<PAGE>
As filed with the Securities and Exchange Commission on December 1, 1997
Registration No.
333-38031
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2/A
Registration Statement
Under The
Securities Act of 1933
HALSTEAD ENERGY CORP.
(Name of Small Business Issuer in its Charter)
Nevada 4925 87-0446395
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification No.)
Incorporation or
Organization)
33 Hubbells Drive
Mt. Kisco, New York 10549
(914) 666-3200
(Address and Telephone Number of Principal Executive Offices and Principal Place
of Business)
Ms. Claire E. Tarricone
President
33 Hubbells Drive
Mt. Kisco, New York 10549
(914) 666-3200
(Name, Address and Telephone Number of
Agent For Service)
With a copy to:
Paul J. Pollock, Esq.
Piper & Marbury L.L.P.
1251 Avenue of the Americas
New York, New York 10020-1104
(212) 835-6280
Approximate Date of Proposed Sale to the Public: From time to time
after the effective date of this registration statement.
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(b)
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
- - ------------------------------------------------------------------------------
Title of Each Proposed Proposed
Class of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered Per Unit(1) Price Fee
- - -------------------------------------------------------------------------------
Common Stock 2,170,488 $2.25 $4,883,598 1,479.88
- - -------------------------------------------------------------------------------
TOTAL REGISTRATION FEE 1,479.88
- - -----------------------===============----------------------------==============
(1) Represents the average of the closing bid and asked prices of the Common
Stock of the Registrant on October 13, 1997.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Page 1
<PAGE>
PROSPECTUS
HALSTEAD ENERGY CORP.
2,170,488 Shares of Common Stock
--------------------
The 2,170,488 shares (the "Shares") of Common Stock, par value $.001 per
share (the "Common Stock"), of Halstead Energy Corp. (the "Company") to which
this Prospectus relates are being offered, from time to time, on behalf of and
for the account of Infinity Investors Ltd. ("Infinity"), as more fully described
herein under "Selling Stockholders." The Shares have been or will be acquired by
Infinity upon the conversion of certain shares of the Series B Cumulative
Convertible Redeemable Preferred Stock of the Company (the "Series B Preferred
Stock") acquired by Infinity in a private placement. The distribution of the
Shares by Infinity, or by pledgees, donees, distributees, transferees or other
successors in interest, may be affected from time to time by underwriters who
may be selected by Infinity and/or broker-dealers in one or more transactions
(which may involve crosses and block transactions) on the NASDAQ SmallCap Stock
Market or other over-the-counter markets or, in special offerings, exchange
distributions or secondary distributions pursuant to and in accordance with
rules of such over-the-counter markets or exchanges, in negotiated transactions
or otherwise, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. In connection with the
distribution of the Shares or otherwise, Infinity may enter into hedging or
option transactions with broker-dealers and may sell Shares short and deliver
the Shares to close out such short positions. The Company has agreed to
indemnify Infinity, underwriters who may be selected by Infinity and certain
other persons against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). See "Plan of
Distribution" and "Selling Stockholders."
The Company has agreed to pay all expenses of registration in connection
with this offering but will not receive any of the proceeds from the sale of the
Shares being offered hereby. All brokerage commissions and other similar
expenses incurred by Infinity will be borne by it. The aggregate proceeds to
Infinity from the sale of the Shares will be the purchase price of the Shares
sold, less the aggregate brokerage commissions and underwriters' discounts, if
any, and other expenses of issuance and distribution not borne by the Company.
-------------------
See "Risk Factors," beginning on Page 4, for information and a discussion of
certain factors 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.
-------------------
The date of this Prospectus is December 1, 1997.
Page 2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission") (file no. 000-25660). Such reports, proxy and
information statements and other information filed by the Company can be
inspected and copied at the public reference facility maintained by the
Commission in Washington, D.C. at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549 and at the Commission's regional offices in New York (7 World Trade
Center, Suite 1300, New York New York 10048) and Chicago (Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60611). Copies of
such material can be obtained at prescribed rates from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the Commission at 1-800-SEC-0330 for further information on the
operation of the public reference rooms. The Company's Exchange Act filings are
also available to the public on the Commission's Internet site
(http://www.sec.gov).
This Prospectus, which constitutes part of a registration statement on
Form SB-2 filed with the Commission under the Securities Act by the Company,
omits certain of the information contained in the registration statement.
Reference is hereby made to the registration statement and to the exhibits to
the registration statement for further information about the Company and the
Common Stock. Statements in this Prospectus concerning provisions of documents
are summaries of such documents, and each statement is qualified by reference to
the copy of the applicable document filed with the Commission. Copies of such
material, including the complete registration statement and the exhibits, can be
inspected, without charge at the offices of the Commission, or obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, (i) all dollar amounts in this Prospectus are stated in the
lawful currency of the United States, (ii) all information in this Prospectus
assumes no exercise of any outstanding option or warrant to acquire shares of
the Company's Common Stock, and (iii) all references herein to the Company
include the subsidiaries and divisions of the Company.
Page 3
<PAGE>
THE COMPANY
Halstead Energy Corp. (the "Company") was originally incorporated in the
State of Utah on January 15, 1986 under the name of Technical Analysis, Inc.
Effective October 8, 1990, the Company changed its corporate domicile to the
State of Nevada. On August 5, 1993 the Company acquired Halstead Quinn Propane,
Inc. ("HQ Propane") in exchange for 2,170,000 shares of the Company's Common
Stock. Simultaneously with such acquisition, the Company changed its name to
Halstead Energy Corp. The address of the Company's principal executive office is
33 Hubbells Drive, Mt. Kisco, New York 10549, and its telephone number is (914)
666-3200.
The Company's operating entities are engaged in the wholesale and/or
retail distribution of, and the provision of services relating to, fuel oil,
liquid propane gas, gasoline and diesel fuel primarily in Westchester, Putnam,
Dutchess, Rockland and surrounding counties in New York State. The Company has
four principal operating divisions: HQ Propane, a wholly-owned subsidiary of the
Company, and Halstead Quinn Terminal ("HQ Terminal"), HQ Gasoline ("HQ
Gasoline") and Dino Oil ("Dino"), which are separate divisions of HQ Propane.
The business of White Plains Fuel, Inc. ("WPF"), a Hawthorne, New York-based
retail distributor of fuel oil and diesel fuel which was acquired by the Company
in June 1995, is being operated by a third party under the terms of a four (4)
year lease.
HQ Propane (formerly Halstead Quinn Fuel Oil Co., Inc.), based in central
Westchester County in Mt.Kisco, New York, was established in 1946 and since 1958
has been a retail distributor of liquid propane gas and propane equipment and
also provides services related thereto. A. Tarricone, Inc. ("ATI") acquired HQ
Propane in 1975 and subsequently spun it off to its stockholders in December
1992. In July 1996, HQ Propane acquired the customer list and certain other
assets of E. F. Osborn & Sons, a Pawling, New York-based retail propane
distributor. Approximately 80% of HQ Propane's customers are Westchester County
residents and businesses, and the remaining 20% are located throughout the
surrounding counties of Putnam and Dutchess in New York State. Of HQ Propane's
customers, approximately 78% use propane for hot water heating and cooking;
approximately 16% use propane for pool heating; and approximately 6% use propane
for home heating. Because hot water heating and cooking use is relatively
constant throughout the year, HQ Propane's business is not subject to
significant seasonal variation.
In September 1996, the Company acquired certain assets of Dino Oil, Inc.,
a Bronx, New York-based commercial gasoline distributor. The addition of the
Company's Dino Oil division has broadened the Company's marketing region by
providing the Company with customer accounts (including various service stations
and fleet garages) located in the Bronx, Queens, Brooklyn, and Manhattan, as
well as Nassau, Suffolk and Westchester counties.
HQ Terminal owns and operates a deep water terminal in Yonkers, New York
near the New York City border. The five million gallon terminaling facility
allows for the wholesale distribution of fuel oil, gasoline and diesel fuel, and
also provides storage facilities for other petroleum companies through
warehousing agreements know as thru-puts. The Company's own product requirements
are often supplied through this facility. Pending the approval of HQ Propane's
application with New York State for a terminal operator's license, the facility
is being operated on its behalf by ATI.
HQ Gasoline operates 25 retail gasoline stations throughout eastern New
York State under the trade names "ATI" and "Gulf." The operation of gasoline
stations allows the Company to offset, in part, the seasonal fluctuations that
affect the Company's wholesale fuel oil distribution division. Each station is
combined with either a convenience store and/or an automotive repair shop. Nine
of the 25 gasoline stations are leased from ATI.
Page 4
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk and is speculative in nature. Prospective investors should
carefully consider the following risk factors, as well as others described
elsewhere in this Prospectus, relating to the business of the Company and this
offering. The discussion below highlights some of the more important risks
regarding the Company and this offering. The risks highlighted below should not
be assumed to be the only factors that could affect future performance. In
addition, the discussion in this Prospectus regarding the Company and its
business and operations contains "forward-looking statements." Such statements
consist of any statement other than a recitation of a historical fact and can be
identified by the use of forward-looking terminology such as "may," "expect,"
"anticipate," "estimate" or "continue" or the negative of any thereof or other
variations thereon or comparable terminology. Prospective investors are
cautioned that all forward-looking statements are necessarily speculative and
there are certain risks and uncertainties that could cause actual events or
results to differ materially from those referred to in such forward-looking
statements. The Company does not have a policy of updating or revising
forward-looking statements, and thus it should not be assumed that silence by
management of the Company over time means that actual events or results are
occurring as estimated in such forward-looking statements.
ATI Bankruptcy
On June 10, 1997, ATI, the former parent of the Company's operating
subsidiaries and divisions which is wholly-owned by Claire E. Tarricone, Anthony
J. Tarricone and Joseph A. Tarricone, the Company's directors and principal
executive officers, filed a voluntary petition for reorganization pursuant to
Chapter 11 of the Bankruptcy Code (the "Code"). ATI has continued in possession
of its property and in the management of its affairs as a debtor-in-possession
under the applicable provisions of the Code. In connection with the bankruptcy
proceeding, the Company has asserted (and ATI has acknowledged) pre-petition
claims arising under the note receivable from ATI in the amount of $3,263,563
and pre-petition liens on certain leasehold interests. The proceeding is before
the United States Bankruptcy Court, Southern District of New York, and is
referenced as "A. TARRICONE, INC., 97B21488." It is difficult to determine at
this time the likelihood of recovery by the Company of such indebtedness. The
Company has determined that its asserted pre-petition liens may not have been
properly "perfected," in which case the Company would be deemed an unsecured
creditor (rather than a secured creditor) in the proceeding. The Company intends
to pursue all appropriate avenues (if any) to protect its interests in this
regard. However, there can be no assurance that the indebtedness and the liens
asserted by the Company in this proceeding will be recognized or given full
effect, that the same will not be challenged, modified or reduced, or that all
or any portion of such indebtedness will be repaid to the Company. In any event,
management has reserved the entire amount of the note receivable due from ATI at
June 10, 1997, i.e., $3,263,563, as a bad debt expense. If it were ultimately
determined by the court that the Company's status in the proceeding is that of
an unsecured creditor, the Company's legal basis for recovery would be
materially, adversely affected. Additionally, all executory
contracts between ATI and the Company are susceptible to rejection, at the
election of ATI, under the applicable provisions of the Code. Furthermore, any
transfers from ATI to the Company on account of antecedent debt (of ATI to the
Company) during the one-year period prior to the date of filing of ATI's
voluntary petition may be subject to avoidance under the applicable provisions
of the Code. The occurrence of any such circumstances may have a material
adverse effect on the Company.
Licensing
The Company's principal terminal facility is currently being operated by
ATI pending the approval of the Company's application with the State of New York
for a terminal operator's and diesel motor fuel license. There can be no
assurance about the prospect of obtaining the approval of such licenses. The
Company has been advised by counsel that, pending the conclusion of ATI's
bankruptcy proceeding, ATI will continue to maintain such licenses, and thus
that ATI will be able to continue operating the Company's terminal and diesel
motor fuel businesses. However, there can be no assurance that at the conclusion
of such proceeding, if the result were a liquidation of ATI (and therefore a
termination of such licenses), that the Company would by that time have received
its own licenses or would have been able to contract with another entity to
operate such businesses. The occurrence of any of these circumstances could have
a material and adverse effect on these businesses and on the Company.
Page 5
<PAGE>
Seasonal Factors
The Company's retail gasoline business, while not seasonal, is subject to
use patterns that vary based on the time of the year. The Company's wholesale
fuel oil business is seasonal, as a substantial portion of its business is
conducted during the fall and winter months. As this is the case, weather
patterns during the winter months can have a material adverse impact on its fuel
oil revenues. Although temperature levels for the heating season have been
relatively stable over time, variations can occur from time to time, and warmer
than normal winter weather will adversely affect the results of the Company's
fuel oil operations.
Competition from Alternate Energy Sources
The Company competes for customers in its wholesale fuel oil and retail
propane distribution businesses with suppliers of alternate energy products,
principally natural gas and electricity. Over the past few years, a small
percentage of HQ Propane's customers have converted to other sources, primarily
natural gas. In addition, the Company may lose additional customers due to
conversions during periods in which the cost of its products exceeds the cost of
such alternative energy sources.
Competition for New Customers
The Company's business is highly competitive. In addition to competition
from alternative energy sources, HQ Propane competes with propane distributors
offering a broad range of services and prices, from full service distributors
similar to HQ Propane, to those offering delivery only. Competition with other
companies in the propane industry is based primarily on customer service and
price. Longstanding customer relationships are typical in the retail propane
industry. Many companies in the industry, including HQ Propane, deliver propane
to their customers based upon weather conditions and historical consumption
patterns without the customers having to make an affirmative purchase decision
each time propane is needed. In addition, most companies, including HQ Propane,
provide propane equipment repair service on a 24 hour a day basis, which tends
to build customer loyalty. As a result, HQ Propane may experience difficulty in
acquiring new retail customers due to existing relationships between potential
customers and other propane distributors.
Competition in the retail gasoline business is based on price, appearance,
location and value added services. Many of HQ Gasoline's competitors are large
multinational oil companies and have greater resources and/or a longer track
record for their operations and can offer the convenience of their own credit
cards. There can be no assurance that future actions by such competitors will
not have a material adverse effect on the Company's business operations.
Insurance
Companies engaged in the petroleum products distribution and storage
business may be sued for substantial damages in the event of an actual or
alleged accident or environmental contamination. The Company maintains
$1,000,000 of liability insurance and $5,000,000 of excess liability insurance.
There can be no assurance that the Company will be able to continue to maintain
liability insurance at a reasonable cost in the future, or that a potential
liability will not exceed the coverage limits. Nor can there be any assurance
that the amount of insurance carried by the Company will enable it to satisfy
any claims for which it might be held liable resulting from the conduct of its
business operations.
Page 6
<PAGE>
Environmental/Governmental Regulation
Regulations regarding underground storage tanks ("USTs") including those
at service stations, have been issued by the U.S. Environmental Protection
Agency (the "EPA") . The regulations cover the design, construction and
installation of new UST systems, and require that existing systems meet certain
EPA standards by December 1998. The regulations require that owner/operators of
UST systems demonstrate financial responsibility for the cleanup of spills or
releases, and/or to compensate third parties for any resulting damages. In
January 1994, HQ Propane was served with a complaint alleging that the Company
discharged petroleum products onto certain leased property and seeking $106,173
damages for the costs of clean up and removal of the contaminated soil and an
additional $300,000 for diminution of value. Although the Company has retained
outside counsel and is vigorously defending itself in this lawsuit, there can be
no assurance that such defense will be successful or that such litigation will
not have a material adverse effect on the Company. See "Legal Proceedings."
Although the Company has an ongoing program for maintenance, testing,
retrofitting, or replacement of USTs, there can be no assurance that potential
problems will be discovered before a spill or release occurs. Although the
Company believes that adequate pollution insurance is being maintained to cover
its primary environmental-related loss contingencies, there can be no assurance
that such insurance will be maintained at current levels or that even if so
maintained will cover all loss contingencies.
Growth Dependent Upon Acquisitions
Management of the Company believes that future growth will require
acquisitions of other petroleum product businesses. There can be no assurance,
however, that the Company will be able to identify new acquisition candidates
or, even if a candidate is identified, that it will have access to the capital
necessary to consummate such acquisitions.
Possible Need for Financing
The Company's ability to meet its future capital requirements will depend
on many factors, including, but not limited to, the success of the Company's
expansion efforts and the response of competitors to the Company's efforts. If
the Company's cash flow is not sufficient to support its operations and
expansion plans, the Company may curtail its expansion and gasoline station
renovation plans, or the Company may seek to sell additional shares of its
Common Stock or other securities or to borrow funds. There can be no assurance
that any such financing will be available to the Company or, if available, that
such financing will be available on favorable or affordable terms. The inability
of the Company to obtain necessary additional financing would adversely affect
the Company's operations.
Supply of Petroleum Products
Two major suppliers provide the Company with its propane product
requirements. One supplier provided approximately 65%, and the other
approximately 35%, of the Company's total propane requirements for the year
ended August 31, 1997. The loss of either supplier could have a material adverse
effect on the Company.
The Company met substantially all of its gasoline product requirements
through Gulf Oil, BP and ATI for the year ended August 31, 1997. Gulf Oil
supplied approximately 30%, and ATI provided approximately 65%, of such
requirements during such period. All of the fuel oil and diesel fuel product
requirements of the Company's customers during such period were met by ATI.
Management believes that if the Company's supply of any of the foregoing
products was interrupted, the Company would be able to secure adequate supplies
from other sources without a material disruption in its operations. However,
there can be no assurance that adequate supplies of such petroleum products will
be readily available in the future.
Dependence on Management and Key Personnel
The success of the Company will depend to a considerable degree on the
continued services of Claire E. Tarricone, the Company's President, Anthony J.
Tarricone, the Company's Vice President and Secretary, and Joseph A. Tarricone,
the Company' s Vice President and Treasurer. The loss of the services of any
such person could have a material adverse effect on the Company. The Company
does not maintain any key-man insurance on the life of any of the Tarricones. In
addition, the success of the Company will depend, among other factors, upon the
successful recruitment and retention of additional highly-skilled and
experienced management and technical personnel. The inability to attract and
retain qualified employees could adversely affect the Company's business.
Control by Members of the Tarricone Family
Claire E. Tarricone, Anthony J. Tarricone and Joseph A. Tarricone are
siblings and jointly beneficially own approximately 48% of the Company's
outstanding Common Stock prior to the conversion of any shares of Preferred
Stock or the exercise of any options or warrants. Further, the Tarricones
collectively beneficially own options and warrants to purchase an additional
1,178,850 shares of Common Stock. If all of such options and warrants were
exercised (but no other options or warrants were exercised or preferred stock
converted), the Tarricones would jointly beneficially own approximately 60.11%
of the outstanding Common Stock. In addition, the Tarricones are parties to a
buy/sell agreement pursuant to which, upon the death or disability of any of
them, the others are required to buy out such deceased or disabled stockholder.
Since the Company's Articles of Incorporation do not provide for cumulative
voting, the Tarricone family, by virtue of their beneficial stock ownership and
the buy/sell agreement, may be in a position to elect, and continue to elect,
all of the Company's directors and continue to control the Company's affairs and
operations.
Page 7
<PAGE>
Conflicts of Interest
Claire E. Tarricone, Anthony J. Tarricone and Joseph A. Tarricone are also
the sole officers, sole stockholders and represent a majority of the directors
of ATI. HQ Propane has entered into agreements with ATI under which it (i)
leases 9 of the 25 service stations comprising its HQ Gasoline division from ATI
and pays rent for the service stations in the amount of approximately $19,000
per month; (ii) pays a monthly management and royalty fee to ATI for various
services provided to HQ Propane by ATI in the amount of $30,000 per month; and
(iii) is supplied with substantially all of its fuel oil and diesel fuel
supplies by ATI at ATI's cost plus one quarter of one cent ($.0025) per gallon
purchased. While the Company believes that such transactions were on terms no
more favorable than that which could have been obtained from an unrelated party,
there can be no assurance that the Company is correct in such belief.
ATI also operates retail gasoline service stations in addition to those
that are leased to HQ Gasoline. Accordingly, service stations that are owned by
ATI may compete with HQ Gasoline, and conflicts may arise over whether
prospective service station acquisition opportunities are to be taken by the
Company or ATI.
As a result of the foregoing, both present and future conflicts of
interest may exist with respect to matters involving ATI which are brought
before the Tarricones as officers or directors by virtue of their positions with
and ownership of ATI.
Concentration of Voting Power; Anti-Takeover Provisions
The Company's board of directors has the authority to issue shares of
Preferred Stock and to determine the price, rights, preferences and privileges,
including voting rights, of those shares without any further action by the
Company's stockholders. The rights of holders of the Company's Common Stock will
be subject to and may be adversely affected by the rights of the holders of any
Preferred Stock. The board of directors has already designated and issued Series
A 7.5% Cumulative Convertible Redeemable Preferred Stock of the Company (the
"Series A Preferred Stock") and the Series B Preferred Stock. Any future
designation and issuance of Preferred Stock could have the effect of making it
more difficult for a third party to acquire control of the Company. The Company
is also subject to the provisions of the Nevada General Corporation Law
regulating business combinations, takeovers and control share acquisitions,
which also might hinder or delay a change in control of the Company.
Anti-takeover provisions that could be included in the Preferred Stock when
designated and issued and the Nevada statutes can have a depressive effect on
the market price of the Company's Common Stock and can prevent the Company's
stockholders from realizing a premium on the sale of their shares by
discouraging takeover and tender offer bids.
Possible Volatility of Stock Price
The market price of the Common Stock has been highly volatile. Quarterly
operating results of the Company, changes in general conditions in the economy,
the financial markets, or the energy industry, changes in financial estimates by
securities analysts or failure by the Company to meet such estimates, litigation
involving the Company, actions by governmental agencies or other developments
affecting the Company or its competitors could cause the market price of the
Common Stock to fluctuate substantially. In particular, the stock market may
experience significant price and volume fluctuations which may affect the market
price of the Common Stock for reasons that are unrelated to the Company's
operating performance and that are beyond the Company's control.
Outstanding Warrants, Options and Convertible Securities
As of October 10, 1997, the Company had outstanding options and warrants
to purchase an aggregate of 2,182,850 shares of Common Stock. The Company has
also reserved up to an additional 216,000 shares of Common Stock for issuance
upon exercise of options which have not yet been granted under the Company's
stock option plan. In addition, the shares of Series A Preferred Stock and
Series B Preferred Stock are currently convertible into 2,338,508 shares of
Common Stock. Holders of such warrants and options are likely to exercise them,
and holders of such convertible securities may convert them, when in all
likelihood the Company could obtain additional capital on terms more favorable
than those provided by such options, warrants or convertible securities.
Further, while its warrants, options and convertible securities are outstanding,
the Company's ability to obtain additional financing on favorable terms may be
adversely affected.
Page 10
<PAGE>
Possible Future Dilution
The Company has authorized capital stock of 50,000,000 shares of Common
Stock and 5,000,000 shares of Preferred Stock, par value $.001 per share (the
"Preferred Stock"). Insofar as the Company's Articles of Incorporation permit
the Company to issue authorized but unissued shares of Common Stock and
Preferred Stock without stockholder approval in order to acquire businesses, to
obtain additional financing or for other corporate purposes, there may be
further dilution of the stockholders' interests.
Possible Delisting of Securities From The Nasdaq SmallCap Market
The Company's Common Stock is listed on The Nasdaq SmallCap Market. In
August 1997, the Nasdaq Stock Market, Inc. ("Nasdaq") adopted new requirements
that the Company must meet for continued listing of its Common Stock, including
(i) maintaining a bid price of the Company's Common Stock of at least $1.00,
(ii) having at least $2,000,000 in net tangible assets, (iii) maintaining a
public float of at least 500,000 shares of Common Stock having a market value of
at least $1,000,000, and (iv) complying with certain corporate governance
requirements, such as electing at least two independent directors. The Company
must meet the new requirements within six months of their adoption. If the
Company does not meet Nasdaq's continuing listing criteria, the Common Stock
will be subject to delisting. As a result of delisting, an investor may find it
more difficult to dispose of, or to obtain accurate quotations as to the price
of, the Common Stock. Additional sales practice requirements would be imposed on
broker-dealers who sell such securities to persons other than established
customers and accredited investors. Consequently, the rule affects the ability
of holders of the Common Stock, including purchasers in this offering, to sell
their Common Stock in the secondary market. Delisting from 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.
Dividends on Common Stock
The Company has not paid any dividends on shares of its Common Stock, and
the Company has no plans to pay any dividends. For the foreseeable future, it is
anticipated that earnings, if any, which may be generated from the Company's
operations will be used to finance the growth of the Company and that cash
dividends will not be paid to holders of Common Stock.
Possible Preferred Stock Issuance
The Preferred Stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by the Board of Directors
without further action by the Company's stockholders, and may include voting
rights (including the right to vote as a class on particular matters),
preferences as to dividends and liquidation, conversion and redemption rights
and sinking fund provisions. As of October 10, 168,020 shares of Series A
Preferred Stock and 560,125 shares of Series B Preferred Stock are outstanding.
The issuance of any additional Preferred Stock could affect the rights of the
holders of the Common Stock and, therefore, reduce the value of the Common Stock
and make it less likely that holders of Common Stock would receive a premium for
the sale of their shares. In particular, specific rights granted to future
holders of Preferred Stock could be issued to restrict the Company's ability to
merge with or sell its assets to a third party, thereby preserving control of
the Company by present owners and preventing a takeover of the Company. Any such
issuance could adversely affect holders of the Company's Common Stock who might
want to vote in favor of a proposed merger, asset sale or other transaction.
USE OF PROCEEDS
All of the Shares offered hereby are being offered by Infinity. The
Company will not receive any of the proceeds from the sale of the Shares.
See "Selling Stockholders."
Page 11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Three Months Ended August 31, 1997 Compared to Three Months Ended August
31, 1996
Revenues for the three months ended August 31, 1997, increased by $852,439
to $4,132,331 from $3,279,892 for the three months ended August 31, 1996. The
increase is due to additional gasoline sales revenue totaling $1,156,415
resulting primarily from the Dino Oil acquisition. These increases in revenues
were partially offset by a decrease in propane sales revenue of $10,541 and by a
decrease in home heating oil revenues in the amount of $301,663 due to the sale
of the Company's Rockland Fuel Oil customer list and lost thruput income.
Cost of sales for the three months ended August 31, 1997 increased by
$1,089,853 to $3,386,441 from $2,238,886 for the three months ended August 31,
1996. This increase is due to additional gasoline product purchase requirements
primarily related to the Dino Oil acquisition of $1,220,813. These cost
increases were partially offset by lower product purchases for home heating oil
in the amount of $203,060 primarily due to the sale of the Rockland Fuel Oil
customer list and lower propane costs of $8,079. The percentage of cost of goods
to sales for the three months ended August 31, 1997 and 1996 are 81.9% and 68.3%
respectively. The increase is due in part, to the Dino Oil Division's commercial
business which is characterized by high volume and low gross profit, price
increases in the cost of all gasoline purchases, and lost thruput income.
Selling, General and Administrative Expenses for the three months ended
August 31, 1997 increased by $68,760 to $1,287,882 from $1,219,122 for the three
months ended August 31, 1996. The increase is primarily due to increased
salaries of $201,626 (including severance pay of $49,576 in connection with the
sale of Rockland Fuel Oil's customer list), increased equipment leases of
$17,693, increased telephone uniform and selling expenses of $19,585, increased
professional fees of $41,786 and all other expense increases totaling $61,645.
These increased costs were partially offset by decreases in advertising expense
of $29,819, decreases in vehicle expense totaling $24,824, decreases in oil
spill tax totaling $43,466, decreases in insurance expense totaling $24,396, an
adjustment in real estate taxes totaling $137,356 and decreases in all other
expenses totaling $13,714 as compared to the same period last year.
Interest income for the three months ended August 31, 1997 decreased by
$114,926 to ($56,773) from $58,153 for the three months ended August 31, 1996.
This decrease is primarily due to an adjustment in the interest income relating
to the note receivable due from ATI as compared to the same period last year and
the note receivable due from the sale of Rockland Fuel Oil.
Interest Expense for the three months ended August 31, 1997 increased by
$25,911 to $129,367 from $103,456 for the three months ended August 31, 1996.
This increase is primarily due to an increase of indebtedness.
Net Rental Income for the three months ended August 31, 1997 increased by
$31,581 to $140,716 from $109,135 for the three months ended August 31, 1996.
The increase is due to an increase in gasoline station rental income and other
rental income.
Depreciation and amortization for the three months ended August 31, 1997
decreased by $16,620 to $201,2306 from $217,850 for the three months ended
August 31, 1996. This decrease is due to an adjustment to estimated expense
recognized in the prior three quarters to the year ended August 31, 1997
actuals.
Royalty Expense for the three months ended August 31, 1997 decreased $8,117
to $23,461 from $31,578 for the three months ended August 31, 1996. The decrease
is primarily due to the expense associated with warrants issued to ATI in
exchange for use of the trademark "ATI".
Other Income for the three months ended August 31, 1997 increased by
$10,240 to $30,830 from $20,590 for the three months ended August 31, 1996. This
increase is due to rebates earned under those available programs.
Net Loss for the three months ended August 31, 1997 increased by $4,199,585
to a Net Loss of $4,510,981 from a Net Loss of $311,390 for the three months
ended August 31, 1996. This increase is primarily due to an increase in bad debt
expense of $3,599,564 resulting from the ATI bankruptcy and management's
decision to reserve the entire note receivable due from ATI of $3,263,563, in
addition to the reserve of other doubtful accounts in the amount of 375,870. The
decrease in net income is also a result of a decline in gross profit of
$295,116, an increase in selling, general, and administrative expenses of
$68,760, a decrease in interest income of $114,926, and an increase in interest
expense of $25,911 as compared to the same period last year. The decline in
gross profit is due to increased product costs, the sale of Rockland Fuel Oil's
customer list, and lost thruput income, while the increase in selling, general,
and administrative is mostly attributable to start up costs associated with the
Dino Oil acquisition. This decline in net income is partially offset by a
decrease in depreciation and amortization of $16,620, an increase in net rental
income of $31,581, a decrease in royalty expense of $8,117, and an increase in
other income of $10,240.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Twelve Months Ended August 31, 1997 Compared to Twelve Months Ended August
31, 1996.
Sales for the twelve months ended August 31, 1997, increased by $3,430,988
to $18,743,248 from $15,312,260 for the twelve months ended August 31, 1996. The
increase was due to additional gasoline sales revenue totaling $5,361,011
resulting primarily from the Dino Oil acquisition, and increased propane sales
revenue totaling $205,936. These increases in revenues were partially offset by
a decrease in home heating oil sales in the amount of $2,135,959 primarily due
to a 20% warmer winter, the sale of Rockland Fuel Oil's customer list and lost
thruput income.
Cost of sales for the twleve months ended August 31, 1997 increased by
$3,967,909 to $14,702,109 from $10,734,200 for the twelve months ended August
31, 1996. This increase was due to additional gasoline product purchase
requirements primarily relating to the Dino Oil acquisition of $5,407,280 and
increased propane costs of $87,329. These cost increases were partially off-set
by lower product purchases for home heating oil in the amount of $1,526,700
primarily attributable to a warmer winter and to the sale of Rockland Fuel Oil's
customer list. The percentage of cost of sales to sales for the twelve month
periods ending August 31, 1997 and 1996 were 78.4% and 70.1%, respectively. The
increase in the percentage of cost of sales to sales of 8.3% was due, in part,
to the Dino Oil acquisition, the commercial business of which is characterized
by high volume and low gross profit. In addition, seven year record price
increases in the cost of gasoline and distillates sharply reduced the gross
profit, particularly in the Company's non-residential markets.
Selling, General and Administrative Expenses for the twelve months ended
August 31, 1997 increased by $654,972 to $3,933,938 from $3,278,966 for the
twelve months ended August 31, 1996. The increase is primarily due to increased
salaries of $557,188, telephone uniforms and selling expense of $31,310, and
office expense of $34,625 all of which are primarily due to start up costs
associated with the Dino Oil acquisition, increased equipment leases of
$118,563, increased insurance of $25,914, increased professional fees of $40,779
and all other expenses totalling a net increase of $15,768 as compared to the
previous year. These increases in expenses were partially offset by a decrease
in advertising expense of $64,435, real estate taxes of $30,225, and all other
expenses totalling a net decrease of $26,040 as compared to last year.
Depreciation and Amortization for the twelve months ended August 31, 1997
increased by $96,820 to $776,662 from $679,842 for the twelve months ended
August 31, 1996. The increase is primarily attributable to fixed asset additions
of property and equipment of $529,032, leaseholds of $690,000 and a customer
list totaling $545,052 for fiscal 1997.
Interest Income for the twelve months ended August 31, 1997 decreased by
$73,314 to $28,673 from $101,987 for the twelve months ended August 31, 1996.
This decrease is primarily due to the decrease of interest income due from the
note receivable from ATI. This amount is partially offset by interest income
resulting from invested funds and the note receivable due from the sale of
Rockland Fuel Oil's customer list.
Interest Expense for the twelve months ended August 31, 1997 increased by
$3,489 to $402,378 from $398,889 for the twelve months ended August 31, 1996.
This increase was primarily due to an increase of indebtedness of the Company.
Net Rental Income for the twelve months ended August 31, 1997 increased by
$84,039 to $502,517 from $418,478 for the twelve months ended August 31, 1996.
The increase was due to increased gasoline station and other rent income of
$14,039 and the collection of additional rents due under a third party lease
agreement of $70,000.
Royalty Expense for the twelve months ended August 31, 1997 increased by
$6,109 to $102,211 from $96,102 for the twelve months ended August 31, 1996. The
increase is primarily due to the expense associated with the warrants issued to
ATI in exchange for use of the trademark "ATI".
Other Income for the twelve months ended August 31, 1997 increased by
$64,403 to $103,338 from $38,935 for the twelve months ended August 31, 1996.
This increase is due to rebates earned from available programs connected to
gasoline purchases.
Extraordinary income for the twelve months ended August 31, 1997 increased
by $186,672. The increase was due to the sale of the retail fuel oil customer
list of Rockland Fuel Oil, Inc., a wholly-owned subsidiary of HQ Propane
("Rockland"), to an independent third party distributor.
Page 13
<PAGE>
Net Income for the twelve months ended August 31, 1997 decreased by
$4,533,377 to a net loss of $4,352,283 from a net profit of $181,094 for the
period ended August 31, 1996. The decrease was primarily attributable to an
increase in bad debt expense of $3,599,564 resulting from the ATI bankruptcy,
and management's decision to reserve the entire note receivable due from ATI of
$3,263,563 in addition to the reserve of other doubtful accounts in the amount
of $375,870. The decrease is also due to a reduction in gross profit of $536,921
resulting from lower gross profits in the Company's non-residential markets and
decreased home heating oil sales due to a 20% warmer winter as compared to last
year. Selling, general and administrative expenses also increased by $654,972
primarily as a result of additional expenses incurred in connection with the
Dino Oil acquisition and equipment leases made in connection with the upgrade of
two gasoline stations, increases in depreciation and amortization of $96,820,
increases in royalty expense of $6,109, an increase in interest expense of
$3,489 and a reduction in interest income of $73,314, all totaling $1,371,625.
These increases in total expenses were partially reduced by an increase in other
income of $64,403, an extraordinary gain on the sale of the retail fuel oil
customer list of $186,672 (net of taxes), an increase in net rental income of
$84,039, all totaling $335,114.
Fiscal Year ended August 31, 1996 Compared to Fiscal Year ended August 31,
1995.
Revenues increased from $15,174,559 for the fiscal year ended August 31,
1995 to $15,312,260 for the fiscal year ended August 31, 1996. The increase of
$137,701 was attributable to an increase in sales totaling $1,251,018 primarily
due to increased sales revenues of #2 oil of $769,306, increased sales revenues
of propane of $245,626, increased thru-put revenues of $196,626 and increased
service and tank rental revenues totaling $39,460. These increased sales
revenues were reduced by $1,113,317 as a result of management's decision to
lease gasoline stations to an independent third party distributor.
Cost of Sales decreased from $11,059,346 for the fiscal year ended August
31, 1995 to $10,734,200 for the fiscal year ended August 31, 1996. The decrease
of $325,146 was primarily due to reduced gasoline purchases of $917,601 as a
result of leasing four gasoline stations to an independent third party
distributor. This decrease was partially offset by an increase in cost of goods
resulting primarily from increased purchases of propane, #2 oil and service
parts purchases totaling $592,455. The percentage of cost of sales to sales were
72.9% and 70.1% for fiscal 1995 and 1996, respectively. The increase of 2.8% is
primarily attributable to the increased #2 oil purchases characterized by high
volume and low gross profit.
Selling, General and Administrative Expenses increased from $2,916,401 for
the fiscal year ended August 31, 1995 to $3,278,968 for the fiscal year ended
August 31, 1996. The increase of $362,567 was comprised of an increase in real
estate taxes of $71,956, increased advertising expenses of $57,318, increased
professional fees of $101,763, increased office expenses of $35,601, increased
other expenses of $31,314, increased equipment expenses of $27,537, increased
insurance expense of $18,446 and all other expenses totaling a net increase of
$18,632.
Depreciation and Amortization Expenses for the fiscal year ended August
31, 1996 increased by $228,291 to $679,842. The increase was due primarily to
depreciation and amortization expenses associated with the purchase of certain
leaseholds, the addition of fixed assets and the purchase of certain customer
lists (in connection with the purchase of White Plains Fuel, Inc.
and the E. F. Osborn transaction).
Interest Income for the year ended August 31, 1996 decreased by $145,465
to $101,987 from $247,452 for the year ended August 31, 1995. This decrease was
due to the Company acquiring, on November 1, 1995 and March 22, 1996, two
gasoline leaseholds from ATI, which acquisitions represented partial payment in
the amount of $450,000 and $915,000, respectively, of the outstanding note
receivable balance due from ATI.
Interest Expense for the year ended August 31, 1996 increased by $150,872
to $398,889 from $248,017 for the year ended August 31, 1995. The increase was
due primarily to the interest expense associated with certain bank indebtedness,
certain note payable indebtedness, and certain 8.5% interest bearing convertible
debentures.
Rental Income increased for the year ended August 31, 1996 by $228,530 to
$418,478 from $189,948 for the year ended August 31, 1995. The increase was due
primarily to rental income resulting from the lease by White Plains Fuel of its
customer list to an independent third party distributor.
Bad Debt Expense decreased from the year ended August 31, 1996 by $34,289
to $39,869 from $74,158 for the year ended August 31, 1995. The decrease was due
primarily to increased security deposits for gasoline and increased collection
efforts.
Page 14
<PAGE>
Royalty expense decreased for the year ended August 31, 1996 by $3,436 to
$96,102 from $99,538 for the year ended August 31, 1995. The reduction was
attributable to the Company entering into an agreement with ATI by which ATI was
granted warrants in exchange for the Company continuing to license the trade
name "ATI" for a period of five years. The Company no longer pays a royalty of
$.01 per gallon for gasoline station sales.
Other Income decreased for the year ended August 31, 1996 by $76,498 to
$38,935 from $115,433 for the year ended August 31, 1995. The decrease was due
primarily to a decrease in rebate refunds from a gasoline supplier.
Net Income for the fiscal year ended August 31, 1996 was $181,094 compared
to $256,648 for the fiscal year ended August 31, 1995. The decrease of $75,554
was due to the net change resulting from an increase in gross profit of
$462,847, an increase in depreciation expense of $228,291, an increase in
interest expense of $150,872, a decrease in interest income of $145,465, a
decrease in other income of $76,498, an increase in rental income of $228,530,
an increase in selling, general and administrative expenses of $362,567, a
decrease in royalty expense of $3,436 and a decrease in bad debt expense of
$34,289.
Liquidity and Capital Resources
Management believes that the Company's diversified business operations and
continued growth will result in increased sales revenues and gross profits
(subject, of course, to the effects of price increases which are not
sufficiently passed through to the customers as referenced below) and result in
greater amounts of working capital being generated from operations. However, the
Company's acquisition of the customer list and certain other assets of Dino Oil
has significantly increased the Company's working capital requirements due to
increased gasoline purchase requirements, increases in accounts receivable, and
increased operating expenses (including salary). Additionally, rises in the cost
of petroleum products by as much as 50%, as well as expenditures relating to the
rebuilding of certain of the Company's gasoline stations and certain other
capital expenditures, have further increased the Company's working capital
requirements and have adversely affected the Company's ability to meetthe same.
Though management is starting to see indications that the cost of petroleum
products is declining, there can be no assurance as to the extent to which this
will continue. As a result, without additional financing, there can be no
assurance that the Company will be able to meet its cash requirements for the
next twelve months. If it cannot do so, the Company will be forced to scale back
its operations. The Company will continue to pursue additional financing from a
lending facility or an offering of its securities to enable the Company to meet
such cash requirements and to accomplish growth through acquisition which the
Company is actively pursuing. There can be no assurance that the financing will
occur or that the Company can find a suitable acquisition in the foreseeable
future.
HQ Gasoline will have to invest approximately $325,000 over the next
twelve months in order to meet Federal EPA and State Regulations for underground
storage tanks by December 1998. Through August 31, 1997, the mandatory
requirements for six locations of the Company's 25 locations have been
completed.
In addition the Company plans to rebuild 10 of 25 gasoline stations which
will generally require $20,000 to $550,000 per location for an aggregate of
$1,600,000 (inclusive of the environmental upgrades referenced above). The
rebuilds will be phased in over two years in order to minimize volume losses due
to "downtime" encountered while each station location is under construction.
Capital expenditures for the year ended August 31, 1997 were $1,232,032.
Included in this amount were expenditures for propane and other equipment,
improvements to gas stations and the terminal facility, and improvements and/or
purchases of trucks and auto totaling $529,032, and leaseholds totaling
$703,000.
Page 15
<PAGE>
HQ Propane, an operating subsidiary of the Company, has obtained from
lending institutions a $500,000 mortgage loan and a $500,000 line of credit
which the Company completed during May 1994. The mortgage loan has a term of
five years at a rate of interest equal to 8.5% per annum with principal and
interest payable monthly. The line of credit was available for drawing until
September 15, 1997 at a floating rate of interest equal to 2.5% above the bank's
prime rate in effect from time to time, with interest only payable monthly on
the advances outstanding under the line of credit, and matures on December 31,
1997. The loan and the line of credit are secured by the Company's headquarters
and the terminal facility at Alexander Street. HQ Propane, Claire Tarricone,
Anthony Tarricone and Joseph Tarricone are guarantors on the loans.
On June 8, 1995 the Company acquired all of the capital stock of White
Plains Fuel, Inc. in an exchange of stock valued at $1,008,128. The stockholders
of White Plains Fuel, Inc. received 168,020 shares of newly-created Series A
7.5% Cumulative Convertible Redeemable Preferred Stock of the Company (the
"Series A Preferred Stock"). On various dates throughout the 1997 and 1996
fiscal years, the Company declared dividends on the Series A Preferred Stock for
$.45 per share totaling $75,609 in each such year. The fuel oil business of
White Plains Fuel, Inc. is conducted by a third party operator under the terms
of a four (4) year lease under which HQ Propane receives annual rental income of
$288,000.
On September 29, 1995, two short term demand notes of HQ Propane in the
amount of $300,000 and $200,000 from a financial institution were converted to a
5 year commercial mortgage at a prime commercial lending rate plus 1% and a five
year balloon payment with a 15 year amortization schedule. The commercial
mortgage is guaranteed by the Company, Claire E. Tarricone, Anthony J. Tarricone
and Joseph A. Tarricone, and is secured by certain commercial properties. In
addition, on December 20, 1995, HQ Propane obtained a 5 year mortgage loan in
the amount of $200,000 from the same financial institution at prime plus 1%. The
commercial mortgage is guaranteed by Claire E. Tarricone and secured by certain
commercial properties.
On May 31, 1996 the Company issued 580,646 shares of Series B 8%
Cumulative Convertible Redeemable Preferred Stock (the "Series B Preferred
Stock") with a stated value of $7.75 per share totaling $4,500,000 in a private
placement pursuant to Regulation S. The Company received proceeds, net of
commissions, of $3,870,000. On July 23 and November 20, 1996, the Private
Placement Holder converted $65,100 (8,400 shares) and $39,998 (5,161 shares) of
the Series B Preferred plus accrued dividends of $756.23 and $1,472.79
respectively, into 18,815 and 162,261 shares of the Company's Common Stock.
Through May 31, 1997, there were no further conversions. The terms of the Series
B Preferred Stock have subsequently been amended. See "Description of
Business--Recent Developments."
On August 30, 1996, Claire Tarricone loaned to the Company $80,000, with
interest at 8% per annum, payable on demand. At various times since then,
certain related parties have loaned to the Company an aggregate of $356,765,
with interest at 8% per annum, payable on demand, and an unrelated party loaned
to the Company $200,000, with interest at a floating rate of prime plus 2.5%,
maturing March 31, 2002.
On September 5, 1996, the Company acquired the customer list of Dino Oil,
Inc. in exchange for 200,000 shares of the Company's Common Stock at $1.9375 per
share, $100,000 cash and certain costs of $56,957. The acquisition was accounted
for as a purchase and resulted in the recognition of a customer list in the
amount of $544,457. Subsequent to the September 5, 1996 acquisition, the Company
acquired 4 trucks of Dino Oil at a fair market value of $166,226. This amount
was financed through a capital lease.
On November 29, 1996 and February 28,1997, ATI transferred to HQ Propane
four (4) leaseholds in partial satisfaction of the note receivable due from ATI.
The appraised value of these leaseholds was $160,000, $175,000, $210,000, and
$145,000 respectively. As of June 10, 1997, the note receivable due from ATI was
$3,263,563. On June 10, 1997, ATI filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI has continued in
possession of its property and in the management of its affairs as a
debtor-in-possession under the applicable provisions of the Code. In connection
with the bankruptcy proceeding, the Company has asserted (and ATI has
acknowledged) pre-petition claims arising under the note receivable from ATI in
the amount of $3,263,563 and pre-petition liens on certain leasehold interests.
The proceeding is before the United States Bankruptcy Court, Southern District
of New York, and is referenced as "A. TARRICONE, INC., 97B21488." It is
difficult to determine at this time the likelihood of recovery by the Company of
such indebtedness. The Company has determined that its asserted pre-petition
liens may not have been properly "perfected," in which case the Company would be
deemed an unsecured creditor (rather than a secured creditor) in the proceeding.
The Company intends to pursue all appropriate avenues(if any) to protect its
interest in this regard. However, there can be no assurance that the
Page 16
<PAGE>
the indebtedness and the liens asserted by the Company in this proceeding will
be recognized or given full effect, that the same will not be challenged,
modified or reduced, or that all or any portion of such indebtedness will be
repaid to the Company. In any event, management has reserved the entire amount
of the note receivable due from ATI at June 10, 1997, i.e. $3,263,563, as a bad
debt expense. If it were ultimately determined by the court that the Company's
status in the proceeding is that of an unsecured creditor, the Company's legal
basis for recovery would be materially, adversely affected. Additionally, all
executory contracts between ATI and the Company are susceptible to rejection, at
the election of ATI, under the applicable provisions of the Code. Furthermore,
any transfers from ATI to the Company on account of antecedent debt (of ATI to
the Company) during the one-year period prior to the date of filing of ATI's
voluntary petition may be subject to avoidance under the applicable provisions
of the Code. The occurrence of any such circumstances may have a material
adverse effect on the Company.
On December 31, 1996, the Company entered into an agreement with a third
party distributor to lease four (4) gasoline stations for a period of 10 years
with an option for renewal. The distributor prepaid the Company $149,080 for the
first year of rental expense and the Company is carrying $125,500 as deferred
income. Simultaneously, the Company terminated the previous third party
agreement for $192,497 which resulted in a note receivable and additional rental
income of approximately $70,000.
On May 16, 1997, the Company entered into an agreement for the sale of the
retail fuel oil customer list of Rockland to an independent third party
distributor. The terms of the sale were $200,000 at closing, $200,000 on the
first anniversary, and $127,000 on the second anniversary, with interest on
outstanding amounts at a rate of 6% per annum. As a result, the Company has
recognized extraordinary income to the extent of $186,672 (net of applicable
income taxes). During the quarter ended February 28, 1997, the Company issued
for certain consulting services 400,000 five (5) year warrants dated 2/27/97 at
$.41 per warrant exercise price (for the year ended August 31, 1997, 85,000 of
these warrants were exercised), 100,000 five (5) year warrants(10,000 dated
11/04/96, and 90,000 dated 2/18/97) at $.3125 per warrant exercise price, and
15,000 five (5) year warrants dated 11/05/96 at $1.00 per warrant exercise
price.
On June 9, 1997, the Company obtained a one-year revolving credit facility
in the maximum principal amount of $1,000,000. Interest accrues on outstanding
balances at the prime rate plus 10% per annum, subject to a minimum of 17% per
annum. The credit facility is secured by a security interest in all of the
Company's accounts, general intangibles, contract rights and inventory, as well
as by the guarantees of Claire E. Tarricone, Joseph A. Tarricone and Anthony J.
Tarricone. As of October 31, 1997, the outstanding principle balance was
$815,000.
The Company had working capital of $2,776,040 and a ratio of current
assets to current liabilities of 2.86:1 as at August 31, 1996, and the Company
had a deficit in working capital of $2,359,913 and a ratio of current assets to
current liabilities of 1:2.0 as at August 31, 1997.
Inflation
There was no significant impact on the Company's operations as a result of
inflation during fiscal 1995, fiscal 1996, and fiscal 1997.
New Accounting Standards
In February, 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109 ("Statement No. 109"),
"Accounting for Income Taxes." Statement No. 109 will require the
utilization, if any exist, of the net operating loss carry forwards of the
Company to be recorded as part of the regular income tax provision and not as
an extraordinary item. The implementation of Statement No. 109 is not
expected to have a material impact on the results of operations of financial
condition of the Company. Statement No. 109 is effective for fiscal years
beginning after December 15, 1992.
Page 17
<PAGE>
DESCRIPTION OF BUSINESS
Background
The Company was originally incorporated in the State of Utah on January
15, 1986 under the name of Technical Analysis, Inc. On July 23, 1987, the
Company changed its name to LMD Acquisitions, Inc. and effective October 8,
1990, changed its corporate domicile to the State of Nevada. On March 12, 1993,
the Company changed its name to Castleview Corp. On August 5, 1993 the Company
acquired Halstead Quinn Propane, Inc. in exchange for 2,170,000 shares of the
Company's Common Stock. Simultaneously with such acquisition, the Company
changed its name to Halstead Energy Corp.
The Company's operating entities are engaged in the wholesale and/or
retail distribution of, and the provision of services relating to, fuel oil,
liquid propane gas, gasoline and diesel fuel primarily in Westchester, Putnam,
Dutchess, Rockland and surrounding counties in New York State. The Company has
four principal operating divisions: HQ Propane, a wholly-owned subsidiary of the
Company, and Halstead Quinn Terminal ("HQ Terminal"), HQ Gasoline ("HQ
Gasoline") and Dino Oil ("Dino"), which are separate divisions of HQ Propane,
and Rockland Fuel Oil, Inc., a wholly-owned subsidiary of HQ Propane
("Rockland"). The business of White Plains Fuel, Inc. ("WPF"), a Hawthorne, New
York-based retail distributor of fuel oil and diesel fuel which was acquired by
the Company in June 1995, is being operated by a third party under the terms of
a four (4) year lease.
Recent Developments
On September 24, 1997, the Company, Claire E. Tarricone, Anthony J.
Tarricone and Joseph A. Tarricone and Infinity Investors Limited ("Infinity")
entered into a certain Restructuring Agreement (the "Restructuring Agreement).
Under the terms of the Restructuring Agreement, Infinity agreed to exchange
77,419 shares of Series B Preferred Stock and all accrued and unpaid dividends
on the outstanding shares of Series B Preferred Stock for the Company's
Subordinated Promissory Note in the principal amount of $600,000 (the "Note").
The Note accrues interest at 12% per annum compounded quarterly through
September 24, 1999 and accrues simple interest at 12% per annum after September
24, 1999. The Note matures on September 24, 2002, although the Company is
required to make mandatory prepayments upon the occurrence of certain events.
The terms of the balance of the 560,126 shares of Series B Preferred Stock
owned by Infinity were amended to provide, among other things, for (i) a fixed
conversion price of $2.00 per share of Series B Preferred Stock, (ii) the
removal of certain limitations on the rights of holders of the Series B
Preferred Stock to convert those shares into the Company's Common Stock, and
(iii) an increase in the dividend rate of the Series B Preferred Stock to 12%
from 8% per annum. The Company also agreed to register the shares of Common
Stock of the Company to which this prospectus relates.
In connection with the execution and delivery of the Restructuring
Agreement, Infinity granted to Elizabeth Mandel ("Mandel") an option to purchase
all of the Shares. Under the terms of the option, Mandel has the option to
acquire all of the shares for a price of $2.00 per share until the 18-month
anniversary of the effective date of the registration statement of which this
prospectus forms a part (the "Effective Date"), subject to earlier termination
in the event that Mandel fails to purchase at least an aggregate of 250,000
Shares on or prior to the 90th day following the Effective Date and an aggregate
of 400,000 Shares on or prior to the last day of each succeeding 90-day period
commencing 90 days after the Effective Date.
Page 18
<PAGE>
On June 10, 1997, ATI filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI has continued in
possession of its property and in the management of its affairs as a
debtor-in-possession under the applicable provisions of the Code. In connection
with the bankruptcy proceeding, the Company has asserted (and ATI has
acknowledged) pre-petition claims arising under the note receivable from ATI in
the amount of $3,263,563 and pre-petition liens on certain leasehold interests.
The proceeding is before the United States Bankruptcy Court, Southern District
of New York, and is referenced as "A. TARRICONE, INC., 97B21488." It is
difficult to determine at this time the likelihood of recovery by the Company of
such indebtedness. The Company has determined that its asserted pre-petition
liens may not have been properly "perfected," in which case the Company would be
deemed an unsecured creditor (rather than a secured creditor) in the proceeding.
The Company intends to pursue all appropriate avenues (if any) to protect its
interests in this regard. However, there can be no assurance that the
indebtedness and the liens asserted by the Company in this proceeding will be
recognized or given full effect, that the same will not be challenged, modified
or reduced, or that all or any portion of such indebtedness will be repaid to
the Company. In any event, management has reserved the entire amount of the note
receivable due from ATI at June 10, 1997, i.e., $3,263,563 as a bad debt
expense. If it were ultimately determined by the court that the Company's status
in the proceeding is that of an unsecured creditor, the Company's legal basis
for recovery would be materially, adversely affected. Additionally, all
executory contracts between ATI and the Company are susceptible to rejection, at
the election of ATI, under the applicable provisions of the Code. Furthermore,
any transfers from ATI to the Company on account of antecedent debt (of ATI to
the Company) during the one-year period prior to the date of filing of ATI's
voluntary petition may be subject to avoidance under the applicable provisions
of the Code. The occurrence of any such circumstances may have a material
adverse effect on the Company.
The Company's principal terminal facility is currently being operated by
ATI pending the approval of the Company's application with the State of New York
for a terminal operator's and diesel motor fuel license. There can be no
assurance about the prospect of obtaining the approval of such licenses. The
Company has been advised by counsel that pending the conclusion of ATI's
bankruptcy proceeding, ATI will continue to maintain such licenses, and thus
that ATI will be able to continue operating the Company's terminal and diesel
motor fuel businesses. However, there can be no assurance that at the conclusion
of such proceeding, if the result were a liquidation of ATI (and therefore a
termination of such licenses), that the Company would by that time have received
its own licenses or would have been able to contract with another entity to
operate such businesses. The occurrence of any of these circumstances could have
a material and adverse effect on these businesses and on the Company.
Retail Propane Distribution
HQ Propane (formerly Halstead Quinn Fuel Oil Co., Inc.), based in central
Westchester County in Mt. Kisco, New York, was established in 1946 and since
1958 has been a retail distributor of liquid propane gas and propane equipment
and also provides services related thereto. ATI acquired HQ Propane in 1975 and
subsequently spun it off to its stockholders in December 1992. In July 1996, HQ
Propane acquired the customer list and certain other assets of E. F. Osborn &
Sons, a Pawling, New York-based retail propane distributor.
HQ Propane has just under 7,000 accounts. Of these accounts, approximately
80% are Westchester County residents and businesses, and the remaining 20% are
located throughout the surrounding counties of Putnam and Dutchess in New York
State.
Westchester County harbors many affluent communities whose lifestyles
create an above average demand for energy-intensive applications and, the
Company believes, are also more resistant to recessionary pressures. This is
partly exemplified by the slow but steady growth in sales revenues over the last
three years. The Company believes that, in Westchester County, HQ Propane has a
market share of approximately 18%. In terms of accounts, the Company believes
that HQ Propane is the second largest propane distributor in Westchester County.
Page 19
<PAGE>
Although propane can be used for virtually all household and business
utility applications, of HQ Propane's customers, approximately 78% use propane
for hot water heating and cooking; approximately 16% use propane for pool
heating; and approximately 6% use propane for home heating. HQ Propane has
focused its marketing efforts on hot water heating and cooking applications
because these uses are relatively constant throughout the year, thereby reducing
seasonal fluctuations, and because its gross profit margins from hot water
heating use are significantly more than that of a residential propane heating or
commercial propane account.
The Company believes that propane has distinct advantages over alternative
energy sources, including efficiency, cost and availability. These attributes
result in the retail customer realizing reduced utility bills. With an increased
marketing effort, the Company believes that HQ Propane has the opportunity to
gain a larger share of the Westchester County energy market by converting
electricity and fuel oil users to propane and by having owners of
newly-constructed buildings select propane as their energy source.
HQ Propane's base of operations is centrally located at the Company's
headquarters in Mount Kisco, New York. HQ Propane also maintains an inland fuel
oil storage terminal and a 30,000 gallon propane storage tank for its own
operations. The fuel oil facility is presently leased to a major independent
fuel oil distributor.
Wholesale Distribution and Storage
HQ Terminal, owns a deep water terminal in Yonkers, New York near the New
York City border. The five million gallon terminaling facility allows for the
wholesale distribution of fuel oil, gasoline and diesel fuel and also provides
storage facilities for other petroleum companies through warehousing agreements
know as thru-puts. The Company's own product requirements are often supplied
through this facility.
The terminal facility has 11 above ground tanks that provide an aggregate
storage capacity of 5,000,000 gallons for gasoline, diesel fuel and fuel oil.
These tanks feed three gasoline racks, five oil racks and two diesel fuel racks.
The terminal has been upgraded to comply with all governmental regulations.
Page 20
<PAGE>
The terminal facility has 2.439 acres of above-ground land and an
additional 3.511 acres of land underwater. The large amount of underwater
acreage has enabled the Company to extend the dock lines out to deep water. The
Company believes that the terminal is the only terminal on the east side of the
Hudson River between the Long Island Sound to the east, the Bronx, New York to
the south and Newburgh, New York to the north that has 17 feet of draft at low
tide. This provides a competitive advantage, particularly with regard to
thru-put customers, because the high draft allows large seafaring vessels to
dock independent of tide schedules.
The Company believes that another competitive advantage is the terminal's
location. It is located in the most densely populated area in Westchester
County, and it is the only terminal on the Hudson River south of Newburgh, New
York which distributes gasoline. All other gasoline distribution terminals are
located in the eastern part of Westchester County.
The terminal facility has been operated by ATI pending the approval of HQ
Propane's application with New York State for a Terminal Operator and Diesel
Motor Fuel License. See "Certain Relationships and Related Transactions" and
"Description of Business--Certain Licenses Relating to the Company's Business."
Gasoline
HQ Gasoline operates 25 retail gasoline stations throughout eastern New
York State under the trade names "ATI" and "Gulf." HQ Gasoline's ability to
market under different brand names provides the Company with an opportunity to
reach consumers at the low, middle and high end of the market, thereby allowing
greater flexibility in its marketing strategies. Because gasoline usage is
relatively constant throughout the year, the operation of gasoline stations
allows the Company to offset, in part, the seasonal fluctuations that affect the
Company's fuel oil distribution divisions. Most of the stations are situated in
high traffic areas at major intersections. Presently, 5 of the 25 facilities are
combination convenience store/gasoline pumping facilities. The balance of the
outlets are combination automotive repair shop/gasoline pumping facilities. Nine
of the 25 gasoline stations are leased from ATI. See "Certain Relationships and
Related Transactions" and "Risk Factors."
In September 1996, the Company acquired certain assets of Dino Oil, Inc.,
a Bronx, New York-based commercial gasoline distributor. The addition of the
Company's Dino Oil division has broadened the Company's marketing region by
providing the Company with customer accounts (including various service stations
and fleet garages) located in the Bronx, Queens, Brooklyn, and Manhattan, as
well as Nassau, Suffolk and Westchester counties.
Page 21
<PAGE>
In December 1996, the Company terminated its lease of 4 of its 25 stations
with an independent third party distributor, and simultaneously therewith,
entered into a master lease with another independent third party distributor.
The master lease has an initial term of ten (10) years, and the lessee
thereunder has an option to renew such lease for an additional ten (10) year
term. The lease requires that annual rental payments be made in advance, on the
first day of each year of the lease term. The lease is a triple net lease
agreement which requires the lessee to maintain, operate, and supply all
gasoline to the station outlets. The lessee must also make the necessary capital
improvements to meet applicable environmental laws by 1998.
The Company intends to focus its effort on changing the image of the HQ
Gasoline facilities. The industry has moved away from the "mom & pop" type
operation and into high volume, automated self-service operations, with a
particular focus on convenience. Repair shops, in particular, are becoming
increasingly less desirable. Accordingly, in order to optimize potential
earnings at a site, the Company intends to follow industry trends by upgrading
approximately 12 of these facilities with state-of-the-art pumping apparatus and
canopies and, where appropriate, converting them to multiple revenue sites by
combining the pumping facilities with convenience stores, snack shops and/or car
washes.
In most cases, canopies will be installed to improve lighting and provide
shelter in inclement weather. Industry experts estimate that up to a 20%
increase in volume is derived from this improvement alone. Management believes
that, in the Company's geographic region, canopies have contributed increased
revenues of between 15% and 25%. Electronic self-service pumping apparatus will
also be installed for the convenience of the public, and will afford overhead
savings to the station operator. The addition of a convenience store, snack
shop, or car wash, where applicable, will introduce new sources of revenue and
optimize overall station profitability.
The rebuilding program will require expenditures that range from $20,000
to $550,000 per facility, depending upon the individual station site. The
program is site specific, taking into consideration competition, lot size,
building dimensions, traffic count, community demographics, and area
development. By completing its rebuilding program, the Company believes it will
achieve increased cash flow from operations as a result of increased sales
revenues and rental income. In this regard, as part of the rebuilding program,
management intends to acquire certain station leaseholds from ATI at fair market
value since ATI's underlying leasehold interests extend by an average of 12
years beyond the Company's sublease with ATI. The acquisition of these leasehold
interests will protect the Company's investment in, and long term earnings
potential, from this revenue source. See "Certain Relationships and Related
Transactions" and "Risk Factors--ATI Bankruptcy."
Retail Fuel Oil
The Company's retail fuel oil distribution business was conducted by HQ
Propane's subsidiary, Rockland Fuel Oil, Inc., until May 16, 1997, when the
Company entered into an agreement with an independent third party distributor
for the sale of its retail fuel oil customer list and related business. The
terms of the sale were $200,000 at closing, $200,000 on the first anniversary,
and $127,000 on the second anniversary, with interest on outstanding amounts at
a rate of 6% per annum. Rockland continues to own a facility in Haverstraw, New
York which houses a 2,432 square foot building and a terminal situated on land
fronting the Hudson River. The terminal is capable of storing 2,500,000 gallons
of oil.
The Company acquired all of the stock of White Plains Fuel, Inc., a retail
distributor of fuel oil and diesel fuel, on June 8, 1995, in exchange for
168,020 shares of newly created Series A 7.5% Cumulative Convertible Redeemable
Preferred Stock of the Company. The Company has leased the White Plains Fuel
business to a third party under the terms of a four (4) year lease.
Page 22
<PAGE>
Fundamental Characteristics of the Company's Business
Unaffected by General Economy
The Company's business is relatively unaffected by business cycles. As
fuel oil, propane and gasoline are such basic necessities, variations in the
amount purchased as a result of general economic conditions are limited.
Customer Stability
HQ Propane has a relatively stable customer base due to the tendency of
homeowners to remain with their traditional distributors. In addition, a
majority of the home buyers tend to remain with the previous owner's
distributor. As a result, HQ Propane's customer base each year includes most
customers retained from the prior year or home buyers who have purchased from
such customers. Like many other companies in the industry, HQ Propane delivers
propane to each of its customers an average of approximately six times during
the year, depending upon weather conditions and historical consumption patterns.
Most of HQ Propane's customers receive their propane pursuant to an automatic
delivery system, without the customer having to make an affirmative purchase
decision each time propane is needed. In addition, HQ Propane provides home
heating equipment repair service on a seven day a week, 52 weeks a year basis.
Retail gasoline customers are generally brand loyal or price shoppers who
generally factor appearance, convenience, and credit cards into their decision
making process before making an affirmative purchase decision. HQ gasoline's
ability to market under the trademarks "Gulf" and "ATI" largely meet the
criteria exercised by customers in making their purchase decisions. However, the
Company must complete its station rebuilding program in order to ensure that the
standards which are particularly important to the motoring public, such as
appearance, are maintained.
No single customer accounts for 10% or more of the Company's consolidated
revenues.
Weather Stability
The weather patterns during the winter can have a material effect on the
Company's fuel oil-related business. Although average temperatures over time
have varied to a very limited extent, and the Company does not expect that
average temperatures will vary significantly in the future, winter temperatures
can vary significantly from one year to the next. A warmer than usual winter
would reduce the number of gallons of fuel oil sold which would result in
reduced revenues from the Company's fuel oil-related operations. Severe ice and
snow storms can also greatly effect consumers' driving patterns, thereby
reducing the Company's gasoline revenues. Ice and snow can also greatly reduce
delivery productivity, thereby reducing the number of gallons which can
physically be delivered in a certain period of time. Such conditions would most
likely demand significant overtime hours resulting in increased payroll expense.
Page 23
<PAGE>
Effects of Oil Price Volatility
The price of crude oil remains volatile. While this has not materially
affected the Company's performance in the past (e.g., as a retailer, the Company
has been able to add an increasing gross margin onto its wholesale costs,
whatever their level, to offset the impact of inflation, account attrition and
weather), there can be no assurance that such performance will continue. For
instance, in recent months the Company has experienced difficulties maintaining
its gross margin on its sales of gasoline product (when its cost of same has
substantially increased) due primarily to strong competition for market share.
Petroleum Supply
Two major suppliers provide the Company with its propane product
requirements. One supplier provided approximately 65%, and the other
approximately 35%, of the Company's total propane requirements for the year
ended August 31, 1997.
The Company met substantially all of its gasoline product requirements
through Gulf Oil, BP and ATI for the year ended August 31, 1997. Gulf Oil
supplied approximately 30%, and ATI provided approximately 65%, of such
requirements during such period. All of the fuel oil and diesel fuel product
requirements of the Company's customers during such period were met by ATI. Upon
the issuance of its diesel motor fuel license from New York State, HQ Propane
will assume ATI's role in procuring the Company's petroleum product
requirements. See "Certain Relationships and Related Party Transactions" and
"Business--Certain Licenses Relating to the Company's Business."
Management believes that if the Company's supply of any of the foregoing
products was interrupted, the Company would be able to secure adequate supplies
from other sources without a material disruption in its operations. However,
there can be no assurance that adequate supplies of such petroleum products will
be readily available in the future.
Expansion
The industries in which the Company's petroleum products division compete
are highly fragmented and characterized by numerous local and national fuel oil,
gasoline, diesel fuel and propane distributors. The Company intends to expand
its operating divisions through acquisitions and aggressive sales and marketing
efforts to generate new accounts and increase consumer awareness of the
Company's products and quality.
The Company's acquisition strategy is to grow through the acquisition and
integration of additional distributors in existing and new markets. The Company
believes that many of the proprietors of businesses competitive with the
Company's operating divisions are of retirement age and may be receptive to
selling their operations. Another potential source of acquisitions are companies
that are owned by individual entrepreneurs who find expansion within the
petroleum products industry difficult, either operationally or financially, or
who have other investment opportunities.
Page 24
<PAGE>
More specifically, HQ Propane intends to acquire two types of
distributors. The first type are relatively small distributors which management
believes could be easily integrated into the Company's operations. Management
believes that such distributors could result in significant economies of scale
through the centralization of purchasing, marketing, credit, data processing and
other administrative functions of the acquired distributor. The second type
consists of larger, stand-alone businesses which could not be integrated, but
would, in all probability, be in new markets. The Company expects that
acquisitions of these businesses would provide not only attractive investment
returns, but also provide hubs for future expansion.
The Company also intends to expand HQ Gasoline by pursuing the acquisition
of single unit and chains of retail service stations. Such acquisitions would
provide deeper market penetration in the Company's existing marketing area, and
provide expansion into new marketing areas. Besides the benefits derived from
the economies of scale, the Company would expect to achieve greater buying power
for its petroleum products purchases, and possibly assume additional
distributorships with various major oil companies.
Competition
The Company's business is highly competitive. In addition to competition
from alternative energy sources, HQ Propane competes with propane distributors
offering a broad range of services and prices, from full service distributors
similar to HQ Propane, to those offering delivery only. Competition with other
companies in the propane industry is based primarily on customer service and
price. Longstanding customer relationships are typical in the retail propane
industry. Many companies in the industry, including HQ Propane, deliver propane
to their customers based upon weather conditions and historical consumption
patterns without the customers having to make an affirmative purchase decision
each time propane is needed. In addition, most companies, including HQ Propane,
provide propane equipment repair service on a 24 hour a day basis, which tends
to build customer loyalty. As a result, HQ Propane may experience difficulty in
acquiring new retail customers due to existing relationships between potential
customers and other propane distributors. As of the date of this report, fuel
oil and propane are less expensive sources of energy than electricity. Natural
gas, which is currently less expensive than propane, is not readily available in
upper Westchester and Putnam counties where all of the Company's propane
operations are conducted. Accordingly, the Company believes that an
insignificant number of its customers will switch from fuel oil or propane to
alternative energy sources at this time.
HQ Gasoline's business operations are sensitive to price and brand
competition. In order to compete with branded competitors who benefit from name
recognition and customer loyalty, the "ATI" branded service stations may
maintain a lower price than these competitors. The Gulf branded stations are not
as sensitive to price and, therefore, typically maintain a price consistent with
other brand name competitors.
Page 25
<PAGE>
Certain Licenses Relating to the Company's Business
HQ Propane's principal terminal facility is currently being operated by
ATI pending the approval of HQ Propane's application with the State of New York
for a terminal operator's and diesel motor fuel license and the applications of
Rockland Fuel Oil, Inc. and White Plains Fuel, Inc. for their respective diesel
motor fuel licenses. On October 6, 1995, New York State requested HQ Propane,
Rockland Fuel and White Plains Fuel to post certain bonds as a prerequisite to
obtaining the foregoing licenses. On October 25, 1995, these bonds were obtained
by the Company and the State approved the same. Management believed at the time
that the Company had thereby completed substantially all steps necessary to
receiving such licenses. However, these licenses have not as of yet been
granted, though the State has discussed with management the possibility of
approving applications for certain (but not all) of such licenses (i.e., HQ
Propane's terminal operator's license and its diesel motor fuel license) pending
the completion of the licensing process with respect to the balance of the
licenses. There can be no assurance about the prospect of obtaining the approval
of such licenses. The $.0025 per gallon fee charged by ATI for these services
would be eliminated simultaneously with the issuance of HQ Propane's terminal
operator's license and its diesel motor fuel license. See "Certain Relationships
and Related Transactions."
On June 10, 1997, ATI filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code. See "Certain Relationships and
Related Transactions" and "Legal Proceedings." The Company has been advised by
counsel that pending the conclusion of ATI's bankruptcy proceeding, ATI will
continue to maintain such licenses, and thus that ATI will be able to continue
operating the Company's terminal and diesel motor fuel businesses. However,
there can be no assurance that at the conclusion of such proceeding, if the
result were a liquidation of ATI (and therefore a termination of such licenses),
that the Company would by that time have received its own licenses or would have
been able to contract with another entity to operate such businesses. The
occurrence of any of these circumstances could have a material and adverse
effect on these businesses and on the Company.
Environmental/Governmental Regulation
The Company's operating divisions are subject to various governmental
regulations. New regulations regarding underground storage tanks ("UST's"),
including those at service stations, have been issued by the United States
Environmental Protection Agency (the "EPA"). The regulations cover the design,
construction and installation of new UST systems, and require that existing
systems meet certain EPA standards. The regulations require that owner/operators
of UST systems demonstrate financial responsibility for the cleanup of spills or
releases and/or compensate third parties for any resulting damages. The Company
has recently upgraded its HQ Terminal Facility and its other storage facilities
to conform with applicable law, and the Company has an ongoing program for
maintenance, testing, retrofitting, or replacement of UST's. In addition, the
Company maintains pollution liability coverage on 19 of the 22 gasoline stations
presently leased by the Company. (Three of the 25 stations operated by the
Company are supply contracts only, and therefore management does not believe
that the Company would be subject to any environmental exposure.) The Alexander
Street Terminal is also insured under a separate pollution legal liability
policy.
Page 26
<PAGE>
The Company believes that its operating divisions are in compliance with
all applicable regulatory requirements and have all governmental licenses and
permits (other than those described above in "Description of Business--Certain
Licenses Relating to the Company's Business") required for their business
operations, except where the failure to be in compliance or maintain such
licenses and permits would not have a material adverse effect on the Company's
business. Management knows of no pending or threatened proceedings or
investigations under federal or state environmental laws which would have a
material adverse effect on the Company's business. Management cannot predict the
impact on the Company and its operating divisions of new governmental
regulations and requirements.
The Company will have to invest an estimated minimum of $325,000 over the
next fourteen months in order to meet EPA and State regulations for underground
storage tanks by December, 1998.
Employees
As of November 30, 1997, the Company had a total of 29 employees, of which
19 were office, clerical and customer service personnel, 4 were drivers, 3 were
mechanics, and 3 were executive officers of the Company. All of the Company's
employees are full-time employees and none is seasonally employed. Seven
employees are represented by the International Brotherhood of Teamster and
Chauffeurs Union, Local 456 under a contract which expires on December 31, 1997.
Management believes that its relations with both its union and nonunion
employees are satisfactory.
DESCRIPTION OF PROPERTY
The Company's principal place of business is located at 33 Hubbells Drive,
Mount Kisco, New York, where HQ Propane owns a block and brick building of
approximately 6,000 square feet situated on 1.03 acres.
The Company also owns the following facilities:
1. The HQ Terminal facility located in Yonkers, New York,
which facility is situated on 5.95 acres of land, with
approximately 2.44 acres above water and 3.51 acres are
underwater. Four block and brick buildings of 3,000 square
feet, 234 square feet, 225 square feet and 450 square feet,
respectively are situated on the property. The terminal
also has 11 storage tanks with capacities ranging from
140,000 to 1,000,000 gallons, and an aggregate capacity of
5,083,000 gallons; a 300 foot dock; three gasoline racks;
five oil racks; and two diesel fuel racks.
2. A terminal facility located in Haverstraw, New York, which facility
is situated on 1.30 acres of land. The property houses one building
of 2,432 square feet. The terminal also has 14 storage tanks with
capacities ranging from 15,652 gallons to 508,000 gallons, and an
aggregate capacity of 2,509,545 gallons; and one loading rack.
3. A gasoline station facility in Hartsdale, New York which facility is
situated on 16,700 square feet of land. The property houses a one
story concrete building of 1,827 square feet with three bays and
office. The station is also improved with two islands, each with two
pumps.
As of November 30, 1997, the Company leased the following stations from
ATI (See "Certain Relationships and Related Transactions"):
Station Name and Number Address
(1) Elmsford ATI #203 153-162 E. Main Street
Elmsford, NY 10523
(2) Wingdale ATI #405 Route 22-Box 684 Wingdale,
NY 12594
(3) Salt Point #414 Route 44 & 82 Salt Point, NY
12578
(4) Congers ATI #112 21 South Route 303 Congers,
NY 10920
(5) Mt. Vernon Lincoln Ave. 25 W. Lincoln Avenue
#205 Mt. Vernon, NY 10550
(6) Lakeside P.P. #219 6 N. Lakeside Blvd.
Mahopac, NY 10541
(7) Raceway ATI #221 535 Central Park Avenue
Yonkers, NY 10704
(8) West Hurley #315 1150 Route 28 Kingston, NY
12461
(9) Pine Plains #411 Route 199
Pine Plains, NY 12540
Five of the above leases expire on August 31, 1998, two expire on August
31, 2018, and the other two expire on November 28, 2006 with an option for an
additional ten year term expiring on November 28, 2016. The aggregate annual
rental amount under these leases is $195,976 for the fiscal year ending August
31, 1996, $187,272 for the fiscal year ending August 31, 1997, and $213,633 for
the fiscal year ending August 31, 1998. For the four leases expiring on August
31, 2018 or November 28, 2006, as the case may be, the aggregate rental amount
will range from $89,150 in the fiscal year ending August 31, 1999 to $88,800 in
the fiscal year ending August 31, 2018.
LEGAL PROCEEDINGS
In January 1994, HQ Propane was served with a complaint dated January 5,
1994 relating to an action entitled RAP Holding Corp. v. Halstead Quinn Fuel
Co., Inc. and A. Tarricone, Inc. in the Supreme Court of New York, County of
Westchester. The plaintiff is the owner of property in Westchester County, New
York which was leased by HQ Propane from June 1, 1979 to May 31, 1989. The
complaint alleges that, during the term of the lease, the Company discharged
petroleum products onto the property and seeks $106,173 damages for the costs of
clean up and removal of the contaminated soil and an additional $300,000 for
diminution of value. The Company has retained outside counsel and is vigorously
defending itself in this lawsuit. As of November 30, 1997, there has been no
further action in this case.
On June 10, 1997, ATI filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI has continued in
possession of its property and in the management of its affairs as a
debtor-in-possession under the applicable provisions of the Code. In connection
with the bankruptcy proceeding, the Company has asserted (and ATI has
acknowledged) pre-petition claims arising under the note receivable from ATI in
the amount of $3,263,563 and pre-petition liens on certain leasehold interests.
The proceeding is before the United States Bankruptcy Court, Southern District
of New York, and is referenced as "A. TARRICONE, INC., 97B21488." It is
difficult to determine at this time the likelihood of recovery by the Company of
such indebtedness. The Company has determined that its asserred pre-petition
liens may not have been properly "perfected," in which case the Company would be
deemed an unsecured creditor (rather than a secured creditor) in the proceeding.
The Company intends to pursue all appropriate avenues (if any) to protect its
interest in this regard. However, there can be no assurance that the
indebtedness and the liens asserted by the Company in this proceeding will be
recognized or given full effect, that the same will not be challenged, modified
or reduced, or that all or any portion of such indebtedness will be repaid to
the Company. In any event, management has reserved the entire amount of the note
receivable due from ATI at June 10, 1997, i.e., $3,263,563, as a bad debt
expense. If it were ultimately determined by the court that the Company's status
in the proceeding is that of an unsecured creditor, the Company's legal basis
for recovery would be materially, adversely affected. Additionally, all
executory contracts between ATI and the Company are susceptible to rejection, at
the election of ATI, under the applicable provisions of the Code. Furthermore,
any transfers from ATI to the Company on account of antecedent debt (of ATI to
the Company)during the one-year period prior to the date of filing of ATI's
voluntary petition may be subject to avoidance under the applicable provisions
of the Code. The occurrence of any such circumstances may have a material
adverse effect on the Company.
HQ Propane's principal terminal facility is currently being operated by
ATI pending the approval of HQ Propane's application with the State of New York
for a terminal operator's and diesel motor fuel license. See "Description of
Business--Certain Licenses Relating to the Company's Business." There can be no
assurance about the prospect of obtaining the approval of such licenses. The
Company has been advised by counsel that pending the conclusion of ATI's
bankruptcy proceeding, ATI will continue to maintain such licenses, and thus
that ATI will be able to continue operating the Company's terminal and diesel
motor fuel businesses. However, there can be no assurance that at the conclusion
of such proceeding, if the result were a liquidation of ATI (and therefore a
termination of such licenses), that the Company would by that time have received
its own licenses or would have been able to contract with another entity to
operate such businesses. The occurrence of any of these circumstances could have
a material and adverse effect on these businesses and on the Company.
The Company is not a party to any other material litigation and is not
aware of any threatened litigation that would have a material adverse effect on
its business.
MANAGEMENT
The directors and executive officers of the Company as of November 30,
1997, are as follows:
Name Age Position with the Company
Claire E. Tarricone 41 President and Director
Anthony J. Tarricone 36 Vice President, Secretary and Director
Joseph A. Tarricone 35 Vice President, Treasurer and Director
Edwin Goldwasser 65 Director
The following is a brief description of the professional experience and
background of the directors and executive officers of the Company:
Claire E. Tarricone has been the President and a Director of the
Company since July 27, 1993. Ms. Tarricone has also served as the President
and a Director of HQ Propane and Rockland Fuel since 1992. In June 1995 Ms.
Tarricone also became Director of White Plains Fuel, Inc. From 1991 until
1992, Ms. Tarricone served as Vice President/General Manager of HQ Propane in
charge of its operating divisions. Ms. Tarricone has been President and
Director of ATI since November 1992, and Vice President for at least three
years prior thereto.
Anthony J. Tarricone has been Vice President, Secretary and a Director of
the Company since July 27, 1993. Mr. Tarricone has been Vice President,
Secretary and a Director of HQ Propane and Rockland Fuel since 1992. From 1991
until the present, Mr. Tarricone has served as ATI's gasoline division manager
and has served in similar capacity with HQ Gasoline since September 1993.
Joseph A. Tarricone has been Vice President, Treasurer and a Director of
the Company since July 27, 1993. Mr. Tarricone has been Vice President,
Treasurer and a Director of HQ Propane and Rockland Fuel since November 1992.
From 1990 until 1992, Mr. Tarricone was sales manager for HQ Propane and ATI,
responsible for the development of commercial gasoline and diesel fuel sales for
HQ Terminal and ATI. From 1988 to 1993, Mr. Tarricone served as President of
Energy Technology Services, Inc., an energy use and planning consulting firm.
Edwin Goldwasser has been a Director of the Company since July 27, 1993.
From April 1992 to the present, Mr. Goldwasser has served as a consultant to the
Company. For at least the five years prior to that, Mr. Goldwasser served as
Vice President of Administration and Finance in charge of all financial,
accounting and legal affairs for ATI.
Claire Tarricone, Anthony Tarricone and Joseph Tarricone are siblings.
All Directors hold office until the next annual meeting of stockholders
and the election and qualification of their successors. Directors currently
receive no compensation for serving on the Board of Directors. No Director
received any cash compensation for serving as a Director of the Company during
the past fiscal year. Officers of the Company are appointed annually by the
Board of Directors.
As permitted under Nevada law, the Company's Articles of Incorporation
eliminates the personal liability of the Directors to the Company or any of its
stockholders for damages for breaches of their fiduciary duty as Directors. As a
result of such provision, stockholders may be unable to recover damages against
Directors for actions taken by them which constitute negligence or gross
negligence or that are in violation of their fiduciary duty. The inclusion of
this provision in the Company's Articles of Incorporation may reduce the
likelihood of derivative litigation against directors and other types of
stockholder litigation.
The directors and executive officers of the Company and the owners of more
than ten percent (10%) of the Company's outstanding Common Stock are required to
file reports with the Securities and Exchange Commission and with the National
Association of Securities Dealers, Inc. reporting changes in the number of
shares of the Company's Common Stock beneficially owned by them. Such persons
are required to furnish the Company with copies of all Section 16(a) forms they
file. Based solely on its review of the copies of such forms furnished to the
Company and written representations from the executive officers and directors,
the Company believes that all Section 16(a) filing requirements were met during
fiscal 1996 and 1997, except that each of Claire Tarricone, Anthony Tarricone
and Joseph Tarricone filed one report after the applicable filing deadline.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information for each of the Company's
fiscal years ended August 31, 1997, 1996 and 1995 concerning compensation of (i)
all individuals serving as the Company's Chief Executive Officer during the
fiscal year ended August 31, 1997 and (ii) each other executive officer of the
Company whose total annual salary and bonus equaled or exceeded $100,000 in the
fiscal year ended August 31, 1997 or either of the two previous fiscal years (to
the extent that such person was the Chief Executive Officer and/or an executive
officer, as the case may be, during any part of such fiscal year).
Annual Long-Term
Compensation Compensation Award
RestricteSecurities
Stock Underlying
Name and Principal Year Salary ($) Bonus Other (2) Awards Options
Position
(1) ($) (#)
Claire E. Tarricone 1997 $54,600 -------- $ 9,297 -------- 420,000(3)
President 1996 $54,600 -------- $15,034 -------- 100,000(3)
1995 $54,600 -------- $ 6,931 -------- --------
- - ---------------------
(1)The Company does not have any executive officers whose compensation exceeded
$100,000 during the applicable fiscal periods.
(2)Represents amounts payable under Ms. Tarricone's employment agreement with
the Company for certain insurance premiums and for taxes resulting from such
additional compensation.
(3)Reflects the grant of options under the Company's 1996 Stock Incentive Plan,
which options are not intended to qualify as "incentive stock options" under
Section 422 of the United States Internal Revenue Code of 1986, as amended,
and which options were exercisable for a price of $4.50 per share of the
Company's Common Stock, par value $.001 per share. The 100,000 options were
canceled on November 14, 1996 in favor of the grant of 400,000 new options to
Ms. Tarricone, which options were granted independent of the aforesaid plan.
In addition, on August 12, 1997, Ms. Tarricone was granted 20,000 options
under the plan with an exercise price of $0.63 per share.
Compensation of Directors
Directors of the Company are not compensated for their services, although
the Company reimburses directors for their expenses of attending meetings of the
board of directors.
Stock Incentive Plan
The Board of Directors of the Company voted to adopt the Company's 1996
Stock Incentive Plan (the "Plan") on January 10, 1996, subject to stockholder
approval. The stockholders of the Company approved of the Plan on April 22,
1996. The Plan gives the Company the flexibility to enable it to obtain and
retain the continued services of the personnel necessary for its growth and
development. The Plan provides, among other things, for the granting of options
to acquire up to 650,000 shares of the Company's Common Stock, $.001 par value
per share. Such options may qualify as "incentive stock options" under Section
422 of the Internal Revenue Code of 1986, as amended, or as non-qualified
options.
The Company does not presently maintain any other stock option or other
stock or long-term compensatory plans for its employees.
Employment Agreements, Termination of Employment, and Change in Control
Arrangements
The Company has entered into five year Employment Agreements with each of
Claire E. Tarricone, Anthony J. Tarricone and Joseph A. Tarricone. The
Employment Agreements automatically extend for an additional one year at the end
of each year of the term unless either party notifies the other of his, her or
its election not to so further extend the term. The employment contracts which
became effective on August 5, 1993, provide for annual salaries to such
individuals of (i) $100,000, $75,000 and $75,000 in years one and two,
respectively, (ii) $125,000, $100,000 and $100,000 in years three and four,
respectively, (iii) $150,000, $125,000 and $125,000 in year five, respectively.
Each of the Tarricones has waived her or his rights (as the case may be) to any
unpaid annual salary attributable to the fiscal years ending August 31, 1994,
August 31, 1995, August 31, 1996 and August 31, 1997. After the fifth year the
Employment Agreements provide that the base salary of such individuals will
increase by an amount equal to the greater of 15% or the annual percentage
increase if any, in the Consumer Price Index distributed by the United States
Department of Labor. Under such Employment Agreements, each of the foregoing
persons must devote substantially all of his or her time to the Company;
provided, however, that such person is entitled to be engaged as an employee by
ATI. The Employment Agreements are terminable by the Company on 60 days notice
for "cause" or if any of the Tarricone's have become so incapacitated that they
are unable to resume, within the ensuing 540 days, their respective employment
with the Company by reasons of physical or mental illness or injury, or if any
shall not have substantially performed their duties for 540 consecutive days by
reason of any such physical or mental illness.
Each of the Tarricones will be entitled to terminate his or her employment
and receive a severance payment equal to 2.99 times his or her base salary at
the time of termination upon (i) the acquisition of securities of the Company
representing 50% or more of the combined voting power of the Company's then
outstanding securities in a transaction to which any of the Tarricone's does not
consent, (ii) the future disposition by the Company of all or substantially all
of its business and/or assets in a transaction to which any of the Tarricone's
does not consent, (iii) the occurrence of any circumstance which, in the
reasonable judgment of any of the Tarricone's has the effect of significantly
reducing their duties or authority, (iv) the breach by the Company of its
material obligations under the Employment Agreement or (v) the termination of
the Employment Agreement by the Company for any reason other than for cause or
by mutual agreement of the Company and any of the Tarricones. Additionally, upon
termination, each of the Tarricones would receive (a) the estimated amount which
would have been payable to each pursuant to any bonus pool established by the
Company for the fiscal year during which such termination occurred; (b) health,
accident, life and disability insurance for the longer of one (1) year or the
balance of the Employment Agreement; and (c) immediate rights to exercise any
stock options granted, regardless of whether such options were exercisable at
the time of termination.
Each of the Employment Agreements contains a covenant not to compete with
the Company or solicit its customers or employees for a period of one (1) year
after the employment of any of the Tarricones is terminated, provided that such
person is entitled to be engaged as an employee by ATI.
Indemnification of Directors and Officers
Under the Nevada General Corporation Law, as amended, a director, officer,
employee or agent of a Nevada corporation may be entitled to indemnification by
the corporation under certain circumstances against expenses, judgments, fines
and amounts paid in settlement of claims brought against them by a third person
or by or in right of the corporation.
The Company is obligated under its Articles of Incorporation to indemnify
any of its present or former directors who served at the Company's request as a
director, officer or member of another organization against expenses, judgments,
fines and amounts paid in settlement of claims brought against them by a third
person or by or in right of the corporation if such director acted in good faith
or in a manner such director reasonably believed to be in, or not opposed to,
the best interests of the Company and, with respect to any criminal action or
proceeding, if such director had no reason to believe his or her conduct was
unlawful. However with respect to any action by or in the right of the Company,
the Articles of Incorporation prohibit indemnification in respect of any claim,
issue or matter as to which such director is adjudged liable for negligence or
misconduct in the performance is his or her duties to the Company, unless
otherwise ordered by the relevant court. The Company's Articles of Incorporation
also permit it to indemnify other persons except against gross negligence or
willful misconduct.
The Company is obligated under its bylaws to indemnify its directors,
officers and other persons who have acted as a representatives of the Company at
its request to the fullest extent permitted by applicable law as in effect from
time to time, except for costs, expenses or payments in relation to any matter
as to which such officer, director or representative is finally adjudged
derelict in the performance of his or her duties, unless the Company has
received an opinion from independent counsel that such person was not so
derelict.
In addition, pursuant to indemnification agreements that the Company has
entered into with each of its directors, the Company is obligated to indemnify
its directors to the fullest extent permitted by applicable corporate law and
its Articles of Incorporation. The indemnification agreements also provide that,
upon the request of a director and provided that director undertakes to repay
amounts that turn out not to be reimbursable, that director is entitled to
reimbursement of litigation expenses in advance of the final disposition of the
legal proceeding.
The Nevada General Corporation Law, as amended, also permits a corporation
to limit the personal liability of its officers and directors for monetary
damages resulting from a breach of their fiduciary duty to the corporation and
its stockholders. The Company's Articles of Incorporation limit director
liability to the maximum extent permitted by the Nevada General Corporation Law,
which presently permits limitation of director liability except (i) for a
director's acts or omissions that involve intentional misconduct, fraud or a
knowing violation of law and (ii) for a director's willful or grossly negligent
violation of a Nevada statutory provision that imposes personal liability on
directors for improper distributions to stockholders. As a result of the
inclusion in the Company's Articles of Incorporation of this provision, the
Company's stockholders may be unable to recover monetary damages against
directors as a result of their breach of their fiduciary duty to the Company and
its stockholders. This provision does not, however, affect the availability of
equitable remedies, such as injunctions or rescission based upon a breach of
fiduciary duty by a director.
The Company currently maintains liability insurance in the amount of
$1,000,000 for the benefit of its officers and directors.
The foregoing indemnification obligations are broad enough to permit
indemnification with respect to liabilities arising under the Securities Act.
Insofar as the Company may otherwise be permitted to indemnify its directors,
officers and controlling persons against liabilities arising under the
Securities Act or otherwise, the Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On December 7, 1992, ATI distributed all of the capital stock of HQ
Propane to its sole stockholders, Claire E. Tarricone, Anthony J. Tarricone and
Joseph A. Tarricone. Simultaneously with the distribution, ATI transferred the
assets of the HQ Terminal division and all of the outstanding capital stock of
Rockland to HQ Propane in partial satisfaction of ATI's indebtedness to HQ
Propane of $4,200,000 previously incurred by ATI in order to provide certain
capital improvements and additional working capital. The appraised fair market
value of the assets transferred by ATI to HQ Propane was $2,200,000. However,
the transaction was recorded at ATI's book value.
ATI's indebtedness to the Company is evidenced by a 6% Promissory Note,
dated August 31, 1993, with accrued interest and principal due on August 31,
1998 (the "ATI Note"), the balance of which aggregated $3,263,563 on August 31,
1997 (see immediately succeeding paragraph). On February 28, 1995 and July 31,
1995, ATI granted/transferred 8 station leaseholds and 1 fee property having an
appraised fair market value of $5,760,000 and 2 station leaseholds and 2 twenty
year station leasehold extensions for $985,000 respectively as partial
satisfaction of the ATI Note. The fee property was granted/transferred to the
Company subject to two mortgages payable in the amounts of $140,999 and
$496,177. A former director of one of the entities holding a mortgage, Don
Guarnieri, was formerly a director of the Company. On November 30, 1995 and
March 22, 1996, ATI granted/transferred 2 station leaseholds having an appraised
fair market value of $1,365,000 in partial satisfaction of the ATI Note. On
November 29, 1996 and February 28, 1997, ATI granted/transferred 4 additional
station leaseholds having an appraised fair market value of $690,000 in partial
satisfaction of the ATI Note.
See "Risk Factors--ATI Bankruptcy."
On June 10, 1997, ATI filed a voluntary petition for reorganization
pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI has continued in
possession of its property and in the management of its affairs as a
debtor-in-possession under the applicable provisions of the Code. In connection
with the bankruptcy proceeding, the Company has asserted (and ATI has
acknowledged) pre-petition claims arising under the note receivable from ATI in
the amount of $3,263,563 and pre-petition liens on certain leasehold interests.
The proceeding is before the United States Bankruptcy Court, Southern District
of New York, and is referenced as "A. TARRICONE, INC., 97B21488." It is
difficult to determine at this time the likelihood of recovery by the Company of
such indebtedness. The Company has determined that its asserted pre-petition
liens may not have been properly "perfected," in which case the Company would be
deemed an unsecured creditor (rather than a secured creditor) in the proceeding.
The Company intends to pursue all appropriate avenues (if any) to protect its
interests in this regard. However, there can be no assurance that the
indebtedness and the liens asserted by the Company in this proceeding will be
recognized or given full effect, that the same will not be challenged, modified
or reduced, or that all or any portion of such indebtedness will be repaid to
the Company. In any event, management has reservied the entire amount of the
note receivable due from ATI at June 10, 1997 i.e., $3,263,563, as a bad debt
expense. If it were ultimately determined by the court that the Company's status
in the proceeding is that of an unsecured creditor, the Company's legal basis
for recovery would be materially, adversely affected. Additionally, all
executory contracts between ATI and the Company are susceptible to rejection, at
the election of ATI, under the applicable provisions of the Code. Furthermore,
any transfers from ATI to the Company on account of antecedent debt (of ATI to
the Company) during the one-year period prior to the date of filing of ATI's
voluntary petition may be subject to avoidance under the applicable provisions
of the Code. The occurrence of any such circumstances may have a material
adverse effect on the Company.
In December 1992, HQ Propane entered into a management agreement with ATI
pursuant to which ATI furnishes clerical, administrative, accounting, payroll
and insurance services to HQ Propane. ATI receives a fee of $30,000 per month
for its services. The management agreement expires on August 31, 1998. Further,
HQ Propane entered into agreements with ATI under which it leased 21 of the
service stations comprising its HQ Gasoline Division from ATI until August 31,
1998 and paid rent for the service stations in the approximate amount of $54,000
per month. Additionally, until March 5, 1996, the Company was paying to ATI a
license fee of $.01 per gallon of gasoline and diesel fuel sold for the rights
to use the "ATI" trademark (see the immediately succeeding paragraph). The
Company currently leases 9 service stations from ATI at a reduced rent payment
in the approximate amount of $19,000 per month.
On March 5, 1996, the Company issued warrants to purchase 297,125 shares
of the Company's Common Stock to ATI in exchange for the Company's exclusive
right to use the "ATI" trademark. The exercise price of the warrants is equal to
the lessor of $2.60 per share or a 40% discount from the average closing bid
price. The average closing bid price is calculated based on the average of the
closing bid prices of the Company's Common Stock as reported by the NASDAQ
SmallCap stock market for the five trading days immediately preceding the date
of the exercise of the warrant. The warrants provide that 59,425 were
immediately vested on March 5, 1996, an additional 59,425 vested on March 5,
1997, and the balance become vested in three equal annual installments. The
market price at issuance was $4.30 per share. In consideration of the issuance
of such warrants, the Company is no longer required to pay the license fee of
$.01 per gallon for gasoline station sales.
HQ Propane cannot operate its principal terminal facility until such time
as the pending applications for a terminal operator's license and diesel license
from the State of New York have been approved. See "Description of
Business--Certain Licenses Relating to the Company's Business." Accordingly, ATI
has continued to operate the terminal facility on behalf of HQ Propane. Upon the
issuance of such licenses, HQ Propane will assume operations of its facilities
directly. ATI also supplies the Company's operating divisions with fuel oil and
diesel fuel, and previously supplied the Company with gasoline, at ATI's cost
plus one quarter of one cent ($.0025) per gallon purchased, which aggregated
$51,112 during the fiscal year ended August 31, 1994; $42,494 during the fiscal
year ended August 31, 1995; $38,671 during the fiscal year ended August 31,
1996; and $22,500 during the fiscal year ended August 31, 1997.
The Company has outstanding certain promissory notes in the aggregate
principal amount of $321,426 issued in connection with a private placement of
165,000 shares of Common Stock of the Company ("Bridge Notes"). Interest on the
Bridge Notes is payable quarterly at a rate of 8% per annum, and payment of
principal thereof was tied to the exercise of the Company's 1,600,000 Class A
and 1,600,000 Class B Redeemable Warrants (the "Warrants") which were issued,
and subsequently redeemed, by the Company. In light of the Company's redemption
of its outstanding Warrants, it is unclear when its obligation to make principal
payments on the outstanding Bridge Notes will come due. However, the Company
acknowledges an obligation to make principal payments on the Bridge Notes and
continues to maintain such obligation on its balance sheet. Don Guarnieri, a
former Director of the Company, purchased one unit in connection with such
private placement, which unit was comprised of a $25,000 promissory note from
the Company and 8,250 shares of the Company's Common Stock.
Claire, Anthony and Joseph Tarricone are also parties to a Buy/Sell
Agreement pursuant to which, upon the death or disability of any of them, the
non-deceased or non-disabled stockholders are required to purchase the shares of
the Company owned by the deceased or disabled stockholder for a price equal to
the fair market value of such shares. Each of the Tarricones holds a $3,000,000
insurance policy on the life of the others to partially fund the buyout of the
shares upon death. In addition, the Tarricones have $1,000,000 of disability
buyout insurance which will fund the buyout of such shares in the event of
permanent disability. In the event that the proceeds of such insurance policies
are insufficient to pay the full price for such shares, the balance of the
purchase price for the shares will be paid over a ten year period.
On August 30, 1996, Claire Tarricone loaned to the Company $80,000, with
interest at 8% per annum, payable on demand.
See "Executive Compensation--Employment Contracts, Termination of
Employment and Change in Control Arrangements" for a description of the
Employment Agreements between the Company and Claire E. Tarricone, Anthony J.
Tarricone and Joseph A. Tarricone.
See "Executive Compensation--Indemnification of Directors and Officers"
for a description of indemnification agreements between the Company and each of
its executive officers.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Principal Stockholders
The following table sets forth information regarding ownership of the
Company's voting securities as of October 5, 1997 by (a) each person known by
the Company to beneficially own more than five percent (5%) of any class of the
Company's voting securities, (b) each director and executive officer of the
Company and (c) all directors and officers of the Company as a group. Except as
otherwise indicated, the named person has sole voting and investment power with
respect to such person's shares.
Name and Address Title Of Class No. of Percentage of General
of Beneficial Shares Class Owned Voting
Owner Owned (1) Power(2)
Claire E. Common Stock 1,162,184(3) 24.39%(3) 23.56%(3)
Tarricone
33 Hubbells Drive
Mt. Kisco, NY
10549
Anthony J. Common Stock 1,162,183(4) 24.91%(4) 24.05%(4)
Tarricone
33 Hubbells Drive
Mt. Kisco, NY
10549
Joseph A. Common Stock 1,142,183(5) 24.59%(5) 23.73%(5)
Tarricone
33 Hubbells Drive
Mt. Kisco, NY
10549
Alan Cianflone Series A 84,010 50.0% 1.95%
42 Virginia Lane Cumulative
Thornwood, NY Convertible
10594 Redeemable
Preferred Stock
Jack Troccoli Series A 84,010 50.0% 1.95%
40 Reservoir Court Cumulative
Carmel, NY 10512 Convertible
Redeemable
Preferred Stock
Infinity Series B 560,126(6) 100.0% 41.91%(6)
Investors, Ltd. Cumulative
27 Wellington Road Convertible
Cork, Ireland Redeemable
Preferred Stock
Elizabeth R. Common Stock 2,535,488 37.38%(7) 36.86%(7)
Mandel
885 Arapahoe
Avenue
Boulder, CO 80302
Boulder Financial Common Stock 315,000 6.94%(8) 6.69%(8)
Group
885 Arapahoe Ave.
Boulder, CO 80302
Laurence Hughes Common Stock 420,000 9.45%(9) 9.10%(9)
49 Mountain Road
Pleasantville, NY
10570
Edwin Goldwasser Common Stock - 0 - (8) (8)
7616 Mansfield
Hollow Drive
Delray Beach, FL
33446
All Executive 3,248,850 60.11% 58.30%
Officers and
Directors as a
group (4 persons)
- - ---------------------
(1)Based upon 4,226,091 shares of Common Stock outstanding as of October 5,
1997.
(2)Based on 4,226,091 common and 168,020 Series A Cumulative Convertible
Redeemable Preferred Shares outstanding as of September 30, 1997. Each of the
168,020 shares of Series A Cumulative Convertible Redeemable Preferred Stock
is entitled to vote, together with the holders of the Company's Common Stock,
based upon the number of shares of Common Stock into which such shares are
convertible.
(3)Includes 420,000 shares of Common Stock that may be purchased pursuant to
presently exercisable stock options and 118,850 shares of Common Stock that
may be purchased by ATI pursuant to certain warrants held by ATI and as to
which Ms. Tarricone has an indirect beneficial interest through her ownership
of one third of ATI. Ms. Tarricone disclaims beneficial ownership as to
two-thirds of such 118,850 shares, which disclaimed amount correlates to the
aggregate ownership percentage in ATI held by Anthony J.
Tarricone and Joseph A. Tarricone.
(4)Includes 320,000 shares of Common Stock that may be purchased pursuant to
presently exercisable stock options and 118,850 shares of Common Stock that
may be purchased by ATI pursuant to certain warrants held by ATI and as to
which Mr. Tarricone has an indirect beneficial interest through his ownership
of one third of ATI. Mr. Tarricone disclaims beneficial ownership as to
two-thirds of such 118,850 shares, which disclaimed amount correlates to the
aggregate ownership percentage in ATI held by Claire E.
Tarricone and Joseph A. Tarricone.
(5)Includes 320,000 shares of Common Stock that may be purchased pursuant to
presently exercisable stock options and 118,850 shares of Common Stock that
may be purchased by ATI pursuant to certain warrants held by ATI and as to
which Mr. Tarricone has an indirect beneficial interest through his ownership
of one third of ATI. Mr. Tarricone disclaims beneficial ownership as to
two-thirds of such 118,850 shares, which disclaimed amount correlates to the
aggregate ownership percentage in ATI held by Anthony J.
Tarricone and Claire E. Tarricone.
(6)The Series B Cumulative Convertible Redeemable Preferred Stock is convertible
into 2,170,488 shares of Common Stock. Infinity has the right under the
Restructuring Agreement to acquire an additional 1,000,000 options from the
Tarricones if certain conditions regarding the timing of this offering are
not met.
(7)Includes (i) option to purchase all of the Shares from Infinity exercisable
within 60 days, (ii) warrants to purchase 315,000 shares of Common Stock held
by Boulder Financial Group of which Ms. Mandel is an officer, director and
stockholder.
(8) Consists of warrants to purchase 315,000 shares of Common Stock.
(9)Includes 220,000 shares of Common Stock that may be purchased pursuant to
presently exercisable stock options.
(10) Less than one percent.
---------------------
As of January 1, 1997, 1,069,945 shares of Common Stock (approximately
27.6% of the outstanding Common Stock) were owned of record by Cede & Co., a
nominee of the Depository Trust Company. The Company has been advised by each of
the firms which Cede & Co. indicates own more than 5% of the Common Stock that,
except as set forth above, as of the most recent practical date it did not hold
more than 5% of the Company's outstanding voting securities for any single
person or, to its knowledge, any group.
SELLING STOCKHOLDERS
Infinity Investors Ltd. ("Infinity") will have acquired the shares of
Common Stock offered by this prospectus in connection with the conversion of the
Series B Preferred Stock. As of October 5, 1997, Infinity owned 560,126 shares
of Series B Preferred Stock and did not own any shares of Common Stock.
The maximum aggregate number of shares of Common Stock into which the
Series B Preferred Stock issued to Infinity is convertible and which Infinity
may offer and sell pursuant to this prospectus is 2,170,488 Shares, based on a
conversion price of $2.00 per share. In accordance with Rule 416 under the
Securities Act, this registration statement also covers such indeterminate
number of additional shares of common Stock as may become issuable upon the
conversion of the Series B Preferred Stock to prevent dilution resulting from
stock splits, stock dividends or similar transactions or by reason of changes in
the conversion price as aforesaid. Because Infinity may sell all or a portion of
the common Stock at any time and from time to time after the date hereof, no
estimate can be made of the number of shares of Common Stock that Infinity may
retain upon completion of the offering. The number of Shares that may actually
be sold by Infinity will be determined by it, and may depend upon a number of
factors, including, among other things, the market price of the Common Stock.
The Shares are subject to an Option Agreement dated September 24, 1997
between Infinity and Elizabeth R. Mandel. See "Description of
Business--Recent Developments." Accordingly, all or a substantial portion of
the Shares may be transferred to Ms. Mandel. In addition, Infinity may have
otherwise sold, transferred or disposed of all or a portion of its Shares
since the date on which it provided the information regarding its ownership
of the Shares in transactions exempt from the registration requirements of
the Securities Act. Additional information concerning selling stockholders
may be set forth from time to time in prospectus supplements to this
Prospectus. See "Plan of Distribution."
The Company has agreed to file the Registration Statement to which this
Prospectus forms a part for the purpose of registering the potential resale of
the Shares and to maintain the effectiveness of such Registration Statement
until the Shares are sold and all steps have been taken to remove any legends or
restrictions on transfer thereon or until the Shares have otherwise are
available for resale pursuant to Rule 144(k) promulgated under the Securities
Act, in each case, as contemplated by a certain Restructuring Agreement dated
September 24, 1997 by and among the Company, Infinity Investors Limited, Claire
E. Tarricone, Anthony J. Tarricone and Joseph A. Tarricone (the "Restructuring
Agreement). In addition, the Company and Infinity agreed to indemnify each other
and certain affiliated parties from and against any losses or claims arising out
of, among other things, (1) any alleged untrue statement of a material fact or
(2) any material omission contained or referred to in the Registration
Statement. 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 has been informed
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. All of the registration and filing fees, printing
expenses, blue sky fees, if any, fees and disbursements of counsel for the
Company, and certain fees and disbursements of one counsel for Infinity will be
paid by the Company; provided, however, that fees and disbursements of experts
and counsel retained by Infinity and any underwriting discounts and selling
commissions will be borne by Infinity.
Except as specifically set forth herein, Infinity does not have, and
within the past three years has not had, any position, office or other material
relationship with the Company or any of its predecessors or affiliates.
DESCRIPTION OF SECURITIES
General
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, par value $.001 per share ("Common Stock"), and 5,000,000
shares of Preferred Stock, par value $.01 per share ("Preferred Stock"). As of
October 10, 1997, 4,226,091 shares of Common Stock and 728,146 shares of
Preferred Stock were outstanding, of which 168,020 shares are designated as
Series A Preferred Stock and 560,126 are designated Series B Preferred Stock.
Common Stock
Holders of Common Stock are entitled to one vote per share on each matter
submitted to the stockholders. Holders of Common Stock do not have cumulative
voting rights, which means that the holders of a majority of the Company's
Common Stock and voting Preferred Stock are able to elect all of the Company's
directors. Holders of Common Stock share equally in dividends and distributions
that may be declared by the Company's Board of Directors out of funds legally
available for that purpose after dividends and distributions have been paid in
full to the holders of any series of Preferred Stock that the Company's Board of
Directors has determined shall have a preference in the payment of dividends and
distributions. Upon liquidation or dissolution of the Company, holders of Common
Stock will share equally in the assets of the Company remaining after the
payment of the Company's debts and liabilities and of the liquidation preference
of, and accrued dividends on, any series of Preferred Stock. The Common Stock is
not convertible or redeemable and holders of Common Stock do not have
subscription rights or preemptive rights. The shares of Common Stock currently
outstanding are, and the shares to be sold in connection with this offering will
be, duly authorized, validly issued, fully paid and non-assessable.
Preferred Stock
The Company is authorized to issue up to 5,000,000 shares of Preferred
Stock in one or more series. The Company's Board of Directors is authorized to
designate one or more series of Preferred Stock and to determine the number of
shares, price, preferences, rights and limitations of each series of Preferred
Stock, without any action by the Company's stockholders. The issuance of
Preferred Stock or the issuance of rights to acquire Preferred Stock, may have
the effect of delaying or preventing a change in control of the Company or an
unsolicited takeover bid.
The board of directors has designated and issued Series A Preferred
Stock and Series B Preferred Stock. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The Series A Preferred Stock, at par value $0.001 per share, bears a
cumulative cash dividend rate of $0.45 per annum, payable quarterly, commencing
June 8, 1995, when, as and if declared by the board of directors of the Company.
The Series A Preferred Stock becomes convertible after June 8, 1998 into shares
of Common Stock at a conversion rate of one share of Common Stock for each share
of Preferred Stock, subject to adjustment in certain events. The Series A
Preferred Stock is redeemable at the option of the Company, in whole or in part,
at any time at a redemption price of $6.00 per share, plus accrued and unpaid
dividends. Holders of Series A Preferred Stock may request to have their shares
redeemed by the Company at $6.00 per share at any time commencing on June 8,
2000 and ending June 7, 2004. The Company is not required to redeem from any
holder during any twelve (12) month period a number of shares of Series A
Preferred Stock greater than twenty percent (20%) of the shares of Series A
Preferred Stock then held by the applicable holder, nor is the Company required
to redeem shares of Series A Preferred Stock from any holder more than once
during any twelve (12) month period. Each share of Series A Preferred Stock
entitles its holder to a number of votes equal to the number of shares of Common
Stock (including fractional shares) that such share would be converted into, if
it were so converted, as of the close of business on the day immediately prior
to the date of such vote, and with respect to such votes, a holder of shares of
Series A Preferred Stock has full voting rights and powers equal to the voting
rights and powers of a holder of shares of Common Stock, is entitled to a notice
of any stockholders' meeting in accordance with the By-laws of the Company, and
is entitled to vote with holders of Common Stock together as a single class.
The Series B Preferred Stock, as amended, has a par value of $0.001 per
share and bears a cumulative cash dividend at a rate of 12% per annum on a
stated value of $7.75 per share, payable quarterly after payment of dividends on
the Series A Preferred Stock, when, as and if declared by the board of directors
of the Company. The Series B Preferred Stock is convertible into Common Stock
based on the stated value plus accrued and unpaid dividends at a conversion
price of $2.00 per share of Common Stock, subject to adjustment in certain
events. The Preferred Stock is redeemable at the option of the Company, in whole
or in part, at any time at a redemption price equal to 129% of the stated value
per share, plus accrued and unpaid dividends, subject to adjustment. Except as
required by applicable law, shares of Series B Preferred Stock do not entitle
the holder to any voting rights, but such holder is entitled to notice of any
stockholder meetings in accordance with the by-laws of the Company.
Warrants and Options
As of October 10, 1997, the Company has agreed to issue warrants and
options to purchase up to an aggregate of 2,152,125 shares of Common Stock, of
which warrants and options to purchase an aggregate of 1,973,850 shares of
Common Stock have been issued.
The following table sets forth the outstanding options and warrants of the
Company as of October 10, 1997:
Amount Term Issue Date Exercise Price ($)
297,125 5 yrs. 03/05/96 60% of market
10,000 5 yrs. 11/04/96 .3125
15,000 5 yrs. 11/05/96 1.000
1,200,000 5 yrs. 11/14/96 .3125
225,000 5 yrs. 01/10/97 .3125
90,000 5 yrs. 02/18/97 .3125
315,000 5 yrs. 02/27/97 .4100
209,000 5 yrs. 08/12/97 .6300
All of the foregoing warrants and options have been issued pursuant to
agreements that contain anti-dilutive provisions providing for adjustment of the
exercise price and the number and type of securities issuable upon exercise of
the warrants or options should any one or more of certain specified events
occur.
Anti-Takeover Provisions
The Company's by-laws provide that directors may not be removed without
cause, which limits the ability of stockholders to effect a change in control of
the Company.
Sections 78.378 through 78.3793 of the Nevada General Corporation Law may
affect attempts to acquire control of the Company. In general under those
sections, an entity that acquires "control shares" of an "issuing corporation"
may vote the control shares only if approved by the holders of a majority of the
voting power of the issuing corporation, excluding (i) the acquirer of the
control shares, (ii) officers of the issuing corporation and (iii) those
directors of the issuing corporation who are also employees of the issuing
corporation. An issuing corporation is a corporation that is organized in
Nevada, does business in Nevada, directly or through a subsidiary, and has at
least 200 stockholders, at least 100 of whom are Nevada residents. Control
shares are shares that when added to shares already owned by an entity, would
give that entity voting power in the election of directors of any of three
thresholds: one-fifth, one-third and a majority. The effect of these sections is
to condition the acquisition of voting control of a corporation on the approval
of a majority of the pre-existing disinterested stockholders. An issuing
corporation may exclude itself from the coverage of these sections by inserting
a provision to that effect in its articles of incorporation or by-laws on or
before the tenth day after the relevant acquisition is made.
Sections 78.411 through 78.444 of the Nevada General Corporation Law may
also affect attempts to acquire control of the Company. In general those
sections restrict "business combinations" (defined to include, among other
transactions, mergers, disposition of assets or shares and recapitalizations)
between a Nevada corporation having at least 200 stockholders and an "interested
stockholder" (defined as a stockholder who is the beneficial owner of 10% or
more of the voting power of the covered corporation's outstanding securities).
If occurring within three years from when a stockholder becomes an interested
stockholder, a business combination between that corporation and that interested
stockholder may be consummated only if either the business combination or the
purchase of shares that caused that stockholder to become an interested
stockholder has been approved by the board of directors of that corporation
prior to the date of such purchase. If occurring after three years from when
that stockholder becomes an interested stockholder, a business combination
between that corporation and that interested stockholder may be consummated only
if certain statutory requirements concerning the compensation to be received by
that corporation's stockholders are satisfied or if the business combination is
made in accordance with that corporation's articles of incorporation and either
(i) the business combination or the purchase of shares that caused that
stockholder to become an interested stockholder has been approved by that
corporation's board of directors prior to the date of such purchase or (ii) the
business combination has been approved by the vote of holders of stock
representing a majority of the voting power not beneficially owned by the
interested stockholder at a meeting called for that purpose not earlier than
three years after the date of the purchase of shares that caused that
stockholder to become an interested stockholder. A corporation may elect in its
original articles of incorporation not to be subject to these sections or the
stockholders representing a majority of the voting power not beneficially owned
by the interested stockholder may adopt an amendment to the corporation's
articles of incorporation to make that election, but the amendment will take
effect 18 months after the stockholder vote and will not apply to any
combination with an interested stockholder who was such on the effective date of
the amendment. The Company has not made such an election.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Interwest
Transfer Company whose address is P.O. Box 17136, Salt Lake City, Utah
84117.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock became listed on the NASDAQ SmallCap Stock
Market under the symbol "HSNR". The following table sets forth the range of high
and low bid prices for the Company's Common Stock from September 1, 1995 through
August 31, 1997, as reported by NASDAQ, which bid prices reflect inter-dealer
prices, without retail mark-ups, mark-downs or commissions and may not represent
actual transactions.
Bid
Prices
High Low
Fiscal 1996
First Quarter 6 19/32 5
Second Quarter 6 31/64 4 5/16
Third Quarter 7 4 5/16
Fourth Quarter 6 13/32 1 5/32
Fiscal 1997
First Quarter 1 5/16 3/64
Second Quarter 9/16 5/64
Third Quarter 1 5/64 9/32
Fourth Quarter 1 5/16
As of October 9, 1997, there were 168 holders of record of the Company's
Common Stock. However, those shares being held at various clearing houses,
including the Depository Trust Company and Cede & Company, have not been broken
down. Accordingly, the Company believes there are numerous beneficial owners of
the Company's Common Stock whose shares are held in "street name", including the
Depository Trust Company and Cede & Company.
The Company does not currently pay dividends on its Common Stock. It is
management's intention not to declare or pay dividends on the Company's Common
Stock, but to retain earnings, if any, for the operation and expansion of the
Company's business. In any event, until such time as all accrued dividends on
the Company's Series A Preferred Stock and Series B Preferred Stock have been
paid, the Company is restricted, pursuant to the instruments/documents
authorizing the issuance of such preferred stock, from paying any dividends on
its Common Stock. Any dividends that may be declared in the future will be
determined by the Board of Directors based on the Company's financial condition,
results of operations, market conditions and other factors that the Board deems
relevant.
PLAN OF DISTRIBUTION
Sales of the Shares may be made from time to time by Infinity, or, subject
to applicable law, by pledgees, donees, distributees, transferees or other
successors in interest. Such sales may be made on the NASDAQ SmallCap Stock
Market, in another over-the-counter market, on a national securities exchange
(any of which may involve crosses and block transactions), in privately
negotiated transactions or otherwise or in a combination of such transactions at
prices and at terms then prevailing or at prices related to the then current
market price, or at privately negotiated prices. In addition, any Shares covered
by this Prospectus which qualify for sale pursuant to Section 4(1) of the
Securities Act or Rule 144 promulgated thereunder may be sold under such
provisions rather than pursuant to this Prospectus. Without limiting the
generality of the foregoing, the Shares may be sold in one or more of the
following types of transactions: (a) a block trade in which the broker-dealer so
engaged will attempt to sell the Shares as agent but may position and resell a
portion of the block as principal to facilitate the transaction; (b) purchases
by a broker or dealer as principal and resale by such broker or dealer for its
account pursuant to this Prospectus; (c) an exchange distribution in accordance
with the rules of such exchange; (d) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (e) face-to-face
transactions between sellers and purchasers without a broker-dealer. In
effecting sales, brokers or dealers engaged by Infinity may arrange for other
brokers or dealers to participate in the resales.
In connection with the execution and delivery of the Restructuring
Agreement, Infinity granted to Elizabeth Mandel ("Mandel") an option to purchase
all of the Shares. Under the terms of the option, Mandel has the option to
acquire all of the Shares for a price of $2.00 per share until the 18-month
anniversary of the effective date of the registration statement of which this
prospectus forms a part (the "Effective Date"), subject to earlier termination
in the event that Mandel fails to purchase at least an aggregate of 250,000
Shares on or prior to the 90th day following the Effective Date and an aggregate
of 400,000 Shares on or prior to the last day of each succeeding 90-day period
commencing 90 days after the Effective Date.
In connection with distributions of the Shares or otherwise, Infinity may
enter into hedging transactions with broker-dealers. In connection with such
transactions, broker-dealers may engage in short sales of the Shares registered
hereunder in the course of hedging the positions they assume with Selling
Stockholders. Infinity may also sell Shares short and deliver the Shares to
close out such short positions. Infinity may also enter into option or other
transactions with broker-dealers which require the delivery to the broker-dealer
of the Shares registered hereunder, which the broker-dealer may resell pursuant
to this Prospectus.
Infinity may also pledge the Shares registered hereunder to a broker or
dealer and upon a default, the broker or dealer may effect sales of the pledged
Shares pursuant to this Prospectus.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from Selling Stockholders in amounts to be
negotiated in connection with the sale. Such brokers or dealers and any other
participating brokers or dealers may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales and any such
commission, discount or concession may be deemed to be underwriting discounts or
commissions under the Securities Act.
Information as to whether underwriters who may be selected by Infinity, or
any other broker-dealers, is acting as principal or agent for Infinity, the
compensation to be received by underwriters who may be selected by Infinity, or
any broker-dealer, acting as principal or agent for Infinity and the
compensation to be received by other broker-dealers, in the event the
compensation of such other broker-dealers is in excess of usual and customary
commissions, will, to the extent required, be set forth in a supplement to this
Prospectus (the "Prospectus Supplement"). Any dealer or broker participating in
any distribution of the Shares may be required to deliver a copy of this
Prospectus, including the Prospectus Supplement, if any, to any person who
purchases any of the Shares from or through such dealer or broker.
The Company has advised Infinity that during such time as they may be
engaged in a distribution of the Shares included herein they are required to
comply with Regulation M promulgated under the Exchange Act. With certain
exceptions, Regulation M precludes any selling shareholder, any affiliated
purchasers and any broker-dealer or other person who participates in such
distribution from bidding for or purchasing, or attempting to induce any person
to bid for or purchase any security which is the subject of the distribution
until the entire distribution is complete. Regulation M also prohibits any bids
or purchases made in order to stabilize the price of a security in connection
with the distribution of that security. All of the foregoing may affect the
marketability of the Common Stock.
It is anticipated that Infinity will offer all of the Shares for sale.
Further, because it is possible that a significant number of Shares could be
sold at the same time hereunder, such sales, or the possibility thereof, may
have a depressive effect on the market price of the Company's Common Stock.
LEGAL MATTERS
Certain legal matters with respect to the Common Stock offered hereby will
be passed upon for the company and Infinity by Piper & Marbury L.L.P., New York,
New York.
EXPERTS
The audited financial statements of the Company at August 31, 1996 and
1995, and for each of the two years in the period ended August 31, 1996,
incorporated in this prospectus and registration statement, to the extent and
for the periods indicated in its report, have been audited by Goldman & Murphy,
LLP, independent public accountants, and are incorporated herein in reliance
upon the authority of said firm as experts in accounting and auditing in giving
said report.
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained in, or incorporated by
reference in, this prospectus, in connection with the offering covered by this
prospectus. If given or made, such information or representations must not be
relied upon as having been authorized by the Company, Infinity, or any selling
agent. This prospectus does not constitute an offer to sell, or a solicitation
of an offer to buy, the Common Stock in any jurisdiction where, or to any person
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 an implication that there has not been any change in the facts set forth
in this prospectus or incorporated by reference herein or in the affairs of the
Company since the date hereof.
Page
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE(S)
Consolidated Financial Statements for the Twelve-Months Ended August 31, 1997
(Unaudited) and August 31, 1996 (Audited):
Consolidated Balance Sheets as of August 31, 1997
and August 31, 1996............................... F-2 to F-3
Consolidated Statements of Operations for the three months
and the years ended August 31, 1997 and August 31, 1996... F-4
Consolidated Statements of Stockholders' Equity for the
year ended August 31, 1997................................ F-5
Consolidated Statements of Cash Flows for the years ended
August 31, 1997 and 1996................................... F-6 to F-7
Selected Notes to the Consolidated Financial Statements.... F-8 to F-10
Consolidated Financial Statements for the Fiscal Years Ended August 31, 1996 and
1995 (Audited):
Independent Auditors' Report............................... F-11
Consolidated Balance Sheets as of August 31, 1996 and 1995 F-12 to F-13
Consolidated Statements of Operations for
the years ended August 31, 1996 and 1995................... F-14
Consolidated Statements of Stockholders'
Equity for the years ended August 31, 1996 and 1995........ F-15
Consolidated Statements of Cash Flows for
the years ended August 31, 1996 and 1995................... F-16
Notes to the Consolidated Financial Statements............. F-17 to F-33
Page
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31, August 31,
1997 1996
(Unaudited) (Audited)
A S S E T S
CURRENT ASSETS
Cash and Cash Equivalents.............. $ 0 $ 2,061,474
Accounts Receivable - Trade, Net of
Allowances for $1,574,028 1,628,070
Uncollectible Receivables of $610,751..
Rent Receivable........................ 0 122,497
Other Receivable....................... 64,447 4,798
Inventory.............................. 168,930 251,450
Prepaid Expenses....................... 437,703 195,361
Prepaid Income Taxes................... 6,558 6,558
TOTAL CURRENT ASSETS.................. 2,251,666 4,270,208
NET DEFERRED TAX ASSET................ 698,661 612,406
PROPERTY, PLANT AND EQUIPMENT - NET
Land .................................. 894,000 894,000
Property, Plant and Equipment ......... 11,504,921 10,952,437
TOTAL PROPERTY, PLANT AND EQUIPMENT -
NET................................... 12,398,921 11,846,437
OTHER ASSETS
Notes Receivable....................... 686,854 80,000
Note Receivable - Related Party........ 578,848 1,355,516
Intangible Assets - Net................ 1,524,446 1,098,629
Deposits............................... 2,045 2,045
TOTAL OTHER ASSETS.................... 2,792,193 2,536,250
TOTAL ASSETS.......................... $ 18,141,441 $ 19,265,301
See Selected Notes to Consolidated Financial Statements
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Year Ended Year Ended
August 31, August 31,
1997 1996
(Unaudited) (Audited)
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts Payable - Trade...................... $1,329,351 $ 545,595
Current Portion of Long-Term Debt............. 1,623,549 284,802
Customer Credit Balances Payable.............. 51,899 105,791
Accrued Expenses.............................. 170,224 171,740
Sales Tax Payable............................. 19,010 17,371
Deferred Revenue - Service Contracts.......... 599,029 13,760
Security Deposits Payable..................... 253,996 259,558
Income Taxes Payable.......................... 90,163 10,454
Note Payable - Officer........................ 93,204 80,000
Notes Payable................................. 360,968 0
Pension /Payroll Taxes Payable................ 20,186 5,097
TOTAL CURRENT LIABILITIES.................... 4,611,579 1,494,168
LONG-TERM LIABILITIES
Private Placement Notes....................... 317,000 321,426
Long-Term Debt................................ 1,930,480 2,348,565
TOTAL LONG-TERM LIABILITIES.................. 2,247,480 2,669,991
TOTAL LIABILITIES............................ 6,859,059 4,164,159
Preferred Stock, $.001 Par Value, 168,020
Shares Authorized-Series A 7.5% Cumulative
Convertible Redeemable, 168,020 Shares Issued
and Outstanding ($1,008,120 aggregate
liquidation preference)....................... 168 168
Paid In Capital: Preferred................... 1,064,001 1,064,001
............................................. 1,064,169 1,064,169
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 Par Value, 5,000,000 Shares Authorized
Preferred Stock, $.001 Par Value, 580,646 Shares Authorized-Series B
8.0% Cumulative Convertible 567,085 and 572,246 Shares Issued
and Outstanding as of August 31, 1997 and August 31, 1996, Respectively
($4,394,908 aggregate liquidation preference)
................................................... 567 572
Common Stock, $.001 Par Value, 50,000,000 Shares Authorized,
4,118,591 and 3,491,340 Shares Issued and Outstanding as of
August 31, 1997 and August 31, 1996, Respectively
................................................. 4,119 3,492
Paid in Capital: Preferred................... 3,770,183 3,815,328
Common ....................................... 5,552,076 4,896,947
Retained Earnings ............................ 891,268 5,320,634
TOTAL STOCKHOLDERS' EQUITY .................. 10,218,213 14,036,973
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY 18,141,441 $ 19,265,301
See Selected Notes to Consolidated Financial Statements
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
3 Mos.Ended 3 Mos.Ended Year Ended
8/31/97 8/31/96 8/31/97 8/31/96
(Unaudited) (Audited) (Unaudited) (Audited)
Sales........................$ 4,132,331 $ 3,279,892 $ 18,743,248 $15,312,260
Cost of Sales................. 3,386,441 2,238,886 14,702,109 10,734,200
GROSS PROFIT.................. 745,890 1,041,006 4,041,139 4,578,060
Selling, General & Adm. Exp... 1,287,882 1,219,122 3,933,938 3,278,966
Management Fee, Related Party. 90,000 90,000 360,000 360,000
Net Rental Expense (Income)... (140,716) (109,135) (502,517) (418,478)
Royalty Fee................... 23,461 31,578 102,211 96,102
Depreciation & Amortization... 201,230 217,850 776,662 679,842
Bad Debt Expense 3,639,433 39,869 3,639,433 39,869
INCOME/(LOSS)FROM OPERATIONS(4,355,400) (448,278) (4,268,588) 541,759
OTHER INCOME AND (EXPENSES)
Interest Income............ (56,773) 58,153 28,673 101,987
Interest Expense........... (129,638) (103,456) (402,378) (398,889)
Other Income............... 30,830 20,590 103,338 38,935
NET INC./(LOSS) BEFORE TAXES (4,510,981) (472,991) (4,538,955) 283,792
PROVISION FOR INCOME TAXES:
Current.................... 0 (243,147) 0 14,160
Deferred................... 0 81,552 0 88,538
NET INCOME(Loss) BEFORE EXTRAORDINARY
ITEM (4,510,981) (311,396) (4,538,955) 181,094
EXTRAORDINARY ITEM-Gain from the sale
of customer list less applicable
income taxes of -0-..... 0 0 186,672 0
NET INCOME(Loss)........... ($4,510,981) (311,396) ($4,352,283) 181,094
Net Income(Loss) Per Share
Primary EPS............... ($1.15) ($0.12) ($1.23) $0.00
Fully Diluted EPS......... ($1.15) ($0.12) ($1.23) $0.00
Weighted Average Number of Common
and Common Equivalent Shares
Outstanding:.....PEPS... 4,008,219 3,442,503 3,984,473 3,416,473
FDEPS............ 4,008,219 3,442,503 3,984,473 3,416,473
See Selected Notes to Consolidated Financial Statements
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK TOTAL
$.001 PAR VALUE $.001 PAR VALUEPAID IN RETAINED STOCKHOLDERS'
ISSUED AMOUNT ISSUED AMOUNT CAPITAL EARNINGS EQUITY
Net-Income 0 0 0 0 0 181,094 181,094
8/31/96
Balances at
8/31/96 572,246 $572 3,491,340 $3,492 $8,712,275 $5,320,634 $14,036,973
Private Placement
Cost 0 0 0 0 (5,153) 0 (5,153)
Cash Dividends
Declared:
Preferred,
Series A
$0.2250/sh. 0 0 0 0 0 (75,610) (75,610)
Cash Dividends
Declared:
Preferred,
Series B 0 0 0 0 0 (1,472) (1,472)
Employee Compensation January 1997,
$.50 per share 0 0 20,000 20 9,980 0 10,000
Common Shares issued
for acquisition on
Sept. 1, 1996 at
$1.9375 per share 0 0 200,000 200 387,300 0 387,500
Conversion of
Preferred Shares
to Common (5,161) (5) 162,261 162 1,316 0 1,473
Deferred Expense
Stock Warrants 0 0 0 0 102,211 O 102,211
Common Shares
issued to an employee
for future services 0 0 200,000 200 99,800 0 100,000
Conversion of Note
Pay.to Common Shs. 0 0 (5,010) (5) (1,420) 0 (1,425)
Common Shs. Issued
on Conversion of
Opts.at $.3200/sh. 0 0 50,000 50 15,950 0 16,000
Net (Loss)Income -
8/31/97 0 0 0 0 0 (4,352,284)(4,352,284)
Balances at
8/31/97 567,085 $567 4,118,591 $4,119 $9,322,260 $891,268 $10,218,213
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended
August 31, 1997 August 31,1996
Cash Flows from Operating Activities:
Net Income............................. ($4,352,283) $181,094
Adjustments to Reconcile Net Income to Net
Cash Used in Operating Activities Depreciation
and Amortization 776,662 667,479
Amortization of Deferred Expense - Trademark. 102,211 50,405
Bad Debts Provisions......................... 3,639,433 38,052
Deferred Income Tax Adjustment............... (86,256) 103,756
(Increase) Decrease in Accounts Receivable. (321,828) (316,771)
(Increase) Decrease in Rent Receivable....... 122,497 (36,954)
(Increase) Decrease in Other Receivable..... (59,649) 2,597
(Increase) Decrease In Inventory............. 82,520 (59,212)
(Increase) Decrease in Prepaid Expenses...... (242,342) (58,863)
(Increase) Decrease in Prepaid Income Taxes.. 0 (6,558)
(Increase) Decrease in Deposits.............. 0 0
Increase (Decrease) in Accounts Payable -
Trade & Accrued Expenses................... 782,239 (80,362)
Increase (Decrease) in Sales Taxes........... 1,639 10,555
Increase (Decrease) in Customer Credit
Balances Payable (53,892) (23,115)
Increase (Decrease) in Pension Plan Payable. 15,089 5,097
Increase (Decrease) in Deferred Revenues..... 585,269 (444)
Increase (Decrease) in Income Taxes Payable.. 79,709 (157,133)
Increase (Decrease) in Note Payable - Officer 13,204 80,000
(Increase) Decrease in Notes Payable 360,968 0
(Increase) Decrease in Discount on Notes Payable 12,363
Increase (Decrease) in Security Deposits Payable (5,562) 40,358
TOTAL ADJUSTMENTS............................ 5,791,912 271,250
Net Cash Provided (Used) By Operations....... 1,439,628 452,344
Cash Flows From Investing Activities:
Intangible Assets............................ (540,930) (84,235)
Acquisition of Property and Equipment........ (1,214,032) (1,922,013)
Acquisition of Land.......................... 0 0
Advances in Note Receivable.................. (606,854) (80,000)
Advances in Note Receivable - ATI............ (3,176,835) (1,888,190)
Repayment in Note Receivable - ATI........... 690,000 1,725,000
Net Cash Provided (Used) by Investing Activities (4,848,651) (2,249,438)
Cash Flows From Financing Activities:
Preferred Dividends.......................... (77,082) (76,366)
Increase(Decrease) in Long Term Debt......... 920,662 (296,590)
Proceeds From Capital Contribution........... 503,969 4,297,875
Increase(Decrease) in Cash Overdraft......... 0 (66,351)
Net Cash provided by Financing Activities....... 1,347,549 3,858,568
Net Increase (Decrease) in Cash................. (2,061,474) 2,061,474
Cash and Cash Equivalent at Beginning of
Period 2,061,474 0
Cash and Cash Equivalent at End of Period.... $0 $2,061,474
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Year for:
Interest Expense............................. $ 402,378 $ 361,931
Income Taxes................................. 0 162,631
Acquisition of Property & Equipment.......... 529,032 557,013
Acquisition of Land.......................... 0 0
Supplemental Schedule of Noncash Investing And Financing Activities: During
1997, the Company acquired three leaseholds from ATI valued at $690,000, as
partial payment on its note receivable. On September 1, 1996 the Company issued
common stock to acquire the customer list of Dino Oil, inc., valued at $387,500.
<PAGE>
Selected Notes to Consolidated Financial Statements
Year Ended August 31, 1997
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying condensed financial statements are not audited for the
interim period, but include all adjustments (consisting of only normal recurring
accruals) which management considers necessary for the fair presentation of
results at August 31, 1997.
Moreover, these financial statements do not purport to contain complete
disclosures in conformity with generally accepted accounting principles and
should be read in conjunction with the Company's audited financial statements
at, and for the fiscal year ended, August 31,1996 contained in the Company's
Annual Report on Form 10-KSB dated January 15, 1997.
The results reflected for the year ended August 31, 1997 are indicative of
the results for the fiscal year ending August 31, 1997.
Note 2 - OPTIONS AND WARRANTS
The following table sets forth the options and warrants of the Company as
of August 31, 1997:
Amount Term Issue Date Exercise Price ($)
297,125 5 yrs. 03/05/96 60% of market
10,000 5 yrs. 11/04/96 .3125
15,000 5 yrs. 11/05/96 1.000
1,200,000 5 yrs. 11/14/96 .3125
225,000 5 yrs. 01/10/97 .3125
90,000 5 yrs. 02/18/97 .3125
315,000 5 yrs. 02/27/97 .4100
209,000 5 yrs. 08/12/97 .6300
Note 3 - COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
The following table sets forth the computation of net income (loss) per
common share for Halstead Energy Corp. as contained in the consolidated
statement of operations for the year ended August 31, 1997:
Three Months Year Ended
Ended August 31 August 31,
1997 1996 1997 1996
Net Income (loss) applicable to
Common Stock (4,510,981) (311,396) (4,352,283) 181,094
Preferred Stock Dividends:
Declared (18,902) (18,902) (77,082) (76,366)
Undeclared (cumulative) (87,942) (87,942) (471,959) (87,942)
Net income (loss) applicable to
Common Stock (4,617,825) (418,240) (4,901,324) 16,786
Weighted average shares of Common
Stock outstanding 4,008,219 3,442,503 3,984,473 3,416,473
Weighted average shares of Common
Stock outstanding and Common Stock
equivalents 4,008,219 3,442,503 3,984,473 3,416,473
Earnings Per Share(1) ($1.15) ($0.12) ($1.23) $0.0
(1)Common Stock equivalents and other potentially dilutive securities are not
considered in the calculations of earnings per share because the effect on
earnings per share would be antidilutive.
Note 4 - NOTE RECEIVABLE - RELATED PARTY
On June 10, 1997, A. Tarricone, Inc. (ATI) filed a voluntary petition for
reorganization pursuant to Chapter 11 of the Bankruptcy Code (the "Code"). ATI
has continued in possession of its property and in the management of its affairs
as a debtor-in-possession under the applicable provisions of the Code. In
connection with the bankruptcy proceeding, the Company has asserted (and ATI has
acknowledged) pre-petition claims arising under the note receivable from ATI in
the amount of $3,263,563 and pre-petition liens on certain leasehold interests.
The proceeding is before the United States Bankruptcy Court, Southern District
of New York, and is referenced as "A. TARRICONE, INC., 97B21488." It is
difficult to determine at this time the likelihood of recovery by the Company of
such indebtedness. The Company has determined that its asserted pre- petition
liens may not have been properly "perfected," in which case the Company would be
deemed an unsecured creditor (rather than a secured creditor) in the proceeding.
The Company intends to pursue all appropriate avenues (if any) to protect its
interests in this regard. However, there can be no assurance that the
indebtedness and the liens asserted by the Company in this proceeding will be
recognized or given full effect, that the same will not be challenged, modified
or reduced, or that all or any portion of such indebtedness will be repaid to
the Company. In any event, management has reserved the entire amount of the note
receivable due from ATI at June 10, 1997, i.e., $3,263,563, as a bad debt
expense. If it were ultimately determined by the court that the Company's status
in the proceeding is that of an unsecured creditor, the Company's legal basis
for recovery would be materially, adversely affected. Additionally, all
executory contracts between ATI and the Company are susceptible to rejection, at
the election of ATI, under the applicable provisions of the Code. Furthermore,
any transfers from ATI to the Company on account of antecedent debt (of ATI to
the Company)during the one-year period prior to the date of filing of ATI's
voluntary petition may be subject to avoidance under the applicable provisions
of the Code. The occurrence of any such circumstances may have a material
adverse effect on the Company.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Halstead Energy Corp.
Mount Kisco, New York
We have audited the accompanying consolidated balance sheets of Halstead
Energy Corp. and subsidiaries as of August 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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.
The August 31, 1996 and 1995 financial statements have been restated for
errors detected to August 31, 1995 and prior reports during the course of this
audit (see Note 17).
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Halstead
Energy Corp. and Subsidiaries as of August 31, 1996 and 1995, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
GOLDMAN & MURPHY, LLP
Valley Stream, New York
January 16, 1997, except for Note 17, dated May 2, 1997
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31,
1996 1995
As Restated As Restated
A S S E T S
CURRENT ASSETS
Cash and Cash Equivalents.............. $ 2,061,474 $ -0-
Accounts Receivable - Trade, Net of
Allowances for
Uncollectible Receivables of $227,869 1,628,070 1,349,351
and $189,817,
respectively (Note 2)..................
Rent Receivable........................ 122,497 85,543
Other Receivable....................... 4,798 7,395
Inventory (Note 3)..................... 251,450 192,238
Prepaid Expenses (Note 4).............. 195,361 136,498
Prepaid Income Taxes................... 6,558 -0-
TOTAL CURRENT ASSETS.................. 4,270,208 1,771,025
NET DEFERRED TAX ASSET (Note 17)...... 612,406 716,162
PROPERTY, PLANT AND EQUIPMENT - NET (Note
5)
Land .................................. 894,000 894,000
Property, Plant and Equipment ......... 10,952,437 9,624,042
TOTAL PROPERTY, PLANT AND EQUIPMENT -
NET................................... 11,846,437 10,518,042
OTHER ASSETS
Note Receivable........................ 80,000 -0-
Note Receivable - Related Party (Note 7) 1,355,516 1,192,386
Intangible Assets - Net (Note 6)....... 1,098,629 1,088,255
Deposits............................... 2,045 2,045
TOTAL OTHER ASSETS.................... 2,536,250 2,282,686
TOTAL ASSETS (Note 17)................ $ 19,265,301 $ 15,287,915
See Notes to Consolidated Financial Statements
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
August 31,
1996 1995
As Restated As Restated
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
CURRENT LIABILITIES
Accounts Payable - Trade...................... 545,595 $ 706,832
Cash Overdraft................................ -0- 66,351
Current Portion of Long-Term Debt (Note 8).... 284,802 293,055
Customer Credit Balances Payable.............. 105,791 128,906
Accrued Expenses.............................. 171,740 90,865
Sales Tax Payable............................. 17,371 6,816
Deferred Revenue - Service Contracts (Note 10) 13,760 14,204
Security Deposits Payable..................... 259,558 219,200
Income Taxes Payable (Note 11)................ 10,454 167,587
Note Payable - Officer........................ 80,000 - 0-
Pension Payable............................... 5,097 -0-
TOTAL CURRENT LIABILITIES.................... 1,494,168 1,693,816
LONG-TERM LIABILITIES
Private Placement Notes (Note 8).............. 321,426 462,637
Long-Term Debt (Note 8)....................... 2,348,565 2,483,328
TOTAL LONG-TERM LIABILITIES.................. 2,669,991 2,945,965
TOTAL LIABILITIES (Note 17).................. 4,164,159 4,639,781
Preferred Stock, $.001 Par Value, 168,020 Shares Authorized-Series A 7.5%
Cumulative Convertible Redeemable, 168,020 Shares Issued and Outstanding
($1,008,120 aggregate liquidation preference) 168 168
Paid In Capital: Preferred................... 1,064,001 1,064,001
............................................. 1,064,169 1,064,169
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 Par Value, 5,000,000 Shares Authorized
Preferred Stock, $.001 Par Value, 580,646 Shares Authorized-Series B
8.0% Cumulative Convertible 572,246 Shares Issued and Outstanding
($4,434,900 aggregate liquidation preference) 572 -0-
Common Stock, $.001 Par Value, 50,000,000 Shares Authorized,
3,491,340 and 3,338,117 Shares Issued and Outstanding as of
August 31, 1996 and August 31, 1995,......... 3,492 3,338
Paid in Capital: Preferred................... 3,815,328 -0-
Common (As restated in 1995) (Note 17)........ 4,896,947 4,364,721
Retained Earnings (Note 17)................... 5,320,634 5,215,906
TOTAL STOCKHOLDERS' EQUITY (Note 17)......... 14,036,973 9,583,965
TOTAL LIABILITIES & STOCKHOLDERS'
EQUITY (Note 17) $19,265,301 $15,287,915
See Notes to Consolidated Financial Statements
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended
August 31,
1996 1995
As Restated As Restated
Sales...........................................$ 15,312,260 $ 15,174,559
Cost of Sales...................................10,734,200 11,059,346
GROSS PROFIT.................................... 4,578,060 4,115,213
Selling, General & Administrative Expenses...... 3,278,968 2,916,401
Management Fee, Related Party (Note 12)......... 360,000 360,000
Bad Debt Expense (Note 9)....................... 39,869 74,158
Net Rental Expense (Income)..................... (418,478) (189,948)
Royalty Fee (Note 12 E)......................... 96,102 99,538
Depreciation & Amortization..................... 679,842 451,551
INCOME FROM OPERATIONS....................... 541,757 403,513
OTHER INCOME AND (EXPENSES)
Interest Income.............................. 101,987 247,452
Interest Expense............................. (398,889) (248,017)
Other Income................................. 38,935 115,433
NET INCOME BEFORE TAXES...................... 283,790 518,381
PROVISION FOR INCOME TAXES:
(Notes 11 & 17)
Current (Note 17)............................ 14,160 268,246
Deferred..................................... 88,536 (6,513)
NET INCOME (Note 17)......................... $ 181,094 $ 256,648
Net Income Per Share (Note 20)
Earnings Per Share........................... $ 0.00 $ .08
Primary EPS.................................. 0.00 $ .08
Fully Diluted EPS............................ $ 0.00 $ .08
Weighted Average Number of Common and Common
Equivalent Shares Outstanding................ 3,416,473 3,061,418
See Notes to Consolidated Financial Statements
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK TOTAL
$.001 PAR VALUE $.001 PAR VALUEPAID IN RETAINED STOCKHOLDERS'
ISSUED AMOUNT ISSUED AMOUNT CAPITAL EARNINGS EQUITY
Balances at
August 31, 1994
(As previously
reported) 0 $0 2,779,050 $2,779 $2,484,741 $5,018,724 $7,506,244
Adjustment for the
omission of paid
in capital
( Note 17) 0 0 0 0 984,477 0 984,477
Adjustment for the
understatement of
deferred income tax
liability (Note 17) 0 0 0 0 0 (46,865) (46,865)
Balances at August 31, 1994
(As restated in 1995)
(Note 17) 0 0 2,779,050 2,779 3,469,218 4,971,859 8,443,856
October 1994,
Pursuant to Private
Placements,
$1.75 per share 0 0 115,000 115 201,135 0 201,250
December 1994 through
February 1995,
Pursuant to Private
Placement,
$1.75 per share 0 0 90,000 90 157,410 0 157,500
March 1995 through
May 1995, Pursuant
to Private Placement,
$1.75 per share 0 0 352,142 352 615,897 0 616,249
Employee Compensation
3/95, $2.50 per share 0 0 1,925 2 4,811 0 4,813
Private Placement
Costs 0 0 0 0 (83,750) 0 (83,750)
Net Income - August 31, 1995
(As restated in 1995)
Note 17) 0 0 0 0 0 256,648 256,648
Cash Dividends Declared:
Preferred, Series A,
$0.45 per share 0 0 0 0 0 (12,601) (12,601)
Balances at August 31, 1995
(As restated in 1995)
(Note 17) 0 0 3,338,117 3,338 4,364,721 5,215,906 9,583,965
Cash Dividends Declared: Preferred,
Series A $0.45
per share 0 0 0 0 0 (75,610) (75,610)
Cash Dividends Declared:
Preferred, Series B 0 0 0 0 0 (756) (756)
Debentures Converted at an
average price of
$3.48 per share 0 0 104,647 105 363,740 0 363,845
Employee Compensation March 1996,
$5.38 per share... 0 0 2,250 2 12,092 0 12,094
Preferred Stock Issued
at $7.75 per share 580,646 580 0 0 4,499,420 0 4,500,000
Private Placement
Costs-Commissions 0 0 0 0 (625,246) 0 (625,246)
Conversion of Preferred
Shares to Common (8,400) (8) 18,816 19 745 0 756
Conversion of Note
Payable to Common
Shares 0 0 27,510 28 46,398 0 46,426
Issuance of Stock Warrants
for 297,125 Shares
March 1996 0 0 0 0 511,055 0 511,055
Deferred Expense-
Stock Warrants 0 0 0 0 (460,650) 0 (460,650)
Net Income -
August 31,1996 0 0 0 0 0 181,094 181,094
Balances at August 31, 1996
(as restated
in 1996) 740,266 $572 $3,491,340 $3,492 $8,712,275 $5,320,634 $14,036,973
See Notes to Consolidated Financial Statements
<PAGE>
HALSTEAD ENERGY CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31,
1996 1995
As Restated As Restated
Cash Flows from Operating Activities:
Net Income (Note 17)......................... $ 181,094 $ 256,648
Adjustments to Reconcile Net Income to Net Cash used in Operating
Activities, Depreciation and Amortization.... 667,479 451,551
Amortization of Deferred Expense-Trademark... 50,405 -0-
Bad Debt Provision........................... 38,052 52,647
Deferred Income Tax Adjustments (Note 17).... 103,756 3,550
(Increase) Decrease In Accounts Receivable... (316,771) (61,811)
(Increase) Decrease In Rent Receivable....... (36,954) (85,543)
(Increase) Decrease In Other Receivable...... 2,597 (7,395)
(Increase) Decrease In Inventory............. (59,212) 61,117
(Increase) Decrease In Prepaid Expenses...... (58,863) (24,242)
(Increase) Decrease In Prepaid Income Taxes.. (6,558) -0-
(Increase) Decrease In Deposits.............. -0- 325
Increase (Decrease) In Accounts Payable -
Trade and Accrued Expenses (80,362) 280,518
Increase (Decrease) Sales Taxes.............. 10,555 2,134
Increase (Decrease) In Customer Credit
Balances Payable (23,115) 17,837
Increase (Decrease) In Pension Plan Payable . 5,097 -0-
Increase (Decrease) In Deferred Revenue...... (444) (57)
Increase (Decrease) In Income Taxes Payable.. (157,133) 111,455
(Increase) Decrease In Note Payable - Officer 80,000 -0-
(Increase) Decrease In Discount on Notes Payable 12,363 125,337
(Increase) Decrease In Security Deposits Payable 40,358 9,167
TOTAL ADJUSTMENTS............................ 271,250 936,590
Net Cash Provided By Operations.............. 452,344 1,193,238
Cash Flows From Investing Activities:
Intangible Assets............................ (84,235) (1,060,179)
Acquisition of Property and Equipment........ (1,922,013) (7,548,434)
Advances in Note Receivable.................. (80,000) -0-
Advances in Note Receivable - ATI............ (1,888,190) (3,229,808)
Repayments in Note Receivable - ATI.......... 1,725,000 7,105,000
Net Cash Provided (Used) By Investing
Activities (2,249,438) (4,733,421)
Cash Flows From Financing Activities:
Proceeds from Capital Contribution........... 4,297,875 1,960,231
Preferred Dividends.......................... (76,366) (12,601)
Increase (Decrease) in Long-Term Debt........ (296,590) 1,498,754
Increase (Decrease) in Cash Overdraft........ (66,351) 66,351
Net Cash Provided (Used) by Financing Activi 3,858,568 3,512,735
Net Increase (Decrease) In Cash................. 2,061,474 (27,448)
Cash and Cash Equivalents at Beginning of Period -0- 27,448
Cash and Cash Equivalents at End of Period...... 2,061,474 $ -0-
Supplemental Disclosures - Cash Paid During the Year for:
Interest Expense............................. 361,931 $ 227,862
Income Taxes................................. 162,631 $ 175,948
Acquisition of Property & Equipment.......... 557,013 $ 679,435
Supplemental Schedule of Non-cash Investing and Financing Activities: On March
1, 1996, the company granted ATI warrants for use of its trademark.
Amortization for 1996 was $50,405 (see Note 12(E)). During 1996, the company
acquired two leaseholds with a total value of $1,365,000 from ATI as payment
on its note receivable (see Note 14(D)). On June 8, 1995 the company issued
preferred stock to acquire White Plains Fuel, Inc., valued at $1,064,169 (see
Note 14(B)).
See Notes to Consolidated Financial Statements
<PAGE>
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Organization
Halstead Energy Corp. (the "Company") (formerly Castleview
Capital Corp., a Nevada Corporation) was incorporated in the state of
Utah on January 15, 1986. Effective October 8, 1990, the Company
changed its domicile to the state of Nevada. On August 5, 1993, the
Company acquired Halstead Quinn Propane, Inc. ("HQP"). This
transaction has been accounted for as a purchase, in which HQP was the
acquiring corporation, and the Company was the acquired corporation
(reverse acquisition). The financial statements account for the
transaction as a recapitalization of HQP, with the issuance of
2,170,000 shares of Common Stock for the net assets of the company.
The Company is engaged in the retail sale of propane, propane
equipment, fuel oil, gasoline, and diesel fuel. Fuel oil, gasoline, and
diesel fuel are also distributed wholesale. Finally, the Company services
propane and fuel oil heating equipment.
(B) Principles of Consolidation
The consolidated financial statements include the accounts of
Halstead Energy Corp. and its wholly-owned subsidiaries White Plains Fuel,
Inc., Halstead Quinn Propane, Inc., and Rockland Fuel Oil Inc., a wholly
owned subsidiary of HQP. All inter-company accounts have been eliminated.
(C) Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
(D) Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with a maturity of 90 days or less to be cash equivalents for financial
statement purposes.
(E) Inventories
All inventories are stated at the lower of cost or market. A monthly
moving average method is used for determining inventory costs.
(F) Depreciation and Amortization
Depreciation of property and equipment is computed by use of the
straight-line method for financial statement purposes over their estimated
useful lives. The rates are as follows:
Leaseholds 37.5 years
Buildings and improvements 10-30 years
Equipment 3-20 years
Furniture and fixtures 3-10 years
Vehicles 3-10 years
(G) Intangible Assets
The cost of intangible assets is amortized on a straight-line
basis over the period the Company expects to receive benefits. The
periods used are as follows:
Customer List 15 years
Goodwill 40 years
(H) Customer Credit Balances
Customer credit balances represent payments received from customers
pursuant to a budget payment plan (whereby customers pay their estimated
annual fuel charges on a fixed monthly basis) in excess of actual
deliveries billed.
(I) Revenue Recognition
Revenue is recognized at the time the products are shipped to and
accepted by the customer either directly from the Company or a vendor on
drop shipments or from pick-up company facilities. Retail revenue is
recognized when delivered to the customer (see Note 10).
(J) Concentration of Credit Risk
1. Geographic Area
Substantially all of the Company's customers are located within
the Westchester, Rockland, Putnam, Orange, Dutchess and Bronx
Counties.
2. Major Customers and Vendors
A. The Company has certain significant customers resulting from the
storage of fuel at its terminals. These customers represent 1.5%,
3.5% and 2.7% respectively of total revenues, or an aggregate of
7.9% for fiscal 1995, and 2.5%, 3.5%, and 2.8%, or 8.8% aggregate
for fiscal 1996.
B. The Company has certain significant vendors, which represent
purchases of propane, gasoline and oil for its operations. Those
vendors represent purchases for propane of 6% and gasoline and oil
of 88% of total purchases for fiscal 1995, and 8% and 93% for fiscal
1996.
3. Consideration of Credit Risk
The companies maintain their cash in bank deposit accounts at high
credit quality financial institutions. The balances, at times, may
exceed federally insured limits. At August 31, 1996, the Company
exceeded the insured limit by approximately $1,921,982.
(K) Environmental Costs
The Company expenses, on a current basis, costs associated with
managing hazardous substances and pollution in ongoing operations. The
Company also accrues for costs associated with the premediation of
environmental pollution when it becomes probable that a liability has been
incurred and the amount can be reasonably estimated.
(L) Earnings Per Share
Earnings per share are computed based on the weighted average number
of shares outstanding during the periods presented. Common stock
equivalents are included in the calculation when they are dilutive.
(M) New Authoritative Pronouncements
The Accounting Standard Executive Committee has issued Statement of
Position 93-7 "Reporting on Advertising Costs" ("SOP 93-7"). The Company
has adopted the provisions of SOP 93-7, and there is no effect on the
income before extraordinary items, net income, and related per share
amounts. The Company is expending advertising costs as incurred. These
expenditures are not for direct response advertising.
The Company's advertising expenses are as follows:
August 31,
1996 1995
Advertising $ 64,435 $ 12,435
Note 2 - ACCOUNTS RECEIVABLE - TRADE
The Company has accounts receivable in the normal course of business, net
of allowances for uncollectible receivables, of the following:
August 31,
1996 1995
Trade $ 1,855,939 $ 1,539,168
Less: Allowances (227,869) (189,817)
NET $ 1,628,070 $ 1,349,351
Note 3 - INVENTORY
Inventory consisted of the following:
August 31,
1996 1995
Propane $ 10,985 $ 5,393
Gasoline 110,769 88,372
Service Parts & Supplies 39,500 39,500
# 2 Fuel Oil 38,978 47,867
Diesel 51,218 11,106
TOTAL $ 251,450 $ 192,238
Note 4 - PREPAID EXPENSES
Prepaid Expenses consisted of the following:
August 31,
1996 1995
Prepaid Real Estate Taxes $ 105,364 $ 106,019
Prepaid Insurance 65,014 -0-
Prepaid Financing Costs 24,983 28,924
Miscellaneous -0- 1,555
TOTAL $ 195,361 $ 136,498
Note 5 - PROPERTY, PLANT & EQUIPMENT
Property, Plant & Equipment are stated at cost. The components of
Property, Plant & Equipment are summarized as follows at:
August 31,
1996 1995
Land $ 894,000 $ 894,000
Gas Station Leaseholds 8,110,000 6,745,000
Building and Improvements 2,312,731 2,227,660
Equipment 1,848,638 1,620,612
Furniture & Fixtures 81,790 29,099
Vehicles 1,119,285 928,061
TOTAL 14,366,444 12,444,432
Less:
Accumulated Depreciation (2,520,007) (1,926,390)
NET $ 11,846,437 $ 10,518,042
Note 6 - INTANGIBLE ASSETS
Goodwill represents the excess of the cost of assets acquired over the
fair value of their net assets at dates of acquisition. Customer list represents
the fair value of the customer list purchased from White Plains Fuel, Inc. less
a deficiency of cost under the fair value of its net assets at the acquisition
date. Amortization expense charged to operations for 1996 and 1995 was $73,861
and $19,546, respectively.
The following is a summary of Intangible Assets.
August 31,
1996 1995
Customer List $ 1,144,414 $ 1,060,179
Goodwill 72,797 72,797
TOTAL 1,217,211 1,132,976
Less:
Accumulated Amortization (118,582) (44,721)
NET $ 1,098,629 $ 1,088,255
Note 7 - NOTE RECEIVABLE - RELATED PARTY
(A) The Company had advanced funds to A. Tarricone, Inc. ("ATI"), it's former
parent company. These advances, which originated approximately during
fiscal 1990, are evidenced by a demand promissory note with interest at
6%, due on August 3, 1998. The outstanding note receivable balance was
satisfied by ATI on February 28, 1995 (see Note 14).
(B) The Company has had transactions with ATI since February 28, 1995, the
balance of which is represented above (see Note 14). This debt is
evidenced by a promissory note with interest at 6% due on August 31, 2000.
The Company has not established an allowance for uncollectible amounts,
due to the fact that ATI has collateralized its note with certain real
estate having significant fair market value. See "Risk Factors--ATI
Bankruptcy."
August 31,
1996 1995
Note Receivable - Related Party$ 1,355,576$ 1,192,386
Note 8 - DEBT
(A) Private Placements
The Company is indebted to certain investors for amounts in
connection with the Company's private placement (see Note 13(A)).
The private placement consisted of 20 units in the amount of $25,000
per unit, each unit consisting of (i) a note payable in the amount of
$25,000 with interest payable at a rate of 8%, and (ii) 8,250 shares of
restricted Common Stock of the Company. The value of such shares has been
accounted as $1.50 per share. Accordingly, the effective interest rate on
such notes is calculated at approximately 58%, taking into consideration
the discount on the notes. The following summarizes such notes payable:
August 31,
1996 1995
Face Amount of Note Payable $ 321,426 $475,000
Less:
Discount of Note Payable Net of
Amortization -0- (12,363)
Net $ 321,426 $ 462,637
(B) Notes Payable
August 31,
1996 1995
1. Bank commercial mortgage (i) due 12/20/99
with interest at 10.5%, or 1% above prime. $ 134,000 $ 173,600
2. Bank commercial mortgage (i) due 10/01/00 with
interest at 1% above prime. ................. 469,200 -0-
3. Bank demand note (ii) due 9/29/95 with interest at 1% above prime. This
note was paid off on September 29, 1995. -0- 500,000
4. Bank commercial mortgage (iii) due 5/17/99 with interest
at 8.5%................................... 425,000 458,334
5. $500,000 revolving line of credit (iii) with a bank due 5/17/97 with
interest at 11.5% currently,
or 2.5% above prime. 500,000 500,000
6. Bank commercial mortgage (iv) due 1/16/01 with interest
at 9.25%.................................. 470,914 488,127
7. Commercial mortgage (iv) due 1/15/01 with interest
at 12.5%. 136,364 139,550
8. The company was indebted to bank for a $35,000 line of credit due 12/31/95
with interest at 2% above prime. -0- 35,000
9. The company was indebted to an individual for $50,000.
This is a demand note with interest at 0%...... -0- 50,000
10.Notes payable for certain equipment financed through several purchase
money agreements. These notes are payable in monthly installments of
principal and interest, and collateralized by such equipment..........
497,889 431,772
Total..................................... 2,633,367 2,776,383
Current Portion........................... (284,802) (293,055)
TOTAL..................................... $ 2,348,565 $ 2,483,328
(i) is secured by second mortgage on the Alexander Street Terminal. (ii)
is secured by a general security agreement on personal property. (iii) is
secured by a first mortgage on both the company's headquarters, and
terminal facility at Alexander Street, and further by an assignment of
station leases. The commitment calls for certain covenants relating to
minimum cash balances, rent deposits, and insurance. Certain officers of
the company have personally guaranteed the loan as well. (iv) is secured
the retail gas station acquired from A. Tarricone, Inc. on February 28,
1995 (see Note 7).
Note 9 - BAD DEBT EXPENSE
The Company has established a reserve for uncollectible receivables
relating to trade activities from the normal course of business. During fiscal
1996 and 1995, the Company had bad debts in the amounts of $39,869 and $74,158,
respectively.
Note 10 - DEFERRED REVENUE
Deferred revenue represents the unamortized balance of annual unearned
service contract revenue for burner service. These amounts are being amortized
into income monthly during the heating season when the majority of the service
calls are made. Deferred revenue was summarized as follows at:
August 31,
1996 1995
Deferred Revenue $ 13,760 $ 14,204
Note 11 - INCOME TAXES
The Company utilizes the Financial Accounting Standard Board issued
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" ("Statement No. 109"). Statement No. 109 requires companies to change
from the deferral method to the liability method of accounting for income
taxes. Statement No. 109 requires the utilization, if any, of the net
operating loss carry-forwards of the Company to be recorded as part of the
regular income tax provision and not as an extraordinary item. The Company
has adopted Statement No. 109 for periods after the fiscal year ended August
31, 1993.
The Company's ability to file a consolidated return and to use its net
operating loss carryovers from ATI and Castleview Capital Corp. to offset income
allocable to periods after a public offering is extremely limited. Under the Tax
Reform Act of 1986, the Company's taxable income in any tax year ending after a
more than 50 percentage point change in ownership that can be offset by a net
operating loss carryover before such ownership change cannot exceed a prescribed
rate of the value of the Company's stock on the date of ownership change. For
this purpose, except as may otherwise be provided in regulations, the holder of
a convertible stock or warrants to acquire stock is treated as owning the
underlying stock if such presumption would result in an ownership shift.
In such case, subsequent exercise of a convertible stock or warrants is
disregarded. Since the rule is applied on a warrant-by warrant basis, certain
convertible securities and warrants may be deemed exercised while others are
not. Similar rules apply to the contingent rights to acquire stock and other
similar interests.
Deferred income taxes are provided for to reflect the difference in the
timing of deductions from earnings for financial statements and income tax
reporting and are primarily due to the use of accelerated depreciation methods
for income tax return purposes.
Income tax provision is summarized as follows for the years ended August
31, 1996 and 1995 (as restated, see Note 17).
August 31,
1996 1995
Current 14,160 $ 277,466
Deferred 88,536 (6,513)
TOTAL $ 102,696 $ 270,953
August 31,
1996 1995
Statutory Rates 34% 34%
Income Taxes at Statutory Rates$ 186,899 $ 298,287
Realization of Deferred Tax Benefit(70,261) (75,759)
116,638 222,528
Income Tax Effects Related to the Following Items:
Benefit from Accelerated Depreciation(42,928) (5,123)
Non-deductible Items 28,986 53,548
TOTAL $ 102,696 $ 270,953
Effective Rate of Income Tax 36.2% 50.0%
Components of Net Deferred Tax Asset:
Deferred Tax Asset $ 698,661 $ 768,922
Deferred Tax Liability 86,255 70,261
Net Deferred Tax Asset $ 612,406 $ 698,661
Note 12 - RELATED PARTY TRANSACTIONS
(A) See Note 7.
(B) See Note 14.
(C) Management Agreement - A. Tarricone Inc.
The Company reimburses ATI, it's former parent and brother-sister
corporation with the same majority stockholders, for certain monthly
expenses relating to clerical, administrative, accounting, payroll, and
insurance expenses. This agreement is for fiscal years subsequent to the
December 1992 spin off, commencing in December 1992, and expiring on
August 31, 1998. The agreement calls for the reimbursement of the
approximate actual costs incurred by ATI for such expenses in the amount
of $30,000 per month. Such management fee is accrued monthly, and recorded
as a reduction of the loan due from ATI (see Note 7). For the years ended
August 31, 1996 and 1995, the Company accrued $360,000 and $360,000,
respectively, in connection with such expenses.
(D) Terminal Operations
The Company's Alexander Street Terminal and Rockland Fuel Oil, Inc., which
provides storage for retail and wholesale distribution of fuel oil, diesel
and gasoline, is operated by the Company's former parent, ATI, until such
time that the Company obtains its terminal operator's license from the
State of New York (see Note 13(C)). The cost of these services is
incorporated in the cost of product at $.0025 per gallon. For the fiscal
years ended August 31, 1996 and 1995, the amounts paid to such related
party were $38,671 and $51,112, respectively.
(E) Royalty Agreement
The Company entered into an agreement on September 1, 1993, whereby it
pays a royalty fee of $0.01 per gallon of gasoline and diesel, sold at the
nineteen (19) retail gas stations it was previously leasing from ATI. The
Company purchased thirteen (13) of the station leaseholds from ATI (see
Note 14), but the royalty agreement is still in force on all nineteen (19)
stations until August 31, 1998. As of March 1, 1996, the Company granted
warrants to ATI for use of its trademark for 5 years, subject to
limitations based on sales volume. These warrants were valued at $511,055,
which approximates the future value for use of the trademark based on past
compensation. Amortization for 1996 was $50,405. The royalty fees incurred
for the fiscal years ended August 31, 1996 and 1995, inclusive of
amortization, were $96,102 and $99,538, respectively. This agreement was
terminated subsequent to fiscal 1996.
(F) Leases
The Company had entered into a lease agreement with ATI, whereby the
Company was to lease and operate one (1) retail gas station for a period
of five (5) years. The agreement became effective September 1, 1993.
Subsequently, on February 28, 1995 and July 31, 1995 (see Note 14), the
Company acquired the underlying lease in partial satisfaction of the
Company's outstanding Note Receivable due from ATI (see Note 7).
Note 13 - COMMITMENTS AND CONTINGENCIES
(A) Private Placements
In June, 1993, the Company entered into a letter of intent with an
investment banker to provide financing in the amount of $500,000, in the
form of a private placement not requiring registration, pursuant to
Section 2(3) of the Securities Act of 1933, as amended, and SEC release
#33-929, dated July 29, 1936. The private placement consists of 20 units
in the amount of $25,000 per unit, each unit consisting of (i) a note
payable in the amount of $25,000 with interest payable at 8% and (ii)
8,250 shares of restricted Common Stock issued from the Company. Each note
was to be repaid in full with accrued interest within ten days of the
Company effectuating a warrant conversion resulting in gross proceeds of
at least $1,000,000.
The Company has accounted for the shares issued in connection with
the private placement notes in accordance with APB 14, discounting the
notes based on the fair value at $1.50 per share. The amortized interest
expense for Discount on Notes Payable for the periods ended August 31,
1996 and 1995 was $12,363 and $125,337, respectively.
Following is a summary of Private Placement activity from June 1993
through August 31, 1996:
Year Ended Activity Amount
August 31, 1993 9 Units Sold $ 225,000
August 31, 1994 12 Units Sold 300,000
August 31, 1995 2 Units Repaid (50,000)
Aggregate value of August 31, 1995: 475,000
August 31, 1996 5 Units Repaid (125,000)
August 31, 1996 3 Units Converted(i) (75,000)
August 31, 1996 3 Units Amended(i) 46,462
Aggregate value of August 31, 1996: $ 321,462
------------------------
(i) On August 23, 1996, the Company converted three (3) Private
Placement units valued at $92,852 ($75,000 principle plus
$17,851.61 accrued interest) which was split evenly with $46,426
converted to Common Stock and $46,426 representing principle
balance of amended units, for a new aggregate amount of $321,462 as
per above (see Note 8).
------------------------
On April 11, 1994, the Company registered 3,200,000 shares of its
Common Stock for sale by the Company upon the exercise of its then
outstanding 1,600,000 Class A and 1,600,000 Class B Redeemable Common
Stock Purchase Warrants (collectively, the "Warrants"). The Warrants were
distributed by the Company to all stockholders of record in connection
with the Company's acquisition of HQP. As of August 11, 1994, the Company
redeemed all outstanding Warrants at a price of .001 per Warrant redeemed.
In light of the Company's redemption of its outstanding Warrants, it
is unclear when its obligation to make principal payments on the Private
Placement notes will come due. However, the Company acknowledges an
obligation to make principal payments on the Private Placement notes and
continues to maintain such obligation on its balance sheet.
(B) Employment Agreements
The Company has entered into employment agreements with its
President, Vice President/Secretary, and Vice President/ Treasurer for
five year terms. The agreements provide for the following base
compensation:
Years President VP/Secretary VP/Treasurer
8/5/93-8/4/95 $ 100,000 $ 75,000 $ 75,000
8/5/95-8/4/97 $ 125,000 $ 100,000 $ 100,000
8/5/97-8/4/98 $ 150,000 $ 125,000 $ 125,000
Compensation paid to the officers from 9/1/93 to 8/31/96 was less
than the amounts stated above. However, the officers signed revised
agreements at the beginning of each fiscal year through 8/31/96, waiving
their right to additional compensation.
(C) Licenses Pending
HQP's principal terminal facility is currently operated by ATI
pending approvals of HQP's application with State of New York for a
terminal operator's and diesel motor fuel license, and the applications of
Rockland Fuel Oil, Inc. ("Rockland") and White Plains Fuel, Inc. ("WPF")
for their respective diesel motor fuel licenses.
On October 6, 1995, New York State requested that HQP, Rockland and
WPF post certain bonds as a prerequisite to obtaining the foregoing
licenses. On October 25, 1995, these bonds were obtained by the Company in
compliance with the State's request. At that time, management believed the
Company had substantially completed all steps necessary to receiving such
licenses. However, these licenses have not as yet been granted. Management
is awaiting approval of these licenses, although there can be no
assurances in this regard.
(D) Litigation
The Company is not party to any litigation which individually or in
the aggregate could reasonably be expected to have a material adverse
effect on the Company.
Note 14 - ACQUISITIONS
(A) On February 28, 1995 the Company acquired eight gas station leaseholds and
one fee property from its related party ATI (see Note 12). These stations
are located throughout the operating area of Company.
The purchase price for the stations was as follows:
1. Eight leaseholds (average additional
years added to existing leases, 12 years)$ 5,010,000
2. One Fee Property 750,000
Less: Mortgages Assumed (637,176)
$ 5,122,824
This acquisition was in partial satisfaction of the existing note
receivable due from ATI.
(B) On June 8, 1995 the Company purchased the stock of White Plains Fuel, Inc.
("WPF"), a diesel and fuel oil distributor located in Hawthorne, NY. The
aggregate purchase price for the stock of WPF was $ 1,064,169 payable as
follows:
168,020 shares of Series A 7.5% cumulative, convertible, redeemable
preferred stock, $0.001 par value $1,064,169
Since the transaction was accounted for as a purchase, the purchase price
was allocated to the acquired assets based on their estimated fair market
values at acquisition, with $124,000 allocated to property and equipment,
$167,342 to accounts receivable, $17,204 to inventory, $1,060,179 to
customer list, $1,555 to prepaid expenses, $1,702 to deferred income, and
$307,813 to liabilities.
(C) Effective July 31, 1995, the Company acquired two leaseholds and two
leasehold extensions from ATI, a related party (see Note 12). These
leaseholds were appraised by an independent appraiser for $985,000, on
aggregate. In consideration of the transfer of the two gasoline station
leaseholds and the additional twenty year extension of two other
leaseholds, the company forgave $985,000 of the note receivable due from
ATI.
(D) The Company acquired two leaseholds from ATI, a related party, on March
22, 1996 and November 1, 1995. In consideration of the transfer of the two
gasoline station leaseholds, valued at $1,365,000 by an independent
appraiser, the Company forgave $1,365,000 of the note receivable due from
ATI.
Note 15 - PREFERRED STOCK
(A) The Company has issued Series A 7.5% Cumulative Convertible Redeemable
Preferred Stock, $0.001 par value ("Series A Preferred Stock"). The
holders of outstanding shares Series A Preferred Stock should be entitled
to the following:
The Preferred Stock at par value $0.001 per share, bears a
cumulative cash dividend rate of $0.45 per annum, payable quarterly,
commencing June 8, 1995, when, as and if declared by the board of
directors of the Company. The Preferred Stock becomes convertible
after June 8, 1998 into shares of Common Stock at a conversion rate
of one share of Common Stock for each share of Preferred Stock,
subject to adjustment in certain events.
The Preferred Stock is redeemable at the option of the Company, in
whole or in part, at any time at a redemption price of $6.00 per
share, plus accrued and unpaid dividends.
Holders of Preferred Stock may request to have their shares redeemed
by the Company at $6.00 per share at any time commencing on June 8,
2000 and ending June 7, 2004. As the Preferred Stock is mandatorily
redeemable, it is properly listed above the equity section of the
balance sheet.
The Company shall not be required to redeem from any holder during
any twelve (12) month period a number of shares of Preferred Stock
greater than twenty percent (20%) of the shares of Preferred Stock
then held by the applicable holder and the Company shall not be
required to redeem shares of Preferred Stock from any holder more
than once during any twelve (12) month period.
Each share of Preferred Stock shall entitle its holder to a number
of votes equal to the number of shares of Common Stock (including
fractional shares) that such share would be converted into, if it
were so converted, as of the close of business on the day
immediately prior to the date of such vote, and with respect to such
votes, a holder of shares of Preferred Stock shall have full voting
rights and powers equal to the voting rights and powers of a holder
of shares of Common Stock, and shall be entitled to a notice of any
stockholders' meeting in accordance with the By-laws of the Company
and shall be entitled to vote with holders of Common Stock together
as a single class.
(B) The Company has issued Series B 8.0% Cumulative Convertible Preferred
Stock, $0.001 par value ("Series B Preferred Stock"). The holders of
outstanding shares of Series B Preferred Stock should be entitled to the
following:
The Preferred Stock at par value $0.001 per share, bears a
cumulative cash dividend rate of $0.62 per annum, payable quarterly,
commencing May 31, 1996, when, as and if declared by the board of
directors of the Company. The Preferred Stock becomes convertible
after July 15, 1996 into an unspecified number of shares of Common
Stock at a conversion rate formula based in part on the market value
of the Common Stock on the date of conversion.
The Preferred Stock is redeemable at the option of the Company, in
whole or in part, at any time at a redemption price of $10.00 per
share, plus accrued and unpaid dividends.
Except as required by applicable law, shares of Series B Preferred
Stock shall not entitle the holder to any voting rights, but such
holder shall be entitled to a notice of any stockholder meetings in
accordance with the by-laws of the Company.
Note 16 - OPERATING LEASES
The Company leases facilities under operating leases expiring at various
times.
Minimum future rental payments under non-cancelable operating leases
having remaining terms in excess of one year as of August 31, 1996 for each of
the next five years and in the aggregate are:
August 31 Amount
1997 577,517
1998 586,517
1999 577,566
2000 579,560
2001 578,588
Total $ 2,899,748
Rent expense for 1996 and 1995 under various leases amounted to $568,052
and $607,578, respectively.
Note 17 - ERROR CORRECTION
(A) On December 7, 1992, ATI, HQP's former parent, transferred assets,
including HQP and Rockland customer lists and Rockland equipment and
assets, in partial satisfaction of its note due to the Company (see
Notes 7 and 12(C)). In accordance with Accounting Interpretations No.
27 and 39 of APB 16 for entities under common control, the Company has
accounted for this transaction as a "similar to pooling" combination
and properly recorded these assets at their book values, totaling
$84,676.
For tax purposes, however, these assets were recorded at their fair market
values totaling $2,479,998.
The future tax benefit from the difference between book and tax treatment
gives rise to a deferred tax asset calculated by multiplying this
difference by the tax rate to arrive at the deferred tax asset. This
deferred tax asset arises from a related party transaction and is
therefore classified as Paid in Capital:
Common Stock.
Tax Basis of Assets Transferred $ 2,479,998
Less Book Basis of Assets Transferred 84,676
Additional Future Depreciation for Tax Purposes2,395,322
Tax Rate 41.1%
Deferred Tax Asset/Paid in Capital: Common Stock $984,477
Previously the difference between the Book Basis and Tax Basis was only
taken into consideration in calculating Deferred Tax Liability.
This error, resulting in the misstatements of previously reported assets,
liabilities, equity, and income was discovered during the current year.
Correction of this error resulted in changes previously reported net
income as follows:
Year (Decrease)
8/31/93 $ (25,589)
8/31/94 (21,276)
Cumulative Effect (46,865)
8/31/95 (10,063)
Cumulative Effect $ (56,928)
The August 31, 1995 consolidated statement of operations has been restated
for the effect of correcting this error. The following schedule details
the nature and amount of each error:
Omission of Deferred Tax Asset (Paid in Capital) $984,477
Reclassification of Deferred Income Tax Liability (211,387)
Understatement of Deferred Income Tax Liability
(See above for effects in prior period income) (56,928)
Net Deferred Tax Asset at 8/31/95 $ 716,162
(B) The August 31, 1996 and 1995 financial statements have been restated as
follows:
1. The previously issued August 31, 1995 income statement improperly
included sales, cost of sales, and selling, general and
administrative expenses of newly acquired WPF from September 1,
1994 through June 8, 1995, the date of acquisition. The net
effect of this change after taxes, $13,829, was improperly
included in the calculation of acquired liabilities, which have
been restated (see Note 14(B)). Eliminations from the August 31,
1995 income statement, and the related valuation adjustment to
the WPF purchase are as follows:
Eliminations
Sales $ 1,598,406
Cost of Sales 914,224
Selling, General and
Administrative Expenses 661,133
Net Income Before Taxes 23,049
Provision for Taxes 9,220
Net Income 13,829
Valuation Adjustment
WPF Purchase Price as
previously reported 1,050,340
WPF Purchase Price as
Restated (see Note 14(B)) $ 1,064,169
2. The value of redeemable preferred stock issued to acquire WPF has
been revalued as per above, and properly reclassified above the
equity section of the balance sheet, and thus eliminated from the
Consolidated Statement of Stockholder's Equity.
3. An additional footnote has been provided (see Note 20) showing the
calculation of Earnings Per Share ("EPS"). The EPS amounts have been
restated because previously reported amounts had not been adjusted
for the effect of declared and undeclared dividends on cumulative
preferred stock.
4. The Statement of Cash Flows has been restated for the following:
Proceeds from Capital Contribution and changes in Cash Overdraft are
now classified as financing activities.
The Supplemental Schedule of Non-cash Investing and Financing
Activities now includes a reference to the issuance of preferred
stock to acquire WPF.
5. Rental Income, previously listed with Other Income And (Expenses) in
the Consolidated Statement of Operations, has been renamed Net
Rental Expense (Income) and has been properly listed above Income
From Operations. Also moved above Income From Operations were Bad
Debt Expense and Royalty Fee.
6. A paragraph is added to Note 11 to disclose separately the asset and
liability components of Net Deferred Tax Asset.
7. The first sentence of Note 13(A) now includes a reference to the
specific exemption relied upon for this private placement.
8. The last sentence of Note 13(B) has been reworded to properly
indicate that the waiving of compensation under employment
agreements occurred at the beginning of each fiscal year.
9. The last sentences of Note 14 (C) and (D) now include information
showing the independent appraisals of leaseholds transferred from a
related party, to support subsequent reductions of the related
party's note receivable in the same amounts, with no gain or loss
recognized.
10. The first sentence of Note 15(B) describing "series B, 8.0%
cumulative, convertible, Preferred Stock", now properly omits the
word "redeemable" as this issue is only redeemable by the Company,
and not the stockholders.
11. The segment information disclosed in Note 18 for August 31, 1995 has
been adjusted for the elimination of WPF sales and expenses (Note
17(B)(1)).
Note 18 - SEGMENT INFORMATION
The Company's operations were classified into three business segments as
follows:
Year Ending August 31, 1996
Fuel Oil Propane Gasoline Consolidated
Net Sales $ 5,756,345 $ 2,577,093 $ 6,978,822$ 15,312,260
Gross Profit 1,455,358 1,513,914 1,608,788 4,578,060
Operating Expenses 1,173,590 986,134 1,557,400 3,717,124
Depreciation and
Amortization 135,968 117,985 425,889 679,842
Operating Income $ 145,800 $ 409,795 $ (374,501) $ 181,094
Capital Expenditures $ 132,550 $ 385,599 $ 1,403,864 $ 1,922,013
Assets $ 2,607,462 $ 1,841,191$ 10,659,517$ 15,108,170
Corporate Assets 4,157,131
Total Assets $ 19,265,301
Year Ending August 31, 1995
Fuel Oil Propane Gasoline Consolidated
Net Sales $ 4,861,869 $ 2,290,658 $ 8,022,032$ 15,174,559
Gross Profit 1,026,274 1,397,289 1,691,650 4,115,213
Operating Expenses 795,222 953,147 1,658,645 3,407,014
Depreciation and
Amortization 90,310 45,155 316,086 451,551
Operating Income $ 140,742 $ 398,987 $ (283,081) $ 256,648
Capital Expenditures $ 298,334 $ 330,765 $ 6,919,335 $ 7,548,434
Assets $ 2,448,098 $ 1,539,286 $ 9,362,638$ 13,350,022
Corporate Assets 1,937,893
Total Assets $ 15,287,915
Sales by segment include sales to unaffiliated customers and inter-segment
sales. Retail prices are used to report inter-segment sales.
Operating income is total revenue less operating expenses, and excludes
general corporate expenses, interest expense and income taxes.
Identifiable assets are those used by each segment of the Company's
operations. Corporate assets are primarily cash and note receivable from
related party (see Note 7).
Note 19 - DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS.
Cash, Accounts Receivable, Rent Receivable, Other Receivables, Other
Current Assets, Working Capital Borrowings, Accounts Payable, and
Accrued Expenses.
The carrying amount approximates fair value because of the short maturity
of these instruments.
Notes Receivable, Private Placement Notes, Long-Term Notes.
The fair values of each of the Company's long-term financing instruments,
including current maturities, are based on the amount of future cash flows
associated with each instrument, discounted using the Company's current
borrowing rate for similar instruments of comparable maturity.
The estimated fair value of the Company's non-trading financial
instruments are summarized as follows:
Carrying Estimated
Amount Fair Value
At August 31, 1995
Note Receivable $ -0- $ -0-
Note Receivable - Related Party 1,192,386 1,150,652
Private Placement Notes 462,637 462,637
Long Term Debt 2,776,383 2,672,268
At August 31, 1996
Note Receivable $ 80,000 $ 78,800
Note Receivable - Related Party 1,355,576 1,308,131
Private Placement Notes 321,426 321,426
Long Term Debt 2,633,367 2,490,521
Limitations
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could
significantly affect the estimates.
Note 20 - Earnings Per Share
The following table sets forth the computation of Net Income per common
share, as contained in the Consolidated Statements of Operations for the years
ended August 31, 1996 and 1995.
August 31,
1996 1995
Net Income 181,094 256,648
Preferred Stock Dividends:
Declared (76,366) (12,601)
Undeclared (cumulative) (87,942) -0-
Undeclared
Net Income applicable to
common shares 16,786 244,047
Divided by:
Weighted average of Common
Stock outstanding 3,416,473 3,061,418
Earnings Per Share $ 0.00 $ 0.08
Note 21 - SUBSEQUENT EVENTS
(A) Acquisition:
On September 4, 1996, the Company acquired the assets of Dino Oil,
Inc., in consideration for which it paid $100,000 and issued 200,00 shares
of its $.001 par value stock, restricted under Rule 144 of the Securities
and Exchange Act of 1933.
(B) Pending Delisting:
The Company has been notified by NASDAQ of the failure of the
Company's Common Stock to comply with its minimum bid price requirement,
which is to maintain a closing inside bid price greater than or equal to
$1.00 for a period of ten consecutive trade dates. The Company will be
provided ninety calendar days (to February 14, 1997) in which to either
regain compliance with the minimum bid price requirement or the
alternative requirement (i.e., that the Company's capital and surplus
equal or exceed $2,000,000 and the market value of the public float of the
Company's Common Stock equal or exceed $1,000,000, for ten consecutive
trading days prior to the end of such ninety day period). If the Company
is unable to demonstrate compliance with at least one of the foregoing
requirements prior to February 14, 1997, it must submit a proposal by that
same date for achieving compliance. If the Company fails by February 14,
1997 to either achieve compliance or fails to submit a proposal for
achieving compliance, NASDAQ would consider delisting the Company's Common
Stock on NASDAQ SmallCap Market.
<PAGE>
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the registered securities to which it
relates. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful.
Until December 26, 1997, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as Underwriters and with respect to
their unsold allotments or subscriptions.
TABLE OF CONTENTS
Page
Prospectus Summary 3
Risk Factors 4
Use of Proceeds 9
Management's Discussion and 9
Analysis of Financial
Condition and Results of
Operations
Description of Business 14
Description of Property 20
Legal Proceedings 21
Management 22
Executive Compensation 23
Certain Relationships and
Related Transactions 26
Security Ownership of Certain
Beneficial Owners and
Management 28
Selling Stockholders 30
Description of Securities 30
Market for Common Equity and
Related Stockholder Matters 33
Plan of Distribution 34
Index to Consolidated Financial F-1
Statements
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Under Section 78.751 of the Nevada General Corporation Law, as amended, a
director, officer, employee or agent of a Nevada corporation may be entitled to
indemnification by the corporation under certain circumstances against expenses,
judgments, fines and amounts paid in settlement of claims brought against them
by a third person or by or in right of the corporation.
The Company is obligated under its Articles of Incorporation to indemnify
any of its present or former directors who served at the Company's request as a
director, officer or member of another organization against expenses, judgments,
fines and amounts paid in settlement of claims brought against them by a third
person or by or in right of the corporation if such director acted in good faith
or in a manner such director reasonably believed to be in, or not opposed to,
the best interests of the Company and, with respect to any criminal action or
proceeding, if such director had no reason to believe his or her conduct was
unlawful. However with respect to any action by or in the right of the Company,
the Articles of Incorporation prohibit indemnification in respect of any claim,
issue or matter as to which such director is adjudged liable for negligence or
misconduct in the performance is his or her duties to the Company, unless
otherwise ordered by the relevant court. The Company's Articles of Incorporation
also permit it to indemnify other persons except against gross negligence or
willful misconduct.
The Company is obligated under its bylaws to indemnify its directors,
officer and other persons who have acted as a representatives of the Company at
its request to the fullest extent permitted by applicable law as in effect from
time to time, except for costs, expenses or payments in relation to any matter
as to which such officer, director or representative is finally adjudged
derelict in the performance of his or her duties, unless the Company has
received an opinion from independent counsel that such person was not so
derelict.
In addition, pursuant to indemnification agreements that the Company has
entered into with each of its directors, the Company has agreed to indemnify its
directors to the fullest extent permitted by applicable corporate law and its
Articles of Incorporation. The indemnification agreements also provide that,
upon the request of a director and provided that director undertakes to repay
amounts that turn out not to be reimbursable, that director is entitled to
reimbursement of litigation expenses in advance of the final disposition of the
legal proceeding.
The Nevada General Corporation Law, as amended, also permits a corporation
to limit the personal liability of its officers and directors for monetary
damages resulting from a breach of their fiduciary duty to the corporation and
its stockholders. The Company's Articles of Incorporation limit director
liability to the maximum extent permitted by The Nevada General Corporation Law,
which presently permits limitation of director liability except (i) for a
director's acts or omissions that involve intentional misconduct, fraud or a
knowing violation of law and (ii) for a director's willful or grossly negligent
violation of a Nevada statutory provision that imposes personal liability on
directors for improper distributions to stockholders. As a result of the
inclusion in the Company's Articles of Incorporation of this provision, the
Company's stockholders may be unable to recover monetary damages against
directors as a result of their breach of their fiduciary duty to the Company and
its stockholders. This provision does not, however, affect the availability of
equitable remedies, such as injunctions or rescission based upon a breach of
fiduciary duty by a director.
The Company currently maintains liability insurance in the amount of
$1,000,000 for the benefit of its officers and directors.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses, other than underwriting discounts and commissions,
in connection with the Offering are as follows:
SEC Registration Fee.............................. $ 1,500*
Nasdaq Fees....................................... 7,500*
Blue Sky Fees and Expenses........................ 5,000*
Printing Expenses................................. -0-*
Legal Fees and Expenses........................... 15,000*
Accounting Fees and Expenses...................... 5,000*
Transfer Agent Fees and Expenses.................. 100*
Miscellaneous..................................... -0-*
================
$29,100*
================
----------
*Estimated.
Item 26. Recent Sales of Unregistered Securities.
The following securities of the Company were sold by the Company during
the past three years without being registered under the Securities Act:
On October 19, 1995, the Company received $500,000 and issued $500,000 in
principal amount of 8.5% convertible debentures due on October 19, 1997. As of
May 31, 1996, $250,000 principal amount debentures remained outstanding. On
December 4, January 19, March 6, April 16, June 27 and August 14, 1996, the
subscriber converted a total of $350,000 of debentures for 104,647 common shares
of the Company. On August 20, 1996 the Company purchased the balance of the
outstanding convertible debentures for $150,000 plus accrued interest of
$10,793.84. The securities issued in this private transaction were exempt from
registration under Section 4(2) of the Securities Act.
The Company received $974,998.50 from the proceeds of the private sale
pursuant to Regulation D of 557,142 shares of Common Stock at a price of $1.75
per share. Included as additional paid in capital were $35,000 of legal expenses
associated with the private placement memorandum and commission expenses of
$48,750.
On March 5, 1996, the Company issued warrants to purchase 297,125 shares
of the Company's Common Stock to ATI in exchange for the Company's exclusive use
of the "ATI" trademark. The exercise price is equal to the lessor of $2.60 per
share or a 40% discount from the average closing bid price. The average closing
bid price is calculated based on the average of the closing bid prices of the
Company's Common Stock as reported by the NASDAQ SmallCap stock market for the
five trading days immediately preceding the date of the exercise of the warrant.
The warrants provide that 59,425 were immediately vested on March 5, 1996, an
additional 59,425 vested on March 5, 1997, and the balance become vested in
three equal annual installments. The market price at issuance was $4.30 per
share. The securities issued in this private transaction were exempt from
registration under Section 4(2) of the Securities Act.
On May 31, 1996 the Company issued 580,646 shares of Series B 8%
Cumulative Convertible Redeemable Preferred Stock with a stated value of $7.75
per share totaling $4,500,000 in a private placement to potential foreign
investors pursuant to Regulation S. The Company received proceeds, net of
commissions of $630,000, equal to $3,870,000. On July 23 and November 20, 1996,
the Private Placement Holder converted $65,100 (8,400 shares) and $39,998 (5,161
shares) of the Series "B" Preferred Stock plus accrued dividends of $756.23 and
$1,472.79 respectively, into 18,816 and 162,261 shares of Common Stock.
On September 5, 1996, the Company acquired the customer list of Dino Oil,
Inc. in exchange for 200,000 shares of the Company's Common Stock at $1.9375 per
share, $100,000 cash and certain costs of $56,957.
In March 1995 and March 1996, the Company issued 1,925 and 2,250 shares of
Common Stock, respectively, at a price of $2.50 and $5.38 per share, as employee
compensation.
In January 1997, the Company issued 200,000 shares of Common Stock to an
employee at a price of $0.50 per share. The Company also issued 22,500 shares of
Common Stock in August 1996 and an additional 22,500 shares of Common Stock in
September 1997, in each case at a price of $2.00 per share, to Donnie and Vito
Tarricone in private transactions.
Item 27. Exhibits.
Exhibit
Number Description
3.1 Articles Of Incorporation of the Company, as amended.*
3.2 By-laws of the Company.*
3.3 Certificate to set forth Designations, Voting Powers,
Preferences, Limitations, Restrictions and Relative Rights
of series A 7.5% Cumulative Convertible Redeemable
Preferred Stock**
3.4 Certificate of Amendment and Restatement to Certificate to
Set Forth Designations, Voting Powers, Preferences,
Limitations, Restrictions, and Relative Rights of Series B
8% Cumulative Convertible Redeemable Preferred Stock,
$.001 Par Value
4.1 Specimen Common Stock Certificate.*
4.2 Specimen Series A Preferred Stock Certificate**
4.3 Specimen Series B Preferred Stock Certificate***
4.4 Halstead Energy Corp. Amended and Restated 1996 Stock
Option Plan****
5 Opinion of Piper & Marbury L.L.P. (contains Consent of
Counsel)
10.1 Agreement and Plan of Reorganization dated as of July 5,
1993 between Halstead Quinn Propane, Inc. and the Company.*
10.2 Lease Agreement between HQ Propane and ATI.*
10.5 Management Agreement by and between HQ Propane and ATI.*
10.6 Form of Employment Agreement by and between the Company
and Claire E. Tarricone.*
10.7 Form of Employment Agreement by and between the Company
and Anthony Tarricone.*
10.8 Form of Employment Agreement by and between the Company
and Joseph Tarricone.*
10.9 Promissory Note, dated August 31, 1993, of ATI in favor of
HQ Propane.*
10.10 ATI Purchase Agreements**
10.11 Agreement & Plan of Reorganization by and among Halstead
Energy Corp., Allan Cianflone and Jack Troccoli.**
10.12 Consulting and Warrant Compensation Agreement between the
Company and Boulder Financial Group.****
10.13 Restructuring Agreement, dated September 24, 1997, by and
among the Company, Infinity Investors Limited, Claire E.
Tarricone, Anthony J. Tarricone and Joseph A. Tarricone.
10.14 12% Subordinated Promissory Note of the Company dated
September 24, 1997.
21.1 Subsidiaries of the Small Business Issuer**
23.1 Consent of Piper & Marbury L.L.P. (contained in Exhibit 5)
23.2 Consent of Goldman & Murphy, L.L.P.
- - ---------------------------
* Incorporated by reference to the Company's Registration Statement on Form
SB-2 filed with the SEC on November 19, 1993.
** Incorporated by reference to the Company's Annual Report on Form 10-KSB filed
with the SEC on December 14, 1996.
***Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
filed with the SEC on July 15, 1996.
**** Incorporated by reference to the Company's Registration Statement on Form
S-8 filed with the SEC on September 10, 1997.
--------------------------
Item 28. Undertakings.
(a) The undersigned registrant hereby undertakes to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement to:
(i) include any prospectus required by section 10(a)(3) of
Securities Act of 1933, as amended (the "Securities Act");
(ii) reflect in the prospectus any facts or events arising after the
effective date of this 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 this
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the high or low end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective Registration Statement; and
(iii) include any additional or changed material information on the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
PROVIDED HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the Company
pursuant to Section 13 or Section 15(d) of the Exchange Act of 1934 that
are incorporated by reference in the Registration Statement.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised 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. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
Company 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 Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The Company hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat
the information omitted from the form of Prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Company under Rule 424(b)(1), or (4) or 497(h)
under the Securities Act as part of this registration statement as of the
time the Securities and Exchange Commission declared it effective.
(2) For determining any liability under the Securities Act, treat
each post-effective amendment that contains a form of Prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in the City of Mount Kisco, State
of New York, on December 1, 1997.
HALSTEAD ENERGY CORP.
By /s/ Claire E. Tarricone
---------------------------------
Claire E. Tarricone
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
/s/ Claire E. Tarricone President and Director December 1, 1997
Claire E. Tarricone
/s/ Anthony J. Tarricone Vice President, Secretary December 1, 1997
Anthony J. Tarricone and Director
/s/ Joseph A. Tarricone Vice President, Treasurer December 1, 1997
Joseph A. Tarricone and Director
<PAGE>
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
HALSTEAD ENERGY CORP.
----------
EXHIBITS
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
3.1 Articles Of Incorporation of the Company, as amended.*
3.2 By-laws of the Company.*
3.3 Certificate to set forth Designations, Voting Powers,
Preferences, Limitations, Restrictions and Relative Rights
of series A 7.5% Cumulative Convertible Redeemable
Preferred Stock**
3.4 Certificate of Amendment and Restatement to Certificate to
Set Forth Designations, Voting Powers, Preferences,
Limitations, Restrictions, and Relative Rights of Series B 8%
Cumulative Convertible Redeemable Preferred Stock, $.001 Par
Value
4.1 Specimen Common Stock Certificate.*
4.2 Specimen Series A Preferred Stock Certificate**
4.3 Specimen Series B Preferred Stock Certificate***
4.4 Halstead Energy Corp. Amended and Restated 1996 Stock
Option Plan****
5 Opinion of Piper & Marbury L.L.P. (contains Consent of
Counsel)
10.1 Agreement and Plan of Reorganization dated as of July 5,
1993 between Halstead Quinn Propane, Inc. and the Company.*
10.2 Lease Agreement between HQ Propane and ATI.*
10.5 Management Agreement by and between HQ Propane and ATI.*
10.6 Form of Employment Agreement by and between the Company
and Claire E. Tarricone.*
10.7 Form of Employment Agreement by and between the Company
and Anthony Tarricone.*
10.8 Form of Employment Agreement by and between the Company
and Joseph Tarricone.*
10.9 Promissory Note, dated August 31, 1993, of ATI in favor of
HQ Propane.*
10.10 ATI Purchase Agreements**
10.11 Agreement & Plan of Reorganization by and among Halstead
Energy Corp., Allan Cianflone and Jack Troccoli.**
10.12 Consulting and Warrant Compensation Agreement between the
Company and Boulder Financial Group.****
10.13 Restructuring Agreement, dated September 24, 1997, by and
among the Company, Infinity Investors Limited, Claire E.
Tarricone, Anthony J. Tarricone and Joseph A. Tarricone.
10.14 12% Subordinated Promissory Note of the Company dated
September 24, 1997.
21.1 Subsidiaries of the Small Business Issuer**
23.1 Consent of Piper & Marbury L.L.P.
(contained in Exhibit 5)
23.2 Consent of Goldman & Murphy, L.L.P.
- - ---------------------------
* Previously filed with the Commission as Exhibits to, and incorporated herein
by reference from, the Company's Registration Statement on Form SB-2 filed
with the SEC on November 19, 1993.
** Previously filed with the Commission as Exhibits to, and incorporated herein
by reference from, the Company's Annual Report on Form 10-KSB filed with the
SEC on December 14, 1996.
***Previously filed with the Commission as Exhibits to, and incorporated herein
by reference from, the Company's Quarterly Report on Form 10-QSB filed with
the SEC on July 15, 1996.
**** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's Registration Statement on Form S-8
filed with the SEC on September 10, 1997.
Certificate of Amendment and Restatement to
Certificate to Set Forth Designations,
Voting Powers, Preferences, Limitations,
Restrictions, and Relative Rights of
Series B 8% Cumulative Convertible
Redeemable Preferred Stock, $.001 Par Value
Pursuant to Section 78.1955 of the Nevada General Corporation Law,
Halstead Energy Corp. adopts the following Amended and Restated Certificate
of Designation by stating the following:
I. The name of the corporation is Halstead Energy Corp. (the
"Corporation").
II. The current designation of a series of Preferred Stock of the
Corporation is Series B 8% Cumulative Convertible Redeemable Preferred
Stock. As amended and restated as hereinafter provided, the new designation
of said series of the Series Preferred Stock shall be Series B Cumulative
Convertible Redeemable Preferred Stock (as amended and restated, the "Series
B Preferred Stock").
III. The approval by all shareholders required pursuant to the
provisions of Section 78.1955 of the Nevada General Corporation Law of the
amendment and restatement of the designation of the Series B Preferred Stock
was obtained in accordance with the Nevada General Corporation Law.
IV. Set forth hereafter is the amended and restated terms of the
preferences, limitations, restrictions and relative rights of shares of
Series B Preferred Stock, as contained in a resolution of the Board of
Directors of the Corporation, pursuant to a provision of the Articles of
Incorporation of the Corporation.
1. Designation; Number of Shares.
The designation of said series of Preferred Stock shall be Series
B 8% Cumulative Convertible Redeemable Preferred Stock (the "Series B
Preferred Stock"). The number of shares of Series B Preferred Stock shall be
560,126. Each share of Series B Preferred Stock shall have a stated value
equal to $7.75 (as adjusted for any stock dividends, combinations or splits
with respect to such shares)(the "Stated Value").
- 1 -
<PAGE>
2. Dividends.
(a) The holders of outstanding shares of Series B Preferred
Stock shall be entitled to receive preferential dividends in cash, out of any
funds of the Corporation legally available after dividends shall have been
paid or declared and set apart for payment on shares of the Corporation's
Series A 7.5% Cumulative Convertible Redeemable Preferred Stock (the "Series
A Preferred Stock"), but before any dividend or other distribution will be
paid or declared and set apart for payment on any shares of any Common Stock
or other class of stock junior to the Series B Preferred Stock (the Common
Stock and such junior stock being hereinafter collectively the "Junior
Stock") at the rate of 12% per annum on the Stated Value payable quarterly on
the last day of each calendar quarter; provided, however, that in the event
that dividend payments are not made when due in cash, to the extent permitted
by applicable law, dividend payments shall be made, in the sole discretion of
the Board of Directors of the Corporation, in additional fully paid and
nonassessable shares of the Corporation's Common Stock at a rate of one share
of Common Stock for each $2.00 of such dividend not paid in cash and the
issuance of such additional shares shall constitute full payment of such
dividend.
(b) The dividends on the Series B Preferred Stock at the rates
provided above shall be cumulative whether or not earned, so that if at any
time full cumulative dividends at the rate aforesaid on all shares of the
Series B Preferred Stock then outstanding from the date from and after which
dividends thereon are cumulative to the end of the quarterly dividend period
next preceding such time shall not have been paid or declared and set apart
for payment, or if the full dividend on all such outstanding Series B
Preferred Stock for the then current dividend period shall not have been paid
or declared and set apart for payment, the amount of the deficiency shall be
paid or declared and set apart for payment (but without interest thereon)
before any sum shall be set apart for or applied by the Corporation or a
subsidiary of the Corporation to the purchase, redemption or other
acquisition of the Series B Preferred Stock or any shares of any other class
of stock ranking on a parity with the Series B Preferred Stock ("Parity
Stock") and before any dividend or other distribution shall be paid or
declared and set apart for payment on any Junior Stock and before any sum
shall be set aside for or applied to the purchase, redemption or other
acquisition of Junior Stock.
(c) Dividends on all shares of the Series B Preferred Stock
shall begin to accrue and be cumulative from and after the date of issuance
thereof at the rate then provided. A dividend period shall be deemed to
commence on the day following a quarterly dividend payment date herein
specified and to end of the next succeeding quarterly dividend payment date
herein specified.
3. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, the holders of the Series B
Preferred Stock shall be entitled to receive, after any required payment or
distribution shall be made on the Series A Preferred Stock,
- 2 -
<PAGE>
but before any payment or distribution shall be made on the Junior Stock, out
of the assets of the Corporation available for distribution to stockholders,
the Stated Value per share of Series B Preferred Stock and all accrued and
unpaid dividends to and including the date of payment thereof. Upon the
payment in full of all amounts due to holders of the Series B Preferred
Stock, the holders of the Common Stock of the Corporation and any other class
of Junior Stock shall receive all remaining assets of the Corporation legally
available for distribution. If the assets of the Corporation available for
distribution to the holders of the Series B Preferred Stock shall be
insufficient to permit payment in full of the amounts payable as aforesaid to
the holders of Series B Preferred Stock upon such liquidation, dissolution or
winding-up, whether voluntary or involuntary, then all such assets of the
Corporation shall be distributed, to the exclusion of the holders of shares
of Junior Stock, ratably among the holders of the Series B Preferred Stock.
(b) Neither the purchase nor the redemption by the Corporation of
shares of any class of stock, nor the merger or consolidation of the
Corporation with or into any other corporation or corporations, nor the sale
or transfer by the Corporation of all or any part of its assets, shall be
deemed to be a liquidation, dissolution or winding-up of the Corporation for
the purposes of this paragraph 3. Holders of the Series B Preferred Stock
shall not be entitled, upon the liquidation, dissolution or winding-up of the
Corporation, to receive any amounts with respect to such stock other than the
amounts referred to in this paragraph 3.
4. Redemption.
(a) The shares of Series B Preferred Stock may be redeemed, in
whole or from time to time in part, at the election of the Corporation,
expressed by resolution of the Board, at any time or from time to time at a
redemption price per share equal to 129% of the Stated Value per share (as
adjusted for any stock dividends, stock combinations or splits with respect
to such shares) and all accrued and unpaid dividends on such shares of Series
B Preferred Stock to and including the Redemption Date (as hereinafter
defined).
(b) Notice of every redemption of Series B Preferred Stock
pursuant to this paragraph 4 shall be given by mail or in such other manner
as may be prescribed by resolution of the Board not less than thirty (30)
days prior to the applicable date of redemption ("Redemption Date"). As
applicable, the notice shall specify the number of shares to be redeemed, the
date fixed for redemption, the redemption price per share and the address
where payment of the redemption price per share is to be paid upon the
surrender of certificates representing shares of Series B Preferred Stock.
The giving of such notice shall obligate the Corporation to redeem the shares
to which the notice relates on the Redemption Date. If less than all the
outstanding Series B Preferred Stock is to be redeemed, the selection of
shares for redemption may be made either by lot or pro rata in such manner as
may be prescribed by resolution of the Board.
(c) On and after the applicable Redemption Date and
notwithstanding that any certificate for shares of Series B Preferred Stock
so called for redemption shall not have been surrendered for cancellation,
all dividends on the Series B Preferred Stock called for redemption
- 3 -
<PAGE>
shall cease to accrue and the shares represented thereby shall no longer be
deemed outstanding and all rights of the holders thereof as stockholders of
the Corporation shall cease and terminate, except the right to receive the
redemption price per share as hereinafter provided and except any conversion
rights not theretofore expired.
(d) At any time on or after the applicable Redemption Date, the
holders of record of the Series B Preferred Stock to be redeemed shall be
entitled to receive the redemption price per share upon actual delivery of
the certificates for the shares to be redeemed to the place so specified in
the redemption notice, such certificates, if required, to be duly endorsed in
blank or accompanied by proper instruments of assignment and transfer, or
duly endorsed in blank. If less than all of the shares represented by any
such certificate are redeemed, a new certificate representing the unredeemed
shares shall be issued.
5. Conversion into Common Stock. Shares of Series B Preferred
Stock shall have the following conversion rights and obligations:
(a) Subject to the further provisions of this paragraph 5, each
holder of shares of Series B Preferred Stock shall have the right, at any
time and from time to after forty-five (45) days from the date on which a
share of Series B Preferred Stock was issued, to convert some or all such
shares into fully paid and non-assessable shares of Common Stock of the
Corporation (as defined in subparagraph 5(j) below) determined in accordance
with the Conversion Price provided in paragraph 5(c) below.
(b) Subject to the further provisions of this paragraph 5, the
Corporation shall have the right, at its option at any time after forty-five
(45) days from the date on which a share of Series B Preferred Stock was
issued, to cause each holder of such shares of Series B Preferred Stock to
convert such shares into fully paid and non-assessable shares of Common Stock
of the Corporation at the Conversion Price during the thirty (30) day period
beginning on the day after the fifth consecutive day the Closing Bid Price
equals or exceeds 150% of the Stated Value per share (the "Mandatory
Conversion Period"). Notice of such mandatory conversion of the Series B
Preferred Stock pursuant to this paragraph 5(b) shall be given by mail or in
such other manner as may be prescribed by resolution of the Board of
Directors of the Corporation not later than the expiration of the Mandatory
Conversion Period. As applicable, the notice shall specify the number of
shares to be converted, the date of conversion and the Conversion Price per
share.
(c) The number of shares of Common Stock issuable upon
conversion of each share of Series B Preferred Stock shall equal (i) the sum
of (A) the Stated Value per share and (B) accrued and unpaid dividends on
such share divided by (ii) the Conversion Price. The "Conversion Price"
shall be equal to $2.00 per share of Common Stock, subject to adjustment as
herein provided.
(d) The holder of any certificate for shares of Series B
Preferred Stock desiring to convert any of such shares or whose shares where
converted at the election of the
- 4 -
<PAGE>
Corporation pursuant to the provisions of this paragraph 5 shall surrender
such certificate, at the principal office of any transfer agent for said
stock (the "Transfer Agent"), with a written notice of such election to
convert (if such conversion is voluntary) such shares into Common Stock duly
filled out and executed, and if necessary under the circumstances of such
conversion, with such certificate properly endorsed for, or accompanied by
duly executed instruments of, transfer (and such other transfer papers as
said Transfer Agent may reasonably require). The holder of the shares so
surrendered for conversion shall be entitled to receive within three (3)
business days of the Notice of Conversion (except as otherwise provided
herein) a certificate or certificates, which shall be expressed to be fully
paid and non-assessable, for the number of shares of Common Stock to which
such stockholder shall be entitled upon such conversion, registered in the
name of such holder or in such other name or names as such stockholder in
writing may specify. In the case of any Series B Preferred Stock which is
converted in part only, the holder of shares of Series B Preferred Stock
shall upon delivery of the certificate or certificates representing Common
Stock also receive a new share certificate representing the unconverted
portion of the shares of Series B Preferred Stock. Nothing herein shall be
construed to give any holder of shares of Series B Preferred Stock
surrendering the same for conversion the right to receive any additional
shares of Common Stock or other property which results from an adjustment in
conversion rights under the provisions of subparagraphs (e) or (f) of this
paragraph 5 until holders of Common Stock are entitled to receive the shares
or other property giving rise to the adjustment.
In the case of the exercise of the conversion rights set forth in
paragraphs 5(a) and 5(b), the conversion privilege shall be deemed to have
been exercised, and the shares of Common Stock issuable upon such conversion
shall be deemed to have been issued, upon the date of receipt by such
Transfer Agent for conversion of the certificate for such shares of Series B
Preferred Stock. In the case of the automatic conversion set forth in
paragraph 5(b), conversion shall be deemed to have occurred as provided in
paragraph 5(b). The person or entity entitled to receive Common Stock
issuable upon such conversion shall on the date such conversion privilege is
deemed to have been exercised and thereafter be treated for all purposes as
the record holder of such Common Stock and shall on the same date cease to be
treated for any purpose as the record holder of such shares of Series B
Preferred Stock so converted.
Notwithstanding the foregoing, if the stock transfer books are
closed on the date such shares are received by the Transfer Agent, the
conversion privilege shall be deemed to have been exercised, and the person
or entity shall be treated as a record holder of shares of Common Stock, on
the next succeeding date on which the transfer books are open, but the
Conversion Price shall be that in effect on the date such conversion
privilege was exercised. The Corporation shall not be required to deliver
certificates for shares of its Common Stock or new certificates for
unconverted shares of its Series B Preferred Stock while the stock transfer
books for such respective classes of stock are duly closed for any purpose;
but the right of surrendering shares of Series B Preferred Stock for
conversion shall not be suspended during any period that the stock transfer
books of either of such classes of stock are closed.
- 5 -
<PAGE>
Upon the conversion of any shares of Series B Preferred Stock, no
adjustment or payment shall be made with respect to such converted shares on
account of any dividend on shares of such stock or on account of any dividend
on the Common Stock, except that the holder of such converted shares shall be
entitled to be paid any dividends declared on shares of Common Stock after
conversion thereof.
The conversion privilege shall also be subject to the following
terms and conditions:
(i) if any shares of Series B Preferred Stock shall be
called for redemption, the conversion privilege in respect of
such shares shall terminate at the close of business on the last
business day next preceding the applicable Redemption Date; and
(ii) if the Corporation shall at any time be liquidated,
dissolved or wound-up, the conversion privilege shall terminate
at the close of business on the last business day next preceding
the effective date of such liquidation, dissolution or
winding-up.
The Corporation shall not be required, in connection with any
conversion of Series B Preferred Stock, to issue a fraction of a share of its
Common Stock nor to deliver any stock certificate representing a fraction
thereof, but in lieu thereof the Corporation may make a cash payment equal to
such fraction multiplied by the Closing Bid Price on the date the conversion
right was triggered.
(e) The Conversion Price shall be subject to adjustment from
time to time as follows:
(i) In case the Corporation shall at any time (A) declare
any dividend or distribution on its Common Stock or other
securities of the Corporation other than the Series A Preferred
Stock, (B) split or subdivide the outstanding Common Stock, (C)
combine the outstanding Common Stock into a smaller number of
shares or (D) issue by reclassification of its Common Stock any
shares or other securities of the Corporation, then, in each such
event, the Conversion Price shall be adjusted proportionately so
that the holders of Series B Preferred Stock shall be entitled to
receive the kind and number of shares or other securities of the
Corporation which such holders would have owned or have been
entitled to receive after the happening of any of the events
described above had such shares of Series B Preferred Stock been
converted immediately prior to the happening of such event (or
any record date with respect thereto). Such adjustment shall be
made whenever any of the events listed above shall occur. An
adjustment made to the Conversion pursuant to this paragraph
5(e)(i) shall become effective immediately after the effective
date of the event retroactive to the record date, if any, for the
event.
- 6 -
<PAGE>
(f)(i) In case of any consolidation or merger of the
Corporation with or into any other corporation (other than a
merger or consolidation in which the Corporation is the surviving
or continuing corporation and which does not result in any
reclassification, conversion or change of the outstanding shares
of Common Stock), then, unless the right to convert shares of
Series B Preferred Stock shall have terminated, as part of such
consolidation or merger, lawful provision shall be made so that
holders of Series B Preferred Stock shall thereafter have the
right to convert each share of Series B Preferred Stock into the
kind and amount of shares of stock and/or other securities or
property receivable upon such consolidation or merger by a holder
of the number of shares of Common Stock into which such shares of
Series B Preferred Stock might have been converted immediately
prior to such consolidation or merger. Such provision shall also
provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in paragraph
(e) of this paragraph 5. The foregoing provisions of this
paragraph 5(f) shall similarly apply to successive consolidations
and mergers.
(ii) In case of any sale or conveyance to another person
or entity of the property of the Corporation as an entirety, or
substantially as an entirety, in connection with which shares or
other securities or cash or other property shall be issuable,
distributable, payable or deliverable for outstanding shares of
Common Stock, then, unless the right to convert such shares shall
have terminated, lawful provision shall be made so that the
holders of Series B Preferred Stock shall thereafter have the
right to convert each share of the Series B Preferred Stock into
the kind and amount of shares of stock or other securities or
property that shall be issuable, distributable, payable or
deliverable upon such sale or conveyance with respect to each
share of Common Stock immediately prior to such conveyance.
(g) Whenever the number of shares to be issued upon conversion
of the Series B Preferred Stock is required to be adjusted as provided in
this paragraph 5, the Corporation shall forthwith compute the adjusted number
of shares to be so issued and prepare a certificate setting forth such
adjusted conversion amount and the facts upon which such adjustment is based,
and such certificate shall forthwith be filed with the Transfer Agent for the
Series B Preferred Stock and the Common Stock; and the Corporation shall mail
to each holder of record of Series B Preferred Stock notice of such adjusted
conversion price.
- 7 -
<PAGE>
(h) In case at any time the Corporation shall propose:
(i) to pay any dividend or distribution payable in shares
upon its Common Stock or make any distribution (other than cash
dividends) to the holders of its Common Stock; or
(ii) to offer for subscription to the holders of its
Common Stock any additional shares of any class or any other
rights; or
(iii) any capital reorganization or reclassification of its
shares, or the consolidation or merger of the Corporation with
another corporation; or
(iv) the voluntary dissolution, liquidation or winding-up
of the Corporation;
then, and in any one or more of said cases, the Corporation shall cause at
least fifteen (15) days prior notice of the date on which (A) the books of
the Corporation shall close, or a record be taken for such stock dividend,
distribution or subscription rights, or (B) such capital reorganization,
reclassification, consolidation, merger, dissolution, liquidation or
winding-up shall take place, as the case may be, to be mailed to the Transfer
Agent for the Series B Preferred Stock and for the Common Stock and to the
holders of record of the Series B Preferred Stock.
(i) So long as any shares of Series B Preferred Stock shall
remain outstanding and the holders thereof shall have the right to convert
the same in accordance with provisions of this paragraph 5, the Corporation
shall at all times reserve from the authorized and unissued shares of its
Common Stock a sufficient number of shares to provide for such conversions.
(j) The term "Common Stock" as used in this paragraph 5 shall
mean Common Stock of the Corporation as such stock is constituted at the date
of issuance thereof or as it may from time to time be changed, or shares of
stock of any class, other securities and/or property into which the shares of
Series B Preferred Stock shall at any time become convertible pursuant to the
provisions of this paragraph 5.
(k) The Corporation shall pay the amount of any and all issue
taxes which may be imposed in respect of any issue or delivery of stock upon
the conversion of any shares of Series B Preferred Stock, but all transfer
taxes that may be payable in respect of any change of ownership of Series B
Preferred Stock, or any rights represented thereby, or of stock receivable
upon conversion thereof, shall be paid by the person or persons surrendering
such stock for conversion.
- 8 -
<PAGE>
6. Voting Rights.
Except as required by applicable law, shares of Series B
Preferred Stock shall not entitle its holder to any voting rights, but such
holder shall be entitled to a notice of any stockholders' meeting in
accordance with the By-laws of the Corporation.
7. Status of Converted or Redeemed Stock.
In case any shares of Series B Preferred Stock shall be redeemed
or converted pursuant to paragraphs 4 or 5 hereof, or otherwise repurchased
or reacquired, the shares so redeemed, converted or reacquired shall resume
the status of authorized but unissued shares of Preferred Stock and shall no
longer be designated as Series B Preferred Stock.
Signed as of this 24nd day of September, 1997.
HALSTEAD ENERGY CORP.
By: /s/ Claire E. Tarricone
Claire E. Tarricone
President
By: /s/ Anthony J. Tarricone
Anthony J. Tarricone
Secretary
STATE OF NEW YORK )
) SS.:
COUNTY OF WESTCHESTER )
On September 24, 1997, Claire E. Tarricone and Anthony J.
Tarricone, personally appeared before me, a Notary Public for the State and
County aforesaid, as President and Secretary, respectively, of Halstead
Energy Corp., who acknowledged that each of them executed the above
instrument.
__________________________
Notary Public
Piper & Marbury, L.L.P.
1251 Avenue of the Americas
New York, New York 10020-1104
December 1, 1997
Halstead Energy Corp.
33 Hubbells Drive
Mount Kisco, New York 10549
Re: Registration Statement on Form SB-2 (No. 333 - 38031)
Gentlemen:
We refer to the registration by Halstead Energy Corp. (the "Company") of
2,170,488 shares of the Company's common stock, par value $0.001 per share (the
"Common Stock"), that may be offered for sale for the accounts of certain
selling stockholders (the "Selling Stockholders"), as more fully described in
the Registration Statement (No. 333 - 38031) on Form SB-2 (the "Registration
Statement") filed by the Company pursuant to the Securities Act of 1933, as
amended (the "Act"), to which this opinion is an exhibit, and in the Prospectus
constituting a part thereof (the "Prospectus"), including such additional
securities as may be issued to the Selling Stockholders as more fully described
in the Prospectus.
We have acted as counsel to the Company in connection with the preparation
of the Registration Statement. As such counsel, we have examined originals, or
copies certified to our satisfaction, of the Company's Articles of Incorporation
and Bylaws, as amended, such agreements, documents, certificates and other
statements of government officials and corporate officers and representatives,
and other papers as we have deemed relevant and necessary as a basis for our
opinion. In such examination we have assumed the genuineness of all documents
submitted to us as originals and the conformity with the original document of
documents submitted to us as copies. In addition, as to matters of fact only, we
have relied to the extent we deemed such reliance proper, upon certificates and
other written statements of public officials and corporate officers of the
Company.
Based upon the foregoing, we are of the opinion that the shares of Common
Stock offered for sale for the account of the Selling Stockholders, when issued
and delivered in accordance with the Company's Amended and Restated Certificate
of Designation and as described in the Registration Statement, will be duly
authorized, validly issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
above-mentioned Registration Statement and to the use of our name under the
caption "Legal Matters" in the Prospectus.
Very truly yours,
PIPER & MARBURY, L.L.P
/s/ Piper & Marbury, L.L.P.
RESTRUCTURING AGREEMENT
This RESTRUCTURING AGREEMENT is made this 24th day of September, 1997
by and between HALSTEAD ENERGY CORP. ("Halstead"), INFINITY INVESTORS LIMITED
(the "Investor"), CLAIRE E. TARRICONE ("C. Tarricone"), ANTHONY J. TARRICONE
("A. Tarricone"), JOSEPH A. TARRICONE ("J. Tarricone," and together with C.
Tarricone and A. Tarricone, the "Tarricones").
WHEREAS, pursuant to a certain Offshore Securities Subscription
Agreement dated as of May 31, 1996, Halstead issued and sold to the Investor,
and the Investor purchased, 580,646 shares of Halstead's Series B 8%
Cumulative Convertible Redeemable Preferred Stock (the "Series B Preferred
Stock");
WHEREAS, Halstead and the Investor have entered into a letter of intent
dated May 19, 1997 regarding, among other matters, the proposed terms of a
restructuring of the shares of Series B Preferred Stock owned by the Investor
and the modification of the terms of the Series B Preferred Stock; and
WHEREAS, the Tarricones are the holders of Options to purchase an
aggregate of 1,000,000 shares of Halstead's Common Stock having an exercise
price of $.3125 per share (the "Tarricone Options") and are willing to
transfer to the Investor or other third parties all or a portion of the
Tarricone Options upon the occurrence of the events described herein.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereby agree as
follows:
1. Recapitalization of Series B Preferred Stock. The Investor
represents and warrants that, as of the date hereof, it is the record and
beneficial owner of 567,085 shares of Series B Preferred Stock (the "Investor
Shares") free and clear of any liens, claims, options or other encumbrances.
As of the date hereof, accrued and unpaid dividends on the Series B Preferred
Stock aggregated $467,813.91 and Halstead was indebted to the Investor in an
additional amount of $78,252.20. With respect to the Investor Shares, the
Investor and Halstead agree as follows:
(a) In exchange for 77,419 shares of Series B Preferred Stock
together with all accrued and unpaid dividends on such shares, and the other
amounts owing hereunder, Halstead agrees to issue, and the Investor agrees to
accept, a $600,000 principal amount 12% Subordinated Note in the form of
Exhibit A hereto (the "Note");
(b) With respect to the balance of the 560,126 Investor Shares
(the "Remaining Investor Shares"), the Investor and Halstead hereby agree to
amend the Certificate to Set Forth Designations, Voting Powers, Preferences,
Limitations, Restrictions and Relative Rights of Series B 8% Cumulative
Convertible Redeemable Preferred Stock, $.001 par value (the
- 1 -
<PAGE>
"Certificate of Designation") to provide, among other things, (i) a
fixed Conversion Price (as defined in the Certificate of Designation) of
$2.00 per share of Series B Preferred Stock, (ii) a removal of certain
limitations on the rights of the holders of the Series B Preferred Stock to
convert such shares into Halstead's Common Stock and (iii) an increase in the
dividend rate of the Series B Preferred Stock on the Stated Value (as defined
in the Certificate of Designation). As so amended, the Certificate of
Designation shall read in its entirety as set forth in Exhibit B hereto.
2. Registration.
(a) Definitions. The following definitions shall apply with
respect to this Agreement and to a registration (a "Registration") pursuant
to this Section 2:
(i) "Conversion Shares" shall mean shares of Halstead's
Common Stock issuable upon conversion of the Remaining Investor Shares.
(ii) "Dividend Shares" shall mean shares of Halstead's
Common Stock issuable in lieu of cash dividends on the Remaining Investor
Shares.
(iii) "Option Shares" shall mean shares of Halstead's
Common Stock issuable upon exercise of the Tarricone Options.
(iv) "Public Offering" shall mean a public offering of
equity securities of Halstead pursuant to an effective registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), covering
the offer and sale of equity securities of Halstead to the public.
(v) The term "Registrable Shares" shall mean the
Conversion Shares, the Dividend Shares and the Option Shares and any
securities issued or issuable with respect to such securities by way of stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization or
otherwise. Registrable Shares shall cease to be Registrable Shares when they
may be sold under Rule 144(k) and all requisite steps have been taken to
remove any legends or restrictions on transfer under the Securities Act with
respect to such Registrable Shares; provided, however, that Registrable
Shares which are subject to the Option shall not cease to be Registrable
Shares unless the transfer pursuant to the exercise of the Option can be made
under Rule 144(k).
(vi) The term "Registration Statement" shall mean any
registration statement of Halstead that covers any of the Registrable Shares
pursuant to the provisions of this Agreement, including the prospectus
included therein, any amendment or supplement thereof, including
post-effective amendments, and all exhibits and all material incorporated by
reference in such Registration Statement.
- 2 -
<PAGE>
(vii) The term "SEC" shall mean the United States Securities and
Exchange Commission or any successor thereto.
(b) Agreement to Register Conversion Shares. Within seven (7)
business days after the closing of the transactions contemplated by this
Agreement, Halstead shall prepare and file with the SEC a Registration
Statement covering the resale of the Conversion Shares and use its
commercially reasonable efforts to cause such Registration Statement to
become effective not later than October 15, 1997. In this regard, Halstead
shall respond to any SEC comments within three (3) business days after the
date of receipt thereof; provided however, that in the event that any SEC
response involves or requires the input of any third party, including Goldman
& Murphy LLP, and such input is not received by the SEC within such three (3)
business day period, the SEC response time shall be extended for up to an
additional (i) fifteen (15) business days in the event that such SEC comments
relate, in whole or in part, to Halstead's audited financial statements for
the fiscal year ended August 31, 1996 and (ii) five (5) additional business
days in all other cases. In the event that such Registration Statement
shall not have been declared effective on or before October 15, 1997, within
seven (7) business days after October 15, 1997, the Company shall prepare and
file an amendment to the Registration Statement containing such unaudited
interim financial statements as shall be necessary to permit the Registration
Statement to become effective and the Conversion Shares to be sold
thereunder; provided, however, that in the event that any such amendment
involves or requires the input of Goldman & Murphy LLP, and such involvement
or input is not received within seven (7) business days, the time period
within which to file an amended Registration Statement shall be extended for
up to an additional eight (8) business days.
The offering contemplated by this Section 2(b) may be, at the option of
a majority (by number of securities) of the holders of the Conversion Shares
so included, an underwritten offering and the underwriter or underwriters
thereof shall be selected by the holders of at least a majority (by number of
securities) of the Registrable Shares as to which registration has been
requested who shall be reasonably acceptable to Halstead.
(c) Piggyback Registration of Dividend Shares.
(i) If Halstead at any time after the second anniversary
of the effective date of the Registration Statement referred to in Section
2(b) hereof proposes to register any of its shares of Common Stock under the
Securities Act (other than on Form S-4 or Form S-8 or other comparable form
or pursuant to an exchange offer or other offering of securities solely to
Halstead's shareholders), Halstead shall give written notice to the Investor
of its intention to effect such registration within ten (10) days after
making such determination, and upon the request of the Investor delivered to
Halstead within twenty (20) days after giving of such notice (which request
shall specify the number of Registrable Shares relating to Dividend Shares
intended to be disposed of by the Investor and the intended method of
disposition thereof), Halstead shall use its commercially reasonable efforts
to cause such Registrable Shares relating to Dividend Shares to be included
in such registration.
- 3 -
<PAGE>
(ii) In the event that a registration pursuant to this Section
2(c) is for a Public Offering involving an underwriting, Halstead shall so
advise the Investor. In such event, the right of the Investor to
registration pursuant to this Section 2(c) shall be conditioned upon the
approval of the managing underwriter and the inclusion of the Dividend Shares
in the underwriting shall be subject to the following conditions: (A) the
Investor shall enter into an underwriting agreement in customary form with
the managing underwriter selected by Halstead; (B) if the managing
underwriter advises Halstead in writing (with a copy to each holder of
Registrable Shares) that marketing factors require a limitation of the number
of Dividend Shares to be underwritten, the number of Dividend Shares shall be
reduced to the number which Halstead is so advised can be sold in such
offering, pro rata among the holders on the basis of the number of
Registrable Shares held (or then acquirable) by such holders, provided that
no other holders of registration rights granted after the date hereof shall
have their shares included in such Registration Statement unless all of the
Registrable Shares relating to Dividend Shares shall be so included and,
provided, further, that the holders of Dividend Shares shall have priority to
all shares sought to be included by officers and directors of Halstead as
well as holders of ten percent (10%) or more of the Halstead Common Stock;
and (C) if the Investor disapproves of the terms of the underwriting, it may
elect to withdraw therefrom by written notice to Halstead, in which case, the
Dividend Shares shall not be transferred in a public distribution prior to 90
days after the effective date of such Registration Statement, or a shorter
period (if permitted by the managing underwriter), in each case as requested
in writing by the managing underwriter.
(d) Mandatory Registration of the Dividend Shares. At any time
after the second anniversary of the effective date of the Registration
Statement referred to in Section 2(b), upon the written request of the
Investors owning not less than a majority of the Dividend Shares, Halstead
shall use its commercially reasonable efforts to effect the registration of
all Dividend Shares then issued as soon as practicable, but no later than 90
days after the request for registration pursuant to this Section 2(d);
provided, however, that such period may be extended or delayed by Halstead
for one period of up to 45 days if, upon the advice of counsel at the time
such Registration Statement is required to be filed, or at the time Halstead
is required to exercise its commercially reasonable efforts to cause such
Registration Statement to become effective, such delay is advisable and in
the best interests of Halstead because of the existence of non-public
material information, or to allow Halstead to complete any pending audit of
its financial statements. The right to demand registration pursuant to this
Section 2(d) shall terminate after two Registration Statements prepared
pursuant to this Section 2(d) have been declared effective.
(e) Provisions Applicable to Registration. The following
provisions shall apply, as applicable, in connection with the Registrable
Shares to be included in the Registration Statement pursuant to this Section
2:
(i) the Investor, if reasonably requested by the
underwriter with respect to any Public Offering, shall agree not to sell,
make any short sale of, loan, grant any options for the purchase of, or
otherwise dispose of any Registrable Shares (other than those included in the
Registration) without the prior written consent of such underwriters, as the
case
- 4 -
<PAGE>
may be, for such period of time (not to exceed one hundred twenty (120)
days), from the effective date of such Registration Statement, or the
commencement of the offering, as applicable, as may be requested by the
underwriters;
(ii) Halstead shall prepare the Registration Statements
utilizing, the information set forth on Annex A attached hereto and such
other information provided to Halstead in writing by the Investor and shall
not thereafter amend the portion of the Registration Statement containing
such information without the Investor's consent, which consent shall not be
unreasonably withheld or delayed.
(iii) the Investor shall promptly provide Halstead upon
written request therefrom with such non-confidential and non-proprietary
information as it shall reasonably request and that is available to the
Investor and necessary in order to prepare the Registration Statement;
(iv) all reasonable and necessary expenses in connection
with the preparation of the Registration Statements contemplated by Sections
2(b) and 2(c) hereof and the first Registration Statement prepared pursuant
to Section 2(d), including, without limitation, any and all legal, accounting
and filing fees (but not including fees and disbursements of experts,
counsel, personnel and other persons retained by the Investor or underwriting
discounts and commissions to be paid by the Investor) shall be borne by
Halstead; the Investor shall bear all such fees, costs and expenses for any
other registrations;
(v) Halstead shall use its commercially reasonable
efforts to effect such Registration permitting the sale of such Registrable
Shares in accordance with the intended method or methods of distribution
thereof, and pursuant thereto, Halstead shall as expeditiously as possible:
(1) prepare and file with the SEC a Registration
Statement by the date required herein (the "Required Effectiveness
Date") relating to the applicable registration on any appropriate form
under the Securities Act, which form shall be available for the sale of
the Registrable Shares in accordance with the intended method or
methods of distribution thereof and use its commercially reasonable
efforts to cause such Registration Statement to become effective and
keep such Registration Statement effective in accordance with Section
2(e)(v)(2) below; provided, however that before filing such
Registration Statement or any amendments thereto, Halstead will furnish
to the counsel selected by the holders of Registrable Shares which are
to be included in such registration, copies of all such documents
proposed to be filed;
(2) prepare and file with the SEC such amendments
and post-effective amendments to the Registration Statement as may be
necessary to keep the Registration effective until all such Registrable
Shares are sold or otherwise cease to be Registrable Shares (the
"Registration Maintenance Period"); cause the prospectus to be
supplemented by any required prospectus supplement, and as so
supplemented to be filed
- 4 -
<PAGE>
pursuant to Rule 424 under the Securities Act; and comply with the
provisions of the Securities Act with respect to the disposition of all
Registrable Shares covered by such Registration Statement during the
applicable period in accordance with the intended method or methods of
distribution by the sellers thereof as set forth in such Registration
Statement or supplement to the prospectus; provided, however that
Halstead may, from time to time, request that the holders of the
Registrable Shares immediately discontinue the disposition of the
Registrable Shares for a period not to exceed thirty consecutive days
or an aggregate of seventy five (75) days in any year if Halstead
determines, in the good faith exercise of its reasonable business
judgment, that the offering and disposition of the Registrable Shares
could materially interfere with bona fide financing, acquisition or
other material business plans of Halstead or would require disclosure
of non-public information, the premature disclosure of which could
materially and adversely affect Halstead (it being acknowledged that
Halstead is not required to disclose in such request any such
transaction, plan or non-public information), so long as Halstead
promptly after the disclosure of such transaction, plan or non-public
information complies with this section 2(e)(v)(2).
(3) notify the Investor and the underwriter, if
any, promptly, and (if requested by any such person) confirm such
advice in writing, (A) when the prospectus or any prospectus supplement
or post-effective amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment thereto, when
the same has become effective, (B) of any request by the SEC for
amendments or supplements to the Registration Statement or the
prospectus or for additional information, (C) of the issuance by the
SEC of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose, (D) of
the receipt by Halstead of any notification with respect to the
suspension of the qualification of the Registrable Shares for sale in
any jurisdiction or the initiation of any proceedings for such purpose
and (E) subject to the proviso below, of the happening of any event as
a result of which the prospectus included in such Registration
Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in
light of the circumstances then existing and, subject to Section
2(e)(v)(2) above, at the request of any such person, prepare and
furnish to such person a reasonable number of copies of a supplement to
or an amendment of such prospectus as may be necessary so that, as
thereafter delivered to the purchasers of such shares, such prospectus
shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading in light of the
circumstances then existing; provided, however, Halstead need not
disclose the event if it otherwise has not disclosed such event to the
public.
(4) if requested by the Investor or the
underwriters, if any, promptly incorporate in a prospectus supplement
or post-effective amendment such information as the underwriter and the
Investor agree should be included therein relating
- 6 -
<PAGE>
to the plan of distribution with respect to such Registrable Shares,
including, without limitation, the purchase price being paid therefor
by such underwriters and with respect to any other terms of the
underwritten offering of the Registrable Shares to be sold in such
offering; and make all required filings of such prospectus supplements
or post-effective amendments as soon as notified of the matters to be
incorporated in such prospectus supplements or post-effective
amendments;
(5) deliver to the Investor and the underwriters,
if any, without charge, as many copies of the prospectus (including
each preliminary prospectus) in conformity with the requirement of the
Securities Act and any amendments or supplements thereto as such
persons may reasonably request and such other documents as they may
reasonably request to facilitate the prior sale or other disposition of
such Registrable Shares;
(6) prior to any Public Offering of Registrable
Shares, register or qualify or cooperate with the Investor, or the
underwriters, if any, in connection with the registration or
qualification of such Registrable Shares for offer and sale under the
securities or blue sky laws of such jurisdictions as the Investor or
underwriters, if any, reasonably requests in writing and do any and all
other acts or things necessary or advisable to enable the disposition
in such jurisdictions of the Registrable Shares covered by the
Registration Statement; provided, however, that Halstead shall not be
required to qualify to do business in any jurisdiction where it is not
then so qualified or to take any action that would subject it to
general service of process in any such jurisdiction where it is not
then so subject or would subject Halstead to any tax in any such
jurisdiction where it is not then so subject or would require the
directors, officers or employees of Halstead to agree to a lock-up or
to escrow their shares or to relinquish any options or other rights to
purchase shares; and provided, further, that Halstead shall not be
required to expend more than $20,000 for registration fees in
connection with any single offering contemplated by this Section 2; and
(7) with a view to making available the benefits of
certain rules and regulations of the SEC which may at any time permit
the sale of Registrable Shares to the public without registration,
during such time as a public market exists for its equity securities,
Halstead agrees to:
a) make and keep public information
available, as those terms are understood and defined in Rule 144 under
the Securities Act, at all times after the effective date of the
Registration Statement;
b) use its commercially reasonable efforts
to file with the SEC in a timely manner all reports and other documents
required of Halstead under the Securities Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act")(at any time after
it has become subject to such reporting requirements);
- 7 -
<PAGE>
c) furnish to the Investor forthwith upon
the Investor's request a written statement by Halstead as to Halstead's
compliance with the reporting requirements of said Rule 144, and of the
Securities Act and the Exchange Act, a copy of the most recent annual
or quarterly report of Halstead and such other reports and documents of
Halstead as the Investor may reasonably request in availing itself of
any rule or regulation of the SEC allowing a holder to sell any such
securities without registration; and
(8) list all Registrable Shares covered by such
Registration Statement on any securities exchange or automated
quotation service on which any of the Registrable Shares are then
listed.
(vi) Notwithstanding the provisions of this Section 2 to
the contrary Halstead:
(1) may require the Investor to furnish to Halstead
such information regarding the distribution of such securities as
Halstead may from time to time reasonably request; and
(2) The Investor will covenant that the Investor
has not taken, and will not take, directly, or indirectly, any action
designed, or which might reasonably be expected, to violate applicable
law; and
(vii) the Investor agrees by acquisition of such
Registrable Shares that, upon receipt of the request referred to in the
proviso of Section 2(e)(v)(2) or of any notice from Halstead of the happening
of any event of the kind described in Section 2(e)(v)(3) hereof (other than
as provided in Section 2(e)(v)(3)(A) hereof), the Investor shall forthwith
discontinue disposition of Registrable Shares until it is advised in writing
by Halstead that the use of the prospectus may be resumed, and has received
copies of any additional or supplemental documents or filings that are
incorporated by reference in the prospectus, and, if so directed by Halstead,
the Investor shall deliver to Halstead (at Halstead's expense) all copies
other than permanent file copies then in the Investor's possession, of the
prospectus covering such Registrable Shares current prior to the time of
receipt of such notice.
(f) Indemnification.
(i) In the event of a registration or qualification of
any Registrable Shares under the Securities Act pursuant to the provisions of
this Section 2, Halstead shall indemnify and hold harmless the Investor, the
officers and directors of the Investor and each director or officer of any
person or entity who controls the Investor, each underwriter of such
Registrable Shares and each other person or entity who controls the Investor
or such underwriter within the meaning of the Securities Act (collectively,
the " Investor Indemnitees"), from and against any and all losses, claims,
damages or liabilities, joint or several, to which any of the Investor
Indemnitees, joint or several, may become subject under the Securities Act or
the
- 8 -
<PAGE>
applicable securities laws or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon (x) any untrue statement or alleged untrue statement of any
material fact contained in any Registration Statement under which such
Registrable Shares were registered or qualified under the Securities Act, or
any amendment or supplement thereto, any preliminary prospectus or final
prospectus contained therein, or any supplement thereto, or any document
prepared and/or furnished to the Investor incident to the registration or
qualification of any Registrable Shares, or (y) the omission or alleged
omission to state in any Registration Statement a material fact required to
be stated therein or necessary to make the statements therein not misleading
or, with respect to any prospectus, necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, or
(z) any violation by Halstead of the Securities Act or state securities or
"blue sky" laws applicable to Halstead and relating to action or inaction
required of Halstead in connection with registration or qualification under
such state securities or "blue sky" laws, and in each case shall reimburse
the Investor Indemnitees for any legal or other expenses reasonably incurred
by such the Investor Indemnitees in connection with investigating or
defending any such loss, claim, damage or liability (or action in respect
thereof); provided, however, that Halstead shall not be liable in any such
case to the extent that any such loss, claim, damage or liability (or action
in respect thereof) arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
Registration Statement in reliance upon and in conformity with information
furnished to Halstead by such Investor Indemnitees in writing and expressly
for use in the Registration Statement; and provided further, that Halstead
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability (or action in respect thereof) arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission in such Registration Statement, which untrue statement or alleged
untrue statement or omission or alleged omission is completely corrected in
an amendment or supplement to the Registration Statement and such Investor
Indemnitees thereafter fail to deliver or cause to be delivered such
Registration Statement as so amended or supplemented prior to or concurrently
with the sale of the Registrable Shares to the person asserting such loss,
claim, damage or liability (or actions in respect thereof) or expense after
Halstead has furnished the Investor with the same.
(ii) In the event of the registration or qualification of
any Registrable Shares under the Securities Act pursuant to the provisions of
this Section 2, Halstead may require, as a condition to including any
Registrable Shares in any Registration Statement filed pursuant to this
Agreement, and if so required the Investor hereby agrees, that the Investor
shall indemnify and hold harmless Halstead, each person who controls Halstead
within the meaning of the Securities Act, each officer and director of
Halstead and any other selling holder from and against any losses, claims,
damages or liabilities to which Halstead, such controlling person, any such
officer or director or any other selling holder may become subject under the
Securities Act or the applicable securities laws or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (x) any untrue statement or alleged untrue
statement of any material fact contained in any Registration Statement under
which such Registrable Shares were registered or qualified under the
Securities Act, or any
- 9 -
<PAGE>
amendment or supplement thereto, or (y) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, which untrue statement or alleged
untrue statement or omission or alleged omission was made therein in reliance
upon and in conformity with information furnished to Halstead by the Investor
in writing and expressly for use in the Registration Statement for use in
preparation thereof, and in each case shall reimburse Halstead, such
controlling person, each such officer or director and any other selling
holder for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage or
liability (or action in respect thereof). Notwithstanding the provisions of
this subsection 2(f)(ii), no holder of Registrable Shares shall be liable to
any person or group of persons in any aggregate amount in excess of the gross
proceeds of the sale of Registrable Shares.
(iii) Promptly after receipt by a person entitled to
indemnification under this Section 2(f) (an "Indemnified Party") of notice of
the commencement of any action or claim relating to any Registration
Statement filed under the provisions of this Section 2 or as to which
indemnity may be sought hereunder, such Indemnified Party shall, if a claim
for indemnification hereunder in respect thereof is to be made against any
other party hereto (an "Indemnifying Party"), give written notice to such
Indemnifying Party of the commencement of such action or claim, but the
omission so to notify the Indemnifying Party will not relieve such person
from any liability that such person may have to any Indemnified Party
otherwise than pursuant to the provisions of this Section 2(f) and shall also
not relieve the Indemnifying Party of such party's obligations under this
Section 2(f), except to the extent that the omission so to notify results in
the Indemnifying Party being damaged solely as a result of the failure to
give timely notice. In case any such action is brought against an
Indemnified Party, and such party notifies an Indemnifying Party of the
commencement thereof, the Indemnifying Party shall be entitled (at such
party's own expense) to participate in and, to the extent that the
Indemnifying Party may wish, jointly with any other Indemnifying Party
similarly notified, to assume the defense, with counsel satisfactory to such
Indemnified Party, of such action and/or to settle such action and, after
notice from the Indemnifying Party to such Indemnified Party of its election
so to assume the defense thereof, the Indemnifying Party shall not be liable
to such Indemnified Party for any legal or other expenses subsequently
incurred by such Indemnified Party in connection with the defense thereof,
other than the reasonable cost of investigation; provided, however, that no
Indemnifying Party and no Indemnified Party shall enter into any settlement
agreement that would impose any liability on such other party or parties
without the prior written consent of such other party or parties, unless such
other party or parties are fully indemnified to such party's satisfaction, as
the case may be, against any such liability.
(iv) If for any reason the indemnification provided for in
this Section 2 is unavailable to an Indemnified Party or is insufficient to
hold it harmless as contemplated by this Section 2, then the Indemnifying
Party shall contribute to the amount paid or payable by the Indemnified Party
as a result of such loss, claim, damage, liability or action in such
proportion as is appropriate to reflect to only the relative benefits
received by the Indemnified Party and the Indemnifying Party, but also the
relative fault of the Indemnified Party and the Indemnifying
- 10 -
<PAGE>
Party, as well as any other relevant equitable considerations. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f)
of the Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
3. Option to Purchase Shares. Upon the execution of this Agreement,
the Investor shall grant to Sandy Schwartz, David Somerstein, Elizabeth R.
Mandel and/or Michael Freiss an option (the "Option") to purchase the
Conversion Shares pursuant to an Option Agreement in the form of Exhibit C
hereto. The Option shall provide, among other things, (i) an Option exercise
price of $2.00 per share, (ii) an Option exercise period of 18 months from
the effectiveness of the Registration Statement described in Section 2(b)
(the "Effective Date"), (iii) the expiration of the Option in the event that
the holders of the Option fails to purchase at least an aggregate of (A)
250,000 Conversion Shares on or prior to the 90th day following the Effective
Date and (B) 400,000 Conversion Shares on or prior to the last day of each
succeeding 90 day period commencing 90 days after the Effective Date.
4.A Failure to Timely Effect Registration or Exercise of the Option.
In the event that (i) the Effective Date shall not have occurred on or before
December 15, 1997 or (ii) the Option terminates or expires prior to the
18-month anniversary of the Effective Date in accordance with its terms (any
such date being referred to herein as the "Trigger Date"), the Tarricones,
Halstead and the Investor agree that, in lieu of any further obligations of
Halstead and the Tarricones hereunder, the Investor shall have a period of 90
days after the Trigger Date to elect any one of the following compensation
alternatives:
(a) (i) The Investor shall have the right to cause the
Tarricones to transfer to the Investor such number of the Tarricone Options
(the "Investor Call Option") determined by multiplying the Tarricone Options
(net of any options previously transferred pursuant to Section 4B) by a
fraction the numerator of which is the number of Conversion Shares subject to
the Option on the Trigger Date minus number of Conversion Shares sold or
otherwise purchased pursuant to the Option after the Trigger Date and the
denominator of which is the total number of Conversion Shares subject to the
Option on the date hereof. Upon the transfer of the Tarricone Options but in
no event earlier than the second anniversary of the Effective Date, Halstead
shall prepare and file with the SEC within thirty (30) days of such second
anniversary a Registration Statement covering the resale of the shares of
Common Stock issuable upon exercise of the Option Shares and use its
commercially reasonable efforts to cause such Registration Statement to
become effective within ninety (90) days of the filing thereof. Such
registration shall be subject to all of the other terms and conditions set
forth in Section 2(e) hereof.
(ii) Upon exercise of the Investor Call Option and as a
condition to the delivery of the Tarricone Options subject to the HW Finance
Call Option (defined below), the Certificate of Designation shall be promptly
amended to provide that dividends on the shares of Series B Preferred Stock
shall cease to accrue upon the exercise of the Investor Call Option in
accordance with the form of Certificate of Amendment to the Certificate of
Designation set forth on Exhibit D hereto.
- 11 -
<PAGE>
(b) (i) The Investor shall have the right to cause the
Tarricones to transfer to the Investor such number of Tarricone Options (the
"HW Finance Call Option") determined by multiplying (x) the product of
500,000 and a fraction the numerator of which is the number of Tarricone
Options minus the number of Tarricone Options transferred to the Investor in
accordance with Section 4B and the denominator of which is the number of
Tarricone Options by (y) a fraction the numerator of which is the number of
Conversion Shares subject to the Option on the Trigger Date minus the number
of Conversion Shares sold or otherwise purchased pursuant to the Option after
the Trigger Date and the denominator of which is the total number of
Conversion Shares subject to the Option on the date hereof. Upon the
transfer of the Tarricone Options subject to the HW Finance Call Option, but
in no event earlier than the second anniversary of the Effective Date,
Halstead shall prepare and file with the SEC within thirty (30) days of such
second anniversary a Registration Statement covering the resale of the shares
issuable upon exercise of the Tarricone Options subject to the HW Finance
Call Option and use its commercially reasonable efforts to cause such
Registration Statement to become effective within ninety (90) days after the
filing thereof. Such registration shall be subject to all of the other terms
and conditions set forth in Section 2(e) hereof.
(ii) Upon exercise of the HW Finance Call Option and as a
condition to the delivery of the Tarricone Options subject to the HW Finance
Call Option, the Certificate of Designation shall be amended to provide that
dividends on shares of Series B Preferred Stock shall be reduced to 10% per
annum on the Stated Value in accordance with the form of Certificate of
Amendment to the Certificate of Designation set forth on Exhibit E hereto.
(iii) Upon exercise of the HW Finance Call Option and as a
condition to the delivery of the Tarricone Options subject to the HW Finance
Call Option, the interest rate on the Subordinated Note shall be reduced to
10% and the Investor shall surrender to Halstead the Subordinated Note issued
pursuant to this Agreement in exchange for a new Subordinated Note containing
identical terms but reflecting the amended interest rate.
4.B Failure to Timely Comply with Registration Timetable. In
the event that Halstead fails to timely satisfy its obligations set forth in
the first paragraph of Section 2(b) hereof (other than the October 15, 1997
Effective Date) within the time periods specified therein (other than the
October 15, 1997 Effective Date), for each such failure which is not cured
within five (5) business days' notice of such failure, the Tarricones agree
that the Investor shall have the right to cause the Tarricones to transfer to
the Investor twenty-five percent (25%) of the Tarricone Options subject to
the Investor Call Option. Upon the transfer of all or such other portion of
the Tarricone Options but in no event earlier than the second anniversary
following the Effective Date, Halstead shall prepare and file with the SEC
within thirty (30) days of such second anniversary a Registration Statement
covering the resale of the shares of Common Stock issuable upon exercise of
the transferred Tarricone Options and use its commercially reasonable efforts
to cause such Registration Statement to become effective within ninety (90)
days of the filing thereof. Such registration shall be subject to all of the
other terms and conditions set forth in Section 2(e) hereof.
- 12 -
<PAGE>
5. Representations, Warranties and Covenants of Halstead. Halstead
represents and warrants to, and agrees with, the Investor as follows:
(a) Halstead is a corporation duly organized, validly existing
and in good standing under the laws of the State of Nevada and has all
requisite corporate power and authority to carry on its business as now
conducted and as proposed to be conducted.
(b) All corporate action on the part of Halstead necessary for
the authorization, execution and delivery of this Agreement and the
performance of all obligations of Halstead hereunder has been taken, and this
Agreement constitutes a valid and legally binding obligation of Halstead
enforceable in accordance with its terms.
(c) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby do not and will not
conflict with or result in a breach by Halstead of any of the terms or
provisions of, or constitute a default under, the Articles of Incorporation
or By-Laws of Halstead, or any indenture, mortgage, deed of trust or other
material instrument to which Halstead is a party or by which it or any of its
properties or assets are bound, or any applicable decree, judgment or order
of any court, federal or state regulatory body, administrative agency or
other governmental body having jurisdiction over Halstead or any of its
properties or assets.
(d) Except as disclosed in Halstead's periodic reports filed
pursuant to the requirements of the Exchange Act, there is no action, suit or
proceeding before or by any court or governmental agency or body, domestic or
foreign, now pending against Halstead or any of its properties which could
reasonably be expected to result in any material adverse change in the
business, financial condition or results of operations of Halstead, or which
could reasonably be expected to materially and adversely affect the
properties or assets of Halstead.
(e) For a period of 18 months from and after the Effective
Date, Halstead shall not issue or grant, or contract to issue or grant, to
any of the Tarricones or any other officer or director of Halstead any equity
securities of Halstead or options to purchase equity securities of Halstead
(or securities convertible, exercisable or exchangeable for equity securities
of Halstead) other than (i) securities which are compensatory in nature
(i.e., securities or options which are issued or granted at fair market value
to compensate individuals for the difference between contractual or other
compensation, including reasonable bonuses, which they are actually paid in
cash and the amount of any such compensation to which they are entitled but
which is not otherwise paid), (ii) securities which such persons purchase
from third parties in bona fide arms-length transactions, (iii) securities
which such persons purchase for cash from Halstead at fair market value, and
(iv) securities outstanding on the date hereof.
(f) The Company will reserve from its authorized but unissued
shares of Common Stock a sufficient number of shares of Common Stock to
permit issuance of the Conversion Shares, the Dividend Shares and the Option
Shares.
- 13 -
<PAGE>
(g) The Company will maintain the listing of its Common Stock
on the Nasdaq SmallCap Stock Market so long as it meets the criteria for
inclusion thereon and will use its commercially reasonable efforts to comply
in all respects with the Company's reporting, filing and other obligations
under the bylaws or rules of the National Association of Securities Dealers,
Inc. and such exchanges, as applicable. The Company shall promptly provide
to the Investor copies of any notices it receives from Nasdaq regarding the
continued eligibility of the Common Stock for listing on Nasdaq.
(h) On or prior to the date that the SEC declares effective a
Registration Statement contemplated by Section 2 hereof, the Company shall
promptly secure the listing of the Common Stock to be issued or sold in
connection with such Registration Statement on any national securities
exchange or automated quotation system, if any, upon which shares of Common
Stock are then listed (subject to official notice of issuance) and shall use
commercially reasonable efforts to maintain, so long as any other shares of
Common Stock shall be so listed, such listings of all such shares.
(i) Upon conversion of the Investor Shares in accordance with
the terms of the Series B Preferred Stock, and/or exercise of any Option in
accordance with the terms hereof, the Company will, and will use its
commercially reasonable efforts to cause the transfer agent to, issue one or
more certificates representing shares of Common Stock in such name or names
and in such denominations specified by the Investor in a notice of conversion
or notice of exercise, as the case may be, in accordance with the terms of
this Agreement and the Option. As long as any such Registration Statement
shall remain effective, the shares covered thereby shall be issued to any
transferee of such shares from the Investor without restrictive legend.
6. Representations, Warranties and Covenants of the Tarricones.
Each of the Tarricones represents and warrants to, and agrees with, the
Investor as follows:
(a) All action on the part of each of the Tarricones necessary
for the authorization, execution and delivery of this Agreement and the
performance of all obligations of each of the Tarricones hereunder has been
taken, and this Agreement constitutes a valid and legally binding obligation
of each of the Tarricones enforceable against each of them in accordance with
its terms.
(b) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby do not and will not
conflict with or result in a breach by any of the Tarricones of any of the
terms or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust or other material instrument to which any of the
Tarricones is a party or by which any of the Tarricones is bound, or any
applicable decree, judgment or order of any court, federal or state
regulatory body, administrative agency or other governmental body having
jurisdiction over any of the Tarricones or any of the Tarricones' properties
or assets.
(c) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending
against any of the Tarricones
- 14 -
<PAGE>
which could reasonably be expected to result in any material adverse change
in the financial condition of any of the Tarricones, or which could
reasonably be expected to materially and adversely affect the transactions
contemplated by this Agreement.
(d) Each of the Tarricones represents and warrants that, as of the
date hereof, such person is the record and beneficial holder of the number of
Tarricone Options held by such person free and clear of such liens, claims or
encumbrances of any kind. The Tarricones covenant and agree that they shall
not, directly or indirectly, sell, pledge, give, transfer, assign, encumber
or in any way dispose of (collectively, a "Transfer") such number of
Tarricone Options (or any interest therein) as the Tarricones would be
required to hold from time to time in order to comply with their potential
obligations under Sections 4(a) and (b) hereof except as may be expressly
permitted by this Agreement. Each of the Tarricones represents and warrants
that, upon exercise of the Tarricone Options, assuming the payment in full of
the exercise price for the shares and the taking by Halstead of all requisite
action required by applicable law, the shares of Common Stock to be
transferred thereunder will be transferred to the Investor with good and
marketable title thereto, free and clear of any liens, claims or encumbrances
of any kind.
7. Representation, Warranties and Covenants of the Investor. The
Investor represents and warrants to, and agrees with, Halstead and the
Tarricones as follows:
(a) The Investor is a corporation duly organized, validly
existing and in good standing under the laws of Nevis, West Indies and has
all requisite corporate power and authority to carry on its business as now
conducted and as proposed to be conducted.
(b) All corporate action on the part of the Investor necessary
for the authorization, execution and delivery of this Agreement and the
performance of all obligations of the Investor hereunder has been taken, and
this Agreement constitutes a valid and legally binding obligation of the
Investor enforceable in accordance with its terms.
(c) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby do not and will not
conflict with or result in a breach by the Investor of any of the terms or
provisions of, or constitute a default under, the Articles of Organization or
By-Laws of the Investor, or any indenture, mortgage, deed of trust or other
material instrument to which the Investor is a party or by which it or any of
its properties or assets are bound, or any applicable decree, judgment or
order of any court, federal or state regulatory body, administrative agency
or other governmental body having jurisdiction over the Investor or any of
its properties or assets.
(d) The Investor shall not effect a Transfer of any of the
Investor Shares, the Conversion Shares, the Tarricone Options, the Option
Shares, the Dividend Shares or the Note (or any interest therein) except as
may be expressly permitted by this Agreement. Notwithstanding the general
prohibition on Transfer, the Investor may transfer the Investor Shares, the
Conversion Shares, the Tarricone Options, the Dividend Shares or the Note to
an Affiliate (as hereinafter defined) of the Investor that is reasonably
acceptable to Halstead,
- 15 -
<PAGE>
provided that any such transferee, as a condition to such Transfer, agrees to
be bound by the terms and conditions of this Agreement; and provided further,
that Halstead shall not transfer on its books any certificates for the
Investor Shares, the Conversion Shares, the Option Shares, the Dividend
Shares or Note nor issue any certificate in lieu of the Investor Shares, the
Conversion Shares, the Option Shares, the Dividend Shares or Note unless, in
the reasonable opinion of counsel to Halstead, there has been compliance with
all of the material conditions hereof affecting the Investor Shares or the
Conversion Shares, the Option Shares, the Dividend Shares or the Note, and
any such attempted Transfer in violation of this Agreement shall be void and
of no effect. For purposes of this Agreement, the term "Affiliate" shall
have the meaning set forth in Section 405 of the Securities Act, except that
the term "control" as set forth in such definition shall mean the ownership
of more than 50% of the voting securities of such person or the contractual
power to direct the business of such person.
(e) The Investor acknowledges that the Investor Shares,
Conversion Shares, the Dividend Shares and the Note have not been registered
under the Securities Act or under the securities laws of certain states and,
therefore, cannot be resold, pledged, assigned or otherwise disposed of
unless the securities are subsequently registered under the Securities Act
and under the applicable securities laws of such states or unless an
exemption from such registration, whether pursuant to Rule 144 under the
Securities Act or otherwise, is available in the opinion of counsel for the
holder, which counsel and opinion are reasonably satisfactory to counsel for
Halstead. The Investor is acquiring and will be acquiring the Note, the
Conversion Shares, the Tarricone Options, the Option Shares or the Dividend
Shares for the Investor's own account, for investment and not with a view to
resale or distribution except in compliance with the Securities Act. The
Investor hereby agrees that the following legends shall be inscribed on all
certificates representing the Shares, the Note and the Conversion Shares:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE SECURITIES LAWS AND CANNOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT OR APPLICABLE STATES SECURITIES ACT WHICH, IN THE
OPINION OF COUNSEL FOR THE HOLDER, WHICH COUNSEL AND OPINION ARE REASONABLY
SATISFACTORY TO COUNSEL FOR HALSTEAD, IS AVAILABLE.
THE SHARES REPRESENTED HEREBY ARE ALSO SUBJECT TO A RESTRUCTURING
AGREEMENT, DATED SEPTEMBER 24, 1997, BY AND AMONG HALSTEAD ENERGY CORP.,
INFINITY INVESTORS LIMITED, CLAIRE E. TARRICONE, ANTHONY J. TARRICONE AND
JOSEPH A. TARRICONE, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF
HALSTEAD, AND ANY SALE, PLEDGE, GIFT, TRANSFER, ASSIGNMENT, ENCUMBRANCE OR
OTHER DISPOSITION OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IN
VIOLATION OF SAID AGREEMENT SHALL BE VOID AND OF NO EFFECT."
- 16 -
<PAGE>
(f) The Investor is an accredited investor within the meaning
of the rules and regulations promulgated under the Securities Act.
(g) The Investor is not relying on Halstead with respect to the
tax and other economic considerations of an investment in securities issued
pursuant to this Agreement, and the Investor has relied on the advice of, or
has consulted with, only the Investor's own advisor(s).
(h) The Investor hereby authorizes Halstead to file the amended
Certificate of Designation described in Sections 4(a) and 4(b) immediately
after the required portion of the Tarricone Options is transferred to the
Investor, HW Finance or their designees pursuant to the terms of Section 4.
8. Confidentiality. Each of the parties hereto hereby acknowledges
that it is aware, and agrees that it will advise the Permitted Persons (as
defined below), that federal and state securities laws prohibit certain
persons who possess material, non-public information concerning an issuer
subject to the reporting requirements of the Exchange Act from purchasing or
selling securities of such issuer or from communicating such information to
any other person under the circumstances in which it is reasonably
foreseeable that such person is likely to purchase or sell such securities,
and agrees that it will not engage, and that it will cause all Permitted
Persons not to engage, in any such activities. Without the prior written
consent of Halstead, neither HW Partners, L.P., HW Finance, L.L.C., the
Investor nor any of their respective officers, directors, employees, agents
or representatives will use any non-public, proprietary or confidential
information of or concerning Halstead or disclose the terms hereof other than
as required by applicable law or legal process, nor will any of such
information be disclosed to any person or entity that is not a Permitted
Person. For purposes of this Agreement, the term "Permitted Persons" will
mean Halstead, HW Partners, L.P., HW Finance, L.L.C., the Investor and the
respective directors, officers, employees, advisors, lenders and
representatives of such entity who need to know such information in
connection with the transactions contemplated by this Agreement.
9. Miscellaneous.
(a) This Agreement, together with all Exhibits, constitutes the
entire agreement among the parties with respect to the subject matter hereof
and supersedes all other prior agreements and understandings, both written
and oral, among the parties or between any of them with respect to the
transactions contemplated hereby.
(b) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect
unless such enforceability causes this Agreement to fail in its essential
purpose.
(c) All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made as of
the date delivered or mailed if
- 17 -
<PAGE>
delivered in person, by telecopy or by registered or certified mail (postage
prepaid, return receipt requested) to the respective parties as follows:
if to Halstead at:
Halstead Energy Corp.
33 Hubbells Drive
Mt. Kisco, New York
Telecopy No. (914) 666-3203
Attn: President and General Counsel
if to the Tarricones, to them at:
c/o Claire E. Tarricone
205 Beverly Road
Scarsdale, NY 10583
with a copy to:
Piper & Marbury L.L.P.
1251 Avenue of the Americas
New York, New York 10020
Telecopy No. (212) 835-6001
Attention: Paul J. Pollock, Esq.
if to the Investor, to it at:
38 Hertford Street
London, England W1Y 7TG
Attn: James A. Loughram, Esq.
with a copy to:
H.W. Partners, L.P.
1601 Elm Street
4000 Thanksgiving Tower
Dallas, TX 75201
Telecopy: (214) 720-1662
Attn: Stuart Chasanoff, Esq.
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above.
(d) This Agreement shall be governed by and construed in
accordance with the laws of the State of New York (without giving effect to
principles of conflicts of law).
- 18 -
<PAGE>
(e) The descriptive headings herein are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.
(f) This Agreement shall be binding upon and inure solely to
the benefit of each party hereto, its successors and assigns.
(g) This Agreement may be executed by facsimile signature and
in two or more counterparts, each of which shall be deemed to be an original,
but all of which shall constitute one and the same agreement.
[Signature Page Follows]
- 19 -
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed as of the day and year first above written.
HALSTEAD ENERGY CORP.
By:
/s/ Claire E. Tarricone
Claire E. Tarricone
President and Chief Executive Officer
INFINITY INVESTORS LIMITED
By:
/s/
Name:
Title:
/s/ Claire E. Tarricone
Claire E. Tarricone
/s/ Anthony J. Tarricone
Anthony J. Tarricone
/s/ Joseph A. Tarricone
Joseph A. Tarricone
- 20 -
<PAGE>
ANNEX A
REGISTRATION STATEMENT INSERTS
[PROSPECTUS COVER PAGE]
The shares of common stock, par value $.001 per share
(the "Common Stock"), to which this Prospectus relates (the "Shares") are
being offered, from time to time, on behalf of and for the account of certain
stockholders (the "Selling Stockholders") of Halstead Energy Corp. (the
"Company") as identified herein under "Selling Stockholders." The
distribution of the Shares by the Selling Stockholders, or by pledgees,
donees, distributees, transferees or other successors in interest, may be
affected from time to time by underwriters who may be selected by the Selling
Stockholders and/or broker-dealers, in one or more transactions (which may
involve crosses and block transactions) on
the or other
over-the-counter markets or, in special offerings, exchange distributions or
secondary distributions pursuant to and in accordance with rules of such
over-the-counter markets or exchanges, in negotiated transactions or
otherwise, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. The Company has
agreed to indemnify the Selling Stockholders, underwriters who may be
selected by the Selling Stockholders and certain other persons against
certain liabilities, including liabilities under the Securities Act of 1933,
as amended (the "Securities Act"). See "Plan of Distribution" and "Selling
Stockholders."
The Company has agreed to pay all expenses of registration in
connection with this offering but will not receive any of the proceeds from
the sale of the Shares being offered hereby. All brokerage commissions and
other similar expenses incurred by the Selling Stockholders will be borne by
such Selling Stockholders. The aggregate proceeds to the Selling
Stockholders from the sale of the Shares will be the purchase price of the
Shares sold, less the aggregate brokerage commissions and underwriters'
discounts, if any, and other expenses of issuance and distribution not borne
by the Company.
USE OF PROCEEDS
The Shares being offered hereby are for the account of the Selling
Stockholders. Accordingly, the Company will not receive any of the proceeds
from the sale of the Shares by the Selling Stockholders. See "Selling
Stockholders."
SELLING STOCKHOLDERS
The following table sets forth the name of the Selling Stockholders,
the number of shares of Common Stock beneficially held by such Selling
Stockholders prior to the commencement of the offering made hereby and the
number of Shares that may be offered by each. The number of Shares that may
actually be sold by each of the Selling Stockholders will be determined by
each such Selling Stockholder, and may depend upon a number of factors,
including, among other things, the market price of the Common Stock. The
table below sets forth information as of ____________, concerning the
beneficial ownership of Common Stock of each of the Selling Stockholders.
All information concerning beneficial ownership has been furnished by the
Selling Stockholders.
Less than one percent (1%).
(1) Represents those shares of Common Stock held by the Selling
Stockholder, if any, together with those shares that such Selling Stockholder
has the right to acquire within 60 days. Each of the Selling Stockholders
specifically disclaims beneficial ownership of the shares of Common Stock
held (or acquirable upon exercise or conversion of any derivative securities
held) by the other Selling Stockholders and, as such, the number of shares of
Common Stock represented hereby does not reflect any shares of Common Stock
beneficially owned by any other Selling Stockholder.
(2) The percentages indicated are based on shares
of Common Stock issued and outstanding as of 199_.
(3) Because each of the Selling Stockholders may sell all, some or
none of the Shares that each holds, and because the offering contemplated by
this Prospectus is not now a "firm commitment" underwritten offering, no
estimate can be given as to the number of Shares that will be held by each of
the Selling Stockholders upon or prior to termination of this offering. See
"Plan of Distribution."
The Selling Stockholders identified above may have sold, transferred or
otherwise disposed of all or a portion of their Shares since the date on
which they provided the information regarding their Common Stock in
transactions exempt from the registration requirements of the Securities
Act. Additional information concerning the above listed Selling Stockholders
may be set forth from time to time in prospectus supplements to this
Prospectus. See "Plan of Distribution."
Pursuant to the terms of that certain Restructuring Agreement dated
September 24, 1997 (the "Restructuring Agreement"), the Company has agreed to
file the Registration Statement to which this Prospectus forms a part for the
purpose of registering the potential resale of the Shares and to maintain the
effectiveness of such Registration Statement until [or
until the Shares have otherwise are available for resale pursuant to Rule
144(k) promulgated under the Securities Act], in each case, as contemplated
by a certain Restructuring Agreement dated September 24, 1997 by and among
the Company, Infinity Investors Limited, Claire E. Tarricone, Anthony J.
Tarricone and Joseph A. Tarricone (the "Restructuring Agreement). In
addition, the Company and the Selling Stockholders agreed to indemnify each
other and certain affiliated parties from and against any losses or claims
arising out of, among other things, (1) any alleged untrue statement of a
material fact or (2) any material omission contained or referred to in the
Registration Statement. 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
has been informed 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. All of the registration and
filing fees, printing expenses, blue sky fees, if any, fees and disbursements
of counsel for the Company, and certain fees and disbursements of one counsel
for the Selling Stockholders will be paid by the Company; provided, however,
that fees and disbursements of experts and counsel retained by the Selling
Stockholders and any underwriting discounts and selling commissions will be
borne by the Selling Stockholders.
Except as specifically set forth herein, none of the Selling
Stockholders has, or within the past three years has had, any position,
office or other material relationship with the Company or any of its
predecessors or affiliates.
PLAN OF DISTRIBUTION
Sales of the Shares may be made from time to time by the Selling
Stockholders, or, subject to applicable law, by pledgees, donees,
distributees, transferees or other successors in interest. Such sales may be
made on the ____________________, in another over-the-counter market, on a
national securities exchange (any of which may involve crosses and block
transactions), in privately negotiated transactions or otherwise or in a
combination of such transactions at prices and at terms then prevailing or at
prices related to the then current market price, or at privately negotiated
prices. In addition, any Shares covered by this Prospectus which qualify for
sale pursuant to Section 4(1) of the Securities Act or Rule 144 promulgated
thereunder may be sold under such provisions rather than pursuant to this
Prospectus. Without limiting the generality of the foregoing, the Shares may
be sold in one or more of the following types of transactions: (a) a block
trade in which the broker-dealer so engaged will attempt to sell the Shares
as agent but may position and resell a portion of the block as principal to
facilitate the transaction; (b) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this
Prospectus; (c) an exchange distribution in accordance with the rules of such
exchange; (d) ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and (e) face-to-face transactions between sellers
and purchasers without a broker-dealer. In effecting sales, brokers or
dealers engaged by the Selling Stockholders may arrange for other brokers or
dealers to participate in the resales.
In addition, the Shares are subject to a certain Option Agreement dated
September 24, 1997 between the Selling Stockholders and ___________.
Accordingly, all or a substantial portion of the Shares may be transferred to
__________.
In connection with distributions of the Shares or otherwise, the
Selling Stockholders may enter into hedging transactions with
broker-dealers. In connection with such transactions, broker-dealers may
engage in short sales of the Shares registered hereunder in the course of
hedging the positions they assume with Selling Stockholders. The Selling
Stockholders may also sell Shares short and deliver the Shares to close out
such short positions. The Selling Stockholders may also enter into option or
other transactions with broker-dealers which require the delivery to the
broker-dealer of the Shares registered hereunder, which the broker-dealer may
resell pursuant to this Prospectus.
The Selling Stockholders may also pledge the Shares registered
hereunder to a broker or dealer and upon a default, the broker or dealer may
effect sales of the pledged Shares pursuant to this Prospectus.
Brokers, dealers or agents may receive compensation in the form of
commissions, discounts or concessions from Selling Stockholders in amounts to
be negotiated in connection with the sale. Such brokers or dealers and any
other participating brokers or dealers may be deemed to be "underwriters"
within the meaning of the Securities Act in connection with such sales and
any such commission, discount or concession may be deemed to be underwriting
discounts or commissions under the Securities Act.
Information as to whether underwriters who may be selected by the
Selling Stockholders, or any other broker-dealers, is acting as principal or
agent for the Selling Stockholders, the compensation to be received by
underwriters who may be selected by the Selling Stockholders, or any
broker-dealer, acting as principal or agent for the Selling Stockholders and
the compensation to be received by other broker-dealers, in the event the
compensation of such other broker-dealers is in excess of usual and customary
commissions, will, to the extent required, be set forth in a supplement to
this Prospectus (the "Prospectus Supplement"). Any dealer or broker
participating in any distribution of the Shares may be required to deliver a
copy of this Prospectus, including the Prospectus Supplement, if any, to any
person who purchases any of the Shares from or through such dealer or broker.
The Company has advised the Selling Stockholders that during such time
as they may be engaged in a distribution of the Shares included herein they
are required to comply with Regulation M promulgated under the Exchange Act.
With certain exceptions, Regulation M precludes any selling shareholder, any
affiliated purchasers and any broker-dealer or other person who participates
in such distribution from bidding for or purchasing, or attempting to induce
any person to bid for or purchase any security which is the subject of the
distribution until the entire distribution is complete. Regulation M also
prohibits any bids or purchases made in order to stabilize the price of a
security in connection with the distribution of that security. All of the
foregoing may affect the marketability of the Common Stock.
It is anticipated that the Selling Stockholders will offer all of the
Shares for sale. Further, because it is possible that a significant number
of Shares could be sold at the same time hereunder, such sales, or the
possibility thereof, may have a depressive effect on the market price of the
Company's Common Stock.
<PAGE>
EXHIBIT A
NOTE
THE SECURITY REPRESENTED HEREBY WAS ORIGINALLY ISSUED
ON SEPTEMBER 24, 1997 AND HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS
SECURITY CANNOT BE SOLD OR OTHERWISE TRANSFERRED
UNLESS THIS SECURITY IS REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE ISSUER IS
FURNISHED WITH AN ACCEPTABLE OPINION OF COUNSEL THAT
AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
12% SUBORDINATED PROMISSORY NOTE
September 24, 1997 $600,000
HALSTEAD ENERGY CORP., a Nevada corporation (the "Company"), hereby
promises to pay to the order of Infinity Investors Limited ("Payee") the
principal amount of $600,000, together with interest thereon calculated from
the date hereof in accordance with the provisions of this 12% Subordinated
Promissory Note (this "Note").
By accepting this Note, Payee agrees that this Note shall be
subordinated to Senior Debt of the Company (as defined in paragraph 3 hereto)
upon the terms set forth in paragraph 3.
1. Payment of Interest. Interest will accrue from the date hereof
at the rate of twelve percent (12%) per annum on the unpaid principal amount
of this Note outstanding from time to time (calculated on the basis of a 360
day year consisting of 12 30-day months). Interest shall be compounded
quarterly from the date hereof through and including September 24, 1999 and
thereafter shall be computed on the basis of simple interest. Subject to
paragraph 3 hereof, the Company will pay to the Payee all accrued interest
commencing on September 30, 1999, and thereafter quarterly in arrears
beginning after September 30 1999. Any accrued interest which for any reason
has not theretofore been paid will be paid in full on the date on which the
final principal payment on this Note is paid.
2. Payment of Principal of Note.
(a) Scheduled Payments. Subject to paragraph 3 hereof, the
Company will repay in full the principal amount of this Note and any accrued
and unpaid interest thereon on September 24, 2002.
(b) Optional Prepayment. Subject to paragraph 3 hereof, the
Company may at any time prepay, without premium or penalty, all or any
portion of the outstanding principal amount of this Note, together with
interest accrued on such prepaid amount to the date of payment. A prepayment
of less than all of the outstanding principal amount of this Note will be
applied against the Company's obligation to make the repayment of principal
at maturity.
(c) Mandatory Prepayment. Subject to paragraph 3 hereof, the
Company shall (i), if it enters into a Senior Debt financing facility after
the date hereof which, after giving effect to the refinancing of any
indebtedness of the Company which is required to be repaid by the terms of
the relevant documents or such new holder, results in or makes available to
the Company proceeds (the "New Money") in excess of $4,250,000, prepay,
without premium or penalty, the outstanding amount hereunder and (ii) within
thirty (30) days after the delivery of audited financial statements of the
Company for each fiscal year after the fiscal year ended August 31, 1997
prepay, without premium or penalty, an amount equal to fifty percent (50%) of
the Company's Excess Cash Flow (as defined below), but in no event more that
the then principal balance of this Note and any accrued interest hereon. For
purposes of this Note, "Excess Cash Flow" shall mean, with respect to each of
the Company's fiscal years after the fiscal year ended August 31, 1997, (i)
the Company's after tax net income (excluding any extraordinary items) for
such fiscal period, plus (ii) the sum of the Company's amortization and
depreciation expenses used in the calculation of consolidated after tax net
income for such fiscal period, minus (iii) capital expenditures made during
such fiscal period, minus (iv) any required payments of Senior Debt, minus
$100,000; provided however, that the definition of Excess Cash Flow shall be
subject to amendment or modification at the reasonable request of any lender
or other financial institution (a "Senior Lender") which commits, after the
date hereof, to advance to the Company New Money in excess of $1,500,000 but
less than $4,250,000; provided, however, that no such amendment or
modification shall result in a greater than 35% decrease in the amount that
would otherwise be deemed Excess Cash Flow or lengthen the one-year period
referred to in Section 3(c)(ii) hereof.
(d) Notice of Prepayment. The Company will give written notice
of its election to prepay this Note to the Payee in person or by registered
or certified mail, return receipt requested, at least 10 days prior to the
date of prepayment. On the date of prepayment specified in the Company's
notice, the Company will pay to the Payee, by wire transfer of immediately
available funds, the entire outstanding principal amount being prepaid,
together with all accrued interest thereon through the date of prepayment.
3. Subordination. The Company's payment of this Note shall be
subject to the following restrictions:
(a) Anything in this Note to the contrary notwithstanding, the
obligations of the Company in respect of the principal of and interest on
this Note shall be subordinate and junior in right of payment, to the extent
and in the manner hereinafter set forth, to the Company's Senior Debt. For
purposes of this Agreement, the "Senior Debt" shall mean (i) the maximum
principal amount of the secured indebtedness which any financial institution
or other lender is committed, from time to time, to make or has made
available to the Company pursuant to its loan agreement(s) with the Company
(its "Loan Agreement"), (ii) all interest, commitment fees, collection fees
and audit, servicing and other fees and expenses which may from time to time
be due under its Loan Agreement accrued to the date of payment, regardless of
whether proceedings for collection of the same or other proceedings under
Title 11 of the United States Code have been commenced, (iii) all
reimbursements and other fees and obligations of the Company to the bank
under the Loan Agreement and (iv) any deferrals, renewals, extensions or
refundings of the Senior Debt and any indebtedness which refinances the
Senior Debt. For purposes of this Section 3 and Section 5 hereof, the term
"Company" shall mean the Company and its subsidiaries.
(b) In the event of any insolvency or bankruptcy proceedings,
and any receivership, liquidation, reorganization, arrangement, readjustment,
composition or other similar proceedings in connection therewith, relative to
the Company, or to its creditors, as such, or to its property, or in the
event of any proceedings for voluntary liquidation, dissolution or other
winding-up of the Company, whether or not involving insolvency or bankruptcy,
or in the event of any assignment by the Company for the benefit of creditors
or in the event of any other marshaling of the assets of the Company
(collectively referred to as an "Insolvency Event"), subject to clauses (i)
and (ii) of subparagraph 3(e) hereof, the holders of the Senior Debt shall be
entitled to receive payment in full of all Senior Debt (including interest
thereon accruing after the commencement of any such proceedings) before the
Payee is entitled to receive any payment on account of principal, interest or
other amounts due upon this Note, and to that end the holders of Senior Debt
shall be entitled to receive for application in payment thereof any payment
or distribution of any kind or character, whether in cash or property or
securities, which may be payable or deliverable in any such proceedings in
respect of this Note.
(c) After the occurrence and during the continuance of any
payment or financial covenant default with respect to the Senior Debt which
gives the holder of such Senior Debt the right to accelerate the maturity of
its Senior Debt, including any default which may arise after giving effect to
any payment made or to be made hereunder, no payment of principal or interest
will be made on this Note and the holder of this Note will take no action to
recover any such amounts until the earlier of (i) the date such default has
been remedied or the Senior Debt shall have been discharged or (ii) six
months from the occurrence of such default; provided, however, that at the
request of a Senior Lender for New Money, the period set forth in clause (ii)
shall be extended to a period of a maximum of one year.
(d) Each holder of Senior Debt may at any time, in their
discretion, renew or extend the time of payment of Senior Debt so held or
exercise any of their rights under the Senior Debt including, without
limitation, the waiver of defaults thereunder, the release, foreclosure or
any other transactions with respect to collateral, and the amendment of any
of the terms or provisions thereof (or any notice evidencing or creating the
same), all without notice to or assent from the Payee. No compromise,
alteration, amendment, renewal or other change of, or waiver, consent or
other action in respect of any liability or obligation under or in respect
of, any terms, covenants or conditions of the Senior Debt (or any instrument
evidencing or creating the same), whether or not such release is in
accordance with the provisions of the Senior Debt (or any instrument
evidencing or creating the same), shall in any way alter or affect any of the
subordination provisions of this Note.
(e) If, notwithstanding the provisions of this paragraph 3, any
payment or distribution of any character (whether in cash, securities or
other property) or any security shall be received by the Payee in
contravention of this paragraph 3, and before all the Senior Debt shall have
been paid in full, such payment, distribution or security shall be held in
trust for the benefit of, and shall be immediately paid over or delivered or
transferred to, the holders of the Senior Debt, or their duly appointed
agents, for application of the payment of all Senior Debt remaining unpaid,
until all of the Senior Debt shall have been paid in full, or such payment
has been provided for; provided:
(i) no delivery will be made of stock or obligations which are
issued by the Company or any corporation succeeding to the Company or
acquiring its property and assets, pursuant to reorganization
proceedings or dissolution or liquidation proceedings or upon any
merger, consolidation, sale, lease, transfer or other disposal, if such
stock or obligations are subordinate and junior at least to the extent
provided hereunder to the payment of Senior Debt to the extent then
outstanding and to the payment of any stock or obligations which are
issued in exchange for Senior Debt to the extent then outstanding; and
(ii) the Payee will (after all principal and interest owing on such
Senior Debt has been paid in full) be subrogated to the rights of the
holders of such Senior Debt to receive distributions applicable to the
Senior Debt to the extent that distributions otherwise payable to the
Payee have been applied to the payment of Senior Debt.
(f) No holder of Senior Debt shall be prejudiced in its right
to enforce the subordination of this Note by any act or failure to act on the
part of the Company.
(g) The provisions of paragraph 3 are for the purpose of
defining the relative rights of holders of Senior Debt, on the one hand, and
the Payee, on the other hand. No provision of such paragraph will be
construed to prevent the Payee from exercising all remedies otherwise
available under this Note or under applicable law upon the occurrence of any
Event of Default, subject to the rights of the Payee or holders of the Senior
Debt as set forth above to receive cash, assets, stock or obligations
otherwise payable or deliverable to the Payee. No provision of such
paragraph will be deemed to subordinate to any extent, any claim or right of
the Payee to any claim against the Company by any creditor or any other
Person except to the extent expressly provided in such paragraph.
4. Covenants.
The Company hereby agrees that, from and after the date hereof
until such time as the Note has been paid in full:
(a) Information. The Company will deliver to the Payee:
(i) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration
statements on Form S-8 or its equivalent) and reports on Forms 10-KSB,
10-QSB and 8-K (or their equivalents) which the Company or any
subsidiary of the Company has filed with the Securities Exchange
Commission (the "Commission");
(ii) within ten (10) days after any officer of the Company obtains
knowledge of an Event of Default, a certificate of the chief financial
officer or the chief accounting officer of the Company setting forth
the details thereof and the action which the Company is taking or
proposes to take with respect thereto;
(iii) promptly upon the mailing thereof to the shareholders of the
Company generally, copies of all financial statements, reports and
proxy statements so mailed and any other document generally distributed
to shareholders; and
(iv) promptly following the commencement thereof, notice and a
description in reasonable detail of any litigation or proceeding to
which the Company or any subsidiary of the Company is a party in which
the amount involved is $100,000 or more.
(b) Payment of Obligations. The Company and its subsidiaries
will maintain, in accordance with generally accepted accounting principles,
appropriate reserves for the accrual of any of the same.
(c) Maintenance of Property; Insurance. The Company and each
subsidiary of the Company will use commercially reasonable efforts keep all
property useful and necessary in its business in working order and condition,
ordinary wear and tear excepted. In addition, the Company and each such
subsidiary will maintain insurance in at least such amounts and against such
risks as it has insured against as of the date hereof.
(d) Maintenance of Existence. Subject to applicable laws
regarding business judgment and the Company's business plan from time to time
in effect, the Company will continue, and shall cause each subsidiary to
continue, to engage in business of the same general type as now conducted by
the Company and such subsidiaries, and will preserve, renew and keep in full
force and effect its respective corporate existence and their respective
material rights, privileges and franchises necessary or desirable in the
normal conduct of business.
(e) Compliance with Laws. The Company and each subsidiary of
the Company will comply, in all material respects, with all federal, state,
municipal, local or foreign applicable laws, ordinances, rules, regulations,
municipal by-laws, codes and requirements of governmental authorities
(including, without limitation, environmental and employee pension and
benefit laws and the rules and regulations thereunder) except where
non-compliance therewith could not reasonably be expected, in the aggregate,
to have a material adverse effect on the business, condition (financial or
otherwise), operations or properties of the Company or such subsidiary.
(f) Inspection of Property, Books and Records. The Company and
each subsidiary of the Company will keep proper books of record and account
in which full, true and correct entries shall be made of all dealings and
transactions in relation to their respective businesses and activities; and
will permit, during normal business hours Payee or its representative, to
visit and inspect any of their respective properties, upon reasonable prior
notice once per annum, to examine and make abstracts from any of their
respective books and records and to discuss their respective affairs,
finances and accounts with their respective executive officers and
independent public accountants.
(g) Supplemental Information. If at any time the Company is
not subject to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company will promptly furnish at its
expense, upon request, for the benefit of the Payee, information satisfying
the information requirements of Rule 144 of the Securities Act of 1933, as
amended.
(h) Compliance with Terms and Conditions of Material
Contracts. The Company and each subsidiary of the Company will comply, in
all material respects, with all terms and conditions of all material
contracts to which it is subject, except where such non-compliance could not
reasonably be expected, in the aggregate, to have a material adverse effect
on the business, condition (financial or otherwise), operations or properties
of the Company or such subsidiary.
5. Events of Default.
(a) Definition. For the purposes of this Note, an "Event of
Default" will be deemed to have occurred if:
(i) the Company fails to pay when due the interest then due and
payable on this Note, whether or not such payment is prohibited by
paragraph 3 hereof, and such failure has continued for a period of five
(5) days after the Company's receipt of written notice thereof, or the
Company fails to pay when due the full amount of any principal payment
of this Note, whether or not such payment is prohibited by paragraph 3
hereof;
(ii) the Company fails to perform or observe any other provision
contained in this Note or any material failure to perform any material
covenant or obligation set forth in the Restructuring Agreement (as
defined below), including without limitation the provisions of Section
2 thereof, and such failure continues for a period of 30 days after the
Company's receipt of written notice thereof; provided, however, that if
such failure cannot be cured within 30 days, it shall be extended for a
reasonable period of time thereof for so long as the Company promptly
takes steps to cure such default.
(iii) any representation, warranty or information contained in any
writing furnished herein by the Company to the Payee is false or
misleading in any material respect on the date made or furnished;
(iv) the Company makes an assignment for the benefit of creditors
or admits in writing its inability to pay its debts generally as they
become due; or an order, judgment or decree is entered adjudicating the
Company bankrupt or insolvent or any order for relief with respect to
the Company is entered under the Federal Bankruptcy Code; or the
Company petitions or applies to any tribunal for the appointment of a
custodian, trustee, receiver or liquidator of the Company or of any
substantial part of the assets of the Company, or commences any
proceeding or any such petition or application is filed, or any such
proceeding is commenced, against the Company and either (A) the Company
by any act indicates its approval thereof, consents thereto or
acquiesces therein or (B) such petition, application or proceeding is
not dismissed within 90 days; or
(v) The Company fails to pay any dividends when due on the shares
of Series B 8% Cumulative Convertible Redeemable Preferred Stock owned
by the Payee and such failure shall have continued for a period of five
(5) days after the Company's receipt of written notice thereof.
(b) Consequences of Events of Default.
(i) After the occurrence and during the continuation of any Event
of Default the Payee may demand (by written notice delivered to the
Company) immediate payment of all or any portion of the outstanding
principal amount of the Note owed by such Payee, together with accrued
and unpaid interest.
(ii) The Payee will also have any other rights which such Payee may
have pursuant to applicable law.
6. Amendment and Waiver. Except as otherwise expressly provided
herein, the provisions of this Note may only be amended by written agreement
between the Company and the Payee. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon the Payee at the time
and each future Payee.
7. Cancellation. After all principal and accrued interest at any
time owed on this Note has been paid in full, this Note will be surrendered
to the Company for cancellation and will not be reissued.
8. Place of Payment. Payments of principal and interest are to be
delivered to the Payee at 38 Hertford Street, London, England W1Y 7TG, Attn:
James A. Loughram, Esq. or to such other address or to the attention of such
other Person as specified by prior written notice to the Company. At the
request of the Payee, all payments of principal and interest on this Note
will be made by wire transfer of immediately available funds to an account
which the Payee may designate from time to time.
9. Waiver of Presentment, Demand and Dishonor. Except as expressly
set forth herein, the Company hereby waives presentment for payment, protest,
demand, notice of protest, notice of nonpayment, notice of intention to
accelerate, notice of acceleration, and diligence with respect to this Note,
and waives and renounces all rights to the benefits of any statute of
limitations or any moratorium, appraisement, exemption or homestead.
No failure on the part of the Payee hereof to exercise any right or
remedy hereunder with respect to the Company, whether before or after the
happening of an Event of Default, shall constitute waiver of any future Event
of Default or of any other Event of Default. No failure to accelerate the
debt of the Company evidenced hereby by reason of an Event of Default or
indulgence granted from time to time shall be construed to be a waiver of the
right to insist upon prompt payment thereafter; or shall be deemed to be a
notation of this Note or a reinstatement of such debt evidenced hereby or a
waiver of such right of acceleration or any other right, or be construed so
as to preclude the exercise of any right the Payee may have, whether by the
laws of the state governing this Note, by agreement or otherwise; and the
Company hereby expressly waives the benefit of any statute or rule of law or
equity that would produce a result contrary to or in conflict with the
foregoing.
10. Usury. Notwithstanding any provision to the contrary contained
in this Note, or any and all other instruments or documents executed in
connection herewith, the Payee and the Company intend that the obligations
evidenced by this Note conform strictly to the applicable usury laws from
time to time in force. All agreements between the Company and Payee, whether
now existing or hereafter arising and whether oral or written, hereby are
expressly limited so that in no case, contingency or event whatsoever,
whether by acceleration of maturity hereof or otherwise, shall the amount
paid or agreed to be paid to Payee, or collected by Payee, by or on behalf of
the Company for the use, forbearance or detention of the money to be loaned
to the Company hereunder or otherwise, or for the payment or performance of
any covenant or obligation contained herein of the Company to Payee, or in
any other document evidencing, securing or pertaining to such indebtedness
evidenced hereby, exceed the maximum amount permissible under applicable
usury law. If, under any circumstances whatsoever, fulfillment of any
provisions thereof or any other document, at the time performance of such
provisions shall be due, shall involve transcending the limit of validity
prescribed by law, then, ipso facto, the obligation to be fulfilled shall be
reduced to the limit of such validity; and if under any circumstances Payee
ever shall receive from or on behalf of the Company an amount deemed
interest, by applicable law, which would exceed the highest lawful rate, such
amount that would be excessive interest under applicable usury laws shall be
applied to the reduction of the Company's unpaid principal amount owing
hereunder and not to the payment of interest, or if such excessive interest
exceeds the unpaid balance of principal and such other indebtedness, the
excess shall be deemed to have been a payment as a result of an error on the
part of the Payee and the Company and the party receiving such excess payment
shall promptly, upon discovery of such error or upon notice thereof from the
party making such payment, refund to the Company or to any other person
making such payment on the Company's behalf, and this Note shall be
automatically deemed reformed so as to permit only the collection of the
maximum non-usurious rate and amount of interest allowed by applicable law.
All sums paid or agreed to be paid to the Payee or any other holders hereof
for the use, forbearance or detention of the indebtedness evidenced hereby
shall, to the full extent permitted by applicable law, be amortized,
prorated, allocated and spread through the full term of this Note.
11. Assignment. This Note is the Note referred to in that
certain Restructuring Agreement dated September 24, 1997 by and between the
Company, Payee, Claire E. Tarricone, Anthony J. Tarricone and Joseph A.
Tarricone (the "Restructuring Agreement"). Infinity shall not sell, assign
or transfer the Note (or any interest therein) except as may be expressly
permitted by the Restructuring Agreement. Any such attempted transfer in
violation of this Agreement or the Restructuring Agreement shall be void and
of no effect.
12. Governing Law. The validity, construction and interpretation of
this Note will be governed, construed, and enforced in accordance with the
laws, of the State of New York (without giving effect to principles of
conflicts of law).
IN WITNESS WHEREOF, the Company has executed and delivered this Note on
the date first above written.
HALSTEAD ENERGY CORP.
By:___________________________________
Claire E. Tarricone
President
<PAGE>
EXHIBIT B
CERTIFICATE OF DESIGNATION
Certificate of Amendment and Restatement to
Certificate to Set Forth Designations,
Voting Powers, Preferences, Limitations,
Restrictions, and Relative Rights of
Series B 8% Cumulative Convertible
Redeemable Preferred Stock, $.001 Par Value
Pursuant to Section 78.1955 of the Nevada General Corporation Law,
Halstead Energy Corp. adopts the following Amended and Restated Certificate
of Designation by stating the following:
I. The name of the corporation is Halstead Energy Corp. (the
"Corporation").
II. The current designation of a series of Preferred Stock of the
Corporation is Series B 8% Cumulative Convertible Redeemable Preferred
Stock. As amended and restated as hereinafter provided, the new designation
of said series of the Series Preferred Stock shall be Series B Cumulative
Convertible Redeemable Preferred Stock (as amended and restated, the "Series
B Preferred Stock").
III. The approval by all shareholders required pursuant to the
provisions of Section 78.1955 of the Nevada General Corporation Law of the
amendment and restatement of the designation of the Series B Preferred Stock
was obtained in accordance with the Nevada General Corporation Law.
IV. Set forth hereafter is the amended and restated terms of the
preferences, limitations, restrictions and relative rights of shares of
Series B Preferred Stock, as contained in a resolution of the Board of
Directors of the Corporation, pursuant to a provision of the Articles of
Incorporation of the Corporation.
1. Designation; Number of Shares.
The designation of said series of Preferred Stock shall be Series
B 8% Cumulative Convertible Redeemable Preferred Stock (the "Series B
Preferred Stock"). The number of shares of Series B Preferred Stock shall be
560,126. Each share of Series B Preferred Stock shall have a stated value
equal to $7.75 (as adjusted for any stock dividends, combinations or splits
with respect to such shares)(the "Stated Value").
- 1 -
<PAGE>
2. Dividends.
(a) The holders of outstanding shares of Series B Preferred
Stock shall be entitled to receive preferential dividends in cash, out of any
funds of the Corporation legally available after dividends shall have been
paid or declared and set apart for payment on shares of the Corporation's
Series A 7.5% Cumulative Convertible Redeemable Preferred Stock (the "Series
A Preferred Stock"), but before any dividend or other distribution will be
paid or declared and set apart for payment on any shares of any Common Stock
or other class of stock junior to the Series B Preferred Stock (the Common
Stock and such junior stock being hereinafter collectively the "Junior
Stock") at the rate of 12% per annum on the Stated Value payable quarterly on
the last day of each calendar quarter; provided, however, that in the event
that dividend payments are not made when due in cash, to the extent permitted
by applicable law, dividend payments shall be made, in the sole discretion of
the Board of Directors of the Corporation, in additional fully paid and
nonassessable shares of the Corporation's Common Stock at a rate of one share
of Common Stock for each $2.00 of such dividend not paid in cash and the
issuance of such additional shares shall constitute full payment of such
dividend.
(b) The dividends on the Series B Preferred Stock at the rates
provided above shall be cumulative whether or not earned, so that if at any
time full cumulative dividends at the rate aforesaid on all shares of the
Series B Preferred Stock then outstanding from the date from and after which
dividends thereon are cumulative to the end of the quarterly dividend period
next preceding such time shall not have been paid or declared and set apart
for payment, or if the full dividend on all such outstanding Series B
Preferred Stock for the then current dividend period shall not have been paid
or declared and set apart for payment, the amount of the deficiency shall be
paid or declared and set apart for payment (but without interest thereon)
before any sum shall be set apart for or applied by the Corporation or a
subsidiary of the Corporation to the purchase, redemption or other
acquisition of the Series B Preferred Stock or any shares of any other class
of stock ranking on a parity with the Series B Preferred Stock ("Parity
Stock") and before any dividend or other distribution shall be paid or
declared and set apart for payment on any Junior Stock and before any sum
shall be set aside for or applied to the purchase, redemption or other
acquisition of Junior Stock.
(c) Dividends on all shares of the Series B Preferred Stock
shall begin to accrue and be cumulative from and after the date of issuance
thereof at the rate then provided. A dividend period shall be deemed to
commence on the day following a quarterly dividend payment date herein
specified and to end of the next succeeding quarterly dividend payment date
herein specified.
3. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, the holders of the Series B
Preferred Stock shall be entitled to receive, after any required payment or
distribution shall be made on the Series A Preferred Stock,
- 2 -
<PAGE>
but before any payment or distribution shall be made on the Junior Stock, out
of the assets of the Corporation available for distribution to stockholders,
the Stated Value per share of Series B Preferred Stock and all accrued and
unpaid dividends to and including the date of payment thereof. Upon the
payment in full of all amounts due to holders of the Series B Preferred
Stock, the holders of the Common Stock of the Corporation and any other class
of Junior Stock shall receive all remaining assets of the Corporation legally
available for distribution. If the assets of the Corporation available for
distribution to the holders of the Series B Preferred Stock shall be
insufficient to permit payment in full of the amounts payable as aforesaid to
the holders of Series B Preferred Stock upon such liquidation, dissolution or
winding-up, whether voluntary or involuntary, then all such assets of the
Corporation shall be distributed, to the exclusion of the holders of shares
of Junior Stock, ratably among the holders of the Series B Preferred Stock.
(b) Neither the purchase nor the redemption by the Corporation of
shares of any class of stock, nor the merger or consolidation of the
Corporation with or into any other corporation or corporations, nor the sale
or transfer by the Corporation of all or any part of its assets, shall be
deemed to be a liquidation, dissolution or winding-up of the Corporation for
the purposes of this paragraph 3. Holders of the Series B Preferred Stock
shall not be entitled, upon the liquidation, dissolution or winding-up of the
Corporation, to receive any amounts with respect to such stock other than the
amounts referred to in this paragraph 3.
4. Redemption.
(a) The shares of Series B Preferred Stock may be redeemed, in
whole or from time to time in part, at the election of the Corporation,
expressed by resolution of the Board, at any time or from time to time at a
redemption price per share equal to 129% of the Stated Value per share (as
adjusted for any stock dividends, stock combinations or splits with respect
to such shares) and all accrued and unpaid dividends on such shares of Series
B Preferred Stock to and including the Redemption Date (as hereinafter
defined).
(b) Notice of every redemption of Series B Preferred Stock
pursuant to this paragraph 4 shall be given by mail or in such other manner
as may be prescribed by resolution of the Board not less than thirty (30)
days prior to the applicable date of redemption ("Redemption Date"). As
applicable, the notice shall specify the number of shares to be redeemed, the
date fixed for redemption, the redemption price per share and the address
where payment of the redemption price per share is to be paid upon the
surrender of certificates representing shares of Series B Preferred Stock.
The giving of such notice shall obligate the Corporation to redeem the shares
to which the notice relates on the Redemption Date. If less than all the
outstanding Series B Preferred Stock is to be redeemed, the selection of
shares for redemption may be made either by lot or pro rata in such manner as
may be prescribed by resolution of the Board.
(c) On and after the applicable Redemption Date and
notwithstanding that any certificate for shares of Series B Preferred Stock
so called for redemption shall not have been surrendered for cancellation,
all dividends on the Series B Preferred Stock called for redemption
- 3 -
<PAGE>
shall cease to accrue and the shares represented thereby shall no longer be
deemed outstanding and all rights of the holders thereof as stockholders of
the Corporation shall cease and terminate, except the right to receive the
redemption price per share as hereinafter provided and except any conversion
rights not theretofore expired.
(d) At any time on or after the applicable Redemption Date, the
holders of record of the Series B Preferred Stock to be redeemed shall be
entitled to receive the redemption price per share upon actual delivery of
the certificates for the shares to be redeemed to the place so specified in
the redemption notice, such certificates, if required, to be duly endorsed in
blank or accompanied by proper instruments of assignment and transfer, or
duly endorsed in blank. If less than all of the shares represented by any
such certificate are redeemed, a new certificate representing the unredeemed
shares shall be issued.
5. Conversion into Common Stock. Shares of Series B Preferred
Stock shall have the following conversion rights and obligations:
(a) Subject to the further provisions of this paragraph 5, each
holder of shares of Series B Preferred Stock shall have the right, at any
time and from time to after forty-five (45) days from the date on which a
share of Series B Preferred Stock was issued, to convert some or all such
shares into fully paid and non-assessable shares of Common Stock of the
Corporation (as defined in subparagraph 5(j) below) determined in accordance
with the Conversion Price provided in paragraph 5(c) below.
(b) Subject to the further provisions of this paragraph 5, the
Corporation shall have the right, at its option at any time after forty-five
(45) days from the date on which a share of Series B Preferred Stock was
issued, to cause each holder of such shares of Series B Preferred Stock to
convert such shares into fully paid and non-assessable shares of Common Stock
of the Corporation at the Conversion Price during the thirty (30) day period
beginning on the day after the fifth consecutive day the Closing Bid Price
equals or exceeds 150% of the Stated Value per share (the "Mandatory
Conversion Period"). Notice of such mandatory conversion of the Series B
Preferred Stock pursuant to this paragraph 5(b) shall be given by mail or in
such other manner as may be prescribed by resolution of the Board of
Directors of the Corporation not later than the expiration of the Mandatory
Conversion Period. As applicable, the notice shall specify the number of
shares to be converted, the date of conversion and the Conversion Price per
share.
(c) The number of shares of Common Stock issuable upon
conversion of each share of Series B Preferred Stock shall equal (i) the sum
of (A) the Stated Value per share and (B) accrued and unpaid dividends on
such share divided by (ii) the Conversion Price. The "Conversion Price"
shall be equal to $2.00 per share of Common Stock, subject to adjustment as
herein provided.
(d) The holder of any certificate for shares of Series B
Preferred Stock desiring to convert any of such shares or whose shares where
converted at the election of the
- 4 -
<PAGE>
Corporation pursuant to the provisions of this paragraph 5 shall surrender
such certificate, at the principal office of any transfer agent for said
stock (the "Transfer Agent"), with a written notice of such election to
convert (if such conversion is voluntary) such shares into Common Stock duly
filled out and executed, and if necessary under the circumstances of such
conversion, with such certificate properly endorsed for, or accompanied by
duly executed instruments of, transfer (and such other transfer papers as
said Transfer Agent may reasonably require). The holder of the shares so
surrendered for conversion shall be entitled to receive within three (3)
business days of the Notice of Conversion (except as otherwise provided
herein) a certificate or certificates, which shall be expressed to be fully
paid and non-assessable, for the number of shares of Common Stock to which
such stockholder shall be entitled upon such conversion, registered in the
name of such holder or in such other name or names as such stockholder in
writing may specify. In the case of any Series B Preferred Stock which is
converted in part only, the holder of shares of Series B Preferred Stock
shall upon delivery of the certificate or certificates representing Common
Stock also receive a new share certificate representing the unconverted
portion of the shares of Series B Preferred Stock. Nothing herein shall be
construed to give any holder of shares of Series B Preferred Stock
surrendering the same for conversion the right to receive any additional
shares of Common Stock or other property which results from an adjustment in
conversion rights under the provisions of subparagraphs (e) or (f) of this
paragraph 5 until holders of Common Stock are entitled to receive the shares
or other property giving rise to the adjustment.
In the case of the exercise of the conversion rights set forth in
paragraphs 5(a) and 5(b), the conversion privilege shall be deemed to have
been exercised, and the shares of Common Stock issuable upon such conversion
shall be deemed to have been issued, upon the date of receipt by such
Transfer Agent for conversion of the certificate for such shares of Series B
Preferred Stock. In the case of the automatic conversion set forth in
paragraph 5(b), conversion shall be deemed to have occurred as provided in
paragraph 5(b). The person or entity entitled to receive Common Stock
issuable upon such conversion shall on the date such conversion privilege is
deemed to have been exercised and thereafter be treated for all purposes as
the record holder of such Common Stock and shall on the same date cease to be
treated for any purpose as the record holder of such shares of Series B
Preferred Stock so converted.
Notwithstanding the foregoing, if the stock transfer books are
closed on the date such shares are received by the Transfer Agent, the
conversion privilege shall be deemed to have been exercised, and the person
or entity shall be treated as a record holder of shares of Common Stock, on
the next succeeding date on which the transfer books are open, but the
Conversion Price shall be that in effect on the date such conversion
privilege was exercised. The Corporation shall not be required to deliver
certificates for shares of its Common Stock or new certificates for
unconverted shares of its Series B Preferred Stock while the stock transfer
books for such respective classes of stock are duly closed for any purpose;
but the right of surrendering shares of Series B Preferred Stock for
conversion shall not be suspended during any period that the stock transfer
books of either of such classes of stock are closed.
- 5 -
<PAGE>
Upon the conversion of any shares of Series B Preferred Stock, no
adjustment or payment shall be made with respect to such converted shares on
account of any dividend on shares of such stock or on account of any dividend
on the Common Stock, except that the holder of such converted shares shall be
entitled to be paid any dividends declared on shares of Common Stock after
conversion thereof.
The conversion privilege shall also be subject to the following
terms and conditions:
(i) if any shares of Series B Preferred Stock shall be
called for redemption, the conversion privilege in respect of
such shares shall terminate at the close of business on the last
business day next preceding the applicable Redemption Date; and
(ii) if the Corporation shall at any time be liquidated,
dissolved or wound-up, the conversion privilege shall terminate
at the close of business on the last business day next preceding
the effective date of such liquidation, dissolution or
winding-up.
The Corporation shall not be required, in connection with any
conversion of Series B Preferred Stock, to issue a fraction of a share of its
Common Stock nor to deliver any stock certificate representing a fraction
thereof, but in lieu thereof the Corporation may make a cash payment equal to
such fraction multiplied by the Closing Bid Price on the date the conversion
right was triggered.
(e) The Conversion Price shall be subject to adjustment from
time to time as follows:
(i) In case the Corporation shall at any time (A) declare
any dividend or distribution on its Common Stock or other
securities of the Corporation other than the Series A Preferred
Stock, (B) split or subdivide the outstanding Common Stock, (C)
combine the outstanding Common Stock into a smaller number of
shares or (D) issue by reclassification of its Common Stock any
shares or other securities of the Corporation, then, in each such
event, the Conversion Price shall be adjusted proportionately so
that the holders of Series B Preferred Stock shall be entitled to
receive the kind and number of shares or other securities of the
Corporation which such holders would have owned or have been
entitled to receive after the happening of any of the events
described above had such shares of Series B Preferred Stock been
converted immediately prior to the happening of such event (or
any record date with respect thereto). Such adjustment shall be
made whenever any of the events listed above shall occur. An
adjustment made to the Conversion pursuant to this paragraph
5(e)(i) shall become effective immediately after the effective
date of the event retroactive to the record date, if any, for the
event.
- 6 -
<PAGE>
(f)(i) In case of any consolidation or merger of the
Corporation with or into any other corporation (other than a
merger or consolidation in which the Corporation is the surviving
or continuing corporation and which does not result in any
reclassification, conversion or change of the outstanding shares
of Common Stock), then, unless the right to convert shares of
Series B Preferred Stock shall have terminated, as part of such
consolidation or merger, lawful provision shall be made so that
holders of Series B Preferred Stock shall thereafter have the
right to convert each share of Series B Preferred Stock into the
kind and amount of shares of stock and/or other securities or
property receivable upon such consolidation or merger by a holder
of the number of shares of Common Stock into which such shares of
Series B Preferred Stock might have been converted immediately
prior to such consolidation or merger. Such provision shall also
provide for adjustments which shall be as nearly equivalent as
may be practicable to the adjustments provided for in paragraph
(e) of this paragraph 5. The foregoing provisions of this
paragraph 5(f) shall similarly apply to successive consolidations
and mergers.
(ii) In case of any sale or conveyance to another person
or entity of the property of the Corporation as an entirety, or
substantially as an entirety, in connection with which shares or
other securities or cash or other property shall be issuable,
distributable, payable or deliverable for outstanding shares of
Common Stock, then, unless the right to convert such shares shall
have terminated, lawful provision shall be made so that the
holders of Series B Preferred Stock shall thereafter have the
right to convert each share of the Series B Preferred Stock into
the kind and amount of shares of stock or other securities or
property that shall be issuable, distributable, payable or
deliverable upon such sale or conveyance with respect to each
share of Common Stock immediately prior to such conveyance.
(g) Whenever the number of shares to be issued upon conversion
of the Series B Preferred Stock is required to be adjusted as provided in
this paragraph 5, the Corporation shall forthwith compute the adjusted number
of shares to be so issued and prepare a certificate setting forth such
adjusted conversion amount and the facts upon which such adjustment is based,
and such certificate shall forthwith be filed with the Transfer Agent for the
Series B Preferred Stock and the Common Stock; and the Corporation shall mail
to each holder of record of Series B Preferred Stock notice of such adjusted
conversion price.
- 7 -
<PAGE>
(h) In case at any time the Corporation shall propose:
(i) to pay any dividend or distribution payable in shares
upon its Common Stock or make any distribution (other than cash
dividends) to the holders of its Common Stock; or
(ii) to offer for subscription to the holders of its
Common Stock any additional shares of any class or any other
rights; or
(iii) any capital reorganization or reclassification of its
shares, or the consolidation or merger of the Corporation with
another corporation; or
(iv) the voluntary dissolution, liquidation or winding-up
of the Corporation;
then, and in any one or more of said cases, the Corporation shall cause at
least fifteen (15) days prior notice of the date on which (A) the books of
the Corporation shall close, or a record be taken for such stock dividend,
distribution or subscription rights, or (B) such capital reorganization,
reclassification, consolidation, merger, dissolution, liquidation or
winding-up shall take place, as the case may be, to be mailed to the Transfer
Agent for the Series B Preferred Stock and for the Common Stock and to the
holders of record of the Series B Preferred Stock.
(i) So long as any shares of Series B Preferred Stock shall
remain outstanding and the holders thereof shall have the right to convert
the same in accordance with provisions of this paragraph 5, the Corporation
shall at all times reserve from the authorized and unissued shares of its
Common Stock a sufficient number of shares to provide for such conversions.
(j) The term "Common Stock" as used in this paragraph 5 shall
mean Common Stock of the Corporation as such stock is constituted at the date
of issuance thereof or as it may from time to time be changed, or shares of
stock of any class, other securities and/or property into which the shares of
Series B Preferred Stock shall at any time become convertible pursuant to the
provisions of this paragraph 5.
(k) The Corporation shall pay the amount of any and all issue
taxes which may be imposed in respect of any issue or delivery of stock upon
the conversion of any shares of Series B Preferred Stock, but all transfer
taxes that may be payable in respect of any change of ownership of Series B
Preferred Stock, or any rights represented thereby, or of stock receivable
upon conversion thereof, shall be paid by the person or persons surrendering
such stock for conversion.
- 8 -
<PAGE>
6. Voting Rights.
Except as required by applicable law, shares of Series B
Preferred Stock shall not entitle its holder to any voting rights, but such
holder shall be entitled to a notice of any stockholders' meeting in
accordance with the By-laws of the Corporation.
7. Status of Converted or Redeemed Stock.
In case any shares of Series B Preferred Stock shall be redeemed
or converted pursuant to paragraphs 4 or 5 hereof, or otherwise repurchased
or reacquired, the shares so redeemed, converted or reacquired shall resume
the status of authorized but unissued shares of Preferred Stock and shall no
longer be designated as Series B Preferred Stock.
Signed as of this 24nd day of September, 1997.
HALSTEAD ENERGY CORP.
By:
Claire E. Tarricone
President
By:
Anthony J. Tarricone
Secretary
STATE OF NEW YORK )
) SS.:
COUNTY OF WESTCHESTER )
On September 24, 1997, Claire E. Tarricone and Anthony J.
Tarricone, personally appeared before me, a Notary Public for the State and
County aforesaid, as President and Secretary, respectively, of Halstead
Energy Corp., who acknowledged that each of them executed the above
instrument.
__________________________
Notary Public
<PAGE>
EXHIBIT C
OPTION AGREEMENT
AGREEMENT made as of this 24th day of September, 1997 by and between
INFINITY INVESTORS LIMITED ("Infinity"), and _____________________ (the
"Optionee").
W I T N E S S E T H:
WHEREAS, Infinity is the holder of 560,126 shares of Series B
Convertible Redeemable Preferred Stock (the "Series B Preferred Stock") of
Halstead Energy Corp. (the "Company"), which shares are convertible into
shares of the Company's Common Stock (the "Shares") in accordance with that
certain Certificate to Set Forth Designations, Voting Powers, Preferences,
Limitations, Restrictions and Relative Rights of the Series B Preferred
Stock, as amended and restated; and
WHEREAS, pursuant to the terms of a certain Restructuring Agreement
dated September 24, 1997 by and between Infinity, the Company, Claire E.
Tarricone, Anthony J. Tarricone and Joseph A. Tarricone (the "Restructuring
Agreement"), Infinity has agreed to grant to the Optionee and/or certain
other option holders (the "Option Holders") the right and option to purchase
2,170,488 Shares (the "Conversion Shares").
NOW, THEREFORE, in consideration of the covenants and agreements herein
contained and those contained in the Restructuring Agreement, the parties
hereto hereby agree as follows:
1. Grant of Option and Stock Appreciation Rights. (a) Upon the
terms and subject to the conditions set forth herein, Infinity hereby grants
to the Optionee the right and option (the "Option") to purchase from
Infinity, at a price of $2.00 per share, all of the Conversion Shares during
the period commencing on the effectiveness of the Registration Statement
contemplated by Section 2(b)(i) of the Restructuring Agreement (the
"Effective Date") and ending on the 18-month anniversary of the Effective
Date; provided, however that the unexercised portion of the Option shall
earlier terminate as follows:
(i) In the event that the Option Holders fail to purchase at
least 250,000 Conversion Shares on or prior to the 90th day following
the Effective Date, the Option shall terminate on such 90th day;
(ii) In the event that the Option Holders fail to purchase at
least an additional 400,000 Conversion Shares on or prior to the 181st
day following the Effective Date, the Option shall terminate on such
181st day;
(iii) In the event that the Option Holders fail to purchase at
least an additional 400,000 Conversion Shares on or prior to the 271st
day following the Effective Date, the Option shall terminate on such
271st day;
(iv) In the event that the Option Holders fail to purchase at
least an additional 400,000 Conversion Shares on or prior to the 361st
day following the Effective Date, the Option shall terminate on such
361st day;
(v) In the event that the Option Holders fail to purchase at
least an additional 400,000 Conversion Shares on or prior to the 451st
day following the Effective Date, the Option shall terminate on such
451st day; and
(vi) In the event that the Option Holders fail to purchase the
balance of the Conversion Shares during the period beginning with the
451st day following the Effective Date and ending on the eighteen-month
anniversary of the Effective Date, the Option shall terminate on such
eighteen-month anniversary.
In addition, in the event that Infinity exercises its rights under
Sections 4A(a) or 4A(b) of the Restructuring Agreement, the Option shall
automatically terminate in its entirety.
2. Method of Exercising Option. The Optionee may exercise the
Option by delivering to Infinity (i) a written notice stating the number of
Conversion Shares that the Optionee has elected to purchase at that time from
Infinity and (ii) full payment of the purchase price of the Conversion Shares
then to be purchased. Payment of the purchase price for the Conversion
Shares shall be made by wire transfer of immediately available funds to a
bank designated by Infinity.
3. Issuance of Stock Upon Exercise. As promptly as practicable
after receipt of such written notification of the Optionee's election to
exercise the Option and full payment of such purchase price, but in no event
more than three days after receipt, Infinity shall transfer to the Optionee
the number of Conversion Shares with respect to which the Option has been so
exercised and shall deliver to the Optionee a certificate or certificates
therefor, duly endorsed with signatures guaranteed in a form acceptable to
the Company's transfer agent or shall cause the transfer agent to issue the
Conversion Shares directly to the Optionee.
Notwithstanding any provision of this Agreement to the contrary, the
Optionee acknowledges and agrees that Infinity's right to receive the
Conversion Shares is dependent upon Infinity delivering a duly completed
Notice of Conversion to the Company, which must be honored by the Company,
with the Company's stock transfer agent promptly delivering Conversion Shares
to Infinity in connection therewith. Further, in order for Infinity to sell
the Conversion Shares to the Optionee following exercise of the Option, the
Company must maintain the effectiveness of the Registration Statement
contemplated by Section 2(b)(i) of the Restructuring Agreement. Accordingly,
the Optionee acknowledges and agrees that its right to exercise the Option
shall be subject to the Company maintaining the effectiveness of such
Registration Statement. Further, subject to Infinity's performance of its
obligations hereunder, the Optionee fully releases and discharges Infinity
from any liability associated with the failure of Infinity to deliver
Conversion Shares to the Optionee upon exercise of the Option prior to the
time such Conversion Shares are delivered to Infinity by the Company and its
stock transfer agent upon receipt by the Company of a duly completed Notice
of Conversion from Infinity.
4. Entire Agreement. This Agreement constitutes the entire
agreement among the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and
oral, among the parties or between any of them with respect to the
transactions contemplated hereby.
5. Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability
of any other provision of this Agreement, which shall remain in full force
and effect unless such enforceability causes this Agreement to fail in its
essential purpose.
6. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made as of
the date delivered or mailed if delivered in person, by telecopy or by
registered or certified mail (postage prepaid, return receipt requested) to
the respective parties as follows:
if to Infinity to it at:
38 Hertford Street
London, England W1Y 7TG
Attn: James A. Loughram, Esq.
with a copy to:
H.W. Partners, L.P.
1601 Elm Street
4000 Thanksgiving Tower
Dallas, TX 75201
Telecopy: (214) 720-1662
Attn: Stuart Chasanoff, Esq.
if to the Optionee, to it at:
copies of all notices to:
Halstead Energy Corp.
33 Hubbells Drive
Mt. Kisco, New York
Telecopy No. (914) 666-3203
Attn: President and General Counsel
and
Piper & Marbury L.L.P.
1251 Avenue of the Americas
New York, New York 10020
Telecopy No. (212) 835-6001
Attention: Paul J. Pollock, Esq.
or to such other address as the person to whom notices is given may have
previously furnished to the others in writing in the manner set forth above.
7. Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York (without giving effect
to principles of conflicts of law).
8. Headings. The descriptive headings herein are inserted for
convenience of reference only and are not intended to be part of or to affect
the meaning or interpretation of this Agreement.
9. Binding Agreement. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, its successors and assigns.
10. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
INFINITY INVESTORS LIMITED
By:___________________________
[Optionee]
By:___________________________
<PAGE>
EXHIBIT D
CERTIFICATE OF DESIGNATION
Certificate of Amendment to
Certificate to Set Forth Designations,
Voting Powers, Preferences, Limitations,
Restrictions, and Relative Rights of
Series B 12% Cumulative Convertible
Redeemable Preferred Stock, $.001 Par Value
Pursuant to Section 78.1955 of the Nevada General Corporation Law,
Halstead Energy Corp. adopts the following Amended Certificate of Designation
by stating the following:
I. The name of the corporation is Halstead Energy Corp. (the
"Corporation").
II. The current designation of a series of Preferred Stock of the
Corporation is Series B 12% Cumulative Convertible Redeemable Preferred Stock
(the "Series B Preferred Stock").
III. The approval by all shareholders required pursuant to the
provisions of Section 78.1955 of the Nevada General Corporation Law of the
amendment of the designation of the Series B Preferred Stock was obtained in
accordance with the Nevada General Corporation Law.
IV. Paragraph 2(a) of terms of the preferences, limitations,
restrictions and relative rights of shares of Series B Preferred Stock is
hereby amended, as contained in a resolution of the Board of Directors of the
Corporation, pursuant to a provision of the Articles of Incorporation of the
Corporation and, as so amended, shall read in its entirety as follows.
"2. Dividends.
(a) From and after the date hereof, the outstanding shares of
Series B Preferred Stock shall cease to accrue dividends on such shares."
Signed as of this ___ day of ___________.
HALSTEAD ENERGY CORP.
By:_____________________
Claire E. Tarricone
President
By:_____________________
Anthony J. Tarricone
Secretary
STATE OF NEW YORK )
) SS.:
COUNTY NEW YORK )
On _________, Claire E. Tarricone and Anthony J. Tarricone,
personally appeared before me, a Notary Public for the State and County
aforesaid, as President and Secretary, respectively, of Halstead Energy
Corp., who acknowledged that each of them executed the above instrument.
__________________________
Notary Public
<PAGE>
EXHIBIT E
CERTIFICATE OF DESIGNATION
Certificate of Amendment to
Certificate to Set Forth Designations,
Voting Powers, Preferences, Limitations,
Restrictions, and Relative Rights of
Series B 12% Cumulative Convertible
Redeemable Preferred Stock, $.001 Par Value
Pursuant to Section 78.1955 of the Nevada General Corporation Law,
Halstead Energy Corp. adopts the following Amended Certificate of Designation
by stating the following:
I. The name of the corporation is Halstead Energy Corp. (the
"Corporation").
II. The current designation of a series of Preferred Stock of the
Corporation is Series B 12% Cumulative Convertible Redeemable Preferred Stock
(the "Series B Preferred Stock").
III. The approval by all shareholders required pursuant to the
provisions of Section 78.1955 of the Nevada General Corporation Law of the
amendment of the designation of the Series B Preferred Stock was obtained in
accordance with the Nevada General Corporation Law.
IV. Paragraph 2(a) of terms of the preferences, limitations,
restrictions and relative rights of shares of Series B Preferred Stock is
hereby amended, as contained in a resolution of the Board of Directors of the
Corporation, pursuant to a provision of the Articles of Incorporation of the
Corporation and, as so amended, shall read in its entirety as follows.
"2. Dividends.
(a) From and after the date hereof, the holders of outstanding
shares of Series B Preferred Stock shall be entitled to receive preferential
dividends in cash, out of any funds of the Corporation legally available at
the time for declaration of dividends, after dividends shall have been paid
or declared and set apart for payment on shares of the Corporation's Series A
Cumulative Convertible Redeemable Preferred Stock (the "Series A Preferred
Stock"), but before any dividend or other distribution will be paid or
declared and set apart for payment on any shares of any Common Stock or other
class of stock junior to the Series B Preferred Stock (the Common Stock and
such junior stock being hereinafter collectively the "Junior Stock") at the
rate of 10% per annum on the Stated Value payable quarterly on the last day
of each calendar quarter; provided, however, that in the event that dividend
payments are not made when due in cash, to the extent permitted by applicable
law, dividend payments shall be made, in the sole discretion of the Board of
Directors of the Corporation, in additional fully paid and nonassessable
shares of the Corporation's Common Stock at a rate of one share of Common
Stock for each $2.00 of such dividend not paid in cash and the issuance of
such additional shares shall constitute full payment of such dividend."
Signed as of this ___ day of ___________.
HALSTEAD ENERGY CORP.
By:_____________________
Claire E. Tarricone
President
By:_____________________
Anthony J. Tarricone
Secretary
STATE OF NEW YORK )
) SS.:
COUNTY NEW YORK )
On _________, Claire E. Tarricone and Anthony J. Tarricone,
personally appeared before me, a Notary Public for the State and County
aforesaid, as President and Secretary, respectively, of Halstead Energy
Corp., who acknowledged that each of them executed the above instrument.
__________________________
Notary Public
THE SECURITY REPRESENTED HEREBY WAS ORIGINALLY ISSUED
ON SEPTEMBER 24, 1997 AND HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS
SECURITY CANNOT BE SOLD OR OTHERWISE TRANSFERRED
UNLESS THIS SECURITY IS REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR THE ISSUER IS
FURNISHED WITH AN ACCEPTABLE OPINION OF COUNSEL THAT
AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
12% SUBORDINATED PROMISSORY NOTE
September 24, 1997 $600,000
HALSTEAD ENERGY CORP., a Nevada corporation (the "Company"), hereby
promises to pay to the order of Infinity Investors Limited ("Payee") the
principal amount of $600,000, together with interest thereon calculated from
the date hereof in accordance with the provisions of this 12% Subordinated
Promissory Note (this "Note").
By accepting this Note, Payee agrees that this Note shall be
subordinated to Senior Debt of the Company (as defined in paragraph 3 hereto)
upon the terms set forth in paragraph 3.
1. Payment of Interest. Interest will accrue from the date hereof
at the rate of twelve percent (12%) per annum on the unpaid principal amount
of this Note outstanding from time to time (calculated on the basis of a 360
day year consisting of 12 30-day months). Interest shall be compounded
quarterly from the date hereof through and including September 24, 1999 and
thereafter shall be computed on the basis of simple interest. Subject to
paragraph 3 hereof, the Company will pay to the Payee all accrued interest
commencing on September 30, 1999, and thereafter quarterly in arrears
beginning after September 30 1999. Any accrued interest which for any reason
has not theretofore been paid will be paid in full on the date on which the
final principal payment on this Note is paid.
2. Payment of Principal of Note.
(a) Scheduled Payments. Subject to paragraph 3 hereof, the
Company will repay in full the principal amount of this Note and any accrued
and unpaid interest thereon on September 24, 2002.
(b) Optional Prepayment. Subject to paragraph 3 hereof, the
Company may at any time prepay, without premium or penalty, all or any
portion of the outstanding principal amount of this Note, together with
interest accrued on such prepaid amount to the date of payment. A prepayment
of less than all of the outstanding principal amount of this Note will be
applied against the Company's obligation to make the repayment of principal
at maturity.
(c) Mandatory Prepayment. Subject to paragraph 3 hereof, the
Company shall (i), if it enters into a Senior Debt financing facility after
the date hereof which, after giving effect to the refinancing of any
indebtedness of the Company which is required to be repaid by the terms of
the relevant documents or such new holder, results in or makes available to
the Company proceeds (the "New Money") in excess of $4,250,000, prepay,
without premium or penalty, the outstanding amount hereunder and (ii) within
thirty (30) days after the delivery of audited financial statements of the
Company for each fiscal year after the fiscal year ended August 31, 1997
prepay, without premium or penalty, an amount equal to fifty percent (50%) of
the Company's Excess Cash Flow (as defined below), but in no event more that
the then principal balance of this Note and any accrued interest hereon. For
purposes of this Note, "Excess Cash Flow" shall mean, with respect to each of
the Company's fiscal years after the fiscal year ended August 31, 1997, (i)
the Company's after tax net income (excluding any extraordinary items) for
such fiscal period, plus (ii) the sum of the Company's amortization and
depreciation expenses used in the calculation of consolidated after tax net
income for such fiscal period, minus (iii) capital expenditures made during
such fiscal period, minus (iv) any required payments of Senior Debt, minus
$100,000; provided however, that the definition of Excess Cash Flow shall be
subject to amendment or modification at the reasonable request of any lender
or other financial institution (a "Senior Lender") which commits, after the
date hereof, to advance to the Company New Money in excess of $1,500,000 but
less than $4,250,000; provided, however, that no such amendment or
modification shall result in a greater than 35% decrease in the amount that
would otherwise be deemed Excess Cash Flow or lengthen the one-year period
referred to in Section 3(c)(ii) hereof.
(d) Notice of Prepayment. The Company will give written notice
of its election to prepay this Note to the Payee in person or by registered
or certified mail, return receipt requested, at least 10 days prior to the
date of prepayment. On the date of prepayment specified in the Company's
notice, the Company will pay to the Payee, by wire transfer of immediately
available funds, the entire outstanding principal amount being prepaid,
together with all accrued interest thereon through the date of prepayment.
3. Subordination. The Company's payment of this Note shall be
subject to the following restrictions:
(a) Anything in this Note to the contrary notwithstanding, the
obligations of the Company in respect of the principal of and interest on
this Note shall be subordinate and junior in right of payment, to the extent
and in the manner hereinafter set forth, to the Company's Senior Debt. For
purposes of this Agreement, the "Senior Debt" shall mean (i) the maximum
principal amount of the secured indebtedness which any financial institution
or other lender is committed, from time to time, to make or has made
available to the Company pursuant to its loan agreement(s) with the Company
(its "Loan Agreement"), (ii) all interest, commitment fees, collection fees
and audit, servicing and other fees and expenses which may from time to time
be due under its Loan Agreement accrued to the date of payment, regardless of
whether proceedings for collection of the same or other proceedings under
Title 11 of the United States Code have been commenced, (iii) all
reimbursements and other fees and obligations of the Company to the bank
under the Loan Agreement and (iv) any deferrals, renewals, extensions or
refundings of the Senior Debt and any indebtedness which refinances the
Senior Debt. For purposes of this Section 3 and Section 5 hereof, the term
"Company" shall mean the Company and its subsidiaries.
(b) In the event of any insolvency or bankruptcy proceedings,
and any receivership, liquidation, reorganization, arrangement, readjustment,
composition or other similar proceedings in connection therewith, relative to
the Company, or to its creditors, as such, or to its property, or in the
event of any proceedings for voluntary liquidation, dissolution or other
winding-up of the Company, whether or not involving insolvency or bankruptcy,
or in the event of any assignment by the Company for the benefit of creditors
or in the event of any other marshaling of the assets of the Company
(collectively referred to as an "Insolvency Event"), subject to clauses (i)
and (ii) of subparagraph 3(e) hereof, the holders of the Senior Debt shall be
entitled to receive payment in full of all Senior Debt (including interest
thereon accruing after the commencement of any such proceedings) before the
Payee is entitled to receive any payment on account of principal, interest or
other amounts due upon this Note, and to that end the holders of Senior Debt
shall be entitled to receive for application in payment thereof any payment
or distribution of any kind or character, whether in cash or property or
securities, which may be payable or deliverable in any such proceedings in
respect of this Note.
(c) After the occurrence and during the continuance of any
payment or financial covenant default with respect to the Senior Debt which
gives the holder of such Senior Debt the right to accelerate the maturity of
its Senior Debt, including any default which may arise after giving effect to
any payment made or to be made hereunder, no payment of principal or interest
will be made on this Note and the holder of this Note will take no action to
recover any such amounts until the earlier of (i) the date such default has
been remedied or the Senior Debt shall have been discharged or (ii) six
months from the occurrence of such default; provided, however, that at the
request of a Senior Lender for New Money, the period set forth in clause (ii)
shall be extended to a period of a maximum of one year.
(d) Each holder of Senior Debt may at any time, in their
discretion, renew or extend the time of payment of Senior Debt so held or
exercise any of their rights under the Senior Debt including, without
limitation, the waiver of defaults thereunder, the release, foreclosure or
any other transactions with respect to collateral, and the amendment of any
of the terms or provisions thereof (or any notice evidencing or creating the
same), all without notice to or assent from the Payee. No compromise,
alteration, amendment, renewal or other change of, or waiver, consent or
other action in respect of any liability or obligation under or in respect
of, any terms, covenants or conditions of the Senior Debt (or any instrument
evidencing or creating the same), whether or not such release is in
accordance with the provisions of the Senior Debt (or any instrument
evidencing or creating the same), shall in any way alter or affect any of the
subordination provisions of this Note.
(e) If, notwithstanding the provisions of this paragraph 3, any
payment or distribution of any character (whether in cash, securities or
other property) or any security shall be received by the Payee in
contravention of this paragraph 3, and before all the Senior Debt shall have
been paid in full, such payment, distribution or security shall be held in
trust for the benefit of, and shall be immediately paid over or delivered or
transferred to, the holders of the Senior Debt, or their duly appointed
agents, for application of the payment of all Senior Debt remaining unpaid,
until all of the Senior Debt shall have been paid in full, or such payment
has been provided for; provided:
(i) no delivery will be made of stock or obligations which are
issued by the Company or any corporation succeeding to the Company or
acquiring its property and assets, pursuant to reorganization
proceedings or dissolution or liquidation proceedings or upon any
merger, consolidation, sale, lease, transfer or other disposal, if such
stock or obligations are subordinate and junior at least to the extent
provided hereunder to the payment of Senior Debt to the extent then
outstanding and to the payment of any stock or obligations which are
issued in exchange for Senior Debt to the extent then outstanding; and
(ii) the Payee will (after all principal and interest owing on such
Senior Debt has been paid in full) be subrogated to the rights of the
holders of such Senior Debt to receive distributions applicable to the
Senior Debt to the extent that distributions otherwise payable to the
Payee have been applied to the payment of Senior Debt.
(f) No holder of Senior Debt shall be prejudiced in its right
to enforce the subordination of this Note by any act or failure to act on the
part of the Company.
(g) The provisions of paragraph 3 are for the purpose of
defining the relative rights of holders of Senior Debt, on the one hand, and
the Payee, on the other hand. No provision of such paragraph will be
construed to prevent the Payee from exercising all remedies otherwise
available under this Note or under applicable law upon the occurrence of any
Event of Default, subject to the rights of the Payee or holders of the Senior
Debt as set forth above to receive cash, assets, stock or obligations
otherwise payable or deliverable to the Payee. No provision of such
paragraph will be deemed to subordinate to any extent, any claim or right of
the Payee to any claim against the Company by any creditor or any other
Person except to the extent expressly provided in such paragraph.
4. Covenants.
The Company hereby agrees that, from and after the date hereof
until such time as the Note has been paid in full:
(a) Information. The Company will deliver to the Payee:
(i) promptly upon the filing thereof, copies of all registration
statements (other than the exhibits thereto and any registration
statements on Form S-8 or its equivalent) and reports on Forms 10-KSB,
10-QSB and 8-K (or their equivalents) which the Company or any
subsidiary of the Company has filed with the Securities Exchange
Commission (the "Commission");
(ii) within ten (10) days after any officer of the Company obtains
knowledge of an Event of Default, a certificate of the chief financial
officer or the chief accounting officer of the Company setting forth
the details thereof and the action which the Company is taking or
proposes to take with respect thereto;
(iii) promptly upon the mailing thereof to the shareholders of the
Company generally, copies of all financial statements, reports and
proxy statements so mailed and any other document generally distributed
to shareholders; and
(iv) promptly following the commencement thereof, notice and a
description in reasonable detail of any litigation or proceeding to
which the Company or any subsidiary of the Company is a party in which
the amount involved is $100,000 or more.
(b) Payment of Obligations. The Company and its subsidiaries
will maintain, in accordance with generally accepted accounting principles,
appropriate reserves for the accrual of any of the same.
(c) Maintenance of Property; Insurance. The Company and each
subsidiary of the Company will use commercially reasonable efforts keep all
property useful and necessary in its business in working order and condition,
ordinary wear and tear excepted. In addition, the Company and each such
subsidiary will maintain insurance in at least such amounts and against such
risks as it has insured against as of the date hereof.
(d) Maintenance of Existence. Subject to applicable laws
regarding business judgment and the Company's business plan from time to time
in effect, the Company will continue, and shall cause each subsidiary to
continue, to engage in business of the same general type as now conducted by
the Company and such subsidiaries, and will preserve, renew and keep in full
force and effect its respective corporate existence and their respective
material rights, privileges and franchises necessary or desirable in the
normal conduct of business.
(e) Compliance with Laws. The Company and each subsidiary of
the Company will comply, in all material respects, with all federal, state,
municipal, local or foreign applicable laws, ordinances, rules, regulations,
municipal by-laws, codes and requirements of governmental authorities
(including, without limitation, environmental and employee pension and
benefit laws and the rules and regulations thereunder) except where
non-compliance therewith could not reasonably be expected, in the aggregate,
to have a material adverse effect on the business, condition (financial or
otherwise), operations or properties of the Company or such subsidiary.
(f) Inspection of Property, Books and Records. The Company and
each subsidiary of the Company will keep proper books of record and account
in which full, true and correct entries shall be made of all dealings and
transactions in relation to their respective businesses and activities; and
will permit, during normal business hours Payee or its representative, to
visit and inspect any of their respective properties, upon reasonable prior
notice once per annum, to examine and make abstracts from any of their
respective books and records and to discuss their respective affairs,
finances and accounts with their respective executive officers and
independent public accountants.
(g) Supplemental Information. If at any time the Company is
not subject to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Company will promptly furnish at its
expense, upon request, for the benefit of the Payee, information satisfying
the information requirements of Rule 144 of the Securities Act of 1933, as
amended.
(h) Compliance with Terms and Conditions of Material
Contracts. The Company and each subsidiary of the Company will comply, in
all material respects, with all terms and conditions of all material
contracts to which it is subject, except where such non-compliance could not
reasonably be expected, in the aggregate, to have a material adverse effect
on the business, condition (financial or otherwise), operations or properties
of the Company or such subsidiary.
5. Events of Default.
(a) Definition. For the purposes of this Note, an "Event of
Default" will be deemed to have occurred if:
(i) the Company fails to pay when due the interest then due and
payable on this Note, whether or not such payment is prohibited by
paragraph 3 hereof, and such failure has continued for a period of five
(5) days after the Company's receipt of written notice thereof, or the
Company fails to pay when due the full amount of any principal payment
of this Note, whether or not such payment is prohibited by paragraph 3
hereof;
(ii) the Company fails to perform or observe any other provision
contained in this Note or any material failure to perform any material
covenant or obligation set forth in the Restructuring Agreement (as
defined below), including without limitation the provisions of Section
2 thereof, and such failure continues for a period of 30 days after the
Company's receipt of written notice thereof; provided, however, that if
such failure cannot be cured within 30 days, it shall be extended for a
reasonable period of time thereof for so long as the Company promptly
takes steps to cure such default.
(iii) any representation, warranty or information contained in any
writing furnished herein by the Company to the Payee is false or
misleading in any material respect on the date made or furnished;
(iv) the Company makes an assignment for the benefit of creditors
or admits in writing its inability to pay its debts generally as they
become due; or an order, judgment or decree is entered adjudicating the
Company bankrupt or insolvent or any order for relief with respect to
the Company is entered under the Federal Bankruptcy Code; or the
Company petitions or applies to any tribunal for the appointment of a
custodian, trustee, receiver or liquidator of the Company or of any
substantial part of the assets of the Company, or commences any
proceeding or any such petition or application is filed, or any such
proceeding is commenced, against the Company and either (A) the Company
by any act indicates its approval thereof, consents thereto or
acquiesces therein or (B) such petition, application or proceeding is
not dismissed within 90 days; or
(v) The Company fails to pay any dividends when due on the shares
of Series B 8% Cumulative Convertible Redeemable Preferred Stock owned
by the Payee and such failure shall have continued for a period of five
(5) days after the Company's receipt of written notice thereof.
(b) Consequences of Events of Default.
(i) After the occurrence and during the continuation of any Event
of Default the Payee may demand (by written notice delivered to the
Company) immediate payment of all or any portion of the outstanding
principal amount of the Note owed by such Payee, together with accrued
and unpaid interest.
(ii) The Payee will also have any other rights which such Payee may
have pursuant to applicable law.
6. Amendment and Waiver. Except as otherwise expressly provided
herein, the provisions of this Note may only be amended by written agreement
between the Company and the Payee. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon the Payee at the time
and each future Payee.
7. Cancellation. After all principal and accrued interest at any
time owed on this Note has been paid in full, this Note will be surrendered
to the Company for cancellation and will not be reissued.
8. Place of Payment. Payments of principal and interest are to be
delivered to the Payee at 38 Hertford Street, London, England W1Y 7TG, Attn:
James A. Loughram, Esq. or to such other address or to the attention of such
other Person as specified by prior written notice to the Company. At the
request of the Payee, all payments of principal and interest on this Note
will be made by wire transfer of immediately available funds to an account
which the Payee may designate from time to time.
9. Waiver of Presentment, Demand and Dishonor. Except as expressly
set forth herein, the Company hereby waives presentment for payment, protest,
demand, notice of protest, notice of nonpayment, notice of intention to
accelerate, notice of acceleration, and diligence with respect to this Note,
and waives and renounces all rights to the benefits of any statute of
limitations or any moratorium, appraisement, exemption or homestead.
No failure on the part of the Payee hereof to exercise any right or
remedy hereunder with respect to the Company, whether before or after the
happening of an Event of Default, shall constitute waiver of any future Event
of Default or of any other Event of Default. No failure to accelerate the
debt of the Company evidenced hereby by reason of an Event of Default or
indulgence granted from time to time shall be construed to be a waiver of the
right to insist upon prompt payment thereafter; or shall be deemed to be a
notation of this Note or a reinstatement of such debt evidenced hereby or a
waiver of such right of acceleration or any other right, or be construed so
as to preclude the exercise of any right the Payee may have, whether by the
laws of the state governing this Note, by agreement or otherwise; and the
Company hereby expressly waives the benefit of any statute or rule of law or
equity that would produce a result contrary to or in conflict with the
foregoing.
10. Usury. Notwithstanding any provision to the contrary contained
in this Note, or any and all other instruments or documents executed in
connection herewith, the Payee and the Company intend that the obligations
evidenced by this Note conform strictly to the applicable usury laws from
time to time in force. All agreements between the Company and Payee, whether
now existing or hereafter arising and whether oral or written, hereby are
expressly limited so that in no case, contingency or event whatsoever,
whether by acceleration of maturity hereof or otherwise, shall the amount
paid or agreed to be paid to Payee, or collected by Payee, by or on behalf of
the Company for the use, forbearance or detention of the money to be loaned
to the Company hereunder or otherwise, or for the payment or performance of
any covenant or obligation contained herein of the Company to Payee, or in
any other document evidencing, securing or pertaining to such indebtedness
evidenced hereby, exceed the maximum amount permissible under applicable
usury law. If, under any circumstances whatsoever, fulfillment of any
provisions thereof or any other document, at the time performance of such
provisions shall be due, shall involve transcending the limit of validity
prescribed by law, then, ipso facto, the obligation to be fulfilled shall be
reduced to the limit of such validity; and if under any circumstances Payee
ever shall receive from or on behalf of the Company an amount deemed
interest, by applicable law, which would exceed the highest lawful rate, such
amount that would be excessive interest under applicable usury laws shall be
applied to the reduction of the Company's unpaid principal amount owing
hereunder and not to the payment of interest, or if such excessive interest
exceeds the unpaid balance of principal and such other indebtedness, the
excess shall be deemed to have been a payment as a result of an error on the
part of the Payee and the Company and the party receiving such excess payment
shall promptly, upon discovery of such error or upon notice thereof from the
party making such payment, refund to the Company or to any other person
making such payment on the Company's behalf, and this Note shall be
automatically deemed reformed so as to permit only the collection of the
maximum non-usurious rate and amount of interest allowed by applicable law.
All sums paid or agreed to be paid to the Payee or any other holders hereof
for the use, forbearance or detention of the indebtedness evidenced hereby
shall, to the full extent permitted by applicable law, be amortized,
prorated, allocated and spread through the full term of this Note.
11. Assignment. This Note is the Note referred to in that
certain Restructuring Agreement dated September 24, 1997 by and between the
Company, Payee, Claire E. Tarricone, Anthony J. Tarricone and Joseph A.
Tarricone (the "Restructuring Agreement"). Infinity shall not sell, assign
or transfer the Note (or any interest therein) except as may be expressly
permitted by the Restructuring Agreement. Any such attempted transfer in
violation of this Agreement or the Restructuring Agreement shall be void and
of no effect.
12. Governing Law. The validity, construction and interpretation of
this Note will be governed, construed, and enforced in accordance with the
laws, of the State of New York (without giving effect to principles of
conflicts of law).
IN WITNESS WHEREOF, the Company has executed and delivered this Note on
the date first above written.
HALSTEAD ENERGY CORP.
By: /s/ Claire E. Tarricone
Claire E. Tarricone
President
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Halstead Energy Corp.:
We consent to the use of our report included herein and to the reference
to our firm under the heading "Experts" in the Prospectus.
GOLDMAN & MURPHY, LLP
/s/ Goldman & Murphy, LLP
Valley Stream, New York
December 1, 1997
