions in the recovered materials industries, have worked with the
Company for approximately two years helping to establish the Company's growth
strategy. In June 1996, Mantis agreed to have its representatives join the
Board of Directors and provide the Company with a loan to cover its working
capital needs in connection with the Christie Acquisition and initiation of
the joint venture negotiations with Ash-Kourt Fabrics, Inc. described below.
Over the months following the agreement, the Company drew down $375,000 from
Mantis pursuant to 8% subordinated notes due July 1998. Mantis also received
364,500 shares of Common Stock and three year warrants to purchase 85,000
shares of Common Stock at $2.25 per share, prior to completion of the Christie
Acquisition. All of such shares are subject to a two-year "lockup" agreement
in favor of Roan Capital Partners L.P.
In recent months, consistent with the consolidation strategy to
vertically integrate its operations, management began pursuing feedstock
suppliers, processors and end-product manufacturers regarding joint venture
and merger opportunities. For example, in July 1996, the Company established
AKD, L.L.C., a recycled feedstock sourcing joint venture with Ash-Kourt
Fabrics, Inc., a North Carolina-based processor of recycled polypropylene
which presently provides approximately 30% of the Company's feedstock, with a
view to further increase efficiencies by means of joint sourcing of a wider
variety of grades of scrap feedstock to lower overall purchase prices and
transportation costs of raw materials. The two companies are currently
continuing negotiations on the potential structure of such venture. Currently
Ask-Kourt is operating AKD only as an arm's-length supplier of densified raw
materials to the Company. There can be no assurance that such joint venture
will lead to the procurement of lower-cost feedstocks or provide other
commercial advantages for the Company.
In early November 1996, Discas acquired substantially all of the business
assets of Christie, a manufacturer of high-end plastic containers and products
primarily for the wholesale plant nursery industry, located in Kenilworth, New
Jersey, for a purchase price of $1,630,000 ($130,000 of which was
consideration for a consulting agreement with Frank Criscitiello, former
president of Christie, for providing continuing assistance in customer
relations and transitional advice), of which $1,000,000 is payable by Discas'
convertible promissory note, dated October 30, 1996. This note will be
converted into 160,000 shares of the Common Stock of Discas based upon a
conversion price of 125% of the initial public offering price per share of the
common stock of Discas (the "Conversion Price") upon the closing of this
offering, or the greater of the then fair value of a share of the Common Stock
of Discas and $6.00, in the event this offering is not consummated by October
1, 1997. Some of Christie's products are molded using recycled plastic
compounds that Discas has developed, and the Company plans on expanding the
use of its formulations in other product lines.
Approximately 80% of the Company's Christie subsidiary's sales are nursery
growing containers, with the balance of sales consisting of a wide variety of
heavy-duty plastic ice buckets, laundry baskets and other plastic items.
Christie's sales have historically been evenly divided between the Southeast
and the Middle Atlantic states. Since the acquisition, the Company has also
penetrated the New England market. Sales are principally made by the Company's
in-house sales staff. One customer accounted for approximately 33% of the
subsidiary's sales since the date of the acquisition (but less than 10% of
consolidated revenues). Such customer, while a long-term customer, typically
submits only quarterly purchase orders due to the seasonality and weather
factors that affect growing container requirements.
Discas management believes that further consolidation opportunities exist
and is in early stages of discussions with several suitable acquisition
candidates. The Company is particularly interested in entrepreneurial owners
who would be willing to work for the Company in key management positions
following an acquisition. Discas envisions using Common Stock as part of the
purchase price for such acquisitions, as well as for performance based
incentive compensation to attract strong management.
PROPERTY
Discas leases approximately 55,000 square feet of industrial and office
space in Waterbury, Connecticut pursuant to three triple-net leases expiring
between 1998 and 2000, all of which are extendible until 2005 at the option of
the Company. Annual base rental is currently approximately $170,000,
escalating approximately three percent annually through 2005. Offices total
approximately 4,000 square feet with adequate space to increase office
personnel as required.
The Company also owns or leases its operating equipment located in
Waterbury, including two densifiers, two guillotines, four compounding
extruder lines, six dry blending machines ranging in capacity from 100 pounds
to 6,000 pounds, five silos including two post-blending silos, several
mid-size choppers, a complete compound development laboratory, fabrication
equipment, an extensive physical testing laboratory which has been approved by
the American Council of Independent Labs, and large capacity material handling
equipment including forktrucks, blowers, augers and transfer bins. Certain of
this equipment is leased from Mr. DePaolo or his affiliates. See "Certain
Transactions."
Discas utilizes custom database software for its polymer technology
programs, including formulation development and scrap material analysis.
Computer systems are in place to support financial controls and
sourcing/purchasing.
30
<PAGE>
The Company's New Jersey facility occupies a building with 24,000 sq.
ft. of warehouse and office space. The facility is leased from an affiliate of
the former owner of Christie at rates which management believes are consistent
with current market rates through October 1997, with an option to renew for an
additional two years. Annual rental is $120,000. Equipment includes thirteen
injection molding machines with capacities from 200 tons to 700 tons. Support
equipment includes loader control units, a 75 ton water chiller, raw material
silos and other material handling equipment, as well as a modern diesel truck
for local deliveries. The Company's inventory of molds is extensive and
suitable for the production of a wide variety of nursery products and other
items. A complete machine shop is located on the site.
ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATION
Discas is subject to federal, state and local government requirements
regarding its operations and products which are applicable to manufacturing
businesses generally. Discas does not generate, store, transport or dispose of
any material amounts of hazardous waste. Most permits required in the
operations of Discas relate to fire codes and other local ordinances.
Management of Discas believes that it is in compliance with all material
regulations relating to the operation of its business. None of Discas'
products is regarded as hazardous material by the applicable regulations.
EMPLOYEES
As of March 31, 1997, Discas employed approximately 61 persons, of
whom approximately 11 employees are management, sales and administration and
the balance of whom are involved in the manufacturing process. None of Discas'
employees are covered by a collective bargaining agreement. Discas believes it
has a good relationship with its employees.
LEGAL PROCEEDINGS
Discas is not presently involved in any material legal proceedings.
31
<PAGE>
MANAGEMENT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Patrick A. DePaolo, Sr. 55 Chairman of the Board of Directors,
Chief Executive Officer and President
Thomas R. Tomaszek 45 Vice President, Marketing and Business Development and
Director
Ron Pettirossi 54 Chief Financial Officer
Al Moreno 44 Vice President, Manufacturing
Stephen P. DePaolo 32 Vice President, Materials Sourcing, Distribution and Planning
John Carroll 51 Director
Asher Bernstein 53 Director
Alan Milton 43 Director
</TABLE>
Patrick A. DePaolo, Sr., Chairman of the Board of Directors,
President and CEO. Prior to founding Discas in 1985, Mr. DePaolo worked at
Uniroyal Chemical Corp. for 11 years where he had overall responsibility for
the development and marketing of thermoplastic elastomers. In 1974, he
established Prolastomer, Inc. ("Prolastomer") to develop compounds for
footwear, sporting goods and automotive applications. Mr. DePaolo has
extensive management experience in the field of plastics compounding and
processing and is considered a leading technical expert in developing new
applications for scrap polymers. He has degrees in Chemical Engineering (B.S.)
from the University of Massachusetts at Amherst and Polymer Chemistry (M.S.)
from Southern Connecticut State University and has published articles and text
book chapters in the field of polymer chemistry. Mr. DePaolo has extensive
business experience and has founded or been a partner in several plastics
companies including J-Von, Bailey III Inc., Prolastomer, and NexVal Plastics.
Of these, only J-Von remains in existence, and the Company conducts a
substantial amount of business with J-Von. See "Certain Transactions" and
"Risk Factors - Possible Conflicts of Interest."
Thomas R. Tomaszek, Vice President, Marketing and Business
Development and Director. Mr. Tomaszek has over 20 years management experience
in plastics recycling equipment, design, and operations. In addition to his
experience in equipment and facility development, Mr. Tomaszek has held senior
marketing positions with three plastics manufacturing firms, Rapid Granulator
Company, Nelmor Company and Eaglebrook-East. He was also the manager of
manufacturing operations of Plastics Again, a Genpak and Mobil Corporation
joint venture polystyrene recycling facility and, more recently, from 1990 to
1993, founder and President of North American Plastics Recycling Corp., the
nation's first post-consumer polyethylene film and plastic bottle recycling
plant. From 1993 to 1996 he was Vice President and General Manager of
operations at SBU Operations, a recycling equipment manufacturing subsidiary
of DelCorp., Inc. Mr. Tomaszek joined Discas in April 1996.
Ron Pettirossi, Chief Financial Officer. Mr. Pettirossi became Chief
Financial Officer of the Company in February 1997. Mr. Pettirossi had been
acting Chief Financial Officer of the Company since July 1996. Mr. Pettirossi
was an audit partner for Ernst & Young L.L.P. until 1995 where he held a
variety of positions during a 31 year public accounting career. As an audit
partner, he served numerous public and privately owned companies, including
ADVO, Inc., ESPN, Inc., Reflexite Corporation, Magellan Petroleum Corporation,
the Spencer Turbine Company and Earthgro, Inc. Mr. Pettirossi worked with
senior management on a number of consulting engagements including strategic
planning, management information systems, inventory management, cost control
systems and tax planning. He graduated from the University of Massachusetts
with a B.B.A. in 1964 and is a member of the AICPA and the Connecticut Society
of Certified Public Accountants.
Al Moreno, Vice President, Manufacturing. Mr. Moreno has been the
Vice President of the Company since early 1997. Mr. Moreno worked as Plant
Manager/Purchasing/Sourcing at Converse, Inc. from 1994 until joining the
Company, and, prior to that time, he worked for 10 years as Quality Assurance
Manager and Assistant Vice President of Manufacturing at Lowell Shoe Company.
Mr. Moreno has also held management positions with Hampshire Manufacturing and
Servus Rubber Company. Mr. Moreno attended Daniel Webster College and studied
computer programming.
32
<PAGE>
Stephen P. DePaolo, Vice President, Materials Sourcing, Distribution and
Planning. Mr. DePaolo has worked at Discas in production, marketing and
purchasing since 1985 and currently manages feedstock sourcing and markets. He
has developed advertising and publicity programs covering Discas materials,
and has established approvals as suppliers to Wal-Mart Stores Inc. and
McDonald's Corp. Mr. DePaolo gained a dual B.A. degree from Northeastern
University in Business Administration and Marketing. Stephen DePaolo is the
son of Patrick A. DePaolo.
John Carroll, Director. Mr. Carroll became a director of the Company
in November 1996. Mr. Carroll is the founder, Chairman of the Board and Chief
Executive Officer of Newgrange Co., a holding company created in 1990, which
controls various commercial entities, several of which are in the polymer
industry. Prior to founding Newgrange Co., Mr. Carroll served as Chief
Financial Officer of Leach and Garner Manufacturing Co., and worked at Arthur
D. Little for 12 years as a consultant. Mr. Carroll received an M.B.A. from
the Graduate School of Business of Columbia University. Mr. Carroll is
currently a managing member of J-Von, and a director of Chesterton Co., Leach
and Garner Manufacturing Co. and ATP, Inc. See "Certain Transactions."
Asher Bernstein, Director. Mr. Bernstein is President and principal
of Bernstein Real Estate, a 70 year old company that owns or manages more than
40 commercial buildings in New York City. The firm's residential rental
division specializes in the rental of luxury apartments in Manhattan. Mr.
Bernstein also serves as a Director of AFA Protection Systems, Inc., Director
and Treasurer of the Midtown Realty Owners Association, Director of the
Fashion District Business Improvement District (BID) and as a Director of the
Avenue of the Americas Association. He received a B.A. from New York
University and an M.B.A. from the Graduate School of Business of Columbia
University. Mr. Bernstein is a member of Mantis V, L.L.C., an investor in the
Company, and became a director of the Company in November 1996.
Alan Milton, Director. Mr. Milton is a founder and Managing Director
of Mantis Holdings, Inc., a private environmental industry investment and
business advisory company focusing on manufacturers in the waste minimization
and recycling sectors. Mr. Milton has worked in the energy and environmental
industries for over 17 years with experience in project development,
regulatory compliance and pollution control technology. He currently serves as
a Director of Quadrax Corporation, Composite Particles, Inc. and Industrial
Flexible Materials, Inc. He received his M.A. degree in Environmental Affairs
from Clark University, after completing his undergraduate work in Geology and
Ecology at Clark University. Mr. Milton is a member of Mantis V, L.L.C., an
investor in the Company, and became a director of the Company in November
1996.
All directors serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. No director receives any fees
for his service as such. Messrs. Bernstein, Carroll and Milton are independent
directors of the Company, and such independent directors constitute the
Board's Audit Committee.
EMPLOYMENT AGREEMENTS
Mr. DePaolo serves as Chairman of the Board, Chief Executive Officer and
President of the Company pursuant to a five year Employment Agreement
commencing August 1, 1997 and ending on July 31, 2002. Pursuant to the
Agreement, Mr. DePaolo will receive a salary of $175,000 per year during
the first three years, with scheduled raises thereafter. The Agreement
contains a noncompetition provision and provides for payment of a bonus in
amounts to be determined by the Board of Directors based upon specified
performance criteria. The agreement further provides for such other fringe
benefits as are customary for a Chief Executive Officer in the industry in
which the Company operates. The Agreement also provides that if Mr. DePaolo
is terminated without cause (as defined in the Agreement), then the Company
will continue to pay Mr. DePaolo his scheduled salary through the remaining
term of the Agreement, without setoff for new employment by Mr. DePaolo.
It is the Company's policy to obtain confidentiality and
nondisclosure agreements from its key employees.
EXECUTIVE COMPENSATION
No employee of the Company has ever received cash compensation in excess
of $100,000 per year. The following Summary Compensation Table sets forth the
compensation earned by Patrick A. DePaolo, Sr., the Company's President, Chief
Executive Officer and Chairman of the Board of Directors.
Summary Compensation Table
33
<PAGE>
<TABLE>
<CAPTION>
OTHER
NAME AND PRINCIPAL POSITION ANNUAL COMPENSATION COMPENSATION
CASH
YEAR SALARY BONUS
- ---- --------- -------
<S> <C> <C> <C> <C>
Patrick A. DePaolo, President, Chief Executive
Officer and Chairman of the Board 1996 $50,402 0 $2,234(1)
of Directors 1995 $82,288 0 0
1994 $68,652 0 0
</TABLE>
(1) Deferred compensation.
STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "Plan") was approved by the
Company's Board of Directors and stockholders in February 1997. Options
granted under the Plan may include those qualified as incentive stock options
under Section 422 of the Internal Revenue Code of 1986, as amended, as well as
non-qualified options. Employees as well as other individuals, such as outside
directors, who provide necessary services to the Company are eligible to
participate in the Plan. Non-employees and part-time employees may receive
only non-qualified stock options. The maximum number of shares of Common Stock
for which options may be granted under the Plan is 450,000 shares. Following
the closing of this offering, the Company will issue Mr. DePaolo an option to
purchase 150,000 shares which will expire no later than April 30, 2002,
exercisable at $7.50 per share only at such time as the Company's audited
financial statements show after tax net income equal to or exceeding $0.15 per
share.
The Plan is administered by a Compensation Committee of the Board of
Directors (the "Committee") which may consist of the entire Board of Directors
or a subcommittee thereof. Messrs. DePaolo and Milton are the current members.
The Committee has wide latitude in determining the recipients of options and
numerous other terms and conditions of the options.
However, prior to the issuance of any option, the Company must provide to
Roan Capital Partners L.P. (i) an opinion of a reputable investment banking
firm acceptable to Roan Capital Partners L.P. stating that the consideration
being paid for the acquisition of securities is fair from a financial point of
view if such option is issued with an exercise price below the current market
price, and (ii) a signed lock-up agreement pursuant to which the intended
recipient agrees not to publicly sell any shares owned by them for a period of
the latter of two years from the date of this Prospectus and six months from
issuance.
The exercise price for shares purchased upon the exercise of non-qualified
options granted under the Plan is determined by the Committee. The exercise
price of an incentive stock option must be at least equal to the fair market
value of the Common Stock on the date such option is granted (110% of the fair
market value for stockholders who, at the time the option is granted, own more
than 10% of the total combined classes of stock of the Company or any
subsidiary). No employees may be granted incentive stock options in any year
for shares having a fair market value, determined as of the date of grant, in
excess of $100,000. The exercise price of a non-qualified stock option cannot
be less than 85% of the fair market value of the Common Stock on the date of
grant.
No option may have a term of more than ten years (five years for 10% or
greater stockholders). Options generally may be exercised only if the option
holder remains continuously associated with the Company or a subsidiary from
the date of grant to the date of exercise. However, options may be exercised
upon termination of employment or upon the death or disability of any employee
within certain specified periods.
INDEMNIFICATION AND EXCULPATION PROVISIONS
The Company's Amended and Restated Certificate of Incorporation limits the
liability of its directors to the fullest extent permitted by the Delaware
General Corporation Law. Specifically, directors of the Company will not be
personally liable for monetary damages for breach of fiduciary duty as
directors, except for liability for (i) any breach of the duty of loyalty to
the Company or its stockholders, (ii) acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) acts
falling under Section 174 of the General Corporation Law of the State of
Delaware or (iv) any transaction from which the director derives an improper
personal benefit. Liability under federal securities law is not limited by the
Amended and Restated Certificate of Incorporation.
34
<PAGE>
The Delaware General Corporation Law states that the Company may
indemnify any director, officer or employee made or threatened to be made a
party to a proceeding, by reason of the former or present official capacity of
the person, against judgments, penalties, fines, settlements and reasonable
expenses incurred by the person in connection with the proceeding if certain
statutory standards are met. "Proceeding" means a threatened, pending or
completed civil, criminal, administrative, arbitration or investigative
proceeding, including a derivative action in the name of the Company.
Reference is made to the detailed terms of the Delaware indemnification
statute for a complete statement of such indemnification rights. The Company's
Restated Bylaws require the Company to provide indemnification to the fullest
extent allowed in the indemnification statute.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling
the Company pursuant to the foregoing provisions, the Company is aware that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
CERTAIN TRANSACTIONS
The Company is indebted to Patrick A. DePaolo Sr., the Chairman, Chief
Executive Officer, President and controlling stockholder, in the amount of
$123,734 for working capital and equipment purchase loans made in 1993 and
1995. Such loans are accruing interest at rates between 6.00% to 8.00%. While
such loans are payable upon demand by their respective terms, actual payment
of principal and interest is prohibited by the terms of the Company's senior
commercial loan agreement until such bank loan is paid in full. In addition,
Mr. DePaolo has agreed with the Underwriters not to repay any of such loans
out of the proceeds of this offering or prior to July 31, 1998 without the
prior consent of the Underwriters.
Mr. DePaolo has personally guaranteed the Company's present
commercial bank lending facility. Such guarantee will terminate upon closing
of this offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity, Capital Resources and Other
Matters."
Pastanch L.L.C. ("Pastanch"), which is owned by members of the
DePaolo family, has provided financing in the forms of leases and the purchase
of certain processing equipment used by the Company. One lease is for a period
of two years ending April 30, 1998 and provides for a monthly rental of
$2,200. The Company has an option to purchase the equipment at the end of the
term at its then fair market value. This equipment was purchased by Pastanch
and leased to the Company in order to maintain compliance by the Company with
certain bank loan covenants restricting capital expenditures. In addition,
Pastanch has purchased other processing equipment needed by the Company to
meet current production and sampling requirements and has agreed to sell this
equipment at its total cost of $80,000 for cash to be paid following the
closing of this offering. Pastanch may from time to time offer additional
equipment to Discas at fair market prices in conjunction with Pastanch's
business as an investor/dealer in capital equipment.
Patrick A. DePaolo owns 8% of J-Von Group, L.L.C. ("J-Von"), a
compounder of thermoplastic elastomers, primarily for the footwear industry,
to which the Company sold $128,000 of feedstocks in fiscal 1996 and $671,000
in fiscal 1997, and from which the Company purchased approximately $140,000 of
finished goods in fiscal 1996 and $650,000 in fiscal 1997. The Company has a
non-competition agreement with J-Von pursuant to which the Company and J-Von
have each agreed not to make sales of virgin styrenic SBS and SEBS
thermoplastic elastomers to certain principal customers of the other. The
business of J-Von may be considered to be competitive with the TPE product
lines of the Company. Mr. DePaolo is a director of, but does not have a
management function with, J-Von, which is privately held. John Carroll, a
director of the Company, is a managing member of J-Von. See "Risk Factors -
Possible Conflicts of Interest."
The Company borrowed $375,000 from Mantis V, L.L.C. in 1996 and early 1997
pursuant to three notes bearing interest at 8% due July 1998. Such loans were
used to fund the Company's working capital needs subsequent to the Christie
Acquisition. In conjunction with the funding of such loans, Messrs. Asher
Bernstein and Alan Milton, who are members of Mantis V, L.L.C., were elected
to the Board of Directors of the Company. The Company intends to prepay such
loan at such time as it completes an expansion of its commercial bank debt
with a total loan availability of at least $1,000,000 and in no event may the
Company repay such loan prior to 110 days following the date of this
Prospectus. The Company also pays Mantis Holdings, Inc., an affiliate of the
managing members of Mantis V, L.L.C., a monthly consulting fee of $3,500 for
financial and business advisory services pursuant to a two-year agreement. The
Company paid Mantis Holdings, Inc. an engagement fee of $15,000 at inception
of the agreement. Mantis Holdings, Inc. waived its monthly fees for the first
three months of the agreement.
35
<PAGE>
The Company believes that all of the transactions set forth above
were made on terms no less favorable to the Company than could have been
obtained from unaffiliated third parties. The Company has adopted a policy
that all future transactions, including loans between the Company and its
officers, directors, principal stockholders and their affiliates will be
approved by a majority of the Board of Directors, including a majority of the
independent and disinterested outside directors on the Board of Directors, and
will continue to be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and be made for bona fide business
purposes.
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Common Stock as of the date of this Prospectus, as adjusted
to reflect the sale of the Common Stock by the Company pursuant to this
offering, and by (i) each person known by the Company to own beneficially more
than 5% of the outstanding Common Stock; (ii) each director of the Company,
and (iii) all officers and directors as a group. Except as otherwise indicated
below, each of the entities or persons named in the table has sole voting and
investment powers with respect to all shares of Common Stock beneficially
owned by it or him as set forth opposite its or his name.
<TABLE>
<CAPTION>
SHARES PERCENT OWNED PERCENT OWNED
BENEFICIALLY PRIOR TO OFFERING AFTER OFFERING
NAME AND ADDRESS (3) OWNED (1)(2)
<S> <C> <C> <C>
Patrick A. DePaolo, Sr.(4) 2,164,981 93.9% 66.3%
Mantis V, L.L.C.(5) 449,500 19.2% 13.6%
c/o Mantis Holdings, Inc.
250 Park Avenue
New York, New York 10177
Alan Milton(5) 449,500 19.2% 13.6%
c/o Mantis Holdings, Inc.
250 Park Avenue
New York, New York 10177
Asher Bernstein(5) 449,500 19.2% 13.6%
c/o Bernstein Real Estate
855 Avenue of the Americas
New York, NY 10001
Christie Enterprises, Inc.(6) 160,000 6.6% 4.7%
80 Market Street
Kenilworth, New Jersey 07033
Stephen P. DePaolo 30,969 1.4% (7)
Thomas R. Thomaszek -0- -0- -0-
John Carroll -0- -0- -0-
Ron Pettirossi -0- -0- -0-
Al Moreno -0- -0- -0-
All officers and directors as a group (8 persons) 2,297,200 96.1% 68.5%
</TABLE>
(1) Except as otherwise noted, the persons named have sole voting and
investment power with respect to all shares beneficially owned by them.
(2) For purposes of this table, a person or group of persons is deemed to
have "beneficial ownership" of any shares that such person or group has
the right to acquire within 60 days after such date and for purposes of
computing the percentage of outstanding shares held by each person or
group on a given date, such shares are deemed to be outstanding.
(3) Unless as otherwise indicated, the address of each beneficial owner is
c/o Discas, Inc., 567-1 South Leonard Street, Waterbury, CT 06708.
(4) This amount includes 1,546,392 shares held in Patrick A. DePaolo's name,
271,285 shares held in a family limited liability company, warrants to
purchase 50,000 shares of Common Stock at $2.25 per share, 263,250 shares
of the 364,500 shares owned by Mantis V, L.L.C. and 34,054 shares owned
by four other stockholders which Mr. DePaolo has the right to vote
pursuant to a voting trust for a period of five years.
(5) Alan Milton and Asher Bernstein, directors of the Company, have a
beneficial interest in Mantis V, L.L.C. The number of shares includes
warrants to purchase 85,000 shares of Common Stock at $2.25 per share.
263,250 of the 364,500 shares owned by Mantis V, L.L.C. are held in a
voting trust, granting voting rights to Patrick A. DePaolo for a period
of five years. Mr. Bernstein disclaims beneficial ownership of all
except 27,000 shares of Common Stock and 13,500 of such warrants.
(6) Issuable upon conversion of a note in the principal amount of $1,000,000
convertible into 160,000 shares of Common Stock upon closing of this
offering.
(7) Less than 1%.
CONCURRENT OFFERING
36
<PAGE>
The registration statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering by the Selling
Securityholders of 800,000 Selling Securityholder Warrants, which are
identical to Warrants being offered by the Company herein, and the Common
Stock issuable upon exercise of the Selling Securityholder Warrants. The
Selling Securityholder Warrants are being issued to the Selling
Securityholders as of the date of this Prospectus upon the automatic
conversion of all of the Company's outstanding Bridge Warrants. These Selling
Securityholder Warrants are identical to the Warrants offered hereby. All of
the Selling Securityholder Warrants issued upon conversion of the Bridge
Warrants and the Common Stock issuable upon the exercise of the Warrants will
be registered, at the Company's expense, under the Securities Act, and are
expected to become tradeable without further registration following the
expiration or termination of the "lock-up" agreement described below.
The Selling Securityholder Warrants are subject to two contractual
restrictions which state that (i) the Selling Securityholder Warrants may not
be exercised until 13 months from the date of this Prospectus and (ii) the
Selling Securityholder Warrants or the Common Stock issuable upon exercise of
the Selling Securityholder Warrants may not be sold, assigned, pledged,
hypothecated or otherwise disposed of until 24 months from the date of this
Prospectus (or commencing 13 months from the date of this Prospectus with the
consent of Roan Capital Partners L.P.). After the 24 month period following the
date of this Prospectus (or commencing 13 months from the date of this
Prospectus with the consent of Roan Capital Partners L.P.), the Selling
Securityholders may sell the Selling Securityholder Warrants or the Common
Stock issuable upon exercise of the Selling Securityholder Warrants without
restriction if a current prospectus relating to such Selling Securityholder
Warrants and the Common Stock issuable upon exercise of the Selling
Securityholder Warrants is in effect and the securities are qualified
for sale under any applicable state laws. The Company will not receive any
proceeds from the sale of the Selling Securityholder Warrants. Sales of Selling
Securityholder Warrants issued upon conversion of Bridge Warrants or the
securities underlying such Selling Securityholder Warrants or even the
potential of such sales could have an adverse effect on the market prices of
the Common Stock and the Warrants.
There are no material relationships between any of the Selling
Securityholders and the Company, nor have any such material relationships
existed within the past three years. The Company has been informed by the
Underwriters that there are no agreements between the Underwriters and
any Selling Securityholder regarding the distribution of the Selling
Securityholder Warrants or the underlying securities.
The sale of the securities by the Selling Securityholders may be
effected from time to time in transactions (which may include block
transactions by or for the account of the Selling Securityholders) in the
over-the-counter market or in negotiated transactions, a combination of such
methods of sale or otherwise. Sales may be made at fixed prices which may be
changed, at market prices in negotiated transactions, a combination of such
methods of sale or otherwise.
Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter to sell the securities from time to time in the
over-the-counter market, in negotiated transactions or otherwise. Such
broker-dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers for whom such broker-dealer may act as agent or to whom they may
sell as principals or otherwise (which compensation as to a particular
broker-dealer may exceed customary commissions).
The Company has agreed not to solicit Warrant exercises other than
through the Underwriters, unless the Underwriters decline to make such
solicitation. The Company will not be obligated to compensate the
Underwriters for Warrants which are exercised within the twelve months
following the date of this Prospectus. Upon any exercise of the Warrants after
the first anniversary of the date of this Prospectus, the Company will pay the
Underwriters a fee of seven percent (7%) of the aggregate exercise price of
the Warrants. No commission will be paid to the Underwriters unless such
payment is permissible under the guidelines imposed by the National
Association of Securities Dealers, Inc.
The SEC adopted Regulation M on March 4, 1997 which replaced Rule
10b-6 and certain other rules and regulations under the Exchange Act.
Regulation M prohibits any person engaged in the distribution of the Selling
Securityholders Warrants from simultaneously engaging in market-making
activities with respect to any securities of the Company during the applicable
"cooling-off" period (one to five business days) prior to the commencement of
such distribution. Accordingly, in the event either of the Underwriters
is engaged in a distribution of the Selling Securityholder Warrants, such firm
will not be able to make a market in the Company's securities during the
applicable restrictive period. However, neither of the Underwriters has
agreed to and neither is obligated to act as broker-dealer in the sale of the
Selling Securityholder Warrants and the Selling Securityholders may be
required, in the event such Underwriter is a market-maker, to sell such
securities through another broker-dealer. In addition, each Selling
Securityholder desiring to sell Selling Securityholder Warrants will be subject
to the applicable provisions of the Exchange Act and the rules and regulations
thereunder, which provisions may limit the timing of the purchases and sales of
the Company's securities by a Selling Securityholder.
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<PAGE>
The holders and broker-dealers, if any, acting in connection with such
sales might be deemed to be "underwriters" within the meaning of Section 2(11)
of the Securities Act and any commission received by them and any profit on
the resale of the securities might be deemed to be underwriting discount and
commissions under the Securities Act.
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<PAGE>
INTERIM FINANCING
In April 1997, the Company completed the Bridge Financing in which it sold
an aggregate of $360,000 principal amount of Bridge Notes and 800,000 Bridge
Warrants for $40,000, or $0.05 per Warrant, from which it received net
proceeds of approximately $318,000 (after expenses of such private offering).
The Bridge Notes are payable, together with interest at the rate of 11% per
annum, on the earlier of October 14, 1998 or the closing of this offering. See
"Use of Proceeds." The Bridge Warrants entitled holders thereof to purchase
one share of Common Stock per Bridge Warrant commencing May 14, 1998, but will
be exchanged automatically on the closing of the offering for the Selling
Securityholder Warrants, each of which will be identical to the Warrants
offered hereby. The Selling Securityholder Warrants and the Common Stock
underlying the Selling Securityholder Warrants have been registered for resale
in the Registration Statement of which this Prospectus forms a part, subject
to the contractual restriction that the Selling Securityholders have agreed
not to sell, transfer, hypothecate, assign or otherwise dispose of the Selling
Securityholder Warrants and the Common Stock underlying the Selling
Securityholder Warrants for a period of twenty-four months from the date of
this Prospectus (or commencing 13 months from the date of this Prospectus with
the consent of Roan Capital Partners L.P.). See "Concurrent Offering."
39
<PAGE>
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock,
$.0001 par value per share. As of the date of this Prospectus, 2,254,500
shares of Common Stock are outstanding. There are also outstanding warrants to
purchase 135,000 shares of Common Stock at $2.25 per share and outstanding
Bridge Warrants to purchase 800,000 shares of Common Stock at $6.25 per share.
There is a convertible promissory note payable to Christie Enterprises, Inc.
currently outstanding which will be converted into 160,000 shares of Common
Stock upon closing of this offering. In addition, the Company has reserved an
aggregate of 450,000 shares to be issued pursuant to its 1997 Stock Option
Plan. The Board of Directors has authorized the reservation of a sufficient
number of shares of Common Stock for issuance in connection with the exercise
of the Warrants being issued in this offering and the Concurrent Offering.
Each holder of Common Stock is entitled to one vote for each share of
Common Stock owned of record on all matters to be voted on by stockholders,
including the election of directors. Because the Common Stock is not subject
to cumulative voting, the holders of more than 50% of the outstanding shares
of Common Stock could generally elect the entire membership of the Board of
Directors. The holders of shares of Common Stock are, subject to the prior
liquidation rights of any outstanding shares of preferred stock of the Company
(the "Preferred Stock"), entitled upon dissolution of the Company, to receive
pro rata all assets remaining available for distribution to stockholders. The
Common Stock has no pre-emptive or other subscription rights, and there are no
conversion rights or redemption provisions with respect to such shares. All
outstanding shares of Common Stock are and all Common Stock to be issued upon
the exercise of the Warrants will be validly issued, fully paid and
non-assessable.
The holders of Common Stock are entitled to receive such dividends, if
any, as may be declared from time to time by the Board of Directors, in its
discretion, from funds legally available therefor. The Company has never paid
dividends on its Common Stock and it currently intends to retain all earnings
for use in its operations and does not expect to pay dividends on its Common
Stock in the foreseeable future. Further, the Company's current senior credit
agreement prohibits the payment of cash dividends.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of Preferred Stock,
$0.01 par value per share, in series and with rights, preferences, privileges
and limitations established solely by the Board of Directors. No shares of
Preferred Stock are currently outstanding. The issuance of Preferred Stock in
the future could materially dilute the interests of the holders of the Common
Stock, including limitations on voting rights, dividends, and distributions on
liquidation of the Company, all without any further vote or other action by
the holders of the Common Stock.
WARRANTS
Upon issuance, each Warrant and each Selling Securityholder Warrant will
entitle the registered holder thereof to purchase one share of Common Stock at
a price of $6.25 per share, subject to adjustment in certain circumstances.
The Warrants will be initially exercisable thirteen months from the date of
this Prospectus and shall expire four years from the date it becomes
exercisable.
The Company may call the Warrants for redemption, at the option of the
Company, at a price of $.10 per Warrant at any time following 13 months from
the date of this Prospectus after the Common Stock of the Company trades at a
price equal to 150% of the exercise price of the Warrants for 20 consecutive
trading days, upon not less than 30 days' prior written notice. The
warrantholders shall have exercise rights until the close of business on the
date fixed for redemption.
The exercise price and number of shares of Common Stock issuable on
exercise of the Warrants are subject to adjustments under certain
circumstances, including in the event of a stock dividend, recapitalization,
reorganization, merger or consolidation of the Company. However, the Warrants
are not subject to adjustment for issuances of Common Stock at a price below
the Warrants' exercise price.
The Company has the right, in its sole discretion, to decrease the
exercise price of the Warrants or to extend the expiration date of the
Warrants on five business days' prior written notice to the warrantholders.
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The Warrants may be exercised upon surrender of the Warrant certificate on
or prior to the expiration date of the Warrants at the offices of the warrant
agent, with the exercise form on the reverse side of the Warrant certificate
completed and executed as indicated, accompanied by full payment of the
exercise price (by certified check or other good funds, payable to the warrant
agent) to the warrant agent for the number of Warrants being exercised. The
warrantholders do not have the rights or privileges of holders of Common
Stock, including, without limitation, the right to vote on any matter
presented to stockholders for approval.
No fractional shares will be issued upon exercise of the Warrants.
However, the Company will pay to such warrantholder, in lieu of the issuance
of any fractional share which is otherwise issuable to such warrantholder, an
amount in cash based on the market value of the Common Stock on the last
trading day prior to the exercise date.
DELAWARE ANTI-TAKEOVER LAW
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and Bylaws, as amended, may have the effect of preventing,
discouraging or delaying any change in the control of the Company and may
maintain the incumbency of the Board of Directors and management. The
authorization of undesignated preferred stock makes it possible for the Board
of Directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
the Company.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law (the "Antitakeover Law") regulating corporate
takeovers. The Antitakeover Law prevents certain Delaware corporations,
including those whose securities are authorized for quotation on The NASDAQ
Stock Market (which includes the NASDAQ SmallCap Market), from engaging, under
certain circumstances, in a "business combination" (which includes a merger or
sale of more than 10% of the corporation's assets) with any "interested
stockholder" (a stockholder who acquired 15% or more of the corporation's
outstanding voting stock without the prior approval of the corporation's Board
of Directors) for three years following the date that such stockholder became
an "interested stockholder." A Delaware corporation may "opt out" of the
Antitakeover Law with an express provision in its original certificate of
incorporation or an express provision in its certificate of incorporation or
bylaws resulting from a stockholders' amendment approved by at least a
majority of the outstanding voting shares. The Company has not "opted out" of
the application of the Antitakeover Law.
TRANSFER AGENT, REGISTRAR AND WARRANT AGENT
The transfer agent and registrar for the Common Stock and the warrant
agent for the Warrants, the Selling Securityholder Warrants and the
Underwriters' Warrants is American Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering, the Company will have 3,214,500
shares of Common Stock outstanding. Of these shares, the 800,000 shares sold
by the Company in this offering will be freely-tradeable without restriction
or further registration under the Securities Act, except for any shares
purchased by an "affiliate" of the Company (as defined in the Securities Act
and the rules and regulations thereunder) which will be subject to the
limitations of Rule 144 promulgated under the Securities Act. Of the remaining
2,414,500 shares, subject to the holders compliance with the provisions of
Rule 144, (i) 34,504 shares beneficially owned by four non-affiliates of the
Company will become tradeable in August 1997, (ii) 364,500 shares beneficially
owned by Mantis V, L.L.C., an affiliate of the Company, will become tradeable
in September 1997, (iii) 160,000 shares of Common Stock issuable upon
conversion of a note in the principal amount of $1,000,000 payable to Christie
Enterprises, Inc. upon the closing of this offering will become tradeable in
November 1997 and (iv) 1,848,646 shares beneficially owned by Patrick A.
DePaolo, Sr., Steven DePaolo and a DePaolo family limited liability company,
all affiliates of the Company, are tradeable as of the date of this
Prospectus, although all of the aforementioned shares with the exception of
those set forth in (i) and (iii) will not be freely tradeable for two years
from the date of this Prospectus pursuant to "lock-up" agreements each such
principal stockholder has entered into with Roan Capital Partners L.P., which
lock-up may not be waived for a period of 13 months from the date of this
Prospectus as to the shares listed in (ii) above. These securities were deemed
to be "restricted securities" at the time they were purchased, as that term is
defined under Rule 144 promulgated under the Securities Act, as such shares
were issued in private transactions not involving a public offering.
In general, under Rule 144 as recently modified (which modifications
became effective April 29, 1997), subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company (or persons whose
shares are aggregated), who has beneficially owned the restricted shares of
Common Stock to be sold for at least one year is entitled to sell, within any
three-month period, a number of shares that does not exceed the greater of 1%
of the total number of outstanding shares of the same class or, if the Common
Stock is quoted on an exchange or NASDAQ, the average weekly
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<PAGE>
trading volume during the four calendar weeks preceding the sale. A person who
has not been an affiliate of the Company for at least the three months
immediately preceding the sale and who has beneficially owned the shares of
Common Stock to be sold for at least two years is entitled to sell such shares
under Rule 144 without regard to any of the limitations described above.
Prior to this offering, there has been no market for the Common Stock, and
no prediction can be made as to the effect, if any, that market sales of
restricted shares of Common Stock or the availability of such shares for sale
will have on the market prices prevailing from time to time. Nevertheless, the
possibility that substantial amounts of Common Stock may be sold in the public
market would likely adversely affect prevailing market prices for the Common
Stock and could impair the Company's ability to raise capital through the sale
of its equity securities.
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<PAGE>
UNDERWRITING
Under to the terms and conditions contained in the Underwriting Agreement,
the Company has agreed to sell to the Underwriters, and the Underwriters have
severally agreed to purchase from the Company the respective number of shares
of Common Stock and Warrants set forth opposite its name below.
NUMBER OF
SHARES AND
UNDERWRITER WARRANTS
Roan Capital Partners L.P. 600,000
Merit Capital Associates, Inc. 200,000
-------
Total 800,000
The Underwriters are committed to purchase and pay for all of the shares
of Common Stock and all of the Warrants offered hereby if any such shares of
Common Stock or Warrants are purchased. The shares of Common Stock and
Warrants are being offered by the Underwriters subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to approval
of certain legal matters by counsel and certain other conditions.
All principal stockholders of the Company as of the date of this
Prospectus other than Christie Enterprises, Inc., and all of the Selling
Securityholders, have entered into "lock-up" agreements with Roan Capital
Partners L.P., pursuant to which such principal stockholders and the Selling
Securityholders will not sell or transfer any of the Company's securities for
a 24 month period from the date of this Prospectus. There are no present plans,
agreements or understandings between any of such stockholders or Selling
Securityholders and Roan Capital Partners L.P. to modify, shorten or waive
such lock-up agreements. Roan Capital Partners L.P. has agreed with The Nasdaq
Stock Market, Inc. not to waive such lock-up agreements for a period of at
least 13 months. See "Shares Eligible for Future Sale."
The Underwriters have advised the Company that they propose to offer the
shares of Common Stock and the Warrants to the public at the initial public
offering price set forth on the cover page of this Prospectus. The
Underwriters may allow to certain dealers who are members of the National
Association of Securities Dealers, Inc. (the "NASD") concessions, not in
excess of $.25 per share of Common Stock and $.005 per Warrant.
The Company has granted to the Underwriters an option, exercisable for 45
days from the date of this Prospectus, to purchase up to an aggregate of
120,000 additional shares of Common Stock and 120,000 additional Warrants at
the initial public offering price set forth on the cover page hereof less
underwriting discounts and commissions. The Underwriters may exercise such
option in whole or, from time to time, in part, solely for the purpose of
cover over-allotments, if any, made in connection with the sale of the shares
of Common Stock and the Warrants offered hereby.
The Company has agreed to pay the Underwriters a nonaccountable expense
allowance of three percent (3%) of the gross proceeds of this offering, of
which $40,000 has been paid to date. The Company has also agreed to pay all
expenses in connection with qualifying the shares of Common Stock and the
Warrants offered hereby for sale under the laws of such states as the
Underwriters may designate, including expenses of counsel retained for such
purpose by the Underwriters.
The Company has agreed to sell to the Underwriters or their designees,
for aggregate consideration of $10, warrants (the "Underwriters' Warrants")
to purchase up to 80,000 shares of Common Stock at a price of $8.25 per share
and 80,000 Warrants at a price of $.165 per Warrant and exercisable at $6.25
per share. The Underwriters' Warrants may not be exercised for one year from
the date of this Prospectus, and will then be exercisable for a period of four
years and will expire five years from the date of this Prospectus (the
"Warrant Exercise Term"). During the Warrant Exercise Term, the holders of the
Underwriters' Warrants are given, at nominal cost, the opportunity to profit
from a rise in the market price of the Company's Common Stock. The Company has
agreed that for three years following the date of this Prospectus, the Company
will not merge, reorganize or take any other action which would terminate the
Underwriters' Warrants without first making adequate provisions for the
Warrants. The Underwriters' Warrants may not be redeemed by the Company until
they have been exercised and the underlying Warrants are outstanding. The
Underwriters' Warrants may not be sold,
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<PAGE>
assigned, transferred, pledged or hypothecated for a period of one year from
the date of the Prospectus except to an officer or partner of either of the
Underwriters or members of the selling group or their respective officers or
partners. To the extent that the Underwriters' Warrants are exercised,
dilution to the interests of the Company's stockholders may occur. Further,
the terms upon which the Company will be able to obtain additional equity
capital will be adversely affected since the holders of the Underwriters'
Warrants can be expected to exercise them at a time when the Company would, in
all likelihood, be able to obtain any needed capital on terms more favorable
to the Company than those provided in the Underwriters' Warrants. The
Company has agreed that upon written request of the then holders of at least a
majority of the Underwriters' Warrants made at any time within the period
commencing one year and ending five years after the date of this Prospectus,
it will file a registration or offering statement on Form SB-2 or other
appropriate form under the Securities Act registering the securities
underlying the Underwriters' Warrants. In addition, the Company has agreed
to give advance notice to the holders of the Underwriters' Warrants of its
intention to file certain registration statements commencing one year and
ending five years after the date of this Prospectus, and in such case, holders
of such Underwriters' Warrants or underlying shares of Common Stock and
Warrants shall have the right to require the Company to include all or part of
such shares of Common Stock and Warrants underlying such Underwriters'
Warrants in such registration statement at the Company's expense.
The Company has also agreed to indemnify the Underwriters against certain
civil liabilities, including liabilities under the Securities Act.
At the closing of this offering, the Company will enter into a consulting
agreement with the Underwriters retaining them as management and financial
consultants to the Company for a two-year period commencing as of December 17,
1996 at a fee equal to $3,558.33 per month, or $85,300, which will be paid
upon the Closing of this offering.
The Company has also agreed that, upon completion of this offering, it
will for a period of three years if requested by Roan Capital Partners L.P.
(i) engage a designee of Roan Capital Partners L.P. as an advisor to its
Board of Directors or (ii) elect one of the Roan Capital Partners L.P.'s
designees to its Board of Directors.
Upon the exercise of the Warrants commencing one year from the date of
this Prospectus, the Company will pay the Underwriters a fee of 7% of the
aggregate exercise price if (i) the market price of its Common Stock on the
date the Warrant is exercised is greater than the then exercise price of the
Warrants; (ii) the exercise of the Warrant was solicited by a member of the
NASD and the customer states in writing that the transaction was solicited and
designates in writing the broker-dealer to receive compensation for the
exercise; (iii) the Warrant is not held in a discretionary account; (iv)
disclosure of compensation arrangements was made both at the time of the
offering and at the time of the exercise of the Warrants; and (v) the
solicitation of exercise of the Warrant was not in violation of Regulation M
promulgated under the Exchange Act.
In connection with this offering, the Underwriters and their affiliates
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the Common Stock or the Warrants. Such transactions may
include stabilization transactions effected in accordance with Rule 104 of
Regulation M, pursuant to which such persons may bid or purchase Common Stock
or Warrants for the purpose of stabilizing its market price. Either or both of
the Underwriters may also create a short position for the accounts of the
Underwriters by selling more Common Stock and Warrants in connection with
the offering than they are committed to purchase from the Company, and in such
case may purchase Common Stock or Warrants in the open market following
completion of the offering to cover all or a portion of such short position.
The Underwriters may also cover all or a portion of such short position, up
to 120,000 shares of Common Stock and 120,000 Warrants, by exercising the
over-allotment option referred to herein. Any of the transactions described in
this paragraph may result in the maintenance of the price of the Common Stock
and the price of the Warrants at a level above that which might otherwise
prevail in the open market. None of the transactions described in this
paragraph is required, and, if they are undertaken, they may be discontinued
at any time.
Regulation M may prohibit either of the Underwriters or any other
soliciting broker-dealer from engaging in market-making activities with regard
to the Company's securities for the period from five business days prior to any
solicitation by either of the Underwriters of the exercise of Warrants
until the later of the termination of such solicitation activity or the
termination (by waiver or otherwise) of any right that either of the
Underwriters may have to receive a fee for the exercise of the Warrants
following such solicitation. As a result, each of the Underwriters may be
unable to provide a market for the Company's securities during certain
periods while the Warrants are exercisable.
Prior to this offering, there has been no public trading market for the
Common Stock or the Warrants. Consequently, the initial public offering price
of the Common Stock and the Warrants have been determined by negotiations
between the Company and the Underwriters. Among the factors considered in
determining the initial public offering price were the
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<PAGE>
Company's financial condition and prospects, market prices of similar
securities of comparable publicly traded companies, certain financial and
operating information of companies engaged in activities similar to those of
the Company and the general conditions of the securities market.
LEGAL MATTERS
Epstein Becker & Green, P.C., 250 Park Avenue, New York, New York has
acted as counsel to the Company in connection with this offering. Gusrae,
Kaplan & Bruno, 120 Wall Street, New York, New York has acted as counsel for
the Underwriters in connection with this offering. Richard L. Campbell,
special counsel to Epstein Becker & Green, P.C., is an affiliate of Mantis V,
L.L.C., which is the owner of 364,500 shares of the Company's Common Stock and
of warrants to purchase 85,000 shares of the Company's Common Stock at $2.25
per share.
EXPERTS
The consolidated financial statements of Discas, Inc. and of Christie
Enterprises, Inc. included in this Prospectus have been audited by Jump,
Green, Holman and Company, independent certified public accountants, to the
extent and for the periods set forth in their reports appearing elsewhere
herein, and are included in reliance upon such reports given upon the
authority of said firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (the
"Registration Statement") under the Securities Act with respect to the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
For further information with respect to the Company and this offering,
reference is made to the Registration Statement, including the exhibits and
schedules filed therewith. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office in Washington,
D.C., and copies of all or any part of the Registration Statement may be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of certain fees prescribed
by the Commission. In addition, the Commission maintains a Web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission through the Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR"). The Registration Statement of which this Prospectus forms a
part has been filed electronically through EDGAR and may be retrieved through
the Commission's Web site on the Internet. Descriptions contained in this
Prospectus as to the contents of any agreement or other documents filed as an
exhibit to the Registration Statement are not necessarily complete and each
such description is qualified by reference to such agreement or document.
Upon consummation of this offering, the Company will become subject to the
reporting requirements of the Exchange Act and in accordance therewith will
file reports, proxy statements and other information with the Commission. The
Company intends to furnish its stockholders with annual reports containing
audited financial statements and such other reports as the Company deems
appropriate or as may be required by law.
45
<PAGE>
DISCAS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
-------
<S> <C>
INDEPENDENT AUDITOR'S REPORT--DISCAS, INC. AND SUBSIDIARY F-2
CONSOLIDATED BALANCE SHEET AS OF APRIL 30, 1997 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS F-4
ENDED APRIL 30, 1996 AND 1997
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS F-5
ENDED APRIL 30, 1996 AND 1997
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS F-6
ENDED APRIL 30, 1996 AND 1997
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-8
INDEPENDENT AUDITOR'S REPORT--CHRISTIE ENTERPRISES, INC. F-21
BALANCE SHEET AS OF OCTOBER 31, 1996 F-22
STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 AND FOR THE F-23
TEN MONTHS ENDED OCTOBER 31, 1996
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR F-24
THE YEAR ENDED DECEMBER 31, 1995 AND THE TEN MONTHS ENDED OCTOBER 31, 1996
STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED F-25
DECEMBER 31, 1995 AND FOR THE TEN MONTHS ENDED OCTOBER 31, 1996
NOTES TO FINANCIAL STATEMENTS F-27
DISCAS INC. AND SUBSIDIARY PRO FORMA CONDENSED COMBINED F-31
STATEMENT OF OPERATIONS FOR THE YEAR ENDED APRIL 30, 1997 (UNAUDITED)
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS F-32
</TABLE>
F-1
<PAGE>
[LETTERHEAD OF JUMP, GREEN, HOLMAN AND COMPANY]
INDEPENDENT AUDITOR'S REPORT
The Stockholders
Discas Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheet of Discas Inc. and
Subsidiary as of April 30, 1997 and related consolidated statements of
operations, changes in stockholders' equity and cash flows for the two years
ended April 30, 1996 and 1997. These financial statements are the
responsibility of Discas, Inc. and Subsidiary's management. Our responsibility
is to express an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Discas, Inc. and Subsidiary
as of April 30, 1997 and the results of their operations and cash flows for
the two years ended April 30, 1996 and 1997 in conformity with generally
accepted accounting principles.
JUMP, GREEN, HOLMAN AND COMPANY
June 26, 1997
Toms River, NJ
F-2
<PAGE>
DISCAS, INC. AND SUBSIDIARY
Consolidated Balance Sheet
April 30, 1997
ASSETS
Current assets:
Cash $ 173,100
Accounts receivable 1,244,554
Inventory 1,016,519
Prepaid expenses 4,170
Other current assets 11,429
---------
Total current assets 2,449,772
Property and equipment (net) 1,846,615
Other assets 1,248,602
---------
$ 5,544,989
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,280,710
Accrued expenses 174,629
Line of credit 490,000
Current portion of capital leases 30,416
Current portion of long-term debt 383,069
-------------
Total current liabilities 2,358,824
Capital leases, excluding current portion 48,101
Long-term debt, excluding current portion 2,162,777
Related party loans 123,734
Stockholders' equity:
Common stock, $.0001 par value, 20,000,000
shares authorized, 2,254,500 shares issued
and outstanding 225
Additional paid in capital 822,677
Retained earnings 28,651
---------
Total stockholders' equity 851,553
------------
$ 5,544,989
============
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
DISCAS, INC. AND SUBSIDIARY
Consolidated Statements of Operations
For the years ended April 30, 1996 and 1997
1996 1997
---- ----
Sales $ 3,858,205 5,179,668
Cost of sales 3,012,125 3,982,066
--------- ---------
Gross profit 846,080 1,197,602
Selling, general and administrative
expenses 710,302 1,300,859
--------- ---------
Income (loss) from operations 135,778 (103,257)
--------- ---------
Other income (expense):
Other income 30,929 35,279
Interest expense (87,292) (317,393)
--------- ---------
Net other expense (56,363) (282,114)
--------- ---------
Minority interest 23,841 36,705
--------- ---------
Earnings (loss) before income taxes 103,256 (348,666)
Income tax benefit - 36,000
--------- ---------
Net income (loss) $ 103,256 (312,666)
========= =========
Net income (loss) per share:
Primary $ .04 (.13)
========= =========
Fully diluted $ .04 (.13)
========= =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
DISCAS INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For the years ended April 30, 1996 and 1997
Additional Total
Common Paid in Retained Stockholders'
Stock Capital Earnings Equity
Balances, April 30, 1995 $ 181 1,819 279,796 281,796
Prior period adjustment - - (41,735) (41,735)
------- ------- -------- --------
Adjusted balances, April 30, 1995 181 1,819 238,061 240,061
Net income for the year
ended April 30, 1996 - - 103,256 103,256
------- ------- -------- -------
Balances, April 30, 1996 181 1,819 341,317 343,317
Issuance of common stock 36 608,464 - 608,500
Acquisition of minority interest 8 172,394 - 172,402
Issuance of common stock warrants - 40,000 - 40,000
Net loss for the year
ended April 30, 1997 - - (312,666) (312,666)
------- ------- -------- --------
Balances, April 30, 1997 $ 225 822,677 28,651 851,553
======= ======= ======== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
DISCAS INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the years ended April 30, 1996 and 1997
1996 1997
---- ----
Cash Flows from Operating Activities:
Cash received from customers $ 4,092,786 4,573,965
Cash paid to suppliers and employees (3,872,155) (4,515,399)
Interest paid (84,742) (138,806)
Income taxes paid (17,255) ( - )
--------- ---------
Net cash provided (used) by
operating activities 118,634 (80,240)
--------- ---------
Cash Flows from Investing Activities:
Payments on other assets - (35,604)
Purchases of fixed assets (41,450) (180,873)
--------- ---------
Net cash used by investing
activities (41,450) (216,477)
--------- ---------
Cash Flows from Financing Activities:
Principal payments on long-term debt (108,631) (165,309)
Proceeds from long-term debt 47,171 710,000
Proceeds from issuance of stock warrants - 40,000
Payments of offering costs - (474,487)
Principal payments on capital leases (39,217) (33,933)
Proceeds from credit line 170,000 210,000
--------- ---------
Net cash provided by
financing activities 69,323 286,271
--------- ---------
Net increase (decrease) in cash 146,507 (10,446)
Cash at beginning of year 37,039 183,546
--------- ---------
Cash at end of year $ 183,546 173,100
========= =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE>
DISCAS INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows (continued)
For the years ended April 30, 1996 and 1997
1996 1997
---- ----
Reconciliation of net income (loss) to cash provided (used) by operating
activities:
Net income (loss) $ 103,256 (312,666)
Items which did not (provide) use cash:
Depreciation 129,754 221,267
Interest - 2,550
Amortization - 8,051
Bad debt expense (recovery) (1,000) 17,390
Minority interest (23,841) (36,705)
Deferred financing costs - 176,037
Working capital changes which provided (used) cash:
Accounts receivable 207,430 (771,826)
Inventory (6,920) (468,844)
Other assets (47,366) (500)
Prepaid expenses (6,442) (2,877)
Accounts payable (247,001) 1,000,224
Accrued expenses 17,819 123,659
Income tax payable (7,055) -
Non-current changes which used cash:
Deferred taxes - (36,000)
------- ---------
Net cash provided (used)
by operating activities $ 118,634 (80,240)
======== =========
Schedule of non-cash investing and financing activities:
Financed acquisitions $ - 1,567,904
======== =========
Offering costs $ - 15,000
======== =========
Acquisition of minority interest $ - 172,402
======== =========
Deferred financing costs $ - 608,500
======== =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-7
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
a. Organization
The accompanying consolidated financial statements of Discas, Inc.
and Subsidiary (the "Company") present the accounts of Discas, Inc.,
its 68.81% subsidiary, Discas Recycled Products Corporation (DRPC)
and its wholly owned subsidiary, Christie Products Inc. (CPI).
Intercompany transactions have been eliminated in the consolidation.
On August 27, 1996, DRPC merged into Discas, Inc., pursuant to
Section 251 of the General Corporation Law of the State of Delaware.
Each minority shareholder of DRPC was retired and the holder thereof
received 22.56 shares (76,623 shares in total) of the voting stock
of Discas, Inc., for each share of DRPC owned by them, having a par
value of $.0001 per share. The purchase price of $172,402 ($2.25 per
share) was allocated as follows:
Fixed assets $ 75,000
Minority interest 46,274
Goodwill 51,128
-------
$ 172,402
==========
Prior to the merger, the Board of Directors of Discas, Inc.
authorized a 1 for 8.718477 reverse stock split of common stock to
the stockholders of record on August 27, 1996. As a result,
1,400,000 common shares were issued and outstanding. The Company has
elected to retroactively restate this occurrence to be reflected in
the financial statements for the years ended April 30, 1996 and
1997.
On October 3, 1996, Christie Products, Inc. (CPI), a wholly owned
subsidiary of Discas, Inc., was incorporated in the state of
Delaware. CPI operates out of New Jersey and manufactures and
markets nursery growing pots and other plastic products.
CPI is authorized to issue 3,000 shares of no par value common
stock. As of the date of this financial statement, 100 shares are
issued and outstanding.
Discas, Inc. produces proprietary plastics, plastic containers and
rubber compounds using a variety of recycled and prime materials.
The Company also uses industrial scrap material to manufacture high
quality recycled polypropylene based compounds.
F-8
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
b. Cash and Cash Equivalents
Cash and cash equivalents includes all cash balances and highly
liquid investments with a maturity of three months or less. The
Company places its temporary cash investments with high credit
quality financial institutions. At times such investments may be in
excess of the FDIC insurance limits.
c. Property and Equipment
Property and equipment are stated at cost and are depreciated over
their useful lives of 7 - 10 years. Depreciation is computed by
using the straight-line method for financial reporting purposes and
straight line and accelerated methods for income tax purposes.
Maintenance and repairs are charged to expense as incurred.
Expenditures for major renewals and betterments that extend the
useful lives of the assets are capitalized. The cost and related
accumulated depreciation of property and equipment retired or
disposed of are removed from the accounts and the resulting gains or
losses are reflected in income.
d. Income Taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently
due plus deferred taxes. Deferred taxes are recognized for
differences between the basis of assets and liabilities for
financial statement and income tax purposes. Deferred tax assets and
liabilities represent future tax return consequences of those
differences, which will either be taxable or deductible when the
assets or liabilities are recovered or settled. Deferred taxes are
also recognized for operating losses and tax credits that are
available to offset future taxable income.
e. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the period. Actual results could differ
from these estimates.
F-9
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
f. Fair Value of Financial Instruments
As of April 30, 1997, the carrying values of the Company's financial
instruments which are all held for non-trading purposes,
approximated their fair value.
g. Inventory
Inventory is stated at the lower of cost or market as determined by
the average cost method.
h. Economic Dependency
The Company sells a substantial portion of its product to three
customers. For the years ended April 30, 1996 and 1997, sales to
those customers were as follows:
1996 1997
Customer #1 $ 1,022,000 1,033,000
Customer #2 - 420,000
Customer #3 1,815,000 611,000
--------- ---------
$ 2,837,000 2,064,000
========= =========
As of April 30, 1997, accounts receivable from these customers were
as follows:
Customer #1 $ 63,000
Customer #2 155,000
Customer #3 116,000
---------
$ 334,000
===========
The Company performs ongoing credit evaluations of its customers'
financial condition and generally, requires no collateral from its
customers. The Company believes the allowance for doubtful accounts
is adequate to absorb estimated uncollectible amounts as of April
30, 1997.
F-10
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
i. Deferred Offering Costs
Professional fees and other expenses associated with the initial
public offering of the Company's common stock are capitalized and
subsequently charged against the proceeds of such offering or
expensed in the period such offering is abandoned.
j. Net Income Per Share
The weighted average number of common stock and common stock
equivalents was determined by including all shares issued in 1997 as
if they had been issued at the beginning of fiscal 1996. Warrants
were also deemed exercised at the beginning of fiscal 1996 to the
extent required using the treasury stock method. Primary net income
per share included the conversion of the Christie acquisition
convertible note as of the conversion date. Fully diluted net income
per share did not include the conversion of the note.
k. Impact of Recently Issued Accounting Standards
Effective May 1, 1996 and January 1, 1997, the Company adopted SFAS
No. 121, "Accounting for the Impairment of Long Lived Assets and for
Long Lived Assets to be Disposed Of" and SFAS No. 125, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities". The Company believes that the adoption of these
statements did not have a material effect on the Company's financial
position.
Effective May 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock Based Compensation." The statement requires at a minimum,
new disclosures regarding employee and non-employee stock based
compensation plans. The Company will continue accounting for stock
options under APB Opinion No. 25.
l. Deferred Financing Costs
The issuance of common stock and common stock warrants in connection
with loans made to the Company are being amortized on the interest
method over the term of the loan or expensed in full upon the early
retirement of the debt by the Company.
As a result, included in interest expense is $176,037 of deferred
financing costs for the year ended April 30, 1997.
F-11
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
2. Property and Equipment
As of April 30, 1997, property and equipment consist of the following:
Machinery and equipment $ 2,436,533
Leasehold improvements 63,843
Office equipment 68,402
Vehicles 58,206
Furniture and fixtures 22,098
---------
Total property and equipment 2,649,082
Less: accumulated depreciation 802,467
---------
Net property and equipment $ 1,846,615
=========
3. Accounts Receivable
Accounts receivable at April 30, 1997 are shown net of an allowance for
doubtful accounts of $11,000.
4. Inventory
Inventories at April 30, 1997 consist of:
Finished goods $ 212,148
Raw materials 804,371
---------
$ 1,016,519
=========
5. Other Assets
Other assets at April 30, 1997 consist of the following:
Security deposits $ 32,310
Deferred financing costs, net of $176,037
of accumulated amortization 432,463
Deferred offering costs 532,148
Goodwill net of $8,051 of
accumulated amortization 216,077
Other 35,604
---------
$ 1,248,602
=========
F-12
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
6. Stock Option Plan
The Company's stock option plan was approved by the Company's Board of
Directors and stockholders in February, 1997. Options granted under the
plan may include those qualified as incentive stock options under
Section 422 of the Internal Revenue Code of 1986, as amended, as well as
non-qualified options. Employees as well as other individuals, such as
outside directors, who provide necessary services to the Company are
eligible to participate in the Plan. Non-employees and part-time
employees may receive only non-qualified stock options. The maximum
number of shares of Common Stock for which options may be granted under
the Plan is 450,000 shares.
The exercise price for shares purchased upon the exercise of
non-qualified options granted under the plan is determined by a Board
appointed committee. The exercise price of an incentive stock option
must be at least equal to the fair market value of the common stock on
the date such option is granted (110% of the fair market value for
stockholders who own more than 10% of the common stock of the Company).
The Company, upon closing of the public offering, as described in note
14, will issue 150,000 incentive stock options to its President. Each
option granted entitles the recipient to purchase one share of the
Company's common stock at an exercise price of $7.50 and is exercisable
through April 30, 2002 and only at such time as the Company's audited
financial statements show after tax net income equal to or exceeding
$.15 per share.
7. Income Taxes
The Company's effective income tax rate is lower than would be expected
if the Federal statutory rate were applied to earnings from operations,
primarily because of depreciation and the utilization of net operating
losses.
The components of income tax (expense) benefit for the years ended April
30, 1996 and 1997 were:
1996 Federal State Total
---- ------- ----- -----
Current $ - - -
Deferred (1,000) 1,000 -
-------- ------- ----
$ (1,000) 1,000 -
======== ======= ====
1997 Federal State Total
---- ------- ----- -----
Current $ - - -
Deferred 28,000 8,000 36,000
-------- ------- ------
$ 28,000 8,000 36,000
======== ======= ======
F-13
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
The following is a summary of the components of the Company's Federal and
State deferred tax assets and liabilities as of April 30, 1997:
Current
------- Federal State
Deferred tax assets:
Allowance for doubtful accounts $ 4,000 1,000
Valuation allowance (4,000) (1,000)
------- -------
- -
======= =======
Non-current
-----------
Deferred tax assets:
Net operating loss carryforwards 218,000 63,000
Deferred tax liabilities:
Depreciation (102,000) (30,000)
------- -------
Net deferred tax asset before
valuation allowance 116,000 33,000
Valuation allowance (116,000) (33,000)
------- --------
- -
======= ========
The Company has net operating loss carryforwards of approximately
$545,000 (Federal) and $510,000 (State) which will begin to expire in
2012.
F-14
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
7. Income Taxes (continued)
A reconciliation of the tax benefit (expense) computed at the normal
statutory Federal income tax rate with the Company's provision for income
taxes is as follows:
Year Ended Year Ended
April 30, 1996 April 30, 1997
-------------- --------------
Statutory Federal income
tax (expense) benefit $ (43,000) 136,000
State surtax benefit 16,750 -
State tax (expense) benefit (6,000) 24,400
Permanent differences:
Non-deductible expenses (2,100) (5,850)
Deductible expenses 25,050 11,550
Exempt income 9,300 14,300
Increase in valuation allowance - (154,000)
Change in estimate - tax rates - 9,600
-------- ---------
Income tax benefit $ - 36,000
======== =========
8. Line of Credit
The Company has an available line of credit with a bank which it can
borrow up to $500,000. Interest is due in monthly installments at prime
plus 1 3/4% percent. The line of credit is secured by accounts receivable
and inventory and matures in July, 1997. At April 30, 1997, outstanding
borrowings on this line amounted to $490,000, and as a result, $10,000
remained available to the Company.
In June, 1997, the Company concluded a credit arrangement with a new bank
which provides for a credit line of up to $700,000 on a borrowing base
consisting of 80% of eligible accounts receivable and 50% of eligible
inventory. This new credit line bears interest at the bank's prime rate
plus 1%. This arrangement also provided a five year term loan of $353,000
which was used to pay off the old term loan and certain other debt. The
new term loan calls for monthly principal payments of approximately
$5,300 plus interest at the bank's prime rate plus 1%.
F-15
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
9. Long-term Debt
<TABLE>
<CAPTION>
<S> <C>
Note payable to a bank in monthly principal payments of $6,173 plus
interest at "prime" plus two percent. The loan matures in June, 1997 and
is secured by machinery and equipment and the personal guarantee of the
president of the Company. $ 224,359
Note payable to the Department of Economic and Community Development,
payable in monthly installments of $1,972, including interest at 6%,
maturing in July, 2000 and secured by a lien on all business assets and
the personal guarantee of the president
of the Company. 108,407
Equipment loan payable to a finance company with monthly payments of
$1,572 including interest of 13% per annum. The loan matures in July
1998, and is secured by equipment with a net book value of $43,000. 21,766
Equipment loan payable to a finance company with monthly payments of $423
including interest at 13% per annum. The loan matures in February, 2000,
and is secured by equipment with a net book value of $16,000. 12,032
Loan payable to a finance company in monthly payments of $12,600
including interest at 9.75%. The loan matures in November 2000
and is secured by equipment. 444,282
Loan payable to a company in monthly interest only payments computed at
8% per annum. The note is unsecured and due in full in November 1998. As
partial consideration for the loan, the company was issued 364,500 shares
of common stock and warrants to purchase 85,000 shares of Discas, Inc.
The value of common stock and common stock warrants was
$607,500 and $1,000, respectively. 375,000
</TABLE>
F-16
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
9. Long-term Debt (continued)
<TABLE>
<CAPTION>
<S> <C>
Loan payable to the shareholder of Christie Enterprises, Inc. in
connection with the asset purchase agreement described in note 13. The
note is interest free until April 30, 1997 then at prime plus 1% along
with fixed monthly principal payments of $16,667. The note matures in
April, 2002 and is secured by machinery and equipment of the seller. The
holder for this note may also convert the outstanding principal balance
into common shares of Discas, Inc. at a price
which is also described in note 13. 1,000,000
Various 11% unsecured subordinated notes due on the earlier of September
15, 1998 or the closing of a registered public
offering of securities of the Company. 360,000
---------
Total long-term debt 2,545,846
Less: current portion 383,069
---------
Long-term debt, excluding
current portion $2,162,777
==========
</TABLE>
Maturities of long term debt over the next several years are as follows:
April 30, 1998 $ 383,069
1999 1,133,000
2000 343,777
2001 272,000
Thereafter 414,000
-------
$2,545,846
==========
10. Capital Leases
The Company is lessee of certain equipment under capital leases expiring
in various years through 2003. The assets and liabilities under capital
leases are recorded at the lower of the present value of the minimum
lease payments or the fair value of the asset. The assets are depreciated
over the lower of their lease terms or their estimated productive lives.
F-17
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
10. Capital Leases (continued)
Minimum future lease payments under capital leases as of April 30, 1997
is as follows:
April 30, 1998 $ 37,590
1999 20,460
2000 16,590
2001 15,816
2002 15,816
2003 7,908
-------
Total minimum lease payments 114,180
Less: amounts representing interest 35,663
-------
Present value of future minimum
lease payments 78,517
Less: current portion 30,416
-------
Capital leases, net of current portion $ 48,101
=======
As of April 30, 1997, machinery and equipment held under the
aforementioned capital leases amounted to $136,324 and depreciation
expense for the year ended April 30, 1997 approximated $20,000.
11. Related Party Activity
The president of the Company has made various loans to the company
bearing interest at rates between 6% and 8%. Interest only is due monthly
and the principal is unsecured, subordinated to the Company's bank debt
and has no specific repayment terms.
The President of the Company owns an 8% interest in a Limited Liability
Company which does business with the Company. For the years ended April
30, 1996 and 1997, sales to the related party amounted to approximately
$128,000 and $671,000, and purchases from the related party amounted to
approximately $140,000 and $650,000.
The Company owns a 50% interest in a Limited Liability Company (L.L.C.).
Included in other assets is $35,604, which represents the Company's
initial equity contribution to the L.L.C.
F-18
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
11. Related Party Activity (continued)
Included in selling, general and administrative expenses for the year
ended April 30, 1996 and 1997 is approximately $23,000 and $26,000 paid
to a related company for the rent of machinery and equipment. The lease
is classified as an operating lease and provides for minimum rentals of
$26,400 through April 30, 1998.
12. Commitments and Contingencies
The Company conducts its operations in leased facilities classified as
operating leases which expire in various years through 2000. The Company
also has an option to extend the leases through 2005.
In addition to annual base rental, the leases require additional payments
for maintenance and taxes. The following is a schedule approximating the
future minimum rental payments required under the above operating leases
as of:
April 30, 1998 $ 267,664
1999 121,338
2000 82,443
2001 41,940
Rent expense under the aforementioned leases for the year ended April 30,
1996 and 1997 amounted to $143,443 and $218,405, respectively.
13. Asset Purchase Agreement
On October 30, 1996, Christie Products, Inc. (CPI) a wholly owned
subsidiary of the Company, entered into an agreement with Christie
Enterprises, Inc., to purchase substantially all of their business
assets. The purchase price of $1,500,000 exceeded the fair market value
of the assets purchased by $173,000, which will be amortized on the
straight line basis over 15 years. CPI and Discas, Inc. as
consideration, paid Christie Enterprises, Inc., $500,000 in cash and
issued a convertible promissory note in the amount of $1,000,000. The
note is interest free until April 30, 1997, at which time interest will
be paid at prime plus 1% along with fixed monthly principal payments of
$16,667. The note matures on April 30, 2002 and is secured by the molds,
machinery and equipment of the seller. The holder of this note may also
convert the outstanding principal balance into common shares of Discas,
Inc. The number of shares into which this note may be converted shall be
determined by dividing the aggregate outstanding principal amount of the
note by 125% of the initial public offering price per share of common
stock of Discas, Inc., provided that if Discas, Inc. has not completed
an initial public offering of its common stock by October 1, 1997, then
the conversion price shall be the greater of $6.00 per share or 125% of
the then fair market value of the common stock of Discas, Inc. on a per
share basis.
F-19
<PAGE>
DISCAS INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements (continued)
14. Intent of Public Offering
On December 17, 1996, Discas, Inc. executed a letter of intent with an
underwriter to enter into a definitive agreement with respect to a
public offering of 800,000 shares of common stock and 800,000 redeemable
common stock purchase warrants of Discas, Inc.
In connection with the proposed public offering, Discas, Inc. effected a
1.35 for 1 stock split of common stock to the stockholders of record on
December 31, 1996. As a result of the split, 490,000 additional shares
were issued, and additional paid in capital was reduced by $49. All
references in the accompanying financial statements to the number of
common shares and per share amounts for 1996 and 1997 have been restated
to reflect the stock split.
15. Outstanding Warrants
At April 30, 1997, the date of the Company's financial statements, the
Company had outstanding warrants to purchase 135,000 and 800,000 shares
of the Company's common stock, respectively, at prices of $2.25 and $5.00
per share.
16. Prior Period Adjustment
The accompanying financial statements as of and for the year ended April
30, 1996 have been restated to correct an error in reporting
organizational costs incurred in 1994 and deferred compensation incurred
in 1996. The effect of the restatement was to decrease beginning retained
earnings by $41,735 and decrease net income by $18,356 for the year ended
April 30, 1996.
F-20
<PAGE>
[LETTERHEAD OF JUMP, GREEN, HOLMAN AND COMPANY]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders' of
Christie Enterprises, Inc.
Kenilworth, New Jersey:
We have audited the balance sheet of Christie Enterprises, Inc. as of
October 31, 1996 and the related statements of operations, changes in
stockholders' equity and cash flows for the year ended December 31, 1995 and
the ten months ended October 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Christie Enterprises,
Inc. as of October 31, 1996 and the results of its operations and its cash
flows for the year ended December 31, 1995 and the ten months ended October
31, 1996 in conformity with generally accepted accounting principles.
JUMP, GREEN, HOLMAN AND COMPANY
January 20, 1997
Toms River, New Jersey
F-21
<PAGE>
CHRISTIE ENTERPRISES, INC.
BALANCE SHEET
OCTOBER 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets:
Cash and cash equivalents.............................................. $ 30,841
Accounts receivable.................................................... 619,421
Inventory.............................................................. 202,948
Prepaid expenses and other receivables................................. 14,357
-------------
Total Current Assets................................................... 867,567
Property and Equipment--Net.............................................. 251,816
Other Assets............................................................. 20,287
-------------
$ 1,139,670
=============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable....................................................... 1,090,401
Accrued expenses....................................................... 46,830
Current portion of long-term debt...................................... 495,000
-------------
Total Current Liabilities.............................................. 1,632,231
Related party loans payable.............................................. 63,000
Stockholders' Equity (Deficit):
Common stock, no par value, 1000 shares authorized, 100 shares issued
and outstanding ...................................................... 140,450
Additional paid in capital............................................. 414,658
Accumulated deficit.................................................... (1,110,669)
-------------
Total Stockholders' Equity (Deficit)................................... (555,561)
-------------
$ 1,139,670
=============
</TABLE>
See accompanying notes to financial statements.
F-22
<PAGE>
CHRISTIE ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE TEN MONTHS ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
1995 1996
------------ -----------
<S> <C> <C>
Sales........................................ $2,922,733 2,521,784
Cost of sales................................ 2,667,940 2,297,517
------------ -----------
Gross Profit................................. 254,793 224,267
Selling, general and administrative
expenses.................................... 469,571 386,833
------------ -----------
Loss from Operations......................... (214,778) (162,566)
------------ -----------
Other Expenses:
Interest expense............................ 75,354 42,291
------------ -----------
Net loss..................................... $ (290,132) (204,857)
============ ===========
PRO FORMA INFORMATION
Historical loss before income taxes ........ $ (290,132) (204,857)
Pro forma income tax benefit................ -- 82,000
------------ -----------
Pro forma net loss......................... $ (290,132) (122,857)
============ ===========
Pro forma net loss per share............... $ (2,901) (1,229)
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE>
CHRISTIE ENTERPRISES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE TEN MONTHS ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID IN ACCUMULATED STOCKHOLDERS'
STOCK CAPITAL DEFICIT EQUITY
---------- ------------ ------------- ---------------
<S> <C> <C> <C> <C>
Balances December 31, 1994 .............. $140,450 388,214 (615,680) (87,016)
Capital contributions ................... -- 26,444 -- 26,444
Net loss for the year ended December 31,
1995 ................................... -- -- (290,132) (290,132)
---------- ------------ ------------- ---------------
Balances December 31, 1995 .............. 140,450 414,658 (905,812) (350,704)
Net Loss for the ten months ended
October 31, 1996 ....................... -- -- (204,857) (204,857)
---------- ------------ ------------- ---------------
Balances October 31, 1996 ............... $140,450 414,658 (1,110,669) (555,561)
========== ============ ============= ===============
</TABLE>
See accompany notes to financial statements.
F-24
<PAGE>
CHRISTIE ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,1995 AND
THE TEN MONTHS ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
1995 1996
------------- -------------
<S> <C> <C>
Cash Flows From Operating Activities:
Cash received from customers.................... $ 3,038,796 2,223,531
Cash paid to suppliers and employees............ (2,845,586) (2,179,113)
Interest paid................................... (75,354) (42,291)
------------- -------------
Net Cash Provided By Operating Activities ....... 117,856 2,127
------------- -------------
Cash Flows from Investing Activities: ...........
Capital expenditures............................ (15,927) (16,038)
Proceeds from affiliates........................ -- 59,103
------------- -------------
Net Cash Provided (Used) By Investing
Activities...................................... (15,927) 43,065
------------- -------------
Cash Flows From Financing Activities:
Capital Contributions........................... 26,444 --
Principal payments on long-term debt............ (151,187) (33,260)
------------- -------------
Net Cash Used by Financing Activities............ (124,743) (33,260)
------------- -------------
Net Increase (Decrease) in Cash.................. (22,814) 11,932
Beginning cash................................... 41,723 18,909
------------- -------------
Ending cash...................................... $ 18,909 30,841
============= =============
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE>
CHRISTIE ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31,1995 AND
THE TEN MONTHS ENDED OCTOBER 31, 1996
<TABLE>
<CAPTION>
1995 1996
------------ -----------
<S> <C> <C>
Reconciliation of Net Loss to Net Cash
Provided by Operating Activities:
Net Loss.............................................. $(290,132) (204,857)
Adjustments to Reconcile Net Loss to Net Cash Provided
by Operating Activities:
Depreciation and Amortization......................... 158,437 103,361
Provision for bad debts............................... 101,431 136,107
(Increase) decrease in:
Accounts receivable................................... 14,233 (298,283)
Prepaid expenses and other receivables................ 75 3,730
Inventory............................................. 18,144 47,054
Increase (decrease) in:
Accounts payable...................................... 116,035 199,422
Accrued expenses ..................................... (367) 15,593
------------ -----------
Net Cash Provided by Operating Activities................ $ 117,856 2,127
============ ===========
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE>
CHRISTIE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. ORGANIZATION
Christie Enterprises, Inc., located in Kenilworth, New Jersey,
manufactures plastic containers and products, primarily for the wholesale
plant nursery industry.
B. ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
period. Actual results could differ from these estimates.
C. FAIR VALUE OF FINANCIAL INSTRUMENTS
As of October 31, 1996, the carrying values of the Company's financial
instruments which are all held for non-trading purposes, approximated their
fair value.
D. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1997, the Company will be required to adopt SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". The Company believes that the adoption of
this statement will not have a material effect on the Company's financial
position.
E. INVENTORIES
Inventories have been recorded at the lower of cost or market. The cost of
finished products includes manufacturing, labor and overhead.
F. ACCOUNTS RECEIVABLE
The Company performs ongoing credit evaluations of its customers'
financial condition and generally, requires no collateral from its customers.
The Company believes the allowance for doubtful accounts of $50,000 is
adequate to absorb estimated losses as of October 31, 1996.
G. PROPERTY AND EQUIPMENT
Property and Equipment is stated at cost when placed in service. Repairs
and maintenance which do not appreciably extend the useful lives of the
related assets are charged to expense as incurred; major renewals or
betterments are capitalized. Depreciation is computed using the straight line
method over the estimated useful lives of the assets ranging from five to ten
years.
H. INCOME TAXES
The Company, with the consent of its shareholders, has elected under the
Internal Revenue Code to be an S Corporation. In lieu of corporation income
taxes, the shareholders of an S Corporation are taxed on their proportionate
share of the Company's taxable income. Therefore, no provisions or liability
for federal income taxes has been included in the financial statements. The
Company continues to pay state tax.
F-27
<PAGE>
CHRISTIE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
I. CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid instruments purchased with a maturity of three months or less
to be cash equivalents.
NOTE 2 -- INVENTORIES
Inventory at October 31, 1996 consisted of the following:
<TABLE>
<CAPTION>
<S> <C>
Raw materials . $140,840
Finished
goods......... 62,108
----------
Total........ $202,948
==========
</TABLE>
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following components as of October
31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Machinery and equipment........ $1,618,820
Molds.......................... 1,371,186
Automobiles.................... 63,177
Furniture and fixtures......... 14,785
Leasehold improvements......... 28,793
------------
3,096,761
Less: Accumulated
Depreciation.................. 2,844,945
------------
Total.......................... $ 251,816
============
</TABLE>
NOTE 4 -- LONG-TERM DEBT
Following is a summary of long-term debt as of October 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Loan payable to Constellation Bank, bearing interest at 11.25%,
maturing February 28, 1996............................................. $320,000
Loan payable to United Counties Trust Company, bearing interest at 8.0%
due on demand.......................................................... 175,000
----------
Total long-term debt.................................................... 495,000
Less current portion.................................................... 495,000
----------
Long-term debt, excluding current portion............................... $ --
==========
</TABLE>
Interest expense related to notes payable for the year ended December 31,
1995 and the ten months ended October 31, 1996 amounted to $75,354 and
$42,291, respectively.
NOTE 5 -- PENSION PLAN
The Company has a 401k plan covering substantially all of its employees.
Provisions are funded currently. Expenses charged to operations for the year
ended December 31, 1995 and the ten months ended October 31, 1996 are $2,550
and $-0-, respectively.
NOTE 6 -- RELATED PARTY TRANSACTIONS
At October 31, 1996, amounts due to related companies have been included
in the accompanying financial statements as related party loans payable.
These loans do not bear interest and have no specific repayment terms.
F-28
<PAGE>
CHRISTIE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- RELATED PARTY TRANSACTIONS (Continued)
The shareholders control five related entities which share certain
administrative costs including payroll, with the Company. The Company pays
the costs and is periodically reimbursed by the related entities.
The Company also leases its facilities from an entity owned by a
shareholder. Rental payments for the year ended December 31, 1995 and the ten
months ended October 31, 1996 were $120,000 and $100,000, respectively.
NOTE 7 -- PRO FORMA INCOME TAXES
As discussed in the summary of significant accounting policies, the
Company elected to be taxed under subchapter "S" of the Internal Revenue Code
and accordingly recognize no Federal current or deferred income taxes. The
pro forma adjustments reflect a provision for income taxes, in accordance
with Statement of Financial Accounting Standards No. 109, at an effective
rate of 40% for each year had the Company been a "C" corporation.
Given the historical net losses incurred by the Company and the tax rates
and jurisdictions in which the Company operates, the Company would incur no
income tax benefit as a "C" corporation in 1995; therefore pro forma net loss
and pro forma net loss per share would be equivalent to results as reported
in the income statement. The Company's net operating losses and certain other
items would result in a deferred tax asset and income tax benefit, but the
Company would record a valuation allowance in an equivalent amount to reduce
the deferred tax asset and income tax benefit to zero; accordingly, the
statement of financial position and results of operations would not be
impacted by the Company's pro forma taxation as a "C" corporation in 1995.
However, due to the sale of the Company's business assets on November 1,
1996, a gain of approximately 1.25 million dollars will be recorded by the
Company which can be offset by the Company's prior losses and therefore an
income tax benefit is applicable for 1996.
Deferred income taxes in 1996 reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
The tax effects of significant items comprising the Company's deferred tax
assets are as follows:
<TABLE>
<CAPTION>
<S> <C>
Net operating loss
carryforwards................... $ 240,000
Less: valuation allowance........ (158,000)
-----------
Net deferred tax asset.......... $ 82,000
===========
</TABLE>
Pro forma net loss per share is based upon 100 shares issued and
outstanding for the year ended December 31, 1995 and the ten months ended
October 31, 1996.
NOTE 8 -- SUBSEQUENT EVENTS
On November 1, 1996, Christie Products, Inc. (CPI), a wholly owned
subsidiary of Discas, Inc., entered into an agreement with Christie
Enterprises, Inc., to purchase substantially all of their business assets.
The sale price of $1,500,000 exceeded the fair market value of the assets
sold by $173,000. CPI and Discas, Inc. as consideration, paid Christie
Enterprises, Inc., $500,000 in cash and issued a convertible promissory note
in the amount of $1,000,000. The note is interest free until April 30, 1997,
at which time interest will be paid at prime plus 1% along with fixed monthly
principal payments of $16,667. The note
F-29
<PAGE>
CHRISTIE ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- SUBSEQUENT EVENTS (Continued)
matures on April 30, 2002 and is secured by the molds, machinery and
equipment of the seller. The holder of this note must convert at least one
half of the outstanding principal balance into common shares of Discas, Inc.
The number of shares into which this note may be converted shall be
determined by dividing the aggregate outstanding principal amount of the note
by 125% of the initial public offering price per share of common stock of
Discas, Inc., provided that if Discas, Inc. has not completed an initial
public offering of its common stock by October 1, 1997, then the conversion
price shall be the greater of $6.00 per share or 125% of the then fair market
value of the common stock of Discas, Inc. on a per share basis.
As of November 1, 1996, Christie Enterprises, Inc. ceased substantially
all business operations.
F-30
<PAGE>
DISCAS, INC., AND SUBSIDIARY
Pro Forma Condensed Combined Statement of Operations
(Unaudited)
The following pro forma condensed combined statement of operations for the
year ended April 30, 1997 give effect to the acquisition of Christie
Enterprises, Inc. under the purchase method of accounting and assumptions and
adjustments in the accompanying notes to the pro forma financial statements.
The pro forma statement has been prepared by the management of Discas, Inc.,
and Subsidiary based upon the financial statements of Christie included
elsewhere herein. This pro forma statement may not be indicative of the
results that actually would have occurred if the combination had been in
effect on the dates indicated or which may be obtained in the future. The pro
forma financial statement should be read in conjunction with the audited
financial statements and notes of Discas, Inc., and Subsidiary and Christie
Enterprises, Inc. contained elsewhere herein.
<TABLE>
<CAPTION>
Historical Pro forma Pro forma
Discas, Inc. Christie Enterprises Adjustments Combined
------------ -------------------- ----------- -------------
<S> <C> <C> <C> <C>
Sales $5,179,668 1,756,710 (b) (350,000) 6,586,378
Cost of Sales 3,982,066 1,592,231 (c) 26,785 5,251,082
---------- --------- -----------
(b) (350,000)
Gross Profit 1,197,602 164,479 1,335,296
Selling, General,
and Administrative
Expenses 1,300,859 301,216 (c) 2,843 1,604,918
---------- --------- -----------
Loss from operations (103,257) (136,737) (269,622)
Other income (expense):
Other income 35,279 - 35,279
Interest expense (317,393) (27,388) (d) (18,162) (362,943)
---------- --------- -----------
Net other expense (282,114) (27,388) (327,664)
Minority interest 36,705 - 36,705
---------- --------- -----------
Loss before income
taxes (348,666) (164,125) (560,581)
Income tax benefit 36,000 - 36,000
---------- --------- -----------
Net loss $ (312,666) (164,125) (524,581)
========== ========= ==========
Net loss per share
Primary $ (.13) (.22)
========== ==========
Fully diluted $ (.13) (.23)
========== ==========
</TABLE>
F-31
<PAGE>
DISCAS, INC., AND SUBSIDIARY
Notes to Pro Forma Condensed Combined Financial Statements
On November 1, 1996, Discas acquired substantially all of the business assets
of Christie Enterprises, Inc. for a purchase price of $1,500,000. To finance
the acquisition, the company borrowed $500,000 and issued a note payable to
the former owner of Christie Enterprises, Inc. for $1,000,000. The note is
convertible into shares of Discas at a conversion price of 125% of the Initial
Public Offering price per share of the common stock of Discas, or the greater
of the then fair value of a share of the common stock of Discas and $6.00 in
the event an Initial Public Offering is not consummated by October 31, 1997.
The pro forma financial statements combine the results of operations for the
two companies for the year ended April 30, 1997.
Christie enterprises ceased operations on October 31, 1996, therefore, the
historical year ended April 30, 1997 represents only six months of Christie
activity, however, the last six months of this period includes operations of
both entities. In combining the two entities the following pro forma
adjustments have been made.
(a) Reflects the purchase of property and equipment adjusted to fair
value and the recording of debt.
Total purchase price $1,500,000
==========
Purchase of assets:
Machinery and equipment 912,000
Molds 415,000
----------
Total 1,327,000
Less book value of machinery
and equipment (298,730)
----------
Net adjustment $1,028,270
==========
Goodwill 173,000
Less book value of other assets (18,000)
----------
Net adjustment $ 155,000
==========
Recording of debt
Note payable 500,000
Convertible note payable 1,000,000
----------
$1,500,000
==========
Current portion 209,666
Less Christie debt not assumed (290,000)
----------
$ 80,334
==========
Long term debt excluding current portion 1,290,334
Less Christie debt not assumed (233,591)
----------
Net adjustment $1,056,743
==========
The remaining adjustments eliminates assets and liabilities
not included in the purchase.
F-32
<PAGE>
DISCAS, INC., AND SUBSIDIARY
Notes to Pro Forma Condensed Combined Financial Statements (Continued)
(b) Discas had sales to Christie of approximately $350,000 from May
1, 1996 to October 31, 1996.
(c) Depreciation of property and equipment and amortization of
goodwill was adjusted as follows:
Life
(six months)
7 years Depreciation of machinery and equipment $ 65,143
10 years Depreciation of molds 20,750
15 years Amortization of goodwill 5,752
-------
$ 91,645
========
Total in cost of sales 85,893
Less historical depreciation (59,108)
--------
Net adjustment $ 26,785
========
Total in cost of selling, general and administrative
expenses 5,752
Less historical depreciation (2,909)
-------
Net adjustment $ 2,843
========
(d) Interest on the debt incurred for the acquisition less interest
on historical Christie is as follows:
(six months)
Interest on new borrowings $ 45,550
Less interest on historical debt (27,388)
-------
$ 18,162
========
F-33
<PAGE>
No dealer, salesman or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus, and, if given or made, such information or representations
may not be relied on as having been authorized by the Company or by any of the
Underwriters. Neither the delivery of this Prospectus nor any sale made
hereunder shall under any circumstances create an implication that there has
been no change in the affairs of the Company since the date hereof. This
Prospectus does not constitute an offer to sell or the solicitation of an
offer to buy any securities other than the securities to which it relates or
an offer or solicitation to any person in any jurisdiction where such an offer
or solicitation would be unlawful.
TABLE OF CONTENTS
PAGE
Prospectus Summary 3
Risk Factors 6
Use of Proceeds 14
Dividend Policy 14
Capitalization 15
Dilution 16
Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Business 20
Management 26
Certain Transactions 29
Principal Stockholders 30
Concurrent Offering 31
Interim Financing 33
Description of Securities 33
Shares Eligible for Future Sale 34
Underwriting 35
Legal Matters 37
Experts 37
Additional Information 38
Index to Financial Statements F-1
Until 25 days after the date of this Prospectus, all dealers
effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as underwriter and with respect to their unsold allotments or
subscriptions.
48
<PAGE>
DISCAS, INC.
800,000 shares of Common Stock
and 800,000 Redeemable Common Stock Purchase Warrants
PROSPECTUS
ROAN CAPITAL PARTNERS L.P. MERIT CAPITAL ASSOCIATES, INC.
August 13, 1997
49
<PAGE>
Alternate Prospectus Pages
800,000 Selling Securityholder Warrants and
800,000 Selling Securityholder Shares of Common Stock
DISCAS, INC.
This Prospectus relates to 800,000 warrants (the "Selling
Securityholder Warrants") and 800,000 shares of common stock, par value $.0001
per share (the "Selling Securityholder Common Stock" or "Selling
Securityholder Shares") of Discas, Inc., a Delaware corporation ("Discas" or
the "Company") issuable upon the exercise of the Selling Securityholder
Warrants in accordance with their terms, to be offered and sold from time to
time for the accounts of the Selling Securityholders set forth herein (the
"Selling Securityholders"). All of the 800,000 Selling Securityholder Warrants
and 800,000 Selling Securityholder Shares being offered hereby are being
registered at the Company's expense pursuant to contractual obligations of the
Company incurred in connection with a private placement of its promissory
notes and common stock purchase warrants completed in April 1997. The common
stock purchase warrants were automatically converted into the Selling
Securityholder Warrants upon the effective date of this Prospectus.
Each Selling Securityholder Warrant entitles the registered holder
thereof to purchase, at any time over a four-year period commencing 13 months
from the date of this Prospectus, one share of Common Stock at a price of
$6.25 (the "Warrant Exercise Price"). The Warrant Exercise Price is subject to
anti-dilution adjustments under certain circumstances. The Selling
Securityholder Warrants are subject to redemption by the Company at $.10 per
Selling Securityholder Warrant on 30 days' written notice commencing 13 months
after the date of this Prospectus, provided the average closing bid price of
the Common Stock for 20 consecutive trading days ending not more than fifteen
days prior to the date on which the Company gives notice, exceeds 150% ($9.375
per share) of the current Warrant Exercise Price.
Each Selling Securityholder has agreed with Roan Capital Partners
L.P., an underwriter of the Company's initial public offering being completed
concurrently with this offering, not to sell any Selling Securityholder
Warrants for a period of two years from the date of this Prospectus, or
Selling Securityholder Shares.
The Company will receive no part of the proceeds of sales from the
offering of Selling Securityholder Warrants or Selling Securityholder Shares
by the Selling Securityholders. The Company could receive up to $5,000,000
from the exercise of Selling Securityholder Warrants held by the Selling
Securityholders. The Company has no knowledge of any Selling Securityholder
actually intending to sell any Selling Securityholder Warrants or Selling
Securityholder Shares.
The Selling Securityholder Warrants and the Selling Securityholder
Shares issuable upon exercise of the Selling Securityholder Warrants may be
sold by the Selling Securityholders in underwritten transactions, in ordinary
brokerage transactions, in transactions in which brokers solicit purchases, in
negotiated transactions, or in a combination of such methods of sale, at
market prices prevailing at the time of sale, at prices relating to such
prevailing market prices or at negotiated prices. See "Plan of Distribution."
All expenses of registration incurred in connection with this offering are
being borne by the Company, but all selling and other expenses incurred by the
Selling Securityholders will be borne by such Selling Securityholders. None of
the Selling Securityholder Warrants nor any Selling Securityholder Shares
offered pursuant to this Prospectus has been registered prior to the filing of
the Registration Statement of which this Prospectus is a part.
AN INVESTMENT IN THE SELLING SECURITYHOLDER WARRANTS AND THE
UNDERLYING SELLING SECURITYHOLDER SHARES OFFERED PURSUANT TO THIS PROSPECTUS
IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE [ ] FOR A DISCUSSION OF CERTAIN FACTORS WHICH SHOULD BE
CONSIDEREDBY INVESTORS BEFORE PURCHASING THE SELLING SECURITYHOLDER WARRANTS
AND THE UNDERLYING SELLING SECURITYHOLDER SHARES OFFERED HEREBY.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
50
<PAGE>
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------
The date of this Prospectus is August 13, 1997.
51
<PAGE>
USE OF PROCEEDS
All proceeds from any sale of Selling Securityholder Warrants and
Selling Securityholder Shares offered by the Selling Securityholders will be
received by the Selling Securityholders and not by the Company. The proceeds
to the Company from the exercise of all of the Selling Securityholder Warrants
would be $5,000,000. Such proceeds, if any, will be used for general corporate
purposes.
SELLING SECURITYHOLDERS
800,000 Selling Securityholder Warrants are being offered for resale
by the Selling Securityholders. Up to 800,000 Selling Securityholder Shares
are issuable upon exercise by the holders of the Selling Securityholder
Warrants. All Selling Securityholder Warrants and Selling Securityholder
Shares, to the extent they are being offered, are being offered for the
account of the following Selling Securityholders and their donees or pledgees.
The following table sets forth certain information with respect to
the Selling Securityholders for whom the Company is registering the Selling
Securityholder Warrants and the underlying Selling Securityholder Shares for
resale to the public, including: (i) number of Selling Securityholder Warrants
offered by each Selling Securityholder, (ii) the number of Selling
Securityholder Shares issuable upon exercise of Selling Securityholder
Warrants, and (iii) the percentage of class owned (assuming the maximum number
of shares were issued upon exercise and then sold) by each Selling
Securityholder. The Company has no knowledge of the intentions of any Selling
Securityholders to actually sell any of the Selling Securityholder Warrants or
Selling Securityholder Shares listed under the column "Selling Securityholder
Warrants" or "Selling Securityholder Shares Issuable Upon Exercise of Selling
Securityholder Warrants." There are no material relationships between any of
the Selling Securityholders.
52
<PAGE>
<TABLE>
<CAPTION>
SELLING SECURITYHOLDER
SELLING SHARES ISSUABLE UPON
SECURITYHOLDER EXERCISE OF SELLING PERCENTAGE OF
SELLING SECURITYHOLDER WARRANTS SECURITYHOLDER WARRANTS CLASS
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Brock C. Akers 40,000 40,000 0
Edward J. Rodriguez 20,000 20,000 0
Ellen Gopin 20,000 20,000 0
William B. Greene and Ann S. 20,000 20,000 0
Green TEN ENT
George W. Hawkins 20,000 20,000 0
J. Michael Crum 20,000 20,000 0
Anthony C. Recchia IRA 80,000 80,000 0
Alan R. Williams 20,000 20,000 0
Erik A. Detiger 20,000 20,000 0
Anita Rosner 160,000 160,000 0
Herbert V. Cook 20,000 20,000 0
Diane M. Zam 120,000 120,000 0
Herbert C. Stine 20,000 20,000 0
Stefanie Rubin 80,000 80,000 0
Noel Mortimer Davies 20,000 20,000 0
Glenn W. Sutton III 20,000 20,000 0
Raymark Enterprises Inc.(1) 20,000 20,000 0
Thomas McCann d.b.a 20,000 20,000 0
Knowlton Street Properties
Donald G. Dougherty 20,000 20,000 0
Paul S. Nakian and Maria C. 20,000 20,000 0
Nakian TEN ENT
Christine Wally 20,000 20,000 0
----------------------------------------------------------------------------------
TOTAL 800,000 800,000 0
</TABLE>
(1) An affiliate of Raymond Haddad.
The information concerning the Selling Securityholders may change
from time to time and will be set forth in Supplements to this Prospectus.
PLAN OF DISTRIBUTION
The purpose of this Prospectus is to permit the Selling
Securityholders, if they desire, to offer and sell up to 800,000 Selling
Securityholder Warrants and 800,000 Selling Securityholder Shares issuable
upon the exercise of the Selling Securityholder Warrants at such times and at
such places as the Selling Securityholders choose.
The distribution of the Selling Securityholder Warrants and the
Selling Securityholder Shares may be effected from time to time in one or more
transactions. Any of the Selling Securityholder Warrants and the Selling
53
<PAGE>
Securityholder Shares may be offered for sale, from time to time, by the
Selling Securityholders, or by permitted transferees or successors of the
Selling Securityholders, on the NASDAQ SmallCap Market, the Boston Stock
Exchange, or otherwise, at prices and on terms then obtainable, at fixed
prices, at prices then prevailing at the time of sale, at prices related to
such prevailing prices, or in negotiated transactions at negotiated prices or
otherwise. The Selling Securityholder Warrants and the Selling Securityholder
Shares offered hereby may be sold by one or more of the following: (i) through
underwriters, or through underwriting syndicates; (ii) through one or more
dealers or agents (which may include one or more underwriters), including, but
not limited to: (a) block trades in which the broker or dealer acts as
principal to facilitate the transactions; (b) purchases by a broker or dealer
as principal and resale by such broker or dealer for its account pursuant to
this Prospectus; (c) ordinary brokerage transactions; and (d) transactions in
which the broker solicits purchasers; (iii) directly to one or more
purchasers; or (iv) a combination of these methods. The names of any
underwriters or agents involved in the sale of the Selling Securityholder
Warrants and the Selling Securityholder Shares will be set forth in a
Prospectus Supplement. In connection with the distribution of the Selling
Securityholder Warrants and the Selling Securityholder Shares or otherwise,
the Selling Securityholders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with such
transactions, broker-dealers or other financial institutions may engage in
short sales of Selling Securityholder Shares in the course of hedging the
positions they assume with the Selling Securityholders. The Selling
Securityholders may also sell Selling Securityholder Shares short and
redeliver the shares to close out such short positions. The Selling
Securityholders may also enter into options or other transactions with
broker-dealers or other financial institutions which require the delivery to
such broker-dealers or other financial institutions of the Selling
Securityholder Warrants or the Selling Securityholder Shares, which shares or
Warrants such broker-dealers or financial institutions may resell pursuant to
this Prospectus (as supplemented or amended to reflect such transaction). The
Selling Securityholders may also pledge the Selling Securityholder Warrants or
the Selling Securityholder Shares registered hereunder to a broker-dealer or
other financial institution and, upon a default, such broker-dealer or other
financial institution may effect sales of the pledged shares pursuant to this
Prospectus (as supplemented or amended to reflect such transaction). In
addition, any Selling Securityholder Warrants and the Selling Securityholder
Shares covered by this Prospectus that qualify for sale pursuant to Rule 144
under the Securities Act may be sold under Rule 144 rather than pursuant to
this Prospectus.
The Selling Securityholders or their underwriters, dealers
or agents may sell the Selling Securityholder Warrants and the Selling
Securityholder Shares to or through underwriters, dealers or agents, and such
underwriters, dealers or agents may receive compensation in the form of
discounts or concessions allowed or reallowed. Underwriters, dealers, brokers
or other agents engaged by the Selling Securityholders may arrange for other
such persons to participate. Any fixed public offering price and any discounts
and concessions may be changed from time to time. Underwriters, dealers and
agents who participate in the distribution of the Selling Securityholder
Warrants and the Selling Securityholder Shares may be deemed to be
underwriters within the meaning of the Securities Act, and any discounts or
commissions received by them or any profit on the resale of shares by them may
be deemed to be underwriting discounts and commissions thereunder. The
proposed amounts of the Selling Securityholder Warrants and the Selling
Securityholder Shares, if any, to be purchased by underwriters and the
compensation, if any, of underwriters, dealers or agents will be set forth in
a Prospectus Supplement.
The Selling Securityholders may not effect sales of the
Selling Securityholder Shares or the Selling Securityholder Warrants in the
State of New Jersey except through a registered broker-dealer or else in
reliance upon an exemption from registration in that state.
Unless granted an exemption by the Commission from
Regulation M under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or unless otherwise permitted under Regulation M, the Selling
Securityholders will not engage in any stabilization activity in connection
with the Company's securities, will furnish each broker or dealer engaged by
the Selling Securityholders and each other participating broker or dealer the
number of copies of this Prospectus required by such broker or dealer, and
will not bid for or purchase any securities of the Company or attempt to
induce any person to purchase any of the Company's securities other than as
permitted under the Exchange Act.
The Company will not receive any proceeds from any sales of
the Selling Securityholder Shares, but will receive the proceeds from any
exercise of the Selling Securityholder Warrants held by the Selling
Securityholders, which proceeds, if any, will be used for general corporate
purposes.
In connection with the registration for resale of the
Selling Securityholder Shares and the Selling Securityholder Warrants by the
Company, the Company has agreed with the Selling Securityholders to use its
best efforts to prepare and file with the Commission such amendments and
supplements to the registration statement of which this Prospectus is a part
as may be necessary to keep such registration statement effective and to
comply with the provisions
54
<PAGE>
of the Securities Act with respect to the disposition of the Selling
Securityholder Warrants and Selling Securityholder Shares covered by the
registration statement for the period required to effect the distribution of
such Selling Securityholder Warrants and Selling Securityholder Shares.
The Company is paying certain expenses (other than commissions and
discounts of underwriters, dealers or agents) incident to the offering and
sale of the Selling Securityholder Warrants and the Selling Securityholder
Shares to the public, which are estimated to be nominal due to the concurrent
public offering by the Company. If the Company is required to update this
Prospectus during such period, it may incur additional expenses in excess of
the amount estimated above.
In order to comply with certain states' securities laws, if
applicable, the Selling Securityholder Warrants and Selling Securityholder
Shares will be sold in such jurisdictions only through registered or licensed
brokers or dealers. In certain states the Selling Securityholder Warrants and
Selling Securityholder Shares may not be sold unless they have been registered
or qualify for sale in such state or an exemption from registration or
qualification is available and is complied with.
Concurrent Public Offering
On the date of this Prospectus, a registration statement was declared
effective under the Securities Act with respect to an underwritten offering by
the Company of 800,000 shares of Common Stock and 800,000 Warrants and up to
an additional 120,000 shares of Common Stock and 120,000 Warrants to cover
over-allotments, if any.
55
<PAGE>
Alternate Prospectus Back Cover Page
- ------------------------------------
No dealer, salesman or other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or by any of the
Underwriters. This Prospectus does not constitute an offer to sell, or a
solicitation of an offer to buy, any securities offered hereby by anyone in
any jurisdiction in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so
or to anyone to whom it is unlawful to make such offer, or solicitation.
Neither the delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that the information herein
contained is correct as of any time subsequent to the date of this Prospectus.
-------------------
TABLE OF CONTENTS
Page
----
Prospectus Summary . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . .
Use of Proceeds and Plan of Operations . . . . . . . . . .
Dividend Policy . . . . . . . . . . . . . . . . . . . . .
Capitalization. . . . . . . . . . . . . . . . . . . . . .
Dilution. . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . .
Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . .
Business . . . . . . . . . . . . . . . . . . . . . . . . .
Management. . . . . . . . . . . . . . . . . . . . . . . .
Certain Transactions. . . . . . . . . . . . . . . . . . .
Principal Stockholders. . . . . . . . . . . . . . . . . .
Selling Securityholders . . . . . . . . . . . . . . . . .
Plan of Distribution . . . . . . . . . . . . . . . . . . .
Concurrent Public Offering. . . . . . . . . . . . . . . .
Description of Securities . . . . . . . . . . . . . . . .
Shares Eligible for Future Sale . . . . . . . . . . . . .
Legal Matters . . . . . . . . . . . . . . . . . . . . . .
56
<PAGE>
Experts . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Information . . . . . . . . . . . . . . . . . .
Index to Financial Statements . . . . . . . . . . . . . .. F-1
DISCAS, INC.
800,000 Selling Securityholder Warrants
800,000 Selling Securityholder Shares of Common Stock
-----------------
PROSPECTUS
-----------------
August 13, 1997
57
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Discas, Inc. (the "Company") is incorporated in Delaware. Under
Section 145 of the General Corporation Law of the State of Delaware, a
Delaware corporation has the power, under specified circumstances, to
indemnify its directors, officers, employees and agents in connection with
actions, suits or proceedings brought against them by a third party or in the
right of the corporation, by reason of the fact that they were or are such
directors, officers, employees or agents, against expenses incurred in any
action, suit or proceeding. Article Tenth of the Certificate of Incorporation
and Article III of the Bylaws of the Company provide for indemnification of
directors and officers to the fullest extent permitted by the General
Corporation Law of the State of Delaware. Reference is made to the Amended and
Restated Certificate of Incorporation of the Company, filed as Exhibit 3.1
hereto.
Section 102(b)(7) of the General Corporation Law of the State of
Delaware provides that a certificate of incorporation may contain a provision
eliminating or limiting the personal liability of a director to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director provided that such provision shall not eliminate or limit
the liability of a director (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) under Section 174 (relating to liability for unauthorized
acquisitions or redemptions of, or dividends on, capital stock) of the General
Corporation Law of the State of Delaware, or (iv) for any transaction from
which the director derived an improper personal benefit. Article Ninth of the
Company's Certificate of Incorporation contains such a provision.
The Underwriting Agreement filed herewith as Exhibit 1.2 contains
provisions by which each Underwriter severally agrees to indemnify the
Company, any person controlling the Company within the meaning of Section 15
of the Securities Act of 1933 or Section 20 of the Securities Exchange Act of
1934, each director of the Company, and each officer of the Company who signs
this Registration Statement with respect to information relating to such
Underwriter furnished in writing by or on behalf of such Underwriter expressly
for use in the Registration Statement.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses in connection
with this Registration Statement.
Filing Fee--Securities and Exchange Commission $5,059.13
Filing Fee--National Association of Securities Dealers, Inc. 1,932.28
Filing Fee-NASDAQ SmallCap Market 9,854.00
Filing Fee--Boston Stock Exchange 15,000.00
Fees and Expenses of Accountants 95,000.00
Fees and Expenses of Counsel 120,000.00
Printing and Engraving Expenses 25,000.00
Blue Sky Fees and Expenses 40,000.00
Underwriters' Non-accountable expenses 122,400.00
Transfer and Warrant Agent fees 5,000.00
Underwriters' Consulting Fee 85,300.00
Miscellaneous Expenses 33,458.00
Total $558,000.00
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
In August 1996, Discas Recycled Products Corporation ("DRPC"), a 69%-owned
subsidiary of Discas, Inc. was merged with and into Discas, Inc. As a result
of this transaction, the Company issued an aggregate of 56,758 shares of
Common Stock to four unaffiliated stockholders of DRPC in exchange for each
party's shares of DRCP. Each of such four stockholders has substantial
business experience in some aspect of the plastics industry. There were no
commissions paid in association with this exchange. The transaction was made
in reliance on the exemption provided by Section 4(2) under the Act. In
September 1996, the Company issued 270,000 shares of Common Stock to Mantis V,
L.L.C. for cash consideration of $27,000. All members of Mantis V, L.L.C. are
accredited investors within the meaning of Rule 501 under the Act. No
commissions were paid in association with the transaction, which was made in
reliance on the exemption provided by Section 4(2) under the Act. Effective
December 31, 1996, the Corporation declared a Common Stock split of 1.35
shares to 1, which increased the 56,758 shares issued to the DRPC stockholders
to 76,623 and the 270,000 shares sold to Mantis V, L.L.C. to 364,500. In April
1997, the Company sold 40 Units, each comprised of one $9,000 11% unsecured
subordinated note and warrants to purchase 20,000 shares of Common Stock for
aggregate cash consideration of $400,000 to 21 investors (the "Bridge
Financing".) All of the investors in the Bridge Financing, as well as Mantis
V, L.L.C., represented to the Company that they were "accredited investors" as
such term is defined in Regulation D promulgated by the Act. Roan Capital
Partners L.P. acted as placement agent for the Bridge Financing for a
commission of 10% of the gross proceeds. Such placement was made in reliance
on Rule 506 of Regulation D under the Act.
ITEM 27. EXHIBITS.
1.1 -- Form of Agreement among Underwriters.*
1.2 -- Underwriting Agreement.
1.3 -- Selected Dealer Agreement.
2.1 -- Asset Purchase Agreement--Christie Enterprises, Inc.*
3.1 -- Amended and Restated Certificate of Incorporation.*
3.2 -- Amended Bylaws of the Company.*
4.1 -- Form of Common Stock Certificate.*
4.2 -- Warrant Agreement between the Company and American Stock
Transfer & Trust Company.
II-2
<PAGE>
4.3 -- Form of Common Stock Purchase Warrant (included in Exhibit 4.2.)
4.4 -- Underwriters' Warrant
5.1 -- Opinion of Epstein Becker & Green, P.C.
9.1 -- Voting Trust Agreement--Mantis Partners III, L.P.*
9.2 -- Voting Trust Agreement--Mantis Partners IV, L.P.*
9.3 -- Voting Trust Agreement--Ramona H. Lainas and Telemahos G. Lainas.*
9.4 -- Voting Trust Agreement--Jack Milgrom.*
9.5 -- Voting Trust Agreement--Sheftel Family Irrevocable Trust.*
9.6 -- Voting Trust Agreement--Pimbyco, Inc.*
10.1 -- Employment Agreement between the Company and
Patrick A. DePaolo, Sr.*
10.2 -- 1997 Stock Option Plan*
10.3 -- Credit Agreement--Bank of Boston Connecticut*
10.4 -- Promissory Note (February 23, 1995)--Bank of Boston Connecticut.*
II-3
<PAGE>
10.5 -- Business Loan Agreement (November 8, 1995)--Bank of Boston
Connecticut.*
10.6 -- Change in Terms Agreement (October 6, 1995)--Bank of Boston
Connecticut.*
10.7 -- Change in Terms Agreement #2 (November 8, 1995)--Bank of Boston
Connecticut.*
10.8 -- Change in Terms Agreement #3 (October 31, 1996)--Bank of Boston
Connecticut.*
10.9 -- Amendment to Credit Agreement--Bank of Boston Connecticut.*
10.10 -- Lease (3,728 Sq. Feet)--Industrial Development Group.*
10.11 -- Amendment to Lease (3,728 Sq. Feet)--Industrial Development Group.*
10.12 -- Lease (26,018 Sq. Feet)--Industrial Development Group.*
10.13 -- Amendment to Lease (26,018 Sq. Feet)--Industrial Development
Group.*
10.14 -- Lease (23,966 Sq. Feet)--Industrial Development Group.*
II-4
<PAGE>
10.15 -- Restated Lease Indenture--Plaza Realty Partnership.*
10.16 -- Mantis V, L.L.C. Financing Agreement.*
10.17 -- Mantis V, L.L.C. Promissory Notes totalling $375,000.*
10.18 -- Convertible Promissory Note--Christie Enterprises, Inc.*
10.19 -- Non-Competition Agreement--J-Von, L.L.C.*
10.20 -- Textron Installment Note.*
10.21 -- Form of Consulting Agreement between the Company and Underwriters.*
10.22 -- Note Modification Agreement dated February 24, 1997 between
Mantis V, L.L.C. and the Company.*
10.23 -- Revolving and Term Loan Agreement dated June 26, 1997 among
Discas, Inc., Christie Products, Inc. and Citizens Bank of
Connecticut.*
21.1 -- List of Subsidiaries*
23.1 -- Consent of Jump, Green, Holman & Company.
II-5
<PAGE>
23.2 -- Consent of Epstein Becker & Green, P.C. (Included in Exhibit 5.1).
24 -- Power of Attorney.*
27 -- Financial Data Schedule
* Previously filed.
28. UNDERTAKINGS.
The undersigned small business issuer hereby undertakes:
(a)(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
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 aggregate,
represent a fundamental change in the information set forth in the
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) For determining liability under the Securities Act, treat each
post-effective amendment as new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) To file a post-effective amendment to remove from registration
any of the securities that remain unsold at the end of an offering.
(d) The undersigned small business issuer hereby undertakes to
provide to the underwriters at the closing specified in the placement
agreements, certificates in such denominations and registered in such names as
required by the underwriters to permit prompt delivery to each purchaser.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(f) The undersigned registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
II-6
<PAGE>
(ii) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof
(g) The undersigned small business issuer hereby undertakes to (1)
file a post-effective amendment to this registration statement if the lock-up
arrangements described in the prospectus part under the caption "Concurrent
Offering" are waived by Roan Capital Partners L.P. or its successor as to 10%
or more of the shares of Common Stock underlying the Selling Securityholders'
Warrants and (2) file and add a "sticker" to such prospectus if such lock-up
arrangement is waived as to at least 5% but less than 10% of such underlying
shares of Common Stock.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing this Form SB-2 and has duly caused this
Amendment to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Waterbury, State of
Connecticut, on the 11th day of August 1997.
Discas, Inc.
By: /s/ Patrick A. DePaolo, Sr.
- ---------------------------------
PATRICK A. DEPAOLO, SR.
President & Chief Executive Officer
SIGNATURE TITLE DATE
/s/ Patrick A. DePaolo, Sr. Chairman of the Board August 11, 1997
President, Principal Executive
Patrick A. DePaolo, Sr. Officer
/s/ Ron Pettirossi* Chief Accounting Officer , 1997
Ron Pettirossi
/s/ Thomas R. Tomaszek* Director , 1997
Thomas R. Tomaszek
Director , 1997
John Carroll
/s/ Alan Milton* Director , 1997
Alan Milton
Director , 1997
Asher Bernstein
* By Patrick A. DePaolo, Sr.
attorney in fact
II-8
<PAGE>
EXHIBIT INDEX
EXHIBIT EXHIBITS SEQUENTIALLY
NUMBER NUMBERED
1.1 -- Form of Agreement among Underwriters.*
1.2 -- Underwriting Agreement.
1.3 -- Selected Dealer Agreement.
2.1 -- Asset Purchase Agreement--Christie Enterprises, Inc.*
3.1 -- Amended and Restated Certificate of Incorporation.*
3.2 -- Amended Bylaws of the Company.*
4.1 -- Form of Common Stock Certificate.*
4.2 -- Warrant Agreement between the Company and American Stock
Transfer & Trust Company.
<PAGE>
4.3 -- Form of Common Stock Purchase Warrant (included in Exhibit 4.2.)
4.4 -- Underwriters' Warrant
5.1 -- Opinion of Epstein Becker & Green, P.C.
9.1 -- Voting Trust Agreement--Mantis Partners III, L.P.*
9.2 -- Voting Trust Agreement--Mantis Partners IV, L.P.*
9.3 -- Voting Trust Agreement--Ramona H. Lainas and Telemahos G. Lainas.*
9.4 -- Voting Trust Agreement--Jack Milgrom.*
9.5 -- Voting Trust Agreement--Sheftel Family Irrevocable Trust.*
9.6 -- Voting Trust Agreement--Pimbyco, Inc.*
10.1 -- Employment Agreement between the Company and
Patrick A. DePaolo, Sr.*
10.2 -- 1997 Stock Option Plan*
10.3 -- Credit Agreement--Bank of Boston Connecticut*
10.4 -- Promissory Note (February 23, 1995)--Bank of Boston Connecticut.*
<PAGE>
10.5 -- Business Loan Agreement (November 8, 1995)--Bank of Boston
Connecticut.*
10.6 -- Change in Terms Agreement (October 6, 1995)--Bank of Boston
Connecticut.*
10.7 -- Change in Terms Agreement #2 (November 8, 1995)--Bank of Boston
Connecticut.*
10.8 -- Change in Terms Agreement #3 (October 31, 1996)--Bank of Boston
Connecticut.*
10.9 -- Amendment to Credit Agreement--Bank of Boston Connecticut.*
10.10 -- Lease (3,728 Sq. Feet)--Industrial Development Group.*
10.11 -- Amendment to Lease (3,728 Sq. Feet)--Industrial Development Group.*
10.12 -- Lease (26,018 Sq. Feet)--Industrial Development Group.*
10.13 -- Amendment to Lease (26,018 Sq. Feet)--Industrial Development
Group.*
10.14 -- Lease (23,966 Sq. Feet)--Industrial Development Group.*
<PAGE>
10.15 -- Restated Lease Indenture--Plaza Realty Partnership.*
10.16 -- Mantis V, L.L.C. Financing Agreement.*
10.17 -- Mantis V, L.L.C. Promissory Notes totalling $375,000.*
10.18 -- Convertible Promissory Note--Christie Enterprises, Inc.*
10.19 -- Non-Competition Agreement--J-V on, L.L.C.*
10.20 -- Textron Installment Note.*
10.21 -- Form of Consulting Agreement between the Company and Underwriters.*
10.22 -- Note Modification Agreement dated February 24, 1997 between
Mantis V, L.L.C. and the Company.*
10.23 -- Revolving and Term Loan Agreement dated June 26, 1997 among
Discas, Inc., Christie Products, Inc. and Citizens Bank of
Connecticut.*
21.1 -- List of Subsidiaries*
23.1 -- Consent of Jump, Green, Holman & Company.
<PAGE>
23.2 -- Consent of Epstein Becker & Green, P.C. (Included in Exhibit 5.1).
24 -- Power of Attorney.*
27 -- Financial Data Schedule
Filed herewith
* Previously filed.
<PAGE>
Exhibit 1.2
DISCAS, INC.
800,000 Shares of Common Stock
and
800,000 Redeemable Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
, 1997
Roan Capital Partners L.P.
40 East 52nd Street
New York, New York 10022
and
Merit Capital Associates, Inc.
1221 Post Road East
Westport, Connecticut 06880
Dear Sirs:
Discas, Inc., a Delaware corporation (the "Company") hereby
confirms the agreement with Roan Capital Partners L.P. ("Roan") and
Merit Capital Associates, Inc. ("Merit"), the Underwriters named in
Schedule A of this Underwriting Agreement (the "Agreement") (the
"Underwriters"), as follows:
1. Description of the Securities.
The Company proposes to issue and sell to the Underwriters an
aggregate of 800,000 shares of common stock, $.0001 par value per share (the
"Common Stock"), and 800,000 redeemable common stock purchase warrants of the
Company (the "Warrants," and collectively with the Common Stock, the
"Securities") in the amounts set forth on Schedule A hereto. Each Warrant shall
entitle the holder to purchase one share of Common Stock for $6.25, subject to
adjustment. The Company proposes to grant to the Underwriters an option to
purchase up to 120,000 additional shares of Common Stock and up to an
additional 120,000 Warrants (the "Additional Securities"). The offering of
Securities and Additional Securities contemplated hereby may sometimes be
referred to as the "Offering."
(a) The Warrants.
The Warrants are exercisable beginning thirteen (13) months from the
effective date of the Registration Statement, as defined in Paragraph 2(a) (the
"Effective Date"), and expire five years and one month after the Effective
Date, subject to prior redemption by
<PAGE>
the Company. The shares of Common Stock issuable upon the exercise
of the Warrants are hereinafter referred to as the "Warrant
Shares."
The Warrants will be redeemable at a price of $.10 per Warrant,
commencing thirteen (13) months after the Effective Date upon at least 30 days
prior written notice provided that the average of the closing bid prices of the
Common Stock (or closing sales price if listed on an exchange or on a reporting
system that provides last sales prices) for 20 consecutive trading days ending
on the fifteenth day immediately prior to the date on which notice of
redemption is given shall exceed 150% ($9.375 per share) of the current Warrant
exercise price (subject to adjustment), subject to the right of the holder to
exercise his purchase rights thereunder until redemption.
(b) Underwriters' Warrants.
The Company will sell to the Underwriters, for $10, a warrant to
purchase one share of Common Stock and one Warrant for each ten shares of
Common Stock and ten Warrants sold in this Offering excluding the Additional
Securities (a maximum of 80,000 shares of Common Stock and 80,000 Warrants) at
a price equal to $8.25 per share of Common Stock and $.165 per Warrant (the
"Underwriters' Warrants," and collectively with the Securities underlying the
Underwriters' Warrants, the "Underwriters' Securities"). The Warrants
underlying the Underwriters' Warrants shall be exercisable at a price of $6.25
per Warrant. The Underwriters' Warrants shall be non-transferable (other than
to (i) officers of the Underwriters, and (ii) members of the selling group and
their officers or partners) for a period of 12 months following the Effective
Date. Thereafter, they are transferable for a period of four years. If the
Warrants underlying the Underwriters' Warrants are not exercised during their
term, they shall, by their terms, automatically expire. The Underwriters'
Securities shall be registered for sale to the public and shall be included in
the Registration Statement filed in connection with the Offering.
2. Representations and Warranties of the Company.
The Company represents and warrants to the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission"), a registration statement on Form SB-2 (File No.
333-26543), including any related preliminary prospectus ("Preliminary
Prospectus"), for the registration of the Securities under the Securities Act
of 1933 (the "Act"). The Company will file further amendments to said
registration statement in the form to be delivered to you and will not, before
the registration statement becomes effective, file any other amendment
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thereto to which you shall have objected in writing after having been furnished
with a copy thereof. Except as the context may otherwise require, such
registration statement, as amended, on file with the Commission at the time the
registration statement becomes effective (including the prospectus, financial
statements, exhibits and all other documents filed as a part thereof or
incorporated therein), is hereinafter called the "Registration Statement", and
the prospectus, in the form filed with the Commission pursuant to Rule 424(b)
of the General Rules and Regulations of the Commission under the Act (the
"Regulations") or, if no such filing is made, the definitive prospectus used in
the Offering, is hereinafter called the "Prospectus". The Company has delivered
to you copies of each Preliminary Prospectus as filed with the Commission and
has consented to the use of such copies for purposes permitted by the Act.
(b) The Commission has not issued any orders preventing or
suspending the use of any Preliminary Prospectus, and each Preliminary
Prospectus has conformed in all material respects with the requirements of the
Act and has not included any untrue statement of a material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein, not misleading, subject to the provisions set forth below
and except as such untrue statement or omission has been cured in the a
subsequent preliminary prospectus or in the final prospectus.
(c) When the Registration Statement becomes effective under
the Act and at all times subsequent thereto including the Closing Date
(hereinafter defined) and the Option Closing Date (hereinafter defined) and for
such longer periods as in the opinion of counsel for the Underwriters, a
Prospectus is required to be delivered in connection with the sale of the
Securities by the Underwriters, the Registration Statement and Prospectus, and
any amendment thereof or supplement thereto, will contain all material
statements which are required to be stated therein in accordance with the Act
and the Regulations, and will in all material respects conform to the
requirements of the Act and the Regulations, and neither the Registration
Statement nor the Prospectus, nor any amendment or supplement thereto, will
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; provided, however, that this representation and warranty does
not apply to statements or omissions made in reliance upon and in conformity
with written information furnished to the Company by you, for use in connection
with the preparation of the Registration Statement or Prospectus, or in any
amendment thereof or supplement thereto. It is understood that the statements
set forth under the heading "Underwriting" in the Prospectus with respect to
(i) the amounts of the selling concession and reallowance; (ii) the identity of
counsel to the Underwriters under
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the heading "Legal Matters;" (iii) the information concerning the NASD
affiliation of the Underwriters; and (iv) the Risk Factor entitled "Limited
Experience of Underwriters" constitute for purposes of this Section the only
information furnished in writing by or on behalf of the Underwriters for
inclusion in the Registration Statement and Prospectus, as the case may be.
(d) The Company and each of its subsidiaries (each a
"Subsidiary") are, and at the Closing Date and the Option Closing Date will be,
corporations duly organized, validly existing and in good standing under the
laws of the jurisdiction of their incorporation. The Company and each of its
Subsidiaries are duly qualified or licensed and in good standing as foreign
corporations in each jurisdiction in which their ownership or leasing of any
properties or the character of their operations requires such qualification or
licensing, except those jurisdictions in which the failure to so qualify would
not have a material adverse effect. The Company and each of its Subsidiaries
have all requisite corporate powers and authority, and, except as set forth in
the Registration Statement, the Company and each of its Subsidiaries and their
employees' have all material and necessary authorizations, approvals, orders,
licenses, certificates and permits of and from all governmental regulatory
officials and bodies to own or lease their properties and conduct their
businesses as described in the Prospectus, and the Company and each of its
Subsidiaries are doing business and have been doing business during the period
described in the Registration Statement in compliance with all such material
authorizations, approvals, orders, licenses, certificates and permits and all
material federal, state and local laws, rules and regulations concerning the
businesses in which the Company or its Subsidiaries are engaged. The
disclosures in the Registration Statement concerning the effects of federal,
state and local regulation on the Company's or its Subsidiaries' businesses as
currently conducted and as contemplated are correct in all material respects
and do not omit to state a material fact. The Company has all corporate power
and authority to enter into this Agreement and carry out the provisions and
conditions hereof, and all consents, authorizations, approvals and orders
required in connection therewith have been obtained or will have been obtained
prior to the Closing Date.
(e) This Agreement has been duly and validly authorized and
executed by the Company. The Securities (including the Common Stock and the
Warrants), the Warrant Shares, the Underwriters' Warrants to be issued and sold
by the Company pursuant to this Agreement, the Securities issuable upon
exercise of the Underwriters' Warrants and payment therefor, and the Common
Stock and Warrant Shares underlying such Underwriters' Warrants, have been duly
authorized (and, in the case of the Common Stock and the Warrant Shares, have
been duly reserved for issuance) and, when
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issued and paid for in accordance with this Agreement (and, in the case of the
Warrant Shares, upon exercise of the Warrants and payment to the Company of the
exercise price therefor), the Common Stock and Warrant Shares will be validly
issued, fully paid and non-assessable; the Common Stock, Warrants, Warrant
Shares, Underwriters' Warrants, Additional Securities and Underwriters' Warrant
Shares are not and will not be subject to the preemptive rights of any
stockholder of the Company and conform and at all times up to and including
their issuance will conform in all material respects to all statements with
regard thereto contained in the Registration Statement and Prospectus; and all
corporate action required to be taken for the authorization, issuance and sale
of the Common Stock, Warrants, Warrant Shares and Underwriters' Warrants has
been taken, and this Agreement constitutes a valid and binding obligation of
the Company, enforceable in accordance with its terms, to issue and sell, upon
exercise in accordance with the terms thereof, the number and kind of
securities called for thereby.
(f) The consummation of the transactions contemplated by this
Agreement and the fulfillment of the terms hereof will not result in a breach
or violation of any of the terms or provisions of, or constitute a default
under, the Certificate of Incorporation, as amended, or Bylaws of the Company
or any of its Subsidiaries or of any evidence of material indebtedness, lease,
contract or other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its Subsidiaries or
any of their material properties is bound, or under any applicable law, rule,
regulation, judgment, order or decree of any government, professional advisory
body, administrative agency or court, domestic or foreign, having jurisdiction
over the Company or any of its Subsidiaries or their properties which are
material to the Company or its business, or result in the creation or
imposition of any lien, charge or encumbrance upon any of the properties or
assets of the Company or any of its Subsidiaries; and no consent, approval,
authorization or order of any court or governmental or other regulatory agency
or body is required for the consummation by the Company or any of its
Subsidiaries of the transactions on their part herein contemplated, except such
as may be required under the Act or under state securities or blue sky laws,
except where a breach, violation or failure to obtain such consent would not
have a material adverse effect upon the business or operation of the Company or
its Subsidiaries.
(g) Subsequent to the date hereof, and prior to the Closing
Date and the Option Closing Date, the Company will not issue or acquire any
equity securities other than securities of a wholly-owned subsidiary, except
that the Company may make short-term investments as contemplated in the "Use of
Proceeds"
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section of the Prospectus. Except as described in the Registration Statement,
the Company does not have, and at the Closing Date and at the Option Closing
Date will not have, outstanding any options to purchase or rights or warrants
to subscribe for, or any securities or obligations convertible into, or any
contracts or commitments to issue or sell shares of its Preferred Stock, Common
Stock or any such options, warrants, convertible securities or obligations.
(h) The financial statements and notes thereto included in
the Registration Statement and the Prospectus fairly present the financial
position and the results of operations of the Company at the respective dates
and for the respective periods to which they apply; and such financial
statements have been prepared in conformity with generally accepted accounting
principles, consistently applied throughout the periods involved.
(i) Except as set forth in the Registration Statement, the
Company and each Subsidiary are not, and at the Closing Date and at the Option
Closing Date will not be, in violation or breach of, or default in, the due
performance and observance of any term, covenant or condition of any indenture,
mortgage, deed of trust, note, loan or credit agreement, or any other agreement
or instrument evidencing an obligation for borrowed money, or any other
agreement or instrument to which the Company or any of its Subsidiaries are a
party or by which the Company or any of its Subsidiaries may be bound or to
which any of the property or assets of the Company or any of its Subsidiaries
are subject, which violations, breaches, default or defaults, singularly or in
the aggregate, would have a material adverse effect on the Company or any of
its Subsidiaries. The Company and each of its Subsidiaries have not and will
not have taken any action in material violation of the provisions of the
Certificate of Incorporation, as amended, or the Bylaws of the Company or its
Subsidiaries or any statute or any order, rule or regulation of any court or
regulatory authority or governmental body having jurisdiction over or
application to the Company or its Subsidiaries, their businesses or properties.
(j) The Company and each of its Subsidiaries have, and at the
Closing Date and at the Option Closing Date will 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, claims, security
interests, restrictions and defects of any material nature whatsoever, except
such as are described or referred to in the Prospectus and liens for taxes not
yet due and payable. All of the material leases and subleases under which the
Company or any of its Subsidiaries are the lessor or sublessor of properties or
assets or under which the Company or any of its Subsidiaries hold properties or
assets as lessee as described in the Prospectus are, and will on the Closing
Date and the Option
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Closing Date be, in full force and effect, and except as described in the
Prospectus, the Company and its Subsidiaries are not and will not be in default
in respect to any of the terms or provisions of any of such leases or subleases
(which would have a material adverse effect on the business, business prospects
or operations of the Company or any of its Subsidiaries taken as a whole), and
no claim has been asserted by anyone adverse to rights of the Company or any of
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 any of its Subsidiaries to continue 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 each of its
Subsidiaries owns or leases all such properties as are necessary to its
operations as now conducted and, except as otherwise stated in the Prospectus,
as proposed to be conducted set forth in the Prospectus (which would have a
material adverse effect on the business, business prospects or operations of
the Company or any of its Subsidiaries taken as a whole).
(k) The authorized, issued and outstanding capital stock
of the Company as of April 30, 1997 and as of the date of the
Prospectus is as set forth in the Prospectus under "Capitalization"; the shares
of issued and outstanding capital stock of the Company set forth thereunder
have been duly authorized, validly issued and are fully paid and
non-assessable; 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 Common Stock, the Warrants and all such options and warrants conform in
all material respects, to all statements relating thereto contained in the
Registration Statement and Prospectus.
(l) Except as described in the Prospectus, the Company does
not own or control any capital stock or securities of, or have any proprietary
interest in, or otherwise participate in any other corporation, partnership,
joint venture, firm, association or business organization; provided, however,
that this provision shall not be applicable to the investment, if any, of the
net proceeds from the sale of the Securities sold by the Company in
certificates of deposits, savings deposits, short-term obligations of the
United States Government, money market instruments or other short-term
investments.
(m) To the knowledge of the Company, Jump, Green, Holman &
Company, who have given their reports on certain financial statements filed and
to be filed with the Commission as a part of the Registration Statement, which
are incorporated in the
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Prospectus, are with respect to the Company, independent public accountants as
required by the Act and the Rules and Regulations.
(n) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, and except
as may otherwise be indicated or contemplated herein or therein, the Company
has not (i) issued any securities or incurred any material liability or
obligation, direct or contingent, for borrowed money; or (ii) entered into any
material transaction other than in the ordinary course of business; or (iii)
declared or paid any dividend or made any other distribution on or in respect
to its capital stock.
(o) There is no litigation or governmental proceeding pending
or to the knowledge of the Company or any Subsidiary threatened against, or
involving the properties or business of the Company or any Subsidiary which
might materially adversely affect the value, assets or the operation of the
properties or the business of the Company or any Subsidiary, except as referred
to in the Prospectus. Further, except as referred to in the Prospectus, there
are no pending actions, suits or proceedings related to environmental matters
or related to discrimination on the basis of age, sex, religion or race, nor is
the Company or any Subsidiary charged with or, to its knowledge, under
investigation with respect to any violation of any statutes or regulations of
any regulatory authority having jurisdiction over its business or operations,
and no labor disturbances by the employees of the Company or any Subsidiary
exist or, to the knowledge of the Company or any Subsidiary, have been
threatened.
(p) The Company has, and at the Closing Date and at the
Option Closing Date will have, filed all necessary federal, state and foreign
income and franchise tax returns or has requested extensions thereof (except in
any case where the failure to so file would not have a material adverse effect
on the Company), and has paid all taxes which it believes in good faith were
required to be paid by it except for any such tax that currently is being
contested in good faith or as described in the Prospectus.
(q) The Company has not at any time (i) made any contribution
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, foreign governmental or professional regulatory agency, officer or
official or other person charged with similar public, quasi-public or
professional regulatory duties, other than payments or contributions required
or allowed by applicable law.
(r) Except as set forth in the Registration Statement,
to the knowledge of the Company, neither the Company nor any of
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officer, director, employee or agent of the Company has made any payment or
transfer of any funds or assets of the Company or conferred any personal
benefit by use of the Company's assets or received any funds, assets or
personal benefit in violation of any law, rule or regulation, which is required
to be stated in the Registration Statement or necessary to make the statements
therein not misleading.
(s) On the Closing Date and on the Option Closing Date, all
transfer or other taxes, if any (other than income tax) which are required to
be paid, and are due and payable, in connection with the sale and transfer of
the Securities by the Company to the Underwriters will have been fully paid or
provided for by the Company as the case may be, and all laws imposing such
taxes will have been fully complied with in all material respects.
(t) There are no contracts or other documents of the Company
which are of a character required to be described in the Registration Statement
or Prospectus or filed as exhibits to the Registration Statement which have not
been so described or filed.
(u) The Company will apply the net proceeds from the sale of
the Securities sold by it for the purposes and in the manner set forth in the
Registration Statement and Prospectus under the heading "Use of Proceeds."
(v) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurance that (1) transactions are
executed in accordance with management's general or specified authorizations;
(2) transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (3) access to assets is permitted only in
accordance with management's general or specific authorizations; and (4) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(w) Except as set forth in the Prospectus, no holder of any
securities of the Company has the right to require registration of any
securities because of the filing or effectiveness of the Registration
Statement.
(x) The Company has not taken and at the Closing Date will
not have taken, directly or indirectly, any action designed to cause or result
in, or which has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of the Common Stock
or the Warrants to facilitate the sale or resale of such securities.
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(y) To the Company's knowledge, there are no claims for
services in the nature of a finder's origination fee with respect to the sale
of the Securities hereunder, except as set forth in the Prospectus.
(z) No right of first refusal exists with respect to any
sale of securities by the Company.
(aa) No statement, representation, warranty or covenant made
by the Company in this Agreement or made in any certificate or document
required by this Agreement to be delivered to Underwriters was, when made, or
as of the Closing Date or as of the Option Closing Date will be materially
inaccurate, untrue or incorrect.
(bb) The Company and each of its Subsidiaries have generally
enjoyed satisfactory employer/employee relationships with their respective
employees and are in compliance with all federal, state and local laws and
regulations respecting the employment of their respective employees and
employment practices, terms and conditions of employment and wages and hours
relating thereto. To the knowledge of the Company, there are no pending or
threatened investigations involving the Company or any of its Subsidiaries by
the U.S. Department of Labor or any other federal, state or local agency
responsible for the enforcement of such laws and regulations. To the knowledge
of the Company, there are no unfair labor practice charges or complaints
against the Company or any Subsidiary pending before the National Labor
Relations Board or any strikes, picketing, boycotts, disputes, slowdowns or
stoppage pending or threatened against or involving the Company or any
Subsidiary, or any predecessor entity, and none has occurred. No collective
bargaining agreements or modifications thereof are currently in effect or being
negotiated by the Company or any Subsidiary and their respective employees. No
grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company and any Subsidiary.
(cc) The Company has not maintained or contributed to any
deferred compensation, profit sharing, savings, retirement, pension or other
benefit plan or arrangements with or for the benefit of any person resulting
from a relationship with the Company, except as may be disclosed in the
Prospectus.
(dd) The Company is in compliance with all federal and state
laws, rules and regulations relating to consumer protection, occupational
safety and health and to the storage, handling or transportation of hazardous
or toxic materials and the Company has received all permits, licenses or other
approvals required of the Company under applicable federal and state
occupational safety and health and environmental laws and regulations to
conduct its business and the Company is in compliance with all terms and
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conditions of any such permit, license or approval, except any such violation
of law or regulation, failure to receive required permits, licenses or other
approvals which would not, singly or in the aggregate, result in a material
adverse change in the condition (financial or otherwise), business, net worth
or results of operations of the Company, except as may be described in or
contemplated by the Prospectus.
3. Covenants of the Company.
The Company covenants and agrees that:
(a) It will deliver to the Underwriters, without charge, two
conformed copies of each Registration Statement and of each amendment or
supplement thereto, including all financial statements and exhibits.
(b) The Company has delivered to each of the Underwriters,
and each of the Selected Dealers (as hereinafter defined) without charge, as
many copies as have been requested of each Preliminary Prospectus heretofore
filed with the Commission in accordance with and pursuant to the Commission's
Rule 430 under the Act and will deliver to the Underwriters and to others whose
names and addresses are furnished by the Underwriters or a Selected Dealer,
without charge, on the Effective Date of the Registration Statement, and
thereafter from time to time during such reasonable period as you may request
if, in the opinion of counsel for the Underwriters, the Prospectus is required
by law to be delivered in connection with sales by the Underwriters or a
dealer, as many copies of the Prospectus (and, in the event of any amendment of
or supplement to the Prospectus, of such amended or supplemented Prospectus) as
the Underwriters may reasonably request for the purposes contemplated by the
Act. The Company will take all necessary actions to furnish to whomever
directed by the Underwriters, when and as requested by the Underwriters, all
necessary documents, exhibits, information, applications, instruments and
papers as may be reasonably required or, in the written opinion of counsel to
the Underwriters desirable, in order to permit or facilitate the sale of the
Securities.
(c) The Company has authorized the Underwriters to use, and
make available for use by prospective dealers, the Preliminary Prospectus, and
authorizes the Underwriters, all dealers selected by you in connection with the
distribution of the Securities (the "Selected Dealers") to be purchased by the
Underwriters and all dealers to whom any of such Securities may be sold by the
Underwriters or by any Selected Dealer, to use the Prospectus, as from time to
time amended or supplemented, in connection with the sale of the Securities in
accordance with the applicable provisions of the Act, the applicable
Regulations and applicable state law,
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until completion of the distribution of the Securities and for such longer
period as you may request if the Prospectus is required under the Act, the
applicable Regulations or applicable state law to be delivered in connection
with sales of the Securities by the Underwriters or the Selected Dealers.
(d) The Company will use its best efforts to cause the
Registration Statement to become effective and will notify the Underwriters
immediately, and confirm the notice in writing: (i) when the Registration
Statement or any post-effective amendment thereto becomes effective; (ii) of
the issuance by the Commission of any stop order or of the initiation, or to
the best of the Company's knowledge, the threatening, of any proceedings for
that purpose; (iii) the suspension of the qualification of the Securities and
the Underwriters' Warrants, or underlying securities, for offering or sale in
any jurisdiction or of the initiating, or to the best of the Company's
knowledge the threatening, of any proceeding for that purpose; and (iv) of the
receipt of any comments from the Commission. If the Commission shall enter a
stop order at any time, the Company will make every reasonable effort to obtain
the lifting of such order at the earliest possible moment.
(e) During the time when a prospectus is required to be
delivered under the Act, the Company will comply with all requirements imposed
upon it by the Act and the Securities Exchange Act of 1934 (the "Exchange
Act"), as now and hereafter amended and by the Regulations, as from time to
time in force, as necessary to permit the continuance of sales of or dealings
in the Securities in accordance with the provisions hereof and the Prospectus.
If at any time when a prospectus relating to the Securities is required to be
delivered under the Act, any event shall have occurred as a result of which, in
the opinion of counsel for the Company or counsel for the Underwriters, the
Prospectus as then amended or supplemented includes an untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify you promptly and prepare and file with the Commission an
appropriate amendment or supplement in accordance with Section 10 of the Act
and will furnish to you copies thereof.
(f) The Company will endeavor in good faith, in cooperation
with you, at or prior to the time the Registration Statement becomes effective,
to qualify the Securities for offering and sale under the securities laws or
blue sky laws of such jurisdictions as you may reasonably designate. In each
jurisdiction where such qualification shall be effected, the Company will,
unless you agree that such action is not at the time necessary or advisable,
file and make such statements or reports at such times
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as are or may reasonably be required by the laws of such jurisdiction.
(g) The Company will make generally available to its security
holders, as soon as practicable, but in no event later than the first day of
the fifteenth full calendar month following the Effective Date of the
Registration Statement, an earnings statement of the Company, which will be in
reasonable detail but which need not be audited, covering a period of at least
twelve months beginning after the Effective Date of the Registration Statement,
which earnings statements shall satisfy the requirements of Section 11(a) of
the Act and the Regulations as then in effect. The Company may discharge this
obligation in accordance with Rule 158 of the Regulations.
(h) During the period of five years commencing on the
Effective Date of the Registration Statement, the Company will make available
to its stockholders an annual report (including financial statements audited by
its independent public accountants), in reasonable detail, and, at its expense,
furnish each of the Underwriters (i) within 90 days after the end of each
fiscal year of the Company, a consolidated balance sheet of the Company and its
consolidated subsidiaries and a separate balance sheet of each subsidiary of
the Company the accounts of which are not included in such consolidated balance
sheet as of the end of such fiscal year, and consolidated statements of
operations, stockholders' equity and cash flows of the Company and its
consolidated subsidiaries and separate statements of operations, stockholders'
equity and cash flows of each of the subsidiaries of the Company the accounts
of which are not included in such consolidated statements, for the fiscal year
then ended all in reasonable detail and all certified by independent
accountants (within the meaning of the Act and the Regulations), (ii) within 45
days after the end of each of the first three fiscal quarters of each fiscal
year, similar balance sheets as of the end of such fiscal quarter and similar
statements of operations, stockholders' equity and cash flows for the fiscal
quarter then ended, all in reasonable detail, and subject to year end
adjustment, all certified by the Company's principal financial officer or the
Company's principal accounting officer as having been prepared in accordance
with generally accepted accounting principles applied on a consistent basis,
(iii) as soon as available, each report furnished to or filed with the
Commission or any securities exchange and each report and financial statement
furnished to the Company's shareholders generally and (iv) as soon as
available, such other material as the Underwriters may from time to time
reasonably request regarding the financial condition and operations of the
Company.
(i) For a period of eighteen months from the Closing
Date, the Company, at its expense, shall cause its regularly
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engaged independent certified public accountants to review (but not audit), the
Company's financial statements for each of the first three quarters prior to
the announcement of quarterly financial information, the filing of the
Company's 10-Q quarterly report and the mailing of quarterly financial
information to stockholders.
(j) Prior to the Closing Date or the Option Closing Date, the
Company will not issue, directly or indirectly, without your prior written
consent and that of counsel for the Underwriters, any press release or other
public announcement or hold any press conference with respect to the Company or
its activities with respect to this Offering.
(k) The Company will deliver to you prior to filing, any
amendment or supplement to the Registration Statement or Prospectus proposed to
be filed after the Effective Date of the Registration Statement and will not
file any such amendment or supplement to which you shall reasonably object
after being furnished such copy.
(l) During the period of 120 days commencing on the date
hereof, the Company will not at any time take, directly or indirectly, any
action designed to, or which will constitute or which might reasonably be
expected to cause or result in stabilization or manipulation of the price of
the Securities to facilitate the sale or resale of any of the Securities.
(m) The Company will apply the net proceeds from the Offering
received by it in the manner set forth under "Use of Proceeds" in the
Prospectus.
(n) Counsel for the Company, the Company's accountants, and
the officers and directors of the Company will, respectively, furnish the
opinions, the letters and the certificates referred to in subsections of
Paragraph 9 hereof, and, in the event that the Company shall file any amendment
to the Registration Statement relating to the offering of the Securities or any
amendment or supplement to the Prospectus relating to the offering of the
Securities subsequent to the Effective Date of the Registration Statement, such
counsel, such accountants, such officers and directors, respectively, will, at
the time of such filing or at such subsequent time as you shall specify, so
long as securities being registered by such amendment or supplement are being
underwritten by the Underwriters, furnish to you such opinions, letters and
certificates, each dated the date of its delivery, of the same nature as the
opinions, the letters and the certificates referred to in said Paragraph 9, as
you may reasonably request, or, if any such opinion or letter or certificate
cannot be furnished by reason of the fact that such counsel or such accountants
or any such officer or director believes that the same would be inaccurate,
such counsel or such accountants or such officer or
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director will furnish an accurate opinion or letter or certificate with respect
to the same subject matter.
(o) The Company will comply with all of the provisions
of any undertakings contained in the Registration Statement in all
material respects.
(p) The Company will reserve and keep available for issuance
that maximum number of its authorized but unissued shares of Common Stock which
are issuable upon exercise of the Warrants and issuable upon exercise of the
Underwriters' Warrants (including the underlying securities) outstanding from
time to time.
(q) Following the Effective Date and from time to time
thereafter, so long as the Warrants are outstanding, the Company will timely
prepare and file at its sole cost and expense one or more post-effective
amendments to the Registration Statement or a new registration statement as
required by law as will permit Warrant holders to be furnished with a current
prospectus in the event Warrants are exercised, and to use its best efforts and
due diligence to have same be declared effective. The Company will deliver a
draft of each such post-effective amendment or new registration statement to
the Underwriters at least ten days prior to the filing of such post-effective
amendment or registration statement.
(r) Following the Effective Date and from time to time
thereafter so long as any of the Warrants remain outstanding, the Company will
timely deliver and supply to its warrant agent sufficient copies of the
Company's current Prospectus, as will enable such Warrant Agent to deliver a
copy of such Prospectus to any Warrant or other holder where such Prospectus
delivery is by law required to be made.
(s) So long as any of the Warrants remain outstanding, the
Company shall continue to employ the services of a firm of independent
certified public accountants reasonably acceptable to the Underwriters in
connection with the preparation of the financial statements to be included in
any registration statement to be filed by the Company hereunder, or any
amendment or supplement thereto (it being understood that Jump, Green, Holman &
Company is acceptable to the Underwriters). During the same period, the Company
shall employ the services of a law firm(s) suitably experienced in corporate
and securities laws in connection with all legal work of the Company, including
the preparation of a registration statement to be filed by the Company
hereunder, or any amendment or supplement thereto.
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(t) So long as any of the Warrants remain outstanding, the
Company shall continue to appoint a Warrant Agent for the Warrants, who shall
be reasonably acceptable to the Underwriters.
(u) The Company agrees that it will, upon the Closing Date,
for a period of no less than three (3) years, engage a designee of Roan as an
advisor (the "Advisor") to its Board of Directors where such Advisor shall
attend meetings of the Board, receive all notices and other correspondence and
communications sent by the Company to members of its Board of Directors and
shall be entitled to receive compensation therefor equal to the entitlement of
all non-employee directors. Such Advisor shall also be entitled to receive
reimbursement for all reasonable costs incurred in attending such meetings
including, but not limited to, food, lodging, and transportation. The Company
further agrees that during said three (3) year period, it shall schedule no
less than four (4) formal and "in person" meetings of its Board of Directors in
each such year and fifteen (15) days advance notice of such meetings shall be
given to the Advisor. Further, during such three (3) year period, the Company
shall give notice to Roan with respect to any proposed acquisitions, mergers,
reorganizations or other similar transactions. In lieu of Roan's right to
designate an Advisor, Roan shall have the right during such three-year period,
in its sole discretion, to designate one person for election as a Director of
the Company and the Company will utilize its best efforts to obtain the
election of such person who shall be entitled to receive the same compensation,
expense reimbursements and other benefits set forth above.
The Company agrees to indemnify and hold the Underwriters and
such Advisor or Director harmless against any and all claims, actions, damages,
costs and expenses, and judgments arising solely out of the attendance and
participation of your designee at any such meeting described herein. In the
event the Company maintains a liability insurance policy affording coverage for
the acts of its of officers and directors, it agrees, if possible, to include
the Underwriters's designee as an insured under such policy.
(v) Upon the Closing Date, the Company shall have entered
into a two year agreement with the Underwriters in form reasonably satisfactory
to the Underwriters (the "Consulting Agreement"), pursuant to which the
Underwriters will be retained as a management and financial consultant and will
be paid an aggregate fee of $85,400 all of which shall be paid upon the Closing
Date.
(w) The Company's Common Stock and Warrants shall be listed
on the Nasdaq SmallCap Market ("Nasdaq"), and on the Boston Stock Exchange
("BSE"), not later than the Effective Date. Prior to the Effective Date, the
Company will make all filings required, including registration under the
Exchange Act, to obtain the
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listing of the Common Stock and Warrants on Nasdaq and the BSE, and will effect
and use its best efforts to maintain such listings (unless the Company is
acquired) for at least five years from the date of this Agreement.
(x) The Company will apply for listing in Standard and Poors
Corporation Reports or Moodys OTC Guide and shall use its best efforts to have
the Company included in such publications, as soon as is practicable following
the Closing Date and for at least five years from the Closing Date.
(y) For a period of twenty-four (24) months from the
Effective Date, no officer, director or holder of any securities of the Company
prior to the Offering (other than Christie Enterprises, Inc.) 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 Common Stock into public markets, including shares of Common Stock issuable
upon exercise of options, warrants or any convertible securities of the
Company, without the prior written consent of Roan, 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
every stockholder 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). Notwithstanding the foregoing, the Company's current
stockholders shall be permitted to make transfers for estate planning purposes
or in private sales, so long as the transferee agrees in writing to be bound by
the foregoing provisions. If necessary to comply with any applicable Blue-sky
Law, the shares held by such stockholders will be escrowed with counsel for the
Company or otherwise as required.
(z) Except for the issuance of shares of capital stock by the
Company in connection with a dividend, recapitalization, reorganization,
acquisition of a business 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 Closing Date, directly or indirectly,
offer, sell, issue or transfer any shares 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 (under any form of registration
statement, including Form S-8), without the prior written consent of Roan.
Options granted pursuant to plans must be exercisable at the fair market value
on the date of grant.
(aa) For so long as any of the Warrants remain
outstanding, the Company shall maintain key person life insurance
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payable to the Company on the life of Patrick A. DePaolo, its Chief Executive,
in the amount of $1,000,000, unless his employment with the Company is earlier
terminated. In such event, the Company will obtain a comparable policy on the
life of his successor for the balance of such period.
(bb) The Company will use its best efforts to obtain, as soon
after the Closing Date as is reasonably possible, liability insurance covering
its officers and directors.
(cc) The Company agrees that any conflict of interest arising
between a member of the Company's Board of Directors and the Company in
connection with such Director's dealing with, or obligations to, the Company,
shall be resolved by a vote of the majority of the independent members of the
Board of Directors.
(dd) The Company agrees that it will employ the services of a
financial public relations firm reasonably acceptable to the Underwriters for a
period of at least twelve months following the Effective Date.
(ee) For a period of two (2) years from the Effective Date,
at the request of the Underwriters, the Company shall provide promptly, at its
expense, copies of the Company's monthly transfer sheets furnished to it by its
transfer agent and copies of the securities positions provided to it by the
Depository Trust Company.
4. Sale, Purchase and Delivery of Securities: Closing Date.
(a) The Company agrees to sell to the Underwriters, and the
Underwriters, on the basis of the warranties, representations and agreements of
the Company herein, and subject to the terms and conditions herein, agree to
purchase the Securities from the Company at a price of $5.00 per share of
Common Stock and $.10 per Warrant, less an underwriting discount of ten percent
(10%) of the offering price for each security. The Underwriters may allow a
concession not exceeding $ per share of Common Stock and $ per Warrant to
Selected Dealers who are members of the National Association of Securities
Dealers, Inc ("NASD"), and to certain foreign dealers.
(b) Delivery of the Securities and payment therefor shall be
made at 10:00 A.M., New York time on the Closing Date, as hereinafter defined,
at the offices of Roan or such other location as may be agreed upon by you and
the Company. Delivery of certificates for the Common Stock and Warrants (in
definitive form and registered in such names and in such denominations as you
shall request by written notice to the Company delivered at least two business
days' prior to the Closing Date), shall be made to you for
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the account of the Underwriters against payment of the purchase price therefor
by certified or bank check or wire transfer payable in New York Clearing House
funds to the order of the Company. The Company will make such certificates
available for inspection at least two business days prior to the Closing Date
at such place as you shall designate.
(c) The "Closing Date" shall be , 1997, or such other
date not later than the sixth business day following the effective date of the
Registration Statement as you shall determine and advise the Company by at
least three full business days' notice, confirmed in writing.
(d) The cost of original issue tax stamps, if any, in
connection with the issuance and delivery of the Securities by the Company to
the Underwriters shall be borne by the Company. The Company will pay and hold
the Underwriters, and any subsequent holder of the Securities, harmless from
any and all liabilities with respect to or resulting from any failure or delay
in paying federal and state stamp taxes, if any, which may be payable or
determined to be payable in connection with the original issuance or sale to
the Underwriters of the Securities or any portions thereof.
5. Sale Purchase and Delivery of Additional Securities:
Option Closing Date.
(a) The Company agrees to sell to the Underwriters, and upon
the basis of the representations, warranties and agreements of the Company
herein contained, subject to the satisfaction of all the terms and conditions
of this Agreement, the Underwriters shall have the option (the "Option") to
purchase the Additional Securities from the Company, at the same price per
Security as set forth in Paragraph 4(a) above. Additional Securities may be
purchased solely for the purpose of covering over-allotments made in connection
with the distribution and sale of the Securities.
(b) The Option to purchase all or part of the Additional
Securities covered thereby is exercisable by you at any time and from time to
time before the expiration of a period of 45 calendar days from the date of the
Effective Date of the Registration Statement (the "Option Period") by written
notice to the Company setting forth the number of Additional Securities for
which the Option is being exercised, the name or names in which the
certificates for such Additional Securities are to be registered and the
denominations of such certificates. If less than all of the Additional
Securities are purchased, than the Underwriters shall exercise their Option to
purchase an equal number of shares of Common Stock and Warrants. Upon each
exercise of the Option,
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the Company shall sell to the Underwriters the aggregate number of Additional
Securities specified in the notice exercising such Option.
(c) Delivery of the Additional Securities with respect to
which Options shall have been exercised and payment therefor shall be made at
10:00 A.M., New York time on the Option Closing Date, as hereinafter defined,
at the offices of Roan or at such other locations as may be agreed upon by you
and the Company. Delivery of certificates for Additional Securities shall be
made to you for the account of the Underwriters against payment of the purchase
price therefor by certified or bank check or wire transfer in New York Clearing
House Funds to the order of the Company. The Company will make certificates for
Additional Securities to be purchased at the Option Closing Date available for
inspection at least two business days prior to such Option Closing Date at such
place as you shall designate.
(d) The "Option Closing Date" shall be the date not later
than five business days after the end of the Option Period as you shall
determine and advise the Company by at least three full business days' notice,
unless some other time is agreed upon between you and the Company.
(e) The obligations of the Underwriters to purchase and pay
for Additional Securities at such Option Closing Date shall be subject to
compliance as of such date with all the conditions specified in Paragraph 2
herein and the delivery to you of opinions, certificates and letters, each
dated such Option Closing Date, substantially similar in scope to those
specified in Paragraph 9 herein.
(f) The cost of original issue tax stamps, if any, in
connection with the issuance and delivery of the Additional Securities by the
Company to the Underwriters shall be borne by the Company. The Company will pay
and hold the Underwriters, and any subsequent holder of Additional Securities,
harmless from any and all liabilities with respect to or resulting from any
failure or delay in paying federal and state stamp taxes, if any, which may be
payable or determined to be payable in connection with the original issuance or
sale to the Underwriters of the Additional Securities or any portion thereof.
6. Warrant Solicitation Fee.
The Company agrees to pay Roan or Merit a fee of seven percent (7%) of
the aggregate exercise price of the Warrants if: (i) the market price of the
Common Stock is greater than the exercise price of the Warrants on the date of
exercise; (ii) the exercise of the Warrants are solicited by a member of the
NASD and the customer
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states in writing that the transaction was solicited and designates in writing
the broker-dealer to receive compensation for the exercise; (iii) the Warrants
are not held in a discretionary account; (iv) the disclosure of compensation
arrangements was made both at the time of the Offering and at the time of the
exercise of the Warrant; and (v) the solicitation of the Warrant is not in
violation of Regulation M promulgated under the Exchange Act. The Company
agrees not to solicit the exercise of any Warrants other than through Roan or
Merit and will not authorize any other dealer to engage in such solicitation
without the prior written consent of the Underwriters which will not be
unreasonably withheld. The Warrant solicitation fee will not be paid in a
non-solicited transaction. No Warrant solicitation by the Underwriters will
occur prior to one year from the Effective Date.
7. Representations and Warranties of the Underwriters.
The Underwriters represent and warrant to the Company that:
(a) The Underwriters are each members in good standing of the
National Association of Securities Dealers, Inc., and have complied with all
NASD requirements concerning net capital and compensation to be received in
connection with the Offering.
(b) To the Underwriters' knowledge, there are no claims for
services in the nature of a finder's origination fee with respect to the sale
of the Securities hereunder to which the Company is, or may become, obligated
to pay.
(c) Neither the Underwriters nor their respective registered
representatives have provided purchasers of the Securities with any information
concerning the Company other than the Preliminary Prospectus and the
Prospectus.
8. Payment of Expenses.
(a) The Company will pay and bear all costs, fees, taxes and
expenses incident to and in connection with: (i) the issuance, offer, sale and
delivery of the Securities, including all expenses and fees incident to the
preparation, printing, filing and mailing (including the payment of postage
with respect to such mailing) of the Registration Statement (including all
exhibits thereto), each Preliminary Prospectus, the Prospectus, and amendments
and post-effective amendments thereof and supplements thereto, and this
Agreement and related documents, Preliminary and Final Blue Sky Memoranda,
including the cost of preparing and copying all copies thereof in quantities
deemed necessary by the Underwriters; (ii) the costs of preparing and printing
all "Tombstone" and other appropriate advertisements as mutually agreed upon by
the Company and the Underwriters; (iii) the printing, engraving, issuance and
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delivery of the Common Stock, Warrants, Warrant Shares, Additional Securities,
Underwriters' Warrants and the securities underlying the Underwriters' Warrant,
including any transfer or other taxes payable thereon in connection with the
original issuance thereof; (iv) the qualification of the Common Stock and
Warrants under the state or foreign securities or "Blue Sky" laws selected by
the Underwriters and the Company, and disbursements and reasonable fees of
counsel for the Underwriters in connection therewith; (v) fees to be paid to
counsel to the Underwriters for the preparation of secondary trading
memorandums until such time as the Common Stock is listed on the New York Stock
Exchange or the American Stock Exchange or quoted on the NASDAQ National Market
System not to exceed $6,250 in any one year period and $12,500 in the
aggregate; (vi) fees and disbursements of counsel and accountants for the
Company; (vii) other expenses and disbursements reasonably incurred on behalf
of the Company; (viii) the filing fees payable to the Commission and the
National Association of Securities Dealers, Inc. ("NASD"); and (ix) any listing
of the Common Stock and Warrants on a securities exchange or on NASDAQ.
(b) In addition to the expenses to be paid and borne by the
Company referred to in Paragraph 8(a) above, the Company shall reimburse you at
closing for expenses incurred by you in connection with the Offering (for which
you need not make any accounting), in the amount of 3% of the price to the
public of the Securities and Additional Securities sold in the Offering. This
3% non-accountable expense allowance shall cover the fees of your legal
counsel, but shall not include any expenses for which the Company is
responsible under Paragraph 8(a) above, including the reasonable fees and
disbursements of your legal counsel with respect to Blue Sky matters. As of the
date hereof, $40,000 has been advanced by the Company to the Underwriters with
respect to such non-accountable expense allowance.
(c) In the event that the Company does not or cannot, for any
reason whatsoever other than a default by the Underwriters, proceed with the
Offering, or if any of the representations, warranties or covenants contained
in this Agreement are not materially correct or cannot be complied with by the
Company, or business prospects or obligations of the Company are adversely
affected and the Company does not commence or continue with the Offering at any
time or terminates the proposed transaction prior to the Closing Date, the
Company shall reimburse the Underwriters on an accountable basis for all
out-of-pocket expenses actually incurred in connection with the Underwriting,
this Agreement and all of the transactions hereby contemplated (including,
without limitation, your legal fees and expenses), up to an aggregate total of
$100,000 less such sums which have already been paid.
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9. Conditions of Underwriters' Obligations.
The obligations of the Underwriters to consummate the transactions
contemplated by this Agreement shall be subject to the continuing accuracy of
the representations and warranties of the Company contained herein as of the
date hereof and as of the Closing Date, the accuracy of the statements of the
Company and its officers and directors made pursuant to the provisions hereof,
and to the performance by the Company of its covenants and agreements hereunder
and under each certificate, opinion and document contemplated hereunder and to
the following additional conditions:
(a) The Registration Statement shall have become effective
not later than 5:00 p.m., New York time, on the date following the date of this
Agreement, or such later date and time as shall be consented to in writing by
you and, on or prior to the Closing Date, no stop order suspending the
effectiveness of the Registration Statement or the qualification or
registration of the Securities under the securities laws of any jurisdiction
shall have been issued and no proceedings for that purpose shall have been
instituted or shall be pending or to your knowledge or the knowledge of the
Company, shall be contemplated by the Commission or any such authorities of any
jurisdiction and any request on the part of the Commission or any such
authorities for additional information shall have been complied with to the
reasonable satisfaction of the Commission or such authorities and counsel to
the Underwriters and after the date hereof no amendment or supplement shall
have been filed to the Registration Statement or Prospectus without your prior
consent.
(b) The Registration Statement or the Prospectus or any
amendment thereof or supplement thereto shall not contain an untrue statement
of a fact which is material, or omit to state a fact which is material and is
required to be stated therein or is necessary to make the statements therein,
not misleading.
(c) Between the time of the execution and delivery of this
Agreement and the Closing Date, there shall be no litigation instituted against
the Company or any of its officers or directors and between such dates there
shall be no proceeding instituted or, to the Company's knowledge, threatened
against the Company or any of its officers or directors before or by any
federal, state or county commission, regulatory body, administrative agency or
other governmental body, domestic or foreign, in which litigation or proceeding
an unfavorable ruling, decision or finding would have a material adverse effect
on the Company or its business, business prospects or properties, or have a
material adverse effect on the financial condition or results of operation of
the Company.
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(d) Each of the representations and warranties of the Company
contained herein and each certificate and document contemplated under this
Agreement to be delivered to you shall be true and correct at the Closing Date
as if made at the Closing Date, and all covenants and agreements contained
herein and in each such certificate and document to be performed on the part of
the Company, and all conditions contained herein and in each such certificate
and document to be fulfilled or complied with by the Company at or prior to the
Closing Date shall be fulfilled or complied with.
(e) At the Closing Date, you shall have received the opinion
of Epstein Becker & Green, P.C., counsel to the Company, dated as of such
Closing Date, addressed to the Underwriters and in form and substance
satisfactory to counsel to the Underwriters, to the effect that:
(i) The Company and each of its Subsidiaries are
corporations duly organized, validly existing and in good standing under the
laws of the jurisdiction of their incorporation with full corporate power and
authority, and all licenses, permits, certifications, registrations, approvals,
consents and franchises to own or lease and operate their properties and to
conduct their businesses as described in the Registration Statement. The
Company and each of its Subsidiaries are duly qualified to do business as
foreign corporations and are in good standing in all jurisdictions wherein such
qualification is necessary and failure so to qualify could have a material
adverse effect on the financial condition, results of operations, business or
properties of the Company and each of its Subsidiaries;
(ii) The Company has full corporate power and
authority to execute, deliver and perform the Underwriting Agreement, the
Consulting Agreement, the Warrant Agreement and the Underwriters' Warrants and
to consummate the transactions contemplated thereby. The execution, delivery
and performance of the Underwriting Agreement, the Consulting Agreement, the
Warrant Agreement and the Underwriters' Warrants by the Company, the
consummation by the Company of the transactions therein contemplated and the
compliance by the Company with the terms of the Underwriting Agreement, the
Consulting Agreement, the Warrant Agreement and the Underwriters' Warrants have
been duly authorized by all necessary corporate action, and each of the
Underwriting Agreement, the Consulting Agreement, the Warrant Agreement and the
Underwriters' Warrants have been duly executed and delivered by the Company.
Each of the Underwriting Agreement, the Consulting Agreement, the Warrant
Agreement and the Underwriters' Warrants is a valid and binding obligation of
the Company, enforceable in accordance with their respective terms, subject, as
to enforcement of remedies, to applicable bankruptcy, insolvency,
reorganization,
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moratorium and other laws affecting the rights of creditors generally and the
discretion of courts in granting equitable remedies and except that
enforceability of the indemnification provisions and the contribution
provisions set forth in the Underwriting Agreement may be limited by the
federal securities laws or public policy underlying such laws;
(iii) The execution, delivery and performance of the
Underwriting Agreement, the Consulting Agreement, the Warrant Agreement and the
Underwriters' Warrants by the Company, the consummation by the Company of the
transactions therein contemplated and the compliance by the Company with the
terms of the Underwriting Agreement, the Consulting Agreement, the Warrant
Agreement and the Underwriters' Warrants do not, and will not, with or without
the giving of notice or the lapse of time, or both, (A) result in a violation
of the Certificate of Incorporation, as the same may be amended, or Bylaws of
the Company or any of its Subsidiaries, (B) to the best of our knowledge,
result in a breach of, or conflict with, any terms or provisions of or
constitute a default under, or result in the modification or termination of, or
result in the creation or imposition of any lien, security interest, charge or
encumbrance upon any of the properties or assets of the Company or any of its
Subsidiaries pursuant to, any indenture, mortgage, note, contract, commitment
or other material agreement or instrument to which the Company or any of its
Subsidiaries are a party or by which the Company or any of its Subsidiaries or
any of their properties or assets are or may be bound or affected, except where
any of the foregoing would not result in a material adverse effect upon the
Company's or any Subsidiaries business or operations; (C) to the best of our
knowledge, violate any existing applicable law, rule or regulation or judgment,
order or decree known to us of any governmental agency or court, domestic or
foreign, having jurisdiction over the Company or any of its Subsidiaries or any
of their properties or businesses; or (D) to the best of our knowledge, have
any effect on any permit, certification, registration, approval, consent,
license or franchise necessary for the Company or any of its Subsidiaries to
own or lease and operate their properties and to conduct their business or the
ability of the Company or any of its Subsidiaries to make use thereof;
(iv) To the best of our knowledge, no
authorization, approval, consent, order, registration, license or permit of any
court or governmental agency or body (other than under the Act, the Regulations
and applicable state securities or Blue Sky laws) is required for the valid
authorization, issuance, sale and delivery of the Securities, the Additional
Securities, the Common Stock, the Warrants, the Warrant Shares, or the
Underwriters' Warrants, and the consummation by the Company of the transactions
contemplated by the Underwriting Agreement,
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the Consulting Agreement, the Warrant Agreement or the Underwriters' Warrants;
(v) The Registration Statement was declared
effective under the Act on , 1997; to the best our knowledge, no stop
order suspending the effectiveness of the Registration Statement has been
issued, and no proceedings for that purpose have been instituted or are
pending, threatened or contemplated under the Act or applicable state
securities laws;
(vi) The Registration Statement and the Prospectus,
as of the Effective Date (except for the financial statements and other
financial data included therein or omitted therefrom, as to which we express no
opinion), comply as to form in all material respects with the requirements of
the Act and Regulations and the conditions for use of a registration statement
on Form SB-2 have been satisfied by the Company;
(vii) The description in the Registration Statement
and the Prospectus of statutes, regulations, contracts and other documents have
been reviewed by us, and, based upon such review, are accurate in all material
respects and present fairly the information required to be disclosed, and to
the best of our knowledge, there are no material statutes or regulations, or,
to the best of our knowledge, material contracts or documents, of a character
required to be described in the Registration Statement or the Prospectus or to
be filed as exhibits to the Registration Statement, which are not so described
or filed as required.
To the best of our knowledge, none of the material
provisions of the contracts or instruments described above violates any
existing applicable law, rule or regulation or judgment, order or decree known
to us of any United States governmental agency or court having jurisdiction
over the Company or any of its assets or businesses;
(viii) The outstanding Common Stock and Warrants
have been duly authorized and validly issued. The outstanding Common stock is
fully paid an nonassessable. To the best of our knowledge, none of the
outstanding Common Stock has been issued in violation of the preemptive rights
of any stockholder of the Company. None of the holders of the outstanding
Common Stock is subject to personal liability solely by reason of being such a
holder. The authorized Common Stock conforms to the description thereof
contained in the Registration Statement and Prospectus. To the best of our
knowledge, except as set forth in the Prospectus, no holders of any of the
Company's securities has any rights, "demand," "piggyback" or otherwise, to
have such securities registered under the Act;
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(ix) The issuance and sale of the Securities, the Additional
Securities, the Common Stock, the Warrants, the Warrant Shares and the
Underwriters' Warrants have been duly authorized and when issued and paid
for in accordance with the Underwriting Agreement or the respective Warrants
will be validly issued, fully paid and nonassessable, and the holders thereof
will not be subject to personal liability solely by reason of being such
holders. Neither the Securities, the Additional Securities, nor the Common
Stock are subject to preemptive rights of any stockholder of the Company. The
certificates representing the Securities are in proper legal form;
(x) The issuance and sale of the Warrant Shares and
the Underwriters' Warrants have been duly authorized and, when paid for, issued
and delivered pursuant to the terms of the Warrant Agreement or the
Underwriters' Warrants, as the case may be, the Warrants and the Underwriters'
Warrants will constitute the valid and binding obligations of the Company,
enforceable in accordance with their terms, to issue and sell the Warrants, the
Warrant Shares and/or Underwriters' Warrants. All corporate action required to
be taken for the authorization, issuance and sale of the securities has been
duly, validly and sufficiently taken. The Common Stock and the Warrants have
been duly authorized by the Company to be offered in the form of the
Securities. The Warrants, the Warrant Shares and the Underwriters' Warrants
conform to the descriptions thereof contained in the Registration Statement and
Prospectus;
(xi) The Underwriters have acquired good title to the
Securities, free and clear of all liens, encumbrances, equities, security
interests and claims, provided that the Underwriters are bona fide purchasers
as defined in ss.8-302 of the Uniform Commercial Code;
(xii) Assuming that the Underwriters exercise the over-allotment
option to purchase the Additional Securities and make payments therefor in
accordance with the terms of the Underwriting Agreement, upon delivery of the
Additional Securities to the Underwriters thereunder, the Underwriters will
acquire good title to the Additional Securities, free and clear of any liens,
encumbrances, equities, security interests and claims, provided that the
Underwriters are bona fide purchasers as defined in ss.8-302 of the Uniform
Commercial Code;
(xiii) To the best of our knowledge, there are no claims,
actions, suits, proceedings, arbitrations, investigations or inquiries before
any governmental agency, court or tribunal, foreign or domestic, or before any
private arbitration tribunal, pending or threatened against the Company or any
of its Subsidiaries or involving their properties or businesses, other
27
<PAGE>
than as described in the Prospectus, such description being accurate, and other
than litigation incident to the kind of business conducted by the Company or
any of its Subsidiaries which, individually and in the aggregate, is not
material, and, except as otherwise disclosed in the Prospectus and the
Registration Statement, the Company and its Subsidiaries have complied with all
federal and state laws, statutes and regulations concerning its business;
(xiv) All sales of the Company's securities have been made
in compliance with or under an exemption from the registration requirements
of the Act, and no purchaser of such securities in any such sale has a right
of action against the Company for failure to comply with the registration or
filing requirements of any state; and
(xv) We have participated in reviews and
discussions in connection with the preparation of the Registration Statement
and the Prospectus. Although we are not passing upon and do not assume
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement, no facts came to our attention which
lead us to believe that (A) the Registration Statement (except as to the
financial statements and other financial data contained therein, as to which we
express no opinion), on the Effective Date, contained any untrue statement of a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or that (B) the Prospectus (except as to the financial statements
and other financial data contained therein, as to which we express no opinion)
contains any untrue statement or a material fact or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(f) On or prior to the Closing Date, counsel for the
Underwriters shall have been furnished such documents, certificates and
opinions as they may reasonably require for the purpose of enabling them to
review the matters referred to in subparagraph (e) of this Paragraph 9, or in
order to evidence the accuracy, completeness or satisfaction of any of the
representations, warranties or conditions herein contained.
(g) Prior to the Closing Date:
(i) There shall have been no material adverse change in the
condition or prospects or the business activities, financial or otherwise, of
the Company from the latest dates as of which such condition is set forth in
the Registration Statement and Prospectus;
28
<PAGE>
(ii) There shall have been no transaction, outside
the ordinary course of business, entered into by the Company from the latest
date as of which the financial condition of the Company is set forth in the
Registration Statement and Prospectus which is material to the Company, which
is either (x) required to be disclosed in the Prospectus or Registration
Statement and is not so disclosed, or (y) likely to have a material adverse
effect on the Company's business or financial condition;
(iii) The Company shall not be in default under any
material provision of any instrument relating to any outstanding indebtedness,
except as described in the Prospectus;
(iv) No material amount of the assets of the Company shall
have been pledged, mortgaged or otherwise encumbered, except as set forth
in the Registration Statement and Prospectus;
(v) No action, suit or proceeding, at law or in
equity, shall have been pending or to its knowledge threatened against the
Company or affecting any of its properties or businesses before or by any court
or federal or state commission, board or other administrative agency wherein an
unfavorable decision, ruling or finding would materially and adversely affect
the business, operations, prospects or financial condition or income of the
Company, taken as a whole, except as set forth in the Registration Statement
and Prospectus; and
(vi) No stop order shall have been issued under the
Act and no proceedings therefor shall have been initiated or, to the Company's
knowledge, threatened by the Commission.
(vii) Each of the representations and warranties of
the Company contained in this Agreement and in each certificate and document
contemplated under this Agreement to be delivered to you was, when originally
made and is at the time such certificate is dated, true and correct.
(h) Concurrently with the execution and delivery of this
Agreement and at the Closing Date, you shall have received a certificate of the
Company signed by the Chief Executive Officer of the Company and the principal
financial officer of the Company, dated as of the Closing Date, to the effect
that the conditions set forth in subparagraph (g) above have been satisfied and
that, as of the Closing Date, the representations and warranties of the Company
set forth in Paragraph 2 herein and the statements in the Registration
Statement and Prospectus were and are true and correct in all material
respects. Any certificate signed by any officer of the Company and delivered to
you or for counsel for the Underwriters shall be deemed a representation and
warranty by the Company to the Underwriters as to the statements made therein.
29
<PAGE>
(i) At the time this Agreement is executed, and at the
Closing Date, you shall have received a "cold comfort" letter, addressed to the
Underwriters and in form and substance satisfactory in all respects to you and
counsel for the Underwriters, from Jump, Green, Holman & Company, dated as of
the date of this Agreement and as of the Closing Date.
(j) All proceedings taken in connection with the
authorization, issuance or sale of the Common Stock, Warrants, Warrant Shares,
Additional Securities, the Underwriters' Warrants and the Underwriters' Warrant
Shares as herein contemplated shall be satisfactory in form and substance to
you and to counsel to the Underwriters, and the Underwriters shall have
received from such counsel an opinion, dated as the Closing Date with respect
to such of these proceedings as you may reasonably require.
(k) The Company shall have furnished to you such
certificates, additional to those specifically mentioned herein, as you may
have reasonably requested in a timely manner as to the accuracy and
completeness, at the Closing Date, of any statement in the Registration
Statement or the Prospectus, as to the accuracy, at the Closing Date, of the
representations and warranties of the Company herein and in each certificate
and document contemplated under this Agreement to be delivered to you, as to
the performance by the Company of its obligations hereunder and under each such
certificate and document or as to the fulfillment of the conditions concurrent
and precedent to your obligations hereunder.
(l) The obligation of the Underwriters to purchase Additional
Securities hereunder is subject to the accuracy of the representations and
warranties of the Company contained herein on and as of the Option Closing Date
and to the satisfaction on and as of the Option Closing Date of the conditions
set forth herein.
(m) On the Closing Date there shall have been duly tendered
to you for your account the appropriate number of shares of Common Stock and
Warrants constituting the Securities.
10. Indemnification and Contribution.
(a) Subject to the conditions set forth below, the Company
agrees to indemnify and hold harmless the Underwriters and each person, if any,
who controls the Underwriters ("controlling person") within the meaning of
either Section 15 of the Act or Section 20 of the Exchange Act, against any and
all losses, liabilities, claims, damages, actions and expenses or liability,
joint or several, whatsoever (including but not limited to any and all expense
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), joint or
several, to which it
30
<PAGE>
or such controlling persons may become subject under the Act, the Exchange Act
or under any other statute or at common law or otherwise or under the laws of
foreign countries, arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
any Preliminary Prospectus or the Prospectus (as from time to time amended and
supplemented); in any post-effective amendment or amendments or any new
registration statement and prospectus in which is included the Warrant Shares
of the Company issued or issuable upon exercise of the Warrants, or
Underwriters' Warrant Shares upon exercise of the Underwriters' Warrant; or in
any application or other document or written communication (in this Paragraph
10 collectively called "application") executed by the Company or based upon
written information furnished by the Company filed in any jurisdiction in order
to qualify the Common Stock, Warrants, Warrant Shares, Additional Securities,
Underwriters' Warrants and Underwriters' Warrant Shares (including the Shares
issuable upon exercise of the Warrants underlying the Underwriters' Warrants)
under the securities laws thereof or filed with the Commission or any
securities exchange; or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements
therein not misleading (in the case of the Prospectus, in the light of the
circumstances under which they were made), unless such statement or omission
was made in reliance upon or in conformity with written information furnished
to the Company with respect to the Underwriters by or on behalf of the
Underwriters expressly for use in any Preliminary Prospectus, the Registration
Statement or Prospectus, or any amendment or supplement thereof, or in
application, as the case may be. Notwithstanding the foregoing, the Company
shall have no liability under this Paragraph 10(a) if any such untrue statement
or omission made in a Preliminary Prospectus, is cured in the Prospectus and
the Underwriters failed to deliver to the person or persons alleging the
liability upon which indemnification is being sought, at or prior to the
written confirmation of such sale, a copy of the Prospectus. This indemnity
will be in addition to any liability which the Company may otherwise have.
(b) The Underwriters agree to indemnify and hold harmless the
Company and each of the officers and directors of the Company who have signed
the Registration Statement and each other person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, to the same extent as the foregoing indemnity from the Company to
the Underwriters in Paragraph 10(a), but only with respect to any untrue
statement or alleged untrue statement of any material fact contained in or any
omission or alleged omission to state a material fact required to be stated in
any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereof or necessary to make the statements therein not
31
<PAGE>
misleading or in any application made solely in reliance upon, and in
conformity with, written information furnished to the Company by you
specifically expressly for use in the preparation of such Preliminary
Prospectus, the Registration Statement or Prospectus directly relating to the
transactions effected by the Underwriters in connection with this Offering.
This indemnity agreement will be in addition to any liability which the
Underwriters may otherwise have. Notwithstanding the foregoing, the
Underwriters shall have no liability under this Paragraph 10(b) if any such
untrue statement or omission made in a Preliminary Prospectus is cured in the
Prospectus, and the Prospectus is delivered to the person or persons alleging
the liability upon which indemnification is being sought.
(c) If any action is brought against any indemnified party
(the "Indemnitee") in respect of which indemnity may be sought against another
party pursuant to the foregoing (the "Indemnitor"), the Indemnitor shall assume
the defense of the action, including the employment and fees of counsel
(reasonably satisfactory to the Indemnitee) and payment of expenses. Any
Indemnitee shall have the right to employ its or their own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
Indemnitee unless the employment of such counsel shall have been authorized in
writing by the Indemnitor in connection with the defense of such action. If the
Indemnitor shall have employed counsel to have charge of the defense or shall
previously have assumed the defense of any such action or claim, the Indemnitor
shall not thereafter be liable to any Indemnitee in investigating, preparing or
defending any such action or claim. Each Indemnitee shall promptly notify the
Indemnitor of the commencement of any litigation or proceedings against the
Indemnitee in connection with the issue and sale of the Common Stock, Warrants,
Warrants Shares, Additional Securities, Underwriters' Securities or in
connection with the Registration Statement or Prospectus.
(d) In order to provide for just and equitable contribution
under the Act in any case in which: (i) the Underwriters make a claim for
indemnification pursuant to Paragraph 10 hereof, but it is judicially
determined (by the entry of a final judgment or decree by a court of competent
jurisdiction and the time to appeal has expired or the last right of appeal has
been denied) that such indemnification may not be enforced in such case
notwithstanding the fact that this Paragraph 10 provides for indemnification of
such case; or (ii) contribution under the Act may be required on the part of
the Underwriters in circumstances for which indemnification is provided under
this Paragraph 10, then, and in each such case, the Company and the
Underwriters shall contribute to the aggregate losses, claims, damages or
liabilities to which they may be subject (after any contribution from others)
32
<PAGE>
in such proportion so that the Underwriters are responsible for the portion
represented by dividing the total compensation received by the Underwriters
herein by the total purchase price of all Securities sold in the public
offering and the Company is responsible for the remaining portion; provided,
that in any such case, 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 was not guilty of such fraudulent
misrepresentation.
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 Underwriters. As used in this
Paragraph 10, the term "Underwriters" includes any officer, director, or other
person who controls the Underwriters within the meaning of Section 15 of the
Act, and the word "Company" includes any of 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 Underwriters and each person who controls the Underwriters shall be
entitled to contribution from the Company to the full extent permitted by law.
No contribution shall be requested with regard to the settlement of any matter
from any party who did not consent to the settlement.
(e) Within fifteen (15) days after receipt by any party to
this Agreement (or its representative) of notice of the commencement of any
action, suit or proceeding, such party will, if a claim for contribution in
respect thereof is made against another party (the "contributing party"),
notify the contributing party of the commencement thereof, but the omission so
to notify the contributing party will not relieve it from any liability it may
have to any other party other than for contribution hereunder.
In case any such action, suit or proceeding is brought
against any party, and such party notifies a contributing party or his or its
representative of the commencement thereof within the aforesaid fifteen (15)
days, the contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified. Any such
contributing party shall not be liable to any party seeking contribution on
account of any settlement of any claim, action or proceeding effected by such
party seeking contribution without the written consent of such contributing
party. The indemnification provisions contained in this Paragraph 10 are in
addition to any other rights or remedies which either party hereto may have
with respect to the other or hereunder.
33
<PAGE>
11. Representations Warranties Agreements to Survive Delivery.
The respective indemnity and contribution agreements by the
Underwriters and the Company contained in Paragraph 10 hereof, and the
covenants, representations and warranties of the Company and the Underwriters
set forth in this Agreement, shall remain operative and in full force and
effect regardless of (i) any investigation made by the Underwriters or on their
behalf or by or on behalf of any person who controls the Underwriters, or by
the Company or any controlling person of the Company or any director or any of
officer of the Company, (ii) acceptance of any of the Securities and payment
therefor, or (iii) any termination of this Agreement, and shall survive the
delivery of the Securities and any successor of the Underwriters or the
Company, or of any person who controls you or the Company or any other
indemnified party, as the case may be, shall be entitled to the benefit of such
respective indemnity and contribution agreements. The respective indemnity and
contribution agreements by the Underwriters and the Company contained in this
Paragraph 11 shall be in addition to any liability which the Underwriters and
the Company may otherwise have.
12. Effective Date of This Agreement and Termination Thereof.
(a) This Agreement shall become effective at 10:00 A.M., New
York time, on the first full business day following the day on which you and
the Company receive notification that the Registration Statement became
effective.
(b) This Agreement may be terminated by the Underwriters by
notifying the Company at any time on or before the Closing Date, if any
domestic or international event or act or occurrence has materially disrupted,
or in your opinion will in the immediate future materially disrupt, securities
markets; or if trading on the New York Stock Exchange, the American Stock
Exchange, or in the over-the-counter market shall have been suspended, or
minimum or maximum prices for trading shall have been fixed, or maximum ranges
for prices for securities shall have been required on the over-the-counter
market by the NASD or NASDAQ or by order of the Commission or any other
governmental authority having jurisdiction; or if a moratorium in foreign
exchange trading by major international banks or persons has been declared; or
if the Company shall have sustained a loss material or substantial to the
Company taken as a whole by fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act which, whether or not such
loss shall have been insured, will, in your opinion, make it inadvisable to
proceed with the delivery of the Securities; or if there shall have been a
material adverse change in the conditions of the securities market in general,
as in your
34
<PAGE>
reasonable judgment would make it inadvisable to proceed with the offering,
sale and delivery of the Securities; or if there shall have been a material
adverse change in the financial or securities markets, particularly in the
over-the-counter market, in the United States having occurred since the date of
this Agreement.
(c) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Paragraph 12, the
Company shall be notified promptly by you by telephone or facsimile, confirmed
by letter.
(d) If this Agreement shall not become effective or if this
Agreement shall not be carried out within the time specified herein by reason
of any failure on the part of the Company to perform any undertaking, or to
materially satisfy any condition of this Agreement by it to be performed or
satisfied, the sole liability of the Company to the Underwriters, in addition
to the obligations assumed by the Company pursuant to Paragraph 8 herein, will
be to reimburse the Underwriters for the following: (i) Blue Sky counsel fees
and expenses to the extent set forth in Paragraph 8(a)(iv); (ii) Blue Sky
filing fees; and (iii) such reasonable out-of-pocket expenses of the
Underwriters (including the fees and disbursements of their counsel), to the
extent set forth in Paragraph 8(c), in connection with this Agreement and the
proposed offering of the Securities, but in no event to exceed the sum of
$100,000 less such amounts already paid.
Notwithstanding any contrary provision contained in this
Agreement, any election hereunder or any termination of this Agreement, and
whether or not this Agreement is otherwise carried out, the provisions of
Paragraph 8 and 10 hereof shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
13. Notices.
All communications hereunder, except as herein otherwise specifically
provided, shall be in writing and, if sent to the Underwriters, shall be
mailed, delivered or telegraphed and confirmed to the Underwriters at Roan
Capital Partners L.P., 40 East 52nd Street, New York, New York 10022,
Attention: Timothy Ryan, with a copy thereof to Alexander Bienenstock, Esq.,
Gusrae Kaplan & Bruno, 120 Wall Street, New York, New York 10005, and, if sent
to the Company, shall be mailed, delivered or telegraphed and confirmed to the
Company at 567-1 South Leonard Street, Waterbury, Connecticut 06708, Attention:
Patrick A. DePaolo, President, with a copy thereof to Epstein Becker & Green,
P.C., 250 Park Avenue, New York, New York 10177, Attention: Joseph A. Smith,
Esq.
35
<PAGE>
14. Parties.
This Agreement shall inure solely to the benefit of and shall be
binding upon, the Underwriters, the Company and the controlling persons,
directors and officers referred to in Paragraph 10 hereof, and their respective
successors, legal representatives and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
15. Construction.
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York and shall supersede any
agreement or understanding, oral or in writing, express or implied, between the
Company and you relating to the sale of any of the Securities.
16. Jurisdiction and Venue.
The Company agrees that the courts of the State of New York shall have
jurisdiction over any litigation arising from this Agreement, and venue shall
be proper in the Southern District of New York.
17. Counterparts.
This agreement may be executed in counterparts.
If the foregoing correctly sets forth the understanding
between you, the Selling Stockholders and the Company, please so indicate in
the space provided below for that purpose, whereupon this letter shall
constitute a binding agreement between us.
Very truly yours,
DISCAS, INC.
By:
-----------------------------
Patrick A. DePaolo, President
Accepted as of the date first above written:
ROAN CAPITAL PARTNERS L.P.
By:
------------------------------
MERIT CAPITAL ASSOCIATES, INC.
By:
-------------------------------
36
<PAGE>
SCHEDULE A
NUMBER OF SHARES NUMBER OF
OF COMMON STOCK WARRANTS TO
TO BE PURCHASED TO BE PURCHASED
----------------- ----------------
UNDERWRITER
Roan Capital Partners L.P.
Merit Capital Associates, Inc.
----------------- ----------------
Total: 800,000 800,000
================= ================
<PAGE>
Exhibit 1.3
DISCAS, INC.
800,000 shares of Common Stock
and
800,000 Redeemable Common Stock Purchase Warrants
SELECTED DEALERS AGREEMENT
, 1997
Dear Sirs:
Roan Capital Partners L.P. and Merit Capital Associates, Inc. are the
underwriters (the "Underwriters") named in the Prospectus dated , 1997.
The Underwriters have agreed to purchase, subject to the terms and conditions
set forth in the Underwriting Agreement referred to in the Prospectus, an
aggregate of 800,000 shares of common stock, par value $.0001 per share (the
"Common Stock"), and 800,000 redeemable common stock purchase warrants (the
"Warrants") of Discas, Inc. (the "Company"), and up to 120,000 additional
shares of Common Stock and 120,000 additional Warrants (the "Additional
Securities"), pursuant to an option for the purpose of covering over-allotments
(said 800,000 shares of Common Stock and 800,000 Warrants plus any of said
Additional Securities purchased upon exercise of the option being herein
collectively called the "Securities"). The Securities and the terms upon which
they are to be offered for sale by the Underwriters are more particularly
described in the Prospectus.
1. The Securities are to be offered to the public by the Underwriters
at a price of $5.00 per share of Common Stock and $.10 per Warrant (herein
called the "Public Offering Price") and in accordance with the terms of the
offering set forth in the Prospectus.
2. The Underwriters are offering, subject to the terms and conditions
hereof, a portion of the Securities for sale to certain dealers which are
members of the National Association of Securities Dealers, Inc. and agree to
comply with the provisions of Rule 2740 of the NASD Conduct Rules, and to
foreign dealers or institutions ineligible for membership in said Association
which agree (a) not to resell Securities (i) to purchasers located in, or to
persons who are nationals of, the United States of America or (ii) when there
is a public demand for the Securities to persons specified as
<PAGE>
those to whom members of said Association participating in a distribution may
not sell; and (b) to comply, as though such foreign dealer or institution were
a member of such Association, with Rules 2730 and 2750 of the NASD Conduct
Rules (such dealers and institutions agreeing to purchase Common Stock and/or
Warrants hereunder being hereinafter referred to as "Selected Dealers") at the
Public Offering Price less a selling concession of $. per share of Common
Stock and $. per Warrant, payable as hereinafter provided. The Underwriters
may be included among the Selected Dealers.
3. The Underwriters shall act as your representative under this
Agreement and shall have full authority to take such action as they may deem
advisable in respect to all matters pertaining to the public offering of the
Securities.
4. If you desire to purchase any of the Securities, your application
should reach us promptly by telephone or facsimile at the office of Roan, and
we will use our best efforts to fill the same. We reserve the right to reject
all subscriptions in whole or in part, to make allotments and to close the
subscription books at any time without notice. The shares of Common Stock and
the Warrants allotted to you will be confirmed, subject to the terms and
conditions of this Agreement.
5. The privilege of purchasing the shares of Common Stock and the
Warrants is extended to you by the Underwriters only if they may lawfully sell
the Securities to dealers in your state.
6. Any of the shares of Common Stock and Warrants purchased by you
under the terms of this Agreement may be immediately reoffered to the public in
accordance with the terms of the offering set forth herein and in the
Prospectus, subject to the securities laws of the various states. Neither you
nor any other person is or has been authorized to give any information or to
make any representations in connection with the sale of Securities other than
as contained in the Prospectus.
7. This Agreement will terminate when we shall have determined that
the public offering of the Securities has been completed and upon telegraphic
notice to you of such termination, but, if not previously terminated, this
Agreement will terminate at the close of business on the 20th full business day
after the date hereof; provided, however, that we shall have the right to
extend this Agreement for an additional period or periods not exceeding 20 full
business days in the aggregate upon telegraphic notice to you. Promptly after
the termination of this Agreement there shall become payable to you the selling
concession on all shares of Common Stock and Warrants which you shall have
purchased hereunder and which shall not have been purchased or contracted for
(including
2
<PAGE>
certificates issued upon transfer) by us, in the open market or otherwise
(except pursuant to Section 10 hereof), during the terms of this Agreement for
the account of the Underwriters.
8. For the purpose of stabilizing the market in the Common Stock and
Warrants of the Company, we have been authorized to make purchases and sales
thereof, in the open market or otherwise, and, in arranging for sale of the
Securities, to over-allot.
9. You agree to advise us from time to time, upon request, prior to
the termination of this Agreement, of the number of Securities purchased by you
hereunder and remaining unsold at the time of such request, and, if in our
opinion any such Securities shall be needed to make delivery of the Securities
sold or over-allotted for the account of the Underwriters, you will, forthwith
upon our request, grant to us, or such party as we determine for, our account
the right, exercisable promptly after receipt of notice from you that such
right has been granted, to purchase, at the Public Offering Price less the
selling concession as we shall determine, such number of Securities owned by
you as shall have been specified in our request.
10. On becoming a Selected Dealer and in offering and selling the
Securities, you agree to comply with all applicable requirements of the
Securities Act of 1933, the Securities Exchange Act of 1934 and the NASD's
Conduct Rules.
11. Upon application, you will be informed as to the jurisdictions in
which we have been advised that the Securities have been qualified for sale
under the respective securities or blue sky laws of such jurisdictions, but we
assume no obligation or responsibility as to the right of any Selected Dealer
to sell the Securities in any jurisdiction or as to any sale therein.
12. Additional copies of the Prospectus will be supplied to
you in reasonable quantities upon request.
13. It is expected that public advertisement of the Securities will be
made on the first day after the effective date of the Registration Statement.
Twenty-four hours after such advertisement shall have appeared but not before,
you will be free to advertise at your own expense, over your own name, subject
to any restrictions of local laws, but your advertisement must conform in all
respects to the requirements ofthe Securities Act of 1933, and we will not be
under any obligation or liability in respect of your advertisement.
14. No Selected Dealer is authorized to act as our agent or
to make any representation as to the existence of an agency
relationship otherwise to act on our behalf in offering or selling
3
<PAGE>
the Securities to the public or otherwise.
15. We shall not be under any liability for or in respect of the
value, validity or form of the certificates for the shares of Common Stock and
Warrants, or delivery of the certificates for the Common Stock or Warrants, or
the performance by anyone of any agreement on his part, or the qualification of
the Securities for sale under the laws of any jurisdiction, or for or in
respect of any matter connected with this Agreement, except for lack of good
faith and for obligations expressly assumed by us in this Agreement. The
foregoing provisions shall be deemed a waiver of any liability imposed under
the Securities Act of 1933.
16. Payment for the Securities sold to you hereunder is to be made at
the Public Offering Price, on or about , 1997, or such later date as we
may advise, by certified or official bank check payable to the order of Roan
Capital Partners, L.P., in current New York Clearing House funds at such place
as we shall specify on one day's notice to you against delivery of certificates
for the Common Stock and Warrants.
17. Notice to us should be addressed to us at the office of Roan
Capital Partners, L.P., 40 East 52nd Street, New York, New York 10022. Notices
to you shall be deemed to have been duly given if telefaxed or mailed to you at
the address to which this letter
is addressed.
18. If you desire to purchase any of the Securities, please confirm
your application by signing and returning to us your confirmation on the
duplicate copy of this letter enclosed herewith even though you have previously
advised us thereof by telephone or facsimile.
Dated: , 1997
ROAN CAPITAL PARTNERS L.P.
By:
-------------------------
MERIT CAPITAL ASSOCIATES, INC.
By:
-------------------------
Accepted and agreed:
as to shares of Common Stock
and Warrants this day
of , 1997.
By:
-------------------------------
<PAGE>
Exhibit 4.2
DISCAS, INC.
A DELAWARE CORPORATION
AND
AMERICAN STOCK TRANSFER & TRUST COMPANY
WARRANT AGENT
WARRANT AGREEMENT
<PAGE>
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
1. Appointment of Warrant Agent....................................... 1
2. Form of Warrant.................................................... 1
3. Countersignature and Registration.................................. 2
4. Transfers and Exchanges............................................ 2
5. Exercise of Warrants; Payment of Warrant Solicitation Fee.......... 2
6. Payment of Taxes................................................... 5
7. Mutilated or Missing Warrants...................................... 5
8. Reservation of Common Stock........................................ 5
9. Warrant Price: Adjustments......................................... 6
10. Fractional Interests............................................... 11
11. Notices to Warrantholders.......................................... 11
12. Disposition of Proceeds on Exercise of Warrants.................... 12
13. Redemption of Warrants............................................. 12
14. Merger or Consolidation or Change of Name of Warrant Agent......... 13
15. Duties of Warrant Agent............................................ 13
16. Change of Warrant Agent............................................ 15
17. Identity of Transfer Agent......................................... 16
18. Notices............................................................ 16
19. Supplements and Amendments......................................... 16
20. New York Contract.................................................. 17
21. Benefits of this Agreement......................................... 17
22. Successors......................................................... 17
<PAGE>
WARRANT AGREEMENT, dated as of __________ __, 1997, by and among
DISCAS, INC., a Delaware corporation (the "Company"), and AMERICAN STOCK
TRANSFER & TRUST COMPANY, as warrant agent (hereinafter called the "Warrant
Agent").
WHEREAS, the Company proposes to issue and sell, through an initial
public offering (the "Offering") by Roan Capital Partners L.P. and Merit
Capital Associates, Inc. (the "Underwriters", or each, an "Underwriter"),
pursuant to an Underwriting Agreement dated __________ __, 1997, an aggregate
of up to 920,000 shares of common stock, $.0001 par value per share (the
"Common Stock"), and up to 920,000 Common Stock Purchase Warrants (the "Public
Warrants") of the Company; and in connection with such offering the Company has
agreed to issue to the Underwriters or their designees options to purchase up
to 80,000 shares of Common Stock and 80,000 Public Warrants (the "Underwriters'
Warrant");
WHEREAS, the Company has sold an additional 800,000 Warrants pursuant
to a Private Placement Memorandum prior to the Offering (the "Bridge
Warrants"), each on the same terms and conditions as the Public Warrants (the
Public Warrants and the Bridge Warrants collectively referred to herein as the
"Warrants");
WHEREAS, each Warrant will entitle the holder to purchase one
share of Common Stock;
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 exercise of the Warrants;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
Section 1. Appointment of Warrant Agent. The Company hereby appoints
the Warrant Agent to act as Warrant Agent for the Company in accordance with
the instructions hereinafter set forth in this Agreement, and the Warrant Agent
hereby accepts such appointment.
Section 2. Form of Warrant. The text of the Warrants and of the form
of election to purchase Common Stock to be printed on the reverse thereof shall
be substantially as set forth in Exhibit A attached hereto. Each Warrant shall
entitle the registered holder thereof to purchase one share of Common Stock at
a purchase price of $6.25, at any time commencing thirteen (13) months from the
effective date of the prospectus of the public offering (__________ __, 1997)
("Effective Date") until 5:00 p.m. Eastern time, on __________ __, 2002. The
warrant exercise price and the number of shares of Common Stock issuable upon
exercise of the
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Warrants are subject to adjustment upon the occurrence of certain events, all
as hereinafter provided. The Warrants shall be executed on behalf of the
Company by the manual or facsimile signature of the present or any future
President or Vice President of the Company, and attested to by the manual or
facsimile signature of the present or any future Secretary or Assistant
Secretary of the Company.
Warrants shall be dated as of the issuance by the Warrant Agent either
upon initial issuance or upon transfer or exchange.
In the event the aforesaid expiration dates of the Warrants falls on a
Saturday or Sunday, or on a legal holiday on which the New York Stock Exchange
is closed, then the Warrants shall expire at 5:00 p.m. Eastern time on the next
succeeding business day.
Section 3. Countersignature and Registration. The Warrant Agent shall
maintain books for the transfer and registration of the Warrants. Upon the
initial issuance of the Warrants, the Warrant Agent shall issue and register
the Warrants in the names of the respective holders thereof. The Warrants shall
be countersigned manually or by facsimile by the Warrant Agent (or by any
successor to the Warrant Agent then acting as warrant agent under this
Agreement) and shall not be valid for any purpose unless so countersigned. The
Warrants may, however, be so countersigned by the Warrant Agent (or by its
successor as Warrant Agent) and be delivered by the Warrant Agent,
notwithstanding that the persons whose manual or facsimile signatures appear
thereon as proper officers of the Company shall have ceased to be such officers
at the time of such countersignature or delivery.
Section 4. Transfers and Exchanges. The Warrant Agent shall transfer,
from time to time, any outstanding Warrants upon the books to be maintained by
the Warrant Agent for that purpose, upon surrender thereof for transfer
properly endorsed or accompanied by appropriate instructions for transfer. Upon
any such transfer, a new Warrant shall be issued to the transferee and the
surrendered Warrant shall be cancelled by the Warrant Agent. Warrants so
cancelled shall be delivered by the Warrant Agent to the Company from time to
time upon request. Warrants may be exchanged at the option of the holder
thereof, when surrendered at the office of the Warrant Agent, for another
Warrant, or other Warrants of different denominations of like tenor and
representing in the aggregate the right to purchase a like number of shares of
Common Stock.
Section 5. Exercise of Warrants; Payment of Warrant Solicitation Fee.
Subject to the provisions of this Agreement, each registered holder of Warrants
shall have the right, which may be exercised commencing at the opening of the
business on , 1998, to purchase from the Company (and the Company shall
issue
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and sell to such registered holder of Warrants) the number of fully paid and
non-assessable shares of Common Stock specified in such Warrants upon surrender
of such Warrants to the Company at the office of the Warrant Agent, with the
form of election to purchase on the reverse thereof duly filled in and signed,
and upon payment to the Company of the warrant price, determined in accordance
with the provisions of Sections 9 and 10 of this Agreement, for the number of
shares of Common Stock in respect of which such Warrants are then exercised.
Payment of such warrant price shall be made in cash or by certified check or
bank draft to the order of the Company. Subject to Section 6, upon such
surrender of Warrants and payment of the warrant price, the Company shall issue
and cause to be delivered with all reasonable dispatch to or upon the written
order of the registered holder of such Warrants and in such name or names as
such registered holder may designate, a certificate or certificates for the
number of full shares of Common Stock so purchased upon the exercise of such
Warrants. Such certificate or certificates shall be deemed to have been issued
and any person so designated to be named therein shall be deemed to have become
a holder of record of such shares of Common Stock as of the date of the
surrender of such Warrants and payment of the warrant price as aforesaid. The
rights of purchase represented by the Warrants shall be exercisable, at the
election of the registered holders thereof, either as an entirety or from time
to time for a portion of the shares specified therein and, in the event that
any Warrant is exercised in respect of less than all of the shares of Common
Stock specified therein at any time prior to the date of expiration of the
Warrants, a new Warrant or Warrants will be issued to the registered holder for
the remaining number of shares of Common Stock specified in the Warrant so
surrendered, and the Warrant Agent is hereby irrevocably authorized to
countersign and to deliver the required new Warrants pursuant to the provisions
of this Section and of Section 3 of this Agreement and the Company, whenever
requested by the Warrant Agent, will supply the Warrant Agent with Warrants
duly executed on behalf of the Company for such purpose. Anything in the
foregoing to the contrary notwithstanding, no Warrant will be exercisable
unless at the time of exercise the Company has filed with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
(the "Act") covering the shares of Common Stock issuable upon exercise of such
Warrant and such registration statement shall have been declared effective,
such shares have been so registered or qualified or deemed to be exempt under
the securities laws of the state of residence of the holder of such Warrant.
The Company shall use its best efforts to have all shares so registered or
qualified on or before the date on which the Warrants become exercisable.
(a) If at the time of exercise of any Warrant after
__________ __, 1998 (i) the market price of the Company's Common
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Stock is equal to or greater than the then exercise price of the Warrant, (ii)
the exercise of the Warrant is solicited by an Underwriter at such time as it
is a member of the National Association of Securities Dealers, Inc. ("NASD"),
(iii) the Warrant is not held in a discretionary account, (iv) disclosure of
the compensation arrangement is made both at the time of the offering and at
the time of the exercise of the Warrants, (v) the Underwriter is designated in
writing as the soliciting broker and (vi) the solicitation of the exercise of
the Warrant is not in violation of Regulation M (as such rule or any successor
rule may be in effect as of such time of exercise) promulgated under the
Securities Exchange Act of 1934, then the Underwriter soliciting such Warrant
shall be entitled to receive from the Company upon exercise of each of the
Warrants so exercised a fee of seven percent (7%) of the aggregate price of the
Warrants so exercised (the "Exercise Fee"). The procedures for payment of the
warrant solicitation fee are set forth in Section 5(b) below.
(b) (1) Within five (5) days of the last day of each month
commencing with __________ __, 1998, the Warrant Agent will notify the
Underwriters of each Warrant Certificate which has been properly completed for
exercise by holders of Warrants during the last month. The Company and Warrant
Agent shall determine, in their sole and absolute discretion, whether a Warrant
Certificate has been properly completed. The Warrant Agent will provide the
Underwriters with such information, in connection with the exercise of each
Warrant, as the Underwriters shall reasonably request.
(2) The Company hereby authorizes and instructs the
Warrant Agent to deliver to the soliciting Underwriter the Exercise Fee
promptly after receipt by the Warrant Agent from the Company of a check payable
to the order of the soliciting Underwriter in the amount of the Exercise Fee.
In the event that an Exercise Fee is paid to the Underwriter with respect to a
Warrant which the Company or the Warrant Agent determines is not properly
completed for exercise or in respect of which the Underwriter is not entitled
to an Exercise Fee, the soliciting Underwriter will return such Exercise Fee to
the Warrant Agent which shall forthwith return such fee to the Company.
The Underwriters and the Company may at any time after __________ __,
1998, and during business hours, examine the records of the Warrant Agent,
including its ledger of original Warrant certificates returned to the Warrant
Agent upon exercise of Warrants. Notwithstanding any provision to the contrary,
the provisions of paragraph 5(a) and 5(c) may not be modified, amended or
deleted without the prior written consent of the Underwriters.
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<PAGE>
Section 6. Payment of Taxes. The Company will pay any documentary
stamp taxes attributable to the initial issuance of Common Stock issuable upon
the exercise of Warrants; provided, however, that the Company shall not be
required to pay any tax which may be payable in respect of any transfer
involved in the issuance or delivery of any certificates of shares of Common
Stock in a name other than that of the registered holder of Warrants in respect
of which such shares are issued, and in such case neither the Company nor the
Warrant Agent shall be required to issue or deliver any certificate for shares
of Common Stock or any Warrant until the person requesting the same has paid to
the Company the amount of such tax or has established to the Company's
satisfaction that such tax has been paid.
Section 7. Mutilated or Missing Warrants. In case any of the Warrants
shall be mutilated, lost, stolen or destroyed, the Company may, in its
discretion, issue and the Warrant Agent shall countersign and deliver in
exchange and substitution for and upon cancellation of the mutilated Warrant,
or in lieu of and in substitution for the Warrant lost, stolen or destroyed, a
new Warrant of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence satisfactory to the Company and the Warrant Agent
of such loss, theft or destruction and, in case of a lost, stolen or destroyed
Warrant, indemnity, if requested, also satisfactory to them. Applicants for
such substitute Warrants shall also comply with such other reasonable
regulations and pay such reasonable charges as the Company or the Warrant Agent
may prescribe.
Section 8. Reservation of Common Stock. There have been reserved, and
the Company shall at all times keep reserved, out of the authorized and
unissued shares of Common Stock, a number of shares of Common Stock sufficient
to provide for the exercise of the rights of purchase represented by the
Warrants, and the transfer agent for the shares of Common Stock and every
subsequent transfer agent for any shares of the Company's Common Stock issuable
upon the exercise of any of the rights of purchase aforesaid are irrevocably
authorized and directed at all times to reserve such number of authorized and
unissued shares of Common Stock as shall be required for such purpose. The
Company agrees that all shares of Common Stock issued upon exercise of the
Warrants shall be, at the time of delivery of the certificates of such shares,
validly issued and outstanding, fully paid and nonassessable and listed on any
national securities exchange upon which the other shares of Common Stock are
then listed. So long as any unexpired Warrants remain outstanding, the Company
will file such post-effective amendments to the registration statement (Form
SB-2, Registration No. 333 - 26543) (the "Registration Statement") filed
pursuant to the Act with respect to the Warrants (or other appropriate
registration statements or post-effective
5
<PAGE>
amendment or supplements) as may be necessary to permit it to deliver to each
person exercising a Warrant, a prospectus meeting the requirements of Section
10(a)(3) of the Act and otherwise complying therewith, and will deliver such
prospectus to each such person. To the extent that during any period it is not
reasonably likely that the Warrants will be exercised, due to market price or
otherwise, the Company need not file such a post-effective amendment during
such period. The Company will keep a copy of this Agreement on file with the
transfer agent for the shares of Common Stock and with every subsequent
transfer agent for any shares of the Company's Common Stock issuable upon the
exercise of the rights of purchase represented by the Warrants. The Warrant
Agent is irrevocably authorized to requisition from time to time from such
transfer agent stock certificates required to honor outstanding Warrants. The
Company will supply such transfer agent with duly executed stock certificates
for that purpose. All Warrants surrendered in the exercise of the rights
thereby evidenced shall be cancelled by the Warrant Agent and shall thereafter
be delivered to the Company, and such cancelled Warrants shall constitute
sufficient evidence of the number of shares of Common Stock which have been
issued upon the exercise of such Warrants. Promptly after the date of
expiration of the Warrants, the Warrant Agent shall certify to the Company the
total aggregate amount of Warrants then outstanding, and thereafter no shares
of Common Stock shall be subject to reservation in respect of such Warrants
which shall have expired.
Section 9. Warrant Price: Adjustments.
(a) The warrant price at which Common Stock shall be
purchasable upon the exercise of the Warrants shall be $6.25 at any time from
__________ __, 1998 until 5:00 Eastern time on __________ __, 2002 or after
adjustment, as provided in this Section, shall be such price as so adjusted
(the "Warrant Price").
(b) The Warrant Price shall be subject to adjustment from
time to time as follows:
(i) In case the Company shall at any time after the
date hereof pay a dividend in shares of Common Stock or make a distribution in
shares of Common Stock, then upon such dividend or distribution the Warrant
Price in effect immediately prior to such dividend or distribution shall
forthwith be reduced to a price determined by dividing:
(A) an amount equal to the total number of
shares of Common Stock outstanding immediately prior to such dividend or
distribution multiplied by the Warrant Price in effect immediately prior to
such dividend or distribution, by
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<PAGE>
(B) the total number of shares of Common Stock outstanding
immediately after such issuance or sale.
For the purposes of any computation to be made in accordance with the
provisions of this clause:
(i) The following provisions shall be applicable:
Common Stock issuable by way of dividend or other distribution on any stock of
the Company shall be deemed to have been issued immediately after the opening
of business on the date following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution.
(ii) In case the Company shall at any time
subdivide or combine the outstanding Common Stock, the Warrant Price shall
forthwith be proportionately decreased in the case of subdivision or increased
in the case of combination to the nearest one cent. Any such adjustment shall
become effective at the time such subdivision or combination shall become
effective.
(iii) Within a reasonable time after the close of
each quarterly fiscal period of the Company during which the Warrant Price has
been adjusted as herein provided, the Company shall:
(A) File with the Warrant Agent a certificate signed by the
President or Vice President of the Company and by the Treasurer or Assistant
Treasurer or the Secretary or an Assistant Secretary of the Company, showing
in detail the facts requiring all such adjustments occurring during such
period and the Warrant Price after each such adjustment; and
(B) The Warrant Agent shall have no duty with respect to any
such certificate filed with it except to keep the same on file and available
for inspection by holders of Warrants during reasonable business hours, and
the Warrant Agent may conclusively rely upon the latest certificate furnished
to it hereunder. The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of a Warrant to determine whether any facts exist
which may require any adjustment of the Warrant Price, or with respect to the
nature or extent of any adjustment of the Warrant Price when made, or with
respect to the method employed in making any such adjustment, or with respect
to the nature or extent of the property or securities deliverable hereunder.
In the absence of a certificate having been furnished, the Warrant Agent may
conclusively rely upon the provisions of the Warrants with respect to the
Common Stock deliverable upon the exercise of the Warrants and the applicable
Warrant Price thereof.
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(C) Notwithstanding anything contained herein to the contrary,
no adjustment of the Warrant Price shall be made if the amount of such
adjustment shall be less than $.05, but in such case any adjustment that would
otherwise be required then to be made shall be carried forward and shall be
made at the time and together with the next subsequent adjustment which,
together with any adjustment so carried forward, shall amount to not less than
$.05.
(c) In the event that the number of outstanding shares of Common
Stock is increased by a stock dividend payable in Common Stock or by a
subdivision of the outstanding Common Stock, then, from and after the time at
which the adjusted Warrant Price becomes effective pursuant to Subsection (b)
of this Section by reason of such dividend or subdivision, the number of shares
of Common Stock issuable upon the exercise of each Warrant shall be increased
in proportion to such increase in outstanding shares. In the event that the
number of shares of Common Stock outstanding is decreased by a combination of
the outstanding Common Stock, then, from and after the time at which the
adjusted Warrant Price becomes effective pursuant to Subsection (b) of this
Section by reason of such combination, the number of shares of Common Stock
issuable upon the exercise of each Warrant shall be decreased in proportion to
such decrease in the outstanding shares of Common Stock.
(d) In case of any reorganization or reclassification of the
outstanding Common Stock (other than a change in par value, or from par value
to no par value, or as a result of a subdivision or combination), or in case of
any consolidation of the Company with, or merger of the Company 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 of the
outstanding Common Stock), or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as
an entirety, the holder of each Warrant then outstanding shall thereafter have
the right to purchase the kind and amount of shares of Common Stock and/or
other securities and property receivable upon such reorganization,
reclassification, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock which the holder of such Warrant shall then be
entitled to purchase; such adjustments shall apply with respect to all such
changes occurring between the date of this Warrant Agreement and the date of
exercise of such Warrant.
(e) Subject to the provisions of this Section 9, in case the
Company shall, at any time prior to the exercise of the Warrants, make any
distribution of its assets to holders of its Common Stock as a liquidating or a
partial liquidating dividend, then the holder of Warrants who exercises his
Warrants after the
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<PAGE>
record date for the determination of those holders of Common Stock entitled to
such distribution of assets as a liquidating or partial liquidating dividend
shall be entitled to receive for the Warrant Price per Warrant, in addition to
each share of Common Stock, the amount of such distribution (or, at the option
of the Company, a sum equal to the value of any such assets at the time of such
distribution as determined by the Board of Directors of the Company in good
faith), which would have been payable to such holder had he been the holder of
record of the Common Stock receivable upon exercise of his Warrant on the
record date for the determination of those entitled to such distribution.
(f) In case of the dissolution, liquidation or winding-up of the
Company, all rights under the Warrants shall terminate on a date fixed by the
Company, such date to be no earlier than ten (10) days prior to the
effectiveness of such dissolution, liquidation or winding-up and not later than
five (5) days prior to such effectiveness. Notice of such termination of
purchase rights shall be given to the last registered holder of the Warrants,
as the same shall appear on the books of the Company maintained by the Warrant
Agent, by registered mail at least thirty (30) days prior to such termination
date.
(g) In case the Company shall, at any time prior to the expiration
of the Warrants and prior to the exercise thereof, offer to the holders of its
Common Stock any rights to subscribe for additional shares of any class of the
Company, then the Company shall give written notice thereof to the last
registered holder thereof not less than thirty (30) days prior to the date on
which the books of the Company are closed or a record date is fixed for the
determination of the stockholders entitled to such subscription rights. Such
notice shall specify the date as to which the books shall be closed or record
date fixed with respect to such offer of subscription and the right of the
holder thereof to participate in such offer of subscription shall terminate if
the Warrant shall not be exercised on or before the date of such closing of the
books or such record date.
(h) Any adjustment pursuant to the aforesaid provisions shall be
made on the basis of the number of shares of Common Stock which the holder
thereof would have been entitled to acquire by the exercise of the Warrant
immediately prior to the event giving rise to such adjustment.
(i) Irrespective of any adjustments in the Warrant Price or the
number or kind of shares purchasable upon exercise of the Warrants, Warrants
previously or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the similar Warrants initially
issuable pursuant to this Warrant Agreement.
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<PAGE>
(j) The Company may retain a firm of independent public accountants
(who may be any such firm regularly employed by the Company) to make any
computation required under this Section, and any certificate setting forth such
computation signed by such firm shall be conclusive evidence of the correctness
of any computation made under this Section.
(k) If at any time, as a result of an adjustment made pursuant to
paragraph (d) above, the holders of a Warrant or Warrants shall become entitled
to purchase any securities other than shares of Common Stock, thereafter the
number of such securities so purchasable upon exercise of each Warrant and the
Warrant Price for such shares shall be subject to adjustment from time to time
in a manner and on terms as nearly equivalent as practicable to the provisions
with respect to the Common Stock contained in paragraphs (b) and (c).
(l) No adjustment to the Purchase Price of the Warrants or to the
number of shares of Common Stock purchasable upon the exercise of such Warrants
will be made, however under the following circumstances:
(i) upon the grant or exercise of any of the
options presently outstanding (or options which may hereafter be granted and/or
exercised) under the Company's 1997 Stock Option Plan for officers, directors
and/or employees, consultants and similar situated parties of the Company; or
(ii) upon the sale or exercise of the Warrants; or
(iii) upon exercise of the Underwriters' Warrant as
otherwise described in the Company's Prospectus dated __________ __, 1997; or
(iv) upon exercise or sale of the Warrants issuable
upon exercise of the Underwriters' Warrant; or
(v) upon any amendment to or change in the term of
any rights or warrants to subscribe for or purchase, or options for the
purchase of Common Stock or convertible securities, including, but not limited
to, any extension of any expiration date of any such right, warrant or option,
any change in any exercise or purchase price provided for in any such right,
warrant or option, any extension of any date through which any convertible
securities are convertible into or exchangeable for Common Stock or any change
in the rate at which any convertible securities are convertible into or
exchangeable for Common Stock.
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Section 10. Fractional Interests. The Warrants may only be exercised
to purchase full shares of Common Stock and the Company shall not be required
to issue fractions of shares of Common Stock on the exercise of Warrants.
However, if a Warrantholder exercises all Warrants then owned of record by him
and such exercise would result in the issuance of a fractional share, the
Company will pay to such Warrantholder, in lieu of the issuance of any
fractional share otherwise issuable, an amount of cash based on the market
value of the Common Stock of the Company on the last trading day prior to the
exercise date.
Section 11. Notices to Warrantholders.
(a) Upon any adjustment of the Warrant Price and the number
of shares of Common Stock issuable upon exercise of a Warrant, then and in each
such case, the Company shall give written notice thereof to the Warrant Agent,
which notice shall state the Warrant Price resulting from such adjustment and
the increase or decrease, if any, in the number of shares purchasable at such
price upon the exercise of a Warrant, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based. The
Company shall also mail such notice to the holders of the Warrants at their
respective addresses appearing in the Warrant register. Failure to give or mail
such notice, or any defect therein, shall not affect the validity of the
adjustments.
(b) In case at any time:
(i) the Company shall pay dividends payable in
stock upon its Common Stock or make any distribution (other than regular cash
dividends) to the holders of its Common Stock; or
(ii) the Company shall offer for subscription pro
rata to all of the holders of its Common Stock any additional shares of stock
of any class or other rights; or
(iii) there shall be any capital reorganization or
reclassification of the capital stock of the Company, or consolidation or
merger of the Company with, or sale of substantially all of its assets to
another corporation; or
(iv) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Company; then in any one or more
of such cases, the Company shall give written notice in the manner set forth in
Section 1 l(a) of the date on which (A) a record shall be taken for such
dividend, distribution or subscription rights, or (B) such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding-up shall take place, as the case may be. Such notice shall also specify
the date as of which the holders of Common Stock of record
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shall participate in such dividend, distribution or subscription rights, or
shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding-up as the case may be. Such
notice shall be given at least thirty (30) days prior to the action in question
and not less than thirty (30) days prior to the record date in respect thereof.
Failure to give such notice, or any defect therein, shall not affect the
legality or validity of any of the matters set forth in this Section 1(b).
(c) The Company shall cause copies of all financial
statements and reports, proxy statements and other documents that are sent to
its stockholders to be sent by first-class mail, postage prepaid, on the date
of mailing to such stockholders, to each registered holder of Warrants at his
address appearing in the Warrant register as of the record date for the
determination of the stockholders entitled to such documents.
Section 12. Disposition of Proceeds on Exercise of Warrants.
(a) The Warrant Agent shall promptly forward to the Company
all monies received by the Warrant Agent for the purchase of shares of Common
Stock through the exercise of such Warrants.
(b) The Warrant Agent shall keep copies of this Agreement
available for inspection by holders of Warrants during normal business hours.
Section 13. Redemption of Warrants. The Warrants are redeemable by the
Company commencing on __________ __, 1998, and prior to their expiration on
__________ __, 2002, in whole or in part, on not less than thirty (30) days'
prior written notice at a redemption price of $.10 per Warrant at any time;
provided that the closing bid price per share on the Nasdaq SmallCap Market, or
the last sale price, if listed on the Nasdaq National Market or a national
exchange (the "Market Place"), of the Common Stock for a period of twenty (20)
consecutive trading days ending within fifteen (15) days prior to the date of
any redemption notice, exceeds 150% of the current Warrant exercise price. Any
redemption in part shall be made pro rata to all Warrant holders. The
redemption notice shall be mailed to the holders of the Warrants at their
respective addresses appearing in the Warrant register. Holders of the Warrants
will have exercise rights until the close of business on the date fixed for
redemption.
The Warrants underlying the Underwriters' Warrant shall not be subject
to redemption by the Company until they have been exercised and the underlying
Warrants are outstanding.
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Section 14. Merger or Consolidation or Change of Name of Warrant
Agent. Any corporation or company which may succeed to the corporate trust
business of the Warrant Agent by any merger or consolidation or otherwise shall
be the successor to the Warrant Agent hereunder without the execution or filing
of any paper or any further act on the part of any of the parties hereto,
provided that such corporation would be eligible for appointment as a successor
Warrant Agent under t he provisions of Section 16 of this Agreement. In case at
the time such successor to the Warrant Agent shall succeed to the agency
created by this Agreement, any of the Warrants shall have been countersigned
but not delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent and deliver such Warrants so
countersigned.
In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrants shall have been countersigned but not
delivered, the Warrant Agent may adopt the countersignature under its prior
name and deliver Warrants so countersigned. In all such cases such Warrants
shall have the full force provided in the Warrants and in the Agreement.
Section 15. Duties of Warrant Agent. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrants, by their
acceptance thereof, shall be bound:
(a) The statements of fact and recitals contained herein and
in the Warrants shall be taken as statements of the Company, and the Warrant
Agent assumes no responsibility for the correctness of any of the same except
as such describe the Warrant Agent or action taken or to be taken by it. The
Warrant Agent assumes no responsibility with respect to the distribution of the
Warrants except as herein expressly provided.
(b) The Warrant Agent shall not be responsible for any
failure of the Company to comply with any of the covenants in this Agreement or
in the Warrants to be complied with by the Company.
(c) The Warrant Agent may consult at any time with counsel
satisfactory to it (who may be counsel for the Company) and the Warrant Agent
shall incur no liability or responsibility to the Company or to any holder of
any Warrant in respect of any action taken, suffered or omitted by it hereunder
in good faith and in accordance with the opinion or the advice of such counsel.
(d) The Warrant Agent shall incur no liability or
responsibility to the Company or to any holder of any Warrant for any action
taken in reliance on any notice, resolution, waiver,
13
<PAGE>
consent, order, certificate or other instrument believed by it to be genuine
and to have been signed, sent or presented by the proper party or parties.
(e) The Company agrees to pay to the Warrant Agent reasonable
compensation for all services rendered by the Warrant Agent in the execution of
this Agreement, to reimburse the Warrant Agent for all expenses, taxes and
governmental charges and other charges incurred by the Warrant Agent in the
execution of this Agreement and to indemnify the Warrant Agent and save it
harmless against any and all liabilities, including judgments, costs and
reasonable counsel fees, for anything done or omitted by the Warrant Agent in
the execution of this Agreement except as a result of the Warrant Agent's
negligence, willful misconduct or bad faith.
(f) The Warrant Agent shall be under no obligation to
institute any action, suit or legal proceeding or to take any other action
likely to involve expenses unless the Company or one or more registered holders
of Warrants shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred (for which there is
no obligation of the Company to do so, except as provided herein) but this
provision shall not affect the power of the Warrant Agent to take such action
as the Warrant Agent may consider proper, whether with or without any such
security or indemnity. All rights of action under this Agreement or under any
of the Warrants may be enforced by the Warrant Agent without the possession of
any of the Warrants or the production thereof at any trial or other proceeding,
and any such action, suit or proceeding instituted by the Warrant Agent shall
be brought in its name as Warrant Agent, and any recovery of judgment shall be
for the ratable benefit of the registered holders of the Warrants, as their
respective rights and interests may appear.
(g) The Warrant Agent and any stockholder, director, officer,
partner or employee of the Warrant Agent may buy, sell or deal in any of the
Warrants or other securities of the Company or become pecuniarily interested in
any transaction in which the Company may be interested, or contract with or
lend money to or otherwise act as fully and freely as though it were not the
Warrant Agent under this Agreement. Nothing herein shall preclude the Warrant
Agent from acting in any other capacity for the Company or for any other legal
entity.
(h) The Warrant Agent shall act hereunder solely as agent and
its duties shall be determined solely by the provisions hereof.
(i) The Warrant Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either
itself or by or through its attorneys, agents or employees, and the Warrant
Agent shall not be answerable or
14
<PAGE>
accountable for any such attorneys, agents or employees or for any loss to the
Company, provided reasonable care had been exercised in the selection and
continued employment thereof.
(j) Any request, direction, election, order or demand of the
Company shall be sufficiently evidenced by an instrument signed in the name of
the Company by its President or a Vice President or its Secretary or an
Assistant Secretary or its Treasurer or an Assistant Treasurer (unless other
evidence in respect thereof be herein specifically prescribed); and any
resolution of the Board of Directors may be evidenced to the Warrant Agent by a
copy thereof certified by the Secretary or an Assistant Secretary of the
Company.
Section 16. Change of Warrant Agent. The Warrant Agent may resign and
be discharged from its duties under this Agreement by giving to the Company
notice in writing, and to the holders of the Warrants notice by mailing such
notice to the holders at their respective addresses appearing on the Warrant
register, of such resignation, specifying a date when such resignation shall
take effect. The Warrant Agent may be removed by like notice to the Warrant
Agent from the Company and the like mailing of notice to the holders of the
Warrants. If the Warrant Agent shall resign or be removed or shall otherwise
become incapable of action, the Company shall appoint a successor to the
Warrant Agent. If the Company shall fail to make such appointment within a
period of thirty (30) days after such removal or after it has been notified in
writing of such resignation or incapacity by the resigning or incapacitated
Warrant Agent or after the Company has received such notice from a registered
holder of a Warrant (who shall, with such notice, submit his Warrant for
inspection by the Company), then the registered holder of any Warrant may apply
to any court of competent jurisdiction for the appointment of a successor to
the Warrant Agent. Any successor Warrant Agent, whether appointed by the
Company or by such a court, shall be a bank or trust company, in good standing,
incorporated under any state or federal law. After appointment, the successor
Warrant Agent shall be vested with the same powers, rights, duties and
responsibility as if it had been originally named as Warrant Agent without
further act or deed and the former Warrant Agent shall deliver and transfer to
the successor Warrant Agent all cancelled Warrants, records and property at the
time held by it hereunder, and execute and deliver any further assurance or
conveyance necessary for the purpose. Failure to file or mail any notice
provided for in this Section, however, or any defect therein, shall not affect
the validity of the resignation or removal of the Warrant Agent or the
appointment of the successor Warrant Agent, as the case may be.
Section 17. Identity of Transfer Agent. Forthwith upon the
appointment of any transfer agent for the shares of Common Stock or
15
<PAGE>
of any subsequent transfer agent for the shares of Common Stock or other shares
of the Company's Common Stock issuable upon the exercise of the` rights of
purchase represented by the Warrants, the Company will file with the Warrant
Agent a statement setting forth the name and address of such transfer agent.
Section 18. Notices. Any notice pursuant to this Agreement to be given
by the Warrant Agent, or by the registered holder of any Warrant to the
Company, shall be sufficiently given if sent by first-class mail, postage
prepaid, addressed (until another is filed in writing by the Company with the
Warrant Agent) as follows:
Discas, Inc.
567-1 South Leonard Street
Waterbury, Connecticut 06708
Attention: Mr. Patrick A. DePaolo, President
and a copy thereof to:
Epstein Becker & Green, P.C.
250 Park Avenue
New York, New York 10177
Attention: Joseph A. Smith, Esq.
Any notice pursuant to this Agreement to be given by the Company or by
the registered holder of any Warrant to the Warrant Agent shall be sufficiently
given if sent by first-class mail, postage prepaid, addressed (until another
address is filed in writing by the Warrant Agent with the Company) as follows:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Attention: Mr. George Karfunkel
Section 19. Supplements and Amendments. The Company, the Warrant Agent
and the Representative may from time to time supplement or amend this Agreement
in order to cure any ambiguity or to correct or supplement any provision
contained herein which may be defective or inconsistent with any other
provision herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Warrant Agent and the
Representative may deem necessary or desirable and which shall not be
inconsistent with the provisions of the Warrants and which shall not adversely
affect the interest of the holders of Warrants.
16
<PAGE>
Section 20. New York Contract. This Agreement and each Warrant issued
hereunder shall be deemed to be a contract made under the laws of the State of
New York and shall be construed in accordance with the laws of New York
applicable to agreements to be performed wholly within New York.
Section 21. Benefits of this Agreement. Nothing in this Agreement
shall be construed to give to any person or corporation other than the Company,
the Warrant Agent and the registered holders of the Warrants any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Warrant Agent and the
registered holders of the Warrants.
Section 22. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Warrant
Agent shall bind and inure to the benefit of their respective
successors and assigns hereunder.
IN WITNESS WHEREOF, the parties have entered into this Agreement on
the date first above written.
DISCAS, INC.
By:
---------------------------------------
Patrick A. DePaolo, President
AMERICAN STOCK TRANSFER & TRUST COMPANY
By:
---------------------------------------
Name:
Title:
17
<PAGE>
EXHIBIT A
[Form of Face of Warrant Certificate]
No. W Warrants
VOID AFTER ________ ___,2002
WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
DISCAS, INC.
THIS CERTIFIES THAT FOR VALUE RECEIVED ____________________________________
___________________________________________________________________________
or registered assigns (the "Registered Holder") is the owner of the number of
Redeemable Common 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 fully paid and nonassessable share of Common
Stock, $.0001 par value per share ("Common Stock"), of DISCAS, INC., a Delaware
corporation (the "Company"), at any time between the Initial Warrant Exercise
Date and 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 $6.25 (the "Purchase Price") in lawful money
of the United States of America in cash or by official bank or certified check
made payable to Discas, 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 __________ __,
1997, 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 Common 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 Common 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.
A-1
<PAGE>
The term "Initial Warrant Exercise Date" shall mean __________ __, 1998.
The term "Expiration Date" shall mean 5:00 p.m. New York time) on
__________ __, 2002, 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.
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 then
effective. This Warrant shall not be exercisable by a Registered Holder in any
state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment with any transfer
fee in addition to any tax or other governmental charge imposed in connection
therewith, for registration of transfer of this Warrant Certificate at such
office, a new Warrant Certificate or Warrant Certificates representing an equal
aggregate number of Warrants will be issued to the transferee in exchange
therefor, subject to the limitations provided in the Warrant Agreement.
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 $.10 per Warrant any time after _________ __, 1998,
provided the per share Market Price (as defined in the Warrant Agreement) for
the securities issuable upon exercise of such Warrant shall exceed 150% of the
current Warrant exercise price on each of the twenty (20) consecutive trading
days during a period ending within fifteen (15) days prior to the date on which
notice of redemption is given. 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
A-2
<PAGE>
rights with respect to this Warrant except to receive the $.10 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.
The Company has agreed to pay a fee of 7% of the Purchase Price upon
certain conditions as specified in the Warrant Agreement upon the exercise of
any Warrants represented hereby.
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.
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.
DISCAS, INC.
By:
----------------------------------------
By:
----------------------------------------
Dated:
--------------------
[Seal]
COUNTERSIGNED:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent
By:
----------------------------
Authorized Officer
A-3
<PAGE>
[Form of Reverse of Warrant Certificate]
NOTICE OF ELECTION TO EXERCISE
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.
The undersigned represents that the exercise of the Warrants evidenced
hereby was solicited by a member of the National Association of Securities
Dealers, Inc. If not solicited by an NASD member firm, please write
"unsolicited" in the space below. Unless otherwise indicated by listing the
name of another NASD member firm, it will be assumed that the exercise was
solicited by Roan Capital Partners L.P.
------------------------------------
(Name of NASD Member, if other than
Roan Capital Partners L.P.)
------------------------------------
Dated: ------------------------------------
-------------------
------------------------------------
Address
------------------------------------
Taxpayer Identification Number
------------------------------------
Signature Guaranteed
------------------------------------
A-4
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder in Order to Assign Warrants
FOR VALUE RECEIVED, __________________________________ hereby
sells, assigns, and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF TRANSFEREE
----------------------------------------
----------------------------------------
----------------------------------------
----------------------------------------
(please print or type name and address)
__________ 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.
Dated: X
-------------------- -----------------------------------
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 AN ELIGIBLE INSTITUTION (AS DEFINED IN RULE 17Ad-15 UNDER THE
SECURITIES AND EXCHANGE ACT OF 1934) WHICH MAY INCLUDE A COMMERCIAL BANK OR
TRUST COMPANY, SAVINGS ASSOCIATION, CREDIT UNION OR A MEMBER FIRM OF THE
AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE OR
MIDWEST STOCK EXCHANGE.
A-5
<PAGE>
Exhibit 4.4
NO SALE OR TRANSFER OF THIS WARRANT OR THE SECURITIES
UNDERLYING THIS WARRANT MAY BE MADE UNTIL
THE EFFECTIVENESS OF A REGISTRATION STATEMENT
OR OF A POST-EFFECTIVE AMENDMENT THERETO
UNDER THE SECURITIES ACT OF 1933 (THE "ACT"),
COVERING THIS WARRANT OR THE SECURITIES UNDERLYING
THIS WARRANT, OR UNTIL THE COMPANY IS IN RECEIPT OF AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY
STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM
THE REGISTRATION REQUIREMENTS OF THE ACT. TRANSFER OF
THIS WARRANT IS RESTRICTED UNDER PARAGRAPH 2 BELOW.
UNDERWRITERS' WARRANT TO PURCHASE
COMMON STOCK AND/OR REDEEMABLE WARRANTS
DISCAS, INC.
(a Delaware corporation)
Dated:______________ ___, 1997
<PAGE>
THIS CERTIFIES THAT Roan Capital Partners L.P., an Underwriter (and
together with its assigns, the "Holder"), is entitled to purchase from Discas,
Inc., a Delaware corporation (the "Company"), for an aggregate price of $10, an
option ("Purchase Option"), during the period as hereinafter specified, for up
to 80,000 shares of the Company's common stock, $.0001 par value per share (the
"Common Stock"), and 80,000 redeemable warrants (the "Warrants" and
collectively with the Common Stock, the "Securities"), at a purchase price of
$8.25 per share of Common Stock and $.165 per Warrant which Warrant is
exercisable at $6.25 per share of Common Stock (the "Exercise Price") (the
"Underwriters' Warrant").
This Underwriters' Warrant is issued pursuant to an Underwriting
Agreement dated __________ __, 1997, between the Company and Roan Capital
Partners L.P. and Merit Capital Associates, Inc. (the "Underwriters"), in
connection with a public offering through the Underwriters (the "Public
Offering") of 800,000 shares of Common Stock and 800,000 Warrants.
1. Exercise of the Underwriters' Warrant.
(a) The rights represented by this Underwriters' Warrant
shall be exercised at the prices and during the periods as follows:
(i) During the period from __________ __, 1997 to
__________ __, 1998, inclusive, the Holder shall have no right to purchase any
Securities hereunder.
(ii) Between __________ __, 1998 and __________ __,
2002, inclusive, the Holder shall have the option to purchase shares of Common
Stock and Warrants hereunder at a price of $8.25 and $.165, respectively, the
purchase price of the Common Stock and the Warrant being 165% of the public
offering price for the Securities set forth in the Prospectus forming a part of
the registration statement on Form SB-2 (File No. 333-26543) of the Company, as
amended (the "Registration Statement").
(iii) After __________ __, 2002, the Holder shall
have no right to purchase any Securities hereunder and this Underwriters'
Warrant shall expire effective at 5:00 p.m., New York time.
(b) The rights represented by this Underwriters' Warrant may
be exercised at any time within the period above specified, in whole or in
part, by (i) the surrender of this Underwriters' Warrant (with the purchase
form at the end hereof properly executed) at the principal executive of office
of the Company (or such other of 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 shares of Common Stock and
Warrants specified in the above-mentioned purchase form together with
applicable stock transfer taxes, if any; and
<PAGE>
(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 5 and subparagraphs (b),
(c) and (d) of Paragraph 6 hereof. This Underwriters' Warrant 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 Underwriters'
Warrant is surrendered and payment is made in accordance with the foregoing
provisions of this Paragraph 1, and the person or persons in whose name or
names the certificates for the Securities shall be issuable upon such exercise
shall become the Holder or Holders of record of such Common Stock and Warrants
at that time and date. The Common Stock and Warrants so purchased shall be
delivered to the Holder within a reasonable time, not exceeding ten (10)
business days, after the rights represented by this Underwriters' Warrant shall
have been so exercised.
2. Restrictions on Transfer.
This Underwriters' Warrant shall not be transferred, sold,
assigned, or hypothecated for a period of one year commencing __________ __,
1997, 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 of officer or partner of
an Underwriter or an officer or partner of any member of the selling group
during such period; and after such one-year period, such a transfer may occur
providing the Underwriters' Warrant is exercised immediately upon transfer, and
if not exercised immediately on transfer, the Underwriters' Warrant shall
lapse. Any such assignment shall be effected by the Holder by (i) completing
and executing the form of assignment at the end hereof and (ii) surrendering
this Underwriters' Warrant with such duly completed and executed assignment
form for cancellation, accompanied by funds sufficient to pay any transfer tax,
at the office or agency of the Company referred to in Paragraph 1 hereof,
accompanied by a certificate (signed by a duly authorized representative of the
Holder), stating that each transferee is a permitted transferee under this
Paragraph 2 hereof; whereupon the Company shall issue, in the name or names
specified by the Holder (including the Holder) a new Underwriters' Warrant or
Underwriters' Warrants of like tenor and representing in the aggregate rights
to purchase the same number of Securities as are then purchasable hereunder.
3. Covenants of the Company.
(a) The Company covenants and agrees that all Common Stock
and Common Stock issuable upon exercise of the Warrants will, upon issuance, be
duly and validly issued, fully paid
2
<PAGE>
and nonassessable and no personal liability will attach to the holder thereof
by reason of being such a holder, other than as set forth herein.
(b) The Company covenants and agrees that during the period
within which this Underwriters' Warrant may be exercised, the Company will at
all times have authorized and reserved a sufficient number of shares of Common
Stock to provide for the exercise of this Underwriters' Warrant and the
Warrants included therein.
(c) The Company covenants and agrees that for so long as the
Securities shall be outstanding, the Company shall use its best efforts to
cause all shares of Common Stock issuable upon the exercise of the
Underwriters' Warrant and the Warrants contained therein, to be listed on or
quoted by the Nasdaq National Market System or on the Nasdaq SmallCap Market.
4. No Rights of Stockholder.
This Underwriters' Warrant shall not entitle the Holder to
any voting rights or other rights as a stockholder of the Company, either at
law or in equity, and the rights of the Holder are limited to those expressed
in this Underwriters' Warrant and are not enforceable against the Company
except to the extent set forth herein.
5. Registration Rights.
(a) The Company shall advise the Holder or its transferee,
whether the Holder holds this Underwriters' Warrant or has exercised this
Underwriters' Warrant and holds Common Stock and Warrants, or Common Stock
underlying the Warrants (the "Warrant Shares"), 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, and will for a period of four years from
__________ __, 1998, 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 any of the Common Stock or Warrants
issuable hereunder, and/or the Warrant Shares (the "Registerable Securities"),
provided however that this Section 5(a) is not applicable to any registration
statement by the Company on Forms S-4 or S-8 (including any Form S-3 related to
such Form S-8) or any other comparable form. The Company shall supply
prospectuses in order to facilitate the public sale or other disposition of the
Registerable Securities, use its best efforts to register and qualify any of
the Registerable Securities for sale in such states as such Holder reasonably
designates, provided such qualification is not solely
3
<PAGE>
for the purpose of subjecting the Company to jurisdiction in that state or is
not unduly burdensome, and do any and all other acts and things which may be
necessary to enable such Holder to consummate the public sale of the
Registerable Securities, and furnish indemnification in the manner provided in
Paragraph 6 hereof. The Holder shall furnish information reasonably requested
by the Company in accordance with such post-effective amendments or
registration statements, including its intentions with respect thereto, and
shall furnish indemnification as set forth in Paragraph 6. The Company shall
continue to advise the Holders of the Registerable Securities of its intention
to file a registration statement or amendment pursuant to this Paragraph 5(a)
until the earlier of (i) __________ __, 2002; or (ii) such time as all of the
Registerable Securities have been registered and sold under the Act.
(b) If any fifty-one (51%) percent holder (as defined below)
shall give notice to the Company at any time during the four (4) year period
beginning one (1) year from __________ __, 1997 to the effect that such holder
desires to register under the Act any Registerable Securities, under such
circumstances that a public distribution (within the meaning of the Act) of any
such Registerable Securities will be involved, then the Company will as
promptly as practicable after receipt of such notice, but not later than thirty
(30) 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 Registerable 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 as provided
herein (including the taking of such steps as are necessary to obtain the
removal of any stop order); provided, that such fifty-one (51%) percent holder
shall furnish the Company with appropriate information in connection therewith
as the Company may reasonably request; and provided, further, that the Company
shall not be required to file such a post effective amendment or registration
statement on more than one occasion at its expense. The Company will maintain
such registration statement or post-effective amendment current under the Act
for a period of at least six (6) months from the effective date thereof. The
Company shall supply prospectuses in order to facilitate the public sale of the
Registerable Securities, use its best efforts to register and qualify any of
the Registerable Securities for sale in such states as such holder reasonably
designates, provided such qualification is not solely for the purpose of
subjecting the Company to jurisdiction in that state or is not unduly
burdensome, and furnish indemnification in the manner provided in Paragraph 6
hereof.
(c) The Holder may, in accordance with Paragraphs 5(a) or
(b), at his or its option, and subject to the limitations set forth in
Paragraph 1(a) hereof, request the registration of any of
4
<PAGE>
the Registerable Securities in a filing made by the Company prior to the
acquisition of the Securities upon exercise of this Representative's Warrant.
The Holder may thereafter exercise the Warrants at any time or from time to
time subsequent to the effectiveness under the Act of the registration
statement in which the Common Stock underlying the Representative's Warrants
and Warrants were included.
(d) The term "51% holder," as used in this Paragraph 5, shall
include any owner or combination of owners of Underwriters' Warrants or
Registerable Securities if the aggregate number of Common Shares and Warrant
Shares included in and underlying the Underwriters' Warrants and Registerable
Securities held of record by it or them, would constitute a majority of the
aggregate of such Common Shares and Warrant Shares.
(e) The following provisions of this Paragraph 5 shall
also be applicable:
(i) Within ten (10) days after receiving any
notice pursuant to Paragraph 5(b), the Company shall give notice to the other
Holders of Underwriters' Warrants or Registerable Securities, advising that the
Company is proceeding with such post-effective amendment or registration and
offering to include therein the Registerable Securities of such other Holders,
provided that they shall furnish the Company with all information in connection
therewith as shall be necessary or appropriate and as the Company shall
reasonably request in writing. Following the effective date of such
post-effective amendment or registration, the Company shall, upon the request
of any Holder of Registerable Securities, forthwith supply such number of
prospectuses meeting the requirements of the Act, as shall be reasonably
requested by such Holder. The Company shall use its best efforts to qualify the
Registerable Securities for sale in such states as the 51% holder shall
designate, provided such qualification is not solely for the purpose of
subjecting the Company to jurisdiction in that state or is not unduly
burdensome, at such times as the registration statement is effective under the
Act.
(ii) The Company shall bear the entire cost and
expense of any registration of securities initiated by it under Paragraph 5(a)
hereof notwithstanding that the Registerable Securities subject to this
Representative's Warrant may be included in any such registration. The Company
shall also comply with one request for registration made by the 51% holder
pursuant to Paragraph 5(b) hereof at the Company's own expense and without
charge to any holder of the Registerable Securities, and with one request at
the expense of the Holders thereof. Notwithstanding the foregoing, any Holder
whose Registerable Securities are included in any such registration statement
pursuant to this Paragraph 5 shall, however, bear the fees of any counsel
retained by him and any
5
<PAGE>
transfer taxes or underwriting discounts or commissions applicable to the
Registerable Securities sold by him pursuant thereto and, in the case of a
registration pursuant to Paragraph 5(a) hereof, any additional registration
fees attributable to the registration of such Holder's Registerable Securities.
(iii) If the managing underwriter in any such
underwritten offering shall advise the Company that it declines to include a
portion or all of the Registerable Securities requested by the Holders to be
included in the registration statement, then distribution of all or a specified
portion of the Registerable Securities shall be excluded from such registration
statement (in case of an exclusion as to a portion of such Registerable
Securities, such portion to be allocated among such Holders in proportion to
the respective numbers of Registerable Securities requested to be registered by
each such Holder). In such event the Company shall give the Holder prompt
notice of the number of Registerable Securities excluded. Further, in such
event the Company shall, within six (6) months of the completion of such
subsequent offering, file and use its best efforts to have declared effective,
at its sole expense, a registration statement relating to such excluded
securities.
6. Indemnification.
(a) Whenever pursuant to Paragraph 5, a registration
statement relating to any Registerable Securities is filed under the Act,
amended or supplemented, the Company will indemnify and hold harmless each
Holder of the Registerable Securities covered by such registration statement,
amendment or supplement (such holder hereinafter referred to as the
"Distributing Holder"), each person, if any, who controls (within the meaning
of the Act) the Distributing Holder, and each officer, employee, partner or
agent of the Distributing Holder, if the Distributing Holder is a broker or
dealer, against any losses, claims, damages or liabilities, joint or several,
to which the Distributing Holder 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 for any legal or other expenses reasonably incurred by the
Distributing Holder, 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 (i) to the extent that any such loss,
claim, damage or liability arises out of or is based upon an untrue statement
or alleged
6
<PAGE>
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, any other Distributing Holder or any
such underwriter for use in the preparation thereof, and (ii) such losses,
claims, damages or liabilities arise out of or are based upon any actual or
alleged untrue statement or omission made in or from any preliminary
prospectus, but corrected in the final prospectus, as amended or supplemented.
(b) Whenever pursuant to Paragraph 5 a registration statement
relating to the Registerable Securities is filed under the Act, or is amended
or supplemented, the Distributing Holder will indemnify and hold harmless the
Company, each of its directors, each of its of officers who have signed said
registration statement and such amendments and supplements thereto, and each
person, if any, who controls the Company (within the meaning of the Act)
against any losses, claims, damages or liabilities to which the Company or any
such director, officer or controlling person may become subject under the Act
or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue 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 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 was
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 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 6 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 to so notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party otherwise than under this
Paragraph 6.
(d) In case any such action is brought against any
indemnified party, and it notifies an indemnifying party of the
7
<PAGE>
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 to so assume the defense
thereof, the indemnifying party will not be liable to such indemnified party
under this Paragraph 6 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof other than
reasonable costs of investigation.
7. Adjustments of Exercise Price and Number of Securities.
(a) The Warrant Price shall be subject to adjustment
from time to time as follows:
(1) In case the Company shall at any time after the
date hereof pay a dividend in shares of Common Stock or make a distribution in
shares of Common Stock, then upon such dividend or distribution the Warrant
Price in effect immediately prior to such dividend or distribution shall
forthwith be reduced to a price determined by dividing:
(a) an amount equal to the total number of
shares of Common Stock outstanding immediately prior to such dividend or
distribution multiplied by the Warrant Price in effect immediately prior to
such dividend or distribution, by;
(b) the total number of shares of Common
Stock outstanding immediately after such issuance or sale.
For the purposes of any computation to be made in accordance with the
provisions of this clause (i), the following provisions shall be applicable:
Common Stock issuable by way of dividend or other distribution on any stock of
the Company shall he deemed to have been issued immediately after the opening
of business on the date following the date fixed for the determination of
stockholders entitled to receive such dividend or other distribution.
(2) In case the Company shall at any time subdivide
or combine the outstanding Common Stock, the Warrant Price shall forthwith be
proportionately decreased in the case of subdivision or increased in the case
of combination to the nearest one cent. Any such adjustment shall become
effective at the time such subdivision or combination shall become effective.
(3) Within a reasonable time after the close
of each quarterly fiscal period of the Company during which the Warrant Price
has been adjusted as herein provided, the Company shall:
8
<PAGE>
(a) Deliver to the Underwriters a
certificate signed by the President or Vice President of the Company and by the
Treasurer or Assistant Treasurer or the Secretary or an Assistant Secretary of
the Company, showing in detail the facts requiring all such adjustments
occurring during such period and the Warrant Price after each such adjustment.
(b) Notwithstanding anything contained
herein to the contrary, no adjustment of the Warrant Price shall be made if the
amount of such adjustment shall be less than $.05, but in such case any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment which, together with any adjustment so carried forward, shall amount
to not less than $.05.
(b) In the event that the number of outstanding shares of
Common Stock is increased by a stock dividend payable in Common Stock or by a
subdivision of the outstanding Common Stock, then, from and after the time at
which the adjusted Warrant Price becomes effective pursuant to Subsection (b)
of this Section by reason of such dividend or subdivision, the number of shares
of Common Stock issuable upon the exercise of each Warrant shall be increased
in proportion to such increase in outstanding shares. In the event that the
number of shares of Common Stock outstanding is decreased by a combination of
the outstanding Common Stock, then, from and after the time at which the
adjusted Warrant Price becomes effective pursuant to Subsection (b) of this
Section by reason of such combination, the number of shares of Common Stock
issuable upon the exercise of each Warrant shall be decreased in proportion to
such decrease in the outstanding shares of Common Stock.
(c) In case of any reorganization or reclassification of the
outstanding Common Stock (other than a change in par value, or from par value
to no par value, or as a result of a subdivision or combination), or in case of
any consolidation of the Company with, or merger of the Company 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 of the
outstanding Common Stock), or in case of any sale or conveyance to another
corporation of the property of the Company as an entirety or substantially as
an entirety, the holder of each Warrant then outstanding shall thereafter have
the right to purchase the kind and amount of shares of Common Stock and/or
other securities and property receivable upon such reorganization,
reclassification, consolidation, merger, sale or conveyance by a holder of the
number of shares of Common Stock which the holder of such Warrant shall then be
entitled to purchase; such adjustments shall apply with respect to all such
changes occurring between the date of this Warrant Agreement and the date of
exercise of such Warrant.
9
<PAGE>
(d) Subject to the provisions of this Section, in case the
Company shall, at any time prior to the exercise of the Warrants, make any
distribution of its assets to holders of its Common Stock as a liquidating or a
partial liquidating dividend, then the holder of Warrants who exercises his
Warrants after the record date for the determination of those holders of Common
Stock entitled to such distribution of assets as a liquidating or partial
liquidating dividend shall be entitled to receive for the Warrant Price per
Warrant, in addition to each share of Common Stock, the amount of such
distribution (or, at the option of the Company, a sum equal to the value of any
such assets at the time of such distribution as determined by the Board of
Directors of the Company in good faith), which would have been payable to such
holder had he been the holder of record of the Common Stock receivable upon
exercise of his Warrant on the record date for the determination of those
entitled to such distribution.
(e) In case of the dissolution, liquidation or winding-up of
the Company, all rights under the Warrants shall terminate on a date fixed by
the Company, such date to be no earlier than ten (10) days prior to the
effectiveness of such dissolution, liquidation or winding-up and not later than
five (5) days prior to such effectiveness. Notice of such termination of
purchase rights shall be given to the last registered holder of the Warrants,
as the same shall appear on the books of the Company maintained by the Warrant
Agent, by registered mail at least thirty (30) days prior to such termination
date.
(f) In case the Company shall, at any time prior to the
expiration of the Warrants and prior to the exercise thereof, offer to the
holders of its Common Stock any rights to subscribe for additional shares of
any class of the Company, then the Company shall give written notice thereof to
the last registered holder thereof not less than thirty (30) days prior to the
date on which the books of the Company are closed or a record date is fixed for
the determination of the stockholders entitled to such subscription rights.
Such notice shall specify the date as to which the books shall be closed or
record date fixed with respect to such offer of subscription and the right of
the holder thereof to participate in such offer of subscription shall terminate
if the Warrant shall not be exercised on or before the date of such closing of
the books or such record date.
(g) Any adjustment pursuant to the aforesaid provisions shall
be made on the basis of the number of shares of Common Stock which the holder
thereof would have been entitled to acquire by the exercise of the Warrant
immediately prior to the event giving rise to such adjustment.
(h) Irrespective of any adjustments in the Warrant Price or
the number or kind of shares purchasable upon exercise of
10
<PAGE>
the Warrants, Warrants previously or thereafter issued may continue to express
the same price and number and kind of shares as are stated in the similar
Warrants initially issuable pursuant to this Warrant Agreement.
(i) The Company may retain a firm of independent public
accountants (who may be any such firm regularly employed by the Company) to
make any computation required under this Section, and any certificate setting
forth such computation signed by such firm shall be conclusive evidence of the
correctness of any computation made under this Section.
(j) If at any time, as a result of an adjustment made
pursuant to paragraph (d) above, the holders of a Warrant or Warrants shall
become entitled to purchase any securities other than shares of Common Stock,
thereafter the number of such securities so purchasable upon exercise of each
Warrant and the Warrant Price for such shares shall be subject to adjustment
from time to time in a manner and on terms as nearly equivalent as practicable
to the provisions with respect to the Common Stock contained in paragraphs (b)
and (c).
(k) No adjustment to the Warrant Price or to the number of
shares of Common Stock purchasable upon the exercise of such Warrants will be
made, however under the following circumstances:
(i) upon the grant or exercise of any of the
options presently outstanding (or options which may hereafter be granted and/or
exercised) under the Company's 1997 Stock Option Plan for officers, directors
and/or employees, consultants and similar situated parties of the Company; or
(ii) upon the sale or exercise of the Warrants
issued to the public pursuant to the ________ __, 1997 Prospectus; or
(iii) upon exercise of this Warrant; or
(iv) upon exercise or sale of the Warrants issuable
upon exercise of the Underwriters' Warrant; or
(v) upon any amendment to or change in the term of
any rights or warrants to subscribe for or purchase, or options for the
purchase of Common Stock or convertible securities, including, but not limited
to, any extension of any expiration date of any such right, warrant or option,
any change in any exercise or purchase price provided for in any such right,
warrant or option, any extension of any date through which any convertible
securities are convertible into or exchangeable for Common Stock or any change
in the rate at which any convertible securities are convertible into or
exchangeable for Common Stock (other than rights, warrants,
11
<PAGE>
options or convertible securities issued or sold after the close of business on
the date of the original issue of the Common Stock, (i) for presently
outstanding securities, or (ii) for which an adjustment in the Warrant Price
then in effect was theretofore made or required to be made, upon issuance or
sale thereof).
8. Fractional Shares.
(a) The Company shall not be required to issue fractions of
shares of Common Shares on the exercise of the Warrants subject to this
Underwriters' Warrant. The Company shall not be obligated to issue any
fractional share interests or fractional warrant interests upon the exercise of
any Warrant or Warrants, nor shall it be obligated to issue scrip or pay cash
in lieu of fractional interests, provided, however, that if a holder exercises
all the Warrants held of record by such holder, the fractional interests shall
be eliminated by rounding any fraction up to the nearest whole number of
shares.
(b) The Holder of this Underwriters' Warrant, by acceptance
hereof, expressly waives his right to receive any fractional share of Common
Stock upon exercise of the Warrants subject to this Underwriters' Warrant.
9. Redemption of Warrants underlying the Underwriters'
Warrant.
The Warrants underlying the Underwriters' Warrant shall not be subject
to redemption by the Company until they have been exercised and the underlying
Warrants are outstanding.
10. Miscellaneous.
(a) This Underwriters' Warrant shall be governed by and
in accordance with the laws of the State of New York.
(b) All notices, requests, consents and other communications
hereunder shall be made in writing and shall be deemed to have been duly made
when delivered, or mailed by registered or certified mail, return receipt
requested: (i) if to a Holder, to the address of such Holder as shown on the
books of the Company, or (ii) if to the Company, 567-1 South Leonard Street,
Waterbury, Connecticut 06708.
(c) The Company and the Underwriters may from time to time
supplement or amend this Underwriters' Warrant without the approval of any
other Holders in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
provisions herein, or to make any other provisions in regard to matters or
questions arising hereunder which the Company and the Underwriters may deem
necessary
12
<PAGE>
or desirable and which the Company and the Underwriters deem not to adversely
affect the interest of the Holders.
(d) All the covenants and provisions of this Underwriters'
Warrant by or for the benefit of the Company and the Holders inure to the
benefit of their respective successors and assigns hereunder.
(e) Nothing in this Underwriters' Warrant shall be construed
to give to any person or corporation other than the Company and the
Underwriters and any other registered Holder or Holders, any legal or equitable
right and that any such right is for the sole and exclusive benefit of the
Company and the Underwriter and any other Holder or Holders.
(f) This Underwriters' Warrant may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and such counterparts shall together constitute but one and
the same instrument.
IN WITNESS WHEREOF, Discas, Inc. has caused this Underwriters'
Warrant to be signed by its duly authorized officer and this Underwriters'
Warrant to be dated __________ __, 1997.
DISCAS, INC.
By:_________________________________
Patrick A. DePaolo, President
13
<PAGE>
PURCHASE FORM
(To be signed only upon exercise of the Underwriters' Warrant)
The undersigned, the Holder of the foregoing Underwriters' Warrant,
hereby irrevocably elects to exercise the purchase rights represented by such
Underwriters' Warrant for, and to purchase thereunder, ________ shares of
Common Stock and/or ___ Warrants of Discas, Inc. and herewith makes payment of
$______ thereof, and requests that the certificates for Common Stock/or
Warrants be issued in the name(s) of, and delivered to ____________ whose
address(es) is (are) ___________________________
Dated:
------------------
- -------------------------
- -------------------------
Address
<PAGE>
TRANSFER FORM
(To be signed only upon transfer of the Underwriters' Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto _______________________ the right to purchase shares of Common
Stock and/or Warrants of Discas, Inc. represented by the foregoing
Underwriters' Warrant to the extent of _____________ shares of Common Stock
and/or ____ Warrants, and appoints ______________, attorney to transfer such
rights on the books of Discas, Inc., with full power of substitution in the
premises.
Dated:
-----------------
- ------------------------
(name of holder)
- ------------------------
Address
- ------------------------
In the presence of:
- ------------------------
- ------------------------
<PAGE>
Exhibit 5.1
EPSTEIN BECKER & GREEN, P.C.
August 11, 1997
Discas, Inc.
567-1 South Leonard Street
Waterbury, CT 06708
Re: Registration Statement on Form SB-2
Discas, Inc.
------------
Ladies and Gentlemen:
We have acted as counsel to Discas, Inc., a Delaware corporation (the
"Company"), in connection with the Company's registered public offering (the
"Public Offering") of 920,000 shares of the Company's common stock, $.0001 par
value per share (the "Common Stock") and 920,000 redeemable common stock
purchase warrants of the Company (the "Warrants") pursuant to a Registration
Statement dated May 6, 1997, Amendment No. 1 thereto dated July 2, 1997,
Amendment No. 2 thereto dated July 24, 1997 and Amendment No. 3 thereto dated
August 12, 1997, respectively (Registration No. 333-26543) (the "Registration
Statement") and the Prospectus dated August 13, 1997 (the "Prospectus") filed
by the Company with the Securities and Exchange Commission under the Securities
Act of 1933, as amended (the "Act"), relating to:
1. 920,000 shares of Common Stock (including 120,000 shares of Common
Stock which the Underwriters have the option to purchase to cover
over-allotments);
2. 920,000 Warrants (including 120,000 Warrants which the Underwriters
have the option to purchase to cover over-allotments) to purchase one share of
Common Stock for $6.25 (together with such indeterminate number of additional
securities as may be issued pursuant to the anti-dilution provisions of the
Warrants, pursuant to Rule 416(a));
<PAGE>
Discas, Inc.
August 11, 1997
Page 2
3. 920,000 shares of Common Stock issuable upon the exercise of the the
Warrants set forth in 2 at a price of $6.25 per share of Common Stock;
4. 80,000 "Underwriters' Warrants" to purchase 80,000 shares of Common
Stock and 80,000 Warrants;
5. 80,000 shares of Common Stock issuable upon the exercise of the
Underwriters' Warrants set forth in 4 at a price of $8.25 per share of Common
Stock;
6. 80,000 Warrants issuable upon the exercise of the Underwriters'
Warrants set forth in 4 at a price of $.165 per Warrant (together with such
indeterminate number of additional securities as may be issued pursuant to the
anti-dilution provisions of the Warrants and the Underwriters' Warrants
pursuant to Rule 416(a));
7. 80,000 shares of Common Stock issuable upon the exercise of the
Warrants set forth in 6 at a price of $6.25 per share of Common Stock;
8. 800,000 redeemable common stock purchase warrants held by selling
securityholders (the "Selling Securityholder Warrants") to purchase one share
of Common Stock for $6.25 (together with such indeterminate number of
additional securities as may be issued pursuant to the anti-dilution provisions
of the Selling Securityholder Warrants, pursuant to Rule 416(a)); and
9. 800,000 shares of Common Stock issuable upon the exercise of the
Selling Securityholder Warrants set forth in 8 at a price of $6.25 per share of
Common Stock.
We have examined copies of said Registration Statement and the Exhibits
thereto under the Act. We have conferred with officers of the Company and have
examined the originals, or photostatic, certified or conformed copies, of such
records of the Company, certificates of officers of the Company, certificates
of public officials, and such other documents as we have deemed relevant and
necessary, as a basis for the opinions set forth herein. In connection with
such examinations, we have assumed the authenticity of all documents submitted
to us as originals or duplicate originals, the conformity to original documents
of all document copies, the authenticity of the respective originals of such
latter documents, and the correctness and completeness of such certificates.
Finally we have obtained from officers of the
<PAGE>
Discas, Inc.
August 11, 1997
Page 3
Company such assurances as we have considered necessary for the purposes of
this opinion.
On the basis of the foregoing, and such other matters of fact and
questions of law as we have deemed relevant in the circumstances, and in
reliance thereon, it is our opinion that:
1. The authorized capital of the Company consists of 20,000,000 shares of
Common Stock, $.0001 par value per share, and (ii) 5,000,000 shares of
Preferred Stock , $.01 par value per share; and
2. The issuance of the shares of Common Stock, the Warrants and the
Underwriters' Warrants have been duly authorized by the Board of Directors of
the Company, and the issuance of the shares of Common Stock underlying the
Warrants (including those underlying the Underwriters' Warrants) and the
Selling Securityholder Warrants has been duly authorized by Board of Directors
of the Company, and upon payment therefor and payment of the exercise price of
the Warrants, the Selling Securityholder Warrants and the Underwriters'
Warrants as provided for in the Prospectus, all of the aforementioned shares of
Common Stock will be validly issued, fully paid and non-assessable.
The undersigned hereby consent to the use of their name in the
Registration Statement and in the Prospectus forming a part of the Registration
Statement, and to references to this opinion contained therein under the
caption of the Prospectus entitled "Legal Matters."
This opinion is limited to the matters herein.
Very truly yours,
EPSTEIN BECKER & GREEN, P.C.
By: /s/ Joseph A. Smith
-------------------
Joseph A. Smith
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting a part
of this Registration Statement of our report dated June 26, 1997, relating to
the financial statements of Discas, Inc., which are contained in this
Prospectus, and to the reference to our firm under the caption "Experts" in
the Prospectus.
We also consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated January 20, 1997 relating to the
financial statements of Christie Enterprises, Inc., which are contained in
this Prospectus.
Toms River, New Jersey
JUMP, GREEN, HOLMAN AND COMPANY
August 8, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> APR-30-1996 APR-30-1997
<PERIOD-END> APR-30-1996 APR-30-1997
<CASH> 183,546 173,100
<SECURITIES> 0 0
<RECEIVABLES> 504,118 1,255,554
<ALLOWANCES> 14,000 11,000
<INVENTORY> 547,675 1,016,519
<CURRENT-ASSETS> 1,239,061 2,449,772
<PP&E> 998,305 2,649,082
<DEPRECIATION> 581,200 802,467
<TOTAL-ASSETS> 1,720,637 5,544,989
<CURRENT-LIABILITIES> 756,627 2,358,824
<BONDS> 0 0
0 0
0 0
<COMMON> 181 225
<OTHER-SE> 343,136 851,328
<TOTAL-LIABILITY-AND-EQUITY> 1,720,637 5,544,989
<SALES> 3,858,205 5,179,668
<TOTAL-REVENUES> 3,889,134 5,214,947
<CGS> 3,012,125 3,982,066
<TOTAL-COSTS> 3,722,427 5,282,925
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 87,292 317,393
<INCOME-PRETAX> 103,256 (348,666)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 103,256 (312,666)
<EPS-PRIMARY> 0.04 (0.13)
<EPS-DILUTED> 0.04 (0.13)
</TABLE>
