-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KFrpFIP+D8qJ143HrISAJ4dZuYnKHaXG8xYUETvLMaGzNp8gBksu+ONbIJOZHOwC LONgiXtzKCLRVVL/Np9YpQ== 0000950150-98-000079.txt : 19980121 0000950150-98-000079.hdr.sgml : 19980121 ACCESSION NUMBER: 0000950150-98-000079 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19980120 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRIGHTON TECHNOLOGIES CORP CENTRAL INDEX KEY: 0001029140 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 870460452 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-40083 FILM NUMBER: 98509166 BUSINESS ADDRESS: STREET 1: 6 PEARL COURT CITY: ALLENDALE STATE: NJ ZIP: 07401 BUSINESS PHONE: 2018182889 MAIL ADDRESS: STREET 1: 6 PEARL COURT CITY: ALLENDALE STATE: NJ ZIP: 07401 SB-2/A 1 AMENDMENT NO. 1 TO FORM SB-2 1 As filed with the Securities and Exchange Commission on JANUARY 20, 1998 Registration No. 333-40083 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- \ AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------ BRIGHTON TECHNOLOGIES CORPORATION (Name of Small Business Issuer in Its Charter)
DELAWARE 7373 87-0460452 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
6 PEARL COURT ALLENDALE, NEW JERSEY 07401 (201) 818-2889 (Address and Telephone Number of Principal Executive Offices) KIT KUNG, CHAIRMAN BRIGHTON TECHNOLOGIES CORPORATION 6 PEARL COURT ALLENDALE, NEW JERSEY 07401 (201) 818-2889 (Name, Address, and Telephone Number of Agent For Service) ------------------- Copies of all communications to: DAVID L. FICKSMAN, ESQ. ALAN I. ANNEX, ESQ. LOEB & LOEB LLP ROBERT S. MATLIN, ESQ. 1000 WILSHIRE BOULEVARD, SUITE 1800 CAMHY KARLINSKY & STEIN LLP LOS ANGELES, CALIFORNIA 90017 1740 BROADWAY, 16TH FLOOR TELEPHONE: (213) 688-3400 NEW YORK, NEW YORK 10019-4315 FACSIMILE: (213) 688-3460 TELEPHONE: (212) 977-6600 FACSIMILE: (212) 977-8389
--------------------------- Approximate Date of Proposed Sale to the Public: As soon as practicable after the Registration Statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, please check the following box. [ ] 2 CALCULATION OF REGISTRATION FEE ================================================================================
Proposed Proposed Maximum Maximum Amount of Titles of Each Class of Amount to be Offering Price Aggregate Registration Securities to be Registered Registered Per Offering Fee Security(2) Price(2) - -------------------------------------------------------------------------------------------------------- Units, each consisting of one share of Common Stock, $.001 par value, and one Redeemable Warrant to purchase one share of Common Stock(1) ................. 1,150,000 $ 7.00 $ 8,050,000 $2,374.75 - -------------------------------------------------------------------------------------------------------- Common Stock, par value $.001 per share, issuable upon exercise of Redeemable Warrants(4) ................... 1,150,000 $10.50 $12,075,000 $3,562.13 - -------------------------------------------------------------------------------------------------------- Representative's Warrants ................ 100,000 $.0001 $ 10.00 (3) - -------------------------------------------------------------------------------------------------------- Units issuable upon exercise of the Representative's Warrants(5) ............. 100,000 $ 8.40 $ 840,000 $ 247.80 - -------------------------------------------------------------------------------------------------------- Common Stock, par value $.001 per share, underlying the Redeemable Warrants included in the Representative's Warrants ................ 100,000 $ 8.40 $ 840,000 $ 247.80 - -------------------------------------------------------------------------------------------------------- Total $6,432.48* ========================================================================================================
*$5,246.27 has been previously paid (1) Based on the offering of 1,000,000 Units and 150,000 Units pursuant to the over-allotment. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933, as amended ("Securities Act"). (3) No Fee is required pursuant to Rule 457(g) under the Securities Act. (4) Issuable upon the exercise of Redeemable Warrants to be offered to the public. Pursuant to Rule 416 under the Securities Act, this Registration Statement covers any additional shares of Common Stock which may become issuable by virtue of the anti-dilution provisions of new Redeemable Warrants. (5) These Units are identical to the Units offered to the public. Pursuant to Rule 416 under the Securities Act, this Registration Statement also covers any additional Units which may become issuable by virtue of the anti-dilution provisions of the Representative's Warrants. (6) Issuable upon the exercise of the Redeemable Warrants included in the Representative's Warrants. Pursuant to Rule 416 under the Securities Act, this Registration Statement also covers any additional shares of Common Stock which may become issuable by virtue of the anti-dilution provision of the Redeemable Warrants. 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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION ("COMMISSION"), ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. 3 PROSPECTUS SUBJECT TO COMPLETION, DATED _______________, 1998 1,000,000 UNITS [LOGO] BRIGHTON TECHNOLOGIES CORPORATION EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE REDEEMABLE COMMON STOCK PURCHASE WARRANT Brighton Technologies Corporation (the "Company") is hereby offering (the "Offering") 1,000,000 units (the "Units"), each Unit consisting of one share of common stock (the "Common Stock"), $.001 par value per share, and one redeemable Common Stock purchase warrant (the "Warrants"). The Units, the Common Stock and the Warrants are sometimes referred to as the "Securities." The Common Stock and the Warrants included in the Units may not be separately traded until _______________, 1998, unless earlier separated upon three days' prior written notice from National Securities Corporation (the "Representative") to the Company at the sole discretion of the Representative. Each Warrant entitles the holder thereof to purchase one share of Common Stock (a "Warrant Share") at an exercise price of 150% of the offering price per Unit at any time commencing _______________, 1999 until _______________, 2003, unless earlier redeemed. The Warrants are subject to redemption by the Company at a price of $0.10 per Warrant at any time commencing _______________, 1999, on thirty days prior written notice, provided that the closing price per share of the Common Stock has equaled or exceeded $_______________ (150% of the offer price) for twenty consecutive trading days within the thirty-day period immediately preceding such notice. See "DESCRIPTION OF SECURITIES" and "UNDERWRITING." It is currently estimated that the initial public offering price per Unit will be between $5.50 and $7.00. The Company has applied to have the Units quoted on the Nasdaq SmallCap Market under the symbol "BRTU." The Common Stock is presently quoted on the OTC Electronic Bulletin Board under the symbol "BRTK." The Company has also applied to have its Common Stock quoted on the Nasdaq SmallCap Market under the Symbol "BRTK". See "UNDERWRITING" for a discussion of the factors to be considered in determining the initial public offering price of the Units. On __________, 1998, the closing bid price of the Common Stock, as reported on the OTC Electronic Bulletin Board, was $________ per share. See "MARKET PRICE FOR THE COMMON STOCK" and "DIVIDEND POLICY." ---------- THE SECURITIES OFFERED HEREBY INVOLVE SUBSTANTIAL RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE [ ] AND "DILUTION" BEGINNING ON PAGE [ ]. ---------- 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. ---------- ================================================================================
Underwriting Discounts and Proceeds to Price to Public Commissions(1) Company(2) - -------------------------------------------------------------------------------- Per Unit .......... $ $ $ - -------------------------------------------------------------------------------- Total (3) ......... $ $ $ ================================================================================
(1) Does not include additional compensation to be received by the Representative as representative of the several underwriters (the "Underwriters") consisting of a non-accountable expense allowance equal to 3% of the total price to the public. In addition, the Company has agreed to indemnify the Underwriters against certain civil liabilities, including liabilities under the Securities Act. See "UNDERWRITING." (2) Before deducting expenses of the Offering payable by the Company estimated at $______, excluding the Representative's non-accountable expense allowance. (3) The Underwriters have been granted an option, expiring 45 days from the date of this Prospectus, to purchase up to 150,000 additional Units from the Company, solely to cover over-allotments, if any. If the over-allotment option is exercised in full, the Total Price to the Public, Underwriting Discounts and Commissions and proceeds the Company will be $__________, $__________ and $__________, respectively, See "UNDERWRITING." The Securities are being offered by the Underwriters named herein on a firm commitment basis subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to approval to certain legal matters by their counsel and subject to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify the Offering and to reject any order in whole or in part. It is expected that delivery of certificates representing the Units will be made at the offices of National Securities in Seattle, Washington on or about __________, 1998. NATIONAL SECURITIES CORPORATION The date of this Prospectus is __________, 1998 4 [PHOTOS] The Company is currently a computer network integrator and a distributor of industrial equipment. The Company formed a joint venture to develop, design, install and maintain a nationwide computerized multi-market securities quotation and trading network in China. The Company is not currently a reporting company under the Securities Exchange Act of 1934, as amended ("Exchange Act"). The Company intends to furnish its stockholders with annual reports containing audited financial statements and interim reports as it deems appropriate. The Company's year end is December 31. In addition, as of the date of this Prospectus, the Company will be subject to the information requirements of the Exchange Act, and in accordance therewith, will file reports, proxy statements and other information with the Commission. CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS, ON THE NASDAQ SMALLCAP MARKET OR OTHERWISE, WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE UNITS. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND PURCHASE SHARES OF UNITS IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 5 PROSPECTUS SUMMARY The following summary does not purport to be complete and is qualified in its entirety by the more detailed information and financial statements and the related notes thereto appearing elsewhere in this Prospectus. Unless otherwise indicated, the information contained in this Prospectus (i) assumes that the Underwriters' over-allotment option will not be exercised, (ii) gives retroactive effect to a reverse stock split of 1 for 3 as a result of which the 10,450,820 outstanding Common Stock of the Company as of October 17, 1997 were converted into 3,483,666 shares of Common Stock, and (iii) gives effect to a reverse stock split of 1 for 3 authorized and approved by the Company's Board of Directors and stockholders on January 13, 1998, which will go into effect on January 26, 1998. This Prospectus contains certain forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed in such forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed in "Risk Factors." THE COMPANY The Company is currently a computer network integrator and a distributor of industrial equipment. The Company is also developing an on-line securities trading network for the Securities Trading Automated Quotations System (the "STAQ Exchange"), which the Company expects to be operational in the third quarter 1998. The Company provides such services and equipment primarily to customers in the People's Republic of China ("PRC" or "China"), as well as other Pacific Basin countries. The Company believes that it has a strong reputation as an independent full service provider of computer network integration services and as a distributor of industrial equipment in China. This belief is based on several factors, including, the Company's Chairman, President, Chief Executive Officer and principal stockholder, Kit Kung's experience in the business of designing and installing computer networks and importing industrial equipment into China since 1980. Building on Mr. Kung's business experience in China, the Company formed a joint venture with a company controlled by the STAQ Exchange, one of four national stock exchanges in China, to develop, design, install and maintain a nationwide computerized multi-market securities quotation and trading network in China. (Hereinafter, reference to the Company shall include its subsidiaries unless the context otherwise requires). The Company intends to maintain its focus on the Chinese market place and its business strategy is focused as follows: o Emphasis on network integration in the banking and finance industries o Commercialization of the on-line securities trading network o Expansion of the industrial equipment distribution business to meet customer demand Banking and Finance Oriented Information Technology. As the Chinese economy continues to grow and the standard of living increases in China, the Company believes that there will be an increased demand for consumer oriented financial services such as automated teller machines ("ATMs") and retail outlets that accept credit card transactions. The Company's strategy has been to meet this increasing demand in the Chinese marketplace by installing wireless telecommunications networks suitable for high volume transactions that require instant responses, such as ATM transactions, credit card verifications, clearance and settlements. The Company currently has contracts with the Industrial and Commercial Bank of China ("ICBC"), the largest retail bank in China, to design and install wireless telecommunication networks for ATM linkage and clearance and settlements for eight of its bank branches. The Company believes that as market demand for ATMs and retail outlets that accept credit card transactions increases, it will be able to secure additional contracts in this area. 3 6 Securities Quotation and Trading Network. The Company is the owner of a 90% interest in Beijing Brighton Staq Electronic System Company Limited ("Brighton-STAQ"), a PRC registered Sino-Hong Kong joint venture. The remaining 10% interest is owned by a company controlled by the STAQ Exchange, one of four national securities exchanges in China, located in Beijing. The purpose of Brighton-STAQ is to develop, design, install and maintain a nationwide computerized multi-market securities quotation and trading network, similar to the National Association of Securities Dealers Automated Quotation System ("NASDAQ") in the U.S., for trading of stocks listed on the Shanghai, Shenzhen and STAQ Exchange (the "STAQ On-line Network"). The Company's initial plans are to offer the STAQ On-line Network to the 550 stock brokerages (operating 2,200 offices) that are members of the STAQ Exchange in the cities of Beijing, Chongqing, Guangzhou, Shanghai, Shenzhen and Wuhan, with plans to eventually market the STAQ On-line Network to all 2,800 stock brokerages (operating over 10,000 offices) in China. The Company expects to initially charge an installation fee of $6,000 and a monthly maintenance fee of $1,000 for each terminal installed at the stock brokerages. The STAQ On-line Network project is currently in the testing phase. The Company expects to commence commercial operations of the STAQ On-line Network in the third quarter of 1998. Industrial Equipment Distribution. Industrial equipment distribution accounts for a substantial portion of the current revenues and operating income of the Company. The types of industrial equipment which the Company has been marketing in China include machine tools, such as machine center and grinder measurement devices, and heavy machinery, such as gantry mills, pressing machine production lines and dyes transfer automation systems. The Company is the exclusive distributor for Milltronics Manufacturing Company (a U.S. company), ALO Teknik AB (a Swedish company), Royal Master Grinders, Inc. (a U.S. company) and K.O. Lee Company (a U.S. company) for the sale of their industrial equipment in China. In addition to representing these manufacturers, the Company has adopted the strategy of increasing sales by searching for industrial equipment from manufacturers worldwide that meet both the customer's technical specifications and budget. The Company will continue its past practice of gradually increasing the size of its sales team to meet customer demand for industrial equipment. CORPORATE STRUCTURE The Company conducts its business through two principal subsidiaries: The Brighton Industries Corporation, a Delaware corporation ("BIC"), and Brighton Electronics Corporation Limited, the Company's Hong Kong registered subsidiary ("BECL"). BIC acts as distributor of third-party manufactured industrial equipment to customers in Pacific Basin countries, with primary distribution to customers in China. BECL is an investment and holding company for Asian-based investments focusing on data transfer networks and industrial equipment related ventures in the Pacific Basin region. BECL holds investments in five second-tier subsidiaries, four of which are companies organized under the laws of Hong Kong and one of which is a Chinese joint venture company. The Company's executive offices are located at 6 Pearl Court, Allendale, New Jersey 07401, and its telephone number is (201) 818-2889. 4 7 THE OFFERING Securities Offered by the Company .. 1,000,000 Units, each Unit consisting of one share of Common Stock and one Warrant. Warrants ........................... Each Warrant will entitle the holder thereof to purchase one share of Common Stock. The Warrants are exercisable commencing _______________, 1999, unless earlier redeemed, for one share of Common Stock each, at an exercise price of 150% of the offering price per Unit in the Offering. The Warrants may not be separately traded until _______________, 1999, unless earlier separated upon three days prior written notice by the Representative to the Company at the discretion of the Representative. The Warrants are redeemable by the Company at $0.10 per Warrant at any time commencing _______________, 1999, on thirty days prior written notice, provided that the closing sale price per share for the Common Stock has equaled or exceeded $__________ (150% of the offer price) for twenty consecutive trading days within the thirty- day period immediately preceding such notice. See "DESCRIPTION OF SECURITIES." Offering Price ..................... $____ per Unit Common Stock Outstanding: Prior to the Offering ........... 1,165,111 shares After the Offering(1) ........... 2,165,111 shares
- ---------- (1) Does not include: (i) 1,000,000 shares of Common Stock issuable upon exercise of the Warrants; (ii) 100,000 shares of Common Stock issuable upon the exercise of the Representative's Warrants; or (iii) up to 150,000 shares of Common Stock issuable upon exercise of the Underwriters' Over-Allotment Option. 5 8 Use of Proceeds .................... To complete the investment required to commercialize the STAQ On-line Network project and for general working capital. See "USE OF PROCEEDS." Risk Factors ....................... The Offering involves a substantial degree of risk, including the entry of the Company into a new business in China, discretionary use of proceeds, general risks associated with operating in China, possible regulatory constraints and possible need for additional financing. See "RISK FACTORS." NASDAQ SmallCap Market Symbols ..... Common Stock .................. "BRTK" Units ......................... "BRTU"
6 9 SUMMARY FINANCIAL INFORMATION The following table sets forth (i) for the periods indicated and at the dates indicated, historical summary financial information of the Company and (ii) adjusted historical balance sheet information of the Company as of September 30, 1997. The historical information contained in the table as of December 31, 1996 and for the years ended December 31, 1995 and 1996 has been derived from audited financial statements, and is qualified in its entirety by, and should be read in connection with, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," the audited financial statements (and notes thereto) and other financial and statistical information of the Company appearing elsewhere in this Prospectus. The historical statements of operations and balance sheet data as of September 30, 1997 and for the nine months ended September 30, 1996 and 1997, have been derived from unaudited financial statements. The financial statements as of September 30, 1997 and for the nine months ended September 30, 1996 and 1997 are unaudited; however in the opinion of management all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial statements for interim periods have been made. The results of interim periods are not necessarily indicative of the results to be obtained in a full fiscal year. The accompanying historical as adjusted unaudited balance sheet data is adjusted to give effect to the Offering as if it had occurred on September 30, 1997. The following data gives retroactive effect to the 1 for 3 reverse stock split which was effective on November 11, 1996, the 1 for 3 reverse stock split effective October 17, 1997 and the 1 for 3 reverse stock split authorized and approved by the Company's Board of Directors and stockholders on January 13, 1998, which will go into effect on January 26, 1998. All share and per share data have been restated for all periods presented to reflect these splits.
Years Ended Nine Months Ended December 31, September 30, ----------------------------- ----------------------------- 1995(1) 1996 1996 1997 ----------- ----------- ----------- ----------- STATEMENT OF OPERATIONS DATA: Revenues $ 8,370,537 $ 8,006,260 $ 6,796,972 $ 5,913,330 Gross profit 2,205,336 2,220,753 1,802,817 1,856,123 Operating income (loss) 557,320 465,724 238,056 (257,562) Income (loss) before income taxes and minority interests 560,644 514,750 287,014 (206,306) Net income (loss) 172,347 198,524 145,351 (108,024) Net income (loss) per common share: Primary and fully diluted .17 .19 .14 (.09) Weighted average number of common shares and common share equivalents outstanding: Primary 1,008,333 1,033,965 1,008,333 1,157,289 Fully diluted 1,008,333 1,046,891 1,022,223 1,199,838
(1) As restated (see "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION-OVERVIEW"). 7 10
September 30, 1997 ---------------------------------- December 31, Historical 1996 Historical As Adjusted(2) ------------ ------------ ------------ BALANCE SHEET DATA: Working capital (deficiency) ($ 879,481) ($ 1,203,728) $ 3,763,620 Fixed assets, net 1,536,458 1,720,352 1,720,352 Total assets 10,187,068 8,577,178 13,307,433 Total liabilities 9,602,032 7,738,446 7,631,201 Stockholders' equity 585,036 838,732 5,676,232
(2) Gives effect to the sale of 1,000,000 Units offered hereby at an assumed price of $6.25 per Unit, reduced by $1,412,500 of costs attributable to the Offering. 8 11 RISK FACTORS An investment in the securities offered hereby involves a substantial degree of risk. Prospective investors, prior to making an investment decision, should carefully consider the following risk factors. This Prospectus contains, in addition to historical information, certain forward-looking statements that involve risks and uncertainties. Reference is made in particular to the description of the Company's plans and objectives for future operations, assumptions underlying such plans and objectives and other forward-looking statements included in "PROSPECTUS SUMMARY," "USE OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS" and "BUSINESS" in this Prospectus. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties which could cause actual results to differ materially from those described in the forward-looking statements. Factors which could cause such results to differ materially from those described in such forward-looking statements include, but are not limited to, those set forth in the risk factors below. OPERATIONS IN CHINA. The Company conducts substantially all its marketing and sales, and provides its services to, end-users in China. The Company expects to continue to focus its efforts on the Chinese market. As such, there are risks involved with the conduct of the Company's business in China, including the following: Internal Political Risks. During the past fifteen years, the Chinese Government has implemented a program of reform, and is expected to continue to open its economic and political systems. Such reforms have resulted in significant economic growth and social progress. Many of the reforms are unprecedented or experimental and are expected to be refined and improved upon. Other political, economic and social factors may also lead to further readjustment of the reform measures. This refinement and readjustment process may not have a positive effect on the operations of the Company. The Company's results at times may also be adversely affected by changes in China's political, economic and social conditions, and/or by changes in the policies of the Chinese Government, such as changes in laws and regulations (or the interpretation thereof), including those with respect to trade with the United States, Sino-foreign joint ventures, the introduction of measures to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittances abroad and others. Over the past years, there has been an increasing focus on attracting foreign investment into China. There can be no assurance that the Chinese Government will continue with the policy of encouraging foreign investment in the Company's businesses, nor that the maximum levels of foreign percentage holding allowed for joint ventures will be continued. Government Control Over the Economy and Inflation. The economy of China differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development ("OECD") in such respects as structure, government involvement, level of development, growth rate, capital reinvestment, allocation of resources, self-sufficiency, rate of inflation and balance of payments position, among others. For almost 40 years, the economy of China has been primarily a planned economy subject to one-, five- and 10-year State Plans. Pursuant to such State Plans, various Central Government agencies with jurisdiction over different industries and local Governments at various levels formulate and implement more specific plans applicable to their respective industries and localities. Although the majority of productive assets in China are still owned by the Chinese Government, which relies on state-owned enterprises for a substantial portion of its revenue, in recent years the portion of the Chinese economy subject to State Plans has been diminishing. Nevertheless, at times, the economic reform measures adopted by the Chinese Government may be inconsistent or ineffectual and, therefore, the Company may not be able at times to capitalize on such reforms. The Chinese economy has experienced significant growth in the past five years, but such growth has been uneven both geographically and among various sectors of the economy. Economic growth has also been 9 12 accompanied by rising inflation. The Chinese Government has implemented policies from time-to-time to restrain the rate of such economic growth and control inflation in order to achieve coordinated economic development. In July 1993, the Central Government adopted a number of measures to strengthen "macroeconomic control" of the economy, including increasing interest rates on bank loans and deposits, and postponing certain planned price reforms. Despite some successes in controlling economic expansion and the inflation rate, the Central Government has stated its intention to slow further economic growth in order to combat inflation which has seen prices rise more than 20% in some years. A significant portion of the economic activity in China is related to exports and may therefore be affected by developments in the economies of China's principal trading partners. The United States annually reconsiders the renewal of "Most Favored Nation" ("MFN") trading status for China, which provides China with trading privileges available to trading partners of the United States. If trade relations between China and the United States were to deteriorate for any reason, the Company could be adversely affected. Restrictions on Currency Conversions. The Company's income from the STAQ On-line Network project will be received or realized in the Chinese currency, Renminbi ("Rmb"), although the Company will be required to compute and report its results of operations in U.S. dollars. Accordingly, changes in the Renminbi against the U.S. dollar will result in corresponding changes in the U.S. dollar value of the Company's assets denominated in Renminbi, and will change the U.S. dollar value of income and dividends received or to be received in Renminbi. The Company does not currently engage in hedging transactions and does not intend to do so in the future. During the last five years, the value of the Renminbi generally has experienced a gradual but significant devaluation against most major currencies. On January 1, 1994, the official exchange rate was abolished and a new managed floating-rate foreign exchange system was implemented. Although the Renminbi to U.S. dollar exchange rate has been stable since January 1, 1994 and the Central Government has stated its intention to intervene in the future to support the value of the Renminbi, there can be no assurance that exchange rates will not again become volatile or that the Renminbi will not further decline in value against the U.S. dollar. Both the conversion of Renminbi into foreign currencies and the remittance of foreign currencies abroad require Chinese Government approvals. The Company believes that it will be able to obtain all required approvals for the conversion and remittance abroad of foreign currency necessary to support the operations of the Company and distribute dividends to stockholders should the Company elect to do so. However, such approvals do not guarantee the availability of foreign currency, and, no assurance can be given that the Company will be able to convert sufficient amounts of foreign currencies in China's foreign exchange markets. See "BUSINESS-STAQ ON-LINE NETWORK." Restrictions on Repatriation of Foreign Currency. Foreign investment enterprises may generally remit out of China profits or dividends derived from a source within China, subject to the availability of foreign currency. Except for such profits or dividends, remittance out of China by foreign investment enterprises of any other amount (including proceeds from a disposition of an investment in China) is subject to the approval of governmental regulatory agencies and the availability of foreign currency. In addition, if there were to be a deterioration in China's balance of payments, or for other reasons, China could impose restrictions on foreign currency remittances abroad. No assurance can be given that the Company will be able to remit out of China amounts due the Company from any Sino-foreign joint venture with which the Company may engage in business. Legal System. Since 1979, many laws and regulations governing economic matters in general have been promulgated in China. Despite these efforts in developing the legal system, China does not have a comprehensive system of laws. In addition, the enforcement of existing laws may be uncertain and sporadic, and implementation and interpretation thereof inconsistent. The Chinese judiciary is relatively inexperienced in enforcing the laws that 10 13 exist, leading to a higher than usual degree of uncertainty as to the outcome of any litigation. Even whereadequate laws exists in China, it may be difficult to obtain swift and equitable enforcement of such laws, or to obtain enforcement of a judgment by a court of another jurisdiction. The Chinese legal system is based on written statutes and, therefore, decided legal cases are without binding legal effect, although they are often followed by judges as guidance. The interpretation of Chinese laws may be subject to policy changes which reflect domestic political changes. As the Chinese legal system develops, the promulgation of new laws, changes to existing laws and the pre-emption of local regulations by national laws may adversely affect the Company's businesses. The general effect of legislation over the past 18 years, however, has been to significantly enhance the protection afforded to foreign investment enterprises in China. However, there can be no assurance that changes in such legislation or interpretation thereof will not have an adverse effect upon the businesses and prospects of the Company. The Company's activities in China are by law subject, in certain cases, to administrative review and approval by various national and local agencies of the Chinese government. In particular, part of the Company's current operations and the realization of its future expansion programs in China will be subject to Chinese government approvals. Enforceability of Judgements. China has not entered into treaties or arrangements providing for the recognition and enforcement of judgements of courts in most other countries. Accordingly, it may be difficult to secure recognition and enforcement in China for the judgements of courts in such jurisdictions. Foreign Trade Corporations. In order to conduct the distribution business in China, the Company must make most of its sales through foreign trade corporations ("FTC's") which are legally authorized by the Chinese Government to conduct import business. Although purchasing decisions are made by the end-user, which is obligated to pay the applicable purchase prices, the Company enters into a formal purchase contract with only the FTC. The FTC's make purchases on behalf of the end-users. By virtue of its direct contractual relationship with the FTC's, rather than the end-user, the Company is to some extent dependent upon the continuing existence of the contractual compliance by the FTC's until the particular transaction has been consummated. The Company's business, however, is not dependent on any single FTC or end-user. Although sales to certain industries involve repeat transactions with FTC's that operate in those industries, the Company does not believe that it is dependent upon relations with any particular FTC or that the loss of relations with any particular FTC would have a material adverse affect on the Company. Rather, FTC's, which earn commissions in transactions, compete with each other for the right to handle end-users' business. See "BUSINESS-INDUSTRIAL EQUIPMENT DISTRIBUTION BUSINESS." Hong Kong: Transfer of Sovereignty. BECL, the Company's investment and holding company for Asian-based investments for information and industrial equipment related ventures in the Pacific Basin region, is a Hong Kong registered company. As a result, the Company's results of operations and financial condition may be influenced by the political situation in Hong Kong and by the general state of the Hong Kong economy. On July 1, 1997, sovereignty over Hong Kong was transferred from the United Kingdom to China, and Hong Kong became a Special Administrative Region of China (an "SAR"). As provided in the Sino-British Joint Declaration on the Question of Hong Kong and the Basic Law of the Hong Kong SAR of China (the "Basic Law"), the Hong Kong SAR is to have its own legislature, legal and judicial system and full economic autonomy for 50 years. Based on the current political conditions and the Company's understanding of the Basic Law, the Company does not believe that the transfer of sovereignty over Hong Kong will have a material adverse impact on the Company's financial and operating environment. There can be no assurance, however, that changes in political or other conditions will not result in such an adverse impact. See "BUSINESS-THE COMPANY'S CORPORATE STRUCTURE." 11 14 BRINGING BRIGHTON-STAQ TO COMMERCIALIZATION. It is management's belief that Brighton-STAQ represents the primary growth opportunity for the Company. Consequently, the future success of the Company depends to a substantial extent on the successful implementation of the Brighton-STAQ joint venture. The Brighton-STAQ joint venture is inherently a new business for the Company. The Company projects that Brighton-STAQ will operate at a loss for at least 1998, the first year of operation. Prospective investors, therefore, have no historical financial information about Brighton-STAQ upon which to evaluate the Company's performance in this business and investment in the Units offered hereby. The likelihood of the success of Brighton-STAQ must be considered in light of the problems, expenses, difficulties and delays frequently encountered in connection with the formation of a new business. See "BUSINESS-STAQ ON-LINE NETWORK." China's Securities Industry Related Risk. Although the Chinese government has introduced new laws and regulations since January 1, 1994 to modernize its securities market, China does not have a well-developed, consolidated body of law governing the securities industry. As China continues to develop its securities market, changes to existing laws, regulations and policies (or in the application or enforcement thereof), the adoption of new laws, and the pre-emption of local regulations by national laws may adversely affect Brighton-STAQ. See "RISKS RELATING TO OPERATIONS IN CHINA." Dependence on Strategic Relationship. The Company, through its subsidiary, operates Brighton-STAQ as a joint venture company with Beijing Huazheng Electronic Technology Co., Ltd. ("Huazheng"), a Chinese registered Sino-Hong Kong equity joint venture company. Huazheng is a company controlled by the STAQ Exchange in Beijing. It is the Company's understanding that Huazheng's affiliation with the STAQ Exchange provides Brighton-STAQ with access to the STAQ Exchange. The deterioration of this strategic relationship would have a material adverse effect on Brighton-STAQ and would potentially limit the Company's ability to continue to design, install and maintain the STAQ On-line Network. There can be no assurance that the Company's relationship with its strategic partner will remain on agreeable terms or that the Company's partner will not end its relationship with the Company by selling its interest in Brighton-STAQ. See "BUSINESS-STAQ ON-LINE NETWORK." Limited Duration of Joint Venture. Brighton-STAQ has a term of 12 years. To the extent that the Company is unable to either extend the term of the joint venture in 2006 or replace the revenues generated from its operations, the Company's future earnings may be adversely affected. Although the Company expects to be able to extend the term of Brighton-STAQ, there can be no assurance that the Company will be successful in extending the term of the joint venture or be able to establish new arrangements sufficient to replace such lost revenues. See "BUSINESS-STAQ ON-LINE NETWORK." Right of Huazheng to Buy up to 49% of Brighton-STAQ. The Company and Huazheng, during negotiations for the establishment of Brighton-STAQ, orally agreed that under certain financial performance criteria to be agreed upon by the parties, Huazheng would have the right, during the term of Brighton-STAQ, to acquire up to an additional 10% of Brighton-STAQ annually, at market valuation, up to a total ownership of 49%. The parties have not yet agreed on the mechanism for determining such performance criteria. The Company is uncertain with respect to the validity of this oral agreement under Chinese law since it was not reflected in the written agreement approved by the Chinese government providing for the establishment of Brighton-STAQ. However, the Company believes that local business custom dictates that the Company honor such oral agreement if so requested by its partner. If Huazheng decides to exercise such right at a time when Brighton-STAQ is profitable, the Company's operating results and anticipated growth may be adversely affected. In addition, the mechanism for determining market valuation if and when Huazheng exercises such right, which is not yet agreed to by the parties, may possibly be unfavorable to the Company. See "BUSINESS-STAQ ON-LINE NETWORK." Construction and Operation of the STAQ On-line Network. In order for the STAQ On-line Network to be fully operational, additional Chinese governmental approvals will be required. Even in the event that the 12 15 Company obtains all necessary governmental approvals related to, and has adequate financing to fund construction and operation of the STAQ On-line Network, Brighton-STAQ may experience difficulties and delays relating to the construction and operation of such network system. There can be no assurance that such network system will be completed in a timely manner, if at all, or that financing will be sufficient to complete or to operate the STAQ On-line Network. The failure to achieve these goals may have a material adverse effect upon the liquidity, working capital requirements and anticipated growth of the Company's business operations. See "BUSINESS-STAQ ON-LINE NETWORK." Dependence on The People's Daily as Satellite Provider. The operation of the STAQ On-line Network is dependent on satellite service provided by The People's Daily, the major newspaper serving China. The Company is negotiating a three-year contract for satellite services with The People's Daily, which it expects to finalize in the first quarter of 1998. The People's Daily is not a commercial provider of satellite service and itself subscribes to Asia Satellite Telecommunications Co. Ltd. in Hong Kong for lease of a C-Band transponder and China Telecommunications Broadcast Satellite Corporation in Beijing for lease of a Ku-Band transponder. The Company is dependent on The People's Daily's transponder lease agreements with the commercial satellite service providers. If The People's Daily's transponder lease agreements were to terminate for any reason, the Company will need to subscribe for satellite service from a commercial provider at substantially higher cost to the Company. See "BUSINESS-STAQ ON-LINE NETWORK." Additional Capital Requirements. In addition to the net proceeds from the Offering allocated to the STAQ On-line Network project, the Company may be required to fund additional capital expenditures, development and construction costs and working capital requirements related to the Company's development of the STAQ On-line Network. Furthermore, the Company may decide to reallocate the net proceeds from the Offering allocated to working capital to satisfy any future financing requirements of the STAQ On-line Network project. The Company cannot predict the extent to which additional capital may be required for those purposes and there can be no assurance that the Company will be able to obtain such additional capital on terms acceptable to the Company. To the extent that future financing requirements are satisfied through the issuance of equity securities, prospective investors may experience significant dilution in the net book value of the Common Stock comprising a part of the Units offered hereby. See "USE OF PROCEEDS." In addition, the projected capital requirements to complete the STAQ On-line Network exceed Brighton-STAQ's current authorized total investment amount. Under Chinese law, the Company may not make capital contributions in excess of authorized total investment amounts (currently $1,600,000) for Brighton-STAQ without the consent of relevant Chinese Governmental authorities. The Company intends to apply for approval to increase the authorized total investment amount when the funds from the Offering are available. The Company currently expects that the required governmental approvals will be obtained based on several factors, including, but not limited to, the Chinese Government's focus on attracting foreign investment into China, and that the Company has made, to date, all of its requisite capital contributions to Brighton-STAQ on a timely basis. Such approvals, however, are beyond the control of the Company and Brighton-STAQ and there can be no assurance that such approval will be granted. If such approval is not obtained, the ability of Brighton-STAQ to meet its projected future business targets may be materially adversely impacted. See "BUSINESS-STAQ ON-LINE NETWORK" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS." Competition. The STAQ On-line Network may potentially compete with the Shanghai and Shenzhen Stock Exchanges as both the exchanges maintain their own on-line securities quotation and trading system. Management believes that it is unlikely that either of the two exchanges would compete with the STAQ On-line Network because the STAQ Exchange and the Shanghai and Shenzhen Stock Exchanges are under common control and the development of the STAQ On-line Network complements the two stock exchanges. No assurances can be given that competition from these exchanges will not arise. 13 16 In addition, other businesses experienced in the systems management and computer network integration business as well as the wireless communications business, such as Dow Jones Markets, Inc., Reuters Limited and Bloomberg L.P., may compete with the Company. These competitors have greater marketing and development budgets than the Company and have greater capital resources than the Company. There can be no assurance that the Company will be successful in commercializing the STAQ On-line Network. DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES. The Company's network integration and STAQ On-line Network business segments operate in an industry that is characterized by fast-changing technology. As a result, the Company will be required to expend substantial funds for and commit significant resources to the conduct of continuing product development, including research and development activities and the engagement of additional engineering and other technical personnel. Any failure by the Company to anticipate or respond adequately to technological developments, customer requirements, or new design and production techniques, or any significant delays in product development or introduction, could have a material adverse effect on the operating results of the Company. The Company's future operating results will depend to a significant extent on its ability to identify, develop, and market enhancements or improvements to existing network integration applications as well as to introduce new product lines that compare favorably on the basis of time to introduction, cost and performance with the product lines offered by competitors. The success of new product lines depend on various factors, including proper market segment selection, utilization of advances in technology, innovative development of new product concepts, timely completion and delivery, efficient and cost-effective features, and market acceptance. Due to the complexity of the design and implementation process required by the Company's integration services, the Company may experience delays from time to time in completing the design and implementation of improvements to existing network systems or the introduction of new network integration applications. In addition, there can be no assurance that any new network integration application will receive or maintain customer or market acceptance. The Company's future operating results would be adversely affected in the event that it is unable to design and implement enhancements to existing network systems or introduce new network integration applications on a timely and cost-effective basis. See "BUSINESS -- COMPUTER NETWORK INTEGRATION AND STAQ ON-LINE NETWORK." Complex network integration systems, such as those developed by the Company, and incorporated third party hardware and software programs, often encounter development delays and occasionally contain errors that are discovered only after network systems have been installed and used by many different customers in a variety of business operations. Significant development delays in the future may result in increased product development costs, delays in market acceptance, loss of sales, and reduction of market share, which could have a material adverse effect on the Company's operating results. Although the Company conducts testing of its network integration applications and systems, there can be no assurance that the Company will successfully detect and eliminate all programming errors. CHANGE IN PRODUCT MIX. Historically, the Company has derived a substantial portion of its revenue from the sale and integration of hardware and software developed by others. The resale of hardware products manufactured by third parties is extremely competitive and involves relatively low profit margins. The sale of software developed by others also involves relatively low profit margins and exposes the Company to various risks, including product performance and market acceptance of such products as well as the strategies of the product developers, over which the Company has little control. The Company has changed its business strategy to emphasize the development of its own network system in an effort to increase the relative percentage of revenue it will derive from offering network services for securities trading on the STAQ Exchange. The Company has completed testing of the STAQ On-line Network using land telephone lines and is in the process of bringing it to commercialization. There can be no assurance, 14 17 however, that the Company will be successful in commercializing the STAQ On-line Network. The failure of the Company to successfully develop and market the STAQ On-line Network could have a material adverse effect on the Company. See "BRINGING BRIGHTON-STAQ TO COMMERCIALIZATION." MANAGEMENT OF CHANGE IN BUSINESS. The Company currently is experiencing a period of significant growth in the development of the STAQ On-line Network. The Company's ability to effectively manage this change in its business operations will require it to enhance its operational, financial, and management systems; to expand its facilities and equipment; and to successfully hire, train, and motivate additional employees, including the technical personnel necessary to develop the STAQ On-line Network and to integrate new software systems with evolving hardware technologies. The failure of the Company to manage effectively the change in its business focus could have a material adverse effect on the Company. DEPENDENCE ON KEY CUSTOMERS. The Company's industrial equipment customers vary from year to year, but, historically, significant portions of its revenues are from a limited number of customers, including China National as described in the following paragraph. The Company expects that significant portions of future revenues from this business segment will continue to be generated by a limited number of customers. The Company's inability to secure individual contracts for significant industrial equipment may result in substantial reduction in business volume and would adversely affect operating results. China Henan Light Industrial Products Import and Export Corporation, a BECL customer, accounted for 17% of the Company's revenues in 1996 and Honest Fortune International, Ltd., a BIC customer, accounted for 10% of the Company's revenues in 1995. CHINA NATIONAL CONTRACT. The Company's contract with China National Chemical Construction Company ("China National") for the engineering design and implementation for a sodium bichromate production plant with an annual production capacity of 20,000 metric tons is an $11 million turn-key contract. This contract accounted for 34% and 13% of the Company's revenues for the years ended December 31, 1995 and 1996, respectively, and 40% of the Company's revenues for the nine months ended September 30, 1997. Management does not expect that any significant revenues will be earned from this contract during 1998. Contracts of this nature are generally discrete projects, and the Company does not anticipate repeat business from China National after the completion of the contract. The Company does not currently have or plan to have any projects of this nature in the foreseeable future. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION-OVERVIEW" and "BUSINESS-CHINA NATIONAL." COMPETITION. The network integration and industrial equipment distribution businesses are highly competitive in China and include competition from distributors and service providers from around the world. Certain of the Company's competitors have considerably greater financial, marketing, personnel and other resources than the Company, as well as greater experience and customer recognition than the Company. In the wireless system integration area, the Company competes with Multipoint Networks, Inc., a U.S. company, and Kb/Tel, SA, a Mexican company, which both offer wireless telecommunication equipment with identical features as Aria Wireless Systems, Inc.'s wireless telecommunications system marketed by the Company (the "Aria Wireless System"). In the industrial equipment distribution area, the Company competes with other independent distributors, as well as manufacturers such as Cincinnati Milacron, Inc. and Ingersoll-Rand Company. There can be no assurance that the Company will be able to successfully compete with its competitors. See "BUSINESS-COMPUTER NETWORK INTEGRATION-COMPETITION." DEPENDENCE ON KEY PERSONNEL. The Company depends to a large extent on the abilities and relationships of its Chairman, President, Chief Executive Officer and principal stockholder, Kit Kung. Mr. Kung does not have an employment agreement with the Company (see "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT"). The loss of Mr. Kung as an officer and director could have a material adverse effect on the Company's business. In addition, there is strong competition for qualified technical and management personnel in the information, systems management and communications industries, and the loss of key technical and management personnel or an inability to continue to attract, retain and motivate key 15 18 personnel could adversely affect the Company's business. There can be no assurance that the Company will be able to retain its existing key personnel or attract additional qualified personnel. The Company does not have a key-person life insurance policy on Mr. Kung or any employee of the Company. The Company will, prior to the completion of the Offering, obtain and maintain a $2,000,000 term life insurance policy covering Kit Kung which names the Company as the sole beneficiary. See "MANAGEMENT." CONTROL BY KIT KUNG. Upon the consummation of the Offering, Kit Kung will own approximately 43.3% of the issued and outstanding Common Stock, assuming the Warrants have not been converted into Common Stock, or 29.6% of the issued and outstanding Common Stock, assuming the Warrants have been converted into Common Stock. Accordingly, Kit Kung will be able to significantly influence the Company's business and affairs. This concentration of ownership may have the affect of delaying, deferring or preventing a change in control of the Company. See "PRINCIPAL STOCKHOLDERS." DISCRETIONARY USE OF PROCEEDS. The Company intends to use $4,000,000 of the net proceeds from the Offering to bring the STAQ On-line Network project to commercial operation and $837,500 for working capital and general corporate purposes. To the extent the STAQ On-line Network project requires financing in addition to the allocated net proceeds of the Offering, the Company may decide to satisfy such financing requirements by reallocating the net proceeds from the Offering from working capital to the STAQ On-line Network project. The Company's management will, therefore, retain broad discretion in allocating all of the net proceeds of the Offering. See "USE OF PROCEEDS." NO DIVIDENDS. The Company has not paid any dividends on its Common Stock since it acquired all of the issued and outstanding capital stock of BIC and BECL, effective November 11, 1996, and does not intend to pay dividends in the foreseeable future. Earnings of the Company, if any, not paid as dividends are expected to be retained to finance the expansion of the Company's business. The payment of dividends on its Common Stock in the future will depend on the results of operations, financial condition, capital expenditure plans and other cash obligations of the Company and will be at the sole discretion of the Board of Directors. See "DIVIDEND POLICY" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS." NEED FOR ADDITIONAL FINANCING. Based on the Company's operating plan, management believes that the proceeds from the Offering, together with projected cash flow provided by operations, will be sufficient to meet the Company's anticipated cash needs and to finance its current plans for the STAQ On-line Network project for at least the next 12 months from the date of this Prospectus. However, if the Company's plans for the STAQ On-line Network project change or if the Company decides to expand such plans, it may require additional financing to meet the changed or expanded plans for the STAQ On-line Network project. No assurance can be given that the Company will be successful in obtaining additional financing on favorable terms, if at all. If the Company is unable to obtain additional financing, its ability to meet such changed or expanded plans for the STAQ On-line Network project could be materially adversely affected. The Company has financed its operations to date primarily from cash flow from operations, financing and other assistance from Kit Kung and his family and private sales of equity. All prior financing and other assistance from Kit Kung and his family members were provided on a case by case basis with no commitment to provide such financing or assistance in the future by Kit Kung or his family members. Subsequent to the completion of the Offering, the Company will adopt a policy to the effect that any future related party transactions be on terms no less favorable to the Company than could reasonably be obtained in arm's length transactions with independent third parties, and that any such transactions be approved by a majority of the Company's independent directors disinterested in the transaction. See "USE OF PROCEEDS," "CAPITALIZATION," "CERTAIN TRANSACTIONS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS." 16 19 DILUTION. Upon completion of the Offering, prospective investors of the Units will experience dilution in net tangible book value of their investment in the Company of $3.64 per share of Common Stock. See "DILUTION." NO PRIOR MARKET FOR THE UNITS; ARBITRARY DETERMINATION OF OFFERING PRICE. Prior to the Offering, there has been no public market for the Units. While the Company has applied for the listing of the Units on the Nasdaq SmallCap Market, there can be no assurance that an active trading market for the Units will be established, or if so established, sustained. The initial offering price for the Units has been arbitrarily determined through negotiation between the Company and the Representative based on such factors as the business potential and earnings prospects of the Company and prevailing market conditions. The offering price for the Units may be higher or lower than the price of the Common Stock quoted on the OTC Electronic Bulletin Board. Such price may not be indicative of the market price of the Units after the Offering has been consummated. See "UNDERWRITING." The trading price of the Company's Units may be highly volatile and could be subject to significant fluctuations in response to variations in the Company's quarterly operating results and other factors. In addition, the stock market is subject to price and volume fluctuations affecting the market price for the securities of many companies generally, which fluctuations often are unrelated to operating results. ANTI-TAKEOVER CONSIDERATIONS. The Board of Directors has the authority to issue up to Five Million (5,000,000) shares of preferred stock, par value $.001 per share and to establish the rights and preferences of such shares. Such issuance could occur without action by the holders of the Common Stock and the holders of the Units. Such preferred stock could have voting and conversion rights that adversely affect the voting power of the holders of Units and/or Common Stock, or could result in one or more classes of outstanding securities that would have dividend, liquidation or other rights superior to those of the Units and/or Common Stock. Issuance of such preferred stock may have an adverse effect on the then prevailing market price of the Units and/or Common Stock. This authority, together with certain provisions in the Company's Restated Certificate of Incorporation and ByLaws, may delay, deter or prevent a change in control of the Company, may discourage bids for the Units and/or Common Stock at a premium over the market price of the Units and/or Common Stock, and may adversely affect the market price of, and the voting and other rights of the holders of, Units and/or the Common Stock. Additionally, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law ("Delaware Law"), which prohibits the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. Section 203 could have the effect of delaying or preventing a change of control of the Company. See "DESCRIPTION OF SECURITIES." SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, there will be 2,165,111 shares of Common Stock outstanding (assuming no conversion of convertible notes), of which 1,031,279 shares of Common Stock will be "restricted" securities within the meaning of the Securities Act and may not be sold in the absence of registration under the Securities Act or an exemption therefrom, including the exemptions contained in Rule 144 under the Securities Act. Without regard to the "Lock-Up Agreements" with the Representative, referred to below, such shares will become available for sale under Rule 144 at various times commencing 90 days from the date of this Prospectus. No prediction can be made as to the effect, if any, that future sales of shares of Common Stock will have on the market price of the shares of Common Stock prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that these sales could occur, could adversely affect prevailing market prices for the Common Stock and could impair the ability of the Company to raise additional capital through the sale of its equity securities or through debt financing. The Company and its officers, directors and current stockholders have agreed to enter into agreements ("Lock-Up Agreements") under which they 17 20 will agree not to sell or otherwise dispose of any of their shares of Common Stock or other securities of the Company for a period of thirteen (13) months commencing upon the date of this Prospectus, without the prior written consent of the Representative. See "UNDERWRITING" and "SHARES ELIGIBLE FOR FUTURE SALE." POSSIBLE DELISTING FROM NASDAQ SYSTEM AND MARKET ILLIQUIDITY. While the Units meet the Nasdaq listing requirements and are expected to be initially quoted on the Nasdaq SmallCap Market, there can be no assurance the Company will meet the criteria for continued listing. For continued listing on the Nasdaq SmallCap Market, a company would need to have, among other things, (A) net tangible assets of $2,000,000, (B) a market capitalization of $35,000,000, or net income for two of the last three fiscal years of $500,000, (C) a minimum market value of public float of $1,000,000 and (D) a minimum bid price of $1.00 per share. Additionally, for both initial listing and continued listing on the Nasdaq SmallCap Market, companies would be required to have at least two independent directors, and an Audit Committee, a majority of the members of which must be independent directors. If the Company's Units were delisted from Nasdaq, it could become subject to Rule 15g-9 under the Exchange Act and be considered a "penny stock" under such Rule, which imposes additional sales practice requirements on broker-dealers that sell such delisted securities to persons other than established customers and "accredited investors" (generally, individuals with a net worth in excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to the sale. Consequently, Rule 15g-9 may adversely affect the ability of broker-dealers to sell the Company's Common Stock or Units and may adversely affect the ability of purchasers in the Offering to sell in the secondary market any of the Units or Common Stock acquired. PENNY STOCK REGULATION. Broker-dealer practices in connection with transactions in "penny stocks" are regulated by certain penny stock rules adopted by the Commission. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. If the Units do not qualify for quotation on the Nasdaq SmallCap Market, or if it qualifies and is later delisted from such Market and has a price of less than $5.00 per Unit, then unless another exemption is available, the Units and the underlying Common Stock would be subject to the penny stock rules. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. If the Securities become subject to the penny stock rules, investors in the Offering may find it more difficult to sell their Securities. ADVERSE CONSEQUENCES ASSOCIATED WITH WARRANTS. The Company has reserved 1,000,000 shares of Common Stock for issuance upon exercise of the Warrants, and 100,000 shares of Common Stock for issuance upon the exercise of the Representative's Warrants. Holders of such Warrants are likely to exercise them when, in all likelihood, the Company could obtain additional capital on terms more favorable than those provided thereby. Furthermore, such Warrants may adversely affect the terms on which the Company could obtain additional capital. Should a significant portion of such Warrants be exercised, the resulting increase in the amount 18 21 of Common Stock in the public market may have the effect of reducing the per share market price thereof. See "SHARES ELIGIBLE FOR FUTURE SALE." POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants are subject to redemption by the Company at a price of $0.10 per Warrant under certain conditions at any time commencing __________, 1999, on thirty days prior written notice. If the Warrants are redeemed, Warrant holders will lose their right to exercise the Warrants except during the 30 day redemption period. Upon receipt of notice of redemption, Warrant holders would be required to: (i) exercise the Warrants and pay the exercise price at a time when it may be disadvantageous for them to do so, (ii) sell the Warrants at the then market price, if any, when they might otherwise wish to hold the Warrants, or (iii) accept the redemption price, which is likely to be substantially less than the market value of the Warrants at the time of redemption. See "DESCRIPTION OF SECURITIES --WARRANTS." STOCKHOLDERS INABILITY TO VOTE ON OR REVIEW CERTAIN TRANSACTIONS. As is customary under the Delaware Law, the Board of Directors, not the stockholders, of the Company have authority to review many types of prospective business transactions and approve or disapprove of the same. Although the Nasdaq SmallCap listing requirements provide that the Company is required to seek stockholder approval for certain acquisitions and stock offerings, the stockholders of the Company may not have the opportunity to review the terms of any other prospective transactions nor review the financial statements of any entities relating to any such transactions. REPRESENTATIVE'S INFLUENCE ON THE MARKET. A significant number of Units offered hereby may be sold to customers of the Underwriters. Such customers subsequently may engage in transactions for the sale or purchase of such securities through or with the Underwriters. Although they have no obligation to do so, the Underwriters intend to make a market in the Units and may otherwise effect transactions in such securities. If they participate in such market, the Underwriters may exert a dominating influence on the market, if one develops, for the Units. Such market-making activity may be discontinued at any time. Moreover, if the Representative exercises the Warrants, it may be required under the Exchange Act to temporarily suspend market-making activities. The price and liquidity of the Units may be significantly affected by the degree, if any, of the Underwriters' participation in such market. See "UNDERWRITING." 19 22 USE OF PROCEEDS Based on an assumed offering price of $6.25 per Unit, net proceeds to the Company from the sale of the Units in the Offering are estimated to be $4,837,500, after deducting estimated selling commissions and other expenses associated with the Offering. The Company intends to use such net proceeds as set forth below:
OFFERING ----------------------- AMOUNT PERCENTAGE ----------- ------ Commercialization of the STAQ On-line Network Project $4,000,000 82.7% Working capital 837,500 17.3% ----------- ------ TOTAL $4,837,500 100.0% =========== ======
The commercialization of the STAQ On-line Network, currently in the testing phase of linking Beijing, Chongqing, Guangzhou, Shanghai, Shenzhen and Wuhan to the STAQ Exchange, requires aggregate capital expenditures of $3,540,000, consisting of $3,000,000 for the necessary satellite-linking equipment and $540,000 for other capital expenditures, and $460,000 in related costs to establish operations in the cities of Beijing, Chongqing, Guangzhou, Shanghai, Shenzhen and Wuhan, such as wireless systems, office facilities, office equipment and personnel. See "BUSINESS-STAQ ON-LINE NETWORK." The foregoing allocations are estimates only and are subject to revision from time-to-time to meet the Company's requirements. Pending full utilization of the proceeds of the Offering, the Company may invest the net proceeds in insured interest-bearing savings accounts, U.S. Government obligations, insured Certificates of Deposit or other insured short-term investments of similar quality. See "RISK FACTORS - ADDITIONAL CAPITAL REQUIREMENTS," "- DISCRETIONARY USE OF PROCEEDS," "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS" and "BUSINESS-STAQ ON-LINE NETWORK." 20 23 MARKET PRICE FOR THE COMMON STOCK The Company was formed as a result of a reverse acquisition effective November 11, 1996, whereby the Company acquired all of the issued and outstanding capital stock of BIC and BECL from their shareholders in exchange for the issuance by the Company of a controlling interest in the Company to such shareholders (the "Reverse Merger"). Since November 12, 1996, the Company's Common Stock has been listed for trading on the OTC Electronic Bulletin Board under the symbol "BRTK." Prior to that date, the Company's Common Stock traded under the symbol "ZNTX." The trading market is limited and sporadic and should not be deemed to constitute an "established trading market." The following table sets forth the range of bid prices of the Company's common stock as quoted on the OTC Electronic Bulletin Board during the periods indicated. Such prices reflect prices between dealers in securities and do not include any retail markup, markdown or commission and may not necessarily represent actual transactions. The information set forth below was provided by Nasdaq Trading & Market Services. All prices reflect the 1-for-3 reverse stock split effective November 11, 1996, the 1-for-3 reverse stock split effective October 17, 1997 and the 1-for-3 reverse stock split authorized and approved by the Company's Board of Directors and stockholders on January 13, 1998, which will go into effect on January 26, 1998.
FISCAL YEAR ENDED DECEMBER 31, 1996 HIGH LOW ------- ------- Quarter Ended March 31, 1996 (1) $135.00 $ 27.00 Quarter Ended June 30, 1996 (1) 94.50 94.50 Quarter Ended September 30, 1996 (1) (2) (2) Period from October 1, 1996 - November 11, 1996 (1) 62.46 33.75 Period from November 12, 1996 - December 31, 1996 64.17 56.25 FISCAL YEAR ENDED DECEMBER 31, 1997 Quarter Ended March 31, 1997 63.00 48.42 Quarter Ended June 30, 1997 52.92 29.25 Quarter Ended September 30, 1997 46.14 21.39 Quarter Ended December 31, 1997 21.39 4.50
FISCAL YEAR ENDING DECEMBER 31, 1998 Period from January 1, 1998 to January 15, 1998 7.50 6.75 (1) High and low bid prices of the Company's Common Stock traded under the symbol "ZNTX" prior to the reverse acquisition effective November 11, 1996. (2) Not available. On January 14, 1998, the closing bid price for the Common Stock as reported by OTC Electronic Bulletin Board was $6.75. As of December 31, 1997, the number of security holders of record of the Company's Common Stock was 91. As of such date, 1,165,111 shares were outstanding. 21 24 DIVIDEND POLICY The Company has not paid dividends on the Common Stock since its acquisition of all of the issued and outstanding capital stock of BIC and BECL, effective November 11, 1996, and does not anticipate paying dividends on its Common Stock in the foreseeable future. It is the present policy of the Board of Directors to retain all earnings to provide for the future growth of the Company. Earnings of the Company, if any, not paid as dividends are expected to be retained to finance the expansion of the Company's business. The payment of dividends on its Common Stock in the future will depend on the results of operations, financial condition, capital expenditure plans and other cash obligations of the Company and will be at the sole discretion of the Board of Directors. See "DESCRIPTION OF SECURITIES." 22 25 DILUTION The following discussion and tables allocate no value to the Warrants contained in the Units and assumes no exercise of the Warrants, the Underwriters' Over-Allotment Option or the Representative's Warrants. See "UNDERWRITING" and "DESCRIPTION OF SECURITIES." The difference between the public offering price per share of Common Stock and the pro forma net tangible book value per share of Common Stock after the Offering constitutes the dilution per share of Common Stock to investors in the Offering. Net tangible book value per share of Common Stock on any given date is determined by dividing the net tangible book value of the Company (total tangible assets less total liabilities) on such date by the number of shares of Common Stock outstanding on such date. At September 30, 1997, the net tangible book value of the Company was $575,930, or $.50 per share of Common Stock. After giving effect to the sale of the 1,000,000 shares of Common Stock included in the Units offered by the Company hereby at an assumed offering price of $6.25 per Unit (less underwriting discounts and estimated expenses of the Offering), the pro forma net tangible book value of the Company at September 30, 1997 would have been $5,650,523 or $2.61 per share, representing an immediate increase in net tangible book value of $2.11 to existing stockholders and an immediate dilution of $3.64 per share of Common Stock to the purchasers of Units in the Offering. The following table illustrates the dilution to prospective investors on a per-share basis: Offering price..................................................... $6.25 Net tangible book value before the Offering................... $.50 Increase attributable to prospective investors................ 2.11 ----- Pro forma net tangible book value after the Offering............... 2.61 ------ Dilution to prospective investors.................................. $3.64 =====
After giving effect to the sale of 1,000,000 shares of Common Stock included in the Units offered by the Company hereby at an assumed offering price of $6.25 per Unit (less underwriting discounts and estimated expenses of the Offering), and assuming conversion into Common Stock of the convertible notes payable, the pro forma net tangible book value of the Company at September 30, 1997 would have been $6,452,628 or $2.82 per share, representing an immediate increase in net tangible book value of $2.32 to existing stockholders and an immediate dilution of $3.43 per share of Common Stock to the purchasers of Units in the Offering. The following table sets forth, as of September 30, 1997, with respect to the existing stockholders and the purchasers of Common Stock constituting part of the Units in the Offering, a comparison of the number and percentage of shares of Common Stock acquired from the Company, the amount and percentage of consideration paid and the average price per share: 23 26
Shares Purchased Total Consideration Average --------------------- ------------------------- Price Per Number Percentage Amount Percentage Share --------- ---- ---------- ---- ----- Existing Stockholders 1,161,222 53.7% $2,096,703(2) 25.1% $1.81 Prospective Investors 1,000,000 46.3% 6,250,000 74.9% 6.25 --------- ----- ---------- ----- Total(1) 2,161,222 100.0% $8,346,703 100.0% ========= ===== ========== =====
(1) Does not include (i) 3,889 shares of Common Stock issued to a consulting firm in November 1997 for certain business development services; (ii) 128,337 additional shares of Common Stock issuable at the option of the holders upon conversion of convertible notes; and (iii) 150,000 shares issuable upon the exercise of the Underwriters' Over-Allotment option. (2) Includes contribution to capital of net amounts owed to Kit Kung by the Company of $1,266,973 in December 1996. 24 27 CAPITALIZATION The following table sets forth the actual short term debt and capitalization of the Company as of September 30, 1997 and as adjusted to reflect the sale of Units at an assumed offering price of $6.25 per Unit. See "USE OF PROCEEDS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
SEPTEMBER 30, 1997 ------------------------------ ACTUAL AS ADJUSTED ----------- ----------- Short term debt: Convertible demand note payable, including accrued interest (1) $ 643,355 $ 643,355 Note payable, including accrued interest (2) 158,750 158,750 ----------- ----------- Total short term debt payable 802,105 802,105 ----------- ----------- Stockholders' equity: Preferred Stock, $.001 par value 5,000,000 shares authorized, none issued and outstanding Common Stock, $.001 par value 100,000,000 shares authorized, 1,161,222 shares outstanding; 2,161,222(3) shares issued and outstanding as adjusted 1,161 2,161 Contributed capital 1,856,740 6,693,240 Accumulated deficit (1,006,919) (1,006,919) Unearned compensation cost (12,250) (12,250) ----------- ----------- Stockholders' equity 838,732 5,676,232 ----------- ----------- Total short term debt and capitalization $ 1,640,837 $ 6,478,337 =========== ===========
(1) The note is payable upon demand, bears interest at 5% per annum and is convertible into shares of Common Stock at prevailing market values. (2) The note bears interest at 10% per annum, with interest to accrue until the due date of February 24, 1998. Thereafter, the note will be payable upon demand, with interest at 12% per annum. (3) Does not include: (i) 1,000,000 shares of Common Stock issuable upon exercise of the Warrants; (ii) 100,000 shares of Common Stock issuable upon the exercise of the Representative's Warrants; or (iii) up to 150,000 shares of Common Stock issuable upon exercise of the Underwriters' Over-Allotment Option; (iv) 3,889 shares of Common Stock issued during November 1997 pursuant to a consulting agreement; and (v) the conversion of convertible notes at the option of the holders thereof into an aggregate of 128,337 shares of Common Stock. 25 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION OVERVIEW: Effective November 11, 1996, the Company acquired all of the issued and outstanding capital stock of BIC and BECL from Kit Kung and Hong Yun (the "Brighton Shareholders") in exchange for the issuance by the Company of an approximate 88% controlling interest in the Company to the Brighton Shareholders. The acquisition of BIC and BECL by the Company was accounted for as a recapitalization of BIC and BECL, with BIC and BECL as the acquirer (reverse acquisition). This transaction was consummated to consolidate the operating companies (BIC and BECL) owned by the Brighton Shareholders into one entity and to attract and facilitate investment into the Company. Accordingly, the historical financial statements consist of the combined financial statements of BIC and BECL for all periods presented. The consolidated financial statements include the accounts of BIC, a United States-based company, and BECL, a Hong Kong-based holding company with controlling interests in four Hong Kong subsidiaries and joint ventures (See "BUSINESS-THE COMPANY'S CORPORATE STRUCTURE.") All share and per share amounts presented herein have been adjusted to reflect the 1 for 3 reverse stock split effective November 11, 1996, the reverse stock split effective October 17, 1997 and the 1 for 3 reverse stock split authorized and approved by the Company's Board of Directors and stockholders on January 13, 1998, which will go into effect January 26, 1998. BIC is a distributor of third party manufactured industrial equipment to customers in China and other Pacific Basin countries. BECL is an investment and holding company whose subsidiaries are involved in (i) the buying, selling and installation of computer and industrial equipment, and (ii) the marketing, sale and service of wireless telecommunication equipment used for credit card approval and authorization systems in China and other Pacific Basin countries. In addition, the Company is developing the STAQ On-line Network for the STAQ Exchange, which is not yet operational. Accordingly, the Company considers its current operations to be in two business segments - Industrial Equipment Distribution and Networking. On April 15, 1994, BIC entered into a long-term contract with expected revenues of $11,000,000 with China National to provide aid in the design and construction of a sodium bichromate production plant in Chongqing, Sichuan Province, PRC, with an annual production capacity of 20,000 metric tons. Although this contract and the work related to it was outside the ordinary scope of the Company's industrial equipment distribution business, given its size and complexity, because of certain third party technology that was available to the Company at that time, the Company was able to successfully bid on the contract. Contracts of this nature are project based and since the Company's current focus is on developing other business opportunities in the PRC, the Company does not anticipate engaging in additional projects of this type or size in the foreseeable future. This contract was temporarily suspended in February 1996 by the municipal government due to environmental concerns relating to China National's proposed methods for waste disposal by the plant. The revised proposal for waste management submitted by China National was approved by the municipal government and the temporary suspension was lifted in January 1997. The contract resumed following the lifting of the temporary suspension. The Company has been advised by China National that they are currently negotiating with third party lenders for the necessary funds to complete the construction of the project. The Company is currently unable to predict the ultimate outcome of these discussions. In the event that China National is unsuccessful in its efforts to obtain such financing and construction efforts are suspended or terminated, the Company's anticipated revenues in the future with regard to this contract may be reduced or eliminated. Based on an assessment of discussions with China National and the timing involved in obtaining the necessary funds, management of the Company does not expect that any significant revenues will be earned from this contract during the year ending December 31, 1998. If China National is unable to complete the project, management does not expect that the ultimate resolution of this matter will have a material adverse impact on the Company's financial position or cash flows. 26 29 Revenues under this contract for the years ended December 31, 1995 and 1996, and the nine months ended September 30, 1997, were approximately $2,855,000, $1,048,000 and $2,337,000, respectively, or 34%, 13% and 40% of the Company's total revenues, respectively, and 67%, 29% and 65% of industrial equipment distribution revenues, respectively. The Company has recorded cumulative aggregate revenues of $6,898,000 through September 30, 1997 under this contract (including revenues of $658,000 for the year ended December 31, 1994), or approximately 63% of the contract's total expected revenues. During 1995 and 1996, a different customer in each such year accounted for approximately 10% and 17% of revenues, respectively. The Company has historically relied on a limited number of customers for a substantial portion of its total revenues. In addition, substantially all of the Company's business is currently conducted with or in China. The Company expects that a significant portion of its future revenues will continue to be generated by a limited number of customers in China. The loss of any of these customers or any substantial reduction in business volume with any of these customers, or any political or economic difficulties between the United States and China could have a material adverse effect on future results of operations. 27 30 The following tables set forth certain historical operating data for the periods presented. The 1995 financial statements were restated to reflect the correction of depreciation expense recorded on project equipment, accounting for losses related to BECL's subsidiaries, and to appropriately recognize revenue from certain long-term projects. As a result, net income for the year ended December 31, 1995 was reduced by $258,353. The following table sets forth certain historical operating data for the periods presented:
Years Ended December 31, Nine Months Ended September 30, ------------------------------------------ -------------------------------------------- 1995 1996 1996 1997 ------------------- -------------------- -------------------- -------------------- Amount % Amount % Amount % Amount % ----------- ----- ----------- ----- ----------- ----- ----------- ----- Revenues $ 8,370,537 100.0 $ 8,006,260 100.0 $ 6,796,972 100.0 $ 5,913,330 100.0 Cost of Revenues 6,165,201 73.6 5,785,507 72.3 4,994,155 73.5 4,057,207 68.6 General and Administrative Expenses 1,648,016 19.7 1,755,029 21.9 1,564,761 23.0 1,747,255 29.6 Consulting Fees 366,430 6.2 ----------- ----- ----------- ----- ----------- ----- ----------- ----- Total Operating Expenses 1,648,016 19.7 1,755,029 21.9 1,564,761 23.0 2,113,685 35.8 ----------- ----- ----------- ----- ----------- ----- ----------- ----- Operating Income (Loss) 557,320 6.7 465,724 5.8 238,056 3.5 (257,562) (4.4) Total Other Income, Net 3,324 -- 49,026 .6 48,958 .7 51,256 .9 ----------- ----- ----------- ----- ----------- ----- ----------- ----- Income (Loss) Before Income Taxes and Minority Interests 560,644 6.7 514,750 6.4 287,014 4.2 (206,306) (3.5) Provision (Benefit) for Income Taxes 444,000 5.3 309,000 3.8 115,000 1.7 (89,000) (1.5) Minority Interests 55,703 .7 (7,226) (.1) (26,663) (.4) 9,282 .2 ----------- ----- ----------- ----- ----------- ----- ----------- ----- Net Income (Loss) $ 172,347 2.1 $ 198,524 2.5 $ 145,351 2.1 $ (108,024) (1.8) =========== ===== =========== ===== =========== ===== =========== =====
28 31 Revenues from the United States consist primarily of revenues from industrial equipment distribution export sales to the Far East, while revenues from the Far East based operations consist of revenues from both industrial equipment distribution and networking. GEOGRAPHIC AREA INFORMATION
Years Ended December 31, Nine Months Ended September 30, -------------------------------------------- ----------------------------------------------- 1995 1996 1996 1997 -------------------- -------------------- -------------------- ----------------------- Amount % Amount % Amount % Amount % ----------- ----- ----------- ----- ----------- ----- ----------- ----- Revenues: United States $ 6,497,541 77.6 $ 6,039,716 75.4 $ 4,960,347 73.0 $ 5,000,743 84.6 Far East 1,872,996 22.4 1,966,544 24.6 1,836,625 27.0 912,587 15.4 ----------- ----- ----------- ----- ----------- ----- ----------- ----- Total $ 8,370,537 100.0 $ 8,006,260 100.0 $ 6,796,972 100.0 $ 5,913,330 100.0 =========== ===== =========== ===== =========== ===== =========== ===== Operating Income (Loss): United States $ 927,375 166.4 $ 730,875 156.9 $ 396,717 166.6 $ 340,257 312.5 Far East (370,055) (66.4) (265,151) (56.9) (158,661) (66.6) (231,389) (212.5) ----------- ----- ----------- ----- ----------- ----- ----------- ----- Total $ 557,320 100.0 $ 465,724 100.0 $ 238,056 100.0 $ 108,868(1) 100.0 =========== ===== =========== ===== =========== ===== =========== =====
29 32 BUSINESS SEGMENT INFORMATION
Years Ended December 31, Nine Months Ended September 30, --------------------------------------- ------------------------------------------ 1995 1996 1996 1997 ------------------ ------------------ ------------------ --------------------- Amount % Amount % Amount % Amount % ---------- ----- ---------- ----- ---------- ----- ---------- ----- Revenues: Networking $4,102,746 49.0 $4,341,827 54.2 $3,465,793 51.0 $2,340,570 39.6 Industrial Equipment Distribution 4,267,791 51.0 3,664,433 45.8 3,331,179 49.0 3,572,760 60.4 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total $8,370,537 100.0 $8,006,260 100.0 $6,796,972 100.0 $5,913,330 100.0 ========== ===== ========== ===== ========== ===== ========== ===== Operating Income: Networking $ 309,891 55.6 $ 251,209 53.9 $ 104,513 43.9 $ 99,525 91.4
Years Ended December 31, Nine Months Ended September 30, --------------------------------------- ------------------------------------------ 1995 1996 1996 1997 ------------------ ------------------ ------------------ --------------------- Amount % Amount % Amount % Amount % ---------- ----- ---------- ----- ---------- ----- ---------- ----- Industrial Equipment Distribution 247,429 44.4 214,515 46.1 133,543 56.1 9,343 8.6 ---------- ----- ---------- ----- ---------- ----- ---------- ----- Total $ 557,320 100.0 $ 465,724 100.0 $ 238,056 100.0 $ 108,868(1) 100.0 ========== ===== ========== ===== ========== ===== ========== =====
- --------------------- (1) Operating income (loss) for both Geographic Area Information and Business Segment Information exclude operating expenses relating to business development consulting fees of $366,430. 30 33 CONSOLIDATED RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997: Revenues. Revenues for the nine months ended September 30, 1997 were $5,913,330, as compared to $6,796,972 for the nine months ended September 30, 1996, a decrease of $883,642 or 13.0%. The decrease in revenues of $883,642 in 1997 as compared to 1996 consisted of a decrease of $1,125,223 or 32.5% from networking, which was offset in part by an increase of $241,581 or 7.3% from industrial equipment distribution. For the nine months ended September 30, 1997 and 1996, revenues from industrial equipment distribution represented approximately 60.4% and 49.0% of revenues, respectively, and revenues from networking represented approximately 39.6% and 51.0% of revenues, respectively. The primary reason for the decrease in revenues from networking in 1997 as compared to 1996 was management's decision to allocate personnel and resources in 1997 to continue the development of the STAQ On-line Network (See "BUSINESS-STAQ ON-LINE NETWORK"), which, due to the Company's limited capital and operating resources, required the Company to reduce its sales efforts with respect to the networking business segment. For the nine months ended September 30, 1997 and 1996, the China National contract accounted for approximately 39.5% and 0% of revenues, respectively, and approximately 65.4% and 0% of industrial equipment distribution revenues, respectively. Revenues from the China National contract were approximately $2,337,000 for the nine months ended September 30, 1997 and $0 for the nine months ended September 30, 1996 due to the project's temporary suspension (which suspension was imposed in February 1996 and was lifted in January 1997). Management of the Company does not expect that any significant revenues will be earned from this contract during the year ending December 31, 1998. Networking revenues include revenues from the sale and installation of the Aria Wireless System. During the nine months ended September 30, 1997, the Company completed five agreements with ICBC to provide and install the Aria Wireless System for ATM linkage and clearance and settlements for five of its bank branches as transaction automation is introduced within the bank's entire system comprising over 12,000 branches in China. For the nine months ended September 30, 1997, revenues from the sale and installation of the Aria Wireless System were $906,498 or 38.7% of networking revenues. The Company did not have any revenues from the sale and installation of the Aria Wireless System during the nine months ended September 30, 1996. For the nine months ended September 30, 1997, United States revenues from export sales to the Far East increased by $40,396 or 0.8%, to $5,000,743 in 1997 from $4,960,347 in 1996, and revenues from operations based in the Far East decreased by $924,038 or 50.3%, to $912,587 in 1997 from $1,836,625 in 1996. Revenues from operations based in the Far East decreased in 1997 as compared to 1996 as a result of the Company's focus on development of the Brighton STAQ On-line project, which is not expected to become operational until the third quarter of 1998. For the nine months ended September 30, 1997 and 1996, United States export sales revenues represented approximately 84.6% and 73.0% of consolidated revenues, respectively, and revenues from the Far East operations represented 15.4% and 27.0% of consolidated revenues, respectively. Gross Profit. Gross profit for the nine months ended September 30, 1997 increased by $53,306 or 3.0%, to $1,856,123 or 31.4% of revenues, as compared to $1,802,817 or 26.5% of revenues for the nine months ended September 30, 1996. Despite a decrease in revenues in 1997 as 31 34 compared to 1996 of 13.0%, gross profit increased as a result of improvement in gross margin, which was primarily a result ofincreased progress on the completion of the China National contract in early 1997, and improved gross margins from certain industrial equipment distribution contracts. General and Administrative Expenses. Excluding consulting fees of $366,430 as described below, general and administrative expenses increased by $182,494 or 11.7% to $1,747,255 or 29.5% of revenues for the nine months ended September 30, 1997, as compared to $1,564,761 or 23.0% of revenues for the nine months ended September 30, 1996, primarily as a result of increases in employee compensation and occupancy costs incurred to develop the STAQ On-line Network in particular and to expand both Networking and Industrial Equipment Distribution operations in general. During the nine months ended September 30, 1997, the Company incurred consulting fees aggregating $366,430 for certain professional, consulting and other costs incurred in connection with the Company's ongoing business development activities. The Company did not incur any similar costs during the nine months ended September 30, 1996. The Company does not expect that this category of costs will continue at these levels in 1998 subsequent to the completion of the Offering. Included in the $366,430 of consulting fees are (i) 500 shares of Common Stock issued to a consultant for services rendered which were valued at $17,438, and (ii) $175,000 of costs pursuant to a consulting agreement with a consulting firm as described below at "Consulting Fees." Consulting Fees. On February 25, 1997, the Company entered into a consulting agreement with a consulting firm for business advisory services. Pursuant to that agreement, the Company paid the consulting firm $25,000 and issued a one-year note for $150,000 for services rendered. The note is unsecured, bears interest at 10% per annum, with interest to accrue until the due date of February 24, 1998. Thereafter, such note will become payable upon demand, with interest at 12% per annum. If the Company does not complete a debt or equity financing by February 24, 1998, then the Company will have the option of converting the note, including accrued interest, into its common stock, with the value of such common shares to be calculated at 75% of the market price on such date. The maximum number of common shares that the Company will be required to reserve and issue as full settlement for the note, including accrued interest, will be 25,000 shares. Such shares, if issued, will be restricted and will have piggyback registration rights. If the Company completes a private financing by February 24, 1998, then the noteholder will have the option of converting the note, including accrued interest, into the same debt or equity instrument issued in connection with such private financing. If the Company completes a secondary public offering by February 24, 1998, the noteholder will have the option of converting the balance of the note, including interest, into the same securities issued in connection with the secondary public offering at the offering price. Such securities, if issued, will be restricted and will have piggyback registration rights. In addition, the noteholder will have the right to elect one member of the Company's board of directors. Operating Income (Loss). For the nine months ended September 30, 1997, operating loss was ($257,562) as compared to operating income of $238,056 for the nine months ended September 30, 1996, and operating income (loss) as a percent of revenues was (4.4%) in 1997 as compared to 3.5% in 1996. The Company incurred an operating loss in 1997 as compared to operating income in 1996 primarily as a result of increased general and administrative expenses related to business development activities. For the nine months ended September 30, 1997 and 1996, operating income from industrial equipment distribution represented approximately 0.3% and 4.0% of industrial equipment 32 35 distribution revenues, respectively, and operating income from networking represented approximately 4.3% and 3.0% of networking revenues, respectively. The decline in operating income from industrial equipment distribution in 1997 as compared to 1996 was a result of increased general and administrative expenses, in particular from expanded operations in China, and a change in the business mix which affected the allocation of general and administrative expenses. For the nine months ended September 30, 1997 and 1996, operating income from the United States export sales to the Far East represented approximately 6.8% and 8.0% of such revenues, respectively, and operating income (loss) from Far East based operations represented approximately (25.4%) and (8.6%) of Far East revenues, respectively. Other Income (Expense). For the nine months ended September 30, 1997, interest expense and bank fees increased by $21,347 or 94.3% to $43,994, as compared to $22,647 for the nine months ended September 30, 1996, primarily as a result of an increase in notes payable. For the nine months ended September 30, 1997, interest income increased by $54,591 or 239.2%, as compared to $22,827 for the nine months ended September 30, 1996, primarily as a result of increased cash balances generated by contract advances. During the nine months ended September 30, 1996, miscellaneous income aggregated $48,778, and included nonrecurring license income of $44,871. Miscellaneous income was $17,832 for the nine months ended September 30, 1997. Income Taxes. For the nine months ended September 30, 1997, the benefit from income taxes was ($89,000) or 43.1% of the loss before income taxes and minority interests, as compared to a provision for income taxes of $115,000 or 40.1% of income before income taxes and minority interests for the nine months ended September 30, 1996, primarily as a result of a lower valuation allowance relating to foreign tax loss carryforwards. Substantially all of the income tax benefit for the nine months ended September 30, 1997 arises from the Company's United States operations. As previously discussed, there were substantial consulting fees charged in 1997 which led, in part, to a loss before taxes and minority interests of $206,306. Based on an assessment of all available information, including historical trends, the Company has concluded that realization of the domestic deferred tax asset is more likely than not. The Company's consolidated effective tax rate is increased by the effects of valuation allowances established against net operating losses generated by BECL subsidiaries, the realization of which cannot be considered more likely than not. The Company is subject to different tax rates and tax laws because it operates in various distinct jurisdictions. As a result, the Company may not necessarily be able to offset its income earned in one jurisdiction against losses incurred in another jurisdiction. Therefore, the Company anticipates that its consolidated effective tax rate may vary significantly between periods. 33 36 Net Income (Loss). The net loss for the nine months ended September 30, 1997 was ($108,024) or ($.09) per share, as compared to net income of $145,351 or $.14 per share for the nine months ended September 30, 1996. CONSOLIDATED RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995 AND 1996: Revenues. Revenues for the year ended December 31, 1996 were $8,006,260, as compared to $8,370,537 for the year ended December 31, 1995, a decrease of $364,277 or 4.4%. The decrease in revenues of $364,277 in 1996 as compared to 1995 consisted of a decrease in revenues from industrial equipment distribution of $603,358 or 14.1%, which was partially offset by an increase in revenues from networking of $239,081 or 5.8%. For the years ended December 31, 1996 and 1995, revenue from industrial equipment distribution represented approximately 45.8% and 51.0% of revenues, respectively, and revenues from networking represented approximately 54.2% and 49.0% of revenues, respectively. Industrial equipment distribution revenues for the year ended December 31, 1996 decreased primarily because of the temporary suspension imposed by the municipal government from February 1996 to January 1997 relating to the previously described contract with China National. Revenue from this long term contract is included in the Company's industrial equipment distribution business segment, and is recognized using the percentage of completion method. As a result of the project's temporary suspension, revenue from this contract was reduced by approximately $1,807,000 in 1996 as compared to 1995, from approximately $2,855,000 in 1995 to $1,048,000 in 1996. United States revenues from export sales to the Far East consist primarily of revenues from industrial equipment distribution, while revenues from operations based in the Far East consist of revenues from both industrial equipment distribution and networking. For the year ended December 31, 1996, revenues from the United States export sales decreased by $457,825 or 7.0%, to $6,039,716 in 1996 from $6,497,541 in 1995, and revenues from the Far East operations increased by $93,548 or 5.0%, to $1,966,544 in 1996 from $1,872,996 in 1995. For the years ended December 31, 1996 and 1995, revenues from the United States export sales represented approximately 75.4% and 77.6% of consolidated revenues, respectively, and revenues from the Far East operations represented approximately 24.6% and 22.4% of consolidated revenues, respectively. Gross Profit. Gross profit for the year ended December 31, 1996 was $2,220,753 or 27.7% of revenues, as compared to $2,205,336 or 26.3% of revenues for the year ended December 31, 1995. The increase in the gross margin from 1995 to 1996 was primarily a result of the increase in revenues from networking, both on an absolute basis and as a percentage of revenues. General and Administrative Expenses. General and administrative expenses increased by $107,013 or 6.5%, to $1,755,029 or 21.9% of revenues for the year ended December 31, 1996, as compared to $1,648,016 or 19.7% of revenues for the year ended December 31, 1995, primarily as a result of increases in employee compensation and occupancy costs incurred to develop the STAQ On-line Network in particular and to expand operations in general. These increased costs were offset in part by decreases in travel and lodging and miscellaneous costs. Operating Income. For the year ended December 31, 1996, operating income decreased by $91,596 or 16.4% to $465,724, as compared to $557,320 for the year ended December 31, 1995, and operating income as a percent of revenues decreased to 5.8% in 1996 from 6.7% in 1995. The reduction in operating income in 1996 as compared to 1995 reflects a decrease in revenues, primarily from the China National 34 37 contract, increased start-up and marketing costs in the networking business segment and increased general and administrative costs. For the years ended December 31, 1996 and 1995, operating income from industrial equipment distribution represented approximately 5.9% and 5.8% of industrial equipment distribution revenues, respectively, and operating income from networking represented approximately 5.8% and 7.6% of networking revenues, respectively. The decrease in operating income from industrial equipment distribution of $32,914 or 13.3% in 1996 as compared to 1995 reflects a decrease in revenues, primarily from the China National contract, and the decrease in operating income from networking of $58,682 or 18.9% in 1996 as compared to 1995 reflects an increase in various operating costs. For the years ended December 31, 1996 and 1995, operating income from the United States represented approximately 12.1% and 14.3% of United States revenues, respectively, and operating loss from the Far East represented approximately (13.5%) and (19.8%) of Far East revenues, respectively. The decrease in operating income from the United States of $196,500 or 21.2% in 1996 as compared to 1995 was a result of the decrease in revenues, primarily from the China National contract, and the decrease in operating loss from the Far East of $104,904 or 28.3% in 1996 as compared to 1995 was a result of an increase in revenues. Income Taxes. For the year ended December 31, 1996, the provision for income taxes was $309,000 or 60.0% of income before income taxes and minority interests, as compared to $444,000 or 79.2% of income before income taxes and minority interests for the year ended December 31, 1995, primarily as a result of a lower valuation allowance relating to foreign tax loss carryforwards. Accordingly, the Company's effective tax rate is increased by the effects of valuation allowances established against net operating losses generated by BECL subsidiaries, the realization of which cannot be considered more likely than not. The Company is subject to different tax rates and tax laws because it operates in various distinct jurisdictions. As a result, the Company may not necessarily be able to offset its income earned in one jurisdiction against losses incurred in another jurisdiction. Therefore, the Company anticipates that its consolidated effective tax rate may vary significantly between periods. Net Income. Net income for the year ended December 31, 1996 was $198,524 ($.19 per share), as compared to net income of $172,347 ($.17 per share) for the year ended December 31, 1995. CONSOLIDATED FINANCIAL CONDITION LIQUIDITY AND CAPITAL RESOURCES: Operating. For the nine months ended September 30, 1997, the Company's operations utilized cash resources of $873,496, as compared to generating cash resources of $1,336,304 for the nine months ended September 30, 1996. The Company had a net working capital deficit of ($1,203,728) at September 30, 1997, as compared to a net working capital deficit of ($879,481) at December 31, 1996, reflecting a current ratio of .84:1 at September 30, 1997 as compared to .91:1 at December 31, 1996. The Company's operations utilized cash resources in 1997 as compared to generating cash resources in 1996 as a result of increased activity with respect to the China National contract and the STAQ On-line Network project. For the year ended December 31, 1996, the Company's cash flow from operations was $2,741,329, as compared to $599,233 for the year ended December 31, 1995. The Company had a net working 35 38 capital deficit of ($879,481) at December 31, 1996, as compared to a net working capital deficit of ($2,819,778) at December 31, 1995, reflecting current ratios of .91:1 and .48:1, respectively. The Company's operating cash flow improved substantially in 1996 as compared to 1995 primarily as a result of improved project management that focused on cash collection. Accounts receivable increased by $701,025 to $2,040,343 at September 30, 1997, from $1,339,318 at December 31, 1996, and by $1,185,943 to $1,339,318 at December 31, 1996, from $153,375 at December 31, 1995. Accounts receivable increased during the nine months ended September 30, 1997 as a result of the timing of certain revenues from the third quarter 1997 projects. During the nine months ended September 30, 1997, the accounts receivable from a Hong Kong-based customer, on an unsecured basis, was $240,700, which represents a $271,229 reduction from the December 31, 1996 balance of $511,929. This accounts receivable balance at December 31, 1996 represented approximately 38% of total accounts receivable. Management is currently discussing the timing of the settlement of the remainder of this accounts receivable with the customer and expects that it will be paid in full during the first quarter of 1998. During the three months ended September 30, 1997, the Company received net customer advances aggregating $2,153,628 with respect to the commencement of the third phase of the China National contract, which has been recorded as customer deposits at September 30, 1997, and which is expected to be utilized in the fulfillment of the Company's obligations under that contract during the remainder of 1997 and subsequent to such date. As an accommodation to China National for excess funds held by the Company, the Company has periodically loaned funds to China National. These loans do not bear interest and do not stipulate repayment dates. As of September 30, 1997, the Company had loaned $1,132,169 to China National; such amount has been offset against customer deposits on the December 31, 1996 and September 30, 1997 consolidated balance sheets. Investing. During the years ended December 31, 1995 and 1996, the Company purchased fixed assets aggregating $1,352,434 and $154,484, respectively, primarily in the form of project equipment which will be utilized in completing future projects. During the nine months ended September 30, 1997, the Company acquired fixed assets aggregating $55,935, which does not include a non-cash purchase of $185,950 of equipment for the STAQ On-line Network project from the Company's major stockholder, as described at "CERTAIN TRANSACTIONS." Other than equipment which the Company purchases in the fulfillment of its contracts, the Company has no capital expenditure commitments. However, the Company owns a 90% interest in the joint venture developing the STAQ On-line Network project, has already invested $1,600,000 in such project, and is obligated to provide additional funding of approximately $4,000,000 during the first quarter of 1998, which is expected to be satisfied from the net proceeds of the Offering. (See "BUSINESS - BRIGHTON-STAQ"). Cash set aside for customer purchases which represents prepayments by customers that are set aside to pay project related current liabilities and commitments, decreased by $1,276,365, from $2,636,000 at December 31, 1996 to $1,359,635 at September 30, 1997, as a result of the utilization of a portion of such cash balance to fulfill certain equipment contract obligations related to the China National contract during the nine months ended September 30, 1997. Cash set aside for customer purchases increased by $2,036,000 during 1996, from $600,000 at December 31, 1995 to $2,636,000 at December 31, 1996. Such cash balance at December 31, 1996 secures, in part, irrevocable letters of credit aggregating $746,230 that the Company had issued for contingent commitments on customer purchases. Financing. During January 1996, the Company entered into a convertible demand note agreement with a third party, with interest at 5% per annum. The note had a principal balance outstanding of $620,101 and $643,355 at December 31, 1996 and September 30, 1997. The note is convertible into shares of common stock at prevailing market prices. The Company is currently negotiating with the note holder to convert a portion of this demand note into common stock. 36 39 During December 1996, the Company sold 11,111 shares of common stock in a private transaction for aggregate proceeds of $450,000, less costs of $259,824, generating net proceeds of $190,176. Subsequently, during the nine months ended September 30, 1997, the Company sold an additional 8,002 shares of common stock for aggregate proceeds of $352,948, less costs of $45,416, generating net proceeds of $307,532. Such costs consist of payments to various related and unrelated parties as compensation for services rendered. In addition, the Company issued 2,030 shares of common stock with a value of $89,504 to various individuals and firms for services rendered with respect to capital raising activities. Included in the costs of $259,824 in 1996 and $45,416 in 1997 are payments of $105,731 and $11,931, respectively, to Orient Financial Services Limited, a Hong Kong-based company in which Nils A. Ollquist, a director of the Company, is a principal. In order to meet its working capital requirements, the Company has periodically received funding from Kit Kung, the Chairman of the Board of Directors, President and Chief Executive Officer, and his family members. However, no funds from the Offering will be paid to Kit Kung or his family members. The Company has also periodically made advances to the principals and officers of the Company. Such advances are unsecured and generally bear no stated interest rate or terms of repayment. As of December 31, 1995 and 1996, amounts due from Kit Kung and his family members aggregated $0 and $43,239, respectively; outstanding receivables from other related parties aggregated $8,220 and $15,884, respectively; and amounts due to Kit Kung and his family members aggregated $2,612,896 and $227,298, respectively. During the year ended December 31, 1995, Kit Kung and his family members had advanced $1,612,041 to the Company, and during the year ended December 31, 1996, the Company had repaid $1,118,625 of such advances. During the years ended December 31, 1995 and 1996, advances to other related parties aggregated $518,322 and $43,239, respectively, and during the year ended December 31, 1996, $424,872 of accounts receivable from related parties was repaid. In December 1996, Kit Kung contributed $1,266,973 of net borrowings, consisting of $1,515,076 of amounts owed by the Company to Kit Kung less $248,103 of amounts owed to the Company, to contributed capital. During the nine months ended September 30, 1997, the Company advanced $349,834 to Kit Kung and his family members and repaid amounts due Kit Kung and his family members aggregating $227,298, resulting in receivables from stockholders and related parties of $200,668 at September 30, 1997, net of a credit of $185,950 resulting from the purchase of certain equipment for the STAQ On-line Network project from Kit Kung. Such amount is expected to be repaid or otherwise satisfied in the ordinary course of business during the remainder of 1997 and during 1998. Subsequent to the completion of the Offering, the Company will adopt a policy to the effect that any future transactions between it and its officers, directors, principal stockholders and the Affiliates of the foregoing persons be on terms no less favorable to the Company than could reasonably be obtained in arm's length transactions with independent parties, and that any such transactions be approved by a majority of the Company's independent directors disinterested in the transaction. During December 1997, in order for the Company to arrange the purchase of certain equipment for a customer, Hong Yun, an officer and director of the Company and the wife of Kit Kung, agreed to provide a short-term credit facility by depositing $500,000 into a short-term interest bearing 37 40 account with a Hong Kong bank as security for the bank's letter of credit of approximately $2,145,000 issuable to a supplier. Due the delays in the financing and construction of the China National project, the Company is in the process of renegotiating the terms of certain aspects of technological licensing arrangements that it entered into in conjunction with the China National contract (See "BUSINESS-INDUSTRIAL EQUIPMENT DISTRIBUTION"). The contractual value of services currently under negotiation is approximately $450,000, and the settlement of such obligation is predicated on the resolution of the China National project (See "OVERVIEW". The inability of the Company to fulfill contractual terms of long-term projects or to negotiate favorable arrangements for the use or distribution of licensed technology may have a material adverse effect on the Company's consolidated financial statements. The Company anticipates, based on currently proposed plans and assumptions relating to its operations, that its projected cash flow provided by operations will be sufficient to support operations at current levels for at least the 12 months following the date of this Prospectus. Although the Company's Networking and Industrial Equipment Distribution business segments on a combined basis generate or have available sufficient working capital to support their operations, the Company requires additional capital in connection with the STAQ On-line Network project (see "BUSINESS - STAQ ON-LINE NETWORK"), which the Company anticipates obtaining from the net proceeds of the Offering. The Company projects that Brighton- STAQ will operate at a loss for at least 1998, the first year of operation. To the extent that the Company is unable to timely fund its $4,000,000 commitment to fund the STAQ On-line Network project during the first quarter of 1998, the Company's interest in the project may be reduced or eliminated, which would adversely affect the potential future profitability of this project as it relates to the Company's consolidated results of operations. If the Company were to be unable to fund the continuing development of the Brighton-STAQ project, project equipment aggregating $1,517,538 at September 30, 1997 would be liquidated at net realizable value and the resulting loss, if any, would be charged to operations. INFLATION AND CURRENCY MATTERS: In recent years, the PRC economy has experienced periods of rapid economic growth as well as high rates of inflation, which in turn has resulted in the periodic adoption by the PRC government of various corrective measures designed to regulate growth and contain inflation. Since 1993, the PRC government has implemented an economic program designed to control inflation, which has resulted in the tightening of working capital available to PRC business enterprises. The success of the Company depends in substantial part on the continued growth and development of the PRC economy. Since the Company's contracts are generally denominated in U.S. dollars and are generally of short duration, the Company is not subject to any economic exposure from the effects of inflation in the PRC. However, the STAQ On-line Network project will be subject to the effects of inflation in the PRC. Foreign operations are subject to certain risks inherent in conducting business abroad, including price and currency exchange controls, and fluctuations in the relative value of currencies. Changes in the relative value of currencies occur periodically and may, in certain instances, materially affect the Company's results of operations and the ability of customers to satisfy obligations owed to the Company. In addition, the Renminbi is not freely convertible into foreign currencies. All foreign exchange transactions involving the Renminbi must take place either through the Bank of China or other institutions authorized to buy and sell foreign exchange, or at a Foreign Exchange Adjustment Center. The ability to convert PRC currency is subject to the availability of foreign currencies. 38 41 RECENT ACCOUNTING PRONOUNCEMENTS: In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which is effective for financial statements issued for periods ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods presented. Under the new requirements, the Company will be required to present "basic" earnings per share and "diluted" earnings per share. Basic earnings per share does not include the dilutive effect of stock options and warrants. The Company does not expect that adoption of this statement will have a material effect on reported earnings per share. In February 1997, the Financial Accounting Standards Board issued Statement No. 129, "Disclosure of Information about Capital Structure," which is effective for financial statements issued for periods ending after December 15, 1997. The new standard reinstates various disclosure requirements previously in effect under Accounting Principles Board Opinion No. 15, which has been superseded by this statement. The Company does not expect that adoption of this statement will have a material effect on its current disclosures and presentation. In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income," which is effective for financial statements issued for periods ending after December 15, 1997. Earlier application is permitted. This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income consists of net income and other comprehensive income. Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income. The Company does not expect that adoption of this statement will have a material effect on its current disclosures and presentation. In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for financial statements issued for periods ending after December 15, 1997. This statement discusses how to report operating segments and certain information about a public company's products and services, the geographic areas in which it operates, and its major customers. The Company does not expect that adoption of this statement will have a material effect on its current disclosures and presentation. YEAR 2000 ISSUE: The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Computer programs that have sensitive software may recognize a date using "00" as the year 1900 rather that the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. Based on a recent internal assessment, the Company has determined that certain of its software programs will have to be modified or replaced so that its computer systems will properly utilize dates beyond December 31, 1999. The Company presently believes that the cost to modify its existing software and/or convert to new software will not be significant. The Company has also reviewed both the business operations in its Networking segment in order to determine the potential impact of the Year 2000 Issue with respect to computer networks that the Company has integrated in China. Although the current computer networks that the Company 39 42 integrated are Year 2000 compliant, certain prior computer networks may not have been Year 2000 compliant. However, the Company believes that any software modifications necessary to make such computer networks Year 2000 compliant will be provided by the companies that developed the hardware and software integrated by the Company. In addition, based on the Company's contracts with its customers, including its standard one year warranty provision, the Company does not believe that it has any obligation to modify or replace any network software that it has previously integrated that it is not Year 2000 compliant. Accordingly, the Company does not believe that it will incur any significant costs in this regard with respect to the year 2000 issue. 40 43 BUSINESS GENERAL The Company is currently a computer network integrator and a distributor of industrial equipment. The Company is also developing an on-line securities trading network for the STAQ Exchange, which the Company expects to be operational in the third quarter of 1998. The Company provides such services and equipment primarily to customers in China, as well as other Pacific Basin countries. The Company believes that it has a strong reputation as an independent full service provider of computer network integration services and a distributor of industrial equipment in China. This belief is based on several factors, including, the Company's Chairman, President, Chief Executive Officer and principal stockholder, Kit Kung's experience in the business of designing and installing computer networks and importing industrial equipment in China since 1980. Building on Mr. Kung's business experience in China, the Company formed a joint venture with a company controlled by the STAQ Exchange, one of four national stock exchanges in China, to develop, design, install and maintain a nationwide computerized multi-market securities quotation and trading network in China. BUSINESS STRATEGY The Company intends to maintain its focus on the Chinese market place. Its business strategy is focused as follows: - Emphasis on network integration in the banking and finance industries - Commercialization of the on-line securities trading network - Expansion of the industrial equipment distribution business to meet customer demand Banking and Finance Oriented Information Technology. As the Chinese economy continues to grow and the standard of living increases in China, the Company believes that there will be an increased demand for consumer oriented financial services such as ATMs and retail outlets that accept credit card transactions. The Company's strategy has been to meet this increasing demand in the Chinese marketplace by installing wireless telecommunications networks suitable for high volume transactions that require instant responses, such as ATM transactions, credit card verifications, clearance and settlements. The Company currently has contracts with the Industrial and Commercial Bank of China to design and install wireless telecommunication networks for clearance and settlements for seven of its bank branches. The Company believes that as market demand for ATMs and retail outlets that accept credit card transactions increases, it will be able to secure additional contracts in this area. Securities Quotation and Trading Network. The Company is the owner of a 90% interest in Brighton-STAQ, a PRC registered Sino-Hong Kong joint venture. The remaining 10% interest is owned by a company controlled by the STAQ Exchange, one of four national securities exchanges in China, located in Beijing. The purpose of Brighton-STAQ is to develop, design, install and maintain the STAQ On-line Network. The Company's initial plans are to offer the STAQ On-line Network to the 550 stock brokerages (operating 2,200 offices) that are members of the STAQ Exchange according to STAQ Exchange officials, in the cities of Beijing, Chongqing, Guangzhou, Shanghai, Shenzhen and Wuhan, with plans to eventually market the STAQ On-line Network to all 2,800 stock brokerages (operating over 10,000 offices) in China. The Company expects to initially charge an installation fee of $6,000 and a monthly maintenance fee of $1,000 for each terminal installed at the stock brokerages. The STAQ On-line Network project is currently in the testing phase. 41 44 The Company expects to commence commercial operations of the STAQ On-line Network in the third quarter of 1998. Industrial Equipment Distribution. Industrial equipment distribution accounts for a substantial portion of the current revenues and profits of the Company. The type of industrial equipment which the Company has been marketing in China include machine tools, such as machine center and grinder measurement devices, and heavy machinery, such as gantry mills, pressing machine production lines and dyes transfer automation systems. The Company is the exclusive distributor for Milltronics Manufacturing Company (a U.S. company), ALO Teknik AB (a Swedish company), Royal Master Grinders, Inc. (U.S. company) and K.O. Lee Company (a U.S. company) for the sale of their industrial equipment in China. In addition to representing these manufacturers, the Company has adopted the strategy of increasing revenues by searching for industrial equipment from manufacturers worldwide that meet both the customer's technical specifications and budget. The Company will continue its past practice of gradually increasing the size of its sales team to meet customer demand for industrial equipment. COMPUTER NETWORK INTEGRATION MARKET OVERVIEW China's information technology market has enjoyed significant growth and will likely grow at an increasing rate in the next decade as market demand for Western style modernization increases. In particular, growth will be most significant for system engineering services that provide customized products tailoring to customer's specifications. The following are the market factors which will contribute to this growth: (1) DEVELOPMENT OF LARGE SCALE INFORMATION "INFRASTRUCTURES": The Chinese Central Government has made "informationization" of the economy a priority of its most recent five year plan, and is planning to invest substantial amounts of capital in numerous information super-highway type projects such as the "Golden" projects1. (2) GROWING DEMAND FOR COMPLEX INFORMATION SYSTEMS FROM OTHER LARGE INFRASTRUCTURE PROJECTS: Continuous investment in large-scale infrastructure in areas such as power generation and transportation will drive demand for information technology systems. (3) GROWING DEMAND FOR INFORMATION TECHNOLOGY SYSTEMS FROM ENTERPRISES AND GOVERNMENT AGENCIES: As the Chinese economy develops and matures, enterprises - -------- (1) China's State Council plans to develop the country's information infrastructure by 2000. The plan, know as the China National Information Infrastructure was implemented at the end of 1993 and is characterized by a series of "Golden" Projects, including the Golden Bridge, Golden Taxation, Golden Customs and Golden Card Projects. The Golden Bridge Project's goal is to link, via a telecommunication network, all the cables of the Ministry of Posts and Telecommunications and special telecommunication grids of other ministries and official departments. The telecommunication network is expected to digitally transmit documents, sound and pictures used for serving China's finance, customs, foreign trade, tourism, meteorology, communication, State security, science and technology and other information businesses. The Golden Tax and Golden Customs Projects are extensions of the Golden Bridge Project. The Golden Card Project is consumer oriented and expected to modernize the China's payment and cashing services with the introduction and popularization of credit cards and other related media and decrease the amount of cash in circulation. 42 45 and governmental agencies will need to utilize information technology systems to become competitive with their counterparts in more developed countries. In addition, due to their relative lack of technological sophistication, Chinese customers usually require more systems engineering services on each project than customers in more developed markets. Compared to Western countries, China's information technology industry is relatively young, such that most organizations do not have dedicated information technology departments as are common in Western countries. Much of the industry's technical resources are concentrated in companies that directly engage in the information technology business. As a result, companies outside the industry must rely on outside technical expertise to meet their needs. The demand for outside technical assistance will likely increase, as most of the software packages being developed are general platforms that require substantial customization to meet specific needs of each organization. OPERATIONS The Company provides customized full service computer network and telecommunication equipment integration, installation and maintenance for customers in China and other Pacific Basin countries. The Company provides integrating solutions for customers utilizing software and hardware developed by third parties. The following examples are indicative of the Company's and its subsidiaries' projects:
CUSTOMER PROJECT DESCRIPTION DATE OF EXECUTION CONTRACTUAL BILLINGS - -------- ------------------- ----------------- -------------------- ICBC Bank branch networking in June 1993 $3,478,000 eight cities in China to December 1997 Zhongzhou Hotel Hotel management September 1997 $210,000 computer system for 300- room hotel in Zhongzhou City, PRC The People's Daily Office automation system November 1996 $440,000 for text retrieval and high speed line printer integration
The Company is currently in the process of completing the integration of a hotel management computer system for Zhongzhou Hotel, Zhongzhou City, China. The Company has developed its own software for integration of hotel management computer systems capable of managing reservations, telephones and billings. The Company has installed over 60 hotel management computer systems in China and Hong Kong. The Company's customers include Regent Hotel in Hong Kong, The China Hotel in Guangzhou, International Hotel in Beijing and JC Mandarin Hotel in Shanghai. The Company's gross margin for installation of hotel management computer systems is in the range of 20-25 percent. The Company also provides computer network integration for office automation. The Company installed a database management system for The People's Daily in November 1996 that is capable of scanning, storing, retrieving and typesetting texts in Chinese characters. The Company integrated software 43 46 from Chinese vendors with computer equipment manufactured by Digital Equipment Corporation, with computer software from Oracle Corporation for database management, as well as with high speed line printers. The Company's gross margin for office automation projects is approximately 10 percent. ARIA WIRELESS SYSTEM The Company has introduced the Aria Wireless Systems, which is suitable for high volume transactions that require instant responses, such as ATM transactions, credit card verifications, clearance and settlements, in the Chinese market place. The Company's gross margin on contracts for computer network integration of the Aria Wireless Systems has been approximately 40 percent. In 1997, the Company secured nine contracts with ICBC to customize integration of and install Aria Wireless Systems for ATM linkage and for clearance and settlements for eight of its bank branches. Five of the contracts have been completed and four of the contracts are currently in progress. The Company's focus in the computer network integration segment of its business currently is in wireless telecommunication systems. GENERAL The Company's Aria Wireless Systems utilizes radio frequency to transmit data in metropolitan areas within a 50 kilometer (38 mile) radius. Primary application for the Aria Wireless System is in the financial service industry and includes ATM linkage, credit card processing and banking data transfer. The Aria Wireless System is an industry leader for wireless data transfer technology in on-line transactions processing applications. There are over 5,000 remote locations connected to their respective hosts through Aria Wireless Systems in over 50 countries throughout the world. As the Chinese economy continues to grow and the standard of living increases in China, there will be an increased demand for consumer oriented financial services such as ATMs and retail outlets that accept credit card transactions. The Company believes that the Aria Wireless System is particularly well-suited for use by the financial services industry in China because it offers a more reliable alternative to land telephone lines for data transmission. Unlike Western countries, the land telephone lines in China are not yet able to support the rapid transmission of data with the accuracy and speed required by the financial industry. The Aria Wireless System, which utilizes radio frequencies, will assist the financial services industry to address the demand for consumer oriented financial services. SALES AND MARKETING In 1995, the Company's subsidiary, BECL, signed a Preincorporation Agreement to form a Hong Kong joint venture company, Aria Wireless Systems China Limited ("Aria China"), with two U.S. companies, Aria Wireless Systems, Inc. ("Aria, Inc.") and Valdacom, Inc. ("Valdacom"), to market, sell and service the Aria Wireless System in the China market on an exclusive basis. The Preincorporation Agreement provided that the Company was to receive a 59% ownership of Aria China, and the two other parties, Aria, Inc. and Valdacom, were to receive a 23% and 18% ownership of Aria China, respectively. Financial difficulties at Aria, Inc. delayed formation of Aria China. Aria, Inc. filed for reorganization under Chapter 11 of the United States Bankruptcy Code in February 1996. On May 22, 1997, Aria, Inc. emerged from Chapter 11 under an approved reorganization plan and with a new financial structure. Aria China was incorporated in 1995 by the Company but has remained inactive as the parties to the Preincorporation Agreement have, to date, not subscribed for their respective shares. The Company is currently negotiating with Aria, Inc. to restructure the existing business arrangement. The Company 44 47 expects to finalize a sole distributor agreement for China between Aria, Inc. and BIC in the first quarter of 1998. No assurance can be given that the Company will be able to finalize this agreement. In the meantime, the Company has been able to market and sell the Aria Wireless Systems as a component of its network integration business and plans to continue such sales practice. Aria, Inc.'s financial difficulties have not affected the Company's operations to date. Since its emergence from reorganization, the Company believes that, based upon a review of its financial statements, Aria, Inc. will continue to be a financially viable company. Sales of Aria Wireless Systems by the Company so far have been concentrated in the Beijing area. The Company has plans to target sales of the Aria Wireless System to other large metropolitan markets in China. Although there is no formal written agreement, the Company is the sole distributor of the Aria Wireless System in China. The Company participates in two to three trade shows per annum and holds two to three promotional seminars per annum throughout China and follows up with mass mailings of product catalogues to solicit contracts for its computer network integration services business. The Company's current focus is the network integration of the Aria Wireless Service in the banking and financial industry. To date, the Company's customers for this business segment have all been PRC Government owned or controlled entities, including government ministries, banks, universities and research facilities. COMPETITION The Company competes with Multipoint Networks, Inc., a U.S. company, and Kb/Tel, SA, a Mexican company, on a worldwide basis for the wireless system installation and service business. Both companies manufacture wireless systems that offer features identical to the Aria Wireless System. The Company also competes with other manufacturers of wireless systems that offer similar features to the Aria Wireless System. The Company believes that its technical expertise in computer network integration makes the Aria Wireless System more competitive than the wireless systems offered by the other two companies. The Company has 11 engineers dedicated to installing and customizing system applications for the Aria Wireless System to customer's specifications. It is the Company's belief that its competitors do not have technical staff with the level of expertise of the Company's engineers and the Company is aware that the wireless systems installed by the Company's competitors have in the past experienced numerous technical problems due to improper integration installation. STAQ ON-LINE NETWORK CHINA'S SECURITIES MARKET OVERVIEW (all conversions to U.S. dollars use the January 12, 1998 exchange rate) The Chinese securities market comprises four national exchanges: Shanghai, Shenzhen, STAQ and China National Securities Trading System ("NETS"). The securities industry is regulated by two organizations: The State Council Securities Policy Committee, which is responsible for the macro policy of the industry, and the China Securities Regulatory Commission ("CSRC"), which is responsible for the day-to-day regulation of the securities industry. The CSRC dictates the stock exchange on which the shares of any Chinese company, whether state-owned or foreign-owned, is listed. The CSRC also determines the terms of the listing, including the size of the offering of securities and the price of the offering. 45 48 Trade orders on all four national exchanges are computer matched. Each exchange seat at each of the four exchanges is equipped with a computer terminal for entering trade orders. Membership to the exchanges is limited to licensed stock brokerages and only registered members can trade on the respective exchanges. Non-members of the exchanges place orders with member stock brokerages either personally or by telephone. Each exchange has taken a different approach in developing its distribution system to its members. The NETS Exchange, the Exchange under the control of the People's Bank of China that was originally established for government bond clearing for the other national exchanges, has been inactive for a number of years and is not further discussed. The Shanghai Stock Exchange operates 21 sub-exchanges across China. These sub-exchanges are linked to the main computer via satellite. A member of the Shanghai Stock Exchange can obtain exchange seats at the main exchange or at any of the sub-exchanges. The stock brokerages must place their order with their floor agents by telephone. Stocks, debt instruments and investment funds are traded on the Shanghai Stock Exchange. According to STAQ Exchange officials, a seat on the Shanghai Stock Exchange is Rmb1,000,000 ($120,482) and the annual membership fee is Rmb500,000 ($60,241). The Shanghai Stock Exchange does not offer off-floor on-line trading of its stocks. In 1996, 287 companies were listed on the Shanghai Stock Exchange with market capitalization of Rmb141.5 billion ($17.0 billion). The average daily turnover in 1996 was Rmb446 million ($53.7 million). The Shenzhen Stock Exchange offers direct on-line linkage to its central computer via satellite. Each subscriptive stock brokerage is directly linked to one satellite station. Unlike the Shanghai Stock Exchange, the Shenzhen Stock Exchange allows connections at its members' offices. Trade orders can be entered directly onto computer terminals at the respective stock brokerages. This arrangement offers more flexibility and wider coverage but at a substantial financial cost. According to STAQ Exchange officials, the annual membership fee for the Shenzhen Stock Exchange is Rmb600,000 ($72,289) and it charges its members an installation charge of approximately Rmb300,000 ($36,145) to set up satellite linkage and an annual maintenance fee of Rmb60,000 ($7,229). Stocks, debt instruments and investment funds are traded on the Shenzhen Stock Exchange. In October 1996, 224 companies were listed on the Shenzhen Stock Exchange with an aggregate market capitalization of Rmb394 billion ($47.5 billion). The 1996 turnover through October 1996 was Rmb735.2 billion ($88.6 billion). The STAQ Exchange has its main trading floor in Beijing and a sub-exchange in Xiamen. The STAQ Exchange is the official exchange for (i) legal-person-owned shares (C Shares), that are shares of PRC state-owned enterprises which may only be held by other PRC state-owned enterprises, and (ii) State Treasury Bonds issued by the Ministry of Finance. In addition to listing C Shares (total of 8 stocks) and State Treasury Bonds, the STAQ Exchange acts as a sub-exchange for both the Shanghai and Shenzhen Stock Exchanges. A sub-exchange functions as a branch of the main exchange. Through direct computer linkages via satellite with both the Shanghai and Shenzhen Stock Exchanges, members of the STAQ Exchange can directly trade stocks listed on the Shanghai and Shenzhen Stock Exchanges from the STAQ Exchange trading floor. According to STAQ officials, the annual membership fee for the STAQ Exchange is Rmb150,000 ($18,072). THE STAQ EXCHANGE The STAQ Exchange was approved by the CSRC in 1992 and The Stock Exchange Executive Council (the "SEEC"), a non-governmental advisory body to the CSRC, was assigned the responsibility of designing and developing the STAQ Exchange into a computer-based over-the-counter multi-point to multi-point on-line automated quotations system for securities trading. The members of the SEEC consist of China's largest trust and investment corporations, securities firms, and other non-bank financial institutions authorized to engage in securities and other financial businesses. 46 49 About 80% of all State Treasury Bonds are distributed by the Ministry through the STAQ Exchange and 50% of all State Treasury Bond trading is done through STAQ. Due to the restrictive ownership requirements of C Shares, trading of C Shares is limited and sporadic. When the STAQ Exchange was first approved as a sub-exchange for the Shanghai and Shenzhen Stock Exchanges in 1992 and in 1993, respectively, the trading volume fluctuated substantially due to the inherent instabilities of these two fledgling exchanges which were formally established only in 1991 and 1990, respectively. According to STAQ Exchange officials, the high end trading volume for the STAQ Exchange was approximately 3% of the Shanghai Stock Exchange and 10% of the Shenzhen Stock Exchange. According to STAQ Exchange officials, trading on the STAQ Exchange has stabilized at 1.5% and 4% of the trading volume on the Shanghai and Shenzhen Stock Exchanges, respectively, for the last three years. Trade orders on the STAQ Exchange are entered onto the computer terminals located on the trading floor in either Beijing or Xiamen and are computer matched. Members telephone their floor agents to execute transactions. According to statistics provided by STAQ Exchange officials, there are currently approximately 550 licensed stock brokerages (operating approximately 2,200 offices in China) that are members of the STAQ Exchange. BRIGHTON-STAQ Brighton-STAQ is a PRC registered Sino-Hong Kong equity joint venture company of which the Company owns 90% and Huazheng owns 10%. Brighton-STAQ has its registered office and principal place of business in Beijing and a branch office registered in Shanghai. Brighton-STAQ was formed to develop, design, install and maintain the STAQ On-line Network. In 1992, the STAQ Exchange received a grant of $200,000 from the World Bank for the development of the STAQ Exchange. The STAQ Exchange used part of the funds to invite seven technical experts from NASDAQ to visit the STAQ Exchange in Beijing and also asked the experts from NASDAQ to review the designs for the national on-line securities trading system that was modeled after NASDAQ. After reviewing the plans submitted, the NASDAQ experts confirmed that, as presented, the designs were functionally suitable for the on-line securities trading system as contemplated. Based on its expertise in the computer network integration services business, the Company was invited by the STAQ Exchange to submit designs for the computer network component of the on-line securities trading system. The Company's designs for the STAQ On-line Network were submitted, along with the designs of the securities trading system, for review and approved by the NASDAQ experts. NASDAQ has no on-going involvement with the STAQ Exchange or Brighton-STAQ. The STAQ On-line Network will initially link remote computer terminals installed at stock brokerages in the cities of Beijing and Chongqing (with plans to expand linkage to Guangzhou, Shanghai and Shenzhen) to the STAQ Exchange trading floor in Beijing. The Company anticipates that linkage will eventually be on a nationwide level, with such expansion being driven by the Company's estimated break-even for each city of approximately 15 terminals. Through the use of the STAQ On-line Network, the stock brokerages will then be able to obtain real time price quotations of shares traded on the Shanghai and Shenzhen Stock Exchanges as well as C Shares and State Treasury Bonds and will be able to trade through party-to-party negotiations on remote computer terminals. The STAQ On-line Network is modeled after the on-line trading system offered by NASDAQ in the U.S. although, unlike NASDAQ, with the exception of C Shares, no stock will be quoted solely on the STAQ Exchange. Information displayed on the remote computer terminals will be identical to information available on the trading floor of the STAQ Exchange in Beijing. The operation of the STAQ On-line Network, including all software programs installed on the remote computer terminals at the stock brokerage houses, will 47 50 be maintained and controlled by the STAQ Exchange. Brighton-STAQ's role is to develop, design, install and maintain the STAQ On-line Network. The Company will earn its revenue through an initial installation charge and a monthly maintenance fee charged to the stock brokerage houses for each terminal. The Company initially plans to charge a maintenance fee equivalent to approximately $1,000 per month for each remote computer terminal. The maintenance fee will be paid and denominated in Renminbi. The Company expects to initially charge an installation fee equivalent to approximately $6,000 for installing each remote computer terminal at the stock brokerages which will also be paid and denominated in Renminbi. Brighton-STAQ is authorized by the Ministry of Foreign Economic Relations and Trade for a total investment of $1,600,000. To date, $1,600,000 has been contributed by the Company into the joint venture, with an additional $4,000,000 expected to be required to complete the STAQ On-line Network project (all of which will be the responsibility of the Company). To ensure that all investment in Brighton-STAQ in excess of the authorized total investment is adequately protected under Chinese law, it will be necessary for the Company to submit for approval, a request for an increase in the total investment of the joint venture, which application will be submitted when the funds from the Offering are available. The Company has no reason to believe that such application would not be approved. Additional capital contributed by the Company will be structured as loans to Brighton-STAQ such that the Huazheng's percentage ownership in Brighton-STAQ will not be diluted. The joint venture has a 12-year term expiring in 2006. Extension of the term of the joint venture is subject to the approval of the Ministry of Foreign Economic Relations and Trade, the approval authority for Sino-Hong Kong joint venture companies. The Company will be required to submit a formal application for extension to the Ministry six months prior to the expiration of the term for approval. The Company has no reason to believe that such application would not be approved. The parties orally agreed during negotiations for the establishment of Brighton-STAQ that under certain financial performance criteria to be agreed by the parties, Huazheng would have the right, during the term of Brighton-STAQ, to acquire up to an additional 10% of the joint venture annually, at market valuation, up to a total ownership interest of 49% of Brighton-STAQ. The Company is uncertain with respect to the validity of this oral agreement under Chinese law since it was not reflected in the written agreement approved by the Chinese government providing for the establishment of Brighton-STAQ. The Company believes that local business custom dictates that the Company honor such oral agreement if so requested by its partner. If Huazheng decides to exercise such right at a time when Brighton-STAQ is profitable, the Company's operating results and anticipated growth may be adversely affected. In addition, the mechanism for determining market valuation if and when Huazheng exercised such right, which is not yet agreed to by the parties, may possibly be unfavorable to the Company. CURRENT STATUS OF THE STAQ ON-LINE NETWORK The Company has successfully tested the STAQ On-line Network using dedicated land telephone lines leased from ChinaPac, a commercial arm of the Ministry of Post and Telecommunications. In order to be fully commercially operational, the Company intends to convert the STAQ On-line Network to satellite linkage. The Company is negotiating a three-year arrangement with The People's Daily, the major newspaper serving China, to subscribe for use of its satellite service, which it will finalize pending completion of the Offering. The Company is able to obtain services from The People's Daily at a rate of one-third the rate generally charged by commercial providers of satellite service because The People's Daily uses satellite communication only at night for distribution of text, as is customary for daily newspaper publications. As a result, its satellite communication resources are idle during daylight hours. This provides the opportunity for the Company to lease the system, with availability during key daylight trading hours, at very competitive rates. The satellite transponder providers of The People's Daily are Asia Satellite Telecommunications Co. Ltd. in 48 51 Hong Kong for C-Band transponder and China Telecommunications Broadcast Satellite Corporation in Beijing for Ku-Band transponder. The stock price quotations from the STAQ Exchange trading floor in Beijing will be uplinked to The People's Daily's transponder and downlinked to various cities then being served. Two satellite communication links, one between the STAQ Exchange trading floor in Beijing and Shanghai and the other between the STAQ Exchange trading floor in Beijing and Chongqing, have been completed. The cost of construction for each satellite communication link was approximately $38,000. The satellite equipment utilized for the STAQ On-line Network is manufactured by Hughes Electronics Corporation. After being downlinked to the various cities, the stock price quotations will be transmitted over a wireless system for broadcast to the remote computer terminals at the brokerages. Nodes for receiving the data broadcasted over the wireless system will be installed at the remote computer terminals. When a buy or sell order is executed at the remote computer terminals, such information is transmitted back via the wireless system and the satellite linkage to the STAQ Exchange in Beijing. While The People's Daily provides the services of its satellite transponders to operate the communications linkages, the Company owns the satellite equipment necessary for uplinking and downlinking the stock price quotations. For local wireless communication, the Company plans to "piggyback" on the frequencies used by the Aria Wireless Systems which it has installed for other customers. Radio frequency is a controlled resource in China. Current Chinese laws and regulations do not allow foreign ownership or control of radio frequency. As a result, the Company cannot independently lease radio frequencies from the Ministry of Post and Telecommunication to build its wireless networks. The Company's customer, ICBC, has agreed to allot a portion of ICBC's assigned radio frequency in Beijing and Chongqing for the Company's use for a fee of $100 per node per year. The Company is currently negotiating with a domestic telecommunication service provider in Shanghai to use its assigned radio frequency for the STAQ On-line Network. The Company expects to finalize an agreement with this telecommunication service provider in the first quarter of 1998. The STAQ On-Line Network is functionally similar to other on-line transaction processing systems the Company has designed and installed for its financial services and hospitality industry customers. On-line transaction processing systems are designed to provide instant responses for high volume transactions. In the last seven years, the Company and other companies controlled by the Company's Chairman, Chief Executive Officer, President and principal stockholder have developed, designed and installed over 35 on-line transaction processing networks in the Pacific Basin region to customer's specifications, including credit and authorization systems, airline ticket reservation systems, ATM networks and bank branch networking. The Company has applied this knowledge in the design and development of the STAQ On-Line Network. MARKETING The Company plans to initially set up the satellite-linked STAQ On-line Network in the cities of Beijing and Chongqing and install computer terminals in a selected number of STAQ Exchange member stock brokerages for a three month test period, which is anticipated to begin in the second quarter of 1998. During the test period, the STAQ On-line Network will be provided to the selected stock brokerages free of charge. At the end of the test period, these stock brokerages will have the option to subscribe for the STAQ On-line Network by executing maintenance agreements with Brighton-STAQ. The Company plans to host a series of seminars at these test sites for other traders from the STAQ Exchange member stock brokerages during the test period to attract customers. Once the Company establishes the STAQ On-line Network service in Beijing and Chongqing, it plans to extend its coverage area to Shanghai, Shenzhen and Guangzhou. The Company believes that the STAQ On-line Network will increase the STAQ Exchange's ability to offer access to trading on the exchange. According to STAQ Exchange officials, only half of its 49 52 members currently have seats on the trading floor because of the STAQ Exchange's insufficient technical expertise and capital resources. The remaining members must collaborate with seat members to trade. Eventually, Brighton-STAQ plans to co-market the STAQ On-line Network, in cooperation with the STAQ Exchange, by packaging it with membership to the STAQ Exchange to all stock brokerages who are not yet members of the STAQ Exchange. COMPETITION - BRIGHTON-STAQ Both the Shanghai and Shenzhen Stock Exchanges maintain their own on-line securities quotation and trading systems for internal use and both have the potential to compete with the STAQ Exchange for trading of securities listed on their respective stock exchanges. The Company believes that it is unlikely that either the Shanghai or Shenzhen Stock Exchanges would compete with the STAQ Exchange because all three exchanges are now under common control. The Shanghai and Shenzhen Stock Exchanges were brought under direct control of the CSRC by the PRC State Council in August 1997 to settle conflict of interest issues among the exchanges. In addition, as their sub-exchange, the STAQ Exchange is contributing to the development of the Shanghai and Shenzhen Stock Exchanges. The Company believes that the development of the STAQ On-line Network by Brighton-STAQ will likely complement the Shanghai and Shenzhen Stock Exchanges by increasing the volume of securities traded on both exchanges. The Company will potentially compete with other businesses experienced in the systems management and computer network integration business as well as the wireless communications business, which are capable of designing, installing and maintaining on-line transaction processing systems. The Company believes that information providers that have entered the China market and utilize on-line transaction processing systems in their businesses, such as Dow Jones Markets, Inc., Reuters Limited and Bloomberg L.P., are potential competitors of the Company. These potential competitors have greater marketing and development budgets than the Company and have greater capital resources than the Company. In the developed securities markets in the Pacific Basin region (such as Hong Kong, Singapore, Japan, Malaysia, Thailand and Taiwan), Dow Jones Markets, Inc., Reuters Limited and Bloomberg L.P. have been successful in providing trading on off-exchange floor trading for foreign securities markets, currency trading and news and information. It should be noted that except for China, which permits off-exchange floor trading, the stock exchanges in the Pacific Basin region are all floor-based electronic trading systems which do not permit off-exchange floor trading of their domestically listed securities. INDUSTRIAL EQUIPMENT DISTRIBUTION BUSINESS MARKET OVERVIEW Beginning in the mid-1980's, China commenced economic reforms that significantly decentralized the purchasing authority of government owned or controlled entities with respect to imports. In response to this process of decentralization and market orientation, increased numbers of industrial equipment manufacturers and independent distributors have entered the Chinese market to meet the market demand for modernization. Currently, the industrial equipment distribution sector in China is highly saturated with significant competition among manufacturers and distributors from around the world. PRODUCTS The Company facilitates United States, European and other manufacturers of industrial equipment with access to the Chinese marketplace by providing marketing, sales and technical services for their products. The industrial equipment which the Company has been marketing in China are machine tools, such as machine center and grinder measurement devices, and heavy machinery, such as gantry mills, pressing machine production lines and dyes transfer automation systems. 50 53 The Company has signed exclusive distributor agreements with several major manufacturers of industrial equipment (Milltronics Manufacturing Company (a U.S. company), ALO Teknik AB (a Swedish company), Royal Master Grinders, Inc. (a U.S. company) and K.O. Lee Company (a U.S. company)) for the sale of their industrial equipment in China. However, these manufacturers may sell the industrial equipment to their own customers based outside of China for use in China, such as, sales to the American party of a Sino-foreign joint venture company for use by the Sino-foreign joint venture company in China. In such cases, these manufacturers would pay the Company a sales commission of 5% of the sales price for the Company to provide repair and servicing for the industrial equipment inside China. The Company also sells industrial equipment for other manufacturers on a non-exclusive basis. The following table sets forth the Company's sales of industrial equipment by supplier as of December 31, 1997 and the Company's projected revenues in 1998 based on the Company's on-going negotiations with customers:
Type of Industrial SUPPLIER Equipment 1997 1998 - -------- ------------------ ---- ---- Adaptive Motion Tube & pipe bending $200,000 $300,000 Control Systems machine Alo-Teknik AB Saw tooth grinders $782,000 $300,000 Forest-Line Large size milling - $1,500,000 Capdenac machines Milltronics Machine centers $163,500 $2,000,000 Manufacturing Corporation Normac, Inc. Shred grinding machines - $350,000 Royal Master Centerless grinders - $450,000 Grinders, Inc. Sullair Corporation Industrial air compressors $1,200,000 $1,500,000 and dryers The Monarch Vertical Machine centers $1,780,000 $1,000,000 Machine Tool Company
CUSTOMERS The Company's customers for industrial equipment are PRC Government owned or controlled entities, including government ministries, universities, research facilities and factories. The majority of the Company's customers are metal handling and processing factories in the automotive, ship building and aviation industries in China. The following sets forth the Company's major customers for industrial equipment: China National Chemical Construction Chongqing Company Shenyang Blower Works 51 54 Shenyang Aircraft Corporation State-owned Benxi Toolplant China Offshore Industrial Corporation Dongfeng-Citroen Automobile Company Ltd. Changan Automobile Works Shanghai Jiao Tong University Deyang Qitong Machinery Co. Ltd. Shenzhen Baosheng Co. Ltd. The Company signed three major contracts with Chinese customers for the sale of industrial equipment in 1997 totaling approximately $6,980,000. The Company has been awarded a $1,690,000 contract from Shenyang Aircraft Corporation to equip five heavy duty vertical machining centers. Shenyang Aircraft Corporation is a leading aircraft manufacturer in China and produces sections of the Boeing 737 aircraft. The Company has entered into a contract to provide computer-controlled auto body stamping equipment to Changan Automobile Works, a Chinese state-owned automotive manufacturer, located in Chongqing, for $2,890,000. Changan Automobile Works is one of the largest automotive manufacturers in China and is a long standing customer of the Company. Delivery for the stamping equipment is scheduled for the first quarter of 1998. The Company has contracted to provide a gantry milling machine to Shenyang Blower Works, in Shenyang, for $2,400,000. Shenyang Blower Works is a leading manufacturer of air blowers and air compressors for the petroleum, chemical and electricity generating industries in China. Due to the long manufacturing cycle for large-size machine tools, delivery to Shenyang Blower Works is scheduled for the fourth quarter of 1998. The industrial equipment distribution business accounted for approximately $4,300,000 and $3,700,000 in revenue for 1995 and 1996, respectively. Historically, the Company has relied on a limited number of customers for a substantial portion of its total revenues. The Company's customers vary from year to year, but, historically, significant portions of its revenues are from a limited number of customers. The Company expects that significant portions of future revenues from this business segment will continue to be generated by a limited number of customers, and revenue may vary substantially from quarter to quarter as a result of both the large order sizes and the long lead times characteristic of this business. MARKETING The Company solicits potential customers for the sale of industrial equipment by participating in trade shows, promotional seminars and exhibitions throughout China and following up with mass mailings of product catalogues. At the trade shows, the Company operates a separate promotional exhibit. When the Company receives a request for particular equipment, the Company's sales staff in New Jersey is provided with the technical specifications and searches for suitable equipment manufacturers in the global market. When equipment that meets the technical specifications of the customer is identified, a case-by-case arrangement is negotiated between the equipment manufacturer and the Company. After a purchase agreement is signed with the customer, the Company will purchase the equipment from the manufacturer and resell it to the customer. The Company's industrial equipment distribution business sales and support teams, based in China and New Jersey, have grown from a total of three employees in 1991 to 27 employees as of September 30, 1997. The Company's sales teams in China for the industrial equipment distribution business are located in Beijing (nine employees), Shanghai (eight employees) and Wuhan (eight employees). All orders are sent to Beijing for approval and processing. 52 55 FOREIGN TRADE CORPORATIONS ("FTC's") Contracts for the sale of industrial equipment are entered into between BIC or Brighton Equipment Corporation Limited, a wholly owned Hong Kong subsidiary of BECL ("Brighton Equipment"), and the customer. The Company does not place an order with the third party manufacturer for industrial equipment until a sale has been made to the customer. As a result, the Company does not generally need to warehouse inventory. In most cases, however, the Company does take title to the industrial equipment and bears the risk of loss in the event of non-payment by the customer. Sales of the industrial equipment, regardless of the nature of the customer, are made through FTC's, since Chinese domestic companies and individuals are not permitted to trade directly with foreign companies. The FTC's make purchases on behalf of the customers and are legally authorized by the PRC Government to conduct import business. FTC's are chartered and regulated by the government and were formed to facilitate foreign trade. Once the customer selects the foreign vendor and the industrial equipment to be purchased, it selects an FTC to carry out the necessary procedures for the import and purchase of the equipment. The FTC's function as procurement arms for the customers. Although the purchase decision is made by the customer, the Company enters into formal purchase contracts with FTC's. The FTC's take title to the industrial equipment and resell to the customers. The customers pay the FTC's in Renminbi and the FTC's, which have access to foreign exchange, pay the foreign vendors in U.S. dollars or other foreign currency. By virtue of its direct contractual relationship with the FTC, rather than the customer, the Company is to some extent dependent upon the continuing existence of and contractual compliance by the FTC until the particular transaction has been consummated. The Company's industrial equipment sales business, however, is not dependent on any single FTC or customer. Although sales by the Company to certain industries involve repeat transactions with FTC's that operate in those industries, the Company does not believe that it is dependent upon any particular FTC or that the loss of relations with any particular FTC would have a material adverse effect on the Company. Rather, FTC's, which earn commissions in transactions, compete with each other for the right to handle the customer's business. The Company believes that it is able to ensure that purchase orders for industrial equipment by the customers are properly approved and authorized when a purchase contract is signed with an FTC because the FTC will review all necessary paperwork before executing contracts on the customer's behalf. As an additional precaution, to date, all of the Company's direct sales to its customers have been guaranteed by letters of credit. As a policy, the Company will not ship any industrial equipment ordered until a bank letter of credit is provided by the customer. As such, the Company has seldom experienced nonpayment for industrial equipment orders and the risk of loss due to nonpayment is negligible even though the Company takes title to the industrial equipment. The Company has also never experienced a problem with obtaining payment in U.S. dollars for the industrial equipment. The customer is responsible for carrying out any necessary import procedure for the industrial equipment, obtaining the import license and for freight charges. The Company ships the ordered industrial equipment to the port of entry specified by the customer. It is also the customer's responsibility to clear the industrial equipment through customs and ship the industrial equipment from the port of entry to the customer's premises. After the industrial equipment has arrived at its destination in China, the Company arranges with the customer for the installation of the industrial equipment and the training of the customer's personnel in the operation of the industrial equipment. The industrial equipment is generally warranted for a period of one year after installation. The customer is responsible for any out of warranty service and repairs. 53 56 AFTER-SALE SERVICES In order to perform its servicing and other after-sale responsibilities, the Company employs a staff of five engineering and technical support personnel. The technical support engineers work out of the Company's various offices throughout China and are trained to handle service calls initially through advice and consultation. If necessary, the engineers travel to the location of the unit and perform required servicing. The Company maintains what it believes is an adequate inventory of supplies, spare parts and tools to handle most servicing. If parts under warranty require replacement, the Company may elect to replace that part out of its own parts inventory with the understanding that the manufacturer would in turn replace the part in the Company's inventory. Any post-warranty repair or servicing, charged on a time and material basis, has historically been immaterial to the Company's business. COMPETITION The Company competes with other independent distributors in China marketing similar products. Although the Company believes that it is one of the major independent distributors of industrial equipment, there may be other distributors with greater resources or other competitive advantages over the Company. In addition to other independent distributors, the Company faces more significant competition directly from established manufacturers. With respect to its industrial equipment, for example, the Company competes with Cincinnati Milacron, Inc. of the U.S., which maintains its own direct sales force in China. In addition, certain manufacturers, such as Ingersoll-Rand Company of the U.S., are better able than the Company to establish name recognition across industry lines as they market a wide variety of products in China under one brand name. Domestic Chinese entities also compete in various product areas. Certain of these competitors, whether joint venture projects with foreign manufacturers or all-Chinese groups, often receive preferential treatment by the government regulatory authorities, who seek to curtail spending on imported equipment in favor of domestic Chinese industrial development. Although the Company competes directly with products of certain of such joint ventures and all-Chinese groups, the Company does not believe that this preference by the regulatory authorities is often applied to the material detriment of the Company. CHINA NATIONAL CONTRACT On April 15, 1994, the Company contracted with China National to provide, for a total of $11 million, engineering design and implementation for a sodium bichromate production plant with an annual production capacity of 20,000 metric tons. This contract and the work related to it are outside the ordinary course of the Company's business. However, because of certain third-party technology that was available to it at that time, the Company was able to successfully bid on the contract. Turn-key contracts of this nature are generally discrete projects, and the Company does not anticipate repeat business from China National. The Company also does not currently have or plan to have any other projects of this nature in the foreseeable future. The Company is responsible for the basic engineering design and transferring to China National certain manufacturing technological know-how licensed to the Company by AlliedSignal, Inc. ("AlliedSignal") for use in the production of sodium bichromate, chromic anhydride and chromium sulfate. The Company is also commissioned to procure key production equipment on China National's behalf. To date, the Company has completed the transfer of the basic engineering design and AlliedSignal's technology, and procurement of key production equipment. The first and second shipments of the equipment were made in 54 57 May 1997 and October 1997, respectively. After construction of the plant is complete and ready to commence production, the Company will provide plant commissioning services, including supervision of final construction, equipment installation and pre-operational testing. The contract with China National accounted for approximately 34% and 13% of the Company's revenues for the years ended December 31, 1995 and 1996, respectively, and approximately 67% and 28% of industrial equipment distribution revenues for the years ended December 31, 1995 and 1996, respectively. The decrease in revenues was due to a temporary suspension of the project imposed by the municipal government in February 1996, due to environmental concerns relating to China National's proposed methods for waste disposal by the plant. The revised proposal for waste management submitted by China National was approved by the municipal government and the temporary suspension was lifted in January 1997. The contract resumed following the lifting of the temporary suspension. All payments from China National are remitted to the Company in U.S. dollars. The Company has been advised by China National that they are currently negotiating with third party lenders for the necessary funds to complete the construction of the project. The Company is currently unable to predict the ultimate outcome of these discussions. In the event that China National is unsuccessful in its efforts to obtain such financing and construction efforts are suspended or terminated, the Company's anticipated revenues in the future with regard to this contract may be reduced. Based on an assessment of discussions with China National and the timing involved in obtaining the necessary funds, management of the Company does not expect that any significant revenues will be earned from this contract during the year ending December 31, 1998. If China National is unable to complete the project, management does not expect that the ultimate resolution of this matter will have a material adverse impact on the Company's financial position or cash flows. BACKGROUND OF THE COMPANY The Company was incorporated in the State of Delaware on November 4, 1988 as Sirone Corporation. On November 1, 1995, the Company changed its name to Zentex Corporation. For a period of time prior to November 11, 1996, under previous management, the Company was engaged in the distribution in the United States and Canada of a shampoo and conditioner treatment. In October 1996, the Company entered into an acquisition agreement (the "Acquisition Agreement") with BIC, BECL, and the Brighton Shareholders pursuant to which effective November 11, 1996 the Company acquired all of the issued and outstanding capital stock of BIC and BECL from the Brighton Shareholders in exchange for the issuance by the Company of a controlling interest in the Company to the Brighton Shareholders (the "Reverse Merger"). The business purpose of the Reverse Merger was to facilitate the consolidation of BIC and BECL into one publicly traded entity to attract investment in the Company. Pursuant to the Reverse Merger, and in furtherance of its new business plan, the Company's name was changed to "Brighton Technologies Corporation," and its symbol on the OTC Electronic Bulletin Board was changed to "BRTK." Immediately prior to the Reverse Merger, the Company had a total of 3,513,000 shares of Common Stock issued and outstanding. In connection with the Reverse Merger, the Company issued to the Brighton Shareholders an aggregate of 27,000,000 shares of Common Stock representing approximately 88% of the then outstanding shares of Common Stock of the Company. On November 11, 1996, a 1-for-3 reverse stock split was effected. Effective October 17, 1997, a second 1-for-3 reverse stock split was effected. On January 13, 1998, the Company's Board of Directors and stockholders authorized and approved a 1 for 3 reverse stock split, which will go into effect on January 26, 1998. All Common Stock and per share data have been restated to reflect the reverse stock splits. 55 58 Pursuant to the terms of the Acquisition Agreement, the Company transferred to two individuals who were part of the prior management (the "Transferees") all of its operating assets existing immediately subsequent to the closing of the Reverse Merger (excluding the shares of BIC and BECL) in exchange for the assumption by the Transferees of all of the liabilities of the Company as of the closing of the Reverse Merger and the delivery of a release of all obligations owed by the Company to an affiliate of the Transferees. In addition, at the closing of the Reverse Merger, each member of the Company's then Board of Directors resigned, and was replaced by representatives of the Brighton Shareholders. 56 59 THE COMPANY'S CORPORATE STRUCTURE The Company conducts its business through two principal subsidiaries: BIC and BECL. BIC acts as distributor of third party manufactured industrial equipment to customers in Pacific Basin countries with primary distribution to customers in China. BIC established a representative in Wuhan, China. BECL is an investment and holding company for Asian based investments focusing on information and industrial equipment related ventures in the Pacific Basin region. BECL holds investments in five second tier subsidiaries, four of which are companies organized under the laws of Hong Kong and one is a PRC joint venture company (the percentage of ownership of the issued and outstanding capital stock is denoted parenthetically): (i) Brighton OLTP Systems Limited ("Brighton OLTP") (100%); (ii) Aria China 59%; (iii) Brighton-Equipment (100%); (iv) Brighton Elevator Corporation Limited ("Brighton Elevator") (79%); and (v) Brighton-STAQ (90%). Brighton Equipment provides computer network integration to customers in Pacific Basin countries other than China. Brighton Elevator is a distributor of elevator and escalators in China. Both Brighton OLTP and Aria China are inactive companies. Brighton-STAQ is a PRC Sino-Hong Kong equity joint venture company that was formed to develop, design, install and maintain computer equipment for an automated securities trading and quotation system. The following is a diagram of the Company's structure: [BRIGHTON TECHNOLOGIES FLOWCHART] 57 60 GOVERNMENT REGULATION All foreign entities, businesses, persons and all onshore foreign investors, including Sino-foreign cooperative joint ventures, and Sino-foreign equity joint ventures, are prohibited from managing or participating in the management of any telecommunication business in China. In addition, all such telecommunication businesses are prohibited from structuring any foreign ownership of the management of such businesses. Participation in projects engaged in the leasing service industry is also prohibited to foreign entities, businesses, persons and all on-shore foreign investors. The Company believes that Brighton-STAQ does not violate the provisions of these regulations at the present time. The Company has received an opinion from its Chinese counsel, Zhong Xin Law Office, to the effect that the design, installation and maintenance of the STAQ On-line Network and the charge of a related maintenance fee by Brighton-STAQ does not violate any rules of the relevant Chinese Governmental agencies. The telecommunication services essential to the operation of the STAQ On-line Network will be provided by domestically licensed third-party providers (i.e., The People's Daily and ICBC). In addition, operation of the STAQ On-line Network is controlled directly by the STAQ Exchange. Revenue earned by Brighton-STAQ is for the maintenance and service of the equipment for the STAQ On-line Network. COMPLIANCE WITH ENVIRONMENTAL LAWS The Company has no material expenses and anticipates no material impact on its business occasioned by compliance with environmental laws. EMPLOYEES The Company and its subsidiaries have approximately 130 full-time employees of which over 80% are professionals with specialized skills. There are 32 employees based in Hong Kong, 88 based in China and 10 in the Company's corporate office in Allendale, New Jersey, U.S.A., which serves as technical support base for the Asian operations. Of the 88 employees in China, 27 are dedicated to sales related activities for the industrial equipment distribution business segment and 18 are engineering and technical support personnel in the computer network integration business segment. PROPERTIES NEW JERSEY. The Company and BIC currently occupy facilities leased by BIC in Allendale, New Jersey consisting of 5,000 square feet. The lease expires on July 31, 2001. HONG KONG. BECL and its subsidiaries occupy facilities leased by BECL in Quarry Bay, Hong Kong consisting of office B and D1 on the 14th floor of Aik San Factory Building. The lease expires on February 28, 1998. BEIJING. The facilities occupied by Brighton-STAQ in the Ritan Office Building, Chao Yang District, Beijing are under two separate lease agreements. Both leases expire on April 30, 1999. SHANGHAI. Brighton-STAQ signed a two-year lease for its branch office, effective September 1, 1997 and expiring August 31, 1999, for office space in Shanghai, consisting of Suite D and E on the 5th Floor of the Nan Yang Properties Building. 58 61 SHENZHEN. The Brighton Elevator Shenzhen representative office occupies office space in the Shenzhen Beijing Hotel in Shenzhen. The lease expires June 30, 1998. WUHAN. The Brighton Elevator Wuhan representative office occupies 120 square feet of office space in Wuhan. The lease expires on October 1, 1998. At such time, the BIC Wuhan representative office will assume the remainder of the lease. PATENTS AND TRADEMARKS The Company owns no registered patents or trademarks. The Company believes that its business is not materially dependent on any patent or trademark. LEGAL MATTERS The Company is either a plaintiff or a defendant in several pending legal matters. In the opinion of management, the final resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations. 59 62 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table and text sets forth the names and ages of all directors and executive officers of the Company and the key management personnel as of December 31, 1997. The Board of Directors of the Company is comprised of only one class. All of the directors will serve until the next annual meeting of stockholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. Executive officers serve at the discretion of the Board of Directors, and are appointed to serve until the first Board of Directors meeting following the annual meeting of stockholders. Except as otherwise noted, there are no family relationships among directors and executive officers. Also provided is a brief description of the business experience of each director and executive officer and the key management personnel during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements under the Federal securities laws.
NAME AGE POSITION ---- --- -------- BRIGHTON TECHNOLOGIES CORPORATION Kit Kung 47 Chairman of the Board, President and Chief Executive Officer Robert N. Weingarten 45 Chief Financial Officer Warren Wang 50 Secretary and Chief Accounting Officer Hong Yun 43 Director; Vice President/General Manager of The Brighton Industries Corporation Nils Ollquist 42 Director Michael Muldavin 77 Director KEY MANAGEMENT PERSONNEL Edith Wong 47 General Manager Brighton Electronics Corporation Ltd. (Hong Kong) He Ping 38 General Manager Beijing Brighton Staq Electronic System Company Limited (Beijing) Lu Jian Guo 39 General Manager Beijing Brighton Staq Electronic System Company Limited - Shanghai Branch Office (Shanghai) Ma Yong Jun 31 Manager of Finance and Administration Brighton Electronic Corporation Ltd. (Beijing)
63 63 BACKGROUND AND EXPERIENCE KIT KUNG has been Chairman of the Board, President and Chief Executive Officer of the Company since October 1996. Mr. Kung is the Founder of BECL. He was born in Shanghai and emigrated to the United States in 1974. He re-visited China in 1980, and by 1981 was the first ever to legally export 32-bit computers from the United States into China; those first computers being two sets of VAX computer systems from Digital Equipment Corporation. From that profile, he established an extensive network of customers and relationships in China. Mr. Kung graduated from Rutgers University with a degree in Physics and is a citizen of the United States. Mr. Kung has been listed in the "Who's Who Worldwide" publication since 1993 and the "Outstanding Americans" publication since 1994. He is the husband of Hong Yun. ROBERT N. WEINGARTEN has served as Chief Financial Officer of the Company since November 3, 1997. Mr. Weingarten has agreed to devote, as necessary, up to 80% of his time to serve in this position. From July 1992 to present, Mr. Weingarten has been the sole shareholder of Resource One Group, Inc., a financial consulting and advisory company. From January 1, 1997 through July 31, 1997, Mr. Weingarten was a principal in Chelsea Capital Corporation, a merchant banking firm. From January 1991 through December 1992, Mr. Weingarten served as a general partner of Commerce Partners, a consulting firm specializing in financial restructurings and business reorganizations in financial restructurings and business reorganizations. Since 1979, Mr. Weingarten has served as a consultant with numerous public companies in various stages of development, operation or reorganization. Mr. Weingarten currently serves as a director of Fotoball USA, Inc. and as an officer and director of GolfGear International, Inc., both of which are publicly held companies specializing in sports-related products. Mr. Weingarten received an M.B.A. in Finance from the University of Southern California and a B.A. in Accounting from the University of Washington. WARREN WANG has been Secretary and Chief Accounting Officer of the Company since November 1996. From 1981 to 1996, he was Vice President-Finance at Seavest, Inc. (a financial investment firm with interests in real estate, securities, oil and gas, and other capital ventures). From 1979 to 1980, he was the Accounting Manager at Mailman Brothers. From 1977 to 1978, he was with the CPA firm of Louis Sturz & Co. From 1975 to 1977, he was an accountant with Western Union International, Inc. Mr. Wang is a certified public accountant and received his B.B.A. in accounting from the Bernard M. Baruch College of the City University of New York. HONG YUN has been a director of the Company since October 1996. She founded BIC in 1989 and is the individual responsible for developing the industrial equipment business into a significant operation. Ms. Yun is a native of Beijing and a U.S. citizen by naturalization. Ms. Yun graduated from Beijing University of Beijing, China specializing in electronics engineering. She is the wife of Kit Kung. NILS A. OLLQUIST has been a director of the Company since October 1996. Mr. Ollquist also held the positions of Chief Financial Officer and Vice President of the Company until his resignation, in November 1997. He is also a Principal of Orient Financial Services Limited in Hong Kong. Mr. Ollquist has fifteen years of experience in investment banking and corporate finance in Hong Kong, the United States and Australia. Prior to creating Orient Financial in 1993, he served as head of Bank of America's mergers and acquisitions group in Asia. Before joining Bank of America in 1990, Mr. Ollquist was Director and head of Security Pacific Australia's U.S. corporate finance and investment banking activities. He worked for several years in Sydney with Amsterdam Rotterdam Bank and Barclays Bank from 1980 to 1984. Prior to commencing his investment banking career, Mr. Ollquist served for 5 years in the Australian Treasury in Canberra. He holds degrees in Economics and Law from the Australian National University. 64 64 MICHAEL MULDAVIN has been a director of the Company since October 1996. Mr. Muldavin, currently a visiting professor at the University of California at Los Angeles, was a pioneer in China trading, having assumed responsibility for the family trading business in Heilongjiang province before WWII. In 1979, Mr. Muldavin was invited by the Chinese Government to establish a joint Chinese language magazine "Science & Technology Review." In recent years, Mr. Muldavin has been involved in a total of more than 80 joint venture investments in China including agribusiness, automotive and media/data systems and communications. Mr. Muldavin founded the Benchmark Company Group, an investment consultancy and advisory firm, and has consulted on investments and ventures in China, Russia and Vietnam since 1980. Mr. Muldavin received his B.S. in mathematics and engineering, M.S. in economics, joint PhDs in economics and public administration and J.D. from Harvard College. Mr. Muldavin also holds a M.P.H. (medical care administration and epidemiology) from the University of California, Los Angeles. EDITH WONG is the General Manager of BECL and is responsible for the day-to-day operations of BECL and its Hong Kong subsidiaries. Ms. Wong has worked with Mr. Kung in his computer integration and industrial equipment businesses since 1984. Ms. Wong received her Bachelors Degree in Business Administration and Post-graduate Diploma in Purchasing and Supply from Polytechnic of North London. Ms. Wong is a resident of Hong Kong. HE PING is the General Manager of Brighton-STAQ. Mr. He joined the Company as the Deputy General Manager and then Acting General Manager of Brighton-STAQ project in September 1994, and was promoted to his current position. Prior to joining the Company, Mr. He was the Business Development Officer and Administrative Executive in the Beijing representative office of Imperial Chemical Industry since 1993. Mr. He graduated from Beijing TV University in 1988 and was a graduate of the China-Europe Management Institute MBA program in 1993. Mr. He is a native of Beijing and a Chinese national. LU JIAN GUO is based in the Brighton-STAQ Shanghai branch office and is responsible for the Eastern China operations of the Company. Mr. Lu joined BIC in 1995 as the Deputy General Manager of Eastern Region operations. Prior to joining the Company, Mr. Lu held a number of managerial positions with Sino-Foreign joint venture companies in southern and eastern China from 1991 to 1995. Mr. Lu graduated from Eastern Normal China University in 1983 majoring in mechanical design. He was a lecturer for Shanghai University from 1983 to 1991. Mr. Lu is a native of Shanghai and a Chinese national. MA YONG JUN was employed by BECL in September 1994 as the Manager of Finance and Administration for BECL's Beijing based operations. Prior to joining Brighton, Mr. Ma worked as the Accounting Executive and Financial Manager for Bei Chen Group, a large scale real estate company, from 1990 to 1994. Mr. Ma has had more than eight years in managing financial and administrative matters. Presently, Mr. Ma is responsible for the corporate planning for the China based operations for BIC and BECL. Mr. Ma graduated from the University of Beijing Finance & Accounting College majoring in Finance in 1986. Mr. Ma is native of Beijing and a Chinese national. EXECUTIVE COMPENSATION The following table sets forth the compensation paid during fiscal years ended December 31, 1995 and 1996 to the Company's Chief Executive Officer. No officer of the Company received annual compensation in excess of $100,000 per annum. 65 65 SUMMARY COMPENSATION TABLE
Name and Principal Position Year Salary Kit Kung, Chairman, President and Chief 1996 $80,000 Executive Officer 1995 $80,000
COMPENSATION AGREEMENTS There are currently no long-term employment or consulting agreements between the Company and the executive officers or directors of the Company. BOARD OF DIRECTORS During the year ended December 31, 1996, no meetings of the Board of Directors were held; all corporate actions were conducted by unanimous written consent of the Board of Directors. Directors receive no compensation for serving on the Board of Directors, but are reimbursed for any out-of-pocket expenses incurred in attending board meetings. The Company had no audit, nominating or compensation committees, or committees performing similar functions, during the year ended December 31, 1996. Subsequent to the Offering, the Company will be required under the Nasdaq SmallCap Market listing rules to have at least two independent directors and to form an audit committee with a majority of the members being independent directors. STOCK OPTION PLAN As of December 31, 1997, the Company has not adopted a stock option plan. LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS The Company's Restated Certificate of Incorporation includes provisions which limit the liability of its directors. As permitted by applicable provisions of the Delaware Law, directors will not be liable to the Company for monetary damages arising from a breach of their fiduciary duty as directors in certain circumstances. This limitation does not affect liability for any breach of a director's duty to the Company or its stockholders (i) with respect to approval by the director of any transaction from which he or she derives an improper personal benefit, (ii) with respect to acts or omissions involving an absence of good faith, that the director believes to be contrary to the best interests of the Company or its stockholders, that involve intentional misconduct or a knowing and culpable violation of law, that constitute an unexcused pattern or inattention that amounts to an abdication of his or her duty to the Company or its stockholders, or that show a reckless disregard for duty to the Company or its stockholders in circumstances in which he or she was, or should have been aware, in the ordinary course of performing his or her duties, of a risk of serious injury to the Company or its stockholders, or (iii) based on transactions between the Company and its directors or another corporation with interrelated directors or based on improper distributions, loans or guarantees under applicable sections of Delaware Law. This limitation of directors' liability also does not affect the availability of equitable remedies, such as injunctive relief or rescission. 66 66 The Company has been advised that it is the position of the Commission that insofar as the provision in the Company's Restated Certificate of Incorporation may be invoked for liabilities arising under the Securities Act, the provision is against public policy as expressed in the Securities Act and is therefore unenforceable. KEY MAN INSURANCE The Company will, prior to the completion of the Offering, obtain and maintain a $2,000,000 term life insurance policy covering Kit Kung which names the Company as the sole beneficiary. 67 67 PRINCIPAL STOCKHOLDERS The following table sets forth certain information as of the date of this Prospectus with respect to (i) the beneficial ownership of the Common Stock of the Company by each beneficial owner of more than 5% of the outstanding shares of Common Stock of the Company, each director, each executive officer and all executive officers and directors of the Company as a group, (ii) the number of shares of Common Stock owned by each such person and group and (iii) the percent of the Company's Common Stock so owned. As used in this section, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Exchange Act as consisting of sole or shared voting power (including the power to vote or direct the vote) and/or sole or shared investment power (including the power to dispose of or direct the disposition of) with respect to the security through any contract, arrangement, understanding, relationship or otherwise, subject to community property laws where applicable. Each person has sole voting and investment power with respect to the shares of Common Stock, except as otherwise indicated. Beneficial ownership consists of a direct interest in the shares of Common Stock, except as otherwise indicated.
PERCENTAGE OF PERCENTAGE OF NUMBER OF SHARES OF OUTSTANDING COMMON OUTSTANDING COMMON NAME AND ADDRESS OF COMMON STOCK STOCK BENEFICIALLY STOCK BENEFICIALLY BENEFICIAL OWNER BENEFICIALLY OWNED OWNED BEFORE OFFERING OWNED AFTER OFFERING Kit Kung 937,642(1),(2) 80.5% 43.3% c/o Brighton Technologies Corporation 6 Pearl Court Allendale, NJ 07401 Hong Yun 55,556(3) 4.8% 2.6% c/o Brighton Technologies Corporation 6 Pearl Court Allendale, NJ 07401 Nils Ollquist 3,890 0.3% 0.2% c/o Orient Financial Services 13C, Chinaweal Centre 414-424 Jaffe Road Wanchai, Hong Kong Robert N. Weingarten -- -- -- c/o Brighton Technologies Corporation 6 Pearl Court Allendale, NY 07401 Warren Wang -- -- -- c/o Brighton Technologies Corporation 6 Pearl Court Allendale, NJ 07401
68 68
PERCENTAGE OF PERCENTAGE OF NUMBER OF SHARES OF OUTSTANDING COMMON OUTSTANDING COMMON NAME AND ADDRESS OF COMMON STOCK STOCK BENEFICIALLY STOCK BENEFICIALLY BENEFICIAL OWNER BENEFICIALLY OWNED OWNED BEFORE OFFERING OWNED AFTER OFFERING Michael Muldavin -- -- -- c/o Brighton Technologies Corporation 6 Pearl Court Allendale, NJ 07401 All Directors and 997,088 85.6% 46.1% executive Officers as a group (6 persons)
(1) Does not include 55,556 shares of Common Stock owned by Hung Yun, Mr. Kung's wife. Mr. Kung disclaims beneficial ownership of such shares. (2) On April 15, 1997, Mr. Kung executed an agreement granting two individuals, who are also stockholders, an option to purchase an aggregate of 6,803 shares of Common Stock owned by Mr. Kung at the exercise price of $4.50 per share through June 30, 1998. Such options have not yet been exercised and the shares of Common Stock underlying such options are included herein. (3) Does not include 937,642 shares of Common Stock owned by Kit Kung, Ms. Yun's husband. Ms. Yun disclaims beneficial ownership of such shares. CHANGES IN CONTROL The Company is unaware of any contract or other arrangement, the operation of which may at a subsequent date result in a change in control of the Company. 69 69 CERTAIN TRANSACTIONS In order to meet its working capital requirements, the Company has periodically received funding from Kit Kung, the Chairman of the Board of Directors, President and Chief Executive Officer, and his family members. The Company has also periodically made advances to the principals and officers of the Company. The advances relate to personal travel and related expenses incurred on corporate charge cards. Such advances are unsecured and generally bear no stated interest rate or terms of repayment. As of December 31, 1995 and 1996, amounts due from Kit Kung and his family members aggregated $0 and $43,239, respectively; outstanding receivables from other related parties aggregated $8,220 and $15,884, respectively; and amounts due to Kit King and his family members aggregated $2,612,896 and $227,298, respectively. At December 31, 1995, BIC had a net receivable, funded by advances from Kit Kung, from Brighton Information Systems Corporation (now known as Greater China Corporation) of $493,751. Kit Kung had previously served as a director and officer of Greater China Corporation until his resignation in September 1994 but continued to serve as officer and director of certain subsidiaries until January 1997. In partial settlement of this indebtedness, the Company received an assignment of fixed assets and accounts receivable during 1996 valued at $381,433, resulting in a balance of $112,318. During the year ended December 31, 1995, Kit Kung and his family members had advanced $1,612,041 to the Company, and during the year ended December 31, 1996, the Company had repaid $1,118,625 of such advances. During the years ended December 31, 1995 and 1996, advances to other related parties aggregated $518,322 and $43,239, respectively, and during the year ended December 31, 1996, $424,872 of accounts receivable from related parties was repaid. Through November 1996, BECL had $248,103 of advances to affiliates of Greater China Corporation, which were funded by advances from Kit Kung. Kit Kung agreed to assume responsibility for settlement of such advances (and the previously described balance of $112,318 owed to BIC) and such amounts were offset against advances to stockholders. In December 1996, Kit Kung contributed approximately $1,266,973 of net borrowings, consisting of $1,515,076 of the net amounts owed by the Company to Kit Kung less $248,103 of amounts Kit Kung owed to the Company, to contributed capital. During September 1997, Kit Kung sold project equipment to the Company with a fair market value of $185,950, which is equivalent to the price that the Company would have had to pay to purchase such equipment in the open market, in exchange for an equivalent reduction in the amount due the Company from Kit Kung. During the nine months ended September 30, 1997, the Company advanced $349,834 to Kit Kung and his family members and repaid amounts due Kit Kung and his family members aggregating $227,298, resulting in receivables from stockholders and related parties of $200,668 at September 30, 1997, net of a credit of $185,950 resulting from the sale of certain equipment for the STAQ On- line Network project from Kit Kung as described above. During December 1997, in order for the Company to arrange the purchase of certain equipment for a customer, Hong Yun, an officer and director of the Company and the wife of Kit Kung, provided a short-term credit facility by depositing $500,000 into a short-term interest bearing account with a Hong Kong bank as security for the bank's letter of credit of approximately $2,145,000 issuable to a supplier. Subsequent to the completion of the Offering, the Company will adopt a policy to the effect that any future transactions between it and its officers, directors, principal stockholders and the affiliates 70 70 of the foregoing persons be on terms no less favorable to the Company than could reasonably be obtained in arm's length transactions with independent parties, and that any such transactions be approved by a majority of the Company's independent directors disinterested in the transaction. The Company has in the past relied on Kit Kung and his family members, from time to time, for financing requirements and assistance. All prior financing and other assistance were provided on a case by case basis with no commitment to provide any such financing or assistance in the future by Kit Kung or his family members. During the year ended December 31, 1996, $105,731 was paid to Orient Financial Services Limited, a Hong Kong-based company in which Nils A. Ollquist is a principal: $60,000 was paid as a retainer fee with respect to advisory services provided in relation to the reverse merger with Zentex Corporation (the former name of the Company) and fund raising activities and $45,731 was reimbursement of travel and related expenses. During the nine months ended September 30, 1997, $19,308 was paid to Orient Financial Services Limited. DESCRIPTION OF SECURITIES GENERAL The Company is authorized by its Restated Certificate of Incorporation to issue an aggregate of 100,000,000 shares of Common Stock, par value $.001 per share, and 5,000,000 shares of preferred stock, par value $.001 per share, which preferred stock may be issued with such rights, designations and privileges (including redemption and voting rights) as the Board of Directors may, from time to time, determine. The following summary descriptions are qualified in their entirety by reference to the Company's Restated Certificate of Incorporation, a copy of which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. COMMON STOCK The Company is authorized to issue 100,000,000 shares of Common Stock, par value $.001 per share. As of December 31, 1997, 1,165,111 shares of Common Stock were issued and outstanding and held of record by 91 stockholders. Each stockholder is entitled to one vote per share of Common Stock owned by such stockholder on all matters submitted to a vote of the stockholders. The Common Stock is not entitled to preemptive rights and is not subject to redemption. Subject to the dividend rights of holders of any then outstanding preferred stock, holders of Common Stock are entitled to receive dividends at such times and in such amounts as the Board of Directors, from time to time, may determine. Subject to the liquidation preference of any then outstanding preferred stock, holders of Common Stock are entitled to receive, on a pro rata basis, all remaining assets of the Company available for distribution to the holders of Common Stock in the event of the liquidation, dissolution or winding up of the Company. All outstanding shares of Common Stock are, and the shares of the Common Stock issued pursuant to the Offering will be, validly issued, fully paid and non-assessable. 71 71 PREFERRED STOCK The Board of Directors has the authority to cause the Company to issue, without any further vote or action by the stockholders, up to 5,000,000 shares of preferred stock, par value $.001 per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders. The issuance of preferred stock with voting and conversion rights may adversely effect the voting power of the holders of Common Stock, including the loss of voting control. The Company has no present plans to issue any shares of preferred stock. WARRANTS The Warrants sold in the Offering will be issued pursuant to a warrant agreement (the "Warrant Agreement") among the Company, the Representative and Continental Stock Transfer & Trust Co. (the "Warrant Agent"), and will be evidenced by warrant certificates in registered form. The following summary is qualified in its entirety by the text of the Warrant Agreement. Each Warrant entitles the registered holder thereof to purchase one share of Common Stock at a price of 150% of the offering price per Unit at any time commencing _______________, 1999 until _______________, 2003, unless previously redeemed. The Warrants comprising part of the Units will not be transferable separately from the Units until ____________, 1998, unless earlier separated upon three days' prior written notice from the Representative at the sole discretion of the Representative. The Warrants are subject to redemption by the Company at a price of $0.10 per Warrant, at any time commencing _______________, 1999, on 30 day's prior written notice, provided that the closing price per share of the Common Stock has equaled or exceeded $____________ (150% of the offering price) for twenty consecutive trading days within the thirty-day period immediately preceding such notice. The exercise price of the Warrants and the number of shares of Common Stock or other securities issuable upon the exercise thereof are subject to adjustment in certain circumstances, including, but not limited to, any stock dividend on the Common Stock, any subdivision, combination or reclassification of the Common Stock, any distribution to all stockholders or rights, warrants or options to subscribe for or purchase shares of Common Stock (or securities convertible into Common Stock), or any distribution to all stockholders of assets or evidence of indebtedness of the Company. Adjustments also would be made upon a merger or consolidation where the Company is not the surviving entity, or the sale of all or substantially all of the assets of the Company, so as to enable warrantholders to purchase the kind and number of shares of stock or other securities or property (including cash) receivable in such event by a holder of the number of shares of Common Stock that might otherwise have been purchased upon exercise of such Warrant. The exercise price of the Warrants bears no relation to any objective criteria of value and should not be regarded as an indication of the future market price of the Securities offered hereby. The Warrants do not confer upon the holder any voting or any rights of a stockholder of the Company. Upon written notice to the warrantholders, the Company has the right to reduce the exercise price or extend the expiration date of the Warrants. 72 72 SECTION 203 OF DELAWARE LAW Section 203 of the Delaware Law prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless (i) prior to the date of the business combination, the transaction is approved by the board of directors of the corporation; (ii) upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the outstanding voting stock, or (iii) on or after such date, the business combination is approved by the board of directors and by the affirmative vote of at least 66-2/3% of the outstanding voting stock that is not owned by the interested stockholder. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person, who, together with affiliates and associates, owns (or within three years, did own) 15% or more of the corporation's voting stock. Section 203 may have a depressive effect on the market price of the Common Stock and/or the Units. TRANSFER AGENT The Company has appointed Continental Stock Transfer & Trust Co., New York, New York, as transfer agent for the Units. 73 73 SHARES ELIGIBLE FOR FUTURE SALE Prior to this Offering, there has been no public market for the Units or the Redeemable Warrants. No prediction can be made of the effect, if any, that future market sales of the Common Stock, the Redeemable Warrants or the availability of such shares or warrants for sale will have on the prevailing market price of the securities following this Offering. Nevertheless, sales of substantial amounts of such shares or warrants in the open market following this Offering could adversely affect the prevailing market price of the Units or the Common Stock. Upon completion of the Offering, the Company will have 1,165,111 shares of Common Stock outstanding, of which 1,031,279 shares are "restricted securities" as that term is defined in Rule 144 under the Securities Act and, under certain circumstances, may be sold without registration pursuant to Rule 144. Generally, under Rule 144, each person holding restricted securities of a period of one year may, every three months, sell in ordinary brokerage transactions or to market makers an amount of shares equal to no more than the greater of 1% of the Company's then outstanding Common Stock or the average weekly trading volume for the four weeks prior to the proposed sale. This limitation on the amount of shares which may be sold under the Rule 144 does not apply to restricted securities sold for the account of a person who is not or has not been an affiliate of the Company during the three months prior to the sale and who has beneficially owned the restricted securities for at least two years. The Company's officers, directors and substantially all of its principal stockholders have agreed not to publicly sell any securities of the Company owned by them without the written consent of the Underwriters prior to _________________, 1999. Any sales of restricted securities must be in compliance with Rule 144, pursuant to registration under the Securities Act or pursuant to an exemption therefrom. The public sale of restricted securities pursuant to Rule 144, an effective registration statement, or otherwise, may have an adverse affect on the market price of the Common Stock. The 133,832 share balance of the 1,165,111 shares of Common Stock currently outstanding plus the 1,000,000 shares of Common Stock issuable upon exercise of the Warrants are freely tradable. UNDERWRITING The Underwriters named below, for whom the Representative is acting as representative, has agreed, subject to the terms and conditions of the Underwriting Agreement between the Company and the Underwriters (the "Underwriting Agreement"), to purchase from the Company, and the Company has agreed to sell to the Underwriters on a firm commitment basis, the respective number of Units set forth opposite their names:
Underwriter Number of Units ----------- --------------- National Securities Corporation......................... ___________ ............................................ Total................................................... 1,000,000 =========
The Underwriters are committed to purchase all of the Units offered hereby, if any of such Units are purchased. The Underwriting Agreement provides that the obligations of the several Underwriters are subject to conditions precedent specified therein. The Company has been advised by the Representative that the Underwriters propose initially to offer the Units to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such prices less concessions not in excess of $___ per Unit. Such dealers may re-allow a concession not in excess of $___ per Unit to certain other dealers. After the initial public offering, the public offering price concession and reallowance may be changed by the Representative. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the Underwriters may be required to make. The Company has agreed to pay to the Representative a non-accountable expense allowance equal to 3% of 74 74 the gross proceeds of the Offering, of which $25,000 has already been paid. The Company has also agreed to pay all of the costs of qualifying the Units under federal and state securities laws, together with legal and accounting fees, printing and other costs in connection with the Offering. The Company has granted to the Underwriters an over-allotment option exercisable for 45 days from the date of this Prospectus, to purchase up to 150,000 Units at the initial public offering price per Unit offered hereby, less underwriting discounts and commissions, if any (the "Over-Allotment Option"). The Underwriters may exercise this option, in whole or in part, from time to time, solely for the purpose of covering over-allotments, if any, made in connection with the sale of the Units. To the extent the Over-Allotment Option is exercised in whole or in part, each Underwriter will have a firm commitment, subject to certain conditions, to purchase the number of Units proportionate to its initial commitment. Such option may be exercised only for the purpose of covering over-allotments, if any, incurred in the sale of the Units offered hereby. In connection with the Offering, the Company has agreed to sell to the Representative and its designees, for nominal consideration, warrants to purchase from the Company up to 100,000 Units (the "Representative's Warrants"). The Representative's Warrants are initially exercisable at a price of $___ per Unit (120% of the initial public offering price per Unit) for a period of five years commencing on the effectiveness of the Offering. The Representative's Warrants may not be sold, transferred, assigned or hypothecated for a period of one year from the date of this Prospectus, except to officers and directors of the Representative. The Representative's Warrants provide for adjustments in the number of shares of Common Stock and Warrants and in the exercise price of the Representative's Warrants as a result of certain events, including subdivisions and combinations of the Securities. The Representative's Warrants grant to the holders thereof certain rights of registration for the Common Stock and Warrants issuable upon exercise of the Representative's Warrants. The Company and all of the officers, directors and holders of all outstanding securities of the Company as of the date of this Prospectus have agreed not to, without the Representative's prior written consents, sell, transfer, assign, pledge, hypothecate or otherwise dispose of any equity securities of the Company, or any securities convertible into, or exercisable or exchangeable for, any equity securities of the Company, for a period of 13 months following the effective date of the Registration Statement, except pursuant to the Over-Allotment Option. An appropriate legend shall be marked on the reverse of the certificates representing such securities. The Company has agreed that, for a period of five (5) years from the date of this Prospectus, if so requested by the Representative, the Company shall nominate and use its best efforts to cause an individual designated by the Representative to be elected as a member of the Board of Directors of the Company. In the event that the Representative elects not to designate a person to serve on the Board of Directors of the Company, the Representative shall have the right to designate one person to attend meetings of the Board of Directors of the Company. Such person shall be entitled to attend all such meetings and to receive all notices and other correspondence and communications sent by the Company to members of its Board of Directors. The Company's officers, directors and stockholders have agreed to vote their shares of Common Stock in favor of such designee. The Representative has not yet exercised its right to designate such a person. The Company has agreed to reimburse the designee of the Representative for such designee's out-of-pocket expenses incurred in connection with such designee's attendance of meetings of the Company's Board of Directors. Prior to the Offering, there has been no public trading market for the Units. Consequently, the initial public offering price of the Units has been determined by negotiations between the Company and the Representative and does not necessarily bear any relationship to the Company's asset value, net worth, or other 75 75 established criteria of value. Among the factors considered in determining the offering price, in addition to prevailing market conditions, were the Company's financial condition, prospects and management. There can be no assurance however, that the price at which the Units will sell in any public market after the Offering will not be lower than the offering price. Neither the Representative nor any of the participants of the underwriting group have a material relationship with the promoters, officers and/or directors of the Company. In connection with the Offering, certain Underwriters and selling group members and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of the Units. Such transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M, pursuant to which, such person may bid for or purchase Units for the purpose of stabilizing its market price. The Underwriters also may create a short position for the account of the Underwriters by selling more Units in connection with the Offering than they are committed to purchase from the Company, and in such case may purchase Units in the open market following completion of the Offering to cover all or a portion of such short position. The Underwriters may also cover all or a portion of such short position by exercising the Over-Allotment Option. In addition, the Representative, on behalf of the Underwriters, may impose "penalty bids" under contractual arrangements with the Underwriters whereby they may reclaim from an Underwriter (or dealer participating in the Offering) for the account of other Underwriters, the selling concession with respect to Units that are distributed in the Offering but subsequently purchased for the account of the Underwriters in the open market. Any of the transactions described in this paragraph may stabilize or maintain the price of the Units at a level above that which might otherwise prevail in the open market. None of the transactions described in this paragraph is required, and, if they are undertaken, they may be discontinued at any time. The foregoing is a brief summary of the agreements described above and does not purport to be complete. Reference is made to copies of each such agreement which are filed as exhibits to the Registration Statement. See "ADDITIONAL INFORMATION." LEGAL MATTERS The validity of the shares of Units offered hereby will be passed upon for the Company by Loeb & Loeb LLP, Los Angeles, California. Camhy Karlinsky & Stein LLP, New York, New York, has acted as counsel for the Underwriters in connection with the Offering. EXPERTS The 1996 financial statements and schedules included in this Prospectus and in the Registration Statement have been audited by BDO Seidman, LLP, independent certified public accountants, to the extent and for the period set forth in their report appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such report given upon the authority of said firm as experts in auditing and accounting. The 1995 financial statements and schedules included in this Prospectus and in the Registration Statement have been audited by Russo and Shapiro and Francis S. L. Yan & Co., independent certified public accountants, to the extent and for the period set forth in their reports appearing elsewhere herein and in the Registration Statement, and are included in reliance upon such reports given upon the authority of said firm as experts in auditing and accounting. 76 76 CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT Effective October 23, 1996, Zentex Corporation ("Zentex"), formerly known as Sirone Corporation, an inactive non-reporting public company, acquired BIC and BECL in a transaction accounted for as a reverse merger, and was renamed Brighton Technologies Corporation ("Brighton") on November 12, 1996. Accordingly, BIC and BECL are each wholly-owned subsidiaries of the Company, and Brighton, BIC and BECL are collectively referred to herein as the "Company". Tanner & Co. audited the financial statements of Zentex for the years ended December 31, 1993 and 1994, and certain prior periods. Zentex's financial statements were not audited for the year ended December 31, 1995. As a result of the reverse merger, Tanner & Co. was dismissed as Zentex's independent accountants effective December 3, 1996. The decision to dismiss Tanner & Co. was approved by the Company's board of directors. Tanner & Co.'s reports for the years ended December 31, 1993 and 1994 did not contain an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles. During the years ended December 31, 1993 and 1994, and the period from January 1, 1995 to December 3, 1996, there were no disagreements with Tanner & Co. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Tanner & Co., would have caused such firm to make reference to the subject matter of the disagreements in connection with its reports on Zentex's financial statements. The Company has provided Tanner & Co. with a copy of the disclosures contained herein, and Tanner & Co. has furnished the Company with a letter addressed to the Commission confirming that it agrees with the statements made by the Company in response to Item 304(a) of Regulation S-B under the Securities Act regarding such firm's involvement with Zentex as independent accountants. Russo and Shapiro audited the consolidated financial statements of the Company for the year ended December 31, 1995, on the basis that the reverse merger had occurred effective January 1, 1995. Russo and Shapiro was dismissed as independent accountants of the Company effective December 3, 1996. The decision to dismiss Russo and Shapiro was approved by the Company's board of directors. Russo and Shapiro's report on such financial statements for the year ended December 31, 1995 did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles. In connection with Russo and Shapiro's audit of the consolidated financial statements of the Company for the year ended December 31, 1995, BECL's financial statements were audited by Francis S.L. Yan & Co., whose report was furnished to Russo and Shapiro. Russo and Shapiro's opinion, insofar as it related to amounts included for BECL in the consolidated financial statements for the year ended December 31, 1995, was based solely on the report of Francis S.L. Yan & Co. As a result of the dismissal of Russo and Company, Francis S.L. Yan & Co. was also dismissed. The decision to dismiss Francis S.L. Yan & Co. was approved by the Board with the consent of the majority of the Company's stockholders. Francis S.L. Yan & Co.'s report on such financial statements for the year ended December 31, 1995 did not contain an adverse opinion or a disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles. During the year ended December 31, 1995, and the period from January 1, 1996 to December 3, 1996, there were no disagreements with Russo and Shapiro on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not 77 77 resolved to the satisfaction of Russo and Shapiro, would have caused such firm to make reference to the subject matter of the disagreements in connection with its report on the Company's financial statements. During the year ended December 31, 1995, and the period from January 1, 1996 to November 11, 1997, there were no disagreements with Francis S.L. Yan & Co. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Francis S.L. Yan & Co., would have caused such firm to make reference to the subject matter of the disagreements in connection with its report on BECL's financial statements. The Company has provided Russo and Shapiro with a copy of the disclosures contained herein, and Russo and Shapiro has furnished the Company with a letter addressed to the Commission confirming that it agrees with the statements made by the Company in response to Item 304(a) regarding such firm's involvement with the Company as independent accountants. The Company has provided Francis S.L. Yan & Co. with a copy of the disclosures contained herein, and Francis S.L. Yan & co. has furnished the Company with a letter addressed to the Securities and Exchange Commission confirming that it agrees with the statements made by the Company in response to Item 304(a) regarding such firm's involvement with BECL as independent accountants. Effective December 3, 1996, the Company engaged BDO Seidman, LLP as the Company's independent accountants to audit the Company's consolidated financial statements for the year ended December 31, 1996. Prior to the engagement of BDO Seidman, LLP, the Company did not consult with such firm regarding the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, or any matter that was either the subject of a disagreement or a reportable event. The Company has provided BDO Seidman, LLP with a copy of the disclosures contained herein, and BDO Seidman, LLP has indicated that no letter will be provided containing any new information, clarification of the Company's expression of its views, or the respect in which it does not agree with the statements made by the Company in response to Item 304(a). 78 78 ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission, Washington, D.C. 20549, a registration statement ("Registration Statement"), together with exhibits thereto, under the Securities Act with respect to the Units offered hereby. This Prospectus, which constitutes a part of the Registration Statement, omits certain of the information set forth in the Registration Statement in accordance with the rules and regulations of the Commission. For further information with respect to the Company and to the Units offered hereby, reference is made to such Registration Statement and such exhibits filed as a part thereof. Statements contained in this Prospectus as to the content of any contract or other document referred to are not necessarily complete, and in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement and exhibits can be inspected and copied at the public reference section at the Commission's principal office, 450 5th Street, N.W., Judiciary Plaza, Washington, D.C. 20549, the Commission's Regional Offices located at the Northwestern Atrium Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511, and 7 World Trade Center, 13th Floor, New York, New York 10048 and through the Commission's Web site (http://www.sec.gov). Copies may be obtained from the Commission's principal office upon payment of the fees prescribed by the Commission. 79 79 BRIGHTON TECHNOLOGIES CORPORATION Brighton Technologies Corporation and Subsidiaries Index to Consolidated Financial Statements
Page Number ------ AUDITED CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 Report of Independent Certified Public Accountants - Russo and Shapiro.........................................................F-2 Francis S.L. Yan & Co.....................................................F-3 BDO Seidman, LLP..........................................................F-5 Consolidated Balance Sheets - December 31, 1995 (as restated) and 1996..................................F-6 Consolidated Statements of Income - Years Ended December 31, 1995 (as restated) and 1996......................F-7 Consolidated Statements of Stockholders' Equity - Years Ended December 31, 1995 (as restated) and 1996......................F-8 Consolidated Statements of Cash Flows - Years Ended December 31, 1995 (as restated) and 1996......................F-9 Notes to Consolidated Financial Statements Years Ended December 31, 1995 (as restated) and 1996.....................F-10 UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1997 AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 Condensed Consolidated Balance Sheet - September 30, 1997.......................................................F-28 Condensed Consolidated Statements of Operations - Nine Months Ended September 30, 1996 and 1997............................F-30 Condensed Consolidated Statements of Stockholders' Equity - Nine Months Ended September 30, 1997............................F-32 Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1996 and 1997............................F-33 Notes to Condensed Consolidated Financial Statements.......................F-35
F-1 80 [RUSSO AND SHAPIRO LETTERHEAD] INDEPENDENT AUDITOR'S REPORT To the Stockholders and Board of Directors Brighton Technologies Corporation and Subsidiaries We have audited the accompanying consolidated balance sheet of Brighton Technologies Corporation and subsidiaries as of December 31, 1995, and the related statements of income, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We did not audit the 1995 financial statements of Brighton Electronics Corporation Limited, which are included in the financial statements of Brighton Technologies Corporation which statements reflect total assets of $2,634,859 as of December 31, 1995, and total revenues of $1,872,996 for the year then ended. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Brighton Electronics Corporation Limited, is based solely on the report of the other auditors. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis for our opinion. In our opinion, based on our audit and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Brighton Technologies Corporation and subsidiaries as of December 31, 1995, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. As discussed in Note 3 to the financial statements, the 1995 financial statements have been restated to reflect the correction of depreciation expenses recorded on project equipment, accounting for F-2 81 losses related to joint ventures and in the recognition of revenue on certain long-term projects. Accordingly, the Company's financial statements for the year ended December 31, 1995 have been restated to reflect the correction of these errors. /s/ Russo and Shapiro New York, New York September 25, 1997 F-3 82 [FRANCIS S. L. YAN & CO. LETTERHEAD] REPORT OF THE AUDITORS TO THE MEMBERS OF BRIGHTON ELECTRONICS CORPORATION LIMITED We have audited the financial statements on pages 3 to 9 which have been prepared in accordance with accounting principles generally accepted in Hong Kong. RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS The Companies Ordinance requires the directors to prepare financial statements which give a true and fair view. In preparing financial statements which give a true and fair view it is fundamental that appropriate accounting policies are selected and applied consistently. It is our responsibility to form an independent opinion, based on our audit, on those statements and to report our opinion to you. BASIS OF OPINION We conducted our audit in accordance with Statements of Auditing Standards issued by the Hong Kong Society of Accountants. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the company's circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. We believe that our audit provides a reasonable basis for our opinion. The financial statements have been audited on 13th August, 1996. In view of the benefits of the subsequent information available and the change of the accounting policy of the Group after that date, the financial statements have been re-stated to cancel the interest charges of $1,287,000.00 from the Company to its subsidiary, to write off the subsidiary's preliminary expenses of $950,193.53 in setting up its representative office in China and to consolidate the accounts of the Company and its subsidiaries on 31st December, 1995. F-4 83 [FRANCIS S. L. YAN & CO. LETTERHEAD] REPORT OF THE AUDITORS TO THE MEMBERS OF BRIGHTON ELECTRONICS CORPORATION LIMITED OPINION In our opinion the financial statements give a true and fair view, in all material respects, of the state of the Company's and the Group's affairs as at 31st December, 1995 and of the results of the Group for the year then ended and have been properly prepared in accordance with the Companies Ordinance. /s/Francis S.L. Yan & Co. FRANCIS S. L. YAN & CO. Certified Public Accountants Hong Kong 11 Nov 1997 F-5 84 [THE FORM OF REPORT TO BE FURNISHED UPON COMPLETION OF THE JANUARY 26, 1998 REVERSE STOCK SPLIT DISCUSSED IN THE LAST PARAGRAPH OF NOTE 8] REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Brighton Technologies Corporation and Subsidiaries Allendale, New Jersey **5 We have audited the consolidated balance sheet of Brighton Technologies Corporation and Subsidiaries (the "Company") as of December 31, 1996, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. ** 6 We conducted our audit 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 audit provides a reasonable basis for our opinion. ** 7 In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Brighton Technologies Corporation and Subsidiaries at December 31, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. BDO Seidman LLP Woodbridge, New Jersey May 29, 1997 (January ___, 1998 as to the last paragraph of Note 8) F-6 85 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
1995 (As restated) December 31, (Note 3) 1996 ------------ ------------ ASSETS CURRENT: Cash and cash equivalents $ 137,067 $ 716,699 Cash set aside for customer purchases (Note 2) 600,000 2,636,000 Accounts receivable (net of allowance for doubtful accounts of $30,000 in 1995 and 1996) (Note 11) 153,375 1,339,318 Costs and accumulated gross profit in excess of billings on uncompleted contracts (Note 6) 747,168 2,056,987 Receivables from stockholders and related parties (Note 4) 17,622 43,239 Prepaid expenses 529,460 310,677 Deferred taxes (Note 9) 408,000 1,315,000 Other 1,207 4,700 ------------ ------------ TOTAL CURRENT ASSETS 2,593,899 8,422,620 ------------ ------------ FIXED ASSETS, NET (NOTE 5) 1,349,757 1,536,458 OTHER ASSETS: Non-current accounts receivable - related parties (Note 4) 484,349 15,884 Deposits -- 9,245 Prepaid contract fees 314,375 171,875 Organization costs, net 365 30,986 ------------ ------------ TOTAL OTHER ASSETS 2,148,846 1,764,448 ------------ ------------ TOTAL ASSETS $ 4,742,745 $10,187,068 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT: Accounts payable $ 427,877 $ 958,550 Accrued expenses 252,716 313,337 Accrued licensing costs 600,000 450,000 Billings in excess of costs and accumulated gross profit on uncompleted contracts (Note 6) 1,160,188 4,971,394 Deferred revenue -- 83,421 Demand note payable (Note 7) -- 620,101 Payable to stockholders (Note 4) 2,612,896 227,298 Taxes payable (Note 10) 360,000 1,678,000 ------------ ------------ TOTAL CURRENT LIABILITIES 5,413,677 9,302,101 ------------ ------------ LONG-TERM: Deferred taxes (Note 9) 263,000 156,000 Minority interests (Note 2) 136,705 143,931 ------------ ------------ TOTAL LIABILITIES 5,813,382 9,602,032 ------------ ------------ COMMITMENTS AND CONTINGENCIES (NOTE 10) STOCKHOLDERS' EQUITY (DEFICIT) (NOTES 4 AND 8): Common stock; $.001 par value; shares authorized - 100,000,000; issued and outstanding - 1,008,333 and 1,149,559 in 1995 and 1996, respectively 1,008 1,150 Preferred stock; $.001 par value; shares authorized - 5,000,000; none issued and outstanding -- -- Contributed capital 25,774 1,482,781 Accumulated deficit (1,097,419) (898,895) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (1,070,637) 585,036 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 4,742,745 $10,187,068 ============ ============
See accompanying notes to financial statements. F-7 86 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
1995 (As restated) Year ended December 31, (Note 3) 1996 ----------- ----------- REVENUES (NOTES 6 AND 11) .............................. $ 8,370,537 $ 8,006,260 COST OF REVENUES (NOTE 6) .............................. 6,165,201 5,785,507 ----------- ----------- GROSS PROFIT ........................... 2,205,336 2,220,753 ----------- ----------- GENERAL AND ADMINISTRATIVE EXPENSES: Salaries, payroll taxes and employee benefits (Note 4) ...................................... 579,713 765,035 Rent and premises (Note 10) ......................... 299,365 377,154 Travel and lodging .................................. 234,565 84,402 Depreciation and amortization ....................... 6,007 38,738 Foreign transaction (gains) losses .................. 4,615 5,268 Miscellaneous ....................................... 523,751 484,432 ----------- ----------- TOTAL GENERAL AND ADMINISTRATIVE EXPENSES ............................... 1,648,016 1,755,029 ----------- ----------- OPERATING INCOME ....................... 557,320 465,724 ----------- ----------- OTHER INCOME (EXPENSE): Interest expense and bank fees (Note 7) ............. (38,488) (33,170) Interest income ..................................... 27,949 37,451 Miscellaneous income ................................ 13,863 44,745 ----------- ----------- 3,324 49,026 ----------- ----------- INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS ..................... 560,644 514,750 PROVISION FOR INCOME TAXES (NOTE 9) .................... 444,000 309,000 ----------- ----------- MINORITY INTERESTS (NOTE 2) ............................ 55,703 (7,226) ----------- ----------- NET INCOME ............................................. $ 172,347 $ 198,524 ----------- ----------- EARNINGS PER SHARE DATA: Primary and fully diluted ........................... $ .17 $ .19 =========== =========== Weighted average shares outstanding - primary ....... 1,008,333 1,033,965 =========== =========== Weighted average common shares and common equivalents outstanding - fully diluted ......................... 1,008,333 1,046,891 =========== ===========
See accompanying notes to financial statements. F-8 87 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1995 and 1996 Common Stock ------------------------- Contributed Accumulated Shares Amount Capital Deficit ----------- ----------- ----------- ----------- BALANCE AT JANUARY 1, 1995 (NOTE 3) 1,008,333 $ 1,008 $ 25,774 $ (755,013) Adjustment for the effect on prior years of correction of errors (Note 3) -- -- -- (514,753) ----------- ----------- ----------- ----------- BALANCE AT JANUARY 1, 1995, AS RESTATED (NOTE 3) 1,008,333 1,008 25,774 (1,269,766) Net income, as restated, for 1995 -- -- -- 172,347 ----------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 1995 1,008,333 1,008 25,774 (1,097,419) Net shares issued in connection with reverse merger (Note 1) 130,115 131 (131) -- Sale of common stock 11,111 11 449,989 -- Costs associated with the sale of common stock -- -- (259,824) -- Conversion of advances from majority stockholder (Note 4) -- -- 1,266,973 -- Net income -- -- -- 198,524 ----------- ----------- ----------- ----------- BALANCE AT DECEMBER 31, 1996 1,149,559 $ 1,150 $ 1,482,781 $ (898,895) =========== =========== =========== ===========
See accompanying notes to financial statements. F-9 88 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
1995 (As restated) Year ended December 31, (Note 3) 1996 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 172,347 $ 198,524 ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 143,508 176,238 Deferred income taxes 75,000 (1,014,000) Minority interests (55,703) 7,226 Changes in assets and liabilities: Accounts receivable 2,299,745 (1,185,943) Costs and accumulated gross profit in excess of billings (747,168) (1,309,819) Other current assets (513,530) 208,941 Other assets 63,809 (38,227) Accounts payable (1,946,011) 530,673 Billings in excess of costs and accumulated gross profits 160,013 3,811,206 Taxes payable 573,000 1,318,000 Other liabilities and deferred revenue 374,223 38,510 ----------- ----------- TOTAL ADJUSTMENTS 426,886 2,542,805 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 599,233 2,741,329 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES (NOTE 2): Increase in cash set aside for customer purchases (600,000) (2,036,000) Purchases of fixed assets (1,352,434) (154,484) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (1,952,434) (2,190,484) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES (NOTE 2): Proceeds from demand note payable -- 575,603 Issuance of common stock, net of related costs -- 190,176 Proceeds from Stockholder advances 1,612,041 -- Repayments on Stockholder advances -- (1,118,625) Repayment of accounts receivable - related parties -- 424,872 Advances to related parties (518,322) (43,239) ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,093,719 28,787 ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (259,482) 579,632 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 396,549 137,067 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 137,067 $ 716,699 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Taxes paid $ 221,466 $ 5,358 Interest expense paid 38,488 18,046 =========== ===========
See accompanying notes to financial statements. F-10 89 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS F-11 90 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION OF General COMPANY Brighton Technologies Corporation (the "Company") serves as the ultimate parent of Brighton Industries Corporation ("BIC"), a United States of America based company, and Brighton Electronics Corporation Limited ("BECL"), a Hong Kong based holding company for two Hong Kong subsidiaries and interests in two active joint ventures. On October 23, 1996, Zentex Corporation ("Zentex"), an inactive public company, affected a reverse non-cash merger transaction of BIC and BECL structured in the following manner. Stockholders of BIC and BECL transferred ownership of their shares to Zentex in exchange for the issuance of shares representing a controlling interest in Zentex. Pursuant to the terms of the agreement, Zentex transferred to the predecessor Zentex shareholders all of its operating assets (excluding the shares of BIC and BECL) in exchange for the assumption of liabilities existing immediately subsequent to the closing of the transaction. As part of the transaction, Zentex received a release of all obligations owed by it to an affiliate of the predecessor Zentex shareholders. In addition, at the closing, each member of the predecessor Zentex Board of Directors resigned and was replaced by representatives of the BIC and BECL stockholders. On November 12, 1996, Zentex was renamed Brighton Technologies Corporation. This transaction was consummated to facilitate the consolidation of the operating companies of BIC and BECL's founder and majority stockholder (the "Stockholder) into one entity. The Stockholder and members of his family control the operations of the Company and its subsidiaries. Prior to this transaction, the Stockholder and his family had full ownership of BIC and BECL. Since the BIC and BECL Stockholders obtained control of the Company, the accompanying financial statements reflect the operations of BIC and BECL for periods prior to the consummation of the transaction. The issuance of shares to the predecessor Zentex shareholders was accounted for as the issuance of equity by the Company for no consideration.
F-12 91 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS BIC, a Delaware Corporation, principally conducts its business in the People's Republic of China ("PRC") through registered PRC offices, where it acts as the purchaser and distributor of third party manufactured industrial, telecommunication and computer equipment and technological processes to PRC customers. The Company is actively marketing similar services in other Pacific basin countries. The Company has also entered into a long-term contract with China National Chemical Construction Chongqing Company ("China National") to aid in the design and construction of a sodium bichromate production plant in the PRC. Management does not expect to enter into any significant long-term contracts of this type in the future (see Note 11). BECL is located in and incorporated in Hong Kong and is an investment and holding company for Asian based companies. BECL subsidiaries are involved in the buying, selling and installation of computer and industrial equipment and in the development of credit card approval and authorization systems. One joint venture in which BECL has a 90% interest ("STAQ") has been formed to design, install and maintain a computer network for the trading of securities in the PRC. The minority interest holders of STAQ have the right to acquire an additional 10% ownership interest per annum (at the then determinable fair values) up to a maximum interest of 49%. Under the STAQ joint venture arrangements, the Company is required to invest approximately $4,000,000 ($1,600,000 of which has been invested) at December 31, 1996.
F-13 92 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 2. SUMMARY OF Business Combination and Consolidation SIGNIFICANT Policy ACCOUNTING POLICIES The combination of the Company's subsidiaries, which were previously under the common control of the Stockholder, has been accounted for in a manner similar to the pooling-of-interests method of business combinations. This method presents the Company's financial position, results of operations and cash flows as if BIC and BECL were combined for all periods presented. Accordingly, the consolidated financial statements include the accounts of the Company and its direct subsidiaries and joint ventures in which the Company has a controlling interest. All intercompany accounts and transactions have been eliminated in consolidation. Minority Interests BECL consolidates the accounts of three joint ventures in which it holds controlling interests. Income (loss) allocable to minority interests is recorded in the accompanying consolidated financial statements. Operating losses are allocated to the minority interests only to the extent of the minority interests' investment in these joint ventures. The Company is responsible for losses in excess of the minority interests' investments. At December 31, 1996, the excess of such investments over accumulated losses was approximately $39,000. Foreign Currencies For BECL subsidiaries and BIC branch offices, whose functional currency is the Hong Kong Dollar or the PRC Renminbi, balance sheet accounts are translated at exchange rates in effect at the end of the year and income statement accounts are translated at average exchange rates for the year. Translation adjustments are not material as of December 31, 1996 and 1995. For the majority of BIC transactions, revenue and costs are invoiced in U.S. dollars. Accordingly, the effects of foreign exchange transaction gains or losses are not material. The Company does not enter into foreign currency forward exchange contracts to hedge foreign currency exposures.
F-14 93 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS Revenue Recognition The Company accounts for long-term contracts on the percentage-of- completion method and income is recognized as work on contracts progresses, but estimated losses on contracts in progress are charged to operations immediately. The Company generally bills customers in accordance with contractual terms. At December 31, 1996 and 1995, management estimated that the Company will, at a minimum, recover its outlay for expenses when the projects are completed. Accordingly, no loss provisions for such contracts were recorded during 1996 and 1995. For short-term contracts and projects, revenue is recognized on the accrual basis as goods are shipped and services are performed. Income Taxes The Company accounts for income taxes using the liability method, which requires an entity to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the Corporation's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax basis of liabilities and assets using enacted tax rates in effect in years in which the differences are expected to reverse. Income tax expense (benefit) is determined on a separate company basis and includes current Federal, foreign and state taxes and deferred taxes. For U.S. purposes, the Company files its income tax returns on a cash basis. Cash Equivalents The Company considers all highly liquid debt instruments with a maturity of three months or less at the date of purchase to be cash equivalents. Cash Set Aside for Customer Purchases Cash that is set aside to pay project related liabilities and commitments totaled $600,000 and $2,636,000 at December 31, 1995 and 1996, respectively.
F-15 94 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS Provisions for Doubtful Accounts The Company performs initial and ongoing credit evaluations of its customers, and periodically reviews the collectibility of accounts receivable and provides an allowance for its estimate of accounts deemed to be uncollectible. A significant portion of the Company's business is done on the basis of letters of credit or cash advances with a relatively limited number of customers, and as a result, the Company did not experience any significant bad debt expense in 1996 or 1997 (See Note 11). Non-Cash Investing and Financing Activities During 1996, the Stockholder contributed $1,266,973 of net advances owed by the Company to contributed capital. In 1996, the Company received fixed assets valued at $67,297 in lieu of payments on 1995 accounts receivable balances. In connection with the merger described in Note 1, 130,115 shares of common stock were issued to Zentex stockholders with no proceeds to the Company. The increase in common stock was offset by a reduction to contributed capital in the accompanying financial statements. Organization Costs Costs incurred in connection with the incorporation of the Company and the formation of its current structure are capitalized and amortized over a period of five years. Fixed Assets Fixed assets are carried at cost and are depreciated over the estimated useful lives of the related assets (generally 2 to 5 years) on a straight line bases. The cost of leasehold improvements is amortized over the lesser of the length of the related leases or the estimated useful lives of the assets. Assets purchased, but not utilized in operations, are not subject to depreciation. Prepaid Contract Fees Prepaid contract fees are principally comprised of prepayments for services to be rendered over the life of a long-term contract. The related amortization expense for the years ended December 31, 1995 and 1996 was $137,500. Benefit Plans BIC has no pension or profit sharing plans. BECL has a defined contribution plan covering qualified participants. The amount of contributions for the years ended December 31, 1995 and 1996 were $13,586 and $20,416, respectively.
F-16 95 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company utilizes estimates in measuring and projecting revenue, costs and gross profit on long-term contracts, in providing for an allowance for doubtful accounts (also see Note 11) and in recording accrued liabilities. Actual results could differ from those estimates. Fair Values of Financial Instruments At December 31, 1995 and 1996, the carrying values of cash equivalents, restricted cash, accounts receivable (current and non-current), related party receivables and payables, accounts payable, demand notes payable and long-term debt approximates fair values due to the immediate or short-term maturity of these financial instruments. Earnings Per Share Earnings per share is based on the weighted average number of common stock shares (also see Note 8). For purposes of determining fully diluted earnings per share, the conversion of the demand note into common stock equivalents was valued using the average sales price of the Company's common stock sold in 1996. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). This statement is effective for the Company's 1997 financial statements and establishes criteria for the calculation and presentation of "Basic" and "Diluted" earnings per share. Based on an assessment of its current capital structure, management believes that adoption of SFAS 128 will not have a significant effect on the Company's reported earnings per share. Reclassifications Certain prior period amounts have been reclassified to conform with the current year presentation (also see Note 3).
F-17 96 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 3. RESTATEMENTS The 1995 financial statements have been restated to reflect the correction of depreciation expense recorded on project equipment, accounting for losses related to joint ventures, and to appropriately recognize revenue from certain long- term projects. In prior periods, BIC recognized revenue on long-term projects as certain stages of a project were completed, rather than on a ratable basis over the term of the entire contract. As a result, accumulated deficit at January 1, 1995 was increased by $514,753 and net income for the year ended December 31, 1995 was reduced by $258,353 ($.26 per share) from amounts previously published. 4. RELATED PARTIES Receivables and Liabilities From time to time, the Company receives funding from or provides funding to the Stockholder, his family members, principals and officers. Such advances generally bear no stated interest rate or terms of payments. Outstanding balances with stockholders and related parties at December 31, 1995 and 1996 were as follows:
December 31, 1995 1996 - ------------ ---------- ---------- Receivables (current and non-current): Stockholder and family members $ -- $ 43,239 Brighton Information Systems Corporation (a) and (b) 493,751 -- Other 8,220 15,884 ---------- ---------- $ 501,971 $ 59,123 ========== ========== Liabilities: Stockholder and family members $2,612,896 $ 227,298 ========== ==========
F-18 97 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (a) At December 31, 1995, BIC had a net receivable, funded by the Stockholder, from Brighton Information System Corporation (now known as Greater China Corporation, "Greater China") in the amount of $493,751. The Stockholder had previously served as a director and officer of Greater China until his resignation in March 1996. In partial settlement of this indebtedness in 1996, the Company received an assignment of fixed assets and accounts receivable valued at $381,433. (b) Through November 1996, BECL had $248,103 of advances to affiliates of Greater China, which were funded by advances from the Stockholder. Accordingly, the Stockholder has agreed to assume responsibility for settlement of such advances (and the balance owed to BIC after the transactions described in (a) above) and such amounts were offset against "Advances to stockholders." In December 1996, the Stockholder contributed outstanding borrowings (net of these advances) to the Company's capital structure (see below). Conversion of Advances In December 1996, the Stockholder elected to contribute $1,266,973 of net borrowings ($248,103 of amounts the Stockholder owed to the Company and $1,515,076 of the net amounts owed by the Company) into the Company's capital structure. Professional Fees Fees paid to Directors and their affiliates for financial advisory services totaled $0 and $105,731 for the years ended December 31, 1995 and 1996, respectively. The entire amount in 1996 was charged to contributed capital (see Note 8). General and Administrative Expenses Salaries and incentives expenses for the Stockholder and members of his family totaled approximately $135,000 in each of the years ended December 31, 1995 and 1996.
F-19 98 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 5. FIXED ASSETS Fixed assets at December 31, 1995 and 1996 are comprised of the following:
December 31, 1995 1996 - ------------ ----------- ----------- Equipment $ 18,707 $ 210,367 Furniture and fixtures 6,572 18,834 Leasehold improvements 6,850 18,027 Less: Accumulated depreciation (7,278) (42,358) ----------- ----------- 24,851 204,870 Project equipment (assets to be utilized in completing future projects) 1,324,906 1,331,588 ----------- ----------- Total $ 1,349,757 $ 1,536,458 =========== ===========
6. LONG-TERM At December 31, 1995 and 1996, costs, estimated CONTRACTS gross profit and billings on uncompleted long-term contracts accounted for on the percentage of completion method are summarized as follows:
December 31, 1995 1996 - ------------ ------------ ------------ Costs incurred on long-term $ 4,078,131 $ 6,205,662 contracts Estimated gross profit 834,357 1,242,824 ------------ ------------ 4,912,488 7,448,486 Less: Billings to date (5,325,508) (10,362,893) ------------ ------------ $ (413,020) $ (2,914,407) ============ ============
F-20 99 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS These amounts are included in the accompanying balance sheets under the following captions:
December 31, 1995 1996 - ------------ ---------- ---------- Costs and accumulated gross profit in excess of billing on uncompleted contracts $ 747,168 $2,056,987 Billings in excess of costs and accumulated gross profit on uncompleted contracts 1,160,188 4,971,394 ========= =========
7. DEMAND NOTE In 1996, BECL entered into a convertible demand note agreement with a third party. The note is convertible to common shares at prevailing market values. The balance outstanding at December 31, 1996 was $620,101. The fixed interest rate at December 31, 1996 was 5% per annum. Interest expense for the year ended December 31, 1996 was $15,124. The Company and the creditor are in the process of negotiating the conversion of $440,000 of the note to common shares. 8. STOCKHOLDERS' Private Placement EQUITY In December 1996, the Company sold 11,111 shares of common stock in a private underwriting for aggregate net proceeds (before the costs discussed in the following paragraph) of approximately $450,000. In 1997, the Company sold an additional 8,002 shares of common stock for net proceeds of approximately $350,000. Costs directly related to the completion of these offerings amounted to $259,824 and have been charged to contributed capital in 1996. Public Offering
F-21 100 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS Subject to certain conditions in 1997, the Company is considering a public offering of an unspecified number of shares of its common stock. Proceeds from this sale, if consummated, will be used for general corporate purposes and investments in joint ventures. Common Stock Reserved for Issuance At December 31, 1996, the Company had reserved 13,778 shares for fulfilling the conversion of a demand note payable to common stock. The conversion terms are based on the fair market value of the Company's common stock. Subsequent to December 31, 1996, the Company issued, at nominal cost, 3,141 shares of common stock to various individuals and firms. Of this issuance, 2,033 shares related to services rendered in connection with the Private Placement and contemplated Public Offering. The balance of the authorized, but not outstanding, common stock are not reserved. Preferred Stock The Company has 5,000,000 authorized shares of Preferred Stock (with a par value of $.001 per share), none of which have been issued or remained outstanding as of and for the years ended December 31, 1995 and 1996. The Company's Board of Directors reserves the right to determine the ownership privileges of the Preferred Stockholders and terms of the security prior to its issuance. Dividends There were no dividends declared or paid on the Company's common stock in 1995 and 1996. Increase in Authorized Shares In 1996, the Company's stockholders approved an amendment to the Company's Certificate of Incorporation to establish the number of authorized shares of common stock of the Company at 100,000,000 shares, with a par value of $.001 per share and also approved a three for one stock split of the Company's common stock outstanding at that time. On October 17, 1997 and January 26, 1998, the Company subsequently effected separate one for three reverse stock splits. All share and per share data have been restated for all periods presented to reflect these splits.
F-22 101 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS F-23 102 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 9. INCOME TAXES The domestic and foreign components of income (loss) before income taxes and minority interests are as follows:
December 31, 1995 1996 - ------------ --------- --------- Domestic $ 936,307 $ 764,000 Foreign (375,663) (249,250) --------- --------- $ 560,644 $ 514,750 ========= =========
The components of the provision (benefit) for income taxes are as follows:
December 31, 1995 1996 - ------------ ----------- ----------- Current: Federal $ 274,000 $ 988,000 Foreign 16,000 47,000 State 79,000 288,000 ----------- ----------- 369,000 1,323,000 ----------- ----------- Deferred: Federal 59,000 (802,000) Foreign (87,000) (29,000) State 16,000 (212,000) ----------- ----------- (12,000) (1,043,000) ----------- ----------- Net change in valuation allowance 87,000 29,000 ----------- ----------- Provision for income taxes $ 444,000 $ 309,000 =========== ===========
F-24 103 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS The following table presents the principal reasons for the difference between the actual income tax provision and the tax provision computed by applying the U.S. Federal statutory income tax rate to income before income taxes and minority interests:
December 31, 1995 1996 - ------------ -------- -------- U.S. Federal income tax provision at statutory rates $191,000 $175,000 State income taxes, net of Federal benefit 63,000 50,000 Effects of foreign operations and tax rate differentials 66,000 44,000 Valuation allowance - foreign loss carryforwards 87,000 29,000 Non-deductible losses and expenses 30,000 7,000 Other, net 7,000 4,000 -------- -------- Provision for income taxes $444,000 $309,000 ======== ========
F-25 104 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS The statutory tax rates in the United States (including applicable net state rates), Hong Kong and the PRC are 40%, 16.5% and 33%, respectively. There are no tax holidays, exemptions and incentives afforded to the Company for its off-shore operations. Deferred income taxes as recorded in the accompanying consolidated balance sheets are comprised of the following:
1995 1996 ----------------------------------------- ----------------------------------------- December 31, Asset Liability Net ASSET LIABILITY NET ----------- ----------- ----------- ----------- ----------- ----------- Current deferred income taxes: Accrued account receivables $ -- $ (88,000) $ (88,000) $ -- $ (371,000) $ (371,000) Contract costs -- (234,000) (234,000) -- -- -- Liabilities 733,000 -- 733,000 1,706,000 -- 1,706,000 Other current -- (3,000) (3,000) -- (20,000) (20,000) ----------- ----------- ----------- ----------- ----------- ----------- $ 733,000 $ (325,000) $ 408,000 $ 1,706,000 $ (391,000) $ 1,315,000 =========== =========== =========== =========== =========== =========== Non-current deferred income taxes: Foreign net operating loss carryforwards $ 87,000 $ -- $ 87,000 $ 116,000 $ -- $ 116,000 Deferred costs -- (258,000) (258,000) -- (146,500) (146,500) Fixed assets -- (4,500) (4,500) -- (9,000) (9,000) Other non-current -- (500) (500) -- (500) (500) Valuation allowance (87,000) -- (87,000) (116,000) -- (116,000) ----------- ----------- ----------- ----------- ----------- ----------- $ -- $ (263,000) $ (263,000) $ -- $ (156,000) $ (156,000) =========== =========== =========== =========== =========== ===========
F-26 105 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS At December 31, 1995 and 1996, the Company had established a valuation allowance on the deferred tax assets related to the foreign net operating loss carryforwards of BECL. Reductions to the valuation allowance will be recorded when, in the opinion of management, BECL's ability to generate taxable income in the future is considered more likely than not. At December 31, 1996, the Company has net operating loss carryforwards for Hong Kong tax purposes of approximately $702,000, which can be carried forward indefinitely. 10. COMMITMENTS AND Operating Leases CONTINGENCIES The Company and its subsidiaries lease administrative office space and equipment under operating leases which expire prior to the end of 2001. Total future minimum lease payments as of December 31, 1996 are:
1997 $284,055 1998 187,899 1999 85,817 2000 43,750 2001 25,521 -------- Total minimum lease payments $627,042 ========
Rent expense and related costs for 1995 and 1996 were $149,880 and $260,396, respectively. Legal Matters The Company is either a plaintiff or a defendant in several pending legal matters. In the opinion of management, the final resolution of these matters will not have a material adverse effect on the Company's financial position or results of operations.
F-27 106 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS Contractual Obligations The Company may also be subject to claims and penalties arising from failure to comply with specific contractual requirements on the progression of long-term projects. Management does not believe that it has any measurable exposures related to such contingencies at December 31, 1996. The Company is also in the process of renegotiating the terms of certain aspects of technological licensing arrangements. The contractual value of services currently under negotiation approximates $450,000. The inability of the Company to fulfill contractual terms of long-term projects or to negotiate favorable arrangements on the use or distribution of licensed technology may have a material adverse effect on the Company's financial statements. Letters of Credit At December 31, 1996, the Company had issued irrevocable letters of credit of $746,230 (included in the determination of Cash set aside for customer purchases at December 31, 1996) representing contingent commitments on equipment purchases. 11. CONCENTRATIONS Major Customers China National accounted for approximately 34% and 13% of revenues for the years ended December 31, 1995 and 1996, respectively. A BECL customer accounted for approximately 17% of revenues in 1996 and a BIC customer accounted for approximately 10% of revenues in 1995. The Company had an unsecured accounts receivable balance of approximately $512,000 at December 31, 1996 with a Hong Kong based customer. Management is currently discussing the timing of the settlement of this account receivable with the customer and expects full payment in 1997. Historically, the Company has relied on a limited number of customers for a substantial portion of its total revenues. The Company expects that a significant portion of its future revenues will continue to be generated by a limited number of customers. The loss of any of these customers or any substantial reduction in business volume with any of these customers could materially adversely affect operating results.
F-28 107 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS Suppliers The Company purchases a substantial amount of equipment and licenses technology from a limited number of entities. Based on the number of alternate qualified suppliers, management does not believe that the Company has a concentration of risks under its current arrangements. Geographical The vast majority of the Company's revenues are derived from customers based in countries outside the United States. Such operations subject the Company to certain operational risks. The Company's prospective results of operations could be negatively affected by adverse consequences arising from these risks. Although management believes that the likelihood of such factors occurring is remote, the possibility of unanticipated events disrupting the Company's operations exists. 12. SEGMENT Operations by Geographic Area INFORMATION Net revenues, operating income (loss) and identifiable assets from United States export sales to the Far East and for the Company's operations based in the Far East (principally, PRC and Hong Kong) are as follows:
December 31, 1995 United States Far East Eliminations Consolidated ------------- ------------ ------------ ------------ Net revenues $ 6,497,541 $ 1,872,996 $ -- $ 8,370,537 Operating income (loss) 927,375 (370,055) -- 557,320 Identifiable assets 2,574,807 2,634,859 (466,921) 4,742,745 =========== =========== =========== =========== December 31, 1996 Net revenues $ 6,039,716 $ 1,966,544 $ -- $ 8,006,260 Operating income (loss) 730,875 (265,151) -- 465,724 Identifiable assets 7,152,549 4,299,370 (1,264,851) 10,187,068 =========== =========== =========== ===========
F-29 108 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS Substantially all of the Company's United States revenues are derived from customers based in the Far East.
F-30 109 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS Operations by Segment The Company's predominant businesses are equipment distribution and networking. Net revenues, operating income and allocated assets for the Company's segments are as follows:
Equipment December 31, 1995 Distribution Networking Consolidated ------------ ----------- ------------ Net revenues $ 4,267,791 $ 4,102,746 $ 8,370,537 Operating income 247,429 309,891 557,320 Identifiable assets 1,757,405 2,985,340 4,742,745 Purchases of fixed assets 27,049 1,325,385 1,352,434 Depreciation and amortization expense 5,887 120 6,007 =========== =========== =========== December 31, 1996 Net revenues $ 3,664,433 $ 4,341,827 $ 8,006,260 Operating income 214,515 251,209 465,724 Identifiable assets 4,179,102 6,007,966 10,187,068 Purchases of fixed assets 20,083 134,401 154,484 Depreciation and amortization expense 33,702 5,036 38,738 =========== =========== ===========
F-31 110 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997 ------------- ASSETS Current assets: Cash and cash equivalents $ 556,940 Cash set aside for customer purchases (Note 4) 1,359,635 Accounts receivable, net 2,040,343 Costs and accumulated gross profit in excess of billings on uncompleted contracts 945,107 Receivables from stockholders and related parties 200,668 Prepaid expenses 45,376 Deferred taxes 1,164,000 ---------- Total current assets 6,312,069 ---------- Fixed assets: Project equipment (Notes 7 and 8) 1,517,538 Furniture and equipment, net 202,814 ---------- Net fixed assets 1,720,352 ---------- Other assets: Non-current accounts receivable - related parties 22,339 Deposits 30,883 Prepaid contract fees 228,733 Deferred offering costs (Notes 5 and 10) 237,093 Organization costs, net 25,709 ---------- Total other assets 544,757 ---------- Total assets $8,577,178 ==========
(continued) F-32 111 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 1997 ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $1,628,857 Accrued expenses 378,038 Accrued licensing costs (Note 4) 450,000 Billings in excess of costs and accumulated gross profit on uncompleted contracts 516,725 Deferred revenue 94,444 Notes payable (Note 2) 802,105 Customer deposits, net (Note 4) 2,153,628 Taxes payable 1,492,000 ---------- Total current liabilities 7,515,797 ---------- Long-term liabilities: Deferred taxes 88,000 Minority interests 134,649 ---------- Total long-term liabilities 222,649 ---------- Commitments and contingencies (Notes 4 and 8) Stockholders' equity (Notes 1 and 3): Preferred stock; $.001 par value; shares authorized - 5,000,000; issued and outstanding - none Common stock; $.001 par value; shares authorized - 100,000,000; issued and outstanding - 1,161,222 1,161 Contributed capital 1,856,740 Accumulated deficit (1,006,919) Unearned compensation cost (12,250) ---------- Total stockholders' equity 838,732 ---------- Total liabilities and stockholders' equity $8,577,178 ==========
See accompanying notes to condensed consolidated financial statements. F-33 112 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------ 1996 1997 ---------- ---------- Revenues $6,796,972 $5,913,330 Cost of revenues 4,994,155 4,057,207 ---------- ---------- Gross profit 1,802,817 1,856,123 ---------- ---------- General and administrative expenses: Salaries, payroll taxes and employee benefits 578,837 868,887 Rent and premises 321,678 326,783 Travel and lodging 289,412 169,394 Depreciation and amortization 21,332 63,269 Foreign transaction losses 3,108 20,895 Consulting fees (Note 6) 366,430 Miscellaneous 350,394 298,027 ---------- ---------- Total general and administrative expenses 1,564,761 2,113,685 ---------- ---------- Operating income (loss) 238,056 (257,562) ---------- ---------- Other income (expense): Interest expense and bank fees (22,647) (43,994) Interest income 22,827 77,418 Miscellaneous income 48,778 17,832 ---------- ---------- Total other income, net 48,958 51,256 ---------- ---------- Income (loss) before income taxes and minority interests 287,014 (206,306) Provision (benefit) for income taxes 115,000 (89,000) Minority interests (26,663) 9,282 ---------- ---------- Net income (loss) $ 145,351 $ (108,024) ========== ==========
(continued) F-34 113 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- 1996 1997 --------- ---------- Net income (loss) per common share (Note 1): Primary and fully diluted $.14 $ (.09) ========= ========= Weighted average number of common shares and common share equivalents outstanding (Note 1): Primary 1,008,333 1,157,289 ========= ========= Fully diluted 1,022,223 1,199,838 ========= =========
See accompanying notes to condensed consolidated financial statements. F-35 114 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1997
UNEARNED COMMON STOCK CONTRIBUTED ACCUMULATED COMPENSATION SHARES AMOUNT CAPITAL DEFICIT COST --------- ------ ---------- ----------- ------------ Balance at December 31, 1996 1,149,559 $1,150 $1,482,781 $ (898,895) Sale of common stock 8,002 8 352,940 Costs associated with the sale of common stock (45,416) Issuance of common stock for costs associated with the sale of common stock 2,030 2 (2) Issuance of restricted common stock to employee 1,111 1 48,999 $(49,000) Issuance of restricted common stock for consulting fees 500 17,438 Issuance of common stock from rounding as a result of reverse stock split 20 Amortization of unearned compensation 36,750 Net loss for the nine months ended September 30, 1997 (108,024) --------- ------ ---------- ----------- -------- Balance at September 30, 1997 1,161,222 $1,161 $1,856,740 $(1,006,919) $(12,250) ========= ====== ========== ============ ========
See accompanying notes to condensed consolidated financial statements. F-36 115 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------- 1996 1997 ---------- ----------- Cash flows from operating activities: Net income (loss) $ 145,351 $ (108,024) ---------- ----------- Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 124,457 166,394 Deferred income taxes (707,000) 83,000 Minority interests (32,321) (9,282) Non-cash compensation expense 54,187 Note payable issued for consulting fees 150,000 Interest accrued on notes payable 36,936 32,004 Changes in operating assets and liabilities: Accounts receivable, net (863,629) (701,025) Costs and accumulated gross profit in excess of billings on uncompleted contracts (1,133,197) 1,111,880 Prepaid expenses (424,615) 105,318 Other current assets (20,682) 4,700 Deposits (30,182) (21,638) Accounts payable 146,300 670,307 Accrued expenses 245,415 64,701 Billings in excess of costs and accumulated gross profit on uncompleted contracts 2,615,452 (4,454,669) Deferred revenue 540,901 11,023 Customer deposits, net 2,153,628 Taxes payable 693,118 (186,000) ---------- ---------- Total adjustments 1,190,953 (765,472) ---------- ---------- Net cash provided by (used in) operating activities 1,336,304 (873,496) ---------- ----------
(continued) F-37 116 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------------- 1996 1997 ----------- ----------- Cash flows from investing activities: (Increase) decrease in cash set aside for customer purchases $ (610,000) $ 1,276,365 Acquisition of fixed assets (51,852) (55,935) Organization costs (211) ----------- ----------- Net cash provided by (used in) investing activities (662,063) 1,220,430 ----------- ----------- Cash flows from financing activities: Proceeds from demand note payable 575,603 Sale of common stock, net of related costs 307,532 (Advances to) repayments from stockholder and related parties 501,971 (349,834) Decrease in payable to stockholders (1,297,876) (227,298) Deferred offering costs (86,147) (237,093) ------------ ----------- Net cash used in financing activities (306,449) (506,693) ----------- ----------- Net increase (decrease) in cash and cash equivalents 367,792 (159,759) Cash and cash equivalents, at beginning of period 137,067 716,699 ----------- ----------- Cash and cash equivalents, at end of period $ 504,859 $ 556,940 =========== ===========
See accompanying notes to condensed consolidated financial statements. F-38 117 BRIGHTON TECHNOLOGIES CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 1. Basis of Presentation The accompanying condensed consolidated financial statements as of September 30, 1997 and for the nine months ended September 30, 1996 and 1997 are unaudited but, in the opinion of management of the Company, contain all adjustments necessary to present fairly the financial position at September 30, 1997, the results of operations for the nine months ended September 30, 1996 and 1997, and cash flows for the nine months ended September 30, 1996 and 1997. These adjustments are of a normal recurring nature. The accompanying condensed consolidated financial statements include the accounts of the Company and its direct subsidiaries and joint ventures in which the Company has a controlling interest. All intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although management of the Company believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the Company's consolidated financial statements and notes thereto for the years ended December 31, 1995 and 1996. The results of operations for the nine months ended September 30, 1997 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 1997. Net income (loss) per share for the nine months ended September 30, 1996 and 1997 is based on the weighted average number of shares of common stock outstanding for each respective period. For purposes of determining fully diluted net income (loss) per share, the conversion of the demand note (See Note 2) into common stock equivalents was calculated using the average market price of the Company's common stock during September 1997, and the conversion of the note payable issued for a consulting fee (See Note 2) into common stock equivalents was calculated at the estimated offering price. All common share and per share amounts have been restated for all periods presented to reflect the 1 for 3 reverse stock split effective October 17, 1997 and the 1 for 3 reverse stock split which will go into effect on January 26, 1998. 2. Notes Payable During 1996, Brighton Electronics Corporation Limited, a Hong Kong-based subsidiary of the Company, entered into a convertible demand note agreement with a third party, with interest at 5% per annum. The note is convertible into common stock of the Company at prevailing market values. The note, including accrued interest, had a balance of $643,355 at September 30, 1997. On February 25, 1997, the Company entered into a consulting agreement with a consulting firm for business advisory services. Pursuant to that agreement, the Company paid the consulting firm $25,000 and issued a one-year note for $150,000 for services rendered. This amount was charged to operations during the nine months ended September 30, 1997. The note is unsecured, bears interest at 10% per annum, with interest to accrue until the due date of February 24, 1998. Thereafter, such note will become payable upon demand, with interest at 12% per annum. F-39 118 Brighton Technologies Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) Nine Months Ended September 30, 1996 and 1997 If the Company does not complete a debt or equity financing by February 24, 1998, then the Company will have the option of converting the note, including accrued interest, into its common stock, with the value of such common shares to be calculated at 75% of the market price on such date. The maximum number of common shares that the Company will be required to reserve and issue as full settlement for the note, including accrued interest, will be 25,000 shares. Such shares, if issued, will be restricted and will have piggyback registration rights. If the Company completes a private financing by February 24, 1998, then the noteholder will have the option of converting the note, including accrued interest, into the same debt or equity instrument issued in connection with such private financing. If the Company completes a secondary public offering (See Note 10) by February 24, 1998, the noteholder will have the option of converting the balance of the note, including accrued interest, into the same securities issued in connection with the secondary public offering at the offering price. Such securities, if issued, will be restricted and will have piggyback registration rights. In addition, the noteholder will have the right to elect one member of the Company's board of directors. 3. Stockholders' Equity Transactions affecting the Company's capital structure during the nine months ended September 30, 1997 consisted of the following: a. The Company sold 8,002 shares of common stock for proceeds of $352,948, and incurred related costs of $134,920 of which $45,416 was paid in cash (including $11,931 to an affiliate of a director) and $89,504 was paid by the issuance of 2,030 shares of common stock to various individuals and firms for services rendered in connection therewith. The 2,030 shares of common stock were recorded as a charge to contributed capital at par value. The values ascribed to such shares were based on the sales price of the Company's common stock sold in comparable periods. b. The Company granted 1,111 shares of restricted common stock to an employee. The aggregate value of the shares of $49,000 was recorded as a reduction to stockholders' equity as deferred compensation cost and is being amortized to operations, as earned, during the year ending December 31, 1997. At September 30, 1997, the balance of unearned compensation cost was $12,250. c. In July 1997, the Company issued 500 shares of common stock with an aggregate value of $17,438 to a consultant for services rendered, which was recorded as a charge to operations during the nine months ended September 30, 1997. d. Effective September 13, 1997, the Company entered into a letter of agreement with a public relations firm to provide corporate and investor relations. In conjunction therewith, the Company issued the public relations firm a three year stock option to purchase 2,778 shares of common stock with an exercise price of $22.50 per share, which was the fair market value on the date of grant. The imputed fair value of this stock option is $23,000, which will be amortized to operations, as earned, during the period from October 1997 through March 1998. F-40 119 Brighton Technologies Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) Nine Months Ended September 30, 1996 and 1997 4. China National Project and Related Contractual Obligations The original turn-key contract with China National Chemical Construction Company ("China National") for the engineering design and implementation for a sodium bichromate production plant with an annual production capacity of 20,000 metric tons was expected to generate total revenues of $11,000,000 for the Company. Revenues under this contract for the years ended December 31, 1995 and 1996, and the nine months ended September 30, 1997, were approximately $2,855,000, $1,048,000 and $2,337,000, respectively, or 34%, 13% and 40% of the Company's total revenues, respectively. The Company has recorded cumulative aggregate revenues of $6,898,000 through September 30, 1997 under this contract (including revenues of $658,000 for the year ended December 31, 1994), or approximately 63% of the contract's total expected revenues. The Company has been advised by China National that they are currently negotiating with third party lenders for the necessary funds to complete the construction of the project. The Company is currently unable to predict the ultimate outcome of these discussions. In the event that China National is unsuccessful in its efforts to obtain such financing and construction efforts are suspended or terminated, the Company's anticipated revenues in the future with regard to this contract may be reduced or eliminated. Based on an assessment of discussions with China National and the timing involved in obtaining the necessary funds, management of the Company does not expect that any significant revenues will be earned from this contract during the year ending December 31, 1998. If China National is unable to complete the project, management does not expect that the ultimate resolution of this matter will have a material adverse impact on the Company's financial position or cash flows. As an accommodation to China National for excess funds held by the Company, the Company has periodically loaned funds to China National. These loans do not bear interest and do not stipulate repayment dates. As of September 30, 1997, the Company had loaned $1,132,169 to China National; such amount has been offset against customer deposits on the December 31, 1996 and September 30, 1997 consolidated balance sheets. Due to delays in the financing and construction of the China National project, the Company is in the process of renegotiating the terms of certain aspects of technological licensing arrangements that it entered into in conjunction with the China National contract. The contractual value of services currently under negotiation is approximately $450,000, and the settlement of such obligation is predicated on the resolution of the matter described above. The inability of the Company to fulfill contractual terms of long-term projects or to negotiate favorable arrangements on the use or distribution of licensed technology may have a material adverse effect on the Company's consolidated financial statements. 5. Deferred Offering Costs Deferred offering costs aggregating $237,093 at September 30, 1997 represent certain legal, accounting and underwriter costs incurred in connection with the contemplated public sale of the Company's securities (See Note 10). These costs have been capitalized and will be charged to stockholders' equity upon successful completion of the offering or charged to operations if the offering is not completed. 6. Consulting Fees Consulting fees aggregating $366,430 were charged to operations during the nine months ended September 30, 1997 for certain professional, consulting and other costs incurred in connection with the F-41 120 Brighton Technologies Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) Nine Months Ended September 30, 1996 and 1997 Company's ongoing business development activities. Of such amount, $19,308 was paid to an affiliate of a director during the nine months ended September 30, 1997 and $175,000 was incurred pursuant to an agreement with a consulting firm (See Note 2). 7. Related Party Transactions During September 1997, the Company's founder and majority stockholder sold project equipment to the Company with a fair market value of $185,950, which is equivalent to the price that the Company would have had to pay to purchase such equipment in the open market, in exchange for an equivalent reduction in the amount due the Company from the stockholder. 8. Brighton STAQ Project The Company owns a 90% interest in the joint venture developing the STAQ On-line Network project, has already invested $1,600,000 in such project, and is obligated to provide additional funding of approximately $4,000,000 during the first quarter of 1998. The Company accounts for the joint venture on a consolidated basis. The Company currently expects to meet its funding obligation through the sale of its equity securities in the contemplated public offering (See Note 10), although there can be no assurances that the Company will be successful in this regard. To the extent that the Company is unable to timely fund its $4,000,000 commitment to fund the STAQ On-line Network project during the first quarter of 1998, the Company's interest in the project may be reduced or eliminated, which would adversely affect the potential future profitability of this project as it relates to the Company's consolidated results of operations. If the Company were to be unable to fund the continuing development of the Brighton-STAQ project, project equipment aggregating $1,517,538 at September 30, 1997 would be liquidated at net realizable value and the resulting loss, if any, would be charged to operations. 9. Recent Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings per Share," which is effective for financial statements issued for periods ending after December 15, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods presented. Under the new requirements, the Company will be required to present "basic" earnings per share and "diluted" earnings per share. Basic earnings per share does not include the dilutive effect of stock options and warrants. The Company does not expect that adoption of this statement will have a material effect on reported earnings per share. In February 1997, the Financial Accounting Standards Board issued Statement No. 129, "Disclosure of Information about Capital Structure," which is effective for financial statements issued for periods ending after December 15, 1997. The new standard reinstates various disclosure requirements previously in effect under Accounting Principles Board Opinion No. 15, which has been superseded by this statement. The Company does not expect that adoption of this statement will have a material effect on its current disclosures and presentation. In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income," which is effective for financial statements issued for periods ending after December F-42 121 Brighton Technologies Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) Nine Months Ended September 30, 1996 and 1997 15, 1997. Earlier application is permitted. This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensive income consists of net income and other comprehensive income. Other comprehensive income refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive income but are excluded from net income. The Company does not expect that adoption of this statement will have a material effect on its current disclosures and presentation. In June 1997, the Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for financial statements issued for periods ending after December 15, 1997. This statement discusses how to report operating segments and certain information about a public company's products and services, the geographic areas in which it operates, and its major customers. The Company does not expect that adoption of this statement will have a material effect on its current disclosures and presentation. 10. Public Offering a. On May 7, 1997, the Company entered into a Letter of Intent agreement with an underwriter ("Representative"), as representative of certain underwriters ("Underwriters"), to act as managing underwriter in a firm commitment underwriting for a proposed offering ("Offering") and sale to the public of 1,000,000 units ("Units") of the Company's securities at an offering price ranging from $5.50 to $7.00 per Unit. Each Unit consists of one share of common stock and one redeemable common stock purchase warrant ("Warrant") of the Company. Each Warrant entitles the holder to purchase one share of common stock for 150% of the offering price per Unit, subject to adjustment in certain circumstances, at any time commencing __________, 1999 until _______________, unless earlier redeemed. The Company has granted to the Underwriters an option, exercisable for 45 days from the date of the Offering, to purchase up to 150,000 additional Units at the Unit offering price, less the underwriting discounts and the nonaccountable allowance, for the sole purpose of covering over-allotments, if any. In connection with the Offering, the Company has agreed to sell to the Representative and its designees, for a nominal consideration, an option ("Unit Purchase Option") to purchase up to 100,000 Units. The Unit Purchase Option is exercisable initially at 120% of the Offering price per Unit for a period of five years commencing on the effectiveness of the Offering. 11. Subsequent Events a. Effective October 1, 1997, the Company entered into a consulting agreement with a firm to provide certain business development services in exchange for 3,889 shares of common stock with a fair market value of approximately $29,000, which will be amortized to operations, as earned, during the period from October 1997 through June 1998. The shares were issued on November 3, 1997. b. During December 1997, in order for the Company to arrange the purchase of certain equipment for a customer. The wife of the Company's founder and majority stockholder, who is an officer and director of the Company, provided a short-term credit facility by depositing $500,000 into a short-term interest bearing account with a Hong Kong bank as security for the bank's letter of credit of approximately $2,145,000 issuable to a supplier. The Company will record a credit F-43 122 Brighton Technologies Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (continued) Nine Months Ended September 30, 1996 and 1997 to contributed capital and a charge to operations for the estimated imputed cost of such credit facility during the period for which it is outstanding. F-44 123 The Company maintains offices in the following cities in China -- Beijing, Hong Kong, Shanghai, Shenzhen and Wuhan. 124 No dealer, salesperson or other person has been authorized to give any information or to make any representation other than those contained in this Prospectus in connection with the offer made by this Prospectus. If given or made, such information or representations must not be relied upon as having been authorized by the Company or the Underwriters. 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. This Prospectus does not constitute an offer to, or solicitation of, anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation. ---------------------------- TABLE OF CONTENTS
Page Prospectus Summary......................................................... Risk Factors............................................................... Use of Proceeds............................................................ Market Price for Common Stock.............................................. Dividend Policy............................................................ Dilution................................................................... Capitalization............................................................. Management's Discussion and Analysis or Plan of Operations.................................................. Industry Overview.......................................................... Business Development....................................................... Business................................................................... Management................................................................. Certain Transactions....................................................... Principal Stockholders..................................................... Description of Securities.................................................. Shares Eligible for Future Sale............................................ Underwriting............................................................... Legal Matters.............................................................. Experts.................................................................... Changes in Registrant's Certifying Accountants................................................. Additional Information..................................................... Index to Financial Statements..............................................
-------------------- Until __________, 1998 (25 days after the date of this Prospectus), all dealers effecting transactions in the registered securities offered hereby, whether or not participating in the Offering, 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. 1,000,000 UNITS [LOGO] BRIGHTON TECHNOLOGIES CORPORATION UNITS ---------- PROSPECTUS ---------- ________________, 1998 125 PART II ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Company's Restated Certificate of Incorporation includes provisions which limit the liability of its directors. As permitted by applicable provisions of the Delaware Law, directors will not be liable to the Company for monetary damages arising from a breach of their fiduciary duty as directors in certain circumstances. This limitation does not affect liability for any breach of a director's duty to the Company or its stockholders (i) with respect to approval by the director of any transaction from which he or she derives an improper personal benefit, (ii) with respect to acts or omissions involving an absence of good faith, that the director believes to be contrary to the best interests of the Company or its stockholders, that involve intentional misconduct or a knowing and culpable violation of law, that constitute an unexcused pattern or inattention that amounts to an abdication of his or her duty to the Company or its stockholders, or that show a reckless disregard for duty to the Company or its stockholders in circumstances in which he or she was, or should have been aware, in the ordinary course of performing his or her duties, of a risk of serious injury to the Company or its stockholders, or (iii) based on transactions between the Company and its directors or another corporation with interrelated directors or based on improper distributions, loans or guarantees under applicable sections of Delaware Law. This limitation of directors' liability also does not affect the available of equitable remedies, such as injunctive relief or rescission. The Company has been advised that it is the position of the Commission that insofar as the provision in the Company's Restated Certificate of Incorporation may be invoked for liabilities arising under the Securities Act, the provision is against public policy and is therefore unenforceable. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The estimated expenses for the issuance and distribution of the Units registered hereby, other than underwriting commissions, fees and Representative's nonaccountable expense allowance are set forth in the following table:
ITEM AMOUNT SEC Registration Fee....................................... $6,556.38 NASD Filing Fee............................................ 2,231.21 Nasdaq SmallCap Market Filing Fee.......................... 10,000.00 Blue Sky Fees and Expenses................................. 25,000.00 Transfer Agent Fees........................................ 2,500.00 Legal Fees................................................. 200,000.00 Accounting Fees............................................ 220,000.00 Printing and Engraving Costs............................... 70,000.00 Miscellaneous.............................................. 63,712.41 Total........................................... $600,000.00 ===========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES The following is information for all securities that the Company has sold within the past three years without registering the securities under the Securities Act (all share information reflect the 1 for 3 reverse stock split effective November 11, 1996, the 1 for II-1 126 3 reverse stock split effective October 17, 1997 and the 1 for 3 reverse stock split authorized and approved by the Company's Board of Directors and stockholders on January 13, 1998 which will go into effect on January 26, 1998): 1. On November 28, 1995, the Company issued an aggregate of 62,222 share of common stock to 24 investors. The offering was done as a private placement pursuant to Rule 505 of Regulation D. 2. On November 30, 1995, the Company issued an aggregate of 5,556 shares of common stock to two investors, the offering was done pursuant to Rule 504 of Regulation D. 3. On October 1, 1996, the Company issued an aggregate of 100,481 shares of common stock to eight investors. The offering was done pursuant to Rule 504 of Regulation D for a total offering price of $60,000. 4. On October 22, 1996, the Company issued an aggregate of 944,444 shares of common stock to Mr. Kit Kung and 55,556 shares to Ms. Hong Yun in connection with the Reverse Acquisition. The shares were issued pursuant to Section 4(2) of the Securities Act. 5. On October 22, 1996, the Company issued an aggregate of 8,333 shares of common stock to a consultant for the Company in connection with the Reverse Acquisition. The Shares were issued pursuant to Section 4(2) of the Securities Act. 6. On November 27, 1996, the Company issued an aggregate of 11,111 shares of common stock. The offering was done pursuant to Rule 504 of Regulation D for an aggregate offering price of $500,000. 7. On March 5, 1997, the Company issued an aggregate of 3,141 shares of common stock to five consultants or employees of the Company for services rendered. The shares were issued pursuant to Section 4(2) of the Securities Act. 8. From March 5 through April 28, 1997, the Company issued an aggregate of 8,002 shares of common stock to twelve investors for an aggregate purchase price of $352,948. The offering was done pursuant to Rule 504 of Regulation D. 9. In July 1997, the Company issued 500 shares of common stock, with an aggregate value of $17,438 to a consultant for services rendered. 10. On November 3, 1997, the Company issued 3,889 shares of common stock to a consultant for services to be rendered, of which 3,333 shares were issued pursuant to Rule 504 of the Securities Act and 556 shares were issued pursuant to Rule 701 of the Securities Act. The Company believes that the transactions described above were exempt from registration under Section 3(a)(9), 3(b) or 4(2) of the Securities Act because the Company was not subject to reporting under the Exchange Act and was not a development stage company, the aggregate amount of the subject securities was less than $1,000,000 and the subject securities were, respectively, either (i) issued pursuant to a compensatory benefit plan pursuant to Rule 701 under the Securities Act; or (ii) sold to a limited group of persons, each of whom was believed to have been a sophisticated investor or had a pre-existing business or personal relationship with the Company or its management and was purchasing for investment without a view to further distribution. Restrictive legends were placed on Stock Certificates evidencing the shares. II-2 127 ITEM 27. EXHIBITS
Exhibit Number Title - ------ ----- 1.1 Form of Underwriting Agreement 2.1 Acquisition Agreement with BIC, BECL, Kit Kung and Hung Yun* 3.1 Certificate of Incorporation as filed with the Delaware Secretary of State* 3.2 Certificate of Correction of Certificate of Incorporation, as filed with the Delaware Secretary of State on January 17, 1989* 3.3 Articles of Amendment to the Articles of Incorporation, as filed with the Delaware Secretary of State on November 1, 1995* 3.4 Certificate of Amendment to Certificate of Incorporation, as filed with the Delaware Secretary of State on October 31, 1996* 3.5 Certificate of Amendment to Certificate of Incorporation, as filed with the Delaware Secretary of State on October 10, 1997* 3.6 By-laws* 4.1 Form of Common Stock Certificate 4.2 Form of Representative's Warrant Agreement (including form of Representative's Warrants) 4.3 Form of Redeemable Warrant Agreement 5.1 Opinion of Loeb & Loeb, LLP 10.1 Lease Agreement (Allendale - The Company's and BIC's facilities)* 10.2 Lease Agreement (Hong Kong -- BECL's and its subsidiaries' facilities)* 10.3 Lease Agreement Summary (Beijing)* 10.4 Lease Agreement Summary (Beijing)* 10.5 Lease Agreement Summary (Shanghai)* 10.6 Lease Agreement Summary (Shenzhen)* 10.7 Lease Agreement Summary (Wuhan)* 10.8 Agreement with China National* 10.9 Agreement with AlliedSignal* 10.10 Agreement with Huazheng for establishment of Brighton-STAQ* 10.11 Form of Lock-Up Agreement 10.12 Lease Extension Summary (Shenzhen) 16.1 Letter of Tanner & Co., Independent Certified Accountants 16.2 Letter of Russo & Shapiro, Independent Certified Accountants 16.3 Letter of Francis S.L. Yan & Co., Independent Certified Accountants 21.1 Subsidiaries of Registrant* 23.1 Consent of BDO Seidman, LLP, Independent Certified Public Accountants 23.2 Consent of Russo & Shapiro, Independent Certified Public Accountants* 23.3 Consent of Francis S.L. Yan & Co., Independent Certified Public Accountants* 23.4 Consent of Loeb & Loeb, LLP (included in the opinion to be filed as Exhibit 5.1) 23.5 Consent of Zhong Xin Law Office 24.1 Power of Attorney (included on signature page)* 27.1 Financial Data Schedule
- -------------------- * Previously filed. II-3 128 ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes as follows: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information set forth in the Registration Statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement. (2) To provide to the Underwriters at the closing specified in the Underwriting Agreement (filed herewith as Exhibit 1.1) certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. (3) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described above in Item 24, or otherwise, the Registrant 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. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction of 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. (4) For purposes of determining any liability under the Securities Act, to treat the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4), or 497(h) under the Securities Act as part of this Registration Statement as of the time the Commission declared it effective. (5) For the purpose of determining any liability under the Securities Act, to 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 the offering of such securities at that time as the initial bona fide offering of those securities. II-4 129 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing Form SB-2 and authorized this Amendment No. 1 to this Registration Statement to be signed on its behalf by the undersigned, in the City of Allendale, State of New Jersey, on the 16th day of January, 1998. BRIGHTON TECHNOLOGIES CORPORATION By:/s/ Kit Kung ----------------------------------------- Kit Kung Chairman, President and Chief Executive Officer II-5 130 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kit Kung, as his true and lawful attorney-in-fact and agent with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments (including post-effective amendments) to this Amendment No. 1 to this Registration Statement on Form SB-2 of Brighton Technologies Corporation, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, grant unto said attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the foregoing, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitutes, may lawfully do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, this Amendment No. 1 to this Registration Statement has been signed by the following persons in the capacities and on the date stated.
Signature Title Date - --------- ----- ---- /s/ Kit Kung President, Chief Executive January 16, 1998 - ------------------------------- Kit Kung Officer and Chairman of the Board of Directors (Principal Executive Officer) * Chief Financial Officer January 16, 1998 - ------------------------------- Robert N. Weingarten * Secretary and Chief January 16, 1998 - ------------------------------- Warren Wang Accounting Officer * Director January 16, 1998 - ------------------------------- Nils Ollquist * Director January 16, 1998 - ------------------------------- Hong Yun * Director January 16, 1998 - ------------------------------- Michael Muldavin
II-6 EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 FORM OF UNDERWRITING AGREEMENT DRAFT DATED 1/15/98 BRIGHTON TECHNOLOGIES CORPORATION. 1,000,000 UNITS UNDERWRITING AGREEMENT Allendale, New Jersey January __, 1998 National Securities Corporation As Representative of the Several Underwriters c/o National Securities Corporation 1001 Fourth Avenue, Suite 2200 Seattle, Washington 98154 Ladies and Gentlemen: Brighton Technologies Corporation, a Delaware corporation (the "Company"), hereby agrees with National Securities Corporation ("National") and each of the underwriters named in Schedule A hereto (collectively, the "Underwriters," which term shall also include any underwriter substituted as hereinafter provided in Section 11), for whom National is acting as representative (in such capacity, National shall hereinafter be referred to as "you" or the "Representative") with respect to the sale by the Company and the purchase by the Underwriters, acting severally and not jointly, of the respective amount of units (the "Units") set forth in said Schedule A, each Unit consisting of one (1) share of the Company's Common Stock, par value $.001 per share (the "Common Stock"), and one (1) warrant (the "Warrants") to purchase one (1) share of Common Stock at an exercise price of $____ (150% of the offering price per Unit and exercisable at any time over a _______ (__) month period commencing upon the date of the Prospectus, pursuant to a Warrant Agreement, as defined herein, to be entered into at the Closing, which aggregate to 1,000,000 Units (collectively, the "Shares"). The Units shall not be separately tradeable until _______ (__) months after the date of the Prospectus or, at the sole discretion of the Representative, earlier upon three (3) days prior written notice by the Representative to the Company at the discretion of the Representative. The Warrants will be 2 redeemable by the Company commencing ________ (__) months after the date of the Prospectus, with the prior written consent of the Representative, at $0.10 per Warrant on thirty (30) days' prior written notice if the closing bid price of the Common Stock as reported on the Nasdaq SmallCap Market averages an amount equal to or exceeding $____ per share of Common Stock (150% of the offering price per Unit) for any twenty (20) trading days within a period of thirty (30) consecutive trading days immediately preceding such notice. Upon your request, as provided in Section 2(b) of this Agreement, the Company shall also issue and sell to the Underwriters, acting severally and not jointly, up to an additional aggregate of 150,000 Units for the purpose of covering over-allotments, if any. Such Units are hereinafter referred to as the "Option Shares." The Company also proposes to issue and sell to you warrants (the "Representative's Warrants") pursuant to the Representative's Warrant Agreement (the "Representative's Warrant Agreement") for the purchase of an additional 100,000 Units. The Units and the shares of Common Stock and the Warrants underlying such Units, and the shares of Common Stock underlying the Warrants, all issuable upon exercise of the Representative's Warrants, are hereinafter referred to as the "Representative's Shares." The Shares, Option Shares, the Representative's Warrants, and the Representative's Shares are more fully described in the Registration Statement and the Prospectus referred to below. 1. Representations and Warranties of the Company. (A) The Company represents and warrants to, and agrees with, each of the Underwriters as of the date hereof, and as of the Closing Date and the Option Closing Date, if any, as follows: (a) The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement, and an amendment or amendments thereto, on Form SB-2 (No.333- ) and a registration statement filed pursuant to Rule 462(b), including any related preliminary prospectus ("Preliminary Prospectus"), for the registration of the Shares, the Option Shares, the Representative's Warrants, and the Representative's Shares (collectively, hereinafter referred to as the "Registered Securities") under the Securities Act of 1933, as amended (the "Act"), which registration statement and amendment or amendments have been prepared by the Company in conformity with the requirements of the Act, and the Regulations (as defined below) of the Commission under the Act. The Company will not file any other amendment thereto to which the Underwriters shall have objected in writing after having been furnished with a copy thereof. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement becomes effective (including the prospectus, financial statements, schedules, exhibits and all other documents filed as a part thereof or incorporated therein and all information deemed to be a part thereof as of such time pursuant to paragraph (b) of Rule 430(A) of the Regulations), is hereinafter called the "Registration Statement," and the form of prospectus in the form first filed with the Commission pursuant to Rule 424(b) of the Regulations, is hereinafter called the "Prospectus." For purposes hereof, "Regulations" mean the rules and regulations -2- 3 adopted by the Commission under either the Act or the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as applicable. (b) Neither the Commission nor any state regulatory authority has issued any order preventing or suspending the use of any Preliminary Prospectus, the Registration Statement or the Prospectus and no proceedings for a stop order suspending the effectiveness of the Registration Statement have been instituted, or, to the Company's knowledge, are threatened. Each of the Preliminary Prospectus, the Registration Statement and the Prospectus at the time of filing thereof conformed in all material respects with the requirements of the Act and Regulations, and none of the Preliminary Prospectus, the Registration Statement or the Prospectus at the time of filing thereof contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein and necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except that this representation and warranty does not apply to statements made in reliance upon and in conformity with written information furnished to the Company with respect to the Underwriters by or on behalf of the Underwriters expressly for use in such Preliminary Prospectus, Registration Statement or Prospectus. (c) When the Registration Statement becomes effective and at all times subsequent thereto up to the Closing Date (as defined in Section 2(c) hereof) and each Option Closing Date (as defined in Section 2(b) hereof), if any, and during such longer period as the Prospectus may be required to be delivered in connection with sales by the Underwriters or a dealer, the Registration Statement and the Prospectus, as amended or supplemented as required, will contain all statements which are required to be stated therein in accordance with the Act and the Regulations, and will conform in all material respects to the requirements of the Act and the Regulations; neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, provided, however, that this representation and warranty does not apply to statements made or statements omitted in reliance upon and in conformity with information furnished to the Company in writing by or on behalf of any Underwriter expressly for use in the Registration Statement or the Prospectus or any amendment thereof or supplement thereto. (d) The Company and each of its subsidiaries have been duly organized and are validly existing as corporations in good standing under the laws of the respective states of their incorporation. The Company does not own or control, directly or indirectly, any corporation, partnership, trust, joint venture or other business entity other than the subsidiaries listed in Exhibit 21 of the Registration Statement. Each of the Company and its subsidiaries is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of any properties or the character of its operations require such qualification or licensing and where the failure to do so qualify or be licensed could have a -3- 4 material adverse effect on the financial condition, results of operations or business of the Company. Each of the Company and its subsidiaries has all requisite power and authority (corporate and other), and has obtained any and all necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies (including, without limitation, those having jurisdiction over environmental or similar matters), to own or lease its properties and conduct its business as described in the Prospectus, except where the failure to do so would not have a material adverse effect on the financial condition, results of operations or business of the Company; the Company and each of its subsidiaries have been doing business in compliance with all such authorizations, approvals, orders, licenses, certificates, franchises and permits and all federal, state, local and foreign laws, rules and regulations; and neither the Company nor any of its subsidiaries have received any notice of proceedings relating to the revocation or modification of any such authorization, approval, order, license, certificate, franchise, or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would materially and adversely affect the condition, financial or otherwise, or the business affairs, operations, properties, or results of operations of the Company and its subsidiaries, taken as a whole. The disclosures in the Registration Statement concerning the effects of federal, state, local, and foreign laws, rules and regulations on the Company's business as currently conducted and as contemplated are correct in all material respects and do not omit to state a material fact necessary to make the statements contained therein not misleading in light of the circumstances in which they were made. (e) The Company has a duly authorized, issued and outstanding capitalization as set forth in the Prospectus under the headings "Capitalization" and "Description of Securities" and will have the adjusted capitalization set forth therein on the Closing Date and the Option Closing Date, if any, based upon the assumptions set forth therein, and the Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement and as described in the Prospectus. The Registered Securities and all other securities issued or issuable by the Company conform or, when issued and paid for, will conform, in all material respects to all statements with respect thereto contained in the Registration Statement and the Prospectus. All issued and outstanding shares of capital stock of each subsidiary of the Company have been duly authorized and validly issued and are fully paid and nonassessable. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company and the related notes thereto included in the Prospectus, neither the Company nor any subsidiary has outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements and the options or other rights granted and exercised thereunder as set forth in the Prospectus conforms in all material respects with the requirements of the Act. All issued and outstanding securities of the Company have been duly authorized and validly issued and are fully paid and non-assessable, and the holders thereof have no rights of rescission -4- 5 with respect thereto and are not subject to personal liability by reason of being such holders; and none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company or similar contractual rights granted by the Company. (f) The Registered Securities are not and will not be subject to any preemptive or other similar rights of any shareholder, have been duly authorized and, when issued, paid for and delivered in accordance with the terms hereof, will be validly issued, fully paid and non-assessable and will conform in all material respects to the description thereof contained in the Prospectus; the holders thereof will not be subject to any liability solely as such holders; all corporate action required to be taken for the authorization, issue and sale of the Registered Securities has been duly and validly taken; and the certificates representing the Registered Securities will be in due and proper form. Upon the issuance and delivery pursuant to the terms hereof of the Registered Securities to be sold by the Company hereunder, the Underwriters or the Representative, as the case may be, will acquire good and marketable title to such Registered Securities free and clear of any lien, charge, claim, encumbrance, pledge, security interest, defect, or other restriction or equity of any kind whatsoever. No shareholder of the Company has any right which has not been waived in writing to require the Company to register the sale of any shares owned by such shareholder under the Act in the public offering contemplated by this Agreement. No further approval or authority of the shareholders or the Board of Directors of the Company will be required for the issuance and sale of the Shares, the Option Shares and the Representative's Warrants to be sold by the Company as contemplated herein. (g) The financial statements of the Company, together with the related notes and schedules thereto, included in the Registration Statement, each Preliminary Prospectus and the Prospectus fairly present the financial position, changes in shareholders' equity and the results of operations of the Company at the respective dates and for the respective periods to which they apply and such financial statements have been prepared in conformity with generally accepted accounting principles and the Regulations, consistently applied throughout the periods involved. There has been no material adverse change or development involving a material prospective change in the condition, financial or otherwise, or in the business, affairs, operations, properties, or results of operation of the Company and its subsidiaries taken as a whole whether or not arising in the ordinary course of business since the date of the financial statements included in the Registration Statement and the Prospectus and the outstanding debt, the property, both tangible and intangible, and the business of the Company and its subsidiaries taken as a whole conform in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus. Financial information set forth in the Prospectus under the headings "Prospectus Summary," "Selected Financial Data," "Capitalization," and "Management's Discussion and Analysis of Financial Condition and Results of Operations," fairly present, on the basis stated in the Prospectus, the information set forth therein and have been derived from or compiled on a basis consistent with that of the audited financial statements included in the Prospectus. -5- 6 (h) Except as otherwise disclosed in the Company's balance sheet contained in the Prospectus, the Company (i) has paid all federal, state, local, franchise, and foreign taxes for which it is liable, including, but not limited to, withholding taxes and amounts payable under Chapters 21 through 24 of the Internal Revenue Code of 1986, as amended (the "Code"), and has furnished all information returns it is required to furnish pursuant to the Code, (ii) has established adequate reserves for such taxes which are not due and payable, and (iii) does not have any tax deficiency or claims outstanding, proposed or assessed against it. (i) No transfer tax, stamp duty or other similar tax is payable by or on behalf of the Underwriters in connection with (i) the issuance by the Company of the Registered Securities, (ii) the purchase by the Underwriters of the Registered Securities from the Company and the purchase by the Representative of the Representative's Warrants from the Company, (iii) the consummation by the Company of any of its obligations under this Agreement, or (iv) resales of the Registered Securities in connection with the distribution contemplated hereby. (j) There is no claim, action, suit, proceeding, inquiry, arbitration, mediation, investigation, litigation, governmental or other proceeding (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, pending or threatened against (or circumstances that may give rise to the same), or involving the properties or businesses of, the Company which (i) questions the validity of the capital stock of the Company, this Agreement, the Warrant Agreement or the Representative's Warrant Agreement, or of any action taken or to be taken by the Company pursuant to or in connection with this Agreement, the Warrant Agreement or the Representative's Warrant Agreement, (ii) is required to be disclosed in the Registration Statement which is not so disclosed (and such proceedings as are summarized in the Registration Statement are accurately summarized in all material respects), or (iii) might materially and adversely affect the condition, financial or otherwise, or the business, affairs, position, shareholders' equity, operation, properties, or results of operations of the Company and its subsidiaries taken as a whole. (k) The Company has the corporate power and authority to authorize, issue, deliver, and sell the Registered Securities and to enter into this Agreement, the Warrant Agreement and the Representative's Warrant Agreement, and to consummate the transactions provided for in such agreements; and this Agreement, the Warrant Agreement and the Representative's Warrant Agreement have each been duly and properly authorized, executed, and delivered by the Company. Each of this Agreement, the Warrant Agreement and the Representative's Warrant Agreement constitutes a legal, valid and binding agreement of the Company enforceable against the Company in accordance with its respective terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law), and none of the Company's issue and sale of the Registered Securities, execution, delivery or performance of -6- 7 this Agreement, the Warrant Agreement and the Representative's Warrant Agreement, its consummation of the transactions contemplated herein and therein, or the conduct of its businesses as described in the Registration Statement, the Prospectus, and any amendments or supplements thereto, conflicts with or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a default under, or result in the creation or imposition of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever upon, any property or assets (tangible or intangible) of the Company pursuant to the terms of (i) the articles of incorporation or by-laws of the Company, as amended and restated, (ii) any license, contract, indenture, mortgage, deed of trust, voting trust agreement, shareholders agreement, note, loan or credit agreement or any other agreement or instrument to which the Company is a party or by which it is or may be bound or to which its properties or assets (tangible or intangible) is or may be subject, or any indebtedness, or (iii) any statute, judgment, decree, order, rule or regulation applicable to the Company of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Company of any of their activities or properties. (l) No consent, approval, authorization or order of, and no filing with, any court, regulatory body, government agency or other body, domestic or foreign, is required for the issuance of the Registered Securities pursuant to the Prospectus and the Registration Statement, the performance of this Agreement, the Warrant Agreement, the Representative's Warrant Agreement, and the transactions contemplated hereby and thereby, including without limitation, any waiver of any preemptive, first refusal or other rights that any entity or person may have for the issue and/or sale of any of the Registered Securities, except such as have been or may be obtained under the Act or may be required under state securities or Blue Sky laws in connection with the Underwriters' purchase and distribution of the Registered Securities to be sold by the Company hereunder. (m) All executed agreements, contracts or other documents or copies of executed agreements, contracts or other documents filed as exhibits to the Registration Statement to which the Company is a party or by which it may be bound or to which its assets, properties or businesses may be subject have been duly and validly authorized, executed and delivered by the Company and constitute the legal, valid and binding agreements of the Company enforceable against the Company in accordance with their respective terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law). The descriptions in the Registration Statement of such agreements, contracts and other documents are accurate in all material respects and fairly present the information required to be shown with respect thereto by Form SB-2, and there are no contracts or other documents which are required by the Act to be described in the -7- 8 Registration Statement or filed as exhibits to the Registration Statement which are not described or filed as required, and the exhibits which have been filed are complete and correct copies of the documents of which they purport to be copies. (n) Since the respective dates as of which information is given in the Registration Statement and Prospectus, and except as described in or specifically contemplated by the Prospectus (i) the Company has not incurred any material liabilities or obligations, indirect, direct or contingent, or entered into any material verbal or written agreement or other transaction which is not in the ordinary course of business or which could result in a material reduction in the future earnings of the Company; (ii) the Company has not sustained any material loss or interference with its business or properties from fire, flood, windstorm, accident or other calamity, whether or not covered by insurance; (iii) the Company has not paid or declared any dividends or other distributions with respect to its capital stock, and the Company is not in default in the payment of principal or interest on any outstanding debt obligations; (iv) there has not been any change in the capital stock (other than upon the sale of the Shares, the Option Shares and the Representative's Shares hereunder and upon the exercise of options and warrants described in the Registration Statement) of, or indebtedness material to, the Company (other than in the ordinary course of business); (v) the Company has not issued any securities or incurred any liability or obligation, primary or contingent, for borrowed money; and (vi) there has not been any material adverse change in the condition (financial or otherwise), business, properties, results of operations, or prospects of the Company. (o) Except as disclosed in or specifically contemplated by the Prospectus, (i) the Company has sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals and governmental authorizations to conduct its business as now conducted; (ii) the expiration of any trademarks, trade names, patent rights, copyrights, licenses, approvals or governmental authorizations would not have a material adverse effect on the condition (financial or otherwise), business, results of operations or prospects of the Company; (iii) the Company has no knowledge of any infringement by it or its subsidiaries of trademark, trade name rights, patent rights, copyrights, licenses, trade secret or other similar rights of others; and (iv) there is no claim being made against the Company regarding trademark, trade name, patent, copyright, license, trade secret or other infringement which could have a material adverse effect on the condition (financial or otherwise), business, results of operations or prospects of the Company. (p) Except as otherwise disclosed in the Prospectus, no default exists, which would have a material adverse effect on the Company, in the due performance and observance of any term, covenant or condition of any license, contract, indenture, mortgage, installment sale agreement, lease, deed of trust, voting trust agreement, shareholders agreement, note, loan or credit agreement, or any other material agreement or instrument evidencing an obligation for borrowed money, or any other material agreement or instrument to which the -8- 9 Company is a party or by which the Company may be bound or to which the property or assets (tangible or intangible) of the Company is subject or affected. (q) To the Company's knowledge, there are no pending investigations involving the Company by the U.S. Department of Labor, or any other governmental agency responsible for the enforcement of such federal, state, local, or foreign laws and regulations. There is no unfair labor practice charge or complaint against the Company pending before the National Labor Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage pending or to its knowledge threatened against or involving the Company. No representation question exists respecting the employees of the Company. No collective bargaining agreement, or modification thereof is currently being negotiated by the Company. No grievance or arbitration proceeding is pending under any expired or existing collective bargaining agreements of the Company. No labor dispute with the employees of the Company exists or to its knowledge is imminent. (r) Except as described in the Prospectus, the Company does not maintain, sponsor or contribute to any program or arrangement that is an "employee pension benefit plan, " an "employee welfare benefit plan," or a "multiemployer plan" as such terms are defined in Sections 3(2), 3(1) and 3(37), respectively, of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plans"). The Company does not maintain or contribute to a defined benefit plan, as defined in Section 3(35) of ERISA. No ERISA Plan (or any trust created thereunder) has engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA or Section 4975 of the Code, which could subject the Company to any tax penalty on prohibited transactions and which has not adequately been corrected. Each ERISA Plan is in compliance with all material reporting, disclosure and other requirements of the Code and ERISA as they relate to any such ERISA Plan. Determination letters have been received from the Internal Revenue Service with respect to each ERISA Plan which is intended to comply with Code Section 401(a), stating that such ERISA Plan and the attendant trust are qualified thereunder. The Company has never completely or partially withdrawn from a "multiemployer plan." (s) Neither the Company, nor, to the best of the Company's knowledge, any of its employees, directors, shareholders, or affiliates (within the meaning of the Regulations) of any of the foregoing has taken or will take directly or indirectly, any action designed to or which has constituted or which might be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Registered Securities. (t) The Company has good and marketable title to, or valid and enforceable leasehold estates in, all items of real and personal property stated in the Prospectus to be owned or leased by it, free and clear of all liens, charges, claims, encumbrances, pledges, security -9- 10 interests, or other restrictions or equities of any kind whatsoever other than those referred to in the Prospectus and liens for taxes not yet due and payable. (u) To the best of the Company's knowledge, BDO Seidman, LLP ("BDO Seidman"), whose report is filed with the Commission as a part of the Registration Statement, are independent certified public accountants as required by the Act and the Regulations. (v) The Company has caused to be duly executed legally binding and enforceable agreements pursuant to which all persons or entities that directly or beneficially own Common Stock, as of the effective date of the Registration Statement, have agreed not to, directly or indirectly, offer, offer to sell, sell, grant any option for the sale of, transfer, assign, pledge, hypothecate or otherwise encumber or dispose of any shares of Common Stock or securities convertible into Common Stock, exercisable or exchangeable for or evidencing any right to purchase or subscribe for any shares of Common Stock (either pursuant to Rule 144 of the Regulations or otherwise) or dispose of any interest therein for a period from the date of the Prospectus until thirteen (13) months following the date that the Registration Statement becomes effective, without the prior written consent of National (the "Lock-up Agreements"). The Company will cause the Transfer Agent (as defined herein) to place "stop transfer" orders on the Company's stock ledgers to effect the Lock-up Agreements. (w) There are no claims, payments, arrangements or understandings, whether oral or written, for services in the nature of a finder's or origination fee with respect to the sale of the Registered Securities hereunder or any other arrangements, agreements, understandings, payments or issuance with respect to the Company or any of its officers, directors, shareholders, employees or affiliates that may affect the Underwriters' compensation as determined by the Commission and NASD Regulation, Inc. (the "NASD"). (x) The Registered Securities have been approved for quotation on the Nasdaq SmallCap Market. (y) Neither the Company, nor any of its officers, employees, agents or any other person acting on behalf of the Company has, directly or indirectly, given or agreed to give any money, gift or similar benefit (other than legal price concessions to customers in the ordinary course of business) to any customer, supplier, employee or agent of a customer or supplier, or official or employee of any governmental agency (domestic or foreign) or instrumentality of any government (domestic or foreign) or any political party or candidate for office (domestic or foreign) or other person who was, is, or may be in a position to help or hinder the business of the Company (or assist the Company in connection with any actual or proposed transaction) which might subject the Company or any other such person to any damage or penalty in any civil, criminal or governmental litigation or proceeding (domestic or foreign). The Company believes that its internal accounting controls are sufficient to cause the Company to comply with the Foreign Corrupt Practices Act of 1977, as amended. -10- 11 (z) Except as set forth in the Prospectus, no officer, director or shareholder of the Company, or any "affiliate" or "associate" (as these terms are defined in Rule 405 promulgated under the Regulations) of any of the foregoing persons or entities has or has had, either directly or indirectly, (i) an interest in any person or entity which (A) furnishes or sells services or products which are furnished or sold or are proposed to be furnished or sold by the Company, or (B) purchases from or sells or furnishes to the Company any goods or services, or (ii) a beneficiary interest in any contract or agreement to which the Company is a party or by which it may be bound or affected. Except as set forth in the Prospectus there are no existing agreements, arrangements, understandings or transactions, or proposed agreements, arrangements, understandings or transactions, between or among the Company, and any officer, director, principal shareholder (as such term is used in the Prospectus) of the Company, or any affiliate or associate of any of the foregoing persons or entities. (aa) The Company is not, and does not intend to conduct its business in a manner in which it would become an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (ab) Any certificate signed by any officer of the Company and delivered to the Underwriters or to the Underwriters' Counsel (as defined in Section 4(d) herein) shall be deemed a representation and warranty by the Company to the Underwriters as to the matters covered thereby. (ac) The minute books of the Company have been made available to the Underwriters and contain a complete summary of all meetings and actions of the directors and shareholders of the Company, since the time of its incorporation, and reflect all transactions referred to in such minutes accurately in all material respects. (ad) The Company has not distributed and will not distribute prior to the Closing Date any offering material in connection with the offering and sale of the Shares in this offering other than the Prospectus, the Registration Statement and the other materials permitted by the Act. Except as described in the Prospectus, no holders of any securities of the Company or of any options, warrants or other convertible or exchangeable securities of the Company have the right to include any securities issued by the Company as part of the Registration Statement or to require the Company to file a registration statement under the Act and no person or entity holds any anti-dilution rights with respect to any securities of the Company. (ae) Each of the Company and its subsidiaries maintains insurance by insurers of recognized financial responsibility of the types and in the amounts as are prudent, customary and adequate for the business in which it is engaged, including, but not limited to, insurance covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. The Company has no reason -11- 12 to believe that it will not be able to renew existing insurance coverage with respect to the Company as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business, in either case, at a cost that would not have a material adverse effect on the financial condition, operations, business, assets or properties of the Company. The Company has not failed to file any claims, has no material disputes with its insurance company regarding any claims submitted under its insurance policies, and has complied with all material provisions contained in its insurance policies. (af) The Company has entered into a warrant agreement (the "Warrant Agreement") substantially in the form filed as Exhibit 4.4 to the Registration Statement with Continental Stock Transfer & Trust Company, in form and substance satisfactory to the Representative, with respect to the Warrants providing for the payment of commissions contemplated by Section 4(y), hereof. The Warrant Agreement has been duly and validly authorized by the Company and, assuming due execution by the parties thereto other than the Company, constitutes a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except (i) as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally, (ii) as enforceability of any indemnification provision may be limited under the federal and state securities laws, and (iii) that the remedy of specific performance and injunctive and other forms of equitable relief may be subject to the equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. (ag) None of the Company's services or products have or will have any malfunctions or other usage problems in connection with the use of the Year 2000 and beyond as distinguished from the use of the years 1990 through 1999 and earlier years. 2. Purchase, Sale and Delivery of the Registered Securities. (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, and each Underwriter, severally and not jointly agrees to purchase from the Company, at a price equal to $_____ per Unit, that number of Shares set forth in Schedule A opposite the name of such Underwriter, subject to such adjustment as the Representative in its discretion shall make to eliminate any sales or purchases of fractional shares, plus any additional numbers of Shares which such Underwriter may become obligated to purchase pursuant to the provisions of Section 11 hereof. (b) In addition, on the basis of the representations, warranties, covenants and agreements, herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants an option to the Underwriters, severally and not jointly, to purchase all or any part of the Option Shares at a price equal to $_____ per Unit. The option granted hereby will expire 45 days after (i) the date the Registration Statement becomes effective, if the -12- 13 Company has elected not to rely on Rule 430A under the Regulations, or (ii) the date of this Agreement if the Company has elected to rely upon Rule 430A under the Regulations, and may be exercised in whole or in part from time to time (but not on more than two (2) occasions) only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Shares upon notice by the Representative to the Company setting forth the number of Option Shares as to which the several Underwriters are then exercising the option and the time and date of payment and delivery for any such Option Shares. Any such time and date of delivery (an "Option Closing Date") shall be determined by the Representative, but shall not be later than three full business days after the exercise of said option, nor in any event prior to the Closing Date, as hereinafter defined, unless otherwise agreed upon by the Representative and the Company. Nothing herein contained shall obligate the Underwriters to exercise the over-allotment option described above. No Option Shares shall be delivered unless the Shares shall be simultaneously delivered or shall theretofore have been delivered as herein provided. (c) Payment of the purchase price for, and delivery of certificates for, the Shares shall be made at the offices of National, at 1001 Fourth Avenue, Suite 2200, Seattle, Washington, or at such other place as shall be agreed upon by the Representative and the Company. Such delivery and payment shall be made at 9:00 a.m. (New York time) on _________, 1998 or at such other time and date as shall be agreed upon by the Representative and the Company, but no more than four (4) business days after the date hereof (such time and date of payment and delivery being herein called the "Closing Date"). In addition, in the event that any or all of the Option Shares are purchased by the Underwriters, payment of the purchase price for, and delivery of certificates for, such Option Shares shall be made at the above mentioned office of National or at such other place as shall be agreed upon by the Representative and the Company on each Option Closing Date as specified in the notice from the Representative to the Company. Delivery of the certificates for the Shares and the Option Shares, if any, shall be made to the Underwriters against payment by the Underwriters, of the purchase price for the Shares and the Option Shares, if any, to the order of the Company. In the event such option is exercised, each of the Underwriters, acting severally and not jointly, shall purchase that proportion of the total number of Option Shares then being purchased which the total number of Shares set forth in Schedule A hereto opposite the name of such Underwriter bears to the total number of Shares, subject in each case to such adjustments as the Representative in their discretion shall make to eliminate any sales or purchases of fractional shares. Certificates for the Shares and the Option Shares, if any, shall be in definitive, fully registered form, shall bear no restrictive legends and shall be in such denominations and registered in such names as the Underwriters may request in writing at least three (3) business days prior to Closing Date or the relevant Option Closing Date, as the case may be. The certificates for the Shares and the Option Shares, if any, shall be made available to the Representative at such office or such other place as the Representative may designate for inspection, checking and packaging no later than 9:30 a.m. on the last business day prior to Closing Date or the relevant Option Closing Date, as the case may be. -13- 14 (d) On the Closing Date, the Company shall issue and sell to the Representative the Representative's Warrants at a purchase price of $0.0001 per warrant, which warrants shall entitle the holders thereof to purchase an aggregate of 100,000 Units. The Representative's Warrants shall expire five (5) years after the effective date of the Registration Statement and shall be exercisable commencing one (1) year from the effective date of the Registration Statement at a price equaling one hundred and twenty percent (120%) of the initial public offering price of the Units. The Representative's Warrant Agreement and form of Warrant Certificate shall be substantially in the form filed as Exhibit 4.2 to the Registration Statement. Payment for the Representative's Warrants shall be made on the Closing Date. 3. Public Offering of the Shares. As soon after the Registration Statement becomes effective as the Representative deems advisable, the Underwriters shall make a public offering of the Shares (other than to residents of or in any jurisdiction in which qualification of the Shares is required and has not become effective) at the price and upon the other terms set forth in the Prospectus. The Representative may from time to time increase or decrease the public offering price after distribution of the Shares has been completed to such extent as the Representative, in its sole discretion deems advisable. The Underwriters may enter into one or more agreements as the Underwriters, in each of their sole discretion, deem advisable with one or more broker-dealers who shall act as dealers in connection with such public offering. In addition, the Units shall not be separately tradeable until _______ (__) months after the date of the Prospectus or, at the sole discretion of the Representative, earlier upon three (3) days prior written notice by the Representative to the Company at the discretion of the Representative. 4. Covenants of the Company. The Company covenants and agrees with each of the Underwriters as follows: (a) The Company shall use its best efforts to cause the Registration Statement and any amendments thereto to become effective as promptly as practicable and will not at any time, whether before or after the effective date of the Registration Statement, file any amendment to the Registration Statement or supplement to the Prospectus or file any document under the Act or Exchange Act before termination of the offering of the Shares by the Underwriters of which the Representative shall not previously have been advised and furnished with a copy, or to which the Representative shall have objected or which is not in compliance with the Act, the Exchange Act or the Regulations. (b) As soon as the Company is advised or obtains knowledge thereof, the Company will advise the Representative and confirm the notice in writing, (i) when the Registration Statement, as amended, becomes effective, if the provisions of Rule 430A promulgated under the Act will be relied upon, when the Prospectus has been filed in accordance with said Rule 430A and when any post-effective amendment to the Registration Statement becomes effective, (ii) of the issuance by the Commission of any stop order or of the initiation, or the threatening, of any proceeding, suspending the effectiveness of the Registration Statement -14- 15 or any order preventing or suspending the use of the Preliminary Prospectus or the Prospectus, or any amendment or supplement thereto, or the institution of proceedings for that purpose, (iii) of the issuance by the Commission or by any state securities commission of any proceedings for the suspension of the qualification of any of the Registered Securities for offering or sale in any jurisdiction or of the initiation, or the threatening, of any proceeding for that purpose, (iv) of the receipt of any comments from the Commission; and (v) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information. If the Commission or any state securities commission authority shall enter a stop order or suspend such qualification at any time, the Company will use its best efforts to obtain promptly the lifting of such order. (c) The Company shall file the Prospectus (in form and substance satisfactory to the Representative) in accordance with the requirements of the Act. (d) The Company will give the Representative notice of its intention to file or prepare any amendment to the Registration Statement (including any post-effective amendment) or any amendment or supplement to the Prospectus (including any revised prospectus which the Company proposes for use by the Underwriters in connection with the offering of the Registered Securities which differs from the corresponding prospectus on file at the Commission at the time the Registration Statement becomes effective, whether or not such revised prospectus is required to be filed pursuant to Rule 424(b) of the Regulations), and will furnish the Representative with copies of any such amendment or supplement a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file any such amendment or supplement to which the Representative or Camhy Karlinsky & Stein LLP ("Underwriters' Counsel") shall reasonably object. (e) The Company shall endeavor in good faith, in cooperation with the Representative, at or prior to the time the Registration Statement becomes effective, to qualify the Registered Securities for offering and sale under the securities laws of such jurisdictions as the Representative may reasonably designate to permit the continuance of sales and dealings therein for as long as may be necessary to complete the distribution, and shall make such applications, file such documents and furnish such information as may be required for such purpose; provided, however, the Company shall not be required to qualify as a foreign corporation or become subject to service of process in any such jurisdiction. In each jurisdiction where such qualification shall be effected, the Company will, unless the Representative agree that such action is not at the time necessary or advisable, use all reasonable efforts to file and make such statements or reports at such times as are or may reasonably be required by the laws of such jurisdiction to continue such qualification. (f) During the time when a prospectus is required to be delivered under the Act, the Company shall use all reasonable efforts to comply with all requirements imposed upon it by the Act, as now and hereafter amended, and by the Regulations, as from time to time -15- 16 in force, so far as necessary to permit the continuance of sales of or dealings in the Registered Securities in accordance with the provisions hereof and the Prospectus, or any amendments or supplements thereto. If at any time when a prospectus relating to the Registered Securities is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or Underwriters' Counsel, the Prospectus, as then amended or supplemented, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend or supplement the Prospectus to comply with the Act, the Company will notify the Representative promptly and prepare and file with the Commission an appropriate amendment or supplement in accordance with Section 10 of the Act, each such amendment or supplement to be satisfactory to Underwriters' Counsel, and the Company will furnish to the Underwriters copies of such amendment or supplement as soon as available and in such quantities as the Underwriters may request. (g) As soon as practicable, but in any event not later than 45 days after the end of the 12-month period beginning on the day after the end of the fiscal quarter of the Company during which the effective date of the Registration Statement occurs (90 days in the event that the end of such fiscal quarter is the end of the Company's fiscal year), the Company shall make generally available to its security holders, in the manner specified in Rule 158(b) of the Regulations, and to the Representative, an earnings statement which will be in the detail required by, and will otherwise comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the Regulations, which statement need not be audited unless required by the Act, covering a period of at least 12 consecutive months after the effective date of the Registration Statement. (h) During a period of five (5) years after the date hereof, the Company will furnish to its shareholders, as soon as practicable, annual reports (including financial statements audited by independent public accountants) and unaudited quarterly reports of earnings, and will deliver to the Representative: (i) concurrently with furnishing such quarterly reports to its shareholders, statements of income of the Company for each quarter in the form furnished to the Company's shareholders; (ii) concurrently with furnishing such annual reports to its shareholders, a balance sheet of the Company as at the end of the preceding fiscal year, together with statements of operations, shareholders' equity, and cash flows of the Company for such fiscal year, accompanied by a copy of the report thereon of independent certified public accountants; -16- 17 (iii) as soon as they are available, copies of all reports (financial or other) mailed to shareholders; (iv) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, the Nasdaq SmallCap Market or any securities exchange; (v) every press release and every material news item or article of interest to the financial community in respect of the Company or its affairs which was released or prepared by or on behalf of the Company; and (vi) any additional information of a public nature concerning the Company (and any future subsidiaries) or its businesses which the Representative may reasonably request. During such five-year period, if the Company has active subsidiaries, the foregoing financial statements will be on a consolidated basis to the extent that the accounts of the Company and its subsidiaries are consolidated, and will be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. (i) The Company will maintain a transfer and warrant agent (the "Transfer Agent") and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for the Units, Common Stock, Warrants and the Representative's Warrants. (j) The Company will furnish to the Representative or on the Representative's order, without charge, at such place as the Representative may designate, copies of each Preliminary Prospectus, the Registration Statement and any pre-effective or post-effective amendments thereto (two of which copies will be signed and will include all financial statements and exhibits), each Preliminary Prospectus, the Prospectus, and all amendments and supplements thereto, including any prospectus prepared after the effective date of the Registration Statement, in each case as soon as available and in such quantities as the Representative may reasonably request. (k) On or before the effective date of the Registration Statement, the Company shall provide the Representative with true copies of duly executed, legally binding and enforceable Lock-up Agreements. On or before the Closing Date, the Company shall deliver instructions to the Transfer Agent authorizing it to place appropriate stop transfer orders on the Company's ledgers. (l) The Company shall use its best efforts to cause its officers, directors, shareholders or affiliates (within the meaning of the Regulations) not to take, directly or -17- 18 indirectly, any action designed to, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any securities of the Company. (m) The Company shall apply the net proceeds from the sale of the Registered Securities substantially in the manner, and subject to the conditions, set forth under "Use of Proceeds" in the Prospectus. (n) The Company shall timely file all such reports, forms or other documents as may be required from time to time, under the Act, the Exchange Act, and the Regulations, and all such reports, forms and documents filed will comply as to form and substance with the applicable requirements under the Act, the Exchange Act, and the Regulations. (o) The Company shall cause the Registered Securities to be quoted on the Nasdaq SmallCap Market and for a period of two (2) years from the date hereof shall use its best efforts to maintain the quotation of the Registered Securities to the extent outstanding. (p) For a period of two (2) years from the Closing Date, the Company shall furnish to the Representative, at the Company's sole expense, monthly consolidated transfer sheets relating to the Common Stock. (q) For a period of five (5) years after the effective date of the Registration Statement the Company shall use its best efforts, at the Company's sole expense, to take all necessary and appropriate actions to further qualify the Company's securities in all jurisdictions of the United States in order to permit secondary sales of such securities pursuant to the Blue-Sky laws of those jurisdictions which do not require the Company to qualify as a foreign corporation or to file a general consent to service of process. (r) The Company (i) prior to the effective date of the Registration Statement, has filed a Form 8-A with the Commission providing for the registration of the Common Stock under the Exchange Act and (ii) as soon as practicable, will use its best efforts to take all necessary and appropriate actions to be included in Standard and Poor's Corporation Descriptions and Moody's OTC Manual and to continue such inclusion for a period of not less than five (5) years. (s) The Company agrees that for a period of thirteen (13) months following the effective date of the Registration Statement it will not, without the prior written consent of National, offer, issue, sell, contract to sell, grant any option for the sale of or otherwise dispose of any Units or Common Stock, or securities convertible into Common Stock, except for the issuance of the Option Shares, the Representative's Warrants, and shares of Common Stock upon the exercise of currently outstanding warrants or options issued under any stock option plan in -18- 19 effect on the Closing Date or options to purchase shares of Common Stock granted pursuant to any stock option plan in effect on the Closing Date. (t) Until the completion of the distribution of the Registered Securities, the Company shall not without the prior written consent of National or Underwriters' Counsel, issue, directly or indirectly any press release or other communication or hold any press conference with respect to the Company or its activities or the offering contemplated hereby, other than trade releases issued in the ordinary course of the Company's business consistent with past practices with respect to the Company's operations. (u) For a period equal to the lesser of (i) five (5) years from the date hereof, and (ii) the sale to the public of the Representative's Shares, the Company will not take any action or actions which may prevent or disqualify the Company's use of Form SB-2 (or other appropriate form) for the registration under the Act of the Representative's Shares. (v) The Company agrees that upon the request of National it shall use its best efforts, which shall include, but shall not be limited to, the solicitation of proxies, to elect one (1) designee of National to the Company's Board of Directors for a period of five (5) years following the Closing, provided that such designee is reasonably acceptable to the Company. In the event National does not exercise its right to designate a member of the Board of Directors, then it shall have the right to designate one person to attend all meetings of the Board of Directors of the Company, and all committees thereof, as an observer. Such observer shall be entitled to receive notices of all such meetings, and all correspondence and communications sent by the Company to members of its Board of Directors, and to attend all such meetings. The Company shall reimburse the designee of National for his out-of-pocket expenses incurred in connection with their attendance at such meetings. (w) The Company agrees that within forty-five (45) days after the Closing it shall retain a public relations firm which is acceptable to National. The Company shall keep such public relations firm, or any replacement, for a period of three (3) years from the Closing. Any replacement public relations firm shall be retained only with the consent of National. (x) The Company agrees that any and all future transactions between the Company and its officers, directors, principal shareholders and the affiliates of the foregoing persons will be on terms no less favorable to the Company than could reasonably be obtained in arm's length transactions with independent third parties, and that any such transactions also be approved by a majority of the Company's outside independent directors disinterested in the transaction. (y) The Company shall prepare and deliver, at the Company's sole expense, to National within the one hundred and twenty (120) day period after the later of the effective date of the Registration Statement or the latest Option Closing Date, as the case may -19- 20 be, four (4) bound volumes containing all correspondence with regulatory officials, agreements, documents and all other materials in connection with the offering as requested by the Underwriters' Counsel. (z) The Company shall pay the Representative a commission equal to five percent (5%) of the exercise price of each Warrant exercised for the period commencing twelve (12) months after the effective date of the Registration Statement until the expiration of the term of the Warrants, payable on the date of such exercise on terms provided for in the Warrant Agreement. The Company will not solicit the exercise of the Warrants other than through the Representative. However, no compensation will be paid to the Representative in connection with the exercise of the Warrants if (i) the Warrants are held in a discretionary account, or (ii) the Warrants are exercised in an unsolicited transaction. Further, the Representative must be designated in writing by the account holder as having solicited the transaction, otherwise the Representative shall not be paid the fee. In addition, the Representative will not receive any commission with respect to the exercise of the Warrants contained in the Units to be received upon the exercise of the Representative's Warrants, unless held by a person or entity other than any of the Underwriters. 5. Payment of Expenses. (a) The Company hereby agrees to pay on each of the Closing Date and each Option Closing Date (to the extent not previously paid) all expenses and fees (other than fees of Underwriters' Counsel, except as provided in (iv) below) incident to the performance of the obligations of the Company under this Agreement, the Warrant Agreement, and the Representative's Warrant Agreement, including, without limitation, (i) the fees and expenses of accountants and counsel for the Company, (ii) all costs and expenses incurred in connection with the preparation, duplication, printing, filing, delivery and mailing (including the payment of postage with respect thereto) of the Registration Statement and the Prospectus and any amendments and supplements thereto and the duplication, mailing (including the payment of postage with respect thereto) and delivery of this Agreement, the Agreement Among Underwriters, the Selected Dealers Agreements, the Powers of Attorney, and related documents, including the cost of all copies thereof and of the Preliminary Prospectuses and of the Prospectus and any amendments thereof or supplements thereto supplied to the Underwriters and such dealers as the Underwriters may request, in quantities as hereinabove stated, (iii) the printing, engraving, issuance and delivery of the certificates representing the Registered Securities, (iv) the qualification of the Registered Securities under state or foreign securities or "Blue Sky" laws and determination of the status of such securities under legal investment laws, including the costs of printing and mailing the "Preliminary Blue Sky Memorandum," the "Supplemental Blue Sky Memorandum" and "Legal Investments Survey," if any, and reasonable disbursements and fees of counsel in connection therewith, (v) advertising costs and expenses, including but not limited to the costs and expenses incurred in connection with the "road show," information meetings and presentations, bound volumes and prospectus memorabilia and "tombstone" advertisement -20- 21 expenses, (vi) costs and expenses in connection with due diligence investigations, including but not limited to the fees of any independent counsel or consultant retained, (vii) fees and expenses of the transfer agent and registrar, (viii) the fees payable to the Commission and the NASD, (ix) the fees and expenses incurred in connection with the listing of the Registered Securities on the Nasdaq SmallCap Market, and any other market or exchange, and (x) applications for assignments of a rating of the Securities by qualified rating agencies. (b) If this Agreement is terminated by the Underwriters in accordance with the provisions of Section 6, Section 10(a) or Section 11, the Company shall reimburse and indemnify the Representative for all of their actual out-of-pocket expenses, including the fees and disbursements of Underwriters' Counsel, less any amounts already paid pursuant to Section 5(c) hereof. (c) The Company further agrees that, in addition to the expenses payable pursuant to subsection (a) of this Section 5, it will pay to the Representative on the Closing Date by certified or bank cashier's check or, at the election of the Representative, by deduction from the proceeds of the offering contemplated herein a non-accountable expense allowance equal to three percent (3%) of the gross proceeds received by the Company from the sale of the Shares, $25,000 of which has been paid to date. In the event the Representative elects to exercise the over-allotment option described in Section 2(b) hereof, the Company further agree to pay to the Representative on the Option Closing Date (by certified or bank cashier's check or, at the Representative's election, by deduction from the proceeds of the offering) a non-accountable expense allowance equal to three percent (3%) of the gross proceeds received by the Company from the sale of the Option Shares. 6. Conditions of the Underwriters' Obligations. The obligations of the Underwriters hereunder shall be subject to the continuing accuracy of the representations and warranties of the Company herein as of the date hereof and as of the Closing Date and each Option Closing Date, if any, as if they had been made on and as of the Closing Date or each Option Closing Date, as the case may be; the accuracy on and as of the Closing Date or Option Closing Date, if any, of the statements of officers of the Company made pursuant to the provisions hereof; and the performance by the Company on and as of the Closing Date and each Option Closing Date, if any, of its covenants and obligations hereunder and to the following further conditions: (a) The Registration Statement shall have become effective not later than 5:00 p.m., New York City time, on the date of this Agreement or such later date and time as shall be consented to in writing by the Representative, and, at Closing Date and each Option Closing Date, if any, no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or contemplated by the Commission and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of -21- 22 Underwriters' Counsel. If the Company has elected to rely upon Rule 430A of the Regulations, the price of the Shares and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 424(b) of the Regulations within the prescribed time period, and prior to Closing Date the Company shall have provided evidence satisfactory to the Representative of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the Regulations. (b) The Representative shall not have advised the Company that the Registration Statement, or any amendment thereto, contains an untrue statement of fact which, in the Representative's opinion, is material, or omits to state a fact which, in the Representative's opinion, is material and is required to be stated therein or is necessary to make the statements therein not misleading, or that the Prospectus, or any supplement thereto, contains an untrue statement of fact which, in the Representative's reasonable opinion, is material, or omits to state a fact which, in the Representative's reasonable opinion, is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) On or prior to the Closing Date, the Underwriters shall have received from Underwriters' Counsel such opinion or opinions with respect to the organization of the Company, the validity of the Registered Securities, the Registration Statement, the Prospectus and other related matters as the Representative may request and Underwriters' Counsel shall have received from the Company such papers and information as they request to enable them to pass upon such matters. (d) At Closing Date, the Underwriters shall have received the favorable opinion of Loeb & Loeb LLP ("Loeb & Loeb"), counsel to the Company, dated the Closing Date, addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel, to the effect that: (i) the Company (A) has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, (B) is duly qualified and licensed and in good standing as a foreign corporation in each jurisdiction in which its ownership or leasing of any properties or the character of its operations requires such qualification or licensing, and (C) to the best of such counsel's knowledge, has the requisite corporate power and authority and has obtained the necessary authorizations, approvals, orders, licenses, certificates, franchises and permits of and from all governmental or regulatory officials and bodies including, without limitation, those having jurisdiction over environmental or similar matters (the absence of which would have a -22- 23 material adverse effect on the Company), to own or lease its properties and conduct its business as described in the Prospectus. (ii) except as described in the Prospectus, and to the best of such counsel's knowledge after reasonable investigation, the Company does not own an interest in any corporation, limited liability company, partnership, joint venture, trust or other business entity; (iii) the Company has a duly authorized, issued and outstanding capitalization as set forth in the Prospectus, and any amendment or supplement thereto, under "Capitalization" and "Description of Securities," and to the best knowledge of such counsel, the Company is not a party to or bound by any instrument, agreement or other arrangement providing for it to issue any capital stock, rights, warrants, options or other securities, except for this Agreement, the Warrant Agreement, the Representative's Warrant Agreement, and as described in the Prospectus. The Registered Securities and all other securities issued or issuable by the Company conform in all material respects to the statements with respect thereto contained in the Registration Statement and the Prospectus. All issued and outstanding securities of the Company have been duly authorized and validly issued and are fully paid and non-assessable; and to the best of such counsel's knowledge, none of such securities were issued in violation of the preemptive rights of any holders of any security of the Company. The Registered Securities to be sold by the Company hereunder and under the Warrant Agreement and Representative's Warrant Agreement are not and will not, to the best of such counsel's knowledge, be subject to any preemptive or other similar rights of any shareholder, have been duly authorized and, when issued, paid for and delivered in accordance with their terms, will be validly issued, fully paid and non-assessable and conform in all material respects to the description thereof contained in the Prospectus; all corporate action required to be taken for the authorization, issue and sale of the Registered Securities has been duly and validly taken; and the certificates representing the Registered Securities are in due and proper form. The Representative's Warrants constitute valid and binding obligations of the Company to issue and sell, upon exercise thereof and payment therefor, the number and type of securities of the Company called for thereby (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law). Upon the issuance and -23- 24 delivery pursuant to this Agreement of the Registered Securities to be sold by the Company, the Company will convey, against payment therefor as provided herein, to the Underwriters and the Representative, respectively, good and marketable title to the Registered Securities free and clear of all liens and other encumbrances; (iv) the Registration Statement is effective under the Act, and, if applicable, filing of all pricing information has been timely made in the appropriate form under Rule 430A, and no stop order suspending the use of the Preliminary Prospectus, the Registration Statement or Prospectus or any part of any thereof or suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to the best of such counsel's knowledge, threatened or contemplated under the Act; (v) each of the Preliminary Prospectus, the Registration Statement, and the Prospectus and any amendments or supplements thereto (other than the financial statements and other financial and statistical data included therein as to which no opinion need be rendered) comply as to form in all material respects with the requirements of the Act and the Regulations. Such counsel shall state that such counsel has participated in conferences with officers and other representatives of the Company and the Representative and representatives of the independent public accountants for the Company, at which conferences the contents of the Preliminary Prospectus, the Registration Statement, the Prospectus, and any amendments or supplements thereto were discussed, and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Preliminary Prospectus, the Registration Statement and Prospectus, and any amendments or supplements thereto, on the basis of the foregoing, no facts have come to the attention of such counsel which lead them to believe that either the Registration Statement or any amendment thereto, at the time such Registration Statement or amendment became effective or the Preliminary Prospectus or Prospectus or amendment or supplement thereto as of the date of such opinion contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading (it being understood that such counsel need express no opinion with respect to the financial statements and schedules and other financial and statistical data included in the Preliminary Prospectus, the Registration Statement or Prospectus, and any amendments or supplements thereto); -24- 25 (vi) to the best of such counsel's knowledge after reasonable investigation, (A) there are no agreements, contracts or other documents required by the Act to be described in the Registration Statement and the Prospectus and filed as exhibits to the Registration Statement other than those described in the Registration Statement and the Prospectus and filed as exhibits thereto; (B) the descriptions in the Registration Statement and the Prospectus and any supplement or amendment thereto of contracts and other documents to which the Company is a party or by which it is bound are accurate in all material respects and fairly represent the information required to be shown by Form SB-2; (C) there is not pending or threatened against the Company any action, arbitration, suit, proceeding, litigation, governmental or other proceeding (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, pending or threatened against the Company which (x) is required to be disclosed in the Registration Statement which is not so disclosed (and such proceedings as are summarized in the Registration Statement are accurately summarized in all material respects), (y) questions the validity of the capital stock of the Company or this Agreement, the Warrant Agreement or the Representative's Warrant Agreement, or of any action taken or to be taken by the Company pursuant to or in connection with any of the foregoing; and (D) there is no action, suit or proceeding pending or threatened against the Company before any court or arbitrator or governmental body, agency or official in which there is a reasonable possibility of an adverse decision which may result in a material adverse change in the financial condition, business, affairs, shareholders' equity, operations, properties, business or results of operations of the Company, which could adversely affect the present or prospective ability of the Company to perform its obligations under this Agreement, the Warrant Agreement or the Representative's Warrant Agreement or which in any manner draws into question the validity or enforceability of this Agreement, the Warrant Agreement or the Repre-sentative's Warrant Agreement; (vii) the Company has the corporate power and authority to enter into each of this Agreement, the Warrant Agreement and the Representative's Warrant Agreement and to consummate the transactions provided for therein; and each of this Agreement, the Warrant Agreement and the Representative's Warrant Agreement has been duly authorized, executed and delivered by the Company. Each of this Agreement, the Warrant Agreement and the Representative's Warrant Agreement, assuming due authorization, execution and delivery by each other party thereto, constitutes a legal, valid and binding agreement of the Company -25- 26 enforceable against the Company in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law), and none of the Company's execution, delivery or performance of this Agreement, the Warrant Agreement and the Representative's Warrant Agreement, its consummation of the transactions contemplated herein or therein, or the conduct of its business as described in the Registration Statement, the Prospectus, and any amendments or supplements thereto conflicts with or results in any breach or violation of any of the terms or provisions of, or constitutes a default under, or result in the creation or imposition of any lien, charge, claim, encumbrance, pledge, security interest, defect or other restriction or equity of any kind whatsoever upon, any property or assets (tangible or intangible) of the Company pursuant to the terms of (A) the articles of incorporation or by-laws of the Company, as amended, (B) any license, contract, indenture, mortgage, deed of trust, voting trust agreement, shareholders' agreement, note, loan or credit agreement or any other agreement or instrument known to such counsel to which the Company is a party or by which it is bound, or (C) any federal, state, local or foreign statute, rule or regulation applicable to the Company or any judgment, decree or order known to such counsel of any arbitrator, court, regulatory body or administrative agency or other governmental agency or body (including, without limitation, those having jurisdiction over environmental or similar matters), domestic or foreign, having jurisdiction over the Company or any of its activities or properties; (viii) no consent, approval, authorization or order, and no filing with, any court, regulatory body, government agency or other body (other than such as may be required under federal securities or Blue Sky laws, as to which no opinion need be rendered) is required in connection with the issuance of the Registered Securities pursuant to the Prospectus, and the Registration Statement, the performance of this Agreement, the Warrant Agreement and the Representative's Warrant Agreement, and the transactions contemplated hereby and thereby, except such as have been obtained under the Securities Act and the Regulations; (ix) to the best knowledge of such counsel, and except as disclosed in Registration Statement and the Prospectus, the Company is not in breach of, or in default under, any material term or provision of any license, contract, indenture, mortgage, installment sale agreement, deed -26- 27 of trust, lease, voting trust agreement, shareholders' agreement, note, loan or credit agreement or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company is a party or by which the Company is bound or to which the property or assets (tangible or intangible) of the Company is subject; and the Company is not in violation of any term or provision of its articles of incorporation or by-laws, as amended, and to the best of such counsel's knowledge after reasonable investigation, not in violation of any franchise, license, permit, judgment, decree, order, statute, rule or regulation which would have a material adverse effect on the Company; (x) the statements in the Prospectus under "Dividend Policy" and "Description of Securities," have been reviewed by such counsel, and insofar as they refer to statements of law, descriptions of statutes, licenses, rules or regulations or legal conclusions, are accurate summaries and fairly and correctly present the information called for therein; (xi) the Units, Common Stock and Warrants have been accepted for quotation on the Nasdaq Small Cap; (xii) except as otherwise described in the Prospectus, to the best of such counsel's knowledge and based upon a review of the outstanding securities and the contracts furnished to such counsel by the Company, no person, corporation, trust, partnership, association or other entity has the right to include and/or register any securities of the Company in the Registration Statement, require the Company to file any registration statement or, if filed, to include any security in such registration statement; (xiii) assuming due execution by the parties thereto other than the Company, each Lock-Up Agreement is a legal, valid and binding obligation of the party thereto, enforceable against the party and any subsequent holder of the securities subject thereto in accordance with its terms (except as such enforceablity may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting enforcement of creditors' rights and the application of equitable principles in any action, legal or equitable, and except as rights to indemnity or contribution may be limited by applicable law). In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws other than the laws, rules and regulations of the United States and the laws, rules and regulations of the State of New Jersey, to the extent such counsel deems proper and -27- 28 to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance satisfactory to Underwriters' Counsel) of other counsel acceptable to Underwriters' Counsel, familiar with the applicable laws; (B) as to matters of fact, to the extent they deem proper, on certificates and written statements of responsible officers of the Company and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel if requested. The opinion of such counsel shall state that knowledge shall not include the knowledge of a director or officer of the Company who is affiliated with such firm in his or her capacity as an officer or director of the Company. The opinion of such counsel for the Company shall state that the opinion of any such other counsel is in form satisfactory to such counsel. At each Option Closing Date, if any, the Underwriters shall have received the favorable opinion of Loeb & Loeb, counsel to the Company, dated the Option Closing Date, addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel confirming as of such Option Closing Date the statements made by Loeb & Loeb in their opinion delivered on the Closing Date. (e) On or prior to each of the Closing Date and the Option Closing Date, if any, Underwriters' Counsel shall have been furnished such documents, certificates and opinions as they may reasonably require for the purpose of enabling them to review or pass upon the matters referred to in subsection (c) of this Section 6, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions of the Company or herein contained. (f) Prior to each of the Closing Date and each Option Closing Date, if any, (i) there shall have been no material adverse change nor development involving a prospective change in the condition, financial or otherwise, prospects, shareholders' equity or the business activities of the Company, whether or not in the ordinary course of business, from the latest dates as of which such condition is set forth in the Registration Statement and Prospectus; (ii) there shall have been no transaction, not in the ordinary course of business, entered into by the Company, from the latest date as of which the financial condition of the Company is set forth in the Registration Statement and Prospectus which is adverse to the Company; (iii) the Company shall not be in default under any provision of any instrument relating to any outstanding indebtedness which default has not been waived; (iv) the Company shall not have issued any securities (other than the Registered Securities) or declared or paid any dividend or made any distribution in respect of its capital stock of any class and there has not been any change in the capital stock, or any material increase in the debt (long or short term) or liabilities or obligations of the Company (contingent or otherwise); (v) no material amount of the assets of the Company shall have been pledged or mortgaged, except as set forth in the Registration Statement and Prospectus; (vi) no action, suit or proceeding, at law or in equity, shall have been -28- 29 pending or threatened (or circumstances giving rise to same) against the Company, or affecting any of its respective properties or businesses before or by any court or federal, state or foreign commission, board or other administrative agency wherein an unfavorable decision, ruling or finding may materially adversely affect the business, operations, prospects or financial condition or income of the Company, except as set forth in the Registration Statement and Prospectus; and (vii) no stop order shall have been issued under the Act and no proceedings therefor shall have been initiated, threatened or contemplated by the Commission. (g) At each of the Closing Date and each Option Closing Date, if any, the Underwriters shall have received a certificate of the Company signed on behalf of the Company by the principal executive officer of the Company, dated the Closing Date or Option Closing Date, as the case may be, to the effect that such executive has carefully examined the Registration Statement, the Prospectus and this Agreement, and that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the Closing Date or the Option Closing Date, as the case may be, and the Company has complied with all agreements and covenants and satisfied all conditions contained in this Agreement on its part to be performed or satisfied at or prior to such Closing Date or Option Closing Date, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement or any part thereof has been issued, and no proceedings for that purpose have been instituted or are pending or, to the best of each of such person's knowledge after due inquiry, are contemplated or threatened under the Act; (iii) The Registration Statement and the Prospectus and, if any, each amendment and each supplement thereto, contain all statements and information required by the Act to be included therein, and none of the Registration Statement, the Prospectus nor any amendment or supplement thereto includes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading and neither the Preliminary Prospectus or any supplement, as of their respective dates, thereto included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and -29- 30 (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, (a) the Company has not incurred up to and including the Closing Date or the Option Closing Date, as the case may be, other than in the ordinary course of its business, any material liabilities or obligations, direct or contingent; (b) the Company has not paid or declared any dividends or other distributions on its capital stock; (c) the Company has not entered into any transactions not in the ordinary course of business; (d) there has not been any change in the capital stock or material increase in long-term debt or any increase in the short-term borrowings (other than any increase in the short-term borrowings in the ordinary course of business) of the Company, (e) the Company has not sustained any loss or damage to its property or assets, whether or not insured, (f) there is no litigation which is pending or threatened (or circumstances giving rise to same) against the Company or any affiliated party of any of the foregoing which is required to be set forth in an amended or supplemented Prospectus which has not been set forth, and (g) there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been set forth. References to the Registration Statement and the Prospectus in this subsection (g) are to such documents as amended and supplemented at the date of such certificate. (h) By the Closing Date, the Underwriters will have received clearance from the NASD as to the amount of compensation allowable or payable to the Underwriters. (i) At the time this Agreement is executed, the Underwriters shall have received a letter, dated such date, addressed to the Underwriters in form and substance satisfactory in all respects (including the non-material nature of the changes or decreases, if any, referred to in clause (iii) below) to the Underwriters and Underwriters' Counsel, from BDO Seidman: (i) confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable Rules and Regulations; (ii) stating that it is their opinion that the financial statements and supporting schedules of the Company included in the Registration Statement comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations thereunder and that the Underwriters may rely upon the opinion of BDO Seidman with respect to the financial statements and supporting schedules included in the Registration Statement; -30- 31 (iii) stating that, on the basis of a limited review which included a reading of the latest available unaudited interim financial statements of the Company (with an indication of the date of the latest available unaudited interim financial statements), a reading of the latest available minutes of the shareholders and board of directors and the various committees of the board of directors of the Company, consultations with officers and other employees of the Company responsible for financial and accounting matters and other specified procedures and inquiries, nothing has come to their attention which would lead them to believe that (A) the unaudited financial statements and supporting schedules of the Company included in the Registration Statement, if any, do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Regulations or are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited financial statements of the Company included in the Registration Statement, or (B) at a specified date not more than five (5) days prior to the effective date of the Registration Statement, there has been any change in the capital stock or material increase in long-term debt of the Company, or any material decrease in the shareholders' equity or net current assets or net assets of the Company as compared with amounts shown in the balance sheet included in the Registration Statement, other than as set forth in or contemplated by the Registration Statement, or, if there was any change or decrease, setting forth the amount of such change or decrease. (iv) stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and other financial information pertaining to the Company set forth in the Prospectus in each case to the extent that such amounts, numbers, percentages, statements and information may be derived from the general accounting records, including work sheets, of the Company and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries and other appropriate procedures (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement; and (v) statements as to such other material matters incident to the transaction contemplated hereby as the Representative may reasonably request. -31- 32 (j) At the Closing Date and each Option Closing Date, if any, the Underwriters shall have received from BDO Seidman a letter, dated as of the Closing Date or the Option Closing Date, as the case may be, to the effect that they reaffirm that statements made in the letter furnished pursuant to Subsection (i) of this Section 6, except that the specified date referred to shall be a date not more than five (5) days prior to Closing Date or the Option Closing Date, as the case may be, and, if the Company has elected to rely on Rule 430A of the Rules and Regulations, to the further effect that they have carried out procedures as specified in clause (iv) of Subsection (i) of this Section 6 with respect to certain amounts, percentages and financial information as specified by the Representative and deemed to be a part of the Registration Statement pursuant to Rule 430A(b) and have found such amounts, percentages and financial information to be in agreement with the records specified in such clause (iv). (k) On each of Closing Date and Option Closing Date, if any, there shall have been duly tendered to the Representative for the several Underwriters' accounts the appropriate number of Registered Securities. (l) No order suspending the sale of the Registered Securities in any jurisdiction designated by the Representative pursuant to subsection (e) of Section 4 hereof shall have been issued on either the Closing Date or the Option Closing Date, if any, and no proceedings for that purpose shall have been instituted or shall be contemplated. (m) On or before the Closing Date, the Company shall have executed and delivered to the Representative, (i) the Representative's Warrant Agreement, substantially in the form filed as Exhibit 4.2, to the Registration Statement, in final form and substance satisfactory to the Representative, and (ii) the Representative's Warrants in such denominations and to such designees as shall have been provided to the Company. (n) On or before Closing Date, the Units, Common Stock and Warrants shall have been duly approved for quotation on the Nasdaq SmallCap Market. (o) On or before Closing Date, there shall have been delivered to the Representative all of the Lock-up Agreements in final form and substance satisfactory to Underwriters' Counsel. (p) On or before the Closing Date, the Company shall have executed the Warrant Agreement, substantially in the form filed as Exhibit 4.4 to the Registration Statement, in final form and substance satisfactory to the Representative and their counsel. If any condition to the Underwriters' obligations hereunder to be fulfilled prior to or at the Closing Date or the relevant Option Closing Date, as the case may be, is not so fulfilled, the Representative may terminate this Agreement or, if the Representative so elect, -32- 33 they may waive any such conditions which have not been fulfilled or extend the time for their fulfillment. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each of the Underwriters (for purposes of this Section 7 "Underwriters" shall include the officers, directors, partners, employees, agents and counsel of the Underwriters, including specifically each person who may be substituted for an Underwriter as provided in Section 11 hereof), and each person, if any, who controls the Underwriter ("controlling person") within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, from and against any and all loss, liability, claim, damage, and expense whatsoever (including, but not limited to, reasonable attorneys' fees and any and all reasonable expense whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever and any and all amounts paid in settlement of any claim or litigation provided that the indemnified persons may not agree to any such settlement without the prior written consent of the Company), as and when incurred, arising out of, based upon or in connection with (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus (as from time to time amended and supplemented); or (B) in any application or other document or communication (in this Section 7 collectively called "application") executed by or on behalf of the Company or based upon written information furnished by or on behalf of the Company in any jurisdiction in order to qualify the Registered Securities under the securities laws thereof or filed with the Commission, any state securities commission or agency, The Nasdaq Stock Market, Inc. or any securities exchange; or any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of the Prospectus, in the light of the circumstances under which they were made), unless such statement or omission was made in reliance upon and in conformity with written information furnished to the Company with respect to any Underwriter by or on behalf of such Underwriter expressly for use in any Preliminary Prospectus, the Registration Statement or Prospectus, or any amendment thereof or supplement thereto, or in any application, as the case may be; or (ii) any breach of any representation, warranty, covenant or agreement of the Company contained in this Agreement. The indemnity agreement in this subsection (a) shall be in addition to any liability which the Company may have at common law or otherwise. (b) Each of the Underwriters agrees severally, but not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, and each other person, if any, who controls the Company, within the meaning of the Act, to the same extent as the foregoing indemnity from the Company to the Underwriters but only with respect to statements or omissions, if any, made in any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto or in any application made in reliance upon, and in strict conformity with, written -33- 34 information furnished to the Company with respect to any Underwriter by such Underwriter or the Representative expressly for use in such Preliminary Prospectus, the Registration Statement or Prospectus or any amendment thereof or supplement thereto or in any such application, provided that such written information or omissions only pertain to disclosures in the Preliminary Prospectus, the Registration Statement or Prospectus directly relating to the transactions effected by the Underwriters in connection with this Offering. The Company acknowledges that the statements with respect to the public offering of the Registered Securities set forth under the heading "Underwriting" and the stabilization legend in the Prospectus have been furnished by the Underwriters expressly for use therein and constitute the only information furnished in writing by or on behalf of the Underwriters or the Representative for inclusion in the Prospectus. The indemnity agreement in this subsection (b) shall be in addition to any liability which the Underwriters may have at common law or otherwise. (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, suit or proceeding, such indemnified party shall, if a claim in respect thereof is to be made against one or more indemnifying parties under this Section 7, notify each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure to so notify an indemnifying party shall not relieve it from any liability which it may have otherwise or which it may have under this Section 7, except to the extent that it has been prejudiced in any material respect by such failure). In case any such action is brought against any indemnified party, and it notifies an indemnifying party or parties of the commencement thereof, the indemnifying party or parties will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel shall have been authorized in writing by the indemnifying parties in connection with the defense of such action at the expense of the indemnifying party, (ii) the indemnifying parties shall not have employed counsel reasonably satisfactory to such indemnified party to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded, based on the advise of counsel, that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties and that it is a conflict of interest for the indemnified party or parties to be represented by such counsel (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events the reasonable fees and expenses of one additional counsel shall be borne by the indemnifying parties. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general -34- 35 allegations or circumstances. Anything in this Section 7 to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided, however, that such consent was not unreasonably withheld. (d) In order to provide for just and equitable contribution in any case in which (i) an indemnified party makes claim for indemnification pursuant to this Section 7, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of this Section 7 provide for indemnification in such case, or (ii) contribution under the Act may be required on the part of any indemnified party, then each indemnifying party shall contribute to the amount paid as a result of such losses, claims, damages, expenses or liabilities (or actions in respect thereof) (A) in such proportion as is appropriate to reflect the relative benefits received by each of the contributing parties, on the one hand, and the party to be indemnified on the other hand, from the offering of the Registered Securities or (B) if the allocation provided by clause (A) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each of the contributing parties, on the one hand, and the party to be indemnified on the other hand in connection with the statements or omissions that resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In any case where the Company is contributing parties and the Underwriters are the indemnified party, the relative benefits received by the Company on the one hand, and the Underwriters, on the other, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Registered Securities (before deducting expenses other than underwriting discounts and commissions) bear to the total underwriting discounts received by the Underwriters hereunder, in each case as set forth in the table on the Cover Page of the Prospectus. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, expenses or liabilities (or actions in respect thereof) referred to above in this subdivision (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subdivision (d) the Underwriters shall not be required to contribute any amount in excess of the underwriting discount applicable to the Registered Securities purchased by the Underwriters hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 12(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls the Company within the meaning of the Act, each officer of the Company who has signed the Registration Statement, and each director of the Company shall have the same rights to contribution as the Company, subject in -35- 36 each case to this subparagraph (d). Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect to which a claim for contribution may be made against another party or parties under this subparagraph (d), notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have hereunder or otherwise than under this subparagraph (d), or to the extent that such party or parties were not adversely affected by such omission. The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may have at common law or otherwise. 8. Representations and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or contained in certificates of officers of the Company submitted pursuant hereto, shall be deemed to be representations, warranties and agreements of the Company, at the Closing Date and the Option Closing Date, as the case may be, and such representations, warranties and agreements of the Company, and the respective indemnity and contribution agreements contained in Section 7 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter, the Company, any controlling person of either the Underwriter or the Company, and shall survive termination of this Agreement or the issuance and delivery of the Registered Securities to the Underwriters and the Representative, as the case may be. 9. Effective Date. This Agreement shall become effective at __:00 _.m., New York City time, on the date hereof. For purposes of this Section 9, the Registered Securities to be purchased hereunder shall be deemed to have been so released upon the earlier of dispatch by the Representative of telegrams to securities dealers releasing such shares for offering or the release by the Representative for publication of the first newspaper advertisement which is subsequently published relating to the Registered Securities. 10. Termination. (a) Subject to subsection (b) of this Section 10, the Representative shall have the right to terminate this Agreement, (i) if any domestic or international event or act or occurrence has materially disrupted, or in the Representative's reasonable opinion will in the immediate future materially disrupt the financial markets; or (ii) any material adverse change in the financial markets shall have occurred; or (iii) if trading on the New York Stock Exchange, the American Stock Exchange, or in the over-the-counter market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the over-the-counter market by the NASD or by order of the Commission or any other government authority having jurisdiction; or (iv) if the United States shall have become involved in a war or major hostilities, or if there shall have been an -36- 37 escalation in an existing war or major hostilities or a national emergency shall have been declared in the United States; or (v) if a banking moratorium has been declared by a state or federal authority; or (vi) if the Company shall have sustained a loss material or substantial to the Company by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in the Representative's opinion, make it inadvisable to proceed with the delivery of the Registered Securities; or (viii) if there shall have been such a material adverse change in the prospects or conditions of the Company, or such material adverse change in the general market, political or economic conditions, in the United States or elsewhere as in the Representative's judgment would make it inadvisable to proceed with the offering, sale and/or delivery of the Registered Securities. (b) If this Agreement is terminated by the Representative in accordance with any of the provisions of Section 6, Section 10(a) or Section 11, the Company shall promptly reimburse and indemnify the Underwriters pursuant to Section 5(b) hereof. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement (including, without limitation, pursuant to Sections 6, 10, 11 and 12 hereof), and whether or not this Agreement is otherwise carried out, the provisions of Section 5 and Section 7 shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 11. Substitution of the Underwriters. If one or more of the Underwriters shall fail (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 6, Section 10 or Section 12 hereof) to purchase the Registered Securities which it or they are obligated to purchase on such date under this Agreement (the "Defaulted Securities"), the Representative shall have the right, within 24 hours thereafter, to make arrangement for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth. If, however, the Representative shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the total number of Shares to be purchased on such date, the non-defaulting Underwriters shall be obligated to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the total number of Shares, this Agreement shall terminate without liability on the part of any non-defaulting Underwriters. No action taken pursuant to this Section shall relieve any defaulting Underwriter from liability in respect of any default by such Underwriter under this Agreement. -37- 38 In the event of any such default which does not result in a termination of this Agreement, the Representative shall have the right to postpone the Closing Date for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. 12. Default by the Company. If the Company shall fail at the Closing Date or any Option Closing Date, as applicable, to sell and deliver the number of Registered Securities which it is obligated to sell hereunder on such date, then this Agreement shall terminate (or, if such default shall occur with respect to any Option Shares to be purchased on an Option Closing Date, the Underwriters may at the Representative's option, by notice from the Representative to the Company, terminate the Underwriters' obligation to purchase Option Shares from the Company on such date) without any liability on the part of any non-defaulting party other than pursuant to Section 5, Section 7 and Section 10 hereof. No action taken pursuant to this Section shall relieve the Company from liability, if any, in respect of such default. 13. Notices. All notices and communications hereunder, except as herein otherwise specifically provided, shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Representative, c/o National Securities Corporation, 1001 Fourth Avenue, Suite 2200, Seattle, Washington 98154, Attention: Steven Rothstein, with a copy, which shall not constitute notice, to Camhy Karlinsky & Stein LLP, 1740 Broadway, 16th Floor, New York, New York 10019, Attention: Alan I. Annex, Esq. Notices to the Company shall be directed to the Company at Brighton Technologies Corporation, 6 Pearl Court, Allendale, New Jersey 07401, Attention: CEO, with a copy, which shall not constitute notice, to Loeb & Loeb LLP, 1000 Wilshire Boulevard, Suite 1800, Los Angeles, California 90017, Attn: David L. Ficksman, Esq. 14. Parties. This Agreement shall inure solely to the benefit of and shall be binding upon the Underwriters, the Company and the controlling persons, directors and officers referred to in Section 7 hereof and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provisions herein contained. No purchaser of Registered Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. 15. Construction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the choice of law or conflict of laws principles. -38- 39 16. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which taken together shall be deemed to be one and the same instrument. 17. Entire Agreement; Amendments. This Agreement, the Warrant Agreement and the Representative's Warrant Agreement constitute the entire agreement of the parties hereto and supersede all prior written or oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may not be amended except in a writing, signed by the Representative, and the Company. -39- 40 If the foregoing correctly sets forth the understanding among the Underwriters and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among us. Very truly yours, BRIGHTON TECHNOLOGIES CORPORATION By: --------------------------------------- Name: Kit Kung Title: Chief Executive Officer CONFIRMED AND ACCEPTED AS OF THE DATE FIRST ABOVE WRITTEN: NATIONAL SECURITIES CORPORATION By: ----------------------------------------- Name: Steven A. Rothstein Title: Chairman For itself and as Representative of the Underwriters named in Schedule A hereto. -40- 41 SCHEDULE A
Total Number of Name of Units to be Underwriters Purchased - ------------ --------- National Securities Corporation TOTAL 1,000,000
EX-4.1 3 FORM OF COMMON STOCK CERTIFICATE 1 EXHIBIT 4.1 NOT VALID UNLESS COUNTERSIGNED BY TRANSFER AGENT INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CUSIP NO. 109444 208 BRIGHTON TECHNOLOGIES CORPORATION AUTHORIZED COMMON STOCK: 150,000,000 SHARES PAR VALUE: $.061 THIS CERTIFIES THAT IS THE HOLDER OF Shares of common stock of BRIGHTON TECHNOLOGIES CORPORATION transferable on the books of the Corporation in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. [BRIGHTON TECHNOLOGIES CORPORATION SEAL] Dated: [SIG] [SIG] - --------------------------- ------------------------------ SECRETARY PRESIDENT 2 Notice: Signature must be guaranteed by a firm which is a member of a registered national stock exchange, or by a bank (other than a saving bank), or a trust company. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFT MINA CT - Custodian TEN ENT - as tenants by the entireties --------------- JT TEN - as joint tenants with right of (Cust) (Minor) survivorship and not as tenants under Uniform Gifts to Minors in common Act ____________________ (State) Additional abbreviations may also be used though not in the above list. For Value Received, __________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURIYY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE [ ] - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- _________________________________________________________________ Shares of the capital stock represented by the within certificate, and do hereby irrevocably constitute and appoint _____________________________________________________________________Attorney to transfer the said stock on the books of the within name Corporation with full power of substitution in the premises. Dated __________________________ --------------------------------------------------------- NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular without alteration or enlargement or any change whatever EX-4.2 4 FORM OF REPRESENTATIVE'S WARRANT AGREEMENT 1 EXHIBIT 4.2 FORM OF REPRESENTATIVE'S WARRANT AGREEMENT ------------------------------------------ BRIGHTON TECHNOLOGIES CORPORATION AND NATIONAL SECURITIES CORPORATION REPRESENTATIVE'S WARRANT AGREEMENT DATED AS OF ______ __, 1998 ------------------------------------------ 2 REPRESENTATIVE'S WARRANT AGREEMENT dated as of _________ __, 1998, between BRIGHTON TECHNOLOGIES CORPORATION, a Delaware corporation (the "Company"), and NATIONAL SECURITIES CORPORATION and its assignees or designees (each hereinafter referred to variously as a "Holder" or "Representative"). W I T N E S S E T H : WHEREAS, the Representative has agreed pursuant to the underwriting agreement (the "Underwriting Agreement") between the Representative and the Company, to act as the representative of the several underwriters listed therein (the "Underwriters") in connection with the Company's proposed public offering of 1,000,000 Units (the "Units"), consisting of one (1) share of Common Stock (as hereinafter defined) and one (1) warrant (the "Warrant") to purchase one (1) share of Common Stock at an exercise price of $____ (150% of the offering price per Unit), at a public offering price of $_______ per Unit (the "Public Offering"). WHEREAS, pursuant to the Underwriting Agreement, the Company proposes to issue warrants to the Representative to purchase up to an aggregate of 100,000 Units (the "Representative's Warrants"). WHEREAS, the Representative's Warrants to be issued pursuant to this Agreement will be issued on the Closing Date (as such term is defined in the Underwriting Agreement) by the Company to the Representative in consideration for, and as part of the Underwriters' compensation in connection with, the Representative acting as the representative pursuant to the Underwriting Agreement. 3 NOW, THEREFORE, in consideration of the premises, the payment by the Representative to the Company of an aggregate of ten dollars ($10.00), the agreements herein set forth and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Grant. The Representative is hereby collectively granted the right to purchase, at any time from ___________, 1999 until 5:30 p.m., New York time, on ____________, 2003 (5 years from the Effective Date of the Registration Statement), at which time the Representative's Warrants expire, up to an aggregate 100,000 Units (subject to adjustment as provided in Section 8 hereof), each Unit consisting of one (1) share of common stock, $.001 par value per share, of the Company (the "Common Stock") and one (1) Warrant to purchase one (1) share of Common Stock at an exercise price of $_______ (150% of the offering price per Unit), at an initial exercise price (subject to adjustment as provided in Section 11 hereof) of $____ (120% of the offering price per Unit) (the "Exercise Price"). 2. Representative's Warrant Certificates. The Representative's warrant certificates (the "Warrant Certificates") delivered and to be delivered pursuant to this Agreement shall be in the form set forth in Exhibit A, attached hereto and made a part hereof, with such appropriate insertions, omissions, substitutions, and other variations as required or permitted by this Agreement. 3. Registration of Warrant. The Representative's Warrants shall be numbered and shall be registered on the books of the Company when issued. -2- 4 4. Exercise of Representative's Warrant. 4.1 Method of Exercise. The Representative's Warrants initially are exercisable at the Exercise Price (subject to adjustment as provided in Section 11 hereof) per Representative's Warrant set forth in Section 8 hereof payable by certified or official bank check in New York Clearing House funds. Upon surrender of a Representative's Warrant Certificate with the annexed Form of Election to Purchase duly executed, together with payment of the Exercise Price for the Units purchased at the Company's principal offices in New Jersey (presently located at 6 Pearl Street, Allendale, New Jersey 07401), the registered holder of a Representative's Warrant Certificate ("Holder" or "Holders") shall be entitled to receive a certificate or certificates for the Units so purchased. The purchase rights represented by each Representative's Warrant Certificate are exercisable at the option of the Holder thereof, in whole or in part (but not as to fractional Units underlying the Representative's Warrants). In the case of the purchase of less than all of the Units purchasable under any Representative's Warrant Certificate, the Company shall cancel said Representative's Warrant Certificate upon the surrender thereof and shall execute and deliver a new Representative's Warrant Certificate of like tenor for the balance of the Units purchasable thereunder. 4.2 Exercise by Surrender of Representative's Warrant. In addition to the method of payment set forth in Section 4.1 and in lieu of any cash payment required thereunder, the Holder(s) of the Representative's Warrants shall have the right at any time and from time to time as specified in Section 1 hereof, to exercise the Representative's Warrants in full or in part by surrendering the Warrant Certificate in the manner specified in Section 4.1 in exchange -3- 5 for the number of Units equal to the product of (x) the number of Units as to which the Representative's Warrants are being exercised, multiplied by (y) a fraction, the numerator of which is the Market Price of the Units (as defined in Section 9.3(d) hereof) on the date on which the form of election attached hereto is deemed to have been sent to the Company pursuant to Section 15 hereof minus the Exercise Price of the Units and the denominator of which is the Market Price per Unit; provided, however, that if on the date on which the form of election attached hereto is deemed to have been sent to the Company pursuant to Section 15 the Units have been separated and each of the Common Stock and the Warrants underlying the Representative's Warrant are separately listed and traded, for the purposes of this Section 4.2, the Representative's Warrant shall be treated as two separate warrants: one for the underlying Common Stock and one for the underlying Warrants. In such event, this Section 4.2 shall be applicable for both such Representative's Warrants and "Market Price" shall mean the respective Market Price for the Common Stock and for the Warrants. 5. Issuance of Certificates. Upon the exercise of the Representative's Warrant, the issuance of certificates for Units or other securities, properties or rights underlying such Representative's Warrant shall be made forthwith (and in any event within five (5) business days thereafter) without charge to the Holder thereof including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall (subject to the provisions of Sections 7 and 9 hereof) be issued in the name of, or in such names as may be directed by, the Holder thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any -4- 6 such certificates in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Representative's Warrant Certificates and the certificates representing the Units or other securities, property or rights issued upon exercise of the Representative's Warrant shall be executed on behalf of the Company by the manual or facsimile signature of the then present President or any Vice President of the Company under its corporate seal reproduced thereon, attested to by the manual or facsimile signature of the then present Secretary or any Assistant Secretary of the Company. Representative's Warrant Certificates shall be dated the date of execution by the Company upon initial issuance, division, exchange, substitution or transfer. 6. Transfer of Representative's Warrant. The Representative's Warrant shall be transferable only on the books of the Company maintained at its principal office, where its principal office may then be located, upon delivery thereof duly endorsed by the Holder or by its duly authorized attorney or representative accompanied by proper evidence of succession, assignment or authority to transfer. Upon any registration transfer, the Company shall execute and deliver the new Representative's Warrant to the person entitled thereto. 7. Restriction On Transfer of Representative's Warrant. The Holder of a Representative's Warrant Certificate, by its acceptance thereof, covenants and agrees that the -5- 7 Representative's Warrant is being acquired as an investment and not with a view to the distribution thereof, and that the Representative's Warrant may not be sold, transferred, assigned, hypothecated or otherwise disposed of, in whole or in part, for the term of the Representative's Warrant, except to officers or partners of the Underwriters, or by operation of law. 8. Exercise Price and Number of Securities. Except as otherwise provided in Section 10 hereof, each Representative's Warrant is exercisable to purchase one Unit at an initial exercise price equal to the Exercise Price. The Exercise Price and the number of Units for which the Representative's Warrant may be exercised shall be the price and the number of Units which shall result from time to time from any and all adjustments in accordance with the provisions of Section 11 hereof. 9. Registration Rights. 9.1 Registration Under the Securities Act of 1933. Each Representative's Warrant Certificate and each certificate representing Units and any of the other securities issuable upon exercise of the Representative's Warrant (collectively, the "Warrant Shares") shall bear the following legend unless (i) such Representative's Warrant or Warrant Shares are distributed to the public or sold to the underwriters for distribution to the public pursuant to Section 9 hereof or otherwise pursuant to a registration statement filed under the Securities Act of 1933, as amended (the "Act"), or (ii) the Company has received an opinion of counsel, in -6- 8 form and substance reasonably satisfactory to counsel for the Company, that such legend is unnecessary for any such certificate: THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE REPRESEN- TATIVE'S WARRANT REPRESENTED BY THE CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE REPRESENTATIVE'S WARRANT AGREEMENT REFERRED TO HEREIN. 9.2 Piggyback Registration. If, at any time commencing after the effective date of the Registration Statement and expiring five (5) years thereafter, the Company proposes to register any of its securities under the Act (other than in connection with a merger or pursuant to Form S-4 or Form S-8) it will give written notice by registered mail, at least thirty (30) days prior to the filing of each such registration statement, to the Holders of the Representative's Warrants and/or the Warrant Shares of its intention to do so. If any of the Holders of the Representative's Warrants and/or Warrant Shares notify the Company within twenty (20) days after mailing of any such notice of its or their desire to include any such securities in such -7- 9 proposed registration statement, the Company shall afford such Holders of the Representative's Warrants and/or Warrant Shares the opportunity to have any such Representative's Warrants and/or Warrant Shares registered under such registration statement. In the event that the managing underwriter for said offering advises the Company in writing that in their opinion the number of securities requested to be included in such registration exceeds the number which can be sold in such offering without causing a diminution in the offering price or otherwise adversely affecting the offering, the Company will include in such registration (a) first, the securities the Company proposes to sell, (b) second, the securities held by the entities that made the demand for registration, (c) third, the Representative's Warrants and/or Warrant Shares requested to be included in such registration which in the opinion of such underwriter can be sold, pro rata among the Holders of Representative's Warrants and/or Warrant Shares on the basis of the number of Representative's Warrants and/or Warrant Shares requested to be registered by such Holders, and (d) fourth, other securities requested to be included in such registration. Notwithstanding the provisions of this Section 9.2, the Company shall have the right at any time after it shall have given written notice pursuant to this Section 9.2 (irrespective of whether a written request for inclusion of any such securities shall have been made) to elect not to file any such proposed registration statement or to withdraw the same after the filing but prior to the effective date thereof. -8- 10 9.3 Demand Registration. (a) At any time commencing one (1) year after the effective date of the Registration Statement and expiring five (5) years from the effective date of the Registration Statement, the Holders of the Representative's Warrants and/or Warrant Shares representing a "Majority" (as hereinafter defined) of the Representative's Warrants and/or Warrant Shares shall have the right (which right is in addition to the registration rights under Section 9.2 hereof), exercisable by written notice to the Company, to have the Company prepare and file with the Securities and Exchange Commission (the "Commission"), on one occasion, a registration statement and such other documents, including a prospectus, as may be necessary in the opinion of both counsel for the Company and counsel for the Holders, in order to comply with the provisions of the Act, so as to permit a public offering and sale by such Holders and any other Holders of the Representative's Warrant and/or Warrant Shares who notify the Company within fifteen (15) days after the Company mails notice of such request pursuant to Section 9.3(b) hereof (collectively, the "Requesting Holders") of their respective Warrant Shares for the earlier of (i) six (6) consecutive months or (ii) until the sale of all of the Warrant Shares requested to be registered by the Requesting Holders. (b) The Company covenants and agrees to give written notice of any registration request under this Section 9.3 by any Holder or Holders representing a Majority of the Representative's Warrants and/or Warrant Shares to all other registered Holders of the Representative's Warrants and the Warrant Shares within ten (10) days from the date of the receipt of any such registration request. -9- 11 (c) In addition to the registration rights under Section 9.2 and subsection (a) of this Section 9.3, at any time commencing one (1) year after the effective date of the Registration Statement and expiring five (5) years from the effective date of the Registration Statement, the Holders of a Majority of the Representative's Warrants and/or Warrant Shares shall have the right on one occasion, exercisable by written request to the Company, to have the Company prepare and file with the Commission a registration statement so as to permit a public offering and sale by such Holders of their respective Warrant Shares for the earlier of (i) six (6) consecutive months or (ii) until the sale of all of the Warrant Shares requested to be registered by such Holders; provided, however, that the provisions of Section 9.4(b) hereof shall not apply to any such registration request and registration and all costs incident thereto shall be at the expense of the Holder or Holders making such request. If the Holders have exercised their rights under Section 9.3(a) then the Holders may not exercise their rights under Section 9.3(c) for a period of six (6) months following the effective date of any registration statement filed pursuant to Section 9.3(a). (d) Notwithstanding anything to the contrary contained herein, if the Company shall not have filed a registration statement for the Warrant Shares within the time period specified in Section 9.4(a) hereof pursuant to the written notice specified in Section 9.3(a) of the Holders of a Majority of the Representative's Warrants and/or Warrant Shares, the Company, at its option, may repurchase (i) any and all Warrant Shares at the higher of the Market Price (as defined in Section 9.3(e)) per share of Common Stock on (x) the date of the notice sent pursuant to Section 9.3(a) or (y) the expiration of the period specified in Section -10- 12 9.4(a) and (ii) any and all Representative's Warrant at such Market Price less the exercise price of such Representative's Warrant. Such repurchase shall be in immediately available funds and shall close within two (2) days after the later of (i) the expiration of the period specified in Section 9.4(a) or (ii) the delivery of the written notice of election specified in this Section 9.3(d). (e) Definition of Market Price. As used herein, the phrase "Market Price" at any date shall be deemed to be the last reported sale price, or, in case no such reported sale takes place on such day, the average of the last reported sale prices for the last three (3) trading days, in either case as officially reported by the principal securities exchange on which the Units or Common Stock is listed or admitted to trading, or, if the Units or Common Stock is not listed or admitted to trading on any national securities exchange, the average closing sale price as furnished by the NASD through The Nasdaq Stock Market, Inc. ("Nasdaq") or similar organization if Nasdaq is no longer reporting such information, or if the Units or Common Stock is not quoted on Nasdaq, as determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it. 9.4 Covenants of the Company With Respect to Registration. In connection with any registration under Sections 9.2 or 9.3 hereof, the Company covenants and agrees as follows: (a) The Company shall use its best efforts to file a registration statement within ninety (90) days of receipt of any demand therefor, and to have any registration -11- 13 statements declared effective at the earliest possible time, and shall furnish each Holder desiring to sell Warrant Shares such number of prospectuses as shall reasonably be requested. (b) The Company shall pay all costs (excluding fees and expenses of Holder(s)' counsel and any underwriting or selling commissions), fees and expenses in connection with all registration statements filed pursuant to Sections 9.2 and 9.3(a) hereof including, without limitation, the Company's legal and accounting fees, printing expenses, blue sky fees and expenses. The Holder(s) will pay all costs, fees and expenses (including those of the Company) in connection with the registration statement filed pursuant to Section 9.3(c). (c) The Company will take all necessary action which may be required in qualifying or registering the Warrant Shares included in a registration statement for offering and sale under the securities or blue sky laws of such states as reasonably are requested by the Holder(s), provided that the Company shall not be obligated to execute or file any general consent to service of process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (d) The Company shall indemnify the Holder(s) of the Warrant Shares to be sold pursuant to any registration statement and each person, if any, who controls such Holders within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act -12- 14 or otherwise, arising from such registration statement but only to the same extent and with the same effect as the provisions pursuant to which the Company has agreed to indemnify each of the Underwriters contained in Section 7 of the Underwriting Agreement. (e) The Holder(s) of the Warrant Shares to be sold pursuant to a registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage or expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from information furnished by or on behalf of such Holders, or their successors or assigns, for specific inclusion in such registration statement to the same extent and with the same effect as the provisions contained in Section 7 of the Underwriting Agreement pursuant to which the Underwriters have agreed to indemnify the Company. (f) Nothing contained in this Agreement shall be construed as requiring the Holder(s) to exercise their Representative's Warrant prior to the initial filing of any registration statement or the effectiveness thereof. (g) The Company shall not permit the inclusion of any securities other than the Warrant Shares to be included in any registration statement filed pursuant to Section 9.3 hereof, or permit any other registration statement to be or remain effective during the -13- 15 effectiveness of a registration statement filed pursuant to Section 9.3 hereof, without the prior written consent of National Securities Corporation or as otherwise required by the terms of any existing registration rights granted prior to the date of this Agreement by the Company to the holders of any of the Company's securities. (h) The Company shall furnish to each Holder participating in the offering and to each underwriter, if any, a signed counterpart, addressed to such Holder or underwriter, of (i) an opinion of counsel to the Company, dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, an opinion dated the date of the closing under the underwriting agreement), and (ii) a "cold comfort" letter dated the effective date of such registration statement (and, if such registration includes an underwritten public offering, a letter dated the date of the closing under the underwriting agreement) signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities. (i) The Company shall as soon as practicable after the effective date of the registration statement, and in any event within 15 months thereafter, make "generally -14- 16 available to its security holders" (within the meaning of Rule 158 under the Act) an earnings statement (which need not be audited) complying with Section 11(a) of the Act and covering a period of at least 12 consecutive months beginning after the effective date of the registration statement. (j) The Company shall enter into an underwriting agreement with the managing underwriters selected for such underwriting by Holders holding a Majority of the Warrant Shares requested to be included in such underwriting, which may be the Representative. Such agreement shall be satisfactory in form and substance to the Company, each Holder and such managing underwriters, and shall contain such representations, warranties and covenants by the Company and such other terms as are customarily contained in agreements of that type used by the managing underwriter. The Holders shall be parties to any underwriting agreement relating to an underwritten sale of their Warrant Shares and may, at their option, require that any or all the representations, warranties and covenants of the Company to or for the benefit of such underwriters shall also be made to and for the benefit of such Holders. Such Holders shall not be required to make any representations or warranties to or agreements with the Company or the underwriters except as they may relate to such Holders and their intended methods of distribution. (k) For purposes of this Agreement, the term "Majority" in reference to the Representative's Warrants or Warrant Shares, shall mean in excess of fifty percent (50%) of the then outstanding Representative's Warrants or Warrant Shares that (i) are not held by the -15- 17 Company, an affiliate, officer, creditor, employee or agent thereof or any of their respective affiliates, members of their family, persons acting as nominees or in conjunction therewith or (ii) have not been resold to the public pursuant to a registration statement filed with the Commission under the Act. 10. Obligations of Holders. It shall be a condition precedent to the obligations of the Company to take any action pursuant to Section 9 hereof that each of the selling Holders shall: (a) Furnish to the Company such information regarding themselves, the Warrant Shares held by them, the intended method of sale or other disposition of such securities, the identity of and compensation to be paid to any underwriters proposed to be employed in connection with such sale or other disposition, and such other information as may reasonably be required to effect the registration of their Warrant Shares. (b) Notify the Company, at any time when a prospectus relating to the Warrant Shares covered by a registration statement is required to be delivered under the Act, of the happening of any event with respect to such selling Holder 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 the light of the circumstances then existing. 11. Adjustments to Exercise Price and Number of Securities. The Exercise Price in effect at any time and the number and kind of securities purchased upon the exercise -16- 18 of the Representative's Warrant shall be subject to adjustment from time to time only upon the happening of the following events: 11.1 Stock Dividend, Subdivision and Combination. In case the Company shall (i) declare a dividend or make a distribution on its outstanding shares of Common Stock in shares of Common Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding shares of Common Stock into a smaller number of shares, the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the denominator of which shall be the number of shares of Common Stock outstanding after giving effect to such action, and the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such action. Such adjustment shall be made successively whenever any event listed above shall occur. 11.2 Adjustment in Number of Securities. Upon each adjustment of the Exercise Price pursuant to the provisions of this Section 11, the number of Warrant Shares issuable upon the exercise at the adjusted Exercise Price of each Representative's Warrant shall be adjusted to the nearest number of whole shares of Common Stock by multiplying a number equal to the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares issuable upon exercise of the Representative's Warrant immediately prior to such adjustment and dividing the product so obtained by the adjusted Exercise Price. -17- 19 11.3 Definition of Common Stock. For the purpose of this Agreement, the term "Common Stock" shall mean (i) the class of stock designated as Common Stock in the Articles of Incorporation of the Company as amended as of the date hereof, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. 11.4 Merger or Consolidation. In case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), the corporation formed by such consolidation or merger shall execute and deliver to the Holder a supplemental warrant agreement providing that the Holder of each Representative's Warrant then outstanding or to be outstanding shall have the right thereafter (until the expiration of such Representative's Warrant) to receive, upon exercise of such Representative's Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or merger by a holder of the number of shares of Common Stock for which such Representative's Warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments which shall be identical to the adjustments provided in Section 11. The above provision of this subsection shall similarly apply to successive consolidations or mergers. -18- 20 11.5 No Adjustment of Exercise Price in Certain Cases. No adjustment of the Exercise Price shall be made: (a) Upon the issuance or sale of the Representative's Warrant or the Warrant Shares; (b) Upon the issuance or sale of Common Stock (or any other security convertible, exercisable, or exchangeable into shares of Common Stock) upon the direct or indirect conversion, exercise, or exchange of any options, rights, warrants, or other securities or indebtedness of the Company outstanding as of the date of this Agreement or granted pursuant to any stock option plan of the Company in existence as of the date of this Agreement, pursuant to the terms thereof; or (c) If the amount of said adjustment shall be less than two cents ($.02) per share, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least two cents ($.02) per Representative's Warrant. 11.6 Adjustment of Warrants' Exercise Price. With respect to any of the Warrants whether or not the Warrants have been exercised (or are exercisable) and whether or not the Warrants are issued and outstanding, the Warrant exercise price and the number of shares of Common stock underlying such Warrants shall be automatically adjusted in accordance -19- 21 with Section 8 of the Warrant Agreement between the Company and Continental Stock Transfer & Trust Company dated _________, 1998 (the "Warrant Agreement"), upon the occurrence of any of the events described therein. Thereafter, the underlying Warrants shall be exercisable at such adjusted Warrant exercise price for such adjusted number of underlying shares of Common Stock or other securities, properties or rights. 11.7. Exchange and Replacement of Representative's Warrant Certificates. Each Representative's Warrant Certificate is exchangeable, without expense, upon the surrender thereof by the registered Holder at the principal executive office of the Company for a new Representative's Warrant Certificate of like tenor and date representing in the aggregate the right to purchase the same number of Warrant Shares in such denominations as shall be designated by the Holder thereof at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of any Representative's Warrant Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Representative's Warrant, if mutilated, the Company will make and deliver a new Warrant Certificate of like tenor, in lieu thereof. 12. Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of shares of Common Stock upon the exercise of the Representative's Warrant, nor shall it be required to issue scrip or pay cash in lieu of fractional -20- 22 interests, it being the intent of the parties that all fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares of Common Stock or other securities, properties or rights. 13. Reservation and Listing of Securities. The Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance upon the exercise of the Representative's Warrant and the Warrant, such number of shares of Common Stock or other securities, properties or rights as shall be issuable upon the exercise thereof. Every transfer agent ("Transfer Agent") for the Common Stock and other securities of the Company issuable upon the exercise of the Representative's Warrant will be irrevocably authorized and directed at all times to reserve such number of authorized shares of Common Stock and other securities as shall be requisite for such purpose. The Company will keep a copy of this Agreement on file with every Transfer Agent for the Common Stock and other securities of the Company issuable upon the exercise of the Representative's Warrant. The Company will supply every such Transfer Agent with duly executed stock and other certificates, as appropriate, for such purpose. The Company covenants and agrees that, upon exercise of the Representative's Warrant and payment of the Exercise Price therefor, all shares of Common Stock and other securities issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable and not subject to the preemptive rights of any stockholder. As long as the Representative's Warrant shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Representative's Warrant to be listed (subject to official notice of issuance) on all securities exchanges on which the Common -21- 23 Stock issued to the public in connection herewith may then be listed and/or quoted on Nasdaq SmallCap Market. 14. Notices to Representative's Warrant Holders. Nothing contained in this Agreement shall be construed as conferring upon the Holders the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of the Representative's Warrants and their exercise, any of the following events shall occur: (a) the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings, as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or (b) the Company shall offer to all the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or -22- 24 (c) a dissolution, liquidation or winding up of the Company (other than in connection with a consolidation or merger) or a sale of all or substantially all of its property, assets and business as an entirety shall be proposed; then in any one or more of said events, the Company shall give written notice of such event at least fifteen (15) days prior to the date fixed as a record date or the date of closing the transfer books for the determination of the stockholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, or entitled to vote on such proposed dissolution, liquidation, winding up or sale. Such notice shall specify such record date or the date of closing the transfer books, as the case may be. Failure to give such notice or any defect therein shall not affect the validity of any action taken in connection with the declaration or payment of any such dividend, or the issuance of any convertible or exchangeable securities, or subscription rights, options or warrants, or any proposed dissolution, liquidation, winding up or sale. 15. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been duly made and sent when delivered, or mailed by registered or certified mail, return receipt requested: (a) if to the registered Holder of the Representative's Warrant, to the address of such Holder as shown on the books of the Company; or -23- 25 (b) if to the Company, to the address set forth in Section 4 hereof or to such other address as the Company may designate by notice to the Holders. 16. Warrants. The form of the certificate representing Warrants (and the form of election to purchase shares of Common Stock upon the exercise of Warrants and the form of assignment period on the reverse thereof) shall be substantially as set forth in Exhibit "A" to the Warrant Agreement. Each Warrant issuable upon exercise of the Representative's Warrants shall evidence the right to initially purchase one fully paid and non-assessable share of Common Stock at an initial purchase price of $_____ per share commencing on the Initial Exercise Date and ending at 5:00 p.m. New York time on the Warrant Expiration Date at which time the Warrant shall expire. The exercise price of the Warrants and the number of shares of Common Stock issuable upon the exercise of the Warrants are subject to adjustment, whether or not the Representative's Warrants have been exercised and the Warrants have been issued, in the manner and upon the occurrence of the events set forth in Section 8 of the Warrant Agreement, which is hereby incorporated herein by reference and made a part hereof as if set forth in its entirety herein. Subject to the provisions of this Agreement and upon issuance of the Warrants underlying the Representative's Warrants, each registered holder of such Warrants shall have the right to purchase from the Company (and the Company shall issue to such registered holders) up to the number of fully paid and non-assessable shares of Common Stock (subject to adjustment as provided herein and in the Warrant Agreement), free and clear of all preemptive rights of stockholders, provided that such registered holder complies with the terms governing exercise of the Warrants set forth in the Warrant Agreement, and pays the applicable exercise -24- 26 price, determined in accordance with the terms of the Warrant Agreement. Upon exercise of the Warrants, the Company shall forthwith issue to the registered holder of any such Warrant in his name or in such name as may be directed by him, certificates for the number of shares of Common Stock so purchased. Except as otherwise provided herein, the Warrants underlying the Representative's Warrants shall be governed in all respects by the terms of the Warrant Agreement. The Warrants shall be transferable in the manner provided in the Warrant Agreement, and upon any such transfer, a new Warrant Certificate shall be issued promptly to the transferee. The Company covenants to, and agrees with, the Holder(s) that without the prior written consent of the Holder(s), the Warrant Agreement will not be modified, amended, cancelled, altered or superseded, and that the Company will send to each Holder, irrespective of whether or not the Warrants have been exercised, any and all notices required by the Warrant Agreement to be sent to holders of Warrants. 17. Supplements; Amendments; Entire Agreement. This Agreement (including the Underwriting Agreement to the extent portions thereof are referred to herein) contains the entire understanding between the parties hereto with respect to the subject matter hereof and may not be modified or amended except by a writing duly signed by the party against whom enforcement of the modification or amendment is sought. The Company and the Representative may from time to time supplement or amend this Agreement without the approval of any holders of Representative's Warrant Certificates (other than the Representative) in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or -25- 27 questions arising hereunder which the Company and the Representative may deem necessary or desirable and which the Company and the Representative deem shall not adversely affect the interests of the Holders of Representative's Warrant Certificates. 18. Successors. All of the covenants and provisions of this Agreement shall be binding upon and inure to the benefit of the Company, the Holders and their respective successors and assigns hereunder. 19. Survival of Representations and Warranties. All statements in any schedule, exhibit or certificate or other instrument delivered by or on behalf of the parties hereto, or in connection with the transactions contemplated by this Agreement, shall be deemed to be representations and warranties hereunder. Notwithstanding any investigations made by or on behalf of the parties to this Agreement, all representations, warranties and agreements made by the parties to this Agreement or pursuant hereto shall survive. 20. Governing Law. This Agreement and each Representative's Warrant Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the laws of said State without giving effect to the rules of said State governing the conflicts of laws. 21. Severability. If any provision of this Agreement shall be held to be invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision of this Agreement. -26- 28 22. Captions. The caption headings of the Sections of this Agreement are for convenience of reference only and are not intended, nor should they be construed as, a part of this Agreement and shall be given no substantive effect. 23. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company and the Representative and any other registered Holder(s) of the Representative's Warrant Certificates or Warrant Shares any legal or equitable right, remedy or claim under this Agreement; and this Agreement shall be for the sole and exclusive benefit of the Company and the Underwriters and any other Holder(s) of the Representative's Warrant Certificates or Warrant Shares. -27- 29 24. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. IN WITNESS OF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first above written. ATTEST: BRIGHTON TECHNOLOGIES CORPORATION By: - ------------------------- ---------------------------------------- Warren Wang Name: Kit Kung Secretary Title: President and Chief Operating Officer NATIONAL SECURITIES CORPORATION By: --------------------------------------- Name: Steven A. Rothstein Title: Chairman -28- 30 EXHIBIT A [FORM OF REPRESENTATIVE'S WARRANT CERTIFICATE] THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE THEREOF MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, (ii) TO THE EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE. THE TRANSFER OR EXCHANGE OF THE REPRESENTATIVE'S WARRANT REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN. EXERCISABLE ON OR BEFORE 5:30 P.M., NEW YORK TIME, ______ __, 2003 Representative's Warrant No. 100,000 Units WARRANT CERTIFICATE This Warrant Certificate certifies that National Securities Corporation, or its registered assigns, is the registered holder of Warrants to purchase initially, at any time from ________, 1999 until 5:30 p.m., New York time on _________, 2003 ("Expiration Date"), up to 100,000 Units (the "Units"), each Unit consisting of one (1) share of fully-paid and non-assessable common stock, $.001 par value ("Common Stock") of Brighton Technologies Corporation, a Delaware corporation (the "Company") and one (1) warrant to purchase one (1) share of Common Stock at an exercise price of $_______ of the Company, at the initial exercise price, subject to adjustment in certain events, of $______ per Unit (the "Exercise Price") upon surrender of this Representative's Warrant Certificate and payment of the Exercise Price at an office or agency of the Company, but subject to the conditions set forth herein and in the Representative's Warrant Agreement dated as of __________, 1998 among the Company and National Securities Corporation (the "Warrant Agreement"). Payment of the Exercise Price shall be made by certified or official bank check in New York Clearing House funds payable to the order of the Company. EXH. A-1 31 No Warrant may be exercised after 5:30 p.m., New York time, on the Expiration Date, at which time all Representative's Warrant evidenced hereby, unless exercised prior thereto, shall thereafter be void. The Representative's Warrants evidenced by this Warrant Certificate are part of a duly authorized issue of Representative's Warrants issued pursuant to the Warrant Agreement, which Warrant Agreement is hereby incorporated by reference in and made a part of this instrument and is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the holders (the words "holders" or "holder" meaning the registered holders or registered holder) of the Representative's Warrant. The Warrant Agreement provides that upon the occurrence of certain events the Exercise Price and the type and/or number of the Company's securities issuable thereupon may, subject to certain conditions, be adjusted. In such event, the Company will, at the request of the holder, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Representative's Warrant; provided, however, that the failure of the Company to issue such new Warrant Certificates shall not in any way change, alter, or otherwise impair, the rights of the holder as set forth in the Warrant Agreement. Upon due presentment for registration of transfer of this Warrant Certificate at an office or agency of the Company, a new Warrant Certificate or Warrant Certificates of like tenor and evidencing in the aggregate a like number of Representative's Warrant shall be issued to the transferee(s) in exchange for this Warrant Certificate, subject to the limitations provided herein and in the Warrant Agreement, without any charge except for any tax or other governmental charge imposed in connection with such transfer. Upon the exercise of less than all of the Representative's Warrant evidenced by this Certificate, the Company shall forthwith issue to the holder hereof a new Warrant Certificate representing such numbered unexercised Representative's Warrant. The Company may deem and treat the registered holder(s) hereof as the absolute owner(s) of this Warrant Certificate (notwithstanding any notation of ownership or other writing hereon made by anyone), for the purpose of any exercise hereof, and of any distribution to the holder(s) hereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. All terms used in this Warrant Certificate which are defined in the Warrant Agreement shall have the meanings assigned to them in the Warrant Agreement. EXH. A-2 32 This Warrant Certificate does not entitle any holder thereof to any of the rights of a shareholder of the Company. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed under its corporate seal. Dated as of ________, 1998. ATTEST: BRIGHTON TECHNOLOGIES CORPORATION By: - ------------------------------ ---------------------------------------- Warren Wang Name:Kit Kung Secretary Title: President and Chief Operating Officer EXH. A-3 33 [FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 3.11] The undersigned hereby irrevocably elects to exercise the right, represented by this Warrant Certificate, to purchase Units and herewith tenders in payment for such securities a certified or official bank check payable in New York Clearing House Funds to the order of Brighton Technologies Corporation (the "Company") in the amount of $_____, all in accordance with the terms of Section 3.1 of the Representative's Warrant Agreement dated as of __________, 1998 among the Company and National Securities Corporation. The undersigned requests that a certificate for such securities be registered in the name of ___________________ __________________________, whose address is ___________________________________ and that such certificate be delivered to____________________ , whose address is _____________________, and if said number of shares shall not be all the shares purchasable hereunder, that a new Warrant Certificate for the balance of the shares purchasable under the within Warrant Certificate be registered in the name of the undesigned warrantholder or his assignee as below indicated and delivered to the address stated below. Dated: _____________________ Signature:__________________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) Address: _____________________________________________ _____________________________________________ ------------------------------------------------------ (Insert Social Security or Other Identifying Number of Holder) Signature Guaranteed: __________________________________________________________ (Signature must be guaranteed by a bank savings and loan association, stockbroker, or credit union with membership in an approved signature guaranty Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.) EXH. A-4 34 [FORM OF ASSIGNMENT] (TO BE EXECUTED BY THE REGISTERED HOLDER IF SUCH HOLDER DESIRES TO TRANSFER THE WARRANT CERTIFICATE.) FOR VALUE RECEIVED __________________ here sells, assigns and transfers unto [NAME OF TRANSFEREE] this Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _________________________ Attorney, to transfer the within Warrant Certificate on the books of the within-named Company, with full power of substitution. Dated: _____________________________ Signature: ______________________________ (Signature must conform in all respects to name of holder as specified on the face of the Warrant Certificate.) Address: _________________________________ _________________________________ __________________________________________ (Insert Social Security or Other Identifying Number of Holder) Signature Guaranteed: __________________________________________________________ (Signature must be guaranteed by a bank savings and loan association, stockbroker, or credit union with membership in an approved signature guaranty Medallion Program pursuant to Securities Exchange Act Rule 17Ad-15.) EXH. A-5 EX-4.3 5 FORM OF REDEEMABLE WARRANT AGREEMENT 1 EXHIBIT 4.3 FORM OF PUBLIC WARRANT Draft 1/15/98 ================================================================================ BRIGHTON TECHNOLOGIES CORPORATION AND CONTINENTAL STOCK TRANSFER & TRUST COMPANY ---------------- WARRANT AGREEMENT DATED AS OF ______________, 1998 ================================================================================ 2 WARRANT AGREEMENT, dated this ___ day of ________ 1998 [the effective date of the Registration Statement], by and between BRIGHTON TECHNOLOGIES CORPORATION, a Delaware corporation (the "Company"), and CONTINENTAL STOCK TRANSFER & TRUST COMPANY. WITNESSETH: WHEREAS, in connection with (i) the offering (the "Offering") to the public of 1,000,000 units (the "Units"), each Unit consisting of one share of the Company's common stock, $.001 par value per share (the "Common Stock"), and one redeemable warrant (the "Warrants"), each redeemable warrant entitling the holder thereof to purchase one share of Common Stock, (ii) the over-allotment option granted to National Securities Corporation, the representative (the "Representative") of the several underwriters (the "Underwriters") in the public offering referred to above, to purchase up to an additional 150,000 Units (the "Over-Allotment Option"), and (iii) the sale to the Representative of warrants (the "Representative's Warrants") to purchase up to 100,000 Units, the Company will issue up to 1,250,000 Warrants (subject to increase as provided herein); WHEREAS, the Company desires to provide for the issuance of certificates representing the Warrants; and WHEREAS, the Company desires the Warrant Agent (as defined in Section 1(u) hereof) to act on behalf of the Company, and the Warrant Agent is willing to so act, in connection with the issuance, registration, transfer and exchange of certificates representing the Warrants and the exercise of the Warrants. NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth and for the purpose of defining the terms and provisions of the Warrants and the certificates representing the Warrants and the respective rights and obligations thereunder 3 of the Company, the Representative, the holders of certificates representing the Warrants and the Warrant Agent, the parties hereto agree as follows: SECTION 1. Definitions. As used herein, the following terms shall have the following meanings, unless the context shall otherwise require: (a) "Act" shall mean the Securities Act of 1933, as amended. (b) "Commission" shall mean the Securities and Exchange Commission. (c) "Common Stock" shall have the meaning set forth in Section 8(d) hereof. (d) "Company" shall have the meaning assigned to such term in the first (1st) paragraph of this Agreement. (e) "Corporate Office" shall mean the office of the Warrant Agent at which at any particular time its principal business in New York, New York shall be administered, which office is located on the date hereof at 2 Broadway, New York, New York 10004. (f) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (g) "Exercise Date" shall mean, subject to the provisions of Section 5(b) hereof, as to any Warrant, the date on which the Warrant Agent shall have received both (i) the Warrant Certificate representing such Warrant, with the exercise form thereon duly executed by the Registered Holder (as defined in Section 1(m) hereof) thereof or his attorney duly authorized in writing, and (ii) payment in cash or by check made payable to the Warrant Agent for the account of the Company of an amount in lawful money of the United States of America equal to the applicable Purchase Price (as defined in Section 1(k) hereof). (h) "Initial Warrant Exercise Date" shall mean __________, 1998 [the effective date of the Registration Statement]. 2 4 (i) "Initial Warrant Redemption Date" shall mean __________, 1998 [the date _____ (__) months after the effective date of the Registration Statement]. (j) "NASD" shall mean the NASD Regulation, Inc. (k) "Purchase Price" shall mean, subject to modification and adjustment as provided in Section 8 hereof, $ [150% of the initial public offering price per Unit] per Share. (l) "Redemption Date" shall mean the date (which may not occur before the Initial Warrant Redemption Date) fixed for the redemption of the Warrants in accordance with the terms hereof. (m) "Registered Holder" shall mean the person in whose name any certificate representing the Warrants shall be registered on the books maintained by the Warrant Agent pursuant to Section 6(b) hereof. (n) "Representative's Warrant Agreement" shall mean the agreement dated as of __________, 1998 [the effective date of the Registration Statement] between the Company and the Representative relating to and governing the terms and provisions of the Representative's Warrants. (o) "Subsidiary" or "Subsidiaries" shall mean any corporation or corporations, as the case may be, of which stock having ordinary power to elect a majority of the board of directors of such corporation or corporations (regardless of whether or not at the time the stock of any other class or classes of such corporation shall have or may have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned by the Company or by one or more Subsidiaries, or by the Company and one or more Subsidiaries. 3 5 (p) "Transfer Agent" shall mean Continental Stock Transfer & Trust Company of New York, New York or its authorized successor. (q) "Underwriting Agreement" shall mean the underwriting agreement dated _______________, 1998 [the effective date of the Registration Statement] between the Company and the Representative relating to the purchase for resale to the public of 1,000,000 Units (without giving effect to the Over-Allotment Option). (r) "Warrant Agent" shall mean Continental Stock Transfer & Trust Company of New York, New York or its authorized successor. (s) "Warrant Certificate" shall mean a certificate representing each of the Warrants substantially in the form annexed hereto as Exhibit A. (t) "Warrant Expiration Date" shall mean, unless the Warrants are redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (New York time) on __________, 2003 [the 60 month anniversary of issuance] or, if such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then 5:00 p.m. (New York time) on the next following day which in the State of New York is not a holiday or a day on which banks are authorized to close. SECTION 2. Warrants and Issuance of Warrant Certificates. (a) One Warrant shall initially entitle the Registered Holder of the Warrant Certificate representing such Warrant to purchase at the Purchase Price therefor from the Initial Warrant Exercise Date until the Warrant Expiration Date one (1) share of Common Stock upon the exercise thereof, subject to modification and adjustment as provided in Section 8 hereof. (b) Upon execution of this Agreement, Warrant Certificates representing 1,000,000 Warrants to purchase up to an aggregate of 1,000,000 shares of Common Stock 4 6 (subject to modification and adjustment as provided in Section 8 hereof), shall be executed by the Company and delivered to the Warrant Agent. (c) Upon exercise of the Over-Allotment Option, in whole or in part, Warrant Certificates representing up to 150,000 Warrants to purchase up to an aggregate of 150,000 shares of Common Stock (subject to modification and adjustment as provided in Section 8 hereof) shall be executed by the Company and delivered to the Warrant Agent. (d) Upon exercise of the Representative's Warrants as provided therein, Warrant Certificates representing 100,000 Warrants to purchase up to an aggregate of 100,000 shares of Common Stock (subject to modification and adjustment as provided in Section 8 hereof and in the Representative's Warrant Agreement), shall be countersigned, issued and delivered by the Warrant Agent upon written order of the Company signed by its Chairman of the Board, President or a Vice President and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary. (e) From time to time, up to the Warrant Expiration Date, the Warrant Agent shall countersign and deliver Warrant Certificates in required denominations of one or whole number multiples thereof to the person entitled thereto in connection with any transfer or exchange permitted under this Agreement. No Warrant Certificates shall be issued except (i) Warrant Certificates initially issued hereunder, (ii) Warrant Certificates issued upon any transfer or exchange of Warrants, (iii) Warrant Certificates issued in replacement of lost, stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7 hereof, and (iv) Warrant Certificates issued pursuant to the Representative's Warrant Agreement (including Warrants in excess of the 100,000 Representative's Warrants issued as a result of the antidilution provisions contained in the Representative's Warrant Agreement) and (v) at the option of the Company, Warrant Certificates in such form as may be approved by its Board of Directors, to reflect any 5 7 adjustment or change in the Purchase Price, the number of shares of Common Stock purchasable upon the exercise of a Warrant or the redemption price therefor. SECTION 3. Form and Execution of Warrant Certificates. (a) The Warrant Certificates shall be substantially in the form annexed hereto as Exhibit A (the provisions of which are hereby incorporated herein) and may have such letters, numbers or other marks of identification or designation and such legends, summaries or endorsements printed, lithographed or engraved thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Warrants may be listed, or to conform to usage. The Warrant Certificates shall be dated the date of issuance thereof (whether upon initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or destroyed Warrant Certificates). (b) Warrant Certificates shall be executed on behalf of the Company by its Chairman of the Board, President or any Vice President and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary, by manual signatures or by facsimile signatures printed thereon, and shall have imprinted thereon a facsimile of the Company's seal. Warrant Certificates shall be manually countersigned by the Warrant Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Warrant Certificates shall cease to be such officer of the Company before the date of issuance of the Warrant Certificates or before countersignature by the Warrant Agent and issue and delivery thereof, such Warrant Certificates, nevertheless, may be countersigned by the Warrant Agent and issued and delivered with the same force and effect as though the officer of the Company who signed such Warrant Certificates had not ceased to hold such office. 6 8 SECTION 4. Exercise. (a) Warrants in denominations of one or whole number multiples thereof may be exercised commencing at any time on or after the Initial Warrant Exercise Date, but not after the Warrant Expiration Date, upon the terms and subject to the conditions set forth herein (including the provisions set forth in Sections 5 and 9 hereof) and in the applicable Warrant Certificate. A Warrant shall be deemed to have been exercised immediately prior to the close of business on the Exercise Date, provided that the Warrant Certificate representing such Warrant, with the exercise form thereon duly executed by the Registered Holder thereof or his attorney duly authorized in writing, together with payment in cash or by check made payable to the Warrant Agent for the account of the Company of an amount in lawful money of the United States of America equal to the applicable Purchase Price, have been received by the Warrant Agent. The person entitled to receive the securities deliverable upon such exercise shall be treated for all purposes as the holder of such securities as of the close of business on the Exercise Date. As soon as practicable on or after the Exercise Date and in any event within five (5) business days after such date, the Warrant Agent, on behalf of the Company, shall cause to be issued to the person or persons entitled to receive the same a Common Stock certificate or certificates for the shares of Common Stock deliverable upon such exercise, and the Warrant Agent shall deliver the same to the person or persons entitled thereto. Upon the exercise of any Warrants, the Warrant Agent shall promptly notify the Company in writing of such fact and of the number of securities delivered upon such exercise and, subject to Section 4(b) hereof, shall cause all payments in cash or by check made payable to the order of the Company in respect of the Purchase Price to be deposited promptly in the Company's bank account or delivered to the Company. 7 9 (b) At any time upon the exercise of any Warrants after one year and one day from the date hereof, the Warrant Agent shall, on a daily basis, within two business days after such exercise, notify the Representative, its successors or assigns of the exercise of any such Warrants and shall, on a weekly basis (subject to collection of funds constituting the tendered Purchase Price, but in no event later than five business days after the last day of the calendar week in which such funds were tendered), for services rendered by the Representative to the Registered Holders of the Warrants then being exercised, remit to the Representative an amount equal to five percent (5%) of the Purchase Price of such Warrants then being exercised unless the Representative shall have notified the Warrant Agent that the payment of such amount with respect to such Warrant is violative of the General Rules and Regulations promulgated under the Exchange Act, or the rules and regulations of the NASD or applicable state securities or "blue sky" laws, or the Warrants are those underlying the Representative's Warrants in which event, the Warrant Agent shall have to pay such amount to the Company; provided, that, the Warrant Agent shall not be obligated to pay any amounts pursuant to this Section 4(b) during any week that such amounts payable are less than $1,000 and the Warrant Agent's obligation to make such payments shall be suspended until the amount payable aggregates $1,000, and provided further, that, in any event, any such payment (regardless of amount) shall be made not less frequently than monthly. (c) The Company shall not be obligated to issue any fractional share interests or fractional warrant interests upon the exercise of any Warrant or Warrants, nor shall it be obligated to issue scrip or pay cash in lieu of fractional interests. Any fractional interest shall be eliminated by rounding any fraction up to the next full share or Warrant, as the case may be, or other securities, properties or rights. 8 10 SECTION 5. Reservation of Shares, Listing, Payment of Taxes, etc. (a) The Company covenants that it will at all times reserve and keep available out of its authorized Common Stock, solely for the purpose of issuance upon the exercise of Warrants, such number of shares of Common Stock as shall then be issuable upon the exercise of all outstanding Warrants. The Company covenants that, upon exercise of the Warrants and payment of the Purchase Price for the shares of Common Stock underlying the Warrants, all shares of Common Stock which shall be issuable upon such exercise shall be duly and validly issued, fully paid, non-assessable, free from all preemptive or similar rights, and free from all taxes, liens and charges with respect to the issuance thereof, and that upon issuance such shares shall be listed or quoted on each securities exchange, if any, on which the other shares of outstanding Common Stock are then listed or quoted, or if not then so listed or quoted on each place (whether the Nasdaq Stock Market, Inc. (National Market or SmallCap Market, the NASD OTC Electronic Bulletin Board, the National Quotation Bureau "pink sheets" or otherwise) on which the other shares of outstanding Common Stock are listed or quoted. (b) The Company covenants that if any securities reserved for the purpose of exercise of Warrants hereunder require registration with, or approval of, any governmental authority under any federal securities law before such securities may be validly issued or delivered upon such exercise, then the Company will file a registration statement under the federal securities laws or a post-effective amendment to a registration statement, use its best efforts to cause the same to become effective, keep such registration statement current while any of the Warrants are outstanding and deliver a prospectus which complies with Section 10(a)(3) of the Act, to the Registered Holder exercising the Warrant (except, if in the opinion of counsel to the Company, such registration is not required under the federal securities law or if the Company receives a letter from the staff of the Commission stating that it would not take any 9 11 enforcement action if such registration is not effected). The Company will use its best efforts to obtain appropriate approvals or registrations under the state "blue sky" securities laws of all states in which Registered Holders reside. Warrants may not be exercised by, nor may shares of Common Stock be issued to, any Registered Holder in any state in which such exercise would be unlawful. (c) The Company shall pay all documentary, stamp or similar taxes and other governmental charges that may be imposed with respect to the issuance of Warrants, or the issuance or delivery of any shares of Common Stock upon exercise of the Warrants; provided, however, that if shares of Common Stock are to be delivered in a name other than the name of the Registered Holder of the Warrant Certificate representing any Warrant being exercised, then no such delivery shall be made unless the person requesting the same has paid to the Warrant Agent the amount of transfer taxes or charges incident thereto, if any. (d) The Warrant Agent is hereby irrevocably authorized as the Transfer Agent to requisition from time to time certificates representing shares of Common Stock or other securities required upon exercise of the Warrants, and the Company will comply with all such requisitions. SECTION 6. Exchange and Registration of Transfer. (a) Warrant Certificates may be exchanged for other Warrant Certificates representing an equal aggregate number of Warrants or may be transferred in whole or in part. Warrant Certificates to be so exchanged shall be surrendered to the Warrant Agent at its Corporate Office, and the Company shall execute and the Warrant Agent shall countersign, issue and deliver in exchange therefor the Warrant Certificate or Certificates which the Registered Holder making the exchange shall be entitled to receive. 10 12 (b) The Warrant Agent shall keep, at such office, books in which, subject to such reasonable regulations as it may prescribe, it shall register Warrant Certificates and the transfer thereof. Upon due presentment for registration of transfer of any Warrant Certificate at such office, the Company shall execute and the Warrant Agent shall issue and deliver to the transferee or transferees a new Warrant Certificate or Certificates representing an equal aggregate number of Warrants. (c) With respect to any Warrant Certificates presented for registration of transfer, or for exchange or exercise, the subscription or assignment form, as the case may be, on the reverse thereof shall be duly endorsed or be accompanied by a written instrument or instruments of subscription or assignment, in form satisfactory to the Company and the Warrant Agent, duly executed by the Registered Holder thereof or his attorney duly authorized in writing. (d) No service charge shall be made for any exchange or registration of transfer of Warrant Certificates. However, the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. (e) All Warrant Certificates surrendered for exercise or for exchange shall be promptly cancelled by the Warrant Agent. (f) Prior to due presentment for registration or transfer thereof, the Company and the Warrant Agent may deem and treat the Registered Holder of any Warrant Certificate as the absolute owner thereof of each Warrant represented thereby (notwithstanding any notations of ownership or writing thereon made by anyone other than the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary. SECTION 7. Loss or Mutilation. Upon receipt by the Company and the Warrant Agent of evidence satisfactory to them of the ownership of and the loss, theft, destruction or 11 13 mutilation of any Warrant Certificate and (in the case of loss, theft or destruction) of indemnity satisfactory to them, and (in case of mutilation) upon surrender and cancellation thereof, the Company shall execute and the Warrant Agent shall countersign and deliver in lieu thereof a new Warrant Certificate representing an equal number of Warrants. Applicants for a substitute Warrant Certificate shall also comply with such other reasonable regulations and pay such other reasonable charges as the Warrant Agent may prescribe. SECTION 8. Adjustments to Purchase Price and Number of Securities. (a) Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Purchase Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination. (b) Stock Dividends and Distributions. In case the Company shall pay dividend in, or make a distribution of, shares of Common Stock or of the Company's capital stock convertible into Common Stock, the Purchase Price shall forthwith be proportionately decreased. An adjustment made pursuant to this Section 8(b) shall be made as of the record date for the subject stock dividend or distribution. (c) Adjustment in Number of Securities. Upon each adjustment of the Purchase Price pursuant to the provisions of this Section 8, the number of Warrant Securities issuable upon the exercise at the adjusted Purchase Price of each Warrant shall be adjusted to the nearest whole number by multiplying a number equal to the Purchase Price in effect immediately prior to such adjustment by the number of Warrant Securities issuable upon exercise of the Warrants immediately prior to such adjustment and dividing the product so obtained by the adjusted Purchase Price. 12 14 (d) Definition of Common Stock. For the purpose of this Agreement, the term "Common Stock" shall mean (i) the class of stock designated as Common Stock in the Certificate of Incorporation of the Company as may be amended or restated as of the date hereof, or (ii) any other class of stock resulting from successive changes or reclassifications of such Common Stock consisting solely of changes in par value, or from par value to no par value, or from no par value to par value. In the event the Company shall after the date hereof issue Common Stock with greater or superior voting rights than the shares of Common Stock outstanding as of the date hereof, each Holder, at its option, may receive upon exercise of any Warrant either shares of Common Stock or a like number of such securities with greater or superior voting rights. (e) Merger or Consolidation or Sale. (i) In case of any consolidation of the Company with, or merger of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding Common Stock), the corporation formed by such consolidation or surviving such merger shall execute and deliver to the Holder a supplemental warrant agreement providing that the holder of each Warrant then outstanding or to be outstanding shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of such Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation, merger, sale or transfer by a Holder of the number of shares of Common Stock of the Company for which such Warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for adjustments which shall be identical to the adjustments provided in this Section 8. The above provision of this subsection shall similarly apply to successive consolidations or mergers. 13 15 (ii) In the event of (A) the sale by the Company of all or substantially all of its assets, or (B) the engagement by the Company or any of its affiliates in a "Rule 13e-3 transaction" as defined in paragraph (a)(3) of Rule 13e-3 of the General Rules and Regulations under the Exchange Act or (C) a distribution to the Company's stockholders of any cash, assets, property, rights, evidences of indebtedness, securities or any other thing of value, or any combination thereof, the Holders of the unexercised Warrants shall receive notice of such sale, transaction or distribution twenty (20) days prior to the date of such sale or the record date for such transaction or distribution, as applicable, and, if they exercise such Warrants prior to the date of such transaction or distribution, they shall be entitled, in addition to the shares of Common Stock issuable upon the exercise thereof, to receive such property, cash, assets, rights, evidence of indebtedness, securities or any other thing of value, or any combination thereof, on the payment date of such sale, transaction or distribution. (f) No Adjustment of Exercise Price in Certain Cases. No adjustment of the Exercise Price shall be made if the amount of said adjustment shall be less than ten cents (10(cent)) per share of Common Stock, provided, however, that in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time of and together with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to at least ten cents (10(cent)) per share of Common Stock. SECTION 9. Redemption. (a) Commencing on the Initial Warrant Redemption Date, the Company may (but not without the prior written consent of the Representative), on thirty (30) days' prior written notice, redeem all of the Warrants, in whole and not in part, at a redemption price of five cents ($.10) per Warrant; provided, however, that before any such call for redemption of Warrants can take place, the (i) average closing bid price for the Common Stock, as reported 14 16 by the National Association of Securities Dealers Automated Quotation System, or (ii) if not so quoted, as reported by any other recognized quotation system on which the Common Stock is quoted, shall have for any twenty (20) trading days within a period of thirty (30) consecutive trading days ending on the fifth (5th) trading day prior to the date on which the notice contemplated by Sections 9(b) and 9(c) hereof is given, equalled or exceeded 150% of the Offering Price per Unit (subject to adjustment in the event of any stock splits or other similar events as provided in Section 8 hereof). (b) In case the Company shall exercise its right to redeem all of the Warrants, it shall give or cause to be given notice to the Registered Holders of the Warrants, by mailing to such Registered Holders a notice of redemption, first class, postage prepaid, at their last address as shall appear on the records of the Warrant Agent. Any notice mailed in the manner provided herein shall be conclusively presumed to have been duly given whether or not the Registered Holder receives such notice. Not less than five (5) business days prior to the mailing to the Registered Holders of the Warrants of the notice of redemption, the Company shall deliver or cause to be delivered to the Representative or its successors or assigns a similar notice telephonically and confirmed in writing, together with a list of the Registered Holders (including their respective addresses and number of Warrants beneficially owned by them) to whom such notice of redemption has been or will be given. (c) The notice of redemption shall specify (i) the redemption price, (ii) the date fixed for redemption, which shall in no event be less than thirty (30) days after the date of mailing of such notice, (iii) the place where the Warrant Certificates shall be delivered and the redemption price shall be paid, and (iv) that the Representative is the Company's exclusive warrant solicitation agent and shall receive the commission contemplated by Section 4(b) hereof and (v) that the right to exercise the Warrant shall terminate at 5:00 p.m. (New York time) on 15 17 the business day immediately preceding the date fixed for redemption. The date fixed for the redemption of the Warrants shall be the "Redemption Date" for purposes of this Agreement. No failure to mail such notice nor any defect therein or in the mailing thereof shall affect the validity of the proceedings for such redemption except as to a holder (A) to whom notice was not mailed or (B) whose notice was defective. An affidavit of the Warrant Agent or the Secretary or Assistant Secretary of the Company that notice of redemption has been mailed shall, in the absence of fraud, be prima facie evidence of the facts stated therein. (d) Any right to exercise a Warrant shall terminate at 5:00 p.m. (New York time) on the business day immediately preceding the Redemption Date. The redemption price payable to the Registered Holders shall be mailed to such persons at their addresses of record. (e) The Company shall indemnify the Representative and each person, if any, who controls the Representative within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or otherwise, arising from the registration statement or prospectus referred to in Section 5(b) hereof to the same extent and with the same effect (including the provisions regarding contribution) as the provisions pursuant to which the company has agreed to indemnify the Representative contained in Section __ of the Underwriting Agreement. (f) Five business days prior to the Redemption Date, the Company shall furnish to the Representative (i) opinions of counsel to the Company, dated such date and addressed to the Representative, and (ii) a "cold comfort" letter dated such date addressed to the Representative, signed by the independent public accountants who have issued a report on the Company's financial statements included in such registration statement, in each case covering 16 18 substantially the same matters with respect to such registration statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to underwriters in underwritten public offerings of securities, including, without limitation, those matters covered in Sections ___, ____ and ____ of the Underwriting Agreement. (g) The Company shall as soon as practicable after the Redemption Date, and in any event within 15 months thereafter, make "generally available to its security holders" (within the meaning of Rule 158 under the Act) an earnings statement (which need not be audited) complying with Section 11(a) of the Act and covering a period of at least 12 consecutive months beginning after the Redemption Date. (h) The Company shall deliver within five business days prior to the Redemption Date copies of all correspondence between the Commission and the Company, its counsel or auditors and all memoranda relating to discussions with the Commission or its staff with respect to such registration statement and permit the Representative to do such investigation, upon reasonable advance notice, with respect to information contained in or omitted from the registration statement as it deems reasonably necessary to comply with applicable securities laws or rules of the NASD. Such investigation shall include access to books, records and properties and opportunities to discuss the business of the Company with its officers and independent auditors, all to such reasonable extent and at such reasonable times and as often as the Representative shall reasonably request. SECTION 10. Concerning the Warrant Agent. (a) The Warrant Agent acts hereunder as agent and in a ministerial capacity for the Company and the Representative, and its duties shall be determined solely by the 17 19 provisions hereof. The Warrant Agent shall not, by issuing and delivering Warrant Certificates or by any other act hereunder, be deemed to make any representations as to the validity or value or authorization of the Warrant Certificates or the Warrants represented thereby or of any securities or other property delivered upon exercise of any Warrant or whether any stock issued upon exercise of any Warrant is fully paid and non-assessable. (b) The Warrant Agent shall not at any time be under any duty or responsibility to any holder of Warrant Certificates to make or cause to be made any adjustment of the Purchase Price provided in this Agreement, or to determine whether any fact exists which may require any such adjustment, or with respect to the nature or extent of any such adjustment, when made, or with respect to the method employed in making the same. It shall not (i) be liable for any recital or statement of fact contained herein or for any action taken, suffered or omitted by it in reliance on any Warrant Certificate or other document or instrument believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties, (ii) be responsible for any failure on the part of the Company to comply with any of its covenants and obligations contained in this Agreement or in any Warrant Certificate, or (iii) be liable for any act or omission in connection with this Agreement except for its own gross negligence or willful misconduct. (c) The Warrant Agent may at any time consult with counsel satisfactory to it (who may be counsel for the Company or the Representative) and shall incur no liability or responsibility for any action taken, suffered or omitted by it in good faith in accordance with the opinion or advice of such counsel. (d) Any notice, statement, instruction, request, direction, order or demand of the Company shall be sufficiently evidenced by an instrument signed by the Chairman of the Board of Directors, President or any Vice President (unless other evidence in respect thereof is 18 20 herein specifically prescribed). The Warrant Agent shall not be liable for any action taken, suffered or omitted by it in accordance with such notice, statement, instruction, request, direction, order or demand. (e) The Company agrees to pay the Warrant Agent reasonable compensation for its services hereunder and to reimburse it for its reasonable expenses hereunder; the Company further agrees to indemnify the Warrant Agent and hold it harmless against any and all losses, expenses and liabilities, including judgments, costs and counsel fees, for anything done or omitted by the Warrant Agent in the execution of its duties and powers hereunder except losses, expenses and liabilities arising as a result of the Warrant Agent's gross negligence or willful misconduct. (f) The Warrant Agent may resign its duties and be discharged from all further duties and liabilities hereunder (except liabilities arising as a result of the Warrant Agent's own gross negligence or willful misconduct), after giving thirty (30) days' prior written notice to the Company. At least fifteen (15) days prior to the date such resignation is to become effective, the Warrant Agent shall cause a copy of such notice of resignation to be mailed to the Registered Holder of each Warrant Certificate at the Company's expense. Upon such resignation the Company shall appoint in writing a new warrant agent. If the Company shall fail to make such appointment within a period of thirty (30) days after it has been notified in writing of such resignation by the resigning Warrant Agent, then the Registered Holder of any Warrant Certificate may apply to any court of competent jurisdiction for the appointment of a new warrant agent. Any new warrant agent, whether appointed by the Company or by such a court, shall be a bank or trust company having a capital and surplus, as shown by its last published report to its stockholders, of not less than ten million dollars ($10,000,000) or a stock transfer company doing business in New York, New York. After acceptance in writing of such 19 21 appointment by the new warrant agent is received by the Company, such new warrant agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as the warrant agent, without any further assurance, conveyance, act or deed; but if for any reason it shall be necessary or expedient to execute and deliver any further assurance, conveyance, act or deed, the same shall be done at the expense of the Company and shall be legally and validly executed and delivered by the resigning Warrant Agent. Not later than the effective date of any such appointment, the Company shall file notice thereof with the resigning Warrant Agent and shall forthwith cause a copy of such notice to be mailed to the Registered Holder of each Warrant Certificate. (g) Any corporation into which the Warrant Agent or any new warrant agent may be converted or merged, any corporation resulting from any consolidation to which the Warrant Agent or any new warrant agent shall be a party, or any corporation succeeding to the corporate trust business of the Warrant Agent or any new warrant agent shall be a successor warrant agent under this Agreement without any further act, provided that such corporation is eligible for appointment as successor to the Warrant Agent under the provisions of the preceding paragraph. Any such successor warrant agent shall promptly cause notice of its succession as warrant agent to be mailed to the Company and to the Registered Holders of each Warrant Certificate. (h) The Warrant Agent, its subsidiaries and affiliates, and any of its or their officers or directors, may buy and hold or sell Warrants or other securities of the Company and otherwise deal with the Company in the same manner and to the same extent and with like effect as though it were not Warrant Agent. Nothing herein shall preclude the Warrant Agent from acting in any other capacity for the Company or for any other legal entity. 20 22 (i) The Warrant Agent shall retain for a period of two (2) years from the date of exercise any Warrant Certificate received by it upon such exercise. SECTION 11. Modification of Agreement. The Warrant Agent and the Company may by supplemental agreement make any changes or corrections in this Agreement (a) that they shall deem appropriate to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained, or (b) that they may deem necessary or desirable and which shall not adversely affect the interests of the holders of Warrant Certificates; provided, however, that this Agreement shall not otherwise be modified, supplemented or altered in any respect except with the consent in writing of the Registered Holders holding not less than sixty-six and two-thirds percent (66-2/3%) of the Warrants then outstanding; provided, further, that no change in the number or nature of the securities purchasable upon the exercise of any Warrant, and no change that increases the Purchase Price of any Warrant, other than such changes as are specifically set forth in this Agreement as originally executed, shall be made without the consent in writing of each Registered Holders affected by such change. In addition, this Agreement may not be modified, amended or supplemented without the prior written consent of the Representative or its successors or assigns, other than to cure any ambiguity or to correct any defective or inconsistent provision or manifest mistake or error herein contained or to make any such change that the Warrant Agent and the Company deem necessary or desirable and which shall not adversely affect the interests of the Representative or its successors or assigns. SECTION 12. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first-class postage prepaid or delivered to a telegraph office for transmission, if to the Registered Holder of a Warrant 21 23 Certificate, at the address of such holder as shown on the registry books maintained by the Warrant Agent; if to the Company at Brighton Technologies Corporation, 6 Pearl Court, Allendale, New Jersey 07401, Attention: Kit Kung, President and Chief Executive Officer, or at such other address as may have been furnished to the Warrant Agent in writing by the Company; and if to the Warrant Agent, at its Corporate Office. Copies of any notice delivered pursuant to this Agreement shall be delivered to National Securities Corporation, 1001 Fourth Avenue, Suite 2200, Seattle, Washington 98154, Attn: Stephen A. Rothstein, Chairman or at such other address as may have been furnished to the Company and the Warrant Agent in writing. SECTION 13. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York without giving effect to conflicts of laws rules or principals. SECTION 14. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the Company, the Warrant Agent and their respective successors and assigns and the holders from time to time of Warrant Certificates or any of them. Except as hereinafter stated, nothing in this Agreement is intended or shall be construed to confer upon any other person any right, remedy or claim or to impose upon any other person any duty, liability or obligation. The Representative is, and shall at all times irrevocably be deemed to be, a third-party beneficiary of this Agreement, with full power, authority and standing to enforce the rights granted to it hereunder. SECTION 15. Counterparts. This Agreement may be executed in several counterparts, which taken together shall constitute a single document. 22 24 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written. BRIGHTON TECHNOLOGIES CONTINENTAL STOCK TRANSFER CORPORATION & TRUST COMPANY As Warrant Agent By:________________________________ By:_______________________________ Name: Kit Kung Name: Title: President and Title: Chief Executive Officer 23 25 EXHIBIT A No. W ___________ VOID AFTER ____________________, 2003 _________ WARRANTS REDEEMABLE WARRANT CERTIFICATE TO PURCHASE SHARES OF COMMON STOCK BRIGHTON TECHNOLOGIES CORPORATION CUSIP ___ THIS CERTIFIES THAT, FOR VALUE RECEIVED __________________________________ or registered assigns (the "Registered Holder") is the owner of the number of Redeemable Warrants (the "Warrants") specified above. One Warrant initially entitles the Registered Holder to purchase, subject to the terms and conditions set forth in this Certificate and the Warrant Agreement (as hereinafter defined), one fully paid and non-assessable share of Common Stock, $.001 par value per share, of Brighton Technologies Corporation, a Delaware corporation (the "Company"), at any time from _____________, 1998 [the effective date of the Registration Statement] and prior to the Expiration Date (as hereinafter defined) upon the presentation and surrender of this Warrant Certificate with the Subscription Form on the reverse hereof duly executed, at the corporate office of Continental Stock Transfer & Trust Company, 2 Broadway, New York, New York 10004 as Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of $_____ [150% of the initial public offering price per Unit] subject to adjustment (the "Purchase Price"), in lawful money of the United States of America in cash or by check made payable to the Warrant Agent for the account of the Company. This Warrant Certificate is, and each Warrant represented hereby are, issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement (the "Warrant Agreement"), dated __________, 1998 [the effective date of the Registration Statement], by and between the Company and the Warrant Agent. In the event of certain contingencies provided for in the Warrant Agreement, the Purchase Price and the number of shares of Common Stock subject to purchase upon the exercise of each Warrant represented hereby are subject to modification or adjustment. Each Warrant represented hereby is exercisable at the option of the Registered Holder, but no fractional interests will be issued. In the case of the exercise of less than all of the Warrants represented hereby, the Company shall cancel this Warrant Certificate upon the surrender hereof and shall execute and deliver a new Warrant Certificate or Warrant Certificates of like tenor, which the Warrant Agent shall countersign, for the balance of such Warrants. A-1 26 The term "Expiration Date" shall mean 5:00 p.m. (New York time) on __________, 2003 [the 60 month anniversary of the issuance of the Warrant]. If such date shall in the State of New York be a holiday or a day on which banks are authorized to close, then the Expiration Date shall mean 5:00 p.m. (New York time) on the next day which in the State of New York is not a holiday or a day on which banks are authorized to close. The Company shall not be obligated to deliver any securities pursuant to the exercise of this Warrant unless a registration statement under the Securities Act of 1933, as amended (the "Act"), with respect to such securities is effective or an exemption thereunder is available. The Company has covenanted and agreed that it will file a registration statement under the Federal securities laws, use its best efforts to cause the same to become effective, to keep such registration statement current, if required under the Act, while any of the Warrants are outstanding, and deliver a prospectus which complies with Section 10(a)(3) of the Act to the Registered Holder exercising this Warrant. This Warrant shall not be exercisable by a Registered Holder in any state where such exercise would be unlawful. This Warrant Certificate is exchangeable, upon the surrender hereof by the Registered Holder at the corporate office of the Warrant Agent, for a new Warrant Certificate or Warrant Certificates of like tenor representing an equal aggregate number of Warrants, each of such new Warrant Certificates to represent such number of Warrants as shall be designated by such Registered Holder at the time of such surrender. Upon due presentment and payment of any tax or other charge imposed in connection therewith or incident thereto, for registration of transfer of this Warrant Certificate at such office, a new Warrant Certificate or Warrant Certificates representing an equal aggregate number of Warrants will be issued to the transferee in exchange therefor, subject to the limitations provided in the Warrant Agreement. Prior to the exercise of any Warrant represented hereby, the Registered Holder shall not be entitled to any rights of a stockholder of the Company, including, without limitation, the right to vote or to receive dividends or other distributions, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided in the Warrant Agreement. Subject to the provisions of the Warrant Agreement, this Warrant may be redeemed at the option of the Company, in whole and not in part, at a redemption price of $.10 per Warrant, at any time commencing __________, 1998 provided that the average closing bid price for the Company's Common Stock, as reported by the National Association of Securities Dealers Automated Quotation System (or, if not so quoted, as reported by any other recognized quotation system on which the price of the Common Stock is quoted), shall have, for any twenty (20) trading days within a period of thirty (30) consecutive trading days ending on the fifth (5th) trading day prior to the date on which the Notice of Redemption (as defined below) is given, equalled or exceeded 150% of the initial offering price of the Units (subject to adjustment in the event of any stock splits or other similar events). Notice of redemption (the "Notice of Redemption") shall be given not later than the thirtieth (30th) day before the date fixed for redemption, all as provided in the Warrant Agreement. On and after the date fixed for redemption, the Registered Holder shall have no rights with respect to this Warrant except to receive the $.10 per Warrant upon surrender of this Certificate. A-2 27 Prior to due presentment for registration of transfer hereof, the Company and the Warrant Agent may deem and treat the Registered Holder as the absolute owner hereof and of each Warrant represented hereby (notwithstanding any notations of ownership or writing hereon made by anyone other than a duly authorized officer of the Company or the Warrant Agent) for all purposes and shall not be affected by any notice to the contrary, except as provided in the Warrant Agreement. This Warrant Certificate shall be governed by and construed in accordance with the laws of the State of New York without giving effect to conflicts of laws. This Warrant Certificate is not valid unless countersigned by the Warrant Agent. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be duly executed, manually or in facsimile by two of its officers thereunto duly authorized and a facsimile of its corporate seal to be imprinted hereon. Dated: ___________, 1998 BRIGHTON TECHNOLOGIES CORPORATION [SEAL] By: _____________________________ Name: Kit Kung Title: President and Chief Executive Officer ATTEST: By: _____________________________ Name: Title: COUNTERSIGNED: CONTINENTAL STOCK TRANSFER & TRUST COMPANY, as Warrant Agent By: _________________________ Authorized Officer A-3 28 SUBSCRIPTION FORM To Be Executed by the Registered Holder in Order to Exercise Warrant The undersigned Registered Holder hereby irrevocably elects to exercise _____ Warrants represented by this Warrant Certificate, and to purchase the securities issuable upon the exercise of such Warrants, and requests that certificates for such securities shall be issued in name of PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER _______________________________ _______________________________ _______________________________ _______________________________ (please print or type name and address) and be delivered to _______________________________ _______________________________ _______________________________ (please print or type name and address) and if such number of Warrants shall not be all the Warrants evidenced by this Warrant Certificate, that a new Warrant Certificate for the balance of such Warrants be registered in the name of, and delivered to, the Registered Holder at the address stated below. A-4 29 IMPORTANT: PLEASE COMPLETE THE FOLLOWING: 1. If the exercise of this Warrant was solicited by National Securities Corporation please check the following box [ ] 2. The exercise of this Warrant was solicited by [ ] -------------------------- 3. If the exercise of this Warrant was not solicited, please check the following box [ ] Dated: ______________________ X____________________________ ____________________________ ____________________________ Address ____________________________ Social Security or Taxpayer Identification Number ____________________________ Signature Guaranteed ____________________________ A-5 30 ASSIGNMENT To Be Executed by the Registered Holder in Order to Assign Warrants FOR VALUE RECEIVED, __________________________, hereby sells, assigns and transfers unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER ---------------------------------- ---------------------------------- ---------------------------------- (please PRINT or TYPE name and address) ________________________ of the Warrants represented by this Warrant Certificate, and hereby irrevocably constitutes and appoints ____________________ Attorney to transfer this Warrant Certificate on the books of the Company, with full power of substitution in the premises. Dated: _______________________ X__________________________ --------------------------- Signature Guaranteed THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE GUARANTEED BY A COMMERCIAL BANK OR TRUST COMPANY OR A MEMBER FIRM OF THE AMERICAN STOCK EXCHANGE, NEW YORK STOCK EXCHANGE, PACIFIC STOCK EXCHANGE, MIDWEST STOCK EXCHANGE OR BOSTON STOCK EXCHANGE. A-6 EX-5.1 6 OPINION OF LOEB & LOEB LLP 1 [LOEB & LOEB LLP LETTERHEAD] EXHIBIT 5.1 213-688-3698 e-mail: dficksman@loeb.com January 15, 1998 Brighton Technologies Corporation Six Pearl Court Allendale, New Jersey 07401 Re: Registration Statement on Form SB-2 Registration No. 333-40083 Ladies and Gentlemen: We have acted as counsel to Brighton Technologies Corporation, a Delaware corporation (the "Company"), in connection with the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933, as amended, of the above-captioned Registration Statement (the "Registration Statement") for the purpose of registering 1,000,000 of the Company's units (the "Units") (including an over-allotment option of up to 100,000 Units), each unit consisting of one of the Company's common stock, par value $.001 per share and one common stock purchase warrant, to be sold by the Company. In so acting, we have examined and relied upon the originals or copies, certified or otherwise identified to our satisfaction, of such Company records, documents, certificates and other instruments as in our judgment are necessary or appropriate to enable us to render the opinions expressed below. Based upon the foregoing and such examination of law as we have deemed necessary, we are of the opinion that: 1. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. 2. When the 1,000,000 Units to be sold by the Company have been issued and sold as contemplated in the Registration Statement, and in accordance with the terms of 2 Brighton Technologies Corporation January 15, 1998 Page 2 the Underwriting Agreement filed as Exhibit 1.1 to the Registration Statement, they will be legally issued, fully paid and nonassessable. We consent to the use of this letter as an Exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" included in the Prospectus forming a part of the Registration Statement. By: /s/David L. Ficksman ---------------------------------, David L. Ficksman, a Partner of the Firm EX-10.11 7 FORM OF LOCK-UP AGREEMENT 1 EXHIBIT 10.11 January __, 1998 Brighton Technologies Corporation Six Pearl Court Allendale, New Jersey 07401 National Securities Corporation 1001 Fourth Avenue Suite 2200 Seattle, Washington 98154-1100 Ladies and Gentlemen: In order to induce National Securities Corporation (the "Underwriter") and The Brighton Technologies Corporation (the "Company") to enter into an underwriting agreement (the "Underwriting Agreement") with respect to the offering of securities issued by the Company, the undersigned intending to be legally bound hereby agrees that for a period commencing on the date hereof and ending thirteen (13) months following the effective date of the registration statement (the "Registration Statement") relating to the underwritten public offering of securities issued by the Company, he, she or it will not, without the prior written consent of the Underwriter, directly or indirectly, issue, offer to sell, sell, grant an option for the sale of, assign, transfer, pledge, hypothecate or otherwise encumber or dispose of any securities issued by the Company, including common stock or securities convertible into or exchangeable or exercisable for or evidencing any right to purchase or subscribe for any shares of common stock (the "Securities") (either pursuant to Rule 144 of the regulations under the Securities Act of 1933, as amended, or otherwise) whether or not beneficially owned by the undersigned, or dispose of any beneficial interest therein. In order to enable the aforesaid covenants, the undersigned hereby consents to the placing of legends and/or stop-transfer orders with the Transfer Agent of the Company's Securities with respect to any of the Company's Securities registered in the name of the undersigned or beneficially owned by the undersigned. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York without giving effect to the choice of law or conflicts of laws principles thereof. 2 Brighton Technologies Corporation National Securities Corporation January __, 1998 Page 2 Dated: _____________, 1998 ___________________________ Name (Please print or type) - --------------------------- --------------------------- Address (Please print or type) Signature - --------------------------- --------------------------- Social Security or ___________________________ Federal Tax I.D. Number EX-10.12 8 LEASE EXTENSION SUMMARY 1 EXHIBIT 10.12 Summary of Lease Extension Date of Extension: December 11, 1997 Extension: December 31, 1997 - June 30, 1998 Lessor: Shenzhen Beijing Hotel Lessee: Brighton Elevators Corporation Limited Shenzhen Representative Office Rent: Rmb 5,500/month (U.S. $663/month) Terms: All other terms unchanged. EX-16.1 9 LETTER OF TANNER & CO. 1 [TANNER & CO. LETTERHEAD] EXHIBIT 16.1 CERTIFYING ACCOUNTANTS' CONSENT December 30, 1997 U.S. Securities and Exchange Commission Washington, D.C. 20549 We have reviewed the section entitled, "Changes in Registrant's Certifying Accountant" in this registration statement and as pertaining to our firm, we agree with the statements contained therein. Sincerely, /s/ Tanner & Co. EX-16.2 10 LETTER OF RUSSO & SHAPIRO 1 EXHIBIT 16.2 [RUSSO & SHAPIRO LETTERHEAD] Certified Public Accountants Anthony J. Russo Nelson Shapiro 295 Madison Avenue, Suite 1700 New York, New York 10017-6304 Tel: (212) 687-2420 Fax: (212) 687-1815 Fed. I.D. # 13-3770301 December 23, 1997 U.S. Securities and Exchange Commission Washington, D.C. 20549 Dear Sir/Madam, We have reviewed the section entitled "Changes in Registrant's Certifying Accountant" as pertaining to our firm and we agree with the statement contained therein. Sincerely yours, /s/ Russo & Shapiro EX-16.3 11 LETTER OF FRANCIS S.L. YAN & CO. 1 EXHIBIT 16.3 [FRANCIS S.L. YAN & CO. LETTERHEAD] 2nd January 1998 U.S. Securities and Exchange Commission Washington, D.C. 20549, USA. Dear Sir, Re: Brighton Electronics Corporation Limited We have reviewed the section entitled "Changes in Registrant's Certifing Accountant" as pertained to our firm and we agree with the statements contained therein which are set out hereinbelow: " Brighton Electronics Corporation Limited's (BECL) financial statements for the year ended 31st December 1995 were audited by Francis S. L. Yan & Co." " The decision to dismiss Francis S. L. Yan & Co. was approved by the Company's shareholders. Francis S. L. YAN & Co.'s report on such financial statements for the year ended December 31, 1995 did not contain an adverse opinion or an disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope, or accounting principles." " During the year ended December 1995, and the period from January 1, 1995 to 11th November 1997, there were no disagreements with Francis S. L. Yan & Co. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Francis S. L. Yan & Co., would have caused such firm to make reference to the subject matter of the disagreements in connection with its report on BECL's financial statements." Yours faithfully, /s/ Francis S.L. Yan & Co. FRANCIS S.L. YAN & Co. Certified Public Accountants. EX-23.1 12 CONSENT OF BDO SEIDMAN, LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Brighton Technologies Corporation Allendale, New Jersey We hereby consent to the use in the Prospectus constituting a part of this Registration Statement of our report dated May 29, 1997 (January __, 1998 as to the last paragraph of Note 8), relating to the consolidated financial statements of Brighton Technologies Corporation, which is contained in that Prospectus. We also consent to the reference to us under the caption "Experts" in the Prospectus. /s/ BDO SEIDMAN, LLP ---------------------- Woodbridge, New Jersey January 16, 1998 EX-23.5 13 CONSENT OF ZHONG XIN LAW OFFICE 1 EXHIBIT 23.5 (Translation) Letterhead of Zhong Xin Law Office Brighton Technologies Corporation New Jersey, United States of America We hereby consent to the use of our opinion regarding the legal inquiry request made by Brighton Electronics Corporation Limited, dated July 9, 1997, and our name as part of the Prospectus of Brighton Technologies Corporation. /s/ Lian Yan, Attorney Seal of Zhong Xin Law Office December 18, 1997 CERTIFICATE The undersigned hereby certifies that he is the Secretary of Brighton Technologies Corporation; and that the foregoing is a fair and accurate English translation of the Consent of Zhong Xin Law Office. Dated this 9th day of January, 1998. /s/ Warren Wang ------------------------------------ Warren Wang, Secretary EX-27.1 14 FINANCIAL DATA SCHEDULE
5 YEAR 9-MOS DEC-31-1996 DEC-31-1997 JAN-01-1996 JAN-01-1997 DEC-31-1996 SEP-30-1997 3,352,699 1,916,575 0 0 1,369,318 2,070,343 30,000 30,000 2,056,987 945,107 8,422,620 6,312,069 1,578,816 1,810,276 42,358 89,924 10,187,068 85,771,78 9,302,101 7,515,797 0 0 0 0 0 0 1,150 1,161 583,886 837,571 10,187,068 8,577,178 8,006,260 5,913,330 8,006,260 5,913,330 5,785,507 4,057,207 5,785,507 4,057,207 0 0 0 0 33,170 43,994 514,750 (206,306) 309,000 (89,000) 198,524 (108,024) 0 0 0 0 0 0 198,524 (108,024) .19 (.09) .19 (.09)
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