-----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, O3LMJiO3c8PnooI/vjqfIjNVSPL2x4xY3Uu8/fU9L14nLuaH3e7RnU5FtbKGbD+O riCRJnVp78K/31e7qlnGtA== 0000892569-98-002923.txt : 19981110 0000892569-98-002923.hdr.sgml : 19981110 ACCESSION NUMBER: 0000892569-98-002923 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19981109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LUMINEX LIGHTING INC CENTRAL INDEX KEY: 0001039640 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC LIGHTING & WIRING EQUIPMENT [3640] IRS NUMBER: 954467158 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-58025 FILM NUMBER: 98740590 BUSINESS ADDRESS: STREET 1: 13710 RAMONA AVENUE CITY: CHINO STATE: CA ZIP: 91710 MAIL ADDRESS: STREET 1: 13710 RAMONA AVENUE CITY: CHINO STATE: CA ZIP: 91710 SB-2/A 1 AMENDMENT NO. 2 TO FORM SB-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 9, 1998 REGISTRATION NO. 333-58025 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- Amendment No. 2 to Form SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------- LUMINEX LIGHTING, INC. (Name of small business issuer in its charter) --------------------- CALIFORNIA 3648 95-4467158 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.) incorporation or organization) Classification Code Number)
--------------------- 13710 Ramona Avenue 13710 Ramona Avenue Chino, CA 91710 Chino, CA 91710 Phone: (909) 591-5653 Phone: (909) 591-5653 Facsimile: (909) 591-0643 Facsimile: (909) 591-0643 (Address and telephone number of (Address of principal place of business) principal executive office) Wasif Siddiqui 13710 Ramona Avenue Chino, CA 91710 Phone: (909) 591-5653 (Name, address and telephone number of agent for service) ---------------------------- COPIES TO: Lawrence W. Horwitz, Esq. Lawrence Nusbaum, Esq. Horwitz & Beam Gusrae, Kaplan & Bruno Two Venture Plaza, Suite 350 120 Wall Street Irvine, CA 92618 New York, NY 10005 Phone: (714) 453-0300 Phone: (212) 269-1400 Facsimile: (714) 453-9416 Facsimile: (212) 809-5449 ------------------- Approximate Date of Proposed Sale to the Public. As soon as practicable after this 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 of 1933 (the "Act"), please check the following box and list the Act registration number of the earlier effective registration statement for the same offering.[ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Act, check the following box and list the 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 of 1933, check the following box.[X] CALCULATION OF REGISTRATION FEE
TITLE OF EACH CLASS OF SECURITIES TO BE NUMBER OF PROPOSED PROPOSED MAXIMUM AMOUNT OF REGISTERED SHARES OR MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION WARRANTS TO PRICE PER SHARE OR PRICE(1)(2) FEE BE REGISTERED WARRANT(1) Shares of Common Stock, no par value ("Common Stock") 500,000 $5.50 $ 2,750,000 $811.25 Warrants to Purchase Shares of Common Stock 500,000 $0.10 $ 50,000 $ 14.75 Common Stock(3) 500,000 $6.00 $ 3,000,000 $885.00 Underwriter Warrants(4) 1 ---- $ 10 -- Common Stock, Issuable Upon Exercise of Underwriter Warrants(5) 50,000 $8.15 $ 407,500 $120.21
2
TITLE OF EACH CLASS OF SECURITIES TO BE NUMBER OF PROPOSED PROPOSED MAXIMUM AMOUNT OF REGISTERED SHARES OR MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION WARRANTS TO PRICE PER SHARE OR PRICE(1)(2) FEE BE REGISTERED WARRANT(1) Warrants Issuable Upon Exercise of Underwriter Warrants(6) 50,000 $0.14 $ 7,000 $ 2.07 Common Stock Issuable Upon Exercise of Warrants underlying Underwriter Warrants(7) 50,000 $8.30 $ 415,000 $ 122.43 Common Stock, no par value, issued in connection with bridge financing(8) 506,500 $6.60 $ 2,785,750 $ 821.80 Common Stock, underlying warrants issued in connection with bridge financing(9) 500,000 $0.80 $ 400,000 $ 118.00 Common Stock, no par value, underlying options issued pursuant to Employee Stock Option Plan(10) 500,000 $0.01 $ 5,000 $ 1.48 Total 2,756,500 $ 9,820,260 $2,896.98
- ------------------------- (1) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457. (2) The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission (the "Commission"), acting pursuant to said Section 8(a), may determine. (3) Represents Common Stock reserved for issuance upon exercise of Warrants. (4) Warrants issuable to Platinum Equities, Inc., the Underwriter ("Underwriter Warrants") to purchase up to 50,000 Shares of Common Stock and up to 50,000 Warrants. (5) Represents Common Stock issuable upon exercise of the Underwriter Warrants. Pursuant to Rule 416 promulgated under the Securities Act of 1933, this Registration Statement also covers any additional common shares which may become issuable by reason of the antidulution provisions of the Underwriter Warrants. (6) Represents Warrants issuable upon exercise of Underwriter Warrants. Pursuant to Rule 416 promulgated under the Securities Act of 1933, this Registration Statement also covers any additional Common Shares which may become issuable by reason of the antidulution provisions of the Underwriter Warrants. (7) Represents Common Stock issuable upon exercise of Warrants included in Underwriter Warrants. (8) Represents Common Stock issued in connection with bridge financing to the Company. (9) Represents Common Stock issuable upon exercise of Warrants (the "Bridge Warrants") issued in connection with bridge financing to the Company. Pursuant to Rule 416 of the Act, this Registration Statement also covers any additional common shares which may become issuable by reason of the antidilution provisions of the Bridge Warrants. Registration fee calculated to Rule 457(g)(1). (10) Registration fee calculated pursuant to Rule 457(h)(1). 3 LUMINEX LIGHTING, INC. CROSS REFERENCE SHEET Pursuant to Item 501(b) of Regulations S-B Showing Location in the Prospectus of Information Required by Items of Form SB-2
Form SB-2 Item Number and Caption Prospectus 1. Forepart of Registration Statement and Outside Facing Page of Registration Statement: Outside Fron Front Cover Page of Prospectus............................. Cover Page of Prospectus 2. Inside Front and Outside Back Cover Pages of Prospectus................................................. Available Information; Incorporation of Certain Documents by Reference; Table of Contents 3. Summary Information; Risk Factors.......................... Prospectus Summary; Risk Factors 4. Use of Proceeds............................................ Prospectus Summary; Business of the Company; Use of Proceeds 5. Determination of Offering Price............................ Risk Factors; Underwriting 6. Dilution................................................... Dilution 7. Selling Security Holders................................... Selling Shareholders 8. Plan of Distribution....................................... Underwriting 9. Legal Proceedings.......................................... Not Applicable 10. Directors, Executive Officers, Promoters and Control Persons............................................ Management and Principal Shareholders 11. Security Ownership of Certain Beneficial Owners and Management............................................. Management and Principal Shareholders 12. Description of Securities to be Registered................. Description of Securities 13. Interests of Named Experts and Counsel..................... Not Applicable 14. Disclosure of Commission Position on Indemnification for Act Liabilities....................... Indemnification of Directors and Officers 15. Organization Within Last Five Years........................ Business of the Company 16. Description of Business.................................... Business of the Company 17. Management's Discussion and Analysis of Plan of Operation.................................................. Management's Discussion and Analysis of Financial Condition and Results of Operations 18. Description of Property.................................... Business of the Company (Properties) 19. Certain Relationships and Related Transactions............. Certain Transactions 20. Market for Common Equity and Related Stockholder Matters........................................ Risk Factors; Underwriting 21. Executive Compensation..................................... Total Executive Compensation 22. Consolidated Financial Statements.......................... Consolidated Financial Statements 23. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure..................... Not Applicable
4 PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 9, 1998 LUMINEX LIGHTING, INC. UP TO 500,000 SHARES OF COMMON STOCK AND 500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS MINIMUM OFFERING: 250,000 SHARES AND 250,000 WARRANTS Luminex Lighting, Inc., a California corporation ("the Company"), hereby offers for sale: (i) a minimum (the "Minimum Offering") of 250,000 Shares of Common Stock, no par value (the "Common Stock" or the "Shares") and 250,000 Redeemable Common Stock Purchase Warrants (the "Warrants"); and (ii) a maximum (the "Maximum Offering") of 500,000 Shares of Common Stock and 500,000 Warrants. The Common Stock and the Warrants offered hereby (sometimes referred to as the "Securities") will be separately tradeable immediately upon issuance and MAY BE PURCHASED SEPARATELY. The Common Stock and Warrants are being offered through Platinum Equities, Inc. (the "Underwriter") at the public offering prices set forth below. Each Warrant entitles the holder to purchase one share of Common Stock at an exercise price of $6.00, subject to adjustment, during the five year period commencing on the date of this Prospectus (the "Effective Date"). The Warrants are redeemable, in whole or in part, by the Company at a price of $0.10 per Warrant, commencing one year after the Effective Date (or earlier with the consent of the Underwriter), upon notice of not less than 30 days, provided that the closing bid price (as defined) of the Common Stock for a period of 20 consecutive trading days ending on the third day prior to the day on which notice of redemption is given shall have been at least $7.50 per share, subject to adjustment. See "Description of Securities" and "Underwriting." Additionally, 506,500 Shares of Common Stock (the "Private Placement Stock") and 500,000 Shares of Common Stock underlying warrants (the "Private Placement Warrants") (collectively, the "Private Placement Securities") of the Company are being registered herein and will be sold from time to time by the shareholders described herein (the "Selling Shareholders") in transactions in the national over-the-counter market or otherwise at prices prevailing at the time of sale. The Selling Shareholders have agreed not to sell, assign, pledge, hypothecate, or otherwise dispose of any of the Private Placement Stock, as well as the Shares of Common Stock underlying the Private Placement Warrants, for a period of 12 months from the final closing of the Offering ("Closing Date") without the prior written consent of the Underwriter. The Company will not receive any of the proceeds from the sale of any Private Placement Securities by the Selling Shareholders. All expenses incurred in registering the Private Placement Securities are being borne by the Company, but all selling and other expenses incurred by the Selling Shareholders will be borne by the Selling Shareholders. See "Selling Shareholders." THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 6. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE "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. THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY ANYONE WHO CANNOT AFFORD THE LOSS OF HIS OR HER ENTIRE INVESTMENT. SEE "RISK FACTORS" AND "DILUTION." ALL PAYMENTS FOR THE SECURITIES OFFERED HEREBY SHALL BE MADE BY CHECK PAYABLE TO "AMERICAN STOCK TRANSFER & TRUST COMPANY AS ESCROW AGENT FOR LUMINEX LIGHTING, INC." ---------------------------------- PLATINUM EQUITIES, INC. THE DATE OF THIS PROSPECTUS IS NOVEMBER 9, 1998 5 THE UNDERWRITER WILL NOT BE MAKING A MARKET IN THE SECURITIES OFFERED HEREBY. THE ABSENCE OF SUCH ACTIVITY BY THE UNDERWRITER MAY HAVE A MATERIAL ADVERSE AFFECT ON THE LIQUIDITY OF THE SECURITIES OFFERED HEREBY, WHICH COULD MAKE IT MORE DIFFICULT FOR THE INVESTORS HEREIN TO SELL AND/OR PURCHASE SUCH SECURITIES. SEE "RISK FACTORS" AND "UNDERWRITING."
Price to Public Underwriting Proceeds to Issuer or Commissions(1) Other Persons (2)(3) Per Share $5.50 $0.55 $4.95 Per Warrant $0.10 $0.01 $0.09 Minimum Offering(3) (250,000 Shares and 250,000 Warrants) $1,400,000 $140,000 $1,260,000 Maximum Offering (500,000 Shares and 500,000 Warrants) $2,800,000 $280,000 $2,520,000
- -------------------------- (1) Does not include additional compensation to the Underwriter in the form of: (i) a non-accountable expense allowance equal to 3% of the gross proceeds of the offering; (ii) warrants to purchase up to 50,000 shares of Common Stock of the Company and up to 50,000 Warrants at an exercise price equal to approximately 148% of the public offering prices of the Common Stock and approximately 138% of the exercise price of the Warrants sold to the public, to the extent of 10% of the number of Securities actually sold herein (the "Underwriter's Warrants"). For every ten Shares sold, the Underwriter is entitled to one Warrant to purchase one Share of Common Stock of the Company at an exercise price of $8.15. For every ten Warrants sold, the Underwriter is entitled to one Warrant to purchase one Warrant of the Company at an exercise price of $0.14. The Company has agreed to indemnify the Underwriter against, or contribute to losses arising from, certain liabilities, including liabilities under the Act. See "Underwriting." (2) Before deduction of estimated expenses of $194,000 payable by the Company, in the event the Maximum Offering is sold, including the Underwriter's 3% non-accountable expense allowance. See "Underwriting." (3) There is no assurance that all or any of the Securities offered hereunder will be sold. If the Company fails to receive subscriptions for the Minimum Offering within 180 days from the Effective Date , the Offering will be terminated and any subscription payments received will be promptly refunded within five days to subscribers, without any deduction therefrom or any interest thereon. If subscriptions for at least the Minimum Offering are received within such period, funds will not be returned to investors and the Company may continue the Offering until such period expires or subscriptions for the Maximum Offering have been received, whichever comes first. The investment funds shall be held in an escrow account with American Stock Transfer & Trust Company as Escrow Agent for up to 180 days. During this time, investors cannot demand the return of their investments. If the Company does not meet the required minimum number of Securities to be sold (250,000 Shares and 250,000 Warrants), the investors will be refunded their investment in full without interest. Affiliates may purchase Securities in the Offering and no limits have been imposed in this regard, but no one has made any commitment to purchase any portion of the Offering in order to reach the minimum. The Private Placement Securities offered by the Selling Shareholders have been acquired by the Selling Shareholders from the Company in private transactions and are "restricted securities" under the Act, prior to their sale hereunder. This Prospectus has been prepared for the purpose of registering the Private Placement Securities under the Act to allow for future resales by the Selling Shareholders to the public without restriction. To the knowledge of the Company, the Selling Shareholders have made no arrangement with any brokerage firm for the sale of the Private Placement Securities. The Selling Shareholders may be deemed to be "underwriters" within the meaning of the Act. 6 Any commissions received by a broker or dealer in connection with resales of the Private Placement Securities may be deemed to be underwriting commissions or discounts under the Act. See "Plan of Distribution." Prior to this Offering, there has been no public market for the Company's securities. The public offering prices of the Common Stock and the Warrants, and the exercise price and other terms of the Warrants, have been determined by negotiation between the Company and the Underwriter, and are not necessarily related to the Company's asset value, net worth, results of operations, or other established criteria of value. Although it is anticipated that the Common Stock and Warrants will be traded in the over-the-counter market on the OTC Bulletin Board maintained by the National Association of Securities Dealers, Inc. (the "OTC Bulletin Board") under the symbols "LUMX" and "LUMXW," respectively, there can be no assurance that such a market will develop after the completion of this Offering. The Securities are being sold by the Company and offered by the Underwriter on a "best efforts, minimum/maximum" basis, subject to prior sale, when, as and if accepted by the Underwriter, and subject to certain conditions. The Underwriter reserves the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that the certificates representing the Securities will be ready for delivery at the offices of Platinum Equities, Inc., 80 Pine Street, 32nd Floor, New York, NY, 10005, within ten business days after the date of each closing (the "Closing Date") of the Offering. The Company intends to furnish its shareholders with annual reports containing audited financial statements of the Company, after the end of each fiscal year, and make available such other periodic reports as the Company may deem appropriate or as may be required by law. 7 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and the Financial Statements (including the notes thereto) appearing elsewhere in this Prospectus and as part of the Registration Statement and Exhibits attached thereto. Unless otherwise specifically referenced, all references to dollar amounts refer to United States dollars. Each prospective investor is urged to read this Prospectus in its entirety. The Company would like to caution readers regarding certain forward-looking statements in the Prospectus and the Registration Statement of which this Prospectus is a part. Statements that are based on management's projections, estimates, and assumptions are forward-looking statements. The words "believe," "expect," "anticipate," and similar expressions generally identify forward-looking statements. While the Company believes in the veracity of all statements made herein, forward-looking statements are necessarily based upon a number of estimates and assumptions that, while considered reasonable by the Company, are inherently subject to significant business, economic, and competitive uncertainties and contingencies. Many of these uncertainties and contingencies can affect the Company's actual results and could cause its actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. Some of the factors that could cause actual results or future events to differ materially include the Company's inability to find suitable acquisition candidates on terms commercially reasonable to the Company, interruption or cancellation of existing sources of supply, the pricing of and demand for distributed products and the presence of competitors with greater financial resources. Please see "Risk Factors" for a description of some, but not all, of these uncertainties and contingencies. THE COMPANY Luminex Lighting, Inc. (the "Company") distributes quality, energy saving, fluorescent lighting fixtures. The Company designs, tools, tests, assembles, and packages readily available lighting component parts into a finished product, ready for distribution and sale. The Company has expanded its customer base across the United States and is seeking to expand into emerging global markets. The Company believes it is currently one of the largest distributors of cost efficient energy saving fluorescent lighting fixtures. The Company has been in operation for over four years and has experienced substantial growth within the lighting industry. The Company believes it has built a strong customer base, including General Electric Lighting ("GE"), Lithonia Lighting, Costco Wholesale, and Lamps Plus. The Company's niche in the light fixture market is maintained through cost efficiency and quality in its products. The Company believes it has accumulated strength in the purchasing of raw materials. Due to the increased volume of material that the Company purchases, it believes it is able to obtain an advantage when negotiating with its suppliers. The Company believes its competitive edge is based upon low cost purchasing along with low overhead expenses, resulting in quality products at a lower price. The Company believes it is competitive in all aspects of its operations. It believes these factors, combined with experienced management and employees, provide the Company with added value within the industry. The Company is seeking to capture a significant market share in the lighting industry. It believes opportunities are evident not only in the United States, but around the world as well. The Company's intent is to target such territories as Canada, Mexico, South America, and Puerto Rico. The Company recently hired a National Sales Manager and, after the Closing of the Offering, plans on retaining additional sales representatives familiar with these markets. As of the date hereof, the Company had 3,306,500 Shares of Common Stock issued and outstanding and warrants to purchase 500,000 Shares of Common Stock at an exercise price of $0.80 per share issued and outstanding. The Company will have 3,556,500 Shares of Common Stock outstanding if the Minimum Offering is sold and 3,806,500 Shares of Common Stock outstanding if the Maximum Offering is sold, without giving effect to the exercise of any 1 8 warrants. Assuming exercise of all warrants, including the Warrants, the Company will have 4,306,500 Shares of Common Stock outstanding immediately after the Offering if the Minimum Offering is sold and 4,806,500 Shares of Common Stock if the Maximum Offering is sold. The Company also has 500,000 Shares of Common Stock reserved for issuance under its stock option plan, of which no options have been issued. Based upon the audited financial statements of the Company for the year ended December 31, 1997, the Company had revenues and net income of $5,852,969 and $123,097, respectively. Based upon the unaudited financial statements of the Company for the six months ended June 30, 1998, the Company had revenues and a net loss of $3,337,412 and $184,209, respectively. Continued development of the Company's products and successful implementation of the Company's marketing plan are necessary for the Company to increase its operating revenues. The Company was incorporated under the laws of the State of California on January 21, 1994. The address of the Company's principal executive offices is: 13710 Ramona Avenue, Chino, California, 91710. The Company's telephone number is (909) 591-5653. The Company also has a branch office located at 258 Main Street, Suite 111, Milford, Massachusetts, 01757. 2 9 THE OFFERING Securities Offered by the Company......................... A minimum of 250,000 Shares of Common Stock and 250,000 Warrants and a maximum of 500,000 Shares of Common Stock and 500,000 Warrants. Warrants may be purchased separately from the Common Stock. Each Warrant entitles the holder thereof to purchase one share of the Company's Common Stock at an exercise price of $6.00, subject to adjustment, during the five year period commencing on the Effective Date. The Warrants may be redeemed by the Company, commencing one year after the Effective Date (or earlier with the consent of the Underwriter), upon notice of not less than 30 days, provided that the closing bid price of the Common Stock for a period of 20 consecutive trading days ending on the third day prior to the day on which notice of redemption is given shall have been at least $7.50 per share, subject to adjustment. See "Description of Securities." Offering Price Common Stock..................... $5.50 per Share. Warrants......................... $0.10 per Warrant. Securities Offered by Selling Shareholders................ 506,500 Shares of Common Stock and 500,000 Shares of Common Stock underlying warrants. Common Stock Outstanding............ 3,306,500 shares as of the date hereof; 3,556,500 shares if the Minimum Offering is sold; 3,806,500 shares if the Maximum Offering is sold. Warrants and Options Outstanding......................... The Company has 500,000 warrants outstanding as of the date hereof, and will have an additional 250,000 Warrants outstanding if the Minimum Offering is sold and an additional 500,000 Warrants outstanding if the Maximum Offering is sold. See "Description of Securities." The Company has 500,000 shares of Common Stock reserved for issuance under its stock option plan, of which no options have been issued to date. See "Management--Employment and Related Agreements." Proposed OTC/BB Symbol(1) Common Stock..................... LUMX. Warrants......................... LUMXW. Use of Proceeds..................... The Company intends to apply the net proceeds of this Offering primarily for research and development, sales and marketing, facility expansion, acquisition of employees, and working capital. See "Use of Proceeds." Risk Factors........................ The securities offered hereby are speculative, involve a high degree of risk and immediate substantial dilution, and should not be purchased by anyone who cannot afford the loss of his or her entire investment. See "Risk Factors" and "Dilution."
3 10 - -------------------------- (1) Pursuant to the agreement between the Underwriter and the National Association of Securities Dealers, Inc. ("NASD"), the Underwriter is not authorized to make markets in securities. As a result, the Underwriter will not make a market in the Securities offered hereby. The Underwriter's inability to make such a market may have a material adverse effect on the liquidity of the Securities offered hereby, which could make it more difficult for investors in this Offering to purchase or sell such Securities. See "Underwriting." 4 11 SELECTED FINANCIAL DATA The following table presents selected historical financial data for the Company derived from the Company's Financial Statements. The historical financial data are qualified in their entirety by reference to, and should be read in conjunction with, the Financial Statements and notes thereto of the Company, which are incorporated by reference into this Prospectus. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements of the Company and the notes thereto included elsewhere in this Prospectus.
Six Months Ended June 30 Year Ended December 31 1998 1997 1997 1996 ------------ ------------ ---------- ----------- (unaudited) (unaudited) (audited) (audited) STATEMENT OF OPERATIONS DATA: Revenue $ 3,337,412 $ 2,943,158 $ 5,852,969 $ 3,056,532 Net income (loss) (184,209) 124,919 123,097 (113,196) Net income (loss) per share .04 0.04 (0.04) Weighted average number of shares 3,306,500 3,326,500 3,326,500 2,800,000
June 30, 1998 December 31, 1997 Actual (unaudited) As Adjusted(1) Actual (audited) As Adjusted(1) ------------------ -------------- ---------------- -------------- BALANCE SHEET DATA: Current assets $ 1,561,732 $ 3,887,732 $ 1,719,795 $ 4,045,795 Total property and equipment, net 302,043 302,043 274,747 274,747 Other assets 115,192 115,192 91,179 91,179 Total assets 1,978,967 4,304,967 2,085,721 4,411,721 Total current liabilities 1,822,768 1,822,768 1,700,156 1,700,156 Accumulated deficit (371,223) (371,223) (187,014) (187,014) Stockholder's equity 72,699 2,398,699 266,908 2,592,908
- ----------------- (1) Adjusted to give effect to the application of the estimated net proceeds from the Maximum Offering. See "Use of Proceeds" and "Capitalization" 5 12 RISK FACTORS AN INVESTMENT IN THE SECURITIES OFFERED IN THIS PROSPECTUS INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION THEREFORE, IS SPECULATIVE IN NATURE, AND SHOULD ONLY BE MADE BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT. ACCORDINGLY, PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS AND THE "DILUTION" SECTION, IN ADDITION TO THE OTHER INFORMATION CONCERNING THE COMPANY AND ITS BUSINESS CONTAINED IN THIS PROSPECTUS, BEFORE PURCHASING THE SECURITIES OFFERED HEREBY. LIMITED OPERATING HISTORY. The Company began operations in January 1994, and first shipped its product in October 1994. While the Company is generating revenues, net income was not generated on an annual basis until 1997 and, based on unaudited financials for the six months ending June 30, 1998, the Company had a net loss of $184,209 for such period. (See "History of Operating Losses; Accumulated Deficit.") The Company's success is dependent upon the successful development and marketing of its products, as to which there is no assurance. Unanticipated problems, expenses, and delays are frequently encountered in establishing a new business and marketing and developing products. These include, but are not limited to, competition, the need to develop customer support capabilities and market expertise, setbacks in product development, market acceptance, sales, and marketing. The failure of the Company to meet any of these conditions would have a materially adverse effect upon the Company and may force the Company to reduce or curtail operations. No assurance can be given that the Company can or will ever operate profitably. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "The Company--Marketing" and "--Competition." RELIANCE ON ONE CUSTOMER FOR APPROXIMATELY 90% OF REVENUES. Approximately 90% of the Company's current revenues are derived from sales of its products to GE. The Company is currently attempting to expand its customer base within the United States and Canada. However, any negative change in the Company's relationship with GE would, in all likelihood, have a material adverse impact on the Company's business, financial condition, and results of operations. Moreover, no assurance can be given that the Company will be able to expand its customer base or to maintain its relationship with GE. HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT. While the Company had net income of $123,097 for the year ended December 31, 1997, for the year ended December 31, 1996, the Company incurred a net loss of $113,196. In addition, the Company had an accumulated deficit of $187,014 at December 31, 1997 and an accumulated deficit of $310,111 at December 31, 1996. The Company must continue to increase its current rate of sales in order to continue to be profitable and to achieve retained earnings. There can be no assurance that the Company will maintain profitability or that its revenue growth can be sustained in the future. See Financial Statements. HISTORY OF NEGATIVE WORKING CAPITAL AND CASH FLOWS. The Company had negative working capital of $261,036 for the six months ended June 30, 1998; positive working capital of $19,639 for the year ended December 31, 1997; and negative working capital of $288,821 for the year ended December 31, 1996. The Company must achieve consistent profitability through increased sales and improved gross margins in order to improve its working capital position. There can be no assurance that the Company will achieve consistent profits or that revenue or gross margin improvement can be sustained in the future. The Company's cash flow has been uneven during its history. For the six months ended June 30, 1998, the Company had negative cash flow of $164,099. While the Company experienced a positive cash flow of $148,241 for the year ended December 31, 1997, the Company had negative cash flow of $24,652 for the year ended December 31, 1996. The Company must improve cash flow from operations in order to stabilize its overall cash flows on an annual basis. There can be no assurance that the Company can achieve these objectives. See Financial Statements. FUTURE CAPITAL NEEDS COULD RESULT IN DILUTION TO INVESTORS; ADDITIONAL FINANCING COULD BE UNAVAILABLE OR HAVE UNFAVORABLE TERMS. Since inception, the Company has primarily funded its capital requirements through equity infusions, bank loans, and officer loans. The Company's future capital requirements will depend on many factors, including cash flow from operations, progress in its research and development, competing market developments, and the Company's ability to market its products successfully. Although the Company currently has no specific plans or 6 13 arrangements for financing other than this Offering and no commitments for future financing, to the extent that the funds generated by this Offering are insufficient to fund the Company's activities, it may be necessary to raise additional funds through equity or debt financings. Any equity financings could result in dilution to the Company's then-existing shareholders. Sources of debt financing may result in higher interest expense. Any financing, if available, may be on terms unfavorable to the Company. If adequate funds are not obtained, the Company may be required to reduce or curtail operations. The Company anticipates that its existing capital resources, together with the net proceeds of this Offering, even if only the Minimum Offering is sold, will be adequate to satisfy its operating expenses and capital requirements for at least 12 months after the Offering. However, such estimates may prove to be inaccurate. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business of the Company" and Financial Statements. FINANCIAL INSTITUTION'S PRIORITY SECURED INTEREST IN THE ASSETS OF THE COMPANY. In February 1998, the Company entered into a new line of credit with First Community Financial Corporation for $1 million. The line is secured by the Company's accounts receivable and inventory and personal guaranties of certain of the officers. The line bears interest at a rate of 3% above prime. The line of credit expires in February 1999. In the event of the Company's liquidation or dissolution, or in the event the line of credit is called for payment, the Company's accounts receivable and inventory will be used first to repay the Company's obligation under the aforementioned line of credit. This may have a serious adverse affect on all or a portion of a person's investment in the Company. There is no assurance that Company will be able to pay the line of credit through normal business operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financing" and Financial Statements. ECONOMIC CONDITIONS AND CONSUMER SPENDING. The Company's results may be adversely affected by unfavorable local, regional or national economic conditions affecting disposable consumer income. There can be no assurance that consumer spending will not decline in response to economic conditions, thereby adversely affecting the Company's growth, net sales, and profitability. UNPREDICTABLE PRODUCT ACCEPTANCE; LACK OF DISTRIBUTION AGREEMENTS. There can be no assurance that the Company's marketing and/or sales strategies will be effective and that consumers will buy the Company's products. The failure of the Company to broaden its markets would have a material adverse effect upon the Company's operations and prospects. Market acceptance of the Company's products will depend in part upon the ability of the Company to demonstrate the advantages of its products over competing products. In addition, the Company's sales strategy for its products contemplates sales to markets yet to be established. Also, the Company currently has no distribution agreements for any of its products. See "Business of the Company--Marketing" and "--Competition." COMPETITION. The Company will be competing with other established businesses that market similar products. Many of these companies have greater capital, marketing and other resources than the Company. There can be no assurance that these or other entities will not develop new or enhanced products that have greater market acceptance than any that may be marketed by the Company. There can be no assurance that the Company will successfully differentiate itself from its competitors or that the market will consider the Company's products to be superior to or more appealing than those of its competitors. Market entry by any significant competitor may have an adverse effect on the Company's sales and profitability. See "Business of the Company--Competition." DIFFICULTY OF PLANNED EXPANSION; MANAGEMENT OF GROWTH. The Company has expanded its operations rapidly, and it plans to continue to further expand its level of operations in all areas following the Offering. The Company's operating results will be adversely affected if net sales do not increase sufficiently to compensate for the increase in operating expenses caused by this expansion. In addition, the Company's planned expansion of operations may cause significant strain on the Company's management, technical, financial, and other resources. To manage its growth effectively, the Company must continue to improve and expand its existing resources and management information systems and must attract, train, and motivate qualified managers and employees. There can be no assurance, however, that the Company will successfully be able to achieve these goals. If the Company is unable to manage growth effectively, its operating results will be adversely affected. 7 14 DEPENDENCE UPON KEY PERSONNEL. The Company's success depends, to a significant extent, upon a number of key employees. The loss of services of one or more of these employees could have a material adverse effect on the business of the Company. The Company believes that its future success will also depend in part upon its ability to attract, retain, and motivate qualified personnel, and consequently has entered into employment agreements with certain key officers. Competition for such personnel is intense. There can be no assurance that the Company will be successful in attracting and retaining such personnel. The Company does not have "key person" life insurance on any of its key employees. See "Management." NO OUTSIDE DIRECTORS OR COMMITTEES. The Company's Board of Directors presently consists of three (3) directors: Wasif Siddiqui, President, Chief Executive Officer, and Chief Financial Officer; Tasneem Siddiqui, his wife, Executive Vice President and Secretary; and Asra Rasheed, their daughter, Vice President of Corporate Planning. Therefore, the Company's Board of Directors has no outside directors and insiders can presently control the policies, actions, and decisions of the Company. While the Company plans on adding one independent director upon completion of this Offering, the inside directors will still constitute a majority of the directors. Further, the Company currently has no committees established to advise the Board of Directors. See "Management--Directors and Executive Officers." RELATED PARTY TRANSACTIONS AND POTENTIAL CONFLICTS. During the past two years, the Company has taken loans drawn on personal lines of credit of Asra Rasheed, Vice President of Corporate Planning and a Director and Shareholder of the Company. The interest rate at December 31, 1997 was 12.57%. The balance of the lines of credit at December 31, 1997 was $6,272. The funds drawn were contributed to the Company for working capital. Subsequent to December 31, 1997, the loans were paid in full and the Company has no plan to take any further loans from this line of credit. Ms. Rasheed received no personal benefit from these transactions. The Company's management believes that the terms of these transactions were no less favorable to the Company than would have been obtained from an unaffiliated third party in similar transactions. Any future transactions with affiliates will be on terms no less favorable than could be obtained from unaffiliated third parties, and will be approved by a majority of the disinterested directors. See "Certain Transactions." LACK OF DIVIDENDS. The Company has never paid any cash dividends on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings, if any, to fund the development and growth of its business. See "Dividend Policy." IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of Shares of Common Stock in the Offering will experience immediate dilution of $5.17 per share (94%) if the Minimum Offering is sold and dilution of $4.87 per Share (88.5%) if the Maximum Offering is sold (based on the initial public offering price of $5.50 per share) in the net tangible book value of the shares from the initial public offering price. Existing shareholders of the Company paid approximately $0.13 per Share for their shares of Common Stock, while investors in this Offering shall pay $5.50 per Share (see "Comparative Data"). Therefore, investors in this Offering incur a greater risk of loss than the Company's current shareholders. The shares sold by the Company in the Offering represent 7% of the total Shares of Common Stock outstanding following the Offering if the Minimum Offering is sold or 13% of the total Shares of Common Stock outstanding following the Offering if the Maximum Offering is sold, and represent a cash contribution of 75.6% of the aggregate book value or cash contributions to the Company if the minimum amount is sold or a cash contribution of 86.1% of the aggregate book value or cash contributions to the Company if the maximum amount is sold without giving effect to the exercise of any warrants or options. See "Dilution." BEST EFFORTS OFFERING: ESCROW OF INVESTORS' FUNDS FOR UP TO 180 DAYS. This Offering is being made on a "best efforts, 250,000 Share, 250,000 Warrant minimum" basis. Unless and until 250,000 Shares of Common Stock ($1,375,000) and 250,000 Warrants ($25,000) are sold, the Offering will not close. No assurance can be given that the Underwriter will be able to sell the Minimum Offering and the Underwriter hereby expressly does not make, and has not made, any commitment to sell any of the Securities. Consequently, investors may tie up their funds for up to 180 days, if the Offering Period is extended. Although the proceeds will be held in an escrow account with American Stock Transfer & Trust Company as Escrow Agent and will not be subject to loss during the Offering Period, there will be no interest paid on the escrowed funds, regardless of whether or not the Offering is 8 15 consummated. If the Company fails to receive subscriptions for the Minimum Offering within 180 days from the Effective Date, the Offering will be terminated and any subscription payments received will be promptly refunded within five business days to subscribers, without any deduction therefrom or any interest thereon. If subscriptions for at least the Minimum Offering are received within such period, funds will not be returned to investors and the Company may continue the Offering until such period expires or subscriptions for the Maximum Offering have been received, whichever comes first. CONTROL BY EXISTING SHAREHOLDERS. Upon completion of this Offering, the Company's existing shareholders will beneficially own approximately 90% of the outstanding Common Stock if the minimum amount is sold or approximately 87% of the outstanding Common Stock if the maximum amount is sold. Of these shares, the Company's officers and directors, together with shareholders who beneficially own more than five percent of the outstanding stock of the Company, will beneficially own approximately 81% of the outstanding Common Stock if the minimum amount is sold or approximately 78% of the outstanding Common Stock if the maximum amount is sold hereunder. Investors purchasing shares pursuant to this Offering will beneficially own approximately 10% of the outstanding Common Stock if the minimum amount is sold or approximately 13% of the outstanding Common Stock if the maximum amount is sold. As a result, all or certain combinations of the Company's existing shareholders, acting in concert, will have the ability to control the Board of Directors and policies of the Company. See "Principal Shareholders" and "Certain Transactions." NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF SHARE PRICE; ARBITRARY DETERMINATION OF OFFERING PRICE. No public securities market existed prior to this Offering for the Company's Securities. Although the Company has applied to have the Securities included on the OTC Bulletin Board, there can be no assurance that an active public trading market for such securities will be developed or sustained. Accordingly, purchasers of the Securities may experience substantial difficulty selling such securities. The offering price of the Securities has been determined by negotiations between the Company and the Underwriter on an arbitrary basis and are not necessarily related to the Company's asset value, net worth, or other established criteria of value. Additionally, potential investors should be aware that the securities of the Company have been recently sold in a private offering (the "Private Placement") at a substantial discount to the public offering price herein. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company and the Underwriter considered the following factors in pricing the securities issued in the Private Placement at $0.50 per share of Common Stock and $0.10 per warrant versus the initial public offering price: at the time of the Private Placement the Company was not profitable, certain key personnel of the Company were not yet in place, the Company was in the process of structuring its public offering plan, the Company had not yet secured an underwriter for a public offering, and there could be no assurance of a public market for the securities. See "Underwriting." SHARES ELIGIBLE FOR FUTURE SALE. Assuming the Maximum Offering is sold (and without giving effect to the exercise of outstanding warrants to purchase 500,000 shares of Common Stock, the Warrants offered hereby, or the Underwriters Warrants), 2,800,000 of the total of 3,806,500 shares of Common Stock outstanding after this Offering will be "restricted securities" within the meaning of Rule 144 under the Securities Act of 1933 (the "Act"). All directors, officers, and holders of any securities of the Company prior to the Offering have agreed not to sell any Shares of Common Stock, including Shares of Common Stock issuable upon exercise of options, warrants, or any convertible securities of the Company, for a period of 12 months after the Final Closing Date without the prior written consent of the Underwriter. At the end of that period, these shares will be eligible for sale, subject in the case of restricted securities to the holding period, volume limitations, and other conditions imposed by Rule 144. Ordinarily, under Rule 144, a person holding restricted securities for a period of at least one year may, every three months, sell in ordinary brokerage transactions or in transactions directly with a market maker an amount equal to the greater of one percent of the Company's then-outstanding Common Stock or the average weekly trading volume during the four calendar weeks prior to such sale. Non-affiliates who hold shares for at least two years can sell their shares without any quantity limitations. Future sales of such shares could have an adverse effect on the market price of the Common Stock. See "Description of Securities" and "Underwriting." RISKS RELATING TO LOW-PRICE STOCKS; SECURITIES SOLD IN THIS OFFERING COULD BE CONSTRUED AS "PENNY STOCKS." It is anticipated that the Common Stock will initially be traded in the over-the-counter market on the OTC 9 16 Bulletin Board. As a consequence, an investor could find it difficult to dispose of, or to obtain accurate quotations as to the price of, the Common Stock. The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks. The SEC regulations generally define a penny stock to be any equity security that has a market price or exercise price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on Nasdaq and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000 if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000 during such issuer's last three years of operations. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith. Furthermore, in connection with any transaction in a penny stock, brokers must also provide investors with current bid and offer quotations therefor, the compensation of the broker and its salesperson in connection therewith and monthly accounts statements showing the market value of each penny stock in the investor's account. In addition, if the Common Stock is not quoted on Nasdaq, and the Company does not have $2,000,000 in net tangible assets, trading in the Common Stock would be covered by Rule 15g-9 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act") for non-Nasdaq and non-exchange listed securities. Under such rule, broker/dealers who recommend such securities to persons other than established customers and accredited investors must make a special written suitability determination for the purchaser and receive the purchaser's written agreement to a transaction prior to sale. Securities also are exempt from this rule if the market price is at least $5.00 per share. As of the date of this Prospectus, the Company believes that, by reason of the $5.50 offering price of the Common Stock, that such security will be outside the definitional scope of a penny stock. In the event the Company's Common Stock were subsequently to become characterized as a penny stock, the market liquidity for such securities could be adversely affected. In such an event, the regulations on penny stocks could limit the ability of broker/dealers to sell the Common Stock, and thus the ability of purchasers of the Common Stock to sell such securities in the secondary market would be adversely affected. REQUIREMENTS OF CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION IN CONNECTION WITH THE EXERCISE OF THE WARRANTS. The Warrants offered hereby are not exercisable unless, at the time of exercise: (i) there is a current prospectus relating to the Common Stock issuable upon the exercise of the Warrants under an effective registration statement filed with the Commission; and (ii) such Common Stock is then qualified for sale or exempt therefrom under applicable state securities laws in the jurisdictions in which the various holders of Warrants reside. There can be no assurance, however, that the Company will be successful in maintaining a current registration statement. After a registration statement becomes effective, it may require updating by the filing of a post-effective amendment. A post-effective amendment is required: (i) any time after nine months subsequent to the effective date when any information contained in the prospectus is over sixteen months old; (ii) when facts or events have occurred which represent a fundamental change in the information contained in the registration statement; or (iii) when any material change occurs in the information relating to the plan of distribution of the securities registered by such registration statement. The Company anticipates that this Registration Statement will remain effective for at least nine months following the date of this Prospectus, assuming a post-effective amendment is not filed by the Company. The Warrants will be separately tradeable and separately transferable from the Common Stock offered hereby immediately commencing on the date of this Prospectus. The Company intends to qualify the Warrants and the Shares of Common Stock issuable upon exercise of the Warrants in a limited number of states, although certain exemptions under state securities ("blue sky") laws may permit the Warrants to be transferred to purchasers in states other than those in which the Warrants were initially qualified. The Company will be prevented, however, from issuing Shares of Common Stock upon exercise of the Warrants in those states where exemptions are unavailable and the Company has failed to qualify the Common Stock issuable upon exercise of the Warrants. The Company may decide not to seek, or may not be able to obtain qualification of the issuance of such Common Stock in all of the states in which the holders of the Warrants reside. In such a case, the Warrants of those holders will expire and have a no value if such Warrants cannot be exercised or sold. See "Description of Securities." 10 17 LIMITED EXPERIENCE OF UNDERWRITER; UNDERWRITER WILL NOT MAKE A MARKET IN THE COMPANY'S SECURITIES; HISTORY OF CERTAIN PRINCIPALS EMPLOYED BY UNDERWRITER. Platinum Equities, Inc. (the "Underwriter") has little experience in underwriting public offerings. This Offering is the second public offering being underwritten by the Underwriter. There can be no assurance that the Underwriter's lack of experience will not adversely affect the Offering. Pursuant to the terms of the Underwriter's Agreement with the NASD, the Underwriter, Platinum Equities, Inc., does not have "market maker" status with the NASD. As a result thereof, the Underwriter will not make a market in the Securities offered hereby. The Underwriter's inability to make such a market may have a material adverse effect on the liquidity of the Securities offered hereby, which could make it more difficult for investors in this Offering to purchase or sell such securities. See "Underwriting." Two of the seven supervising principals currently employed by the Underwriter were previously employed by other broker-dealers, as supervisors, which broker-dealers closed down or underwent investigations by securities regulators. BROAD DISCRETION IN USE OF PROCEEDS. The net proceeds to the Company from the sale of the Securities offered hereby, assuming the Maximum Offering is sold, are estimated to be approximately $2,326,000. The Company estimates that $440,000 (18%) of such net proceeds will be allocated to working capital. The Company has broad discretion in the use of funds allocated to working capital. In addition, the Company's management and Board of Directors have a broad discretion in the allocation and reallocation of the other specified uses for the proceeds. See "Use of Proceeds." THE COMPANY'S CASH ACCOUNTS MAY EXCEED FEDERALLY INSURED LIMITS. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. YEAR 2000. The Company has begun to address possible remedial efforts in connection with its computer software that could be affected by the year 2000 problem. The year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900, rather than the year 2000. This could result in a major system failure or miscalculations. The Company has been informed by the suppliers of substantially all of the Company's software that all of those suppliers' software that is used by the Company is Year 2000 compliant. The Company has no internally generated software. After reasonable investigation, the Company has not yet identified any Year 2000 problems but will continue to monitor the issue. However, there can be no assurances that Year 2000 problems will not occur with respect to the company's computer systems. The Year 2000 problem may impact other entities with which the Company transacts business, and the Company cannot predict the effect of the year 2000 problem on such entities. 11 18 DILUTION Dilution is the difference between the public offering price of $5.50 per share for the Common Stock offered herein, and the net tangible book value per share of the Common Stock immediately after its purchase. The Company's net tangible book value per share is calculated by subtracting the Company's total liabilities from its total assets less any intangible assets, and then dividing by the number of shares then outstanding. The net tangible book value of the Company prior to this Offering, based on June 30, 1998 financial statements, was $72,699 or approximately $0.02 per common share. Prior to selling any shares in this Offering, the Company has 3,306,500 Shares of Common Stock outstanding. If the Maximum Offering is sold, the Company will have 3,806,500 shares outstanding upon completion of the Offering. The post offering pro forma net tangible book value of the Company, which gives effect to receipt of the net proceeds from the Offering and issuance of additional Shares of Common Stock in the Offering, but does not take into consideration the Warrants sold in the Offering nor any other changes in the net tangible book value of the Company after June 30, 1998, will be $2,398,699 or $0.63 per share, approximately. This would result in dilution to investors in this Offering of $4.87 per share or 88.5% from the public offering price of $5.50 per Share. Net tangible book value per share would increase to the benefit of present shareholders from $0.02 prior to the Offering to $0.63 after the Offering, or an increase of $0.61 per share attributable to the purchase of the Shares by investors in this Offering. If only the Minimum Offering is sold, the Company will have 3,556,500 shares outstanding upon completion of the Offering. The post offering pro forma net tangible book value of the Company will be $1,180,699 or $0.33 per share, approximately. This would result in dilution to investors in this Offering of $5.17 per share or 94% from the public offering price of $5.50 per Share. Net tangible book value per share would increase to the benefit of present shareholders from $0.02 prior to the Offering to $0.33 after the Offering, or an increase of $0.31 per share attributable to the purchase of the Shares by investors in this Offering. The following table sets forth the estimated net tangible book value per share after the Offering and the dilution to persons purchasing Shares based on the foregoing minimum and maximum offering assumptions
MINIMUM (1) MAXIMUM (2) ----------- ------------ Initial public offering price (per share) $ 5.50 $ 5.50 Net tangible book value per share before the Offering $ 0.02 $ 0.02 Increase per share attributable to payments by new investors $ 0.31 $ 0.61 Pro forma net tangible book value per share after the Offering $ 0.33 $ 0.63 Dilution per share to new investors $ 5.17 (94%) $ 4.87 (88.5%)
The following charts illustrate the pro forma proportionate ownership in the Company upon completion of the Offering under alternative minimum and maximum offering assumptions, of present shareholders and of investors in this Offering, compared to the relative amounts paid and contributed to capital of the Company by present shareholders and by investors in this Offering, assuming no changes in net tangible book value other than those resulting from the Offering. 12 19
MINIMUM OFFERING SHARES PURCHASED TOTAL CONSIDERATION - ---------------- ---------------------- -------------------------- AVERAGE PRICE PER PERCENT PERCENT SHARE ------- ------- ----- Existing shareholders 3,306,500 93% $ 443,922(3) 24.4% $ 0.13 New investors 250,000 7% $ 1,375,000(4) 75.6% $ 5.50 Total 3,556,500 100% $ 1,818,922 100.0%
MAXIMUM OFFERING SHARES PURCHASED TOTAL CONSIDERATION - ---------------- ---------------------- -------------------------- AVERAGE PRICE PER PERCENT PERCENT SHARE ------- ------- ----- Existing shareholders 3,306,500 87% $ 443,922(3) 13.9% $ 0.13 New investors 500,000 13% $ 2,750,000(5) 86.1% $ 5.50 Total 3,806,500 100% $ 3,193,922 100.0%
- ------------ (1) Assumes $1,108,000 net proceeds from Minimum Offering. (2) Assumes $2,326,000 net proceeds from Maximum Offering (3) Based on capital contributions from inception to June 30, 1998. (4) Assumes $1,400,000 gross proceeds from Minimum Offering. (5) Assumes $2,800,000 gross proceeds from Maximum Offering. 13 20 USE OF PROCEEDS The net proceeds to the Company from the sale of the Securities offered hereby, after deducting underwriting discounts and commissions, the Underwriter's non-accountable expense allowance, and expenses of this Offering (approximately $110,000) are estimated to be approximately $1,108,000 if the minimum amount is raised hereunder and $2,326,000 if the maximum amount is raised, excluding any proceeds from the sale or exercise of the Warrants. USE OF PROCEEDS
MINIMUM PERCENT MAXIMUM PERCENT ------- ------- ------- ------- Research and development(1) $ 354,560 32% $ 721,000 31% Sales and marketing $ 277,000 25% $ 625,000 27% Facility expansion $ 177,280 16% $ 340,000 15% Acquisition of employees, including $ 99,720 9% $ 200,000 9% domestic and international sales representatives Working capital $ 199,440 18% $ 440,000 18% TOTALS $1,108,000 100% $2,326,000 100%
The Company currently plans to use that portion of the net proceeds set aside for working capital to retire existing trade accounts payable and to retire existing high interest equipment loans and leases. The allocation of net proceeds set forth above represents the Company's current estimates based upon its current plans and upon certain assumptions regarding the progress of development of its products, technological advances and changing competitive conditions, the ongoing evaluation and determination of the commercial potential of the Company's products and the Company's ability to enter into agreements. If any of these factors change, the Company may reallocate some of the net proceeds within or between the above-described categories. The Company believes that the funds generated by this Offering, whether the minimum or maximum offering is sold, together with current resources, will be sufficient to fund working capital and capital requirements for at least 12 months from the date of this Prospectus. Pending their utilization, the net proceeds may be invested temporarily in certificates of deposit, insured savings accounts, short term commercial paper, money market funds, or government securities. The Company does not intend to register under the Investment Company Act of 1940, and therefore, will be limited as to the types of investments which may be temporarily made with the proceeds. DIVIDEND POLICY The Company has never paid any cash dividends on its Common Stock and does not anticipate paying any cash dividends in the future. The Company currently intends to retain future earnings, if any, to fund the development and growth of its business. - -------------------------- (1) Management of the Company plans to use the proceeds allocated for research and development to develop the products discussed in "Business of the Company--Products" in the latter half of that section which discusses the various product series currently in the development stage. These development stage products include the Decorative Utility Light; the Plastic Series; the Compact Fluorescent Series, the Euro Series; and the Circle Light. Management plans to use these proceeds for the design, tooling needs, product testing, packaging, and sample preparation for the new products. 14 21 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1998 and as adjusted to give effect to the sale by the Company of the Minimum Offering and the application of the net proceeds of $1,108,000 therefrom and as adjusted to give effect to the sale by the Company of the Maximum Offering and the application of the net proceeds of $2,326,000 therefrom.
Minimum as Maximum as June 30, 1998 Adjusted Adjusted ------------- -------- -------- (unaudited) DEBT: Current Liabilities $1,822,768 $1,822,768 $1,822,768 Notes Payable 74,661 74,661 74,661 Capital Leases 8,839 8,839 8,839 Total debt: $1,906,268 $1,906,268 $1,906,268 ========== ========== ========== STOCKHOLDERS' EQUITY: Common Stock, no par value 10,000,000 shares authorized 3,306,500 shares issued and outstanding 3,556,500 as adjusted minimum $ 417,172 3,806,500 as adjusted maximum 26,750 $1,500,172 $2,693,172 ========== ========== Additional paid-in capital (371,223) 51,750 76,750 --------- Accumulated deficit (371,223) (371,223) $ 72,699 ---------- --------- ========= Total stockholders' equity: $1,180,699 $2,398,699 ========== ==========
15 22 SELECTED FINANCIAL DATA The following selected financial data are qualified by reference to, and should be read in conjunction with, the Financial Statements, related Notes to Financial Statements and Report of Independent Public Accountants, and Management's Discussion and Analysis of Financial Condition and Results of Operations contained elsewhere herein. The following tables summarize certain selected financial data of the Company for the six months ended June 30, 1998 (unaudited), the six months ended June 30, 1997 (unaudited), and for the year ended December 31, 1996 (audited) and the year ended December 31, 1997 (audited). The data has been derived from Financial Statements included elsewhere in this Prospectus that were audited by Stonefield Josephson, Inc., Certified Public Accountants. No dividends have been paid for any of the periods presented.
Six Months Ended June 30 Year Ended December 31 1998 1997 1997 1996 ---- ---- ---- ---- (unaudited) (unaudited) (audited) (audited) STATEMENT OF OPERATIONS DATA: Revenue $ 3,337,412 $ 2,943,158 $ 5,852,969 $ 3,056,532 Net income (loss) (184,209) 124,919 123,097 (113,196) Net income (loss) per share .04 0.04 (0.04) Weighted average number of shares 3,306,500 3,326,500 3,326,500 2,800,000
June 30, 1998 December 31, 1997 Actual (unaudited) As Adjusted(1) Actual (audited) As Adjusted(1) ------------------------------------ ---------------------------------- BALANCE SHEET DATA: Current assets $ 1,561,732 $ 3,887,732 $ 1,719,795 $ 4,045,795 Total property and equipment, net 302,043 302,043 274,747 274,747 Other assets 115,192 115,192 91,179 91,179 Total assets 1,978,967 4,304,967 2,085,721 4,411,721 Total current liabilities 1,822,768 1,822,768 1,700,156 1,700,156 Accumulated deficit (371,223) (371,223) (187,014) (187,014) Stockholder's equity 72,699 2,398,699 266,908 2,592,908
- ----------- (1) Adjusted to give effect to the application of the estimated net proceeds from the Maximum Offering. See "Use of Proceeds" and "Capitalization" 16 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company was incorporated on January 21, 1994 for the purpose of manufacturing and selling fluorescent lighting fixtures for both commercial and residential uses. The Company has experienced significant growth since its inception in 1994. The Company's growth rate has far exceeded its expectations. However, management believes that this growth will continue at a slower rate in 1998. Certain key factors that are necessary in maintaining and exceeding the current growth rates are as follows: - Further expanding the Company's customer base - Successful integration into the emerging global markets - Obtaining greater market share of the commercial lighting industry - Obtaining financing at more favorable terms RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, selected financial information for the Company:
SIX MONTHS SIX MONTHS YEAR ENDED YEAR ENDED ENDED ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 JUNE 30, 1998 JUNE 30, 1997 (AUDITED) (AUDITED) ------------- ------------- ----------------- ----------------- (UNAUDITED) (UNAUDITED) Total revenue $3,337,412 $2,943,158 $5,852,969 $ 3,056,532 Cost of revenue 2,874,274 2,440,076 4,601,497 2,584,668 Gross profit 463,138 503,082 1,251,472 471,864 General, administrative, and selling expenses 588,482 312,313 991,164 488,491 Interest expense 58,065 65,050 136,411 95,769 Income (loss) before taxes (183,409) 125,719 123,897 (112,396) Taxes on income 800 800 800 800 Net income (loss) (184,209) 124,919 123,097 (113,196) Net income (loss) per share (.06) .04 0.04 (0.04)
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED) Revenues. The Company generated revenues of $3,337,412 for the six months ended June 30, 1998 as compared to revenues of $2,943,158 for the six months ended June 30, 1997. The 13.4% increase in revenues for the six months ended June 30, 1998 is a result of increased shipments to GE and increased sales through the Company's commercial division, Energy Plus. Gross Profit. Gross profit for the six months ended June 30, 1998 was $463,138 (13.9% of sales) compared to $503,082 (17.1% of sales) for the six months ended June 30, 1997. The decrease in gross profit percentage was a result of higher direct labor costs due to increases in the minimum wage. 17 24 General, administrative and selling expenses. General, administrative and selling expenses for the six months ended June 30, 1998 were $588,482 (17.6% of revenues) as compared to $312,313 (10.6% of revenues) for the six months ended June 30, 1997. The total dollar increase of $276,169 is primarily a result of additional facility rental expense of $29,811; settlement costs of $105,000 associated with a litigation matter; and $106,900 of additional legal fees defending the litigation matter (see "Business of the Company--Litigation"). Interest expense. Interest expense for the six months ended June 30, 1998 was $58,065 compared to $65,050 for the six months ended June 30, 1997. The reduction in interest expense was a result of the Company's ability to reduce its borrowing costs through a new line of credit entered into in February 1998. The Company has also reduced outstanding borrowings on its line of credit as a result of improved collection efforts on its Accounts Receivable. Net income (loss). Net loss for the six months ended June 30, 1998 was ($184,209) compared to net income of $124,919 for the six months ended June 30, 1997. The decrease in profitability is a direct result of increases in direct labor costs due to minimum wage increases and legal and settlement costs associated with the litigation matter (see "Business of the Company--Litigation"). YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996 (AUDITED) Revenues. The Company generated revenues of $5,852,969 for the year ended December 31, 1997 as compared to revenues of $3,056,532 for the year ended December 31, 1996. The 91% increase in revenues for the year ended December 31, 1997 was primarily the result of shipments and increased orders to GE. The Company began shipping product to GE in 1996. Gross Profit. Gross profit for the year ended December 31, 1997 was $1,251,472 (21.4% of sales) compared to $471,864 for the year ended December 31, 1996 (15.4% of sales). The 6% increase in gross profit percentage was primarily a result of increased purchasing and production efficiencies created by the significant increase in material needs and sales volume. General, administrative, and selling expenses. General, administrative, and selling expenses for the year ended December 31, 1997 were $991,164 compared to $488,491 for the year ended December 31, 1996. The increase is primarily the result of: increased administrative compensation expense due to additional hirings and discretionary officer bonus programs initiated in 1997 ($386,000); accounting and legal costs ($106,000); and increased selling expenses, due to increased sales volume ($18,527). Administrative compensation expenses will continue to occur in the future as the Company plans on hiring a National Sales Manager as well as additional sales representatives. Expenses incurred in the discretionary officer bonus program will continue as long as the Company is profitable as the discretionary officer bonus program is based on a percentage of gross sales allowed in the discretion of the Board of Directors. See "Employment and Related Agreements--Employment Agreements." Increased accounting costs are due to the preparation of audited financial information in conjunction with this Offering; such accounting costs will continue in the future as the Company will need to have audited financial statements prepared in accordance with the reporting requirements of the Securities Exchange Act of 1934. Increased legal costs were a one-time only expense incurred with the defense and settlement of a litigation matter. See "Business of the Company--Litigation." Selling expenses will increase or decrease in the future correspondingly with sales of the Company's products. Interest expense. Interest expense for the year ended December 31, 1997 was $136,411 compared to $95,769 for the year ended December 31, 1996. The increase of $40,642 is primarily the result of increased average monthly borrowings on the Company's line of credit during 1997. The increased borrowings were required to fund increased inventory expenditures needed to meet the growth in sales volume. Net income (loss). Net income for the year ended December 31, 1997 was $123,097 compared to a net loss of $113,196 for the year ended December 31, 1996. The increase in profitability is directly attributable to greater purchasing and production efficiencies and increased sales volume achieved through shipments made to GE for the year ended December 31, 1997. 18 25 The Internal Revenue Code of 1986 includes provisions which may limit the net operating loss carry forwards available for use in any given year if certain events occur, specifically a stock ownership change of 50% or more within a three year period. Therefore, upon completion of this Offering, utilization of the Company's net operating loss carry forwards to offset future income may be limited. The Company's net operating loss carry forward as of December 31, 1997 was approximately $145,000. BACKLOG The Company's backlog consists of unfulfilled purchase orders, mainly with GE. These purchase orders are subject to change and can be revised at any time by GE. For the month of December 1997, the Company's backlog was $7,522,000 as compared to $2,022,000 for the month of December 1996. As of September 30, 1998, the Company's backlog was $5,833,000. LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has primarily funded its capital requirements through equity infusions, bank loans, and officer loans. Initial start-up funding of $50,000 was raised through the sale of 10,000 shares of the Company's Common Stock to its founders in 1994. An additional $113,922 was raised during 1995 through the sale of 2,590,000 shares at a price of $0.04 per share. On April 4, 1997, the Company commenced a private placement (the "Private Placement") of 506,500 shares of Common Stock at a purchase price of $0.50 per share (the "Private Placement Stock") and 500,000 warrants, each warrant to purchase one share of the Company's Common Stock at an exercise price of $0.80 for a term of five years at a purchase price of $0.10 per warrant (the "Private Placement Warrants"). The Private Placement Stock and the Common Stock underlying the Private Placement Warrants are being registered herein. The Private Placement generated net proceeds of approximately $280,000. At June 30, 1998, the Company had outstanding current liabilities of $1,822,768. The Company anticipates satisfying its current liabilities in the ordinary course of business from revenues and accounts receivable. Capital expenditures during the period from inception through June 30, 1998, were $387,277. Over the next 12 months, the Company plans to upgrade its management information system, telecommunications system and office equipment to accommodate anticipated growth plans. In addition, computers and test equipment for product development will be acquired for use in research and development. At June 30, 1998, the Company had $568,234 outstanding in accounts receivables from customers who have been billed. The Company believes that proceeds from this Offering, even if only the Minimum Offering is sold, together with revenues from the Company's operations, and the Company's other resources, will be sufficient to cover working capital requirements for at least 12 months after this Offering. See "Use of Proceeds." The Company may nevertheless require additional financing to support continued expansion of its business, marketing, and development of its existing and future products, and the potential acquisition of other products or technologies. The Company has made no arrangements or commitments for such financing and there can be no assurance that the Company will be able to obtain such financing on satisfactory terms, if at all. If adequate financing is not available or available on satisfactory terms, the Company may be required to delay, scale back or eliminate certain of its marketing programs, research and development activities or expansion plans. To the extent the Company raises additional capital by issuing equity securities, ownership dilution to the investors in this Offering will result. 19 26 FINANCING The Company's primary source of borrowing was a $1,000,000 maximum line of credit with a financial institution, Fremont Business Credit. The line was secured by the Company's accounts receivable and inventory and personal guarantees of certain of the shareholders. $279,955 was outstanding on the line of credit as of December 31, 1997. The line bore interest at a rate of 4% above prime. The line of credit expired in February 1998 and was paid in full. Subsequent to December 31, 1997, the Company entered into a new line of credit with First Community Financial Corporation, Arizona for $1,000,000. The line is secured by the Company's accounts receivable and inventory and personal guaranties of certain of the officers. The loan will bear interest at a rate of 3% above prime (as of September 30, 1998, such interest rate was 11.25%). The line of credit expires in February 1999. The Company will continue to rely on cash flow from operations and borrowings on its replacement line of credit to fund its capital requirements. The Company also finances its business activities using unsecured lines of credit, short-term bank loans, and equipment lease financing. Terms under these various facilities vary depending upon the type of facility used. Management will continue to finance a portion of the capital requirements using these type of facilities to the extent that they are available at terms that are deemed favorable to the Company. The Company does not believe that inflation has had a significant impact on its operations since inception of the Company. SEASONALITY The Company's business is subject to seasonable fluctuations, with a slight decrease in sales and revenues occurring during the month of December due to the holidays. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for the full year. 20 27 BUSINESS OF THE COMPANY GENERAL Luminex Lighting, Inc. (the "Company") distributes quality, energy saving, fluorescent lighting fixtures. The Company designs, tools, tests, assembles, and packages readily available lighting component parts into a finished product, ready for distribution and sale. The Company has expanded its customer base across the United States and is seeking to expand into the direct retail and emerging global markets. The Company believes it is currently one of the largest distributors of cost efficient energy saving fluorescent lighting fixtures. The Company has been in operation for over four years and has experienced substantial growth within the lighting industry. The Company believes it has built a strong customer base, including GE and Lamps Plus. The Company's niche in the light fixture market is maintained through cost efficiency and quality in its products. The Company believes it has accumulated strength in the purchasing of raw materials. Due to the increased volume of material that the Company purchases, it believes it is able to obtain an advantage when negotiating with its suppliers. The Company believes its competitive edge is based upon low cost purchasing along with low overhead expenses, resulting in quality products at a lower price. The Company is competitive in all aspects of its operations. It believes these factors, combined with experienced management and employees, provide the Company with added value within the industry. The Company is seeking to capture a significant market share in the lighting industry. It believes opportunities exist not only in the United States, but internationally as well. The Company intends to target such territories as Canada, Mexico, South America, and Puerto Rico. Presently, the Company does not make any sales into markets outside the United States. With a portion of the proceeds of this Offering, the Company plans on retaining sales representatives familiar with both domestic and foreign markets. (See "Use of Proceeds.") In February 1999, the Company plans to attend the Hardware/Housewares and Building Material Show of the Caribbean (the "Hardware Show"). This will mark the beginning of the Company's expansion into foreign markets. The Hardware Show will be held in Puerto Rico and generally attracts over 12,000 buyers from South America, the Caribbean, Central America, and parts of Europe. The Company was incorporated under the laws of the State of California on January 21, 1994. The address of the Company's principal executive offices is: 13710 Ramona Avenue, Chino, California, 91710. The Company's telephone number is (909) 591-5653. The Company also has a branch office located at 258 Main Street, Suite 111, Milford, Massachusetts, 01757. 21 28 OVERVIEW OF THE COMPANY'S MARKETS Based on industry reports and evaluations done by Business Trend Analysis, the residential lighting fixtures market is expected to outperform all other types of lighting markets in 1998. (Energy Information Administration, Office of Energy Markets and End Use; Lighting Research Center, Rensselaer Polytechnic Institute, 1997.) Households in the U.S. contain a total of 523 million lights that are on one or more hours a day -- 282 million of these are on four or more hours a day. (Energy Information Administration, 1993.) Based on the 1995 Commercial Buildings Energy Consumption Survey (CBECS), approximately 77% of all commercial buildings are lit by fluorescent lights. Therefore, both the U.S. residential and commercial lighting markets are large and wide-spread. The Company produces its products primarily as an OEM (original equipment manufacturer) for GE, its major customer. The Company believes the OEM market alone has great potential for further expansion of the Company's products. The Company believes the OEM market gives the Company the ability to acquire pre-existing national distribution channels. The Company is currently in discussions with various customers in order to expand and generate further revenue through the OEM markets. During 1998, the Company began entering into the direct retail market by introducing new products under the Luminex Lighting private label. Thus far, the Company has received orders for its private label products from Costco Wholesale and Lithonia Lighting. The Company expects to further introduce its product line to markets such as home improvement retail stores; retail outlets such as Kmart, Target, and Wal-Mart; drug stores; and office supply stores. Again, the Company believes the potential to expand into this market is great and if the Company successfully enters the direct retail market, it will provide the following benefits: establishing its own private label, creating brand recognition, and enabling the Company to acquire extensive national distribution channels. The Company also plans on expanding its Energy Plus division which currently consists of products being sold mainly to the commercial and industrial markets. These products are used for the construction of new homes, buildings, medical centers, and shopping plazas. They are also sold to smaller home improvement and retail lighting outlets. The overall lighting market is wide in scope. The Company has developed various products which represent the scope of products offered by both the commercial and residential lighting industries. BUSINESS STRATEGY Currently, the Company is highly concentrated within the OEM distribution channel. Its primary customer at this time is GE. GE plays a significant role in the generation of revenue for Luminex Lighting. Luminex would like to further diversify its business through entering into the direct retail market and by further expanding its commercial and wholesale distribution division, Energy Plus (see "Sales, Marketing and Distribution"). The Company is currently in the process of structuring and preparing itself for entry into the direct retail market. Direct sale to the retail market provides higher margins, increased profitability, and establishes Company recognition within the lighting industry. The Company has developed many new products to support the market and has created a new image for the Luminex label. The Company began its direct retail program 22 29 in the second half of 1998 by retaining a National Sales Manager in order to develop business, and by improving its packaging. The Company plans on taking these additional actions to continue to expand its direct retail program: - retainment of additional sales representatives across the United State and Canada; - further development of creative lighting fixtures appealing to the consumer; - establishing brand recognition and Company image; - new and creative catalogs appealing to buyers; - increased marketing of product through advertising and specials; - additional investment in product research and development; and - introduction of fluorescent product lines to home centers, hardware chains, drug stores, supermarket chains, and several independent hardware stores. The Company's ability to continue this direct retail program and the timing of these actions are dependent upon the Company's receiving the net proceeds from this Offering. The Company anticipates that, if it receives the net proceeds from the Minimum Offering, it will be able to take all of the actions listed above expeditiously. However, if no funds are raised from this Offering, the Company's plans will be delayed until such time as the Company generates enough revenue to take these actions. The Company believes that market opportunities exist not only domestically but internationally. Currently, the Company is marketing its products extensively within the United States region. However, due to insufficient amounts of working capital, the Company has not been able to expand and reach its fullest potential in the international market. The Company intends to target such territories as Canada, Mexico, South America, and Puerto Rico. PRODUCTS The Company has integrated a variety of lighting products into its inventory. Its product lines are highly diversified and guaranteed the highest quality within the lighting industry. The Company provides a five year warranty on all of its products. Luminex produces products that are energy efficient. For example, an 18 watt compact fluorescent light produces the same number of lumens as a 75 watt incandescent. These energy savings are passed on to the consumer. According to research conducted by the United States Chamber of Commerce in 1993, U.S. households used a total of 90.8 billion kWh for electricity for lighting. If households replaced all incandescent bulbs used four or more hours per day with compact fluorescent lights, they could save 31.7 kWh annually, or 35% of all electricity used for residential lighting. Management of the Company believes that replacements have generally not been made mainly because the consumer has not been educated on savings presented by compact fluorescent light fixtures. Also, the Company believes that the introduction of electronics and compact fluorescent lights has not been marketed to its fullest potential. In addition to the energy efficient products that Luminex produces, the Company has gone a step further by implementing electronic ballasts into many of their products. CBECS data suggests greater energy savings will occur by replacing existing fluorescent lights with more energy - efficient equipment such as electronic ballasts, which increase fluorescent efficiency by up to 25%. Following is a brief overview of the various products the Company currently offers and an introduction of the new and innovative products the Company will attempt to add to its product lines. 23 30 1. CEILING MOUNT FIXTURES are used for commercial and residential purposes where efficient higher light output fixtures can be used in new or existing construction to replace inefficient incandescent fixtures. These fixtures include the cloud series and decorative wraparound series. 2. DECORATIVE VANITY SERIES fixtures are efficient and attractive in design and provide uniform low glare diffusers. This series is excellent for residential and commercial use such as restrooms or hotels, motels, and health care facilities. These fixtures also save energy. 3. COMPACT CEILING MOUNTS include contemporary fluorescent cloud fixtures and contoured cloud fixtures. These mounts are popular because of their soft lines and shallow appearance. These products are used both in residential and commercial applications. These fixtures feature the latest in long life compact fluorescent and circleline lamps. These fixtures are ideal for small rooms, entrance areas, accent areas, or hallways. 4. UNDERCABINET SERIES. Supplying this product to its constantly growing customer base, including GE as the largest purchaser and distributor, the Company is also being asked by other competitors to produce the product for them as the Company believes that other companies are unable to compete with the quality and price the Company offers. The Company's Undercabinet Series has a very low profile, excellent in energy saving, multipurpose use and has now become the most popular item among all the Company's products. 5. PLASTIC BLACKLIGHT SERIES. At the current time, the Company is producing the plastic Blacklight Series for GE only. However, there is no exclusive contract between the Company and GE. GE then sells this product to many retailers including Spencer Gifts, Target, and other novelty stores, so this popular fixture is constantly in demand. On some days the Company produces more than 10,000 Blacklight fixtures. Recent estimates from GE suggest that Blacklight orders within the next twelve months will be approximately 750,000 units. All of the Company's products are 100% tested electrically prior to shipment, are monitored for finish (i.e., the aesthetic appearance free from scratches, dents, etc.) as well as mechanical fit, and are Underwriters Laboratories ("UL"), Canadian Standards Association ("CSA"), and Canadian Underwriters Laboratories ("CUL") approved. The Company believes that these factors, combined with the Company's management, strategically place the Company in a position to capture a significant portion of the commercial and residential lighting industry. During 1999, the Company plans to introduce a minimum of four new fixture series to its present family of products. These products, in addition to the current products being sold, will be marketed to the D14 retail market under the Luminex Lighting label. The various product series currently in the development stage are the following: 1. DECORATIVE UTILITY LIGHT is an inexpensive, portable utility light which can be used for homes, offices, commercial, and residential purposes. 2. PLASTIC SERIES, with similar construction to the Blacklight, will enable consumers to purchase multipurpose lighting fixtures at an economical price. 3. COMPACT FLUORESCENT SERIES leads the market in compact energy efficient products utilizing the latest "state of the art" lamp technology. This series will be offered in a variety of products including ceiling and wall lights. 4. EURO SERIES. The Euro Single Strip, Euro Twin Light, Euro 15" Strip Light, and Euro Nightlite are included in this series. This inexpensive and affordable product line is characterized by its rounded dimensions and is designed to fit almost anywhere. These lights can be used to brighten up areas such as the kitchen, laundry area, garage, office, and almost anywhere around the home or office. As one of the newer lighting developments by Luminex, the Euro Series has created a great deal of interest in Luminex and its product lines. This series will be marketed extensively through the do it yourself ("DIY")/retail market under the Luminex label. The "do it yourself" market encompasses companies which sell products to the consumer for the consumer to install, such as Home Depot, Home Base, and Orchard Supply Hardware. The expected launch date for this program is late 1998. 24 31 5. CIRCLE LIGHT. Luminex will be introducing a new line of energy efficient, screw-in fluorescent Circle Light adapters. This product easily replaces the 75 watt and 150 watt incandescent lamps with only 22 watts and 30 watts respectively. The 22 watt system consists of a compact and dependable Circle Light lamp and magnetic adapter. The 30 watt system utilizes high color rendering lamps with sophisticated and state of the art electronic ballast for quick starting and long life efficient operation. CUSTOMERS The largest customers of the Company for the last two years are as follows: General Electric Company Lithonia Lighting Costco Wholesale Lamps Plus, Inc. United Electric Supply Company, Inc. The Orman Grubb Company California Commercial Lighting Supply, Inc. All Sale Electric, Inc. COMPETITION The Company faces competition from numerous companies, certain of which are more established, benefit from greater market recognition, and have greater financial, production and marketing resources than the Company. The Company's products compete on the basis of certain factors, including first to market product capabilities, product performance, price, support of industry standard, ease of use, customer support as well as user productivity. The lighting industry is large and composed of many companies. Much of the competition that the Company faces is centralized within California. Companies such as American Power Products, Lights of America, Lampi Corporation, and Lamar Lighting manufacture similar lighting fixtures to those sold by the Company. The Undercabinet line in particular is in direct competition with various other manufacturers of similar lines. Such competition may diminish the Company's market share or its ability to gain entry into the market, and may consequently have a material adverse effect on the Company. COMPETITIVE ADVANTAGES Management of the Company believes that the Company has the following advantages over its competition: - - The Company is able to purchase material at below market cost thereby enabling the final price of the finished product to be competitive within the industry. - - All products assembled by the Company are tested and inspected by the Company's team of Quality Control Specialists thereby resulting in a 100% product satisfaction guarantee to its customers. Customers receive a replacement or full refund on any defective product. - - The Company's diverse product lines offer ease of use in both the commercial and residential settings. - - The Company is consistently applying the newest technology to its various products. In the lighting industry, technology changes rapidly. The Company has a team of specialists who are able to apply these new innovations to its lighting products giving the Company a competitive edge against the general market. 25 32 SALES, MARKETING, AND DISTRIBUTION GENERAL The Company is currently marketing its products throughout the United States and Canada. Currently, the Company's revenues are largely based on OEM customers such as GE. Management feels that there are significant opportunities within the OEM market and intends to capitalize and expand its revenue base from this market. Aside from OEM manufacturing, the Company is currently selling its wide range of fluorescent lighting fixtures through various distributors and independent sales representatives. This accounts for approximately 5% of revenues for the Company. The remaining approximately 95% of sales is derived from GE. Distribution takes place through the Company's Chino, California assembly and distribution center. ENERGY PLUS - A DIVISION OF LUMINEX LIGHTING, INC. Energy Plus, a division of Luminex Lighting, Inc., has been specifically set up to target the commercial and electrical distribution markets. This market includes lighting needs for home and industrial construction, electrical distributors, and electrical wholesalers. Currently, Energy Plus provides the market with several fixtures, including over 93 various options. Products being sold through Energy Plus include all undercabinet series (plastic and metal), flushmounts, sidemounts, various cloud designs, wraparounds, decorative vanity, decorative cloud, all open strip fixtures, industrial use fixtures, enclosed fixtures, and gasket fixtures. Energy Plus recently acquired a new Sales Manager at the end of 1997 and formed a strong team of sales representatives and customer service representatives to support its division. The Company believes the restructuring of the division has dramatically increased annual sales and has proven that Energy Plus can be competitive within the electrical and commercial markets. During the first half of 1998, Energy Plus reached a level of $278,469 in gross sales. The Company believes that there will be continued growth within this division based on increased orders by new and existing customers. In order to establish new clients, Energy Plus is continuously searching for sales representatives across the United States and Canada. Currently, Energy Plus retains over 20 sales representatives who mainly cover the Western and Midwestern states. In order to facilitate the forecasted growth for Energy Plus, it will be necessary to expand its customer base through the acquisition of additional sales representatives. The division plans on aggressively expanding its representative base during the remainder of 1998 and during 1999. Also, it will be necessary to maintain on hand inventory of the products being offered and to ensure rapid turn around time. Energy Plus will continue to stay focused on customer service and quality control enabling the division to further expand competitively. Energy Plus is a significant part of Luminex's business. Due to the direct sale of product to the customer, Energy Plus is able to maintain higher margins than those of Luminex Lighting, Inc. The higher margins attained within this division significantly contribute to the overall profitability of the business. Therefore, Luminex will continue to support the Energy Plus division and continue to acquire the business available in the commercial and electrical wholesale market. Energy Plus has recently launched a new PRODUCT PROMOTION PROGRAM. This program is a tool which the Company believes will enable the Company to strategically acquire new business through special promotions of products every two months. The Company believes this form of advertising and marketing will promote additional sales with electrical distributors and will provide the distributors with an incentive to purchase the product that is being promoted that particular month. This program is planned to be aggressively marketed through their in house sales force along with their independent representatives across the United States. 26 33 LUMINEX-MEXICO Luminex identified an opportunity to reduce costs by manufacturing components in Mexico where direct labor costs are significantly lower than those in the United States. Therefore, in 1998, the Company, in conjunction with Enertech-Mexico, began manufacturing certain component parts for its lighting fixtures in order to increase margins. The Company is manufacturing several different types of ballasts for use in its fixtures. It is also manufacturing starter assemblies at the Mexico facility. There is no affiliation between Enertech-Mexico and the Company other than the manufacturing arrangement. The Company may also move the assembly of certain lighting fixtures to Mexico later in the year. The Company believes this move will enable Luminex to realize significant cost savings by assembling certain of its lighting fixtures in Mexico. WEB SITE The Company has established an interactive website which it believes will enable potential and existing clients to access the website and receive information, price quotes, and an opportunity to place orders. This will also allow interaction with international prospects. Again, the Company believes this website provides additional tools for marketing its products domestically and internationally. The Company's website address is www.luminexlighting.com. EMPLOYEES As of the date of this Prospectus, the Company employed 80 full-time employees and no part-time employees. The Company hires independent contractors on an "as needed" basis only. The Company has no collective bargaining agreements with its employees. The Company believes that its employee relationships are satisfactory. The Company plans on hiring additional part-time sales staff in the immediate future with the proceeds of this Offering. Long term, the Company will attempt to hire additional employees as needed based on its growth rate. In particular, if at least the Minimum Offering is sold, the Company plans on hiring a national sales manager to market the Company's own brand label products in the U.S. and Canadian retail markets. See "Use of Proceeds." PROPERTIES The Company leases a 25,000 square foot warehouse, including office space, in Chino, California which is the Company's headquarters. The Chino facility is comprised of the following areas: office space - 2,900 square feet; assembly/manufacturing space - 5,200 square feet; and inventory stocking area - 16,900 square feet. The lease term expires in October 2000. The lease contains two options to extend the lease term for a period of three years each. The monthly lease payment is $11,250. The Company also leases approximately 500 square feet of office space in Milford, Massachusetts. The monthly lease payment is $275 and the lease expires November 30, 1998. LITIGATION On March 11, 1997, the Company was served with a Complaint in the matter of David P. Holmes, Plaintiff ("Plaintiff") vs. Luminex Lighting, Inc., a California corporation; Wasif Siddiqui, an individual; Tasneem Siddiqui, an individual; and Does 1 through 20, inclusive, Defendants ("Defendants"), Superior Court of the State of California for the County of Orange, Case No. 776430. Plaintiff is a former employee of the Company who was terminated. Plaintiff alleged he had an implied employment contract with Defendants such that he would be employed by Defendants so long as his performance was satisfactory, and that Defendants would not discharge him without good and just cause. Plaintiff alleged the following causes of action in his complaint: breach of contract for continued employment; breach of implied contract of continued employment; and breach of implied covenant of good faith and fair dealing. On June 18, 1997, Defendants filed a Cross-Complaint against Plaintiff for misappropriation of trade secrets; interference with a significant 27 34 business relationships; conversion of trade secrets; and unfair competition. On May 27, 1998, Defendants entered into a settlement agreement with Plaintiff whereby Defendants would pay to Plaintiff the total sum of $105,000 according to the following payment schedule: $25,000 initial lump sum payment and $10,000 per month for eight months. All settlement payments will be made by the Company on behalf of all Defendants. Management of the Company believes that there are no other litigation matters pending or threatened against the Company. 28 35 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and officers of the Company as of the date of this Prospectus are as follows:
NAME AGE POSITION - ---- --- -------- Wasif Siddiqui 52 President, Chief Executive Officer, Chief Financial Officer, Director Tasneem Siddiqui 44 Executive Vice President, Secretary, Director Asra Rasheed 25 Vice President of Corporate Planning, Director
The number of directors may be fixed from time to time by the Board of Directors. The Board of Directors presently consists of three directors, all of whom are inside directors. The Company will add one independent director at the completion of this Offering. This individual has yet to be determined. Each of the Company's directors hold office until their respective successors are elected at the next annual meeting of shareholders. Vacancies in the Board of Directors are filled by a majority vote of the remaining directors or by a shareholder vote called expressly for such purpose. The Company currently has no committees established to advise the Board of Directors. See "Risk Factors--No Outside Directors or Committees." WASIF SIDDIQUI, PRESIDENT, CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL OFFICER, AND DIRECTOR, has over 15 years of experience within the lighting industry. He is one of the original founders of the Company and spent 1993 forming the Company which was incorporated in January 1994. From 1987 through 1993, he was President and Chief Executive Officer of American Power Products, a lighting Company with sales volume that exceeded 35 million dollars. 1 Prior to his term as President of both companies, Mr. Siddiqui specialized in various management positions with three different Fortune 500 companies. His experience in management, along with his expertise in the lighting industry, has brought the Company a strong and committed leader focused on the growth and success of the Company. Mr. Siddiqui earned his Masters Degree in Business Administration from Northrop University, Los Angeles, California. TASNEEM SIDDIQUI, EXECUTIVE VICE PRESIDENT, SECRETARY, AND DIRECTOR, brings to the Company insight and experience in financial and manufacturing management. She is an original founder of the Company and spent 1993 forming the Company with Mr. Siddiqui. Ms. Siddiqui was Manager of Finance with American Power Products from 1991 through 1992.2 Ms. Siddiqui was the owner and operator of National Products, a multi-million dollar artificial plant manufacturing Company, from 1986 through 1991. Through this venture, she gained experience in overseeing production and manufacturing. Ms. Siddiqui is responsible for the daily management and supervision of various departments such as Accounts Payable and Production, of the Company. She has a B.S. Degree in Economics. Tasneem Siddiqui, Executive Vice President, Secretary, and a Director of the Company is the wife of Wasif Siddiqui, President, Chief Executive Officer, Chief Financial Officer, and a Director of the Company. ASRA S. RASHEED, VICE PRESIDENT OF CORPORATE PLANNING, AND DIRECTOR, brings to the Company expertise in business and financial analysis. She joined the Company in October 1996. She was previously employed at Wells Fargo Bank from August 1991 through September 1996 as a Personal Banking Officer and Customer Service Representative where - -------- 1 American Power Products is still in business operating in Chino, California. Mr. and Mrs. Siddiqui are no longer officers, directors, or employees of American Power Products. They have no connection whatsoever to American Power Products. 29 36 she gained experience in the sales and financial industry. Ms. Rasheed is responsible for long term forecasting and financial structuring for the Company as well as overseeing day-to-day sales and accounts receivable activity that funnel through the Company. Ms. Rasheed has a B.S. Degree in Finance (with emphasis on Corporate Finance and Investments). Asra Rasheed, Vice President of Corporate Planning and a Director of the Company, is the daughter of Tasneem Siddiqui, Executive Vice President, Secretary, and a Director of the Company, and Wasif Siddiqui, President, Chief Executive Officer, Chief Financial Officer, and a Director of the Company. EXECUTIVE COMPENSATION The following officers of the Company receive the following annual cash salaries and other compensation: SUMMARY COMPENSATION TABLE
Name and Principal Position Year Annual Bonus(2) Awards(3) Salary(1) Restricted Securities Stock Awards(4) Underlying Options Wasif Siddiqui, President, Chief 1998 $96,000 $-0- -0- -0- Executive Officer, Chief Financial 1997 $96,000 $175,589 -0- -0- Officer 1996 $62,000 $-0- -0- -0- Tasneem Siddiqui, Executive Vice 1998 $72,000 $-0- -0- -0- President and Secretary 1997 $72,000 $-0- -0- -0- 1996 $36,000 $-0- -0- -0- Asra Rasheed, Vice President of 1998 $39,000 $-0- -0- -0- Corporate Planning 1997 $36,000 $-0- -0- -0- 1996 $ 9,000 $-0- -0- -0-
- ---------------- (1) The table does not include any amounts for personal benefits extended to officers of the Company, such as the cost of automobiles, life insurance and supplemental medical insurance, because the specific dollar amounts of such personal benefits cannot be ascertained. Management believes that the value of non-cash benefits and compensation distributed to executive officers of the Company individually or as a group during fiscal year 1998 will not exceed the lesser of $50,000 or ten percent of such officers' individual cash compensation or, with respect to the group, $50,000 times the number of persons in the group or ten percent of the group's aggregate cash compensation. (2) Mr. Wasif Siddiqui and Ms. Tasneem Siddiqui have bonus compensation agreements. For fiscal 1998, Mr. Siddiqui shall receive bonus compensation equal to 3% of gross annual sales; such amount is presently not ascertainable. For fiscal 1998, Ms. Siddiqui shall receive bonus compensation up to 1% of gross annual sales in the discretion of the board of directors; such amount is presently not ascertainable. (3) No officers received or will receive any long term incentive plan (LTIP) payouts or other payouts during fiscal 1998. (4) No officers received or will receive any restricted stock awards or options during fiscal 1998. INDEMNIFICATION OF DIRECTORS AND OFFICERS The laws of the State of California and the Company's Bylaws provide for indemnification of the Company's directors for liabilities and expenses that they may incur in such capacities. In general, directors and officers are indemnified with respect to actions taken in good faith in a manner reasonably believed to be in, or not opposed to, the best interests of the Company, and with respect to any criminal action or proceeding, actions that the indemnitee had no reasonable cause to believe were unlawful. The Company has been advised that in the opinion of the Commission, indemnification for liabilities arising under the Act is against public policy as expressed in the Act and is, therefore, unenforceable. 30 37 EMPLOYMENT AND RELATED AGREEMENTS INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN On May 5, 1997, the Company enacted an Incentive and Nonstatutory Stock Option Plan (the "Plan") for its employees and consultants under which a maximum of 500,000 options may be granted to purchase Common Stock of the Company. Two types of options may be granted under the Plan: (1) Incentive Stock Options (also known as Qualified Stock Options) which only may be issued to employees of the Company and whereby the exercise price of the option is not less than the fair market value of the Common Stock on the date it was reserved for issuance under the Plan; and (2) Nonstatutory Stock Options which may be issued to either employees or consultants of the Company and whereby the exercise price of the option is less than the fair market value of the Common Stock on the date it was reserved for issuance under the Plan. Grants of options may be made to employees and consultants without regard to any performance measures. Any options issued pursuant to the Plan vest over an 18 month period from the date of the grant per the following schedule: 33% of the options vest on the date which is six months from the date of the grant; 33% of the options vest on the date which is 12 months from the date of the grant; and 34% of the options vest on the date which is 18 months from the date of the grant. Any options issued pursuant to the Plan are nontransferable and subject to forfeiture. As of the date of this Prospectus, the Company had not issued any options under the Plan. EMPLOYMENT AGREEMENTS Effective as of January 1, 1997, the Company entered into an "Annual Salary and Bonus Compensation Plan" with Wasif Siddiqui (the "Wasif Siddiqui Employment Agreement"). The term of the Wasif Siddiqui Employment Agreement is five years and is renewable subject to Board approval at the expiration of the initial term. This Employ ment Agreement provides for annual salary compensation of $96,000 per year with a 5% increase every year for a period of five years. The Wasif Siddiqui Employment Agreement provides for bonus compensation of 3% of gross annual sales of the Company each fiscal year, provided that the bonus does not create a net loss before taxes for the Company. Effective January 1, 1997, the Company entered into a Bonus Plan with Charles Boulos, an employee (the " Boulos Bonus Plan"). This Bonus Plan provides for a bonus each fiscal year in a range between 0.5% and 1% of gross annual sales of the Company. The actual percentage for the bonus to be determined by the Board of Directors of the Company at the annual meeting, but no less than 0.5% nor more than 1% of gross annual sales. The Boulos Bonus Plan contains no other provisions and is subject to amendment or termination at will. Mr. Boulos does not have an employment agreement with the Company and his employment is terminable at will. Effective as of June 1, 1997, the Company entered into an "Annual Salary and Bonus Compensation Plan" with Tasneem Siddiqui (the "Tasneem Siddiqui Employment Agreement"). The term of the Tasneem Siddiqui Employment Agreement is five years and is renewable subject to Board approval at the expiration of the initial term. This Employment Agreement provides for annual salary compensation of $72,000 per year with a 5% increase every year for five years thereafter. The Tasneem Siddiqui Employment Agreement provides for bonus compensation of up to 1% of gross annual sales of the Company each fiscal year, provided that the bonus does not create a net loss before taxes for the Company. CERTAIN TRANSACTIONS During the past two years, the Company had taken loans drawn on personal lines of credit of Asra Rasheed, Vice President of Corporate Planning and a Director and Shareholder of the Company. The interest rate at December 31, 1997 was 12.51%. The balance of the lines of credit at December 31, 1997 was $6,272. The funds drawn were contributed to the Company for working capital. Subsequent to December 31, 1997, the loans were paid in full and the Company has no plan to take any further loans from this line of credit. 31 38 The Company's management believes that the terms of these transactions are no less favorable to the Company than would have been obtained from an unaffiliated third party in similar transactions. All future transactions with affiliates will be on terms no less favorable than could be obtained from unaffiliated third parties, and will be approved by a majority of the disinterested directors. PRINCIPAL SHAREHOLDERS The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock, as of the date hereof and as adjusted to reflect the sale of the Shares offered hereby by (i) each shareholder known by the Company to be the beneficial owner of more than five percent of the outstanding Common Stock, (ii) each director of the Company, (iii) each officer of the Company, and (iv) all directors and officers as a group. Unless otherwise indicated, the address for each shareholder is 13710 Ramona Avenue, Chino, CA 91710. Percentage Beneficially Owned(1)
Number Name Of Shares Before After After Offering Minimum Maximum Offering Offering Wasif A. Siddiqui and Tasneem Siddiqui, held 2,600,000 78.6% 73.1% 68.3% jointly Whittington Investments, Ltd., a corporation(2) 237,000 7.2% 6.5% 6.2% Suite M2 Charlotte House P.O. Box N4825 Nassau, Bahamas Clearweather Investment, Ltd.(3) 210,000 6.4% 5.6% 5.5% 65 Main Street, P.O. Box 3463 Road Town/Tortola British Virgin Islands Asra Rasheed 200,000 6.0% 5.6% 5.3% Knightrider Investments Limited, a corporation(4) 175,000 5.3% 4.7% 4.6% c/o John King Worldwide Trust Services Limited Charlotte House, Charlotte St. Nassau, Bahamas All officers and directors as a group (3 persons) 2,800,000 84.7% 78.7% 73.6%
- ---------- * Less than one percent (1) Except as otherwise indicated, the Company believes that the beneficial owners of Common Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person. (2) Includes 115,000 Private Placement Warrants (3) Includes 200,000 Private Placement Warrants (4) Includes 150,000 Private Placement Warrants 32 39 SELLING SHAREHOLDERS The following table sets forth the number of Shares of Common Stock which may be offered for sale from time to time by the Selling Shareholders. The shares offered for sale constitute all of the Shares of Common Stock known to the Company to be beneficially owned by the Selling Shareholders. To the best of management's knowledge, none of the Selling Shareholders has or have any material relationship with the Company, except as otherwise set forth below.
NAME OF SHARES OF SELLING SHAREHOLDER COMMON STOCK OFFERED(1) - ------------------- -------------------- Whittington Investments, Ltd. 122,000 Whittington Investments, Ltd. 115,000(2) Horwitz & Beam, Inc., a California corporation(3) 5,000 Horwitz & Beam, Inc., a California corporation(3) 25,000(2) Clarence W. Coffey, an individual 20,000 Rockspitz Stiftung 9,500 Rockspitz Stiftung 5,000(2) Richard Houlihan, an individual 20,000 Stephen Leslie Schneider, an individual 30,000 Joseph T. Doino and Carm M. Doino, JTWROS 25,000 Graham Thorogood, an individual 5,000(2) Gregory A. Majka, an individual 10,000 Z.T. Global, Inc., a corporation 20,000 Clearweather Investments 10,000 Clearweather Investments 200,000(2) Montague Securities International Ltd., a corporation 10,000 Irfan Mustafa, an individual 50,000 Equitrade Securities Corp. 10,000 Winthrop Venture Fund, Ltd. 80,000 C.R. Hanson, an individual 20,000 Knightrider Investments Limited, a corporation 25,000 Knightrider Investments Limited, a corporation 150,000(2) Michael Preston, an individual 20,000 Steven Lampert, an individual 20,000 Total 1,006,500
- --------------- (1) All of these Shares are currently restricted under Rule 144 of the 1933 Act. (2) Represents Shares underlying Private Placement Warrants. (3) Legal counsel to the Company. Horwitz & Beam, Inc. acquired the securities in the Private Placement as an investor on April 24, 1997 pursuant to a subscription agreement and the payment of $5,000. PLAN OF DISTRIBUTION The Shares will be offered and sold by the Selling Shareholders for their own accounts. The Company will not receive any of the proceeds from the sale of the Shares by the Selling Shareholders pursuant to this Prospectus. The Company will pay all of the expenses of the registration of the Shares, but shall not pay any commissions, discounts, and fees of underwriters, dealers, or agents. The Selling Shareholders may offer and sell the Shares from time to time in transactions in the over-the-counter market or in negotiated transactions, at market prices prevailing at the time of sale or at negotiated prices. The Selling Shareholders have agreed not to sell, assign, pledge, hypothecate, or otherwise dispose of any of the Private Placement 33 40 Stock, as well as the Shares of Common Stock underlying the Private Placement Warrants, for a period of 12 months from the final closing of the Offering without the prior written consent of the Underwriter. The Selling Shareholders have advised the Company that they have not entered into any agreements, understandings, or arrangements with any underwriters or broker-dealers regarding the distribution of their Shares, nor is there an underwriter or coordinating broker acting in connection with the proposed sale of Shares by the Selling Shareholders. Sales may be made directly or to or through broker-dealers who may received compensation in the for of discounts, concessions, or commissions from the Selling Shareholders or the purchasers of the Shares for whom such broker-dealers may act as agent or to whom they may sell as principal, or both (which compensation as to a particular broker-dealer may be in excess of customary commissions). The Selling Shareholders and any broker-dealers acting in connection with the sale of the Shares hereunder may be deemed to be "underwriters' within the meaning of Section 2(11) of the Act, and any commissions received by them and any profit realized by them on the resale of Shares as principals may be deemed underwriting compensation under the Act. Under the Exchange Act and the regulations thereunder, any person engaged in a distribution of the Shares offered by this Prospectus may not simultaneously engage in market making activities with respect to the Common Stock of the Company during the applicable "cooling off" periods prior to the commencement of such distribution. In addition, and without limiting the foregoing, the Selling Shareholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Regulation M, which provisions may limit the timing of purchases and sales of Common Stock by the Selling Shareholders. Selling Shareholders may also use Rule 144 under the Act to sell the Shares if they meet the criteria and conform to the requirements of such Rule. DESCRIPTION OF SECURITIES The authorized capital stock of the Company consists of ten million Shares of Common Stock, no par value. The Company's Transfer Agent is Oxford Transfer & Registrar, 317 S.W. Alder, Suite 1120, Portland, Oregon, 97204. The following summary of the material terms of the Company's securities does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Company's Articles of Incorporation and Bylaws, which are included as exhibits to the Registration Statement of which this Prospectus is a part, and the provisions of applicable law. COMMON STOCK As of the date of this Prospectus, there are 3,306,500 Shares of Common Stock outstanding, and after completion of this Offering, 3,556,500 Shares of Common Stock will be issued and outstanding if the minimum amount hereunder is sold and 3,806,500 Shares of Common Stock if the maximum amount hereunder is sold (without giving effect to the exercise of any warrants). Holders of Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. At all elections of directors of the Company, each holder of stock possessing voting power is entitled to as many votes as equal to the number of his or her shares of stock multiplied by the number of directors to be elected, and he or she may cast all of such votes for a single director or may distribute them among the number to be voted for or any two or more of them, as he or she may see fit (cumulative voting). Subject to preferences that may be applicable to any then outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any then outstanding Preferred Stock. Holders of Common Stock have no right to convert their Common Stock into any other securities. The Common Stock has no preemptive or other subscription rights. There are no redemption or sinking fund provisions applicable to the Common Stock. All outstanding Shares of Common Stock are, and the 34 41 Common Stock to be outstanding upon completion of this Offering will be, duly authorized, validly issued, fully paid and nonassessable. WARRANTS As of the date of this Prospectus, there are 500,000 warrants outstanding (the "Private Placement Warrants"). These warrants were issued by the Company to private individuals in connection with the Company's Private Placement Bridge Financing commenced on April 4, 1997. The Private Placement Warrants are each exercisable for one share of Common Stock of the Company at $0.80 per share. The term of the Private Placement Warrants is five years from the date of issuance. The Company is also offering hereunder, a minimum of 250,000 warrants and a maximum of 500,000 warrants (the "Warrants"). The Warrants are each exercisable for one share of Common Stock of the Company at $6.00 per share, subject to adjustment. The term of the Warrants is five years from the Effective Date. The exercise price of the Warrants and the number of Shares of Common Stock or other securities and property issuable upon exercise of the Warrants are subject to adjustment in certain circumstances, including stock splits, stock dividends, subdivisions, combinations, reclassification or issuances of stock at a price lower than the current market price. Additionally, an adjustment will be made upon the sale of all or substantially all of the assets of the Company in order to enable the holders of the Warrants 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 the Warrants. The Warrants do not confer upon the holder any voting or any other rights of a shareholder of the Company. Upon notice to the holders of the Warrants, the Company has the right to reduce the exercise or extend the expiration date of the Warrants. Warrants may be exercised upon surrender of the Warrant certificate evidencing those Warrants on or prior to the expiration date (or earlier redemption date) of the Warrants to American Stock Transfer & Trust Company as warrant agent (the "Warrant Agent"), with the form of "Election to Purchase" on the reverse side of the Warrant certificate completed and executed as indicated, accompanied by payment of the full exercise price (in United States funds, by cash or certified bank check payable to the order of the Warrant Agent) for the number of Warrants being exercised. No fractional shares will be issued upon exercise of the Warrants. However, if a holder of a Warrant exercises all Warrants then owned of record by him, the Company will pay to that holder in lieu of the issuance of any fractional share which would otherwise be issuable, an amount in cash based on the market value of the Common Stock on the last trading day prior to the exercise date. No Warrant will be exercisable unless at the time of exercise the Company has filed with the Commission a current prospectus covering the issuance of Shares of Common Stock issuable upon exercise of the Warrants and the issuance of shares has been registered or qualified or is deemed to be exempt from registration or qualification under the securities laws of the state of residence of the holder of the Warrant. The Company has undertaken to use its best efforts to maintain a current prospectus relating to the issuance of Shares of Common Stock upon the exercise of the Warrants until the expiration of the Warrants, subject to the terms of the Warrant Agreement. While it is the Company's intention to maintain a current prospectus, there is no assurance that it will be able to do so. The Warrants are redeemable, in whole or in part, by the Company at a price of $0.10 per Warrant, commencing 12 months from the Effective Date (except the Warrants may be redeemed earlier with the Underwriter's express written consent), and prior to their expiration, provided that: (i) prior written notice of not less than 30 days is given to the holders of the Warrants ("Warrantholders"); and (ii) the closing bid price of the Company's Common Stock for the 20 consecutive trading days ending on the third day prior to the date on which the notice of redemption is given, 35 42 shall have exceeded $7.50 per share. The Warrantholders shall have exercise rights until the close of business, the day preceding the date fixed for redemption. If the Minimum Offering is sold, the Company will have a total of 750,000 warrants outstanding. If the Maximum Offering is sold, the Company will have a total of 1,000,000 warrants outstanding. Additionally, the Company has agreed to issue to the Underwriter, upon the closing of this offering, Underwriter's Warrants exercisable to purchase up to 50,000 Shares of Common Stock at $8.15 per share and/or 50,000 Warrants at an exercise price of $8.30 per Share and $0.14 per Warrant. The Company has agreed with certain state securities regulators that it will not grant options and warrants in excess of 10% of the shares outstanding at the conclusion of the Offering and that the exercise price will not be less than 85% of the initial public offering price on the date of grant, except for options issued to employees which meet the requirements of Section 424(b) of the Internal Revenue Code (as amended) pursuant to the Company's Incentive and Statutory Stock Option Plan. See "Employment and Related Agreements-- Incentive and Nonstatutory Stock Option Plan" for a complete description of the Company's Stock Option Plan. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have outstanding 3,556,500 shares of Common Stock if the Minimum Offering is sold hereunder and 3,806,500 shares if the Maximum Offering is sold (without giving effect to the exercise of any warrants). All shares acquired in this Offering, other than shares that may be acquired by "affiliates" of the Company as defined by Rule 144 under the Act, will be freely transferable without restriction or further registration under the Act. All of the 3,306,500 shares outstanding prior to this offering were shares issued by the Company and sold by the Company in private transactions in reliance on an exemption from registration. Accordingly, such shares are "restricted shares" within the meaning of Rule 144 and cannot be resold without registration, except in reliance on Rule 144 or another applicable exemption from registration. All directors, officers, and holders of any securities of the Company prior to the Offering have agreed not to sell any Shares of Common Stock, including Shares of Common Stock issuable upon exercise of options, warrants, or any convertible securities of the Company, for a period of 12 months after the final Closing Date without the prior written consent of the Underwriter. In general, under Rule 144 as currently in effect, a person (or persons whose shares are required to be aggregated), including any affiliate of the Company, who beneficially owns "restricted shares" for a period of at least one year is entitled to sell within any three-month period, shares equal in number to the greater of (i) 1% of the then outstanding Shares of Common Stock, or (ii) the average weekly trading volume of the Common Stock during the four calendar weeks preceding the filing of the required notice of sale with the Commission. The seller also must comply with the notice and manner of sale requirements of Rule 144, and there must be current public information available about the Company. In addition, any person (or persons whose shares are aggregated) who is not, at the time of the sale, nor during the preceding three months, an affiliate of the Company, and who has beneficially owned restricted shares for at least two years, can sell such shares under Rule 144 without regard to notice, manner of sale, public information or the volume limitations described above. The Private Placement Stock and the shares underlying the Private Placement Warrants are being registered herein. Therefore, 506,500 shares of Common Stock and 500,000 shares of Common Stock issuable upon exercise of warrants will be freely tradeable upon the effective date hereof. 36 43 UNDERWRITING Platinum Equities, Inc. (the "Underwriter") has agreed, subject to the terms and conditions contained in the Underwriting Agreement, to act as the exclusive agent for the Company to sell the Securities on a "best efforts 250,000 Shares of Common Stock and 250,000 Warrants minimum ('Minimum Offering'), 500,000 Shares of Common Stock and 500,000 Warrants maximum ('Maximum Offering')" basis. The Underwriter has made no commitment to purchase any or all of the Shares of Common Stock or Warrants. It has agreed only to use its best efforts to find purchasers for the Shares of Common Stock and Warrants within a period of 180 days from the date of this Prospectus. All proceeds from subscriptions will be deposited promptly in a non-interest bearing account with American Stock Transfer & Trust Company as escrow agent (the "Escrow Agent"), pursuant to an escrow agreement between the Company, the Underwriter, and the Escrow Agent. Funds will be transmitted to the Escrow Agent for deposit in the escrow account no later than noon of the business day following receipt. All checks must be made payable to "American Stock Transfer & Trust Company, Escrow Agent -- Luminex Lighting, Inc." In the event the Minimum Offering is not sold within the 180 day offering period , funds will be refunded promptly to subscribers in full without deduction therefrom or interest thereon. During the 180 day offering period and any extension, no subscriber will be entitled to a refund of any subscription, and no funds will be released from escrow until the Minimum Offering is sold, or the termination of the Offering. There are none, nor will there be, any arrangements between the Company and the Underwriter whereby Shares of Common Stock or Warrants will be reserved to persons associated or affiliated with management of the Company or its affiliated persons, although such persons may purchase Shares of Common Stock or Warrants in order to insure that the Minimum Offering is sold. Any purchases made by any persons affiliated with the Company for the explicit purpose of meeting the minimum contingency must be made for investment purposes only, and not with a view toward redistribution. The Underwriter has advised the Company that it proposes to offer the Securities to the public at the public offering price set forth on the cover page of this Prospectus and that it may allow to certain dealers who are members of the National Association of Securities Dealers, Inc. ("NASD") concessions not in excess of $0.25 per Share of Common Stock and $0.005 per Warrant. The Underwriter is to receive cash commission of 10% of the gross offering. In addition, the Company has agreed to pay to the Underwriter a non-accountable expense allowance of 3% of the gross proceeds of this Offering. The Company has also agreed to pay all expenses in connection with qualifying the Common Stock and Warrants offered hereby for sale under the laws of such states as the Underwriter may designate, including expenses of counsel retained for such purpose by the Underwriter. The Company has agreed to sell to the Underwriter for $10, upon the closing of this Offering, Underwriter's Warrants exercisable to purchase up to 50,000 Shares of Common Stock for $8.15 per Share and/or 50,000 Warrants at an exercise price of $8.30 per Share of Common Stock at a purchase price of $0.14 per Warrant. This means that, for every ten Shares sold, the Underwriter is entitled to one Warrant to purchase one Share of Common Stock of the Company at an exercise price of $8.15. For every ten Warrants sold, the Underwriter is entitled to one Warrant to purchase one Warrant of the Company at an exercise price of $0.14; this Warrant is exercisable at $8.30 for one Share of Common Stock. The Underwriter's Warrants may not be sold, transferred, assigned, or hypothecated for one year from the date of this Prospectus, except to the officers or partners of the Underwriter and members of the selling group, and are exercisable during the four-year period commencing one year from the Effective Date (the "Warrant Exercise Term"). During the Warrant Exercise Term, the holders of the Underwriter's Warrants are given, at nominal cost, the opportunity to profit from a rise in the market price of the Common Stock. To the extent that the Underwriter's Warrants are exercised, dilution to the interests of the Company's shareholders will occur. Further, the terms upon which the Company will be able to obtain additional equity capital may be adversely affected since the holders of the Underwriter's Warrants can be expected to exercise them at a time when the Company would, in all likelihood, be able to obtain any needed capital on terms more favorable to the Company than those provided in the Underwriter's Warrants. Any profit realized by the Underwriter on the sale of the Underwriter's Warrants may be 37 44 deemed additional underwriting compensation. Subject to certain limitations and exclusions, the Company has agreed, at the request of the holders of a majority of the Underwriter's Warrants to register the Underwriter's Warrants, the underlying Shares of Common Stock and the underlying Warrants under the Act on two occasions (one at the Company's expense and one at the holder's expense) during the Warrant Exercise Term and to include such Underwriter's Warrants, the underlying Shares of Common Stock and the underlying Warrants in any appropriate registration statement which is filed by the Company during the five years following the date of this Prospectus. Additionally, the Underwriter has been engaged as the Company's warrant solicitation agent, and pursuant thereto may participate in the solicitation of the exercise of the Warrants. Upon the exercise of the Warrants, commencing one year from the Effective Date, the Company will pay the Underwriter a commission of 7% of the aggregate exercise price of the Warrants exercised. In accordance with the NASD Notice to Members 92-98, no fee shall be paid: (i) upon the exercise of warrants where the market price of the underlying Common Stock is lower than the exercise price; (ii) upon the exercise of any Warrants not solicited by the Underwriter; (iii) for the exercise of Warrants held in any discretionary account; or (iv) upon the exercise of Warrants where disclosure of compensation arrangements has not been made and documents have not been provided to customers both as part of the original offering and at the time of exercise. Further, the exercise of any Warrant shall be presumed unsolicited unless the holder of such Warrant states in writing that the transaction was solicited by the Underwriter. Notwithstanding the foregoing, no fees will be paid to the Underwriter or any other NASD members upon exercise of the Warrants within the first twelve months from the Effective Date. The Company has agreed that it will not issue, sell, or agree to issue or sell any other securities (except the shares of Common Stock underlying the Warrants being offered and sold by the Selling Shareholders, the Underwriter's Warrants, or the Company's Stock Option Plan) for a period of 18 months from the Final Closing Date without the prior written consent of the Underwriter. All of the directors, officers, and holders of any securities of the Company prior to the offering have agreed not to sell any shares of Common Stock, including Shares of Common Stock issuable upon exercise of options, Warrants, or any convertible securities of the Company, for a period of 12 months from the Final Closing Date without the prior written consent of the Underwriter. During the three-year period from the Final Closing Date, the Underwriter shall have a right of first refusal to act as underwriter or agent of any and all public or private offerings of securities of the Company by the Company or any secondary offering of the Company's securities by one of its officers, directors, or principal shareholders. Although the Underwriting Agreement will provide that, for a period of three years from the Initial Closing Date, the Underwriter may designate for election one person to the Company's Board of Directors, the Underwriter has advised the Company that it has not selected such individual and has no immediate plans to do so. If the Underwriter elects not to assert such right, then it may designate one person to attend all Board of Directors meetings as an observer. In the event that such an individual is designated, such individual shall receive reimbursement of expenses for attending the meetings of the Board of Directors. The Company has agreed to indemnify the Underwriter against certain civil liabilities, including liabilities under the Act. To the extent this section may purport to provide exculpation from possible liabilities arising under the Federal securities laws, it is the opinion of the Commission that such indemnification is against public policy and is therefore unenforceable. This section contains the material terms of the Underwriting Agreement and the Underwriter's Warrants. Potential investors may also review the complete Underwriting Agreement and Underwriter's Warrants which are filed as exhibits to the Registration Statement of which this Prospectus forms a part. These documents can be found at the SEC's web site at www.sec.gov in the Edgar database or copies may be requested from the Underwriter. 38 45 The Underwriter has little experience in underwriting public offerings. This Offering is the second public offering being underwritten by the Underwriter. Prospective purchasers of the Securities offered hereby should consider the Underwriter's lack of experience in being a manager of an underwritten public offering. The Underwriter has informed the Company that it does not expect sales to be made to discretionary accounts to exceed 1% of the Securities offered hereby. Prior to this Offering, there has been no public market for the Common Stock or the Warrants. Accordingly, the Offering and exercise price of such Securities being offered hereby was determined, in large part, by negotiations between the Company and the Underwriters on an arbitrary basis and bear no direct relationship to the assets, earnings, or other recognized criterion of value. Factors considered in determining such prices, in addition to prevailing market conditions, include the history and business prospects of the Company, as well as such other factors as were deemed relevant, including an evaluation of management and the general economic climate. The prices should in no event, however, be regarded as an indication of any future market price of the Common Stock or the Warrants. Pursuant to agreement with the NASD, the Underwriter, Platinum Equities, Inc., is not authorized to make markets in securities. The predecessor owner of the Underwriter did not want to make markets and requested permission from the NASD not to make markets. The Underwriter has now requested permission from the NASD to have market making capabilities, but must go through the NASD process of amending the Underwriter's agreement with the NASD which can take many months. Therefore, the Underwriter does not anticipate that it will have the ability to make a market in the securities of the Company or any other securities in the near future. Further, the Underwriter's ability to make markets is within the discretion of the NASD and the NASD may not allow the Underwriter to make markets at all. The Underwriter's inability to make such a market may materially affect the liquidity of the Securities offered hereby, which could make it more difficult for investors in this Offering to purchase or sell their Securities. The Underwriter, however, may execute buy and sell orders for its customers in the Common Stock and Warrants offered hereby on an agency basis. See "Risk Factors -- Underwriter Will Not Make a Market in the Company's Securities." LEGAL MATTERS The validity of the securities offered hereby will be passed upon for the Company by Horwitz & Beam, Irvine, California. Certain legal matters in connection with this Offering will be passed upon for the Underwriters by Gusrae, Kaplan & Bruno. Horwitz & Beam, Inc., a California corporation, is the owner of 5,000 shares of Private Placement Stock and 25,000 Private Placement Warrants which are being registered for resale herein along with the securities held by all of the Selling Shareholders (see "Selling Shareholders"). Horwitz & Beam, Inc. acquired such securities in the Private Placement as an investor on April 28, 1997 pursuant to a subscription agreement and the payment of $5,000. EXPERTS The Financial Statements of the Company included herein and elsewhere in the registration statement, have been included herein and in the registration statement in reliance on the report of Stonefield Josephson, Inc., Certified Public Accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company is not presently subject to the reporting requirements of the Securities Exchange Act of 1934. The Company has filed with the Commission a Registration Statement on Form SB-2 (together with all amendments and exhibits thereto, the "Registration Statement") under the Securities Act of 1933, as amended (the "Act") with respect to the Securities offered hereby. This Prospectus, which constitutes a part of the Registration Statement, omits certain information contained in the Registration Statement on file with the Commission pursuant to the Act and the rules and regulations of the Commission thereunder. The Registration Statement, including the exhibits thereto, may be inspected 39 46 and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Copies of such material may be obtained by mail at prescribed rates from the Public Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Statements contained in this Prospectus as to the contents 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. 40 47 LUMINEX LIGHTING, INC. FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997 AND 1996 CONTENTS
Page ---- INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS: Balance Sheets 2 Statements of Income (Operations) 3 Statements of Stockholders' Equity (Deficiency) 4 Statements of Cash Flows 5-6 Notes to Financial Statements 7-15
48 [STONEFIELD JOSEPHSON, INC. LETTERHEAD] INDEPENDENT AUDITORS' REPORT Board of Directors Luminex Lighting, Inc. Chino, California We have audited the accompanying balance sheets of Luminex Lighting, Inc. as of December 31, 1997 and 1996, and the related statements of income (operations), stockholders' equity (deficiency) and cash flows for the years 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. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Luminex Lighting, Inc. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for the years then ended, in conformity with generally accepted accounting principles. [SIG] CERTIFIED PUBLIC ACCOUNTANTS Santa Monica, California March 10, 1998 1 49 LUMINEX LIGHTING, INC. BALANCE SHEETS
Six months ended Year ended March 31, December 31, ASSETS 1998 1997 1996 ----------- ----------- ----------- (Unaudited) CURRENT ASSETS: Cash $ 32,828 $ 89,264 $ 665 Cash - restricted 21,800 17,000 -- Accounts receivable, net of allowance for bad debts of $11,900 and $10,000, respectively 568,234 389,137 958,584 Prepaid expenses 10,852 6,606 -- Inventory 928,018 1,217,788 445,893 Due from stockholder -- -- 16,950 ----------- ----------- ----------- Total current assets 1,561,732 1,719,795 1,422,092 ----------- ----------- ----------- PROPERTY AND EQUIPMENT, net of accumulated depreciation and amortization 302,043 274,747 174,039 ----------- ----------- ----------- OTHER ASSETS: Deferred offering costs 69,854 57,158 -- Deposits 31,624 17,768 10,118 Other 13,714 16,253 6,116 ----------- ----------- ----------- Total other assets 115,192 91,179 16,234 ----------- ----------- ----------- $ 1,978,967 $ 2,085,721 $ 1,612,365 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) CURRENT LIABILITIES: Lines of credit $ 519,801 $ 301,199 $ 790,219 Accounts payable and accrued expenses 1,228,532 1,321,719 880,524 Loans payable, stockholder -- 6,272 11,517 Current maturities of long-term debt 57,030 55,767 21,192 Current portion of obligations under capital leases 17,405 15,199 7,461 ----------- ----------- ----------- Total current liabilities 1,822,768 1,700,156 1,710,913 ----------- ----------- ----------- NOTES PAYABLE 74,661 102,761 29,077 ----------- ----------- ----------- CAPITAL LEASES 8,839 15,896 18,564 ----------- ----------- ----------- STOCKHOLDERS' EQUITY (DEFICIENCY): Common stock, no par value; 10,000,000 shares authorized, 3,326,500 and 2,800,000 shares issued and outstanding at December 31, 1997 and 1996, respectively 417,172 427,172 163,922 Additional paid-in capital 26,750 26,750 -- Accumulated deficit (371,223) (187,014) (310,111) ----------- ----------- ----------- Total stockholders' equity (deficiency) 72,699 266,908 (146,189) ----------- ----------- ----------- $ 1,978,967 $ 2,085,721 $ 1,612,365 =========== =========== ===========
See accompanying independent auditors' report and notes to financial statements. 2 50 LUMINEX LIGHTING, INC. STATEMENTS OF INCOME (OPERATIONS)
Six months ended Six months ended Year ended Year ended June 30, 1998 June 30, 1997 December 31, 1997 December 31, 1996 -------------------- --------------------- -------------------- -------------------- Amount Percent Amount Percent Amount Percent Amount Percent ----------- ------- ----------- ------- ----------- ------- ----------- ------- (Unaudited) (Unaudited) ----------- ----------- NET SALES $ 3,337,412 100.0% $ 2,943,158 100.0% $ 5,852,969 100.0% $ 3,056,532 100.0% COST OF SALES 2,874,274 86.1 2,440,076 82.9 4,601,497 78.6 2,584,668 84.6 ----------- ----- ----------- ----- ----------- ----- ----------- ----- GROSS PROFIT 463,138 13.9 503,082 17.1 1,251,472 21.4 471,864 15.4 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 588,482 17.6 312,313 10.6 991,164 16.9 488,491 16.0 INTEREST EXPENSE 58,065 1.7 65,050 2.2 136,411 2.3 95,769 3.1 ----------- ----- ----------- ----- ----------- ----- ----------- ----- NET INCOME (LOSS) BEFORE INCOME TAXES (183,409) (5.5) 125,719 4.3 123,897 2.2 (112,396) (3.7) PROVISION FOR INCOME TAXES 800 800 800 800 ----------- ----- ----------- ----- ----------- ----- ----------- ----- NET INCOME (LOSS) $ (184,209) (5.5)% $ 124,919 4.3% $ 123,097 2.2% $ (113,196) (3.7)% =========== ===== =========== ===== =========== ===== =========== ===== NET INCOME (LOSS) PER SHARE: Basic $ (.06) $ .04 $ .04 $ (.04) =========== =========== =========== =========== Diluted $ (.05) $ .03 $ .03 $ (.03) =========== =========== =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 3,306,500 3,326,500 3,326,500 3,326,500 =========== =========== =========== =========== Diluted 3,806,500 3,826,500 3,826,500 3,826,500 =========== =========== =========== ===========
See accompanying independent auditors' report and notes to financial statements. 3 51 LUMINEX LIGHTING, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
Total Additional stockholders' Common stock paid-in equity Shares Amount capital Deficiency (deficiency) ----------- ----------- ----------- ----------- ----------- Balance at January 1, 1996 2,800,000 $ 163,922 $ $ (196,915) $ (32,993) Net loss (113,196) (113,196) ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1996 2,800,000 163,922 (310,111) (146,189) Issuance of common stock through private offering 526,500 263,250 26,750 290,000 Net income 123,097 123,097 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1997 3,326,500 427,172 26,750 (187,014) 266,908 Redemption of common stock issued through private offering (20,000) (10,000) (10,000) Net loss for the six months ended June 30, 1998 (unaudited) (184,209) (184,209) ----------- ----------- ----------- ----------- ----------- Balance at June 30, 1998 $ 3,306,500 $ 417,172 $ 26,750 $ (371,223) $ 72,699 =========== =========== =========== =========== ===========
See accompanying independent auditors' report and notes to financial statements. 4 52 LUMINEX LIGHTING, INC. STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Three months ended March 31, Years ended December 31, 1998 1997 1997 1996 --------- --------- --------- --------- (Unaudited) (Unaudited) CASH FLOWS PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Net income (loss) $(184,209) $ 124,919 $ 123,097 $(113,196) --------- --------- --------- --------- ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES: Depreciation and amortization 19,164 5,000 46,269 16,894 Allowance for bad debt -- -- 1,900 -- CHANGES IN ASSETS AND LIABILITIES: (INCREASE) DECREASE IN ASSETS: Accounts receivable (179,098) (118,572) 570,045 (889,097) Prepaid expenses (4,246) (19,078) (6,606) -- Inventory 289,770 (211,876) (771,894) (338,556) Deposits (13,856) -- (7,651) (3,918) Other assets 2,539 (10,892) (10,425) 759 INCREASE (DECREASE) IN LIABILITIES - accounts payable and accrued expenses (205,650) (74,806) 483,797 702,049 --------- --------- --------- --------- Total adjustments (91,377) (193,080) 305,435 (511,869) --------- --------- --------- --------- Net cash provided by (used for) operating activities (275,586) (68,161) 428,532 (625,065) --------- --------- --------- --------- CASH FLOWS USED FOR INVESTING ACTIVITIES - purchase of property, plant and equipment (46,460) (40,241) (136,697) (106,359) --------- --------- --------- --------- CASH FLOWS PROVIDED BY (USED FOR) FINANCING ACTIVITIES: Proceeds (payments) on line of credit 218,602 (3,685) (489,020) 716,101 Principal (payments) proceeds on loan payable, stockholder (6,272) (3,813) (5,245) 11,517 Proceeds from note payable -- -- 166,082 -- Principal payments proceeds on notes payable (26,837) (4,756) (57,822) 2,749 Principal payments on lease obligations (4,850) (3,549) 5,069 (6,645) (Redemption) issuance of common stock in private offering (10,000) 290,000 290,000 -- Deferred offering costs (12,696) (40,000) (57,158) -- Loan fees -- -- (12,450) -- Decrease (increase) in due from stockholder -- (4,185) 16,950 (16,950) --------- --------- --------- --------- Net cash provided by (used for) financing activities 157,947 230,012 (143,594) 706,772 --------- --------- --------- --------- NET INCREASE (DECREASE) IN CASH (164,099) 121,610 148,241 (24,652) CASH, beginning of year 106,264 (41,977) (41,977) (17,325) --------- --------- --------- --------- CASH, end of year $ (57,835) $ 79,633 $ 106,264 $ (41,977) ========= ========= ========= =========
See accompanying independent auditors' report and notes to financial statements. 5 53 LUMINEX LIGHTING, INC. STATEMENTS OF CASH FLOWS (CONTINUED) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Six months ended June 30, Years ended December 31, ---------------------------- ------------------------ 1998 1997 1997 1996 ---- ---- ---- ---- (Unaudited) (Unaudited) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 58,065 $ 65,050 $136,411 $ 73,752 ======== ======== ======== ======== Income taxes paid $ 800 $ 800 $ 800 $ 800 ======== ======== ======== ======== SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Capital lease obligation incurred for use of equipment -- -- $ 14,115 $ 32,670 Automobile acquired in exchange for a note payable -- -- 11,978 --
See accompanying independent auditors' report and notes to financial statements. 6 54 LUMINEX LIGHTING, INC. NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997 AND 1996 (1) GENERAL: Luminex Lighting, Inc. ("the Company") was incorporated under the laws of the State of California on January 21, 1994. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BUSINESS ACTIVITY: The Company assembles a diversified product line of energy saving fluorescent fixtures. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. FAIR VALUE: Unless otherwise indicated, the fair values of all reported assets and liabilities which represent financial instruments (none of which were held for trading purposes), approximate carrying values of such amounts. CASH: Equivalents For purposes of the statement of cash flows, cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations. Concentration The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any such losses in such accounts. NET INCOME (LOSS) PER SHARE: The Company has adopted Statement of Financial Accounting Standard No. 128, Earnings per Share ("SFAS No. 128"), which is effective for annual and interim financial statements issued for periods ending after December 15, 1997. SFAS No. 128 was issued to simplify the standards for calculating earnings per share ("EPS") previously in APB No. 15, Earnings Per Share. SFAS No. 128 replaces the presentation of primary EPS with a presentation of basic EPS. The new rules also require dual presentation of basic and diluted EPS on the face of the statement of operations. See accompanying independent auditors' report. 7 55 LUMINEX LIGHTING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1996 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: NET INCOME (LOSS) PER SHARE, CONTINUED: For the six months ended June 30, 1998, and the years ended December 31, 1997 and 1996, the per share data is based on the weighted average number of common and common equivalent shares outstanding, and are calculated in accordance with Staff Accounting Bulletin of the Securities and Exchange Commission (SAB) No. 98 whereby common stock, options or warrants to purchase common stock or other potentially dilutive instruments issued for nominal consideration must be reflected in basic and diluted per share calculations for all periods in a manner similar to a stock split, even if anti-dilutive. Accordingly, in computing basic earnings per share, nominal issuance of common stock are reflected in a manner similar to a stock split or dividend. In computing diluted earnings per share, nominal issuance of common stock and potential common stock are reflected in a manner similar to a stock split or dividend. STOCK OPTION PLANS: The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), and related interpretations in accounting for the employee stock options, rather than adopt the alternative fair value accounting provided under The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". INCOME TAXES: Deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF: On January 1, 1996, the Company adopted the provision of Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amounts of the assets exceed the fair values of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of this statement did not have a material impact on the Company's financial position, results of operations or liquidity. See accompanying independent auditors' report. 8 56 LUMINEX LIGHTING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1996 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: INVENTORY: Inventory, consisting principally of raw materials, is valued at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT: Property and equipment are stated at cost and are depreciated over their estimated useful lives, generally five to seven years, by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. For assets included as capital leases, amortization is based upon the lease term and is included with depreciation expense. REVENUE RECOGNITION: Sales of fluorescent fixtures are recorded when a shipment is made. CONCENTRATION: For the years ended December 31, 1997 and 1996, the Company's largest customer accounted for approximately 90% of total revenue for each year. Included in accounts receivable from this customer is approximately $284,000 and $860,000, for the years ended December 31, 1997 and 1996, respectively. Included in accounts payable and accrued expenses is approximately $475,000 due to two suppliers and $297,000 due to one supplier at December 31, 1997 and 1996, respectively. Total purchases amounted to approximately $2,150,000 and $840,000 for the years ended December 31, 1997 and 1996, respectively. INTERIM FINANCIAL STATEMENTS (UNAUDITED): The accompanying unaudited condensed financial statements for the interim periods ended June 30, 1998 and 1997 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Regulation SB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. (3) CASH - RESTRICTED: At December 31, 1997, $17,000 of cash was pledged as collateral for letters of credit related to inventory purchases and is classified as restricted cash on the balance sheet. There are no outstanding letters of credit at year-end. See accompanying independent auditors' report. 9 57 LUMINEX LIGHTING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1996 (4) PROPERTY AND EQUIPMENT: A summary is as follows:
December 31, 1997 December 31, 1996 ----------------- ----------------- Machinery and equipment $ 255,362 $ 173,456 Furniture and office equipment 53,176 30,808 Leasehold improvements 20,445 - Automobile 11,978 - ----------------- ----------------- 340,961 204,264 Less accumulated depreciation 66,214 30,225 ----------------- ----------------- $ 274,747 $ 174,039 ================= =================
Depreciation and amortization expense for the years ended December 31, 1997 and 1996 amounted to $46,269 and $16,894, respectively. (5) DEFERRED OFFERING COSTS: The Company is in the registration process of a proposed public offering. Deferred stock offering costs of $57,158 will be charged against the proceeds of the proposed public offering when, and if, it becomes effective. (6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES: A summary is as follows:
December 31, 1997 December 31, 1996 ----------------- ----------------- Accounts payable, trade and non-trade $ 1,161,148 $ 819,381 Accrued bonus, officer-stockholder (Note 11) 123,511 - Accrued bonus, other (Note 11) 17,000 18,501 Accrued salaries 14,037 - Accrued interest 6,023 - Bank overdraft - 42,642 ----------------- ------------------ $ 1,321,719 $ 880,524 ================= ==================
See accompanying independent auditors' report. 10 58 LUMINEX LIGHTING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1996 (7) LINES OF CREDIT: The Company has a $25,000 revolving line of credit with a bank. Interest is due monthly on the outstanding balance at a rate of 3% above the bank's reference rate. Currently, the line of credit incurs interest at the annual rate of 11.5%. $21,244 and $23,588 was drawn on the line at December 31, 1997 and 1996, respectively. The Company has a $1,000,000 maximum line of credit with a financial institution. Interest is due monthly on the outstanding balance at a rate of 4% above the reference rate. Currently, the line of credit incurs interest at the annual rate of 12.5%. The term of the line expired on February 7, 1998 (see Note 17). The line is primarily secured by the Company's accounts receivable and inventory. The financial institution will make advances on the line of 80% of eligible accounts receivable and 25% of inventory. The borrowing is personally guaranteed by the majority stockholders. $279,955 and $766,631 was drawn on the line at December 31, 1997 and 1996, respectively. The line was paid in full by the Company upon termination. (8) LONG-TERM DEBT: A summary is as follows:
December 31, 1997 December 31, 1996 ----------------- ----------------- Note payable, bank, secured by inventory and accounts receivable, monthly payments of $1,298 including interest at the bank's prime rate plus 2%. The borrowing is personally guaranteed by the majority stockholders. $ - $ 36,703 Note payable, bank, secured by inventory and accounts receivable, monthly payments of $4,946 including interest at bank's prime rate plus 2.5%, due October 15, 2000. The borrowing is personally guaranteed by the majority stockholders. 142,613 - Note payable, secured by equipment, monthly payments of $850 including interest at 24.0%, due on July 1, 1998. 5,168 13,566 Note payable, secured by automobile, monthly payments of $524 including interest at 11.8%, due on November 30, 1999. 10,747 - 158,528 50,269 Less current maturities 55,767 21,192 ------------ ------------ $ 102,761 $ 29,077 ============ ============
See accompanying independent auditors' report. 11 59 LUMINEX LIGHTING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1996 (8) LONG-TERM DEBT, CONTINUED: Aggregate principal payment requirements are as follows as of December 31, 1997:
Year ending December 31, 1998 $ 55,767 1999 56,229 2000 46,532 ---------- $ 158,528 ==========
(9) LOANS PAYABLE, STOCKHOLDER: The Company is making payments for loans drawn on personal lines of credit of a stockholder. The interest rate at December 31, 1997 was 12.57%. The balance of the lines of credit at December 31, 1997 and 1996 was $6,272 and $11,517, respectively. The funds drawn were contributed to the Company for working capital. (10) CAPITAL LEASES: Obligations under capital leases represents the present value of future net minimum lease payments under agreements with a cost of $46,786 and $32,671 and accumulated depreciation of $7,326 and $1,639 as of December 31, 1997 and 1996, respectively. Depreciation expense for these assets is included in the amounts indicated in Note 4. The following is a schedule by years of future minimum lease payments required under capital leases together with the present value of the net minimum lease payments as of December 31, 1997: Year ending December 31, 1998 $ 15,199 1999 13,768 2000 9,607 2001 1,018 --------- Total minimum lease payments 39,592 Less amounts representing interest 8,497 --------- Present value of net minimum lease payments 31,095 Less current portion 15,199 --------- $ 15,896 =========
See accompanying independent auditors' report. 12 60 LUMINEX LIGHTING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1996 (11) BONUS COMPENSATION PLANS: The Company's Board of Directors approved an Executive Salary and Bonus Compensation Plan (the "Plan") with an officer-stockholder of the Company, effective January 1, 1997. The Plan specifies that the officer-stockholder receive an annual salary of $96,000 per annum, with an annual increase of 5.0%. The Plan also specifies that a bonus equal to 3.0% of annual gross sales be paid within ninety (90) days of year end. Accordingly, approximately $123,000 has been accrued, which represents the unpaid portion at December 31, 1997 (Note 6). The Company's Board of Directors approved a Bonus Compensation Plan with an employee of the Company effective January 1, 1997. The employee shall receive bonus compensation in a range between 0.5% and 1.0% of gross annual sales. The bonus compensation shall be paid within ninety (90) days of year end. Accordingly, $17,000 has been accrued, which represents the unpaid portion at December 31, 1997 (Note 6). (12) INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN: On May 5, 1997, the Company enacted an Incentive and Nonstatutory Stock Option Plan (the "Plan") for its employees and consultants under which a maximum of 500,000 options may be granted to purchase common stock of the Company. Two types of options may be granted under the Plan: (1) Incentive Stock Options (also know as Qualified Stock Options) which may only be issued to employees of the Company and whereby the exercise price of the option is not less than the fair market value of the common stock on the date it was reserved for issuance under the Plan; and (2) Nonstatutory Stock Options which may be issued to either employees or consultants of the Company and whereby the exercise price of the option is less than the fair market value of the common stock on the date it was reserved for issuance under the plan. Grants of options may be made to employees and consultants without regard to any performance measures. All options issued pursuant to the Plan vest over an 18 month period from the date of the grant per the following schedule: 33% of the options vest on the date which is six months from the date of the grant; 33% of the options vest on the date which is 12 months from the date of the grant; and 34% of the options vest on the date which is 18 months from the date of the grant. All options issued pursuant to the Plan are nontransferable and subject to forfeiture. As of December 31, 1997, the Company had not issued any options pursuant to the Plan. (13) PRIVATE PLACEMENT: On April 4, 1997, the Company commenced a private placement (the "Private Placement") of 526,500 shares of the Company's common stock at a purchase price of $0.50 per share (the "Private Placement Stock") and 500,000 warrants, each warrant to purchase one share of the Company's common stock at an exercise price of $0.80 for a term of five years at a purchase price of $0.10 per warrant (the "Private Placement Warrants"). The Private Placement was exempt from the registration provisions of the Act by virtue of Section 4(2) of the Act, as transactions by an issuer not involving any public offering. The securities issued pursuant to the Private Placement were restricted securities as defined in Rule 144. The offering generated gross proceeds of $313,250. See accompanying independent auditors' report. 13 61 LUMINEX LIGHTING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1996 (14) INCOME TAXES: The components of the net deferred tax asset are as follows:
December 31, 1997 December 31, 1996 ----------------- ----------------- Net operating loss (carryforward) $ 65,376 $ 118,308 Valuation allowance (65,376) (118,308) ------------- ------------ Net deferred tax asset $ - $ - ============= ============
The Company has a federal net operating loss carryforward of $148,012 and $271,109 for the years ended December 31, 1997 and 1996, respectively, which will expire in 2011. The Company also has a state net operating loss carryforward of $167,246 and $290,343, for the years ended December 31, 1997 and 1996, respectively, which will expire in 2002. The provision (benefit) for income taxes consist of the following:
December 31, 1997 December 31, 1996 ----------------- ----------------- Current $ 800 $ 800 Deferred $ - $ -
(15) COMMITMENTS: The following is a schedule by years of future minimum rental payments required under operating leases that have noncancellable lease terms in excess of one year as of December 31, 1997:
Year ending December 31, 1998 $ 148,299 1999 148,299 2000 119,799 2001 1,109 ---------- $ 417,506 ==========
Rent expense amounted to $101,012 and $59,711 for the years ended December 31, 1997 and 1996, respectively. (16) CONTINGENCIES: The Company is a defendant in a civil action. The Company intends to vigorously defend this action which it considers groundless. The ultimate resolution of this matter is not ascertainable at this time. In the opinion of management, this matter will not have a material effect upon the financial position of the Company. See accompanying independent auditors' report. 14 62 LUMINEX LIGHTING, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) YEARS ENDED DECEMBER 31, 1997 AND 1996 (17) SUBSEQUENT EVENT: In February 1998, the Company obtained two promissory demand notes for principal up to $850,000 and $150,000 with First Community Financial Corporation ("FCFC"). The notes are collateralized by the Company's inventory and accounts receivable and incur interest at an annual rate of Bank One's prime rate plus 3%. The unpaid outstanding balances are due in full in February 1999 and January 2000, respectively. See accompanying independent auditors' report. 15 63 ================================================================================ NO DEALER, SALES REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE ORDINARY SHARES TO WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ------------------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary 1 Risk Factors 6 Dilution 11 Use of Proceeds 13 Dividend Policy 13 Capitalization 14 Selected Financial Data 15 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 Business of the Company 20 Management 27 Employment and Related Agreements 28 Certain Transactions 29 Principal Shareholders 30 Selling Shareholders 31 Plan of Distribution 31 Description of Securities 32 Shares Eligible for Future Sale 34 Underwriting 34 Legal Matters 37 Experts 37 Additional Information 37 Index to Financial Statements F-1
---------------------------------------- UNTIL DECEMBER 14, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE DISTRIBUTION MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. UP TO 500,000 SHARES OF COMMON STOCK AND 500,000 WARRANTS TO PURCHASE ONE SHARE OF COMMON STOCK FOR $6.00 MINIMUM OFFERING: 250,000 SHARES OF COMMON STOCK AND 250,000 WARRANTS $5.50 PER SHARE $0.10 PER WARRANT LUMINEX LIGHTING, INC. -------------- PROSPECTUS -------------- PLATINUM EQUITIES, INC. ---------------------------------- NOVEMBER 9, 1998 ================================================================================ 64 LUMINEX LIGHTING, INC. PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The California Corporation Law and the Company's Certificate of Incorporation and Bylaws authorize indemnification of a director, officer, employee or agent of the Company against expenses incurred by him or her in connection with any action, suit, or proceeding to which such person is named a party by reason of having acted or served in such capacity, except for liabilities arising from such person's own misconduct or negligence in performance of duty. In addition, even a director, officer, employee or agent of the Company who was found liable for misconduct or negligence in the performance of duty may obtain such indemnification if, in view of all the circumstances in the case, a court of competent jurisdiction determines such person is fairly and reasonably entitled to indemnification. Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers, or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that in the opinion of the Commission, such indemnification is against public policy as expressed in the Act and is therefore unenforceable. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION SEC Registration Fee $ 2,897 NASD Fee $ 1,466 Accounting Fees and Expenses $ 10,000 Legal Fees and Expenses $ 50,000 Printing Expenses $ 10,000 Blue Sky Fees and Expenses $ 35,000 Underwriters' Non-accountable Expense Allowance $ 84,000 Miscellaneous $ 637 --------- Total $ 194,000
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES On December 31, 1995, the Company issued 2,600,000 shares of its Common Stock, jointly to Wasif A. Siddiqui and Tasneem Siddiqui, in consideration of past services rendered for the Company. This transaction was exempt from the registration provisions of the Act by virtue of Section 4(2) of the Act, as transactions by an issuer not involving any public offering. The securities issued pursuant to this transaction were restricted securities as defined in Rule 144. Also on December 31, 1995, the Company issued 200,000 shares of its Common Stock to Asra Rasheed to entice Ms. Rasheed to begin working with the Company. This transaction was exempt from the registration provisions of the Act by virtue of Section 4(2) of the Act, as transactions by an issuer not involving any public offering. The securities issued pursuant to this transaction were restricted securities as defined in Rule 144. On April 4, 1997, the Company commenced a private placement (the "Private Placement") of 506,500 shares of the Company's common stock at a purchase price of $0.50 (the "Private Placement Stock") and 500,000 warrants, each warrant to purchase one share of the Company's common stock at an exercise price of $0.80 for a term of five years at a purchase price of $0.10 (the "Private Placement Warrants"). The Private Placement was exempt from the registration provisions of the Act by virtue of Section 4(2) of the Act, as transactions by an issuer not involving any public offering. The securities issued pursuant to the Private Placement were restricted securities as defined in Rule 144. II-1 65 The Private Placement Stock and the Common Stock underlying the Private Placement Warrants are being registered herein. The offering generated net proceeds of approximately $280,000. All investors in the Private Placement were accredited investors as that term is defined in Rule 501 of Regulation D adopted under the Securities Act of 1933. ITEM 27. EXHIBITS
Exhibit 1.1 Form of Underwriting Agreement 1.2 Form of Underwriter's Warrant 1.3 Selected Dealers Agreement (form)* 3.1 Articles of Incorporation of Luminex Lighting, Inc., a California corporation, dated January 21, 1994* 3.2 Amended Articles of Incorporation of Luminex Lighting, Inc., a California corporation, dated September 5, 1997* 3.3 Bylaws of Luminex Lighting, Inc., dated January 22, 1994* 3.4 Certificate of Amendment of Bylaws of Luminex Lighting, Inc., dated October 15, 1995* 4.1 Lock-Up Agreement (form)* 4.2 Specimen of Common Stock Certificate of Luminex Lighting, Inc.* 4.3 Form of Warrant Agreement and Warrant Certificate* 4.4 Subscription Agreement* 5 Opinion of Horwitz & Beam* 10.1 Lease Agreement, Chino, California, dated June 26, 1997* 10.2 Luminex Lighting, Inc. Benefit Plan, Annual Salary, and Bonus Compensation Plan for Wasif Siddiqui, dated June 30, 1996* 10.3 Luminex Lighting, Inc. Bonus Compensation Plan for Charles Boulos, dated December 15, 1996* 10.4 Luminex Lighting, Inc. 1997 Incentive and Nonstatutory Stock Option Plan, dated May 5, 1997* 10.5 Luminex Lighting, Inc. Annual Salary and Bonus Compensation Plan for Tasneem Siddiqui, dated August 19, 1997* 10.6 Lease Agreement, Milford, Massachusetts, dated November 19, 1996* 23.1 Consent of Stonefield Josephson, Inc., Certified Public Accountants 23.2 Consent of Horwitz & Beam (included in their opinion set forth in Exhibit 5 hereto)* 24 Power of Attorney (see signature page)
- ----------------- *Previously filed. ITEM 28. UNDERTAKINGS The undersigned registrant hereby undertakes to: (1) Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Company pursuant to the foregoing provisions, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (2) File, during any period in which it offers or sells securities, a post effective amendment to this registration statement to: II-2 66 (i) Include any prospectus required by section 10(a)(3) of the Act; (ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and (iii) Include any additional or changed material information on the plan of distribution. For determining liability under the Securities, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering. Supplement the prospectus if an amount between 5% and 10% of the Private Placement Securities are released from the 12 month lock-up agreement with the Underwriter and file an amendment to the registration statement if in excess of 10% of the Private Placement Securities are released from the 12 month lock-up with the Underwriter. II-3 67 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 on Form SB-2 and authorized this Registration Statement to be signed on its behalf by the undersigned, in the City of Chino, State of California on November 9, 1998. LUMINEX LIGHTING, INC. BY: /s/ WASIF SIDDIQUI ------------------------------------------ Wasif Siddiqui, President, Chief Executive Officer, Chief Financial Officer, Director POWER OF ATTORNEY Each person whose signature appears appoints Wasif Siddiqui and Tasneem Siddiqui, in the alternative, as his agents and attorneys-in-fact, with full power of substitution to execute for him and in his name, in any and all capacities, all amendments (including post-effective amendments) to this Registration Statement to which this power of attorney is attached. In accordance with the requirements of the Securities Act of 1933, this Registration Statement was signed by the following persons in the capacities and on the dates stated.
Signature Title Date --------- ----- ---- /s/ Wasif Siddiqui President, Chief Executive Officer, November 9, 1998 - ---------------------------- Wasif Siddiqui Chief Financial Officer, Principal Accounting Officer, Director /s/ Tasneem Siddiqui Executive Vice President, Secretary, Director November 9, 1998 - ---------------------------- Tasneem Siddiqui /s/ Asra Rasheed Vice President of Corporate Planning, Director November 9, 1998 - ----------------------------
Asra Rasheed II-4 68 EXHIBIT INDEX
Exhibit 1.1 Form of Underwriting Agreement 1.2 Form of Underwriter's Warrant 1.3 Selected Dealers Agreement (form)* 3.1 Articles of Incorporation of Luminex Lighting, Inc., a California corporation, dated January 21, 1994* 3.2 Amended Articles of Incorporation of Luminex Lighting, Inc., a California corporation, dated September 5, 1997* 3.3 Bylaws of Luminex Lighting, Inc., dated January 22, 1994* 3.4 Certificate of Amendment of Bylaws of Luminex Lighting, Inc., dated October 15, 1995* 4.1 Lock-Up Agreement (form)* 4.2 Specimen of Common Stock Certificate of Luminex Lighting, Inc.* 4.3 Form of Warrant Agreement and Warrant Certificate* 4.4 Subscription Agreement* 5 Opinion of Horwitz & Beam* 10.1 Lease Agreement, Chino, California, dated June 26, 1997* 10.2 Luminex Lighting, Inc. Benefit Plan, Annual Salary, and Bonus Compensation Plan for Wasif Siddiqui, dated June 30, 1996* 10.3 Luminex Lighting, Inc. Bonus Compensation Plan for Charles Boulos, dated December 15, 1996* 10.4 Luminex Lighting, Inc. 1997 Incentive and Nonstatutory Stock Option Plan, dated May 5, 1997* 10.5 Luminex Lighting, Inc. Annual Salary and Bonus Compensation Plan for Tasneem Siddiqui, dated August 19, 1997* 10.6 Lease Agreement, Milford, Massachusetts, dated November 19, 1996* 23.1 Consent of Stonefield Josephson, Inc., Certified Public Accountants 23.2 Consent of Horwitz & Beam (included in their opinion set forth in Exhibit 5 hereto)* 24 Power of Attorney (see signature page)
- ---------------------- * Previously Filed II-5 EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 UNDERWRITING AGREEMENT (FORM) 2 LUMINEX LIGHTING, INC. Up to 500,000 Shares of Common Stock and Up to 500,000 Redeemable Common Stock Purchase Warrants UNDERWRITING AGREEMENT _____________ ___, 1998 Platinum Equities, Inc. 80 Pine Street, Suite 3200 New York, New York 10005 Dear Sirs: LUMINEX LIGHTING, INC., a California corporation (the "Company") hereby confirms the agreement made with respect to the retention of Platinum Equities, Inc. (the "Underwriter") as the exclusive agent of the Company to publicly offer and sell, pursuant to the terms of this Underwriting Agreement (the "Agreement"), an aggregate of 500,000 shares ("Shares") of Common Stock, no par value per share (the "Common Stock"), and 500,000 redeemable Common Stock purchase warrants (the "Warrants," and collectively with the Common Stock, the "Securities") of the Company on a "best efforts, minimum 250,000 Shares and 250,000 Warrants ("Minimum Offering"), maximum 500,000 Shares and 500,000 Warrants ("Maximum Offering")" basis. The offering of the Securities contemplated hereby may sometimes be referred to as the "Offering." 1. Description of the Securities. (a) The Warrants. Each Warrant shall entitle the holder to purchase one share of Common Stock at an exercise price of $6.00, subject to adjustment. The Warrants are exercisable at any time during the five year-period commencing on the effective date of the Registration Statement, as defined in Paragraph 2(a) herein (the "Effective Date"), subject to prior redemption by the Company. The Shares of Common Stock issuable upon the exercise of the Warrants are hereinafter referred to as the "Warrant Shares." The Warrants will be redeemable at a price of $0.10 per Warrant, commencing twelve (12) months after the Effective Date, or earlier with the prior written consent of the Underwriter, upon at least 30 days prior written notice provided that the closing bid price of the Common Stock (or closing sales price if listed on an exchange or on a reporting system that provides last sales prices) for twenty (20) consecutive trading days ending on the third day prior to the date on which notice of redemption is given, shall exceed $7.50 per share, subject to the right of the holder to exercise his purchase rights thereunder until redemption. (b) Underwriter's Warrants. On the Closing Date, the Company will sell to the Underwriter, for $10, a warrant to purchase one share of Common Stock and one Warrant for each ten Shares of Common Stock and ten Warrants sold in this Offering (a maximum of 50,000 Shares of Common Stock and 50,000 Warrants) at a price equal to $8.15 per share of Common Stock and $.14 per Warrant (the "Warrants," and collectively with the Securities underlying the Underwriter's Warrants, the "Underwriter's Securities"). The Warrants underlying the Underwriter's Warrants shall be exercisable at a price of $8.30 per Warrant. The Underwriter's Warrants shall not be sold, transferred, assigned, pledged or hypothecated (other than to (i) officers of the Underwriter, and (ii) members of the selling group and their officers or partners) for a period of 12 months following the Effective Date. Thereafter, they 1 3 are transferable for a period of four years. If the Warrants underlying the Underwriter's Warrants are not exercised during their term, they shall, by their terms, automatically expire. The Underwriter's Securities shall be registered for sale to the public and shall be included in the Registration Statement filed in connection with the Offering. 2. Representations and Warranties of the Company. The Company hereby represents and warrants to the Underwriter that: (a) The Company has filed with the Securities and Exchange Commission (the "Commission"), a registration statement on Form SB-2 (File No. 333- 58025), including any related preliminary prospectus ("Preliminary Prospectus"), for the registration of the Securities under the Securities Act of 1933, as amended (the "Act"). The Company will file further amendments to said registration statement in the form to be delivered to you and will not, before the registration statement becomes effective, file any other amendment thereto to which you shall have objected in writing after having been furnished with a copy thereof. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement becomes effective (including the prospectus, financial statements, exhibits and all other documents filed as a part thereof or incorporated therein), is hereinafter called the "Registration Statement", and the prospectus, in the form filed with the Commission pursuant to Rule 424(b) of the General Rules and Regulations of the Commission under the Act (the "Rules and Regulations") or, if no such filing is made, the definitive prospectus used in the Offering, is hereinafter called the "Prospectus". The Company has delivered to you copies of each Preliminary Prospectus as filed with the Commission and has consented to the use of such copies for purposes permitted by the Act. (b) The Commission has not issued any orders preventing or suspending the use of any Preliminary Prospectus, and each Preliminary Prospectus has conformed in all material respects with the requirements of the Act and has not included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, subject to the provisions set forth below and except as such untrue statement or omission has been cured in the a subsequent preliminary prospectus or in the final prospectus. (c) When the Registration Statement becomes effective under the Act and at all times subsequent thereto including each of the Closing Dates (hereinafter defined) and for such longer periods as in the opinion of counsel for the Underwriter, a Prospectus is required to be delivered in connection with the sale of the Securities by the Underwriter, the Registration Statement and Prospectus, and any amendment thereof or supplement thereto, will contain all material statements which are required to be stated therein in accordance with the Act and the Regulations, and will in all material respects conform to the requirements of the Act and the Regulations, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty does not apply to statements or omissions made in reliance upon and in conformity with written information furnished to the Company by you, for use in connection with the preparation of the Registration Statement or Prospectus, or in any amendment thereof or supplement thereto. It is understood that (i) the statements set forth under the heading "Underwriting" in the Prospectus with respect to the amounts of the selling concession; (ii) the information in the Risk Factor entitled "Inexperienced Underwriter;" (iii) the identity of counsel to the Underwriter under the heading "Legal Matters"; and (iv) the information concerning the NASD affiliation of the Underwriter constitute for purposes of this Section the only information furnished in writing by or on behalf of the Underwriter for inclusion in the Registration Statement and Prospectus, as the case may be. (d) The Company is, and at each Closing Date will be, a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation. The Company is, and at each Closing Date will be, duly qualified or 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, except those jurisdictions in which the failure to so qualify would not have a material adverse effect. The Company has 2 4 all requisite corporate powers and authority, and, except as set forth in the Registration Statement, the Company and its employees have all material and necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies to own or lease its properties and conduct its businesses as described in the Prospectus, and the Company is doing business and has been doing business during the period described in the Registration Statement in compliance with all such material authorizations, approvals, orders, licenses, certificates and permits and all material federal, state and local laws, rules and regulations concerning the businesses in which the Company is engaged. The disclosures in the Registration Statement concerning the effects of federal, state and local regulation 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. The Company has all corporate power and authority to enter into this Agreement and carry out the provisions and conditions hereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained or will have been obtained prior to the dates of each of the closings (the "Closing Dates") of the Offering. (e) This Agreement has been duly and validly authorized and executed by the Company. The Securities (including the Common Stock and the Warrants), the Warrant Shares, the Underwriter's Warrants to be issued and sold by the Company pursuant to this Agreement, the Securities issuable upon exercise of the Underwriter's Warrants and payment therefor, and the Common Stock and Warrant Shares underlying such Underwriter's Warrants, have been duly authorized (and, in the case of the Common Stock and the Warrant Shares, have been duly reserved for issuance) and, when issued and paid for in accordance with this Agreement (and, in the case of the Warrant Shares, upon exercise of the Warrants and payment to the Company of the exercise price therefor), the Common Stock and Warrant Shares will be validly issued, fully paid and non-assessable; the Common Stock, Warrants, Warrant Shares, Underwriter's Warrants and Underwriter's Warrant Shares are not and will not be subject to the preemptive rights of any shareholder of the Company and conform and at all times up to and including their issuance will conform in all material respects to all statements with regard thereto contained in the Registration Statement and Prospectus; and all corporate action required to be taken for the authorization, issuance and sale of the Common Stock, Warrants, Warrant Shares and Underwriter's Warrants has been taken, and this Agreement constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms, to issue and sell, upon exercise in accordance with the terms thereof, the number and kind of securities called for thereby. (f) The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof will not result in a breach or violation of any of the terms or provisions of, or constitute a default under, the Articles of Incorporation, as amended, or Bylaws of the Company or of any evidence of indebtedness, lease, contract or other agreement or instrument to which the Company is a party or by which the Company or any of its respective properties is bound, or under any applicable law, rule, regulation, judgment, order or decree of any government, professional advisory body, administrative agency or court, domestic or foreign, having jurisdiction over the Company or any of its respective properties, or result in the creation or imposition of any lien, charge or encumbrance upon any of the properties or assets of the Company; and no consent, approval, authorization or order of any court or governmental or other regulatory agency or body is required for the consummation by the Company of the transactions on its part herein contemplated, except such as may be required under the Act or under state securities or blue sky laws, except where a breach, violation or failure to obtain such consent would not have a material adverse effect upon the business or operation of the Company. (g) Subsequent to the date hereof, and prior to the Closing Dates the Company will not issue or acquire any equity securities except that the Company may make short-term investments as contemplated in the "Use of Proceeds" section of the Prospectus. Except as described in the Registration Statement, the Company does not have, and at the Closing Dates will not have, outstanding any options to purchase or rights or warrants to subscribe for, or any securities or obligations convertible into or exchangeable for, or any contracts or commitments to issue or sell shares of its Preferred Stock, Common Stock or any such options, warrants, convertible securities or obligations. (h) The financial statements and notes thereto included in the Registration Statement and the Prospectus fairly present the financial position and the results of operations of the Company at the respective dates and 3 5 for the respective periods to which they apply; and such financial statements have been prepared in conformity with generally accepted accounting principles, consistently applied throughout the periods involved. (i) Except as set forth in the Registration Statement, the Company is not at the Closing Dates nor will be, in violation or breach of, or default in, the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company is a party or by which the Company may be bound or to which any of the property or assets of the Company is subject, which violations, breaches, default or defaults, singularly or in the aggregate, would have a material adverse effect on the Company. The Company has not and will not have taken any action in material violation of the provisions of the Articles of Incorporation, as amended, or the Bylaws of the Company or any statute or any order, rule or regulation of any court or regulatory authority or governmental body having jurisdiction over or application to the Company, its business or properties. (j) The Company has, and at the Closing Dates will have, good and marketable title to all properties and assets described in the Prospectus as owned by it, free and clear of all liens, charges, encumbrances, claims, security interests, restrictions and defects of any material nature whatsoever, except such as are described or referred to in the Prospectus and liens for taxes not yet due and payable. All of the material leases and subleases under which the Company is the lessor or sublessor of properties or assets or under which the Company holds properties or assets as lessee as described in the Prospectus are, and will on the Closing Dates be, in full force and effect, and except as described in the Prospectus, the Company is not and will not be in default in respect to any of the terms or provisions of any of such leases or subleases (which would have a material adverse effect on the business, business prospects or operations of the Company), and no claim has been asserted by anyone adverse to rights of the Company as lessor, sublessor, lessee or sublessee under any of the leases or subleases mentioned above, or affecting or questioning the right of the Company to continue possession of the leased or subleased premises or assets under any such lease or sublease except as described or referred to in the Prospectus, and the Company owns or leases all such properties as are necessary to its operations as now conducted and, except as otherwise stated in the Prospectus, as proposed to be conducted set forth in the Prospectus (which would have a material adverse effect on the business, business prospects or operations of the Company). (k) The authorized, issued and outstanding capital stock of the Company as of December 31, 1997 and as of the date of the Prospectus is as set forth in the Prospectus under "Capitalization"; the shares of issued and outstanding capital stock of the Company set forth thereunder have been duly authorized, validly issued and are fully paid and non-assessable; except as set forth in the Prospectus, no options, warrants or other rights to purchase, agreements or other obligations to issue, or agreements or other rights to convert any obligation into, any shares of capital stock of the Company have been granted or entered into by the Company; and the Common Stock, the Warrants and all such options and warrants conform in all material respects, to all statements relating thereto contained in the Registration Statement and Prospectus. (l) Except as described in the Prospectus, the Company does not own or control any capital stock or securities of, or have any proprietary interest in, or otherwise participate in any other corporation, partnership, joint venture, firm, association or business organization; provided, however, that this provision shall not be applicable to the investment, if any, of the net proceeds from the sale of the Securities sold by the Company in certificates of deposits, savings deposits, short-term obligations of the United States Government, money market instruments or other short-term investments. (m) Stonefield Josephson, Inc., who have given their reports on certain financial statements filed and to be filed with the Commission as a part of the Registration Statement, which are incorporated in the Prospectus, are with respect to the Company, independent public accountants as required by the Act and the Rules and Regulations. (n) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as may otherwise be indicated or contemplated herein or therein, the Company 4 6 has not (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) entered into any transaction other than in the ordinary course of business; or (iii) declared or paid any dividend or made any other distribution on or in respect to its capital stock. (o) There is no litigation or governmental proceeding pending or to the knowledge of the Company threatened against, or involving the properties or business of the Company which might materially adversely affect the value, assets or the operation of the properties or the business of the Company, except as referred to in the Prospectus. Further, except as referred to in the Prospectus, there are no pending actions, suits or proceedings related to environmental matters or related to discrimination on the basis of age, sex, religion or race, nor is the Company charged with or, to its knowledge, under investigation with respect to any violation of any statutes or regulations of any regulatory authority having jurisdiction over its business or operations, and no labor disturbances by the employees of the Company exist or, to the knowledge of the Company, have been threatened. (p) The Company has, and at each Closing Date will have, filed all necessary federal, state and foreign income and franchise tax returns or has requested extensions thereof (except in any case where the failure to so file would not have a material adverse effect on the Company), and has paid all taxes which it believes in good faith were required to be paid by it except for any such tax that currently is being contested in good faith or as described in the Prospectus. (q) The Company maintains insurance policies including, but not limited to, general liability and property insurance, which sufficiently insures the Company and its employees against such losses and risks generally insured against by comparable businesses, and the Company (i) has not failed to give notice or present any insurance claim with respect to any matter including, but not limited to, the Company's business, property or employees, under the insurance policy or surety bond in a due and timely manner, (ii) have any disputes or claims against any underwriter of such insurance policies or surety bonds or has not failed to pay any premiums due and payable thereunder, or (iii) have failed to comply with all conditions contained in such insurance policies and surety bonds. There are no facts or circumstances under any such insurance policy or surety bond which would relieve any insurer of its obligation to satisfy in full any valid claim of the Company. (r) The Company is in compliance with the requirements of Section 13(b)(2) of the Securities Exchange Act of 1934, as amended, and all rules and regulations promulgated thereunder (the "Exchange Act") and, except as disclosed in the Prospectus, to the Company's knowledge, neither the Company, nor any of its employees, officers, directors, agents or affiliates, have made, directly or indirectly, any payment of funds of such entity or received or retained funds in violation of any law, rule or regulation, which payment, receipt or retention is of a character which is required to be disclosed in the Prospectus. (s) Neither the Company nor any of its employees, directors, stockholders, or affiliates (as defined by the Rules and Regulations) of any of the foregoing, have 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, under the Exchange Act, or otherwise, stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Common Stock or Warrants. (t) The Company has not, at any time, (i) made any contribution to any candidate for political office, or failed to disclose fully any such contribution, in violation of law, or (ii) made any payment to any state, federal, foreign governmental or professional regulatory agency, officer or official or other person charged with similar public, quasi-public or professional regulatory duties, other than payments or contributions required or allowed by applicable law. (u) Except as set forth in the Registration Statement, to the knowledge of the Company, neither the Company nor any officer, director, employee or agent of the Company has made any payment or transfer of any funds or assets of the Company or conferred any personal benefit by use of the Company's assets or received any funds, assets or personal benefit in violation of any law, rule or regulation, which is required to be stated in the Registration 5 7 Statement or necessary to make the statements therein not misleading, nor is there any business relationship, arrangement of conflict of interest between the Company and any Majority Shareholder which could have a material adverse effect upon the Company or its business.. (v) On the Closing Date all transfer or other taxes, if any (other than income tax) which are required to be paid, and are due and payable, in connection with (i) the sale and transfer of the Securities by the Company to the Underwriter; (ii) the consummation by the Company of any of its obligations hereunder; and (iii) any tax deficiency or claims outstanding, proposed or assessed against it, will have been fully paid or provided for by the Company as the case may be, and all laws imposing such taxes will have been fully complied with in all material respects. (w) There are no contracts or other documents of the Company which are of a character required to be described in the Registration Statement or Prospectus or filed as exhibits to the Registration Statement which have not been so described or filed. (x) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specified authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (3) access to assets is permitted only in accordance with management's general or specific authorizations; and (4) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (y) Except as set forth in the Prospectus, no holder of any securities of the Company has the right to require registration of any securities because of the filing or effectiveness of the Registration Statement. (z) To the Company's knowledge, there are no claims for services in the nature of a finder's origination fee with respect to the sale of the Securities hereunder, except as set forth in the Prospectus. (aa) No right of first refusal exists with respect to any sale of securities by the Company, except that right of first refusal, granted by the Company to the Underwriter to (1) underwrite or place any public or private offering of any debt or equity securities of the Company (excluding sales to employees of the Company) or any of its subsidiaries or affiliates, or (2) act as its investment banker with respect to any merger, acquisition or disposition of assets of the Company or any of its subsidiaries which it introduces or generates for two years following the Closing Date, and as to which the Underwriter shall have twenty (20) days after its receipt of written notice thereof to accept or decline such offering. If the Underwriter declines to participate in such offering, and if thereafter the terms of such offering are modified, the Underwriter shall have up to ten (10) days thereafter to accept or decline the modified terms. (bb) The Company has generally enjoyed satisfactory employer/employee relationships with its respective employees and is in compliance with all federal, state and local laws and regulations respecting the employment of their respective employees and employment practices, terms and conditions of employment and wages and hours relating thereto. To the knowledge of the Company, there are no pending or threatened investigations involving the Company by the U.S. Department of Labor or any other federal, state or local agency responsible for the enforcement of such laws and regulations. To the knowledge of the Company, there are no unfair labor practice charges or complaints against the Company or any subsidiary pending before the National Labor Relations Board or any strikes, picketing, boycotts, disputes, slowdowns or stoppage pending or threatened against or involving the Company or any subsidiary, or any predecessor entity, and none has occurred. No collective bargaining agreements or modifications thereof are currently in effect or being negotiated by the Company or any subsidiary and their respective employees. No grievance or arbitration proceeding is pending under any expired or existing collective bargaining of the Company or any subsidiary. 6 8 (cc) The Company has not maintained or contributed to any deferred compensation, profit sharing, savings, retirement, pension or other benefit plan or arrangements with or for the benefit of any person resulting form a relationship with the Company, except as may be disclosed in the Prospectus. (dd) The Company is in compliance with all federal and state laws, rules, and regulations relating to consumer protection, occupational safety and health and to the storage, handling or transportation of hazardous or toxic materials and the Company has received all permits, licenses or other approvals required of the Company under applicable federal and state occupational safety and health and environmental laws and regulations to conduct its business and the Company is in compliance with all terms and conditions of any such permit, license or approval, except any such violation of law or regulation, failure to receive required permits, licenses or other approvals which would not, singly or in the aggregate, result in a material adverse change in the condition (financial or otherwise), business, net worth or results of operations of the Company, except as the case may be, as may be described in or contemplated by the Prospectus. (ee) Any certificate signed by any officer of the Company, and delivered to the Underwriter or counsel to the Underwriter, shall be deemed a representation and warranty by the Company to the Underwriter as to the matters covered thereby. (ff) The minute books of the Company contain a complete summary of all meetings and actions of the directors and stockholders of the company, since the time of its incorporation, and reflect all transactions referred to in such minutes accurately in all material respects. (gg) The Company has received, and promptly presented to the Underwriter and counsel for the Underwriter, copies of all duly executed and delivered "lock-up" letters from each of the officers, directors and shareholders of the Company regarding any Common Stock of the Company or securities convertible into or exchangeable for such Common Stock, that each of the foregoing is thereby restricted from selling, hypothecating, pleading or otherwise disposing of any shares of Common Stock or securities convertible into or exchangeable for Common Stock, for twelve (12) months from the Effective Date (or one year with the prior written consent of the Underwriter). (hh) The Company has received, and promptly presented to the Underwriter and counsel for the Underwriter, "10b-5" letters form each of the officers, directors, and holders of at least five percent of the outstanding shares of any class of equity stock of the Company, whereby such individuals stated that the information contained in the Registration Statement and the Prospectus was accurate, and affirmed that he or she has not, in the five years preceding the Effective Date (or as disclosed in the Registration Statement and Prospectus), been the subject of any court order, judgment or decree restricting in any way such person's involvement in the securities or commodities industries, convicted in or named in a criminal proceeding, the subject of any bankruptcy, petition or found by a court of competent jurisdiction of violating any securities or federal commodities law. (ii) No statement, representation, warranty or covenant made by the Company in this Agreement or made in any certificate or document required by this Agreement to be delivered to Underwriter was, when made, or as of the Closing Date will be materially inaccurate, untrue or incorrect. 3. Covenants of the Company. The Company covenants and agrees that: (a) It will deliver to each of the Underwriter and counsel to the Underwriter, without charge, two conformed copies and two copies, cumulatively marked to show changes from the immediately preceding amendment, of each Registration Statement and of each amendment or supplement thereto, including all financial statements and exhibits. 7 9 (b) The Company will cause the Common Stock and Warrants to be registered pursuant to Section 12 of the Exchange Act, not later than the Effective Date. (c) The Company will deliver to the Underwriter, and each of the Selected Dealers (as hereinafter defined) without charge, as many copies as have been requested of each Preliminary Prospectus heretofore filed with the Commission in accordance with and pursuant to the Commission's Rule 430 under the Act and will deliver to the Underwriter and to others whose names and addresses are furnished by the Underwriter or a Selected Dealer, without charge, on the Effective Date, and thereafter from time to time during such reasonable period as you may request if, in the opinion of counsel for the Underwriter, the Prospectus is required by law to be delivered in connection with sales by the Underwriter or a dealer, as many copies of the Prospectus (and, in the event of any amendment of or supplement to the Prospectus, of such amended or supplemented Prospectus) as the Underwriter may request for the purposes contemplated by the Act. The Company will take all necessary actions to furnish to whomever directed by the Underwriter, when and as requested by the Underwriter, all necessary documents, exhibits, information, applications, instruments and papers as may be reasonably required or, in the opinion of counsel to the Underwriter desirable, in order to permit or facilitate the sale of the Securities. (d) The Company will file with the NASD, as long as the securities are quoted on the OTC Bulletin Board, and once as long as the Securities are quoted on the NASDAQ National Market System or SmallCap Market, all documents required thereby to maintain listing or quotation thereupon, and will take any and all actions required to comply with and maintain all continuing requirements for listing thereupon. (e) The Company will notify the Underwriter and counsel for the Underwriter immediately of any actual or threatened or impending investigations (formal or informal) or any delisting or other proceedings brought by NASDAQ, the NASD, SEC or any other governmental or regulatory agency or body or any other exchange, including the issuance or threatened issuance of any "suspension orders" or "stop orders" or other prohibitions preventing or impairing the proposed Offering. In the event of any of the foregoing, the Company shall not acquire in any of the foregoing if such acquiescence would, in all likelihood, adversely affect the Underwriter, and further agrees to actively defend against or appeal any such action unless counsel for each of the Company and the Underwriter advises such parties that the probability of successfully appealing or defending such action is remote. (f) The Company has authorized the Underwriter to use, and make available for use by prospective dealers, the Preliminary Prospectus, and authorizes the Underwriter, all dealers selected by you in connection with the distribution of the Securities (the "Selected Dealers") to be purchased by the Underwriter and all dealers to whom any of such Securities may be sold by the Underwriter or by any Selected Dealer, to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of the Securities in accordance with the applicable provisions of the Act, the applicable Regulations and applicable state law, until completion of the distribution of the Securities and for such longer period as you may request if the Prospectus is required under the Act, the applicable Regulations or applicable state law to be delivered in connection with sales of the Securities by the Underwriter or the Selected Dealers. (g) The Company will use its best efforts to cause the Registration Statement to become effective and will notify the Underwriter immediately, and confirm the notice in writing: (i) when the Registration Statement or any post-effective amendment thereto becomes effective, if the provisions of Rule 497 promulgated under the Act will be relied upon and when the Prospectus has been filed in accordance with said Rule 497; (ii) of the issuance by the Commission of any stop order or of the initiation, or to the best of the Company's knowledge, the threatening, of any proceedings for that purpose; (iii) the suspension of the qualification of the Securities and the Underwriter's Warrants, or underlying securities, for offering or sale in any jurisdiction or of the initiating, or to the best of the Company's knowledge the threatening, of any proceeding for that purpose; and (iv) of the receipt of any comments from the Commission. If the Commission shall enter a stop order at any time, the Company will make every reasonable effort to obtain the lifting of such order at the earliest possible moment. 8 10 (h) The Company shall enter into an escrow agreement with the Underwriter and an escrow agent to be designated by the Underwriter, in form and substance satisfactory to the parties, and agrees to faithfully perform its obligations thereunder. (i) During the time when a prospectus is required to be delivered under the Act, the Company will comply with all requirements imposed upon it by the Act and the Securities Exchange Act of 1934 (the "Exchange Act"), as now and hereafter amended and by the Regulations, as from time to time in force, as necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and the Prospectus. If at any time when a prospectus relating to the Securities is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or counsel for the Underwriter, 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 the Prospectus to comply with the Act, the Company will notify you promptly and prepare and file with the Commission an appropriate amendment or supplement in accordance with Section 10 of the Act and will furnish to you copies thereof. (j) The Company will endeavor in good faith, in cooperation with you, at or prior to the time the Registration Statement becomes effective, to qualify the Securities for offering and sale under the securities laws or blue sky laws of such jurisdictions as you may reasonably designate. In each jurisdiction where such qualification shall be effected, the Company will, unless you agree that such action is not at the time necessary or advisable, file and make such statements or reports at such times as are or may reasonably be required by the laws of such jurisdiction or reasonably requested by Underwriter's counsel. (k) The Company will make generally available to its security holders, as soon as practicable, but in no event later than the first day of the fifteenth full calendar month following the Effective Date of the Registration Statement, an earnings statement of the Company, which will be in reasonable detail but which need not be audited, covering a period of at least twelve months beginning after the Effective Date of the Registration Statement, which earnings statements shall satisfy the requirements of Section 11(a) of the Act and the Regulations as then in effect. The Company may discharge this obligation in accordance with Rule 158 of the Regulations. (l) During the period of five years commencing on the Effective Date of the Registration Statement, the Company will furnish to its stockholders an annual report (including financial statements audited by its independent public accountants), in reasonable detail, and, at its expense, furnish each of the Underwriters (i) within 90 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its consolidated subsidiaries and a separate balance sheet of each subsidiary of the Company the accounts of which are not included in such consolidated balance sheet as of the end of such fiscal year, and consolidated statements of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries and separate statements of operations, stockholders' equity and cash flows of each of the subsidiaries of the Company the accounts of which are not included in such consolidated statements, for the fiscal year then ended all in reasonable detail and all certified by independent accountants (within the meaning of the Act and the Regulations), (ii) within 45 days after the end of each of the first three fiscal quarters of each fiscal year, similar balance sheets as of the end of such fiscal quarter and similar statements of operations, stockholders' equity and cash flows for the fiscal quarter then ended, all in reasonable detail, and subject to year end adjustment, all certified by the Company's principal financial officer or the Company's principal accounting officer as having been prepared in accordance with generally accepted accounting principles applied on a consistent basis, (iii) as soon as available, each report furnished to or filed with the Commission or any securities exchange and each report and financial statement furnished to the Company's shareholders generally and (iv) as soon as available, such other material as the Underwriter may from time to time reasonably request regarding the financial condition and operations of the Company. 9 11 (m) For a period of eighteen months from the initial Closing, the Company, at its expense, shall cause its regularly engaged independent certified public accountants to review (but not audit), the Company's financial statements for each of the first three quarters prior to the announcement of quarterly financial information, the filing of the Company's 10-Q quarterly report and the mailing of quarterly financial information to stockholders. (n) Prior to the Closing Dates, the Company will not issue, directly or indirectly, without your prior written consent and that of counsel for the Underwriter, any press release or other public announcement or hold any press conference with respect to the Company or its activities with respect to this Offering. (o) The Company will deliver to you and to our counsel, prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date of the Registration Statement and will not file any such amendment or supplement to which you or your counsel shall reasonably object after being furnished such copy. (p) During the period of 120 days commencing on the date hereof, neither the Company nor any Majority Shareholder will, at any time, take, directly or indirectly, any action designed to, or which will constitute or which might reasonably be expected to cause or result in stabilization or manipulation of the price of the Securities to facilitate the sale or resale of any of the Securities. (q) The Company will apply the net proceeds from the Offering received by it in the manner set forth under "Use of Proceeds" in the Prospectus. No portion of the net proceeds will be used, directly or indirectly, to acquire any securities issued by the Company. (r) Counsel for the Company, the Company's accountants, and the officers and directors of the Company will, respectively, furnish the opinions, the letters and the certificates referred to in subsections of Paragraph 10 hereof, and, in the event that the Company shall file any amendment to the Registration Statement relating to the offering of the Securities or any amendment or supplement to the Prospectus relating to the offering of the Securities subsequent to the Effective Date of the Registration Statement, such counsel, such accountants, such officers and directors, respectively, will, at the time of each such filing , and at such subsequent time as you shall specify, so long as securities being registered by such amendment or supplement are being underwritten by the Underwriter, furnish to you such opinions, letters and certificates, each dated the date of its delivery, of the same nature as the opinions, the letters and the certificates referred to in said Paragraph 10, as you may reasonably request, or, if any such opinion or letter or certificate cannot be furnished by reason of the fact that such counsel or such accountants or any such officer or director believes that the same would be inaccurate, such counsel or such accountants or such officer or director will furnish an accurate opinion or letter or certificate with respect to the same subject matter. (s) The Company will comply with all of the provisions of any undertakings contained in the Registration Statement in all material respects. (t) The Company will reserve and keep available for issuance that maximum number of its authorized but unissued Shares of Common Stock which are issuable upon exercise of the Warrants and issuable upon exercise of the Underwriter's Warrants (including the underlying securities) outstanding from time to time. (u) Following the Effective Date and from time to time thereafter, so long as the Warrants are outstanding, the Company will timely prepare and file at its sole cost and expense one or more post-effective amendments to the Registration Statement or a new registration statement as required by law as will permit Warrant holders to be furnished with a current prospectus in the event Warrants are exercised, and to use its best efforts and due diligence to have same be declared effective. The Company will deliver a draft of each such post-effective amendment or new registration statement to the Underwriter at least ten days prior to the filing of such post-effective amendment or registration statement. 10 12 (v) Following the Effective Date and from time to time thereafter so long as any of the Warrants remain outstanding, the Company will timely deliver and supply to its warrant agent sufficient copies of the Company's current Prospectus, as will enable such Warrant Agent to deliver a copy of such Prospectus to any Warrant or other holder where such Prospectus delivery is by law required to be made. (w) During a period of three years, commencing on the Effective Date, the Company will furnish to you and any Selected Dealers, who may so request copies of such financial statements and other periodic and special reports as the Company may from time to time distribute generally to the holders of any class of its capital stock, and will furnish to you and such Selected Dealers who may request a copy of each annual or other report which the Company is required to file with the Commission. (x) So long as any of the Warrants remain outstanding, the Company shall continue to employ the services of a firm of independent certified public accountants reasonably acceptable to the Underwriter in connection with the preparation of the financial statements to be included in any registration statement to be filed by the Company hereunder, or any amendment or supplement thereto (it being understood that Stonefield Josephson, Inc. is acceptable to the Underwriter). During the same period, the Company shall employ the services of a law firm(s) acceptable to the Underwriter in connection with all legal work of the Company, including the preparation of a registration statement to be filed by the Company hereunder, or any amendment or supplement thereto. (y) So long as any of the Warrants remain outstanding, the Company shall continue to appoint a Warrant Agent for the Warrants, who shall be reasonably acceptable to the Underwriter. (z) The Company agrees that it will, upon the initial Closing, for a period of no less than three (3) years, engage a designee of the Underwriter as an advisor (the "Advisor") to its Board of Directors where such Advisor shall attend meetings of the Board, receive all notices and other correspondence and communications sent by the Company to members of its Board of Directors and shall be entitled to receive compensation therefor equal to the entitlement of all non-employee directors. Such Advisor shall also be entitled to receive reimbursement for all reasonable costs incurred in attending such meetings including, but not limited to, food, lodging, and transportation. The Company further agrees that during said three (3) year period, it shall schedule no less than four (4) formal and "in person" meetings of its Board of Directors in each such year and thirty (30) days advance notice of such meetings shall be given to the Advisor. Further, during such three (3) year period, the Company shall give notice to the Underwriter with respect to any proposed acquisitions, mergers, reorganizations or other similar transactions. In lieu of the Underwriter's three-year right to designate an Advisor, the Underwriter shall have the right from time to time during such three-year period, in its sole discretion, to designate one person for election as a Director of the Company and the Company will utilize its best efforts to obtain the election of such person who shall be entitled to receive the same compensation, expense reimbursements and other benefits set forth above. The Company agrees to indemnify and hold the Underwriter and such Advisor or Director harmless against any and all claims, actions, damages, costs and expenses, and judgments arising solely out of the attendance and participation of your designee at any such meeting described herein. In the event the Company maintains a liability insurance policy affording coverage for the acts of its of officers and directors, it agrees, if possible, to include the Underwriter's designee as an insured under such policy. (aa) The Company's Common Stock and Warrants shall be listed on the OTC Bulletin Board (the "OTC Bulletin Board") maintained by the National Association of Securities Dealers, Inc. (the "NASD") not later than the final Closing Date. Immediately following the final Closing Date, the Company will make all filings required, including registration under the Exchange Act, and will use its best efforts to obtain the quotation of the Common Stock and Warrants on the Nasdaq Small Cap Market ("Nasdaq") and maintain such listing (unless the Company is quoted upon Nasdaq National Market System ("NASDAQ/NMS") or listed upon the New York Stock Exchange or American Stock Exchange, or is acquired) for at least five years from the date of this Agreement. 11 13 (bb) The Company will apply for listing in Standard and Poors Corporation Reports or Moodys OTC Guide and shall use its best efforts to have the Company included in such publications continuously for at least five years from the final Closing Date. (cc) Within thirty (30) days following the final Closing Date, the Company's accountants shall prepare an audited balance sheet as of the month ending subsequent to such final Closing Date. (dd) For a period of twelve (12) months from the Effective Date, no officer, director or holder of any securities of the Company prior to the Offering will, directly or indirectly, offer, sell (including any short sale), grant any option for the sale of, acquire any option to dispose of, or otherwise dispose of any Shares of Common Stock, including Shares of Common Stock issuable upon exercise of options, warrants or any convertible securities of the Company, without the prior written consent of the Underwriter, other than as set forth in the Registration Statement. In order to enforce this covenant, the Company shall impose stop-transfer instructions with respect to the securities owned by every stockholder prior to the Offering until the end of such period (subject to any exceptions to such limitation on transferability set forth in the Registration Statement). If necessary to comply with any applicable Blue-sky Law, the shares held by such stockholders will be escrowed with counsel for the Company or otherwise as required. (ee) Except for the issuance of shares of capital stock by the Company in connection with a dividend, recapitalization, reorganization or similar transactions or as result of the exercise of warrants or options disclosed in or issued or granted pursuant to plans disclosed in the Registration Statement, the Company shall not, for a period of eighteen (18) months following the Final Closing Date, directly or indirectly, offer, sell, issue or transfer any shares of its capital stock, or any security exchangeable or exercisable for, or convertible into, shares of the capital stock or register any of its capital stock (under any form of registration statement, including Form S-8), without the prior written consent of the Underwriter. Options granted pursuant to plans must be exercisable at the fair market value on the date of grant. (ff) During the three-year period from the Final Closing Date, the Underwriter shall have a right of first refusal to act as underwriter or agent of any and all public or private offerings of the securities of the Company, or any successor to or subsidiary of the Company or any other entity in which the Company has an equity interest (collectively referred to herein as the "Company"), by the Company or any secondary offering of the Company's securities by any of its officers, directors and 5% or greater stockholders ("Principal Stockholders"). The Company has caused such Principal Stockholders to deliver to the Underwriter on or before the date of this Agreement, an agreement to this effect, as it relates to any proposed secondary offering by such Principal Stockholders, in form and substance satisfactory to the Underwriter and to counsel for the Underwriter. (gg) The Company will use its best efforts to obtain, as soon after the first Closing Date as is reasonably possible, liability insurance covering its officers and directors. (hh) The Company agrees that any conflict of interest arising between a member of the Company's Board of Directors or Majority Shareholders and the Company in connection with such Director's dealing with, or obligations to, the Company, shall be resolved by a vote of the majority of the independent members of the Board of Directors. (ii) The Company agrees that, if it deems necessary, in its sole discretion, it will employ the services of a financial public relations firm acceptable to the Underwriter for a period of at least twelve months following the Final Closing Date. The Company will acquire the consent of the Underwriter for its selection. (jj) For a period of five (5) years from the Effective Date, at the request of the Underwriter, the Company shall on a weekly basis provide promptly, at its expense, copies of the Company's transfer sheets furnished to it by its transfer agent and copies of the securities positions provided to it by the Depository Trust Company ("DTC sheets"), and the list of holders of all of the Company's securities. 12 14 (kk) The Company shall take all action necessary or required to effectuate and preserve the registration rights granted to the Underwriter, or other holders, pursuant to the Underwriter's Warrant. 4. Appointment of Agent to Sell the Securities. (a) Subject to the terms and conditions of this Agreement, and upon the basis of the representations, warranties, and agreements herein contained, the Company hereby appoints the Underwriter as its exclusive agent for a period of 180 days from the Effective Date (the "Offering Period"), to sell the Securities, and the Underwriter, on the basis of the representations and warranties of the Company herein, accepts such appointment and agrees to use its best efforts on a "minimum 250,000 Shares and 250,000 Warrants ("Minimum Offering"), maximum 500,000 Shares and 500,000 Warrants ("Maximum Offering")" basis to find purchasers for the Securities. The price at which the Underwriter shall sell the Securities to the public as agent for the Company, shall be $5.50 per share of Common Stock and $.10 per Warrant, less an underwriting discount of ten percent (10%) of the offering price for each security. The Underwriter may allow a concession not exceeding $0.25 per share of Common Stock and $0.005 per Warrant to selected dealers who are members of the National Association of Securities Dealers, Inc. ("NASD"), and to certain foreign dealers, but all such sales by selected dealers shall be made by the Company, acting through the Underwriter as agent, and not for the account of the Underwriter. (b) Provided that the Minimum Offering is sold and paid for, the Company agrees to pay the Underwriter for its expenses a non-accountable expense allowance equal to 3% of the gross proceeds of the offering, subject to the provisions of Paragraph 9 herein. (c) It is a condition of this Agreement that the Underwriter shall use its best efforts to sell the Securities on behalf of the Company, that any and all funds received from such sale, without any deduction therefrom whatsoever, including, but not limited to, any underwriting commission or any dealer concession or otherwise, shall be forthwith deposited into an escrow account with American Stock Transfer & Trust Company as Escrow Agent, pursuant to the terms of an Escrow Agreement entered into by and among the Company, the Underwriter and the Escrow Agent. In the event the Minimum Offering is not sold within the Offering Period, all funds will be promptly refunded to the subscribes in full, without deduction therefrom or interest thereon. Certificates will be issued to purchasers only if the proceeds from the Securities offered hereby are released from escrow to the Company. Until such time as the funds have been released and the certificates delivered to the purchasers thereof, such purchasers, if any, will be deemed subscribers and not stockholders. The funds in escrow will be held for the benefit of those subscribers until released to the Company and will not be subject to creditors of the Company or utilized for the expenses of this Offering. When certificates for the Securities are to be issued in the name of a participating dealer for the benefit of its customer, the Escrow Agent may hold such funds with the dealer reflected as the subscriber. 5. Delivery and Payment. (a) In the event the Minimum Offering is sold during the Offering Period, delivery of the certificates representing the Shares and Warrants against payment therefor shall take place at the offices of Platinum Equities, Inc., 80 Pine Street, Suite 3200, New York, New York 10005 (or at such other place as may be designated by agreement between you and the Company), at 10:00 a.m., New York time, on such date after the Offering has been completed as the Underwriter shall designate, on at least three (3) full business days' prior written notice, such time and date of payment and delivery of the Securities being herein called the "Closing Date." After the Minimum Offering is sold, subsequent Closings shall be held at the discretion of the Company and the Underwriter with respect to additional Shares and Warrants up to the Maximum Offering during the Offering Period. (b) The Company will make the certificates for the Shares and Warrants sold hereunder available to the Underwriter for checking at least two full business days prior to a Closing Date at the offices of the Company's transfer agent. The certificates shall be in such names and denominations as you may request, at least two full business days prior to a Closing Date. 13 15 (c) The cost of original issue tax stamps, if any, in connection with the issuance and delivery of the Securities by the Company to the Underwriter shall be borne by the Company. The Company will pay and hold the Underwriter, and any subsequent holder of the Securities, harmless from any and all liabilities with respect to or resulting from any failure or delay in paying federal and state stamp taxes, if any, which may be payable or determined to be payable in connection with the original issuance or sale to the Underwriter of the Securities or any portions thereof. 6. Offering of Securities on Behalf of the Company. It is understood that the Underwriter proposes to offer the Securities to the public solely as agent for the Company, upon the terms and conditions set forth in the Registration Statement. The Underwriter shall commence making such offer as agent for the Company on the Effective Date, or as soon thereafter as the Underwriter deems advisable. 7. Warrant Solicitation Fee. The Company agrees to pay to the Underwriter, commencing one year from the Effective Date, a fee of seven percent (7%) of the aggregate exercise price of the Warrants if: (i) the market price of the Common Stock is greater than the exercise price of the Warrants on the date of exercise; (ii) the exercise of the Warrants are solicited by the Underwriter; (iii) the Warrants are not held in a discretionary account; (iv) the disclosure of compensation arrangements was made both at the time of the Offering and at the time of the exercise of the Warrant; and (v) the solicitation of the Warrant is not in violation of Regulation M promulgated under the Exchange Act. The Company agrees not to solicit the exercise of any Warrants other than through the Underwriter and will not authorize any other dealer to engage in such solicitation without the prior written consent of the Underwriter which will not be unreasonably withheld. The Warrant solicitation fee will not be paid in a non-solicited transaction. No Warrant solicitation by the Underwriter will occur prior to one year from the Effective Date. Additionally, there will be no warrant solicitation by the Underwriter without the prior written authorization of the Company. 8. Representations and Warranties of the Underwriter. The Underwriter represents and warrants to the Company that: (a) The Underwriter is a member in good standing of the National Association of Securities Dealers, Inc., and has complied with all NASD requirements concerning net capital and compensation to be received in connection with the Offering. (b) To the Underwriter's knowledge, there are no claims for services in the nature of a finder's origination fee with respect to the sale of the Securities hereunder to which the Company is, or may become, obligated to pay. 9. Payment of Expenses. (a) Whether or not this Agreement becomes effective or the sale of the Securities by the Company is completed, the Company will pay and bear all costs, fees, taxes and expenses incident to and in connection with: (i) the issuance, offer, sale and delivery of the Securities, including all expenses and fees incident to the preparation, printing, filing and mailing (including the payment of postage with respect to such mailing) of the Registration Statement (including all exhibits thereto), each Preliminary Prospectus, the Prospectus, and amendments and post- effective amendments thereof and supplements thereto, and this Agreement and related documents, Preliminary and Final Blue Sky Memoranda, including the cost of preparing , copying and distributing all copies thereof, including two bound volumes of complete sets of executed closing documents to each of the Underwriter and counsel to the Underwriter, in quantities deemed necessary by the Underwriter; (ii) the costs of preparing and printing all "Tombstone" and other appropriate advertisements; (iii) the printing, engraving, issuance and 14 16 delivery of the Common Stock, Warrants, Warrant Shares, Underwriter's Warrants and the securities underlying the Underwriter's Warrant, including any transfer or other taxes payable thereon in connection with the original issuance thereof; (iv) the qualification of the Common Stock and Warrants under the state or foreign securities or "Blue Sky" laws selected by the Underwriter and the Company, and disbursements and reasonable fees of counsel for the Underwriter in connection therewith ($35,000) plus all expenses and disbursements of such counsel) plus the filing fees for such states; (v) fees of counsel for the Underwriter for the preparation of a secondary trading memorandum ($15,000); (vi) fees and disbursements of counsel and accountants for the Company; (vii) other expenses and disbursements incurred on behalf of the Company (viii) the filing fees payable to the Commission and the NASD; and (ix) any listing of the Common Stock and Warrants on a securities exchange or on NASDAQ. (b) In addition to the expenses to be paid and borne by the Company referred to in Paragraph 9(a) above, the Company shall reimburse you at each Closing Date for expenses incurred by you in connection with the Offering (for which you need not make any accounting), in the amount of 3% of the price to the public of the Securities sold in the Offering. This 3% non-accountable expense allowance shall cover the fees of your legal counsel, but shall not include any expenses for which the Company is responsible under Paragraph 9(a) above, including the reasonable fees and disbursements of your legal counsel with respect to Blue Sky matters. As of the date hereof, no funds have been advanced by the Company to the Underwriter with respect to such non-accountable expense allowance. (c) In the event that the Company does not or cannot, for any reason whatsoever other than a default by the Underwriters, expeditiously proceed with the Offering, or if any of the representations, warranties or covenants contained in this Agreement are not materially correct or cannot be complied with by the Company, or business prospects or obligations of the Company are adversely affected and the Company does not commence or continue with the Offering at any time or terminates the proposed transaction prior to a Closing Date, the Company shall reimburse the Underwriter on an accountable basis for all out-of-pocket expenses actually incurred in connection with the Underwriting, this Agreement and all of the transactions hereby contemplated, including, without limitation, the Underwriter's legal fees and expenses, less such sums which have already been paid, and the Underwriter shall not be responsible for any expense of the Company or others or for any change or claim related to the Offering contemplated hereunder in the event that the Offering is not consummated. 10. Conditions of Underwriter's Obligations. The obligations of the Underwriter to consummate the transactions contemplated by this Agreement shall be subject to the continuing accuracy of the representations and warranties of the Company contained herein as of the date hereof and as of the Closing Dates, the accuracy of the statements of the Company and its officers and directors made pursuant to the provisions hereof, and to the performance by the Company of its covenants and agreements hereunder and under each certificate, opinion and document contemplated hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:00 p.m., New York time, on the date following the date of this Agreement, or such later date and time as shall be consented to in writing by you and, on or prior to each Closing Date, no stop order suspending the effectiveness of the Registration Statement or the qualification or registration of the Securities under the securities laws of any jurisdiction shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or to your knowledge or the knowledge of the Company, shall be contemplated by the Commission or any such authorities of any jurisdiction and any request on the part of the Commission or any such authorities for additional information shall have been complied with to the reasonable satisfaction of the Commission or such authorities and counsel to the Underwriter and after the date hereof no amendment or supplement shall have been filed to the Registration Statement or Prospectus without your prior consent. (b) As of each Closing Date, the Registration Statement or the Prospectus or any amendment thereof or supplement thereto shall not contain an untrue statement of a fact which is material, or omit to state a fact 15 17 which 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) Between the time of the execution and delivery of this Agreement and each Closing Date, (i) there shall be no litigation instituted against the Company or any of its officers or directors and between such dates there shall be no proceeding instituted or, to the Company's knowledge, threatened against the Company or any of its officers or directors before or by any federal, state or county commission, regulatory body, administrative agency or other governmental body, domestic or foreign, in which litigation or proceeding an unfavorable ruling, decision or finding would, individually or in the aggregate, have a material adverse effect on the Company or its business, business prospects or properties, or have a material adverse effect on the financial condition or results of operation of the Company, and (ii) no executive officer of the Company listed as such in the Prospectus shall have died, become physically or mentally disabled, resigned or been removed or discharged. (d) Each of the representations and warranties of the Company contained herein and each certificate and document contemplated under this Agreement to be delivered to you shall be true and correct at each Closing Date as if made at each such Closing Date, and all covenants and agreements contained herein and in each such certificate and document to be performed on the part of the Company, and all conditions contained herein and in each such certificate and document to be fulfilled or complied with by the Company at or prior to the Closing Dates shall be fulfilled or complied with. (e) At each Closing Date, you shall have received the opinion of Horwitz & Beam, counsel to the Company, dated as of each such Closing Date, addressed to the Underwriter and in form and substance satisfactory to counsel to the Underwriter, as follows: (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation with full corporate power and authority, and all licenses, permits, certifications, registrations, approvals, consents and franchises to own or lease and operate its properties and to conduct its business as described in the Registration Statement. The Company is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions wherein such qualification is necessary and failure so to qualify could have a material adverse effect on the financial condition, results of operations, business or properties of the Company; (ii) The Company has full corporate power and authority to execute, deliver and perform the Underwriting Agreement, the Warrant Agreement and the Underwriter's Warrants and to consummate the transactions contemplated thereby. The execution, delivery and performance of the Underwriting Agreement, the Warrant Agreement and the Underwriter's Warrants by the Company, the consummation by the Company of the transactions therein contemplated and the compliance by the Company with the terms of the Underwriting Agreement, the Warrant Agreement and the Underwriter's Warrants have been duly authorized by all necessary corporate action, and each of the Underwriting Agreement, the Warrant Agreement and the Underwriter's Warrants have been duly executed and delivered by the Company. Each of the Underwriting Agreement, the Warrant Agreement and the Underwriter's Warrants is a valid and binding obligation of the Company, enforceable in accordance with their respective terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the rights of creditors generally and the discretion of courts in granting equitable remedies and except that enforceability of the indemnification provisions and the contribution provisions set forth in the Underwriting Agreement may be limited by the federal securities laws or public policy underlying such laws; (iii) The execution, delivery and performance of the Underwriting Agreement, the Warrant Agreement and the Underwriter's Warrants by the Company, the consummation by the Company of the transactions therein contemplated and the compliance by the Company with the terms of the Underwriting Agreement, the Warrant Agreement and the Underwriter Warrants do not, and will not, with or without the giving of notice or the lapse of time, or both, (A) result in a violation of the Certificate 16 18 of Incorporation, as the same may be amended, or Bylaws of the Company or any of its Subsidiaries, (B) to the best of our knowledge, result in a breach of, or conflict with, any terms or provisions of or constitute a default under, or result in the modification or termination of, or result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to, any indenture, mortgage, note, contract, commitment or other material agreement or instrument to which the Company or any of its Subsidiaries are a party or by which the Company or any of its Subsidiaries or any of their properties or assets are or may be bound or affected, except where any of the foregoing would not result in a material adverse effect upon the Company's or any Subsidiaries business or operations; (C) to the best of our knowledge, violate any existing applicable law, rule or regulation or judgment, order or decree known to us of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its Subsidiaries or any of their properties or businesses; or (D) to the best of our knowledge, have any effect on any permit, certification, registration, approval, consent, license or franchise necessary for the Company or any of its Subsidiaries to own or lease and operate their properties and to conduct their business or the ability of the Company or any of its Subsidiaries to make use thereof; (iv) To the best of our knowledge, no authorization, approval, consent, order, registration, license or permit of any court or governmental agency or body (other than under the Act, the Regulations and applicable state securities or Blue Sky laws) is required for the valid authorization, issuance, sale and delivery of the Securities, the Common Stock, the Warrants, the Warrant Shares, or the Underwriter's Warrants, and the consummation by the Company of the transactions contemplated by the Underwriting Agreement, the Consulting Agreement, the Warrant Agreement or the Underwriter's Warrants; (v) The Registration Statement was declared effective under the Act on _________, 1998 and is effective thereunder, and filing of all pricing information (if applicable) has been timely made in the appropriate form under Rule 430A; and, to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement, the Preliminary Prospectus, or the final Prospectus or any part thereof, has been issued, and no proceedings for that purpose have been instituted or are pending, threatened or contemplated under the Act or applicable state securities laws; (vi) The Registration Statement and the Prospectus, as of the Effective Date (except for the financial statements and other financial data included therein or omitted therefrom, as to which we express no opinion), comply as to form in all material respects with the requirements of the Act and Regulations and the conditions for use of a registration statement on Form SB-2 have been satisfied by the Company; (vii) The description in the Registration Statement and the Prospectus of statutes, regulations, contracts and other documents have been reviewed by us, and, based upon such review, are accurate in all material respects and present fairly the information required to be disclosed, and to the best of our knowledge, there are no material statutes or regulations, or, to the best of our knowledge, material contracts or documents, of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement, which are not so described or filed as required. To the best of our knowledge, none of the material provisions of the contracts or instruments described above violates any existing applicable law, rule or regulation or judgment, order or decree known to us of any United States governmental agency or court having jurisdiction over the Company or any of its assets or businesses; (viii) The outstanding Common Stock , Warrants, and all other securities of the Company, have been duly authorized and validly issued. The outstanding Common Stock is fully paid and nonassessable. To the best of our knowledge, none of the outstanding Common Stock has been issued in violation of the preemptive rights of any stockholder of the Company. None of the holders of the outstanding Common Stock is subject to personal liability solely by reason of being such a holder. The authorized Common Stock conforms to the description thereof contained in the Registration Statement and Prospectus. To the best of our knowledge, except as set forth in the Prospectus, no holders of any of the Company's securities have any rights, "demand," "piggyback" or otherwise, to have such securities registered under the Act; 17 19 (ix) The issuance and sale of the Securities, including the Common Stock, the Warrants, the Warrant Shares and the Underwriter's Warrants have been duly authorized and when issued will be validly issued, fully paid and nonassessable, and the holders thereof will not be subject to personal liability solely by reason of being such holders. Neither the Common Stock nor the Warrants or Warrant Shares are subject to preemptive rights of any stockholder of the Company. The certificates representing the Securities are in proper legal form; (x) The issuance and sale of the Warrant Shares and the Underwriter's Warrants have been duly authorized and, when paid for, issued and delivered pursuant to the terms of the Warrant Agreement or the Underwriter's Warrants, as the case may be, the Warrants, the Warrant Shares and the Underwriter's Warrants will constitute the valid and binding obligations of the Company, enforceable in accordance with their terms, to issue and sell the Warrants, the Warrant Shares and/or Underwriter's Warrants. All corporate action required to be taken for the authorization, issuance and sale of the securities has been duly, validly and sufficiently taken. The Common Stock and the Warrants have been duly authorized by the Company to be offered in the form of the Securities. The Warrants, the Warrant Shares and the Underwriter Warrants conform to the descriptions thereof contained in the Registration Statement and Prospectus; (xi) The Underwriter has acquired good title to the Securities, free and clear of all liens, encumbrances, equities, security interests and claims, provided that the Underwriter is a bona fide purchaser as defined in Section8-302 of the Uniform Commercial Code; (xii) To the best of our knowledge, after due inquiry, there are no claims, actions, suits, proceedings, arbitrations, investigations or inquiries before any governmental agency, court or tribunal, foreign or domestic, or before any private arbitration tribunal, pending or threatened against the Company or any of its Subsidiaries or involving their properties or businesses, other than as described in the Prospectus, such description being accurate, and other than litigation incident to the kind of business conducted by the Company or any of its Subsidiaries which, individually and in the aggregate, is not material, and, except as otherwise disclosed in the Prospectus and the Registration Statement, the Company and its Subsidiaries have complied with all federal and state laws, statutes and regulations concerning its business; (xiii) All sales of the Company's securities have been made in compliance with or under an exemption from the registration requirements of the Act, and no purchaser of such securities in any such sale has a right of action against the Company for failure to comply with the registration or filing requirement of any state; (xiv) The Company owns or possesses, free and clear of all liens or encumbrances and rights thereto or therein by third parties, the requisite licenses or other rights to use all trademarks, service marks, copyrights, service names, trade names, patents, patent applications and licenses necessary to conduct its business (including, without limitation, any such licenses or rights described in the Prospectus as being owned or possessed by the Company), and to the best of such counsel's knowledge after reasonable investigation there is no claim or action by any person pertaining to, or proceeding, pending, or threatened which challenges the exclusive rights of the Company with respect to any trademarks, service marks, copyrights, service names, trade names, patents, patent applications and licenses used in the conduct of the Company's business (including, without limitations, any such licenses or rights described in the Prospectus as being owned or possessed by the Company); (xv) Except as described in the Prospectus, the Company does not (a) maintain, sponsor, or contribute to any ERISA Plans, (b) maintain or contribute, now or at any time previously, to a defined benefit plan, as defined in Section 3(35) of ERISA, and (c) has not, completely or partially, withdrawn from a "multi employer plan," with respect to any employees of or who perform duties on behalf of the Company; (xvi) The Company has no subsidiaries. 18 20 (xvii) Company counsel has participated in reviews and discussions in connection with the preparation of the Registration Statement and the Prospectus. Although we are not passing upon and do not assume responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement, no facts came to our attention which lead us to believe that (A) the Registration Statement (except as to the financial statements and other financial data contained therein, as to which we express no opinion), on the Effective Date, contained any untrue statement of a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or that (B) the Prospectus (except as to the financial statements and other financial data contained therein, as to which we express no opinion) contains any untrue statement or a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (xviii) Company counsel has reviewed the Prospectus, and insofar as it refers to statements of law, description of statues, licenses, rules or regulations or legal conclusions, it is correct in all material respects; (xix) To Company counsel's knowledge, the persons listed in the Principal Stockholders or Management sections of the Prospectus are the respective "beneficial owners" (as such phrase is defined in Regulation 13d-3 promulgated under the Exchange Act) of the securities set forth opposite their respective names thereunder as and to the extent set forth therein; (xx) To such counsel's knowledge, except as described in the Prospectus, 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; (xxi) To such counsel's knowledge, except as described in the Prospectus, there are no claims, payments, issuances, arrangements or understandings for services in the nature of a finder's or origination fee with respect to the sale of the Shares hereunder or the financial consulting arrangement or any other arrangements, agreements, understandings, payments or issuances, that may affect the Underwriter's compensation, as determined by the NASD; (f) On or prior to each Closing Date, counsel for the Underwriter shall have been furnished such documents, certificates and opinions as they may reasonably require for the purpose of enabling them to review the matters referred to in subparagraphs (e) of this Paragraph 10, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions herein contained. (g) Prior to each Closing Date: (i) There shall have been no material adverse change in the condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Registration Statement and Prospectus; (ii) There shall have been no transaction, outside the ordinary course of business, entered into by the Company from the latest date as of which the financial condition of the Company is set forth in the Registration Statement and Prospectus which is material to the Company, which is either (x) required to be disclosed in the Prospectus or Registration Statement and is not so disclosed, or (y) likely to have material adverse effect on the Company's business or financial condition; (iii) The Company shall not be in default under any material provision of any instrument relating to any outstanding indebtedness, except as described in the Prospectus; (iv) No material amount of the assets of the Company shall have been pledged, mortgaged or otherwise encumbered, except as set forth in the Registration Statement and Prospectus; 19 21 (v) No action, investigation, suit or proceeding, at law or in equity, shall have been pending or to its knowledge threatened against the Company or affecting any of its properties or businesses before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding would materially and adversely affect the business, operations, prospects or financial condition or income of the Company, taken as a whole, except as set forth in the Registration Statement and Prospectus; and (vi) No stop order shall have been issued under the Act and no proceedings therefor shall have been initiated or, to the Company's knowledge, threatened by the Commission. (vii) Each of the representations and warranties of the Company contained in this Agreement and in each certificate and document contemplated under this Agreement to be delivered to you was, when originally made and is at the time such certificate is dated, true and correct. (h) Concurrently with the execution and delivery of this Agreement and at each Closing Date, you shall have received a certificate of the Company signed by the Chief Executive Officer of the Company and the principal financial officer of the Company, dated as of the Closing Date, to the effect that the conditions set forth in subparagraph (g) above have been satisfied and that, as of the Closing Date, the representations and warranties of the Company set forth in Paragraph 2 herein and the statements in the Registration Statement and Prospectus were and are true and correct. Any certificate signed by any officer of the Company and delivered to you or for counsel for the Underwriter shall be deemed a representation and warranty by the Company to the Underwriter as to the statements made therein. (i) At the time this Agreement is executed, and at each Closing Date, you shall have received a "cold comfort" letter, addressed to the Underwriter and in form and substance satisfactory in all respects to you and counsel for the Underwriter, from Stonefield Josephson, Inc., dated as of the date of this Agreement and as of each Closing Date: (i) to the effect that they are independent certified public accountants with respect to the Company within the meaning of the Act and the Exchange 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 Exchange Act and the Rules and Regulations thereunder; (iii) and stating that, on the basis of a limited review which included a reading of the latest available unaudited interim financial statements of the Company, a reading of the latest available minutes of the stockholders, 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, as applicable, included in the Registration Statement do not comply as to form in all material respects with the applicable accounting requirements of the Act and the Exchange Act and the Rules and 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 and supporting schedules of the Company, included in the Registration Statements, (B) at a specified date not more than five days prior to the later of the date of this Agreement on the Effective Date of the Registration Statement, there has been any change in the capital stock or long-term debt of the Company or any decrease in the stockholders' equity or net current assets or net assets of the Company, as compared with amounts, shown in the December 31, 1997 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, and (C) during the period from December 31, 1997 to a specified date not more than five days prior to the later of the date of this Agreement or the Effective Date of the Registration Statement, there was any decrease in net revenues, net earnings or net earnings per common share of the Company, as compared with the corresponding period beginning December 31, 1997, other than 20 22 as set forth in or contemplated by the Registration Statement, or, if there was any such decrease, setting forth the amount of such decrease; (iv) stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, statements and/or 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 need not constitute an examination in accordance with generally accepted auditing standards) set forth in the letter and found them to be in agreement; (v) statements as to such other matters incident to the transaction contemplated hereby as you may reasonably request; and (vi) reaffirming that statements made in such letter furnished pursuant to the foregoing clauses (i) through (v), except that the specified date referred to shall be a date not more than five days prior to the Closing Date and, if the Company has elected to rely on Rule 430A of the Rules and Regulations, to the further extent that they have carried out procedures as specified above, with respect to certain amounts, percentages and financial information as specified by you 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 so specified above. (j) All proceedings taken in connection with the authorization, issuance or sale of the Common Stock, Warrants, Warrant Shares, the Underwriter's Warrants and the Underwriter's Warrant Shares as herein contemplated shall be satisfactory in form and substance to you and to counsel to the Underwriter, and the Underwriter shall have received from such counsel an opinion, dated as each Closing Date with respect to such of these proceedings as you may reasonably require. (k) The Company shall have furnished to you such certificates, additional to those specifically mentioned herein, as you may have reasonably requested in a timely manner as to the accuracy and completeness, at each Closing Date, of any statement in the Registration Statement or the Prospectus, as to the accuracy, at each Closing Date, of the representations and warranties of the Company herein and in each certificate and document contemplated under this Agreement to be delivered to you, as to the performance by the Company of its obligations hereunder and under each such certificate and document or as to the fulfillment of the conditions concurrent and precedent to your obligations hereunder. (l) On or before the Closing Date, the Company shall cause to be provided, and the Underwriter shall have received from each officer, director and shareholder of the Company, "lock-up" agreements from each such person restricting any sales, transfers, pledges or other hypothecations of such person's shares of any class of equity security of the Company for a period of twelve (12) months from the Closing Date. (m) The obligation of the Underwriter to sell any Securities hereunder is subject to the accuracy of the representations and warranties of the Company contained herein on and as of each Closing Date and to the satisfaction on and as of each Closing Date of the conditions set forth herein. (n) On each Closing Date there shall have been duly tendered to you for the purchasers of the Securities the appropriate number of Shares of Common Stock and Warrants constituting the Securities and the appropriate number of Underwriter's Warrants. (o) No action shall have been taken by the Commission or the NASD the effect of which would make it improper, at any time prior to the Closing Date, for members of the NASD to execute transactions (as principal or agent) in the Securities and no proceedings for the taking of such action shall have been instituted or shall be pending 21 23 or, to the knowledge of the Representative, the Company shall be contemplated by the Commission or the NASD. The Company and the Underwriter represent that at the date hereof each has no knowledge that any such action is in fact contemplated against any of them by the Commission or the NASD. (p) Prior to the Effective Date, the Company will make all filings required, including registration under the Exchange Act, to obtain, and shall thereafter have obtained and shall use its best efforts to maintain, the quotation of the Common Stock and Warrants on the OTC Bulletin Board. (q) If any of the conditions herein provided for in this paragraph shall not have been fulfilled, or all "lock-up" letters restricting sales, pledges, transfers or hypothications of any kind by officers, directors or all shareholders of the Company for twelve (12) months after the Closing Date have not been received, as of the date indicated, this Agreement and all obligations of the Underwriter under this Agreement may be canceled at, or at any time prior to, each Closing Date by the Underwriter notifying the Company of such cancellation in writing or by telegram at or prior to the applicable Closing Date. Any such cancellation shall be without liability of the Underwriter to the Company. 11. Indemnification and Contribution. (a) Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless the Underwriter and each person, if any, who controls the Underwriter ("controlling person") within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, liabilities, claims, damages, actions and expenses or liability, joint or several, whatsoever (including but not limited to any and all expense whatsoever reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever), joint or several, to which it or such controlling persons may become subject under the Act, the Exchange Act or under any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any Preliminary Prospectus or the Prospectus (as from time to time amended and supplemented); in any post-effective amendment or amendments or any new registration statement and prospectus in which is included the Warrant Shares of the Company issued or issuable upon exercise of the Warrants, or Underwriter's Warrant Shares upon exercise of the Underwriter's Warrants; or in any application or other document or written communication (in this Paragraph 10 collectively called "application") executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Common Stock, Warrants, Warrant Shares, Underwriter's Warrants and Underwriter's Warrant Shares (including the Shares issuable upon exercise of the Warrants underlying the Underwriter's Warrants) under the securities laws thereof or filed with the Commission or any securities exchange; or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of the Prospectus, in the light of the circumstances under which they were made), unless such statement or omission was made in reliance upon or in conformity with written information furnished to the Company with respect to the Underwriter by or on behalf of the Underwriter expressly for use in any Preliminary Prospectus, the Registration Statement or Prospectus, or any amendment or supplement thereof, or in application, as the case may be. Notwithstanding the foregoing, the Company shall have no liability under this Paragraph 11(a) if any such untrue statement or omission made in a Preliminary Prospectus, is cured in the Prospectus and the Underwriter failed to deliver to the person or persons alleging the liability upon which indemnification is being sought, at or prior to the written confirmation of such sale, a copy of the Prospectus. This indemnity will be in addition to any liability which the Company may otherwise have. (b) The Underwriter agrees to indemnify and hold harmless the Company and each of the officers and directors of the Company who have signed the Registration Statement and each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company to the Underwriter in Paragraph 11(a), but only with respect to any untrue statement or alleged untrue statement of any material fact contained in or any omission or alleged omission to state a material fact required to be stated in any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment or supplement thereof or necessary to make the statements therein not misleading or in any application made 22 24 solely in reliance upon, and in conformity with, written information furnished to the Company by you specifically expressly for use in the preparation of such Preliminary Prospectus, the Registration Statement or Prospectus directly relating to the transactions effected by the Underwriter in connection with this Offering. This indemnity agreement will be in addition to any liability which the Underwriter may otherwise have. Notwithstanding the foregoing, the Underwriter shall have no liability under this Paragraph 11(b) if any such untrue statement or omission made in a Preliminary Prospectus is cured in the Prospectus, and the Prospectus is delivered to the person or persons alleging the liability upon which indemnification is being sought. (c) If any action is brought against any indemnified party (the "Indemnitee") in respect of which indemnity may be sought against another party pursuant to the foregoing (the "Indemnitor"), the Indemnitor shall assume the defense of the action, including the employment and fees of counsel (reasonably satisfactory to the Indemnitee) and payment of expenses. Any Indemnitee shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Indemnitee unless the employment of such counsel shall have been authorized in writing by the Indemnitor in connection with the defense of such action. If the Indemnitor shall have employed counsel to have charge of the defense or shall previously have assumed the defense of any such action or claim, the Indemnitor shall not thereafter be liable to any Indemnitee in investigating, preparing or defending any such action or claim. Each Indemnitee shall promptly notify the Indemnitor of the commencement of any litigation or proceedings against the Indemnitee in connection with the issue and sale of the Common Stock, Warrants, Warrants Shares, Underwriter's Securities or in connection with the Registration Statement or Prospectus. (d) In order to provide for just and equitable contribution under the Act in any case in which: (i) the Underwriter makes a claim for indemnification pursuant to Paragraph 11 hereof, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the time to appeal has expired or the last right of appeal has been denied) that such indemnification may not be enforced in such case notwithstanding the fact that this Paragraph 11 provides for indemnification of such case; or (ii) contribution under the Act may be required on the part of the Underwriter in circumstances for which indemnification is provided under this Paragraph 11, then, and in each such case, the Company and the Underwriter shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after any contribution from others) in such proportion so that the Underwriter is responsible for the portion represented by dividing the total compensation received by the Underwriter herein by the total purchase price of all Securities sold in the public offering and the Company is responsible for the remaining portion; provided, that in any such case, no person guilty of a fraudulent misrepresentation (within the meaning of Section 11 (f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The foregoing contribution agreement shall in no way affect the contribution liabilities of any persons having liability under Section 11 of the Act other than the Company and the Underwriter. As used in this Paragraph 11, the term "Underwriter" includes any officer, director, or other person who controls the Underwriter within the meaning of Section 15 of the Act, and the word "Company" includes any of officer, director or person who controls the Company within the meaning of Section 15 of the Act. If the full amount of the contribution specified in this paragraph is not permitted by law, then the Underwriter and each person who controls the Underwriter shall be entitled to contribution from the Company to the full extent permitted by law. No contribution shall be requested with regard to the settlement of any matter from any party who did not consent to the settlement. (e) Within fifteen (15) days after receipt by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is made against another party (the "contributing party"), notify the contributing party of the commencement thereof, but the omission so to notify the contributing party will not relieve it from any liability it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party or his or its representative of the commencement thereof within the aforesaid fifteen (15) days, the contributing 23 25 party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding effected by such party seeking contribution without the written consent of such contributing party. The indemnification provisions contained in this Paragraph 11 are in addition to any other rights or remedies which either party hereto may have with respect to the other or hereunder. 12. Representations, Warranties and Agreements to Survive Delivery. The respective indemnity and contribution agreements by the Underwriter and the Company contained in Paragraph 11 hereof, and the covenants, representations and warranties of the Company and the Underwriter set forth in this Agreement, shall remain operative and in full force and effect regardless of (i) any investigation made by the Underwriter or on its behalf or by or on behalf of any person who controls the Underwriter, or by the Company or any controlling person of the Company or any director or any of officer of the Company, (ii) acceptance of any of the Securities and payment therefor, or (iii) any termination of this Agreement, and shall survive the delivery of the Securities and any successor of the Underwriter or the Company, or of any person who controls you or the Company or any other indemnified party, as the case may be, shall be entitled to the benefit of such respective indemnity and contribution agreements. The respective indemnity and contribution agreements by the Underwriter and the Company contained in this Paragraph 12 shall be in addition to any liability which the Underwriter and the Company may otherwise have. 13. Effective Date of This Agreement and Termination Thereof. (a) This Agreement shall become effective on the date of execution by the parties hereto. (b) This Agreement may be terminated by the Underwriter by notifying the Company at any time on or before the Closing Date, if any domestic or international event or act or occurrence has materially disrupted, or in your opinion will in the immediate future materially disrupt, securities markets; or if trading on the New York Stock Exchange, the American Stock Exchange, or in the over-the-counter market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the over-the-counter market by the NASD or NASDAQ or by order of the Commission or any other governmental authority having jurisdiction; or if a moratorium in foreign exchange trading by major international banks or persons has been declared; or if the Company shall have sustained a loss material or substantial to the Company taken as a whole by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in your opinion, make it inadvisable to proceed with the delivery of the Securities; or if there shall have been a material adverse change in the conditions of the securities market in general, as in your reasonable judgment would make it inadvisable to proceed with the offering, sale and delivery of the Securities; or if there shall have been a material adverse change in the financial or securities markets, particularly in the over-the-counter market, in the United States having occurred since the date of this Agreement. (c) If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Paragraph 12, the Company shall be notified promptly by you by telephone or facsimile, confirmed by letter. (d) If this Agreement shall not become effective by reason of an election of the Underwriter pursuant to this Paragraph 13 or if this Agreement shall not be carried out within the time specified herein by reason of any failure on the part of the Company to perform any undertaking, or to satisfy any condition of this Agreement by it to be performed or satisfied, the sole liability of the Company to the Underwriter, in addition to the obligations assumed by the Company pursuant to Paragraph 8 herein, will be to reimburse the Underwriter for the following: (i) Blue Sky counsel fees and expenses to the extent set forth in Paragraph 9(a)(iv); (ii) Blue Sky filing fees; and (iii) such reasonable out-of-pocket expenses of the Underwriter (including the fees and disbursements of their counsel), to the 24 26 extent set forth in Paragraph 9(c), in connection with this Agreement and the proposed offering of the Securities, less such amounts already paid. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Paragraph 9 and 11 hereof shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 14. Notices. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and, if sent to the Underwriter, shall be mailed, faxed with electronic confirmation receipt, or delivered personally with receipt acknowledged or by a nationally recognized next day courier service with delivery confirmed to the Underwriter at Platinum Equities, Inc., 80 Pine Street, Suite 3200, New York, New York 10005, Attention: John Kenny, with a copy thereof to Lawrence Nusbaum, Esq., Gusrae, Kaplan & Bruno, 120 Wall Street, New York, New York 10005, and, if sent to the Company, shall be mailed, faxed with electronic confirmation receipt, or delivered personally with receipt acknowledged or by a nationally recognized next day courier service with delivery confirmed to the Company at 13710 Ramona Avenue, Chino, California 91710, Attention: Wasif Siddiqui, President, with a copy thereof to Horwitz & Beam, Two Venture Plaza, Suite 350, Irvine, California 92618, Attention: Lawrence W. Horwitz, Esq. 15. Parties. This Agreement shall inure solely to the benefit of and shall be binding upon, the Underwriter, the Company and the controlling persons, directors and officers referred to in Paragraph 11 hereof, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. 16. Construction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York and shall supersede any agreement or understanding, oral or in writing, express or implied, between the Company and you relating to the sale of any of the Securities. 17. Jurisdiction and Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of New York with respect to contracts made and to be fully performed therein, without regard to the conflicts of laws principles thereof. The parties hereto hereby agree that any suit or proceeding arising under this Agreement, or in connection with the consummation of the transactions contemplated hereby, shall be brought solely in a federal or state court located in the City, County and State of New York, or in any court of competent jurisdiction selected by the Underwriter. By its execution hereof, the Company hereby consents and irrevocably submits to the in personam jurisdiction of the federal and state courts located in the City, County and State of New York (or any such other court of competent jurisdiction selected by the Underwriter) and agrees that any process in any suit or proceeding commenced in such courts by this Agreement may be served upon it personally or by certified registered mail, return receipt requested, or by Federal Express or other courier service, with the same force and effect as if personally served upon it in New York City (or in the city or county in which such other court is located). The parties hereto each waive any claim that any such jurisdiction is not a convenient forum for any such suit or proceeding and any defense of lack of in personam jurisdiction with respect thereto. 25 27 18. Counterparts. This agreement may be executed in counterparts. If the foregoing correctly sets forth the understanding between the Underwriter and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us. Very truly yours, LUMINEX LIGHTING, INC. By:__________________________ Wasif Siddiqui, President Accepted as of the date first above written: PLATINUM EQUITIES, INC. By:___________________________ 26 EX-1.2 3 FORM OF UNDERWRITERS' WARRANT 1 EXHIBIT 1.2 UNDERWRITER'S WARRANT (FORM) 2 NO SALE OR TRANSFER OF THIS WARRANT OR THE SECURITIES UNDERLYING THIS WARRANT MAY BE MADE UNTIL THE EFFECTIVENESS OF A REGISTRATION STATEMENT OR OF A POST-EFFECTIVE AMENDMENT THERETO UNDER THE SECURITIES ACT OF 1933 (THE "ACT"), COVERING THIS WARRANT OR THE SECURITIES UNDERLYING THIS WARRANT, OR UNTIL THE COMPANY IS IN RECEIPT OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF THE ACT. TRANSFER OF THIS WARRANT IS RESTRICTED UNDER PARAGRAPH 2 BELOW. UNDERWRITER'S WARRANT TO PURCHASE COMMON STOCK AND/OR REDEEMABLE WARRANTS LUMINEX LIGHTING, INC. (a California corporation) Dated:______________ ___, 1998 1 3 THIS CERTIFIES THAT Platinum Equities, Inc. (the "Underwriter", and together with its assigns, the "Holder") is entitled to purchase from Luminex Lighting, Inc., a California corporation (the "Company"), for an aggregate price of $10, an option ("Purchase Option"), during the period as hereinafter specified, for up to 50,000 shares of the Company's common stock, no par value per share (the "Common Stock"), and up to 50,000 redeemable Common Stock purchase warrants (the "Warrants," and collectively with the Common Stock, the "Securities"), at a purchase price of $8.15 per share of Common Stock and $.14 per Warrant which Warrant is exercisable at $8.30 per share of Common Stock (the "Exercise Price") (the "Underwriter's Warrant"). This Underwriter's Warrant is issued pursuant to an Underwriting Agreement dated , 1998, between the Company and the Underwriter in connection with a public offering through the Underwriter (the "Public Offering") of 500,000 shares of Common Stock and 500,000 Warrants. 1. Exercise of the Underwriter's Warrant. (a) The rights represented by this Underwriter's Warrant shall be exercised at the prices and during the periods as follows: (i) During the period from __________, 1998 to __________, 1999, inclusive, the Holder shall have no right to purchase any Securities hereunder. (ii) Between ___________ , 1999 and ___________ , 2003, inclusive, the Holder shall have the option to purchase shares of Common Stock and Warrants hereunder at a price of $8.15 and $.14, respectively, the purchase price of the Common Stock and the Warrant being 120% of the public offering price for the Securities set forth in the Prospectus forming a part of the registration statement on Form SB-2 (File No. 333- 58025) of the Company, as amended (the "Registration Statement"). (iii) After ________ __, 2003, the Holder shall have no right to purchase any Securities hereunder and this Underwriter's Warrant shall expire effective at 5:00 p.m., New York time. (b) The rights represented by this Underwriter's Warrant may be exercised at any time within the period above specified, in whole or in part, by (i) the surrender of this Underwriter's Warrant (with the purchase form at the end hereof properly executed) at the principal executive of office of the Company (or such other of office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company); (ii) payment to the Company of the Exercise Price then in effect for the number of shares of Common Stock and Warrants specified in the above-mentioned purchase form together with applicable stock transfer taxes, if any; and (iii) delivery to the Company of a duly executed agreement signed by the person(s) designated in the purchase form to the effect that such person(s) agree(s) to be bound by the provisions of Paragraph 5 and subparagraphs (b), (c) and (d) of Paragraph 6 hereof. This Underwriter's Warrant shall be deemed to have been exercised, in whole or in part to the extent specified, immediately prior to the close of business on the date this Underwriter's Warrant is surrendered and payment is made in accordance with the foregoing provisions of this Paragraph 1, and the person or persons in whose name or names the certificates for the Securities shall be issuable upon such exercise shall become the Holder or Holders of record of such Common Stock and Warrants at that time and date. The Common Stock and Warrants so purchased shall be delivered to the Holder within a reasonable time, not exceeding ten (10) business days, after the rights represented by this Underwriter's Warrant shall have been so exercised. 2. Restrictions on Transfer. This Underwriter's Warrant shall not be transferred, sold, assigned, or hypothecated for a period of one year commencing _______ __, 1998, except that it may be transferred to successors of the Holder, and may be assigned in whole or in part to any person who is an of officer of the Underwriter or an officer or partner of any other member of the underwriting syndicate or selling group member during such period; and after such one-year period, such a transfer may occur providing the Underwriter's Warrant is exercised immediately upon transfer, and if not exercised immediately on transfer, the Underwriter's Warrant shall lapse. Any such assignment shall be effected by the Holder 2 4 by (i) completing and executing the form of assignment at the end hereof and (ii) surrendering this Underwriter's Warrant with such duly completed and executed assignment form for cancellation, accompanied by funds sufficient to pay any transfer tax, at the office or agency of the Company referred to in Paragraph 1 hereof, accompanied by a certificate (signed by a duly authorized representative of the Holder), stating that each transferee is a permitted transferee under this Paragraph 2 hereof; whereupon the Company shall issue, in the name or names specified by the Holder (including the Holder) a new Underwriter's Warrant or Underwriter's Warrants of like tenor and representing in the aggregate rights to purchase the same number of Securities as are then purchasable hereunder. 3. Covenants of the Company. (a) The Company covenants and agrees that all Common Stock and Common Stock issuable upon exercise of the Warrants will, upon issuance, be duly and validly issued, fully paid and nonassessable and no personal liability will attach to the holder thereof by reason of being such a holder, other than as set forth herein. (b) The Company covenants and agrees that during the period within which this Underwriter's Warrant may be exercised, the Company will at all times have authorized and reserved a sufficient number of shares of Common Stock to provide for the exercise of this Underwriter's Warrant and the Warrants included therein. (c) The Company covenants and agrees that for so long as the Securities shall be outstanding, the Company shall use its best efforts to cause all shares of Common Stock issuable upon the exercise of the Underwriter's Warrant and the Warrants contained therein, to be listed on or quoted by the over-the-counter bulletin board system or on the Nasdaq SmallCap Market. 4. No Rights of Stockholder. This Underwriter's Warrant shall not entitle the Holder to any voting rights or other rights as a stockholder of the Company, either at law or in equity, and the rights of the Holder are limited to those expressed in this Underwriter's Warrant and are not enforceable against the Company except to the extent set forth herein. 5. Registration Rights. (a) The Company shall advise the Holder or its transferee, whether the Holder holds this Underwriter's Warrant or has exercised this Underwriter's Warrant and holds Common Stock and Warrants, or Common Stock underlying the Warrants (the "Warrant Shares"), by written notice at least 30 days prior to the filing of any post-effective amendment to the Registration Statement or of any new registration statement or post-effective amendment thereto under the Act, covering any securities of the Company, for its own account or for the account of others, and will for a period of four years from , 1999 upon the request of the Holder, include in any such post-effective amendment or registration statement such information as may be required to permit a public offering of any of the Common Stock or Warrants issuable hereunder, and/or the Warrant Shares (the "Registerable Securities"), provided however that this Section 5(a) is not applicable to any registration statement by the Company on Forms S-4 or S-8 (including any Form S-3 related to such Form S-8) or any other comparable form. The Company shall supply prospectuses in order to facilitate the public sale or other disposition of the Registerable Securities, use its best efforts to register and qualify any of the Registerable Securities for sale in such states as such Holder reasonably designates, provided such qualification is not solely for the purpose of subjecting the Company to jurisdiction in that state or is not unduly burdensome, and do any and all other acts and things which may be necessary to enable such Holder to consummate the public sale of the Registerable Securities, and furnish indemnification in the manner provided in Paragraph 6 hereof. The Holder shall furnish information reasonably requested by the Company in accordance with such post-effective amendments or registration statements, including its intentions with respect thereto, and shall furnish indemnification as set forth in Paragraph 6. The Company shall continue to advise the Holders of the Registerable Securities of its intention to file a registration statement or amendment pursuant to this Paragraph 5(a) until the earlier of (i) , 2003; or (ii) such time as all of the Registerable Securities have been registered and sold under the Act. 3 5 (b) If any fifty-one (51%) percent holder (as defined below) shall give notice to the Company at any time during the four (4) year period beginning one (1) year from , 1998 to the effect that such holder desires to register under the Act any Registerable Securities, under such circumstances that a public distribution (within the meaning of the Act) of any such Registerable Securities will be involved, then the Company will as promptly as practicable after receipt of such notice, but not later than thirty (30) days after receipt of such notice, file a post effective amendment to the current Registration Statement or a new registration statement pursuant to the Act to the end that the Registerable Securities may be publicly sold under the Act as promptly as practicable thereafter and the Company will use its best efforts to cause such registration to become and remain effective as provided herein (including the taking of such steps as are necessary to obtain the removal of any stop order); provided, that such fifty-one (51%) percent holder shall furnish the Company with appropriate information in connection therewith as the Company may reasonably request; and provided, further, that the Company shall not be required to file such a post effective amendment or registration statement on more than one occasion at its expense. The Company will maintain such registration statement or post-effective amendment current under the Act for a period of at least six (6) months from the effective date thereof. The Company shall supply prospectuses in order to facilitate the public sale of the Registerable Securities, use its best efforts to register and qualify any of the Registerable Securities for sale in such states as such holder reasonably designates, provided such qualification is not solely for the purpose of subjecting the Company to jurisdiction in that state or is not unduly burdensome, and furnish indemnification in the manner provided in Paragraph 6 hereof. (c) The Holder may, in accordance with Paragraphs 5(a) or (b), at his or its option, and subject to the limitations set forth in Paragraph 1(a) hereof, request the registration of any of the Registerable Securities in a filing made by the Company prior to the acquisition of the Securities upon exercise of this Underwriter's Warrant. The Holder may thereafter exercise the Warrants at any time or from time to time subsequent to the effectiveness under the Act of the registration statement in which the Common Stock underlying the Underwriter's Warrants and Warrants were included. (d) The term "51% holder," as used in this Paragraph 5, shall include any owner or combination of owners of Underwriter's Warrants or Registerable Securities if the aggregate number of Common Shares and Warrant Shares included in and underlying the Underwriter's Warrants and Registerable Securities held of record by it or them, would constitute a majority of the aggregate of such Common Shares and Warrant Shares. (e) The following provisions of this Paragraph 5 shall also be applicable: (i) Within ten (10) days after receiving any notice pursuant to Paragraph 5(b), the Company shall give notice to the other Holders of Underwriter's Warrants or Registerable Securities, advising that the Company is proceeding with such post-effective amendment or registration and offering to include therein the Registerable Securities of such other Holders, provided that they shall furnish the Company with all information in connection therewith as shall be necessary or appropriate and as the Company shall reasonably request in writing. Following the effective date of such post-effective amendment or registration, the Company shall, upon the request of any Holder of Registerable Securities, forthwith supply such number of prospectuses meeting the requirements of the Act, as shall be reasonably requested by such Holder. The Company shall use its best efforts to qualify the Registerable Securities for sale in such states as the 51% holder shall designate, provided such qualification is not solely for the purpose of subjecting the Company to jurisdiction in that state or is not unduly burdensome, at such times as the registration statement is effective under the Act. (ii) The Company shall bear the entire cost and expense of any registration of securities initiated by it under Paragraph 5(a) hereof notwithstanding that the Registerable Securities subject to this Underwriter's Warrant may be included in any such registration. The Company shall also comply with one request for registration made by the 51% holder pursuant to Paragraph 5(b) hereof at the Company's own expense and without charge to any holder of the Registerable Securities, and with one request at the expense of the Holders thereof. Notwithstanding the foregoing, any Holder whose Registerable Securities are included in any such registration statement pursuant to this Paragraph 5 shall, however, bear the fees of any counsel retained by him and any transfer taxes or underwriting discounts or commissions applicable to the Registerable Securities sold by him pursuant thereto and, in the case of a 4 6 registration pursuant to Paragraph 5(a) hereof, any additional registration fees attributable to the registration of such Holder's Registerable Securities. (iii) If the managing underwriter in any such underwritten offering shall advise the Company that it declines to include a portion or all of the Registerable Securities requested by the Holders to be included in the registration statement, then distribution of all or a specified portion of the Registerable Securities shall be excluded from such registration statement (in case of an exclusion as to a portion of such Registerable Securities, such portion to be allocated among such Holders in proportion to the respective numbers of Registerable Securities requested to be registered by each such Holder). In such event the Company shall give the Holder prompt notice of the number of Registerable Securities excluded. Further, in such event the Company shall, within six (6) months of the completion of such subsequent offering, file and use its best efforts to have declared effective, at its sole expense, a registration statement relating to such excluded securities. 6. Indemnification. (a) Whenever pursuant to Paragraph 5, a registration statement relating to any Registerable Securities is filed under the Act, amended or supplemented, the Company will indemnify and hold harmless each Holder of the Registerable Securities covered by such registration statement, amendment or supplement (such holder hereinafter referred to as the "Distributing Holder"), each person, if any, who controls (within the meaning of the Act) the Distributing Holder, and each officer, employee, partner or agent of the Distributing Holder, if the Distributing Holder is a broker or dealer, against any losses, claims, damages or liabilities, joint or several, to which the Distributing Holder may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such registration statement or any preliminary prospectus or final prospectus constituting a part thereof or any amendment or supplement thereto, or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and will reimburse the Distributing Holder for any legal or other expenses reasonably incurred by the Distributing Holder, in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case (i) to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder, any other Distributing Holder or any such underwriter for use in the preparation thereof, and (ii) such losses, claims, damages or liabilities arise out of or are based upon any actual or alleged untrue statement or omission made in or from any preliminary prospectus, but corrected in the final prospectus, as amended or supplemented. (b) Whenever pursuant to Paragraph 5 a registration statement relating to the Registerable Securities is filed under the Act, or is amended or supplemented, the Distributing Holder will indemnify and hold harmless the Company, each of its directors, each of its of officers who have signed said registration statement and such amendments and supplements thereto, and each person, if any, who controls the Company (within the meaning of the Act) against any losses, claims, damages or liabilities to which the Company or any such director, officer or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in any such registration statement or any preliminary prospectus or final prospectus constituting a part thereof, or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent that such untrue statement or alleged untrue statement or omission was made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Distributing Holder for use in the preparation thereof; and will reimburse the Company or any such director, officer or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action. 5 7 (c) Promptly after receipt by an indemnified party under this Paragraph 6 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party, give the indemnifying party notice of the commencement thereof; but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Paragraph 6. (d) In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election to so assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Paragraph 6 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. 7. Adjustments of Exercise Price and Number of Securities. (a) The Warrant Price shall be subject to adjustment from time to time as follows: (1) In case the Company shall at any time after the date hereof pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock, then upon such dividend or distribution the Warrant Price in effect immediately prior to such dividend or distribution shall forthwith be reduced to a price determined by dividing: (a) an amount equal to the total number of shares of Common Stock outstanding immediately prior to such dividend or distribution multiplied by the Warrant Price in effect immediately prior to such dividend or distribution, by (b) the total number of shares of Common Stock outstanding immediately after such issuance or sale. For the purposes of any computation to be made in accordance with the provisions of this clause (i), the following provisions shall be applicable: Common Stock issuable by way of dividend or other distribution on any stock of the Company shall he deemed to have been issued immediately after the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution. (2) In case the Company shall at any time subdivide or combine the outstanding Common Stock, the Warrant Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination to the nearest one cent. Any such adjustment shall become effective at the time such subdivision or combination shall become effective. (3) Within a reasonable time after the close of each quarterly fiscal period of the Company during which the Warrant Price has been adjusted as herein provided, the Company shall: (a) Deliver to the Underwriter a certificate signed by the President or Vice President of the Company and by the Treasurer or Assistant Treasurer or the Secretary or an Assistant Secretary of the Company, showing in detail the facts requiring all such adjustments occurring during such period and the Warrant Price after each such adjustment. (b) Notwithstanding anything contained herein to the contrary, no adjustment of the Warrant Price shall be made if the amount of such adjustment shall be less than $.05, but in such case any adjustment that would otherwise be required then to be made shall be carried forward and shall be made at the time and together 6 8 with the next subsequent adjustment which, together with any adjustment so carried forward, shall amount to not less than $.05. (c) In the event that the number of outstanding shares of Common Stock is increased by a stock dividend payable in Common Stock or by a subdivision of the outstanding Common Stock, then, from and after the time at which the adjusted Warrant Price becomes effective pursuant to Subsection (b) of this Section by reason of such dividend or subdivision, the number of shares of Common Stock issuable upon the exercise of each Warrant shall be increased in proportion to such increase in outstanding shares. In the event that the number of shares of Common Stock outstanding is decreased by a combination of the outstanding Common Stock, then, from and after the time at which the adjusted Warrant Price becomes effective pursuant to Subsection (b) of this Section by reason of such combination, the number of shares of Common Stock issuable upon the exercise of each Warrant shall be decreased in proportion to such decrease in the outstanding shares of Common Stock. (d) In case of any reorganization or reclassification of the outstanding Common Stock (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination), or in case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the continuing corporation and which does not result in any reclassification of the outstanding Common Stock), or in case of any sale or conveyance to another corporation of the property of the Company as an entirety or substantially as an entirety, the holder of each Warrant then outstanding shall thereafter have the right to purchase the kind and amount of shares of Common Stock and/or other securities and property receivable upon such reorganization, reclassification, consolidation, merger, sale or conveyance by a holder of the number of shares of Common Stock which the holder of such Warrant shall then be entitled to purchase; such adjustments shall apply with respect to all such changes occurring between the date of this Warrant Agreement and the date of exercise of such Warrant. (e) Subject to the provisions of this Section, in case the Company shall, at any time prior to the exercise of the Warrants, make any distribution of its assets to holders of its Common Stock as a liquidating or a partial liquidating dividend, then the holder of Warrants who exercises his Warrants after the record date for the determination of those holders of Common Stock entitled to such distribution of assets as a liquidating or partial liquidating dividend shall be entitled to receive for the Warrant Price per Warrant, in addition to each share of Common Stock, the amount of such distribution (or, at the option of the Company, a sum equal to the value of any such assets at the time of such distribution as determined by the Board of Directors of the Company in good faith), which would have been payable to such holder had he been the holder of record of the Common Stock receivable upon exercise of his Warrant on the record date for the determination of those entitled to such distribution. (f) In case of the dissolution, liquidation or winding-up of the Company, all rights under the Warrants shall terminate on a date fixed by the Company, such date to be no earlier than ten (10) days prior to the effectiveness of such dissolution, liquidation or winding-up and not later than five (5) days prior to such effectiveness. Notice of such termination of purchase rights shall be given to the last registered holder of the Warrants, as the same shall appear on the books of the Company maintained by the Warrant Agent, by registered mail at least thirty (30) days prior to such termination date. (g) In case the Company shall, at any time prior to the expiration of the Warrants and prior to the exercise thereof, offer to the holders of its Common Stock any rights to subscribe for additional shares of any class of the Company, then the Company shall give written notice thereof to the last registered holder thereof not less than thirty (30) days prior to the date on which the books of the Company are closed or a record date is fixed for the determination of the stockholders entitled to such subscription rights. Such notice shall specify the date as to which the books shall be closed or record date fixed with respect to such offer of subscription and the right of the holder thereof to participate in such offer of subscription shall terminate if the Warrant shall not be exercised on or before the date of such closing of the books or such record date. 7 9 (h) Any adjustment pursuant to the aforesaid provisions shall be made on the basis of the number of shares of Common Stock which the holder thereof would have been entitled to acquire by the exercise of the Warrant immediately prior to the event giving rise to such adjustment. (i) Irrespective of any adjustments in the Warrant Price or the number or kind of shares purchasable upon exercise of the Warrants, Warrants previously or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrants initially issuable pursuant to this Warrant Agreement. (j) The Company may retain a firm of independent public accountants (who may be any such firm regularly employed by the Company) to make any computation required under this Section, and any certificate setting forth such computation signed by such firm shall be conclusive evidence of the correctness of any computation made under this Section. (k) If at any time, as a result of an adjustment made pursuant to paragraph (d) above, the holders of a Warrant or Warrants shall become entitled to purchase any securities other than shares of Common Stock, thereafter the number of such securities so purchasable upon exercise of each Warrant and the Warrant Price for such shares shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in paragraphs (b) and (c). (l) No adjustment to the Warrant Price or to the number of shares of Common Stock purchasable upon the exercise of such Warrants will be made, however under the following circumstances: (i) upon the grant or exercise of any of the options presently outstanding (or options which may hereafter be granted and/or exercised) under the Company's Stock Option Plan for officers, directors and/or employees, consultants and similar situated parties of the Company; or (ii) upon the sale or exercise of the Warrants issued to the public pursuant to the ________ __, 1998 Prospectus; or (iii) upon exercise of this Warrant; or (iv) upon exercise or sale of the Warrants issuable upon exercise of the Underwriter's Warrant; or (v) upon any amendment to or change in the term of any rights or warrants to subscribe for or purchase, or options for the purchase of Common Stock or convertible securities, including, but not limited to, any extension of any expiration date of any such right, warrant or option, any change in any exercise or purchase price provided for in any such right, warrant or option, any extension of any date through which any convertible securities are convertible into or exchangeable for Common Stock or any change in the rate at which any convertible securities are convertible into or exchangeable for Common Stock (other than rights, warrants, options or convertible securities issued or sold after the close of business on the date of the original issue of the Common Stock, (i) for presently outstanding securities, or (ii) for which an adjustment in the Warrant Price then in effect was theretofore made or required to be made, upon issuance or sale thereof). 8. Fractional Shares. (a) The Company shall not be required to issue fractions of shares of Common Shares on the exercise of the Warrants subject to this Underwriter's Warrant. The Company shall not be obligated to issue any fractional share interests or fractional warrant interests upon the exercise of any Warrant or Warrants, nor shall it be obligated to issue scrip or pay cash in lieu of fractional interests, provided, however, that if a holder exercises all the 8 10 Warrants held of record by such holder, the fractional interests shall be eliminated by rounding any fraction up to the nearest whole number of shares. (b) The Holder of this Underwriter's Warrant, by acceptance hereof, expressly waives his right to receive any fractional share of Common Stock upon exercise of the Warrants subject to this Underwriter's Warrant. 9. Redemption of Warrants underlying the Underwriter's Warrant. The Warrants underlying the Underwriter's Warrant shall not be subject to redemption by the Company until they have been exercised and the underlying Warrants are outstanding. 10. Miscellaneous. (a) This Underwriter's Warrant shall be governed by and in accordance with the laws of the State of New York. (b) All notices, requests, consents and other communications hereunder shall be made in writing and shall be deemed to have been duly made when delivered, or mailed by registered or certified mail, return receipt requested: (i) if to a Holder, to the address of such Holder as shown on the books of the Company, or (ii) if to the Company, 13710 Ramona Avenue, Chino, CA 91710. (c) The Company and the Underwriter may from time to time supplement or amend this Underwriter's Warrant without the approval of any other Holders in order to cure any ambiguity, to correct or supplement any provision contained herein which may be defective or inconsistent with any provisions herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Underwriter may deem necessary or desirable and which the Company and the Underwriter deem not to adversely affect the interest of the Holders. (d) All the covenants and provisions of this Underwriter's Warrant by or for the benefit of the Company and the Holders inure to the benefit of their respective successors and assigns hereunder. (e) Nothing in this Underwriter's Warrant shall be construed to give to any person or corporation other than the Company and the Underwriter and any other registered Holder or Holders, any legal or equitable right and that any such right is for the sole and exclusive benefit of the Company and the Underwriter and any other Holder or Holders. (f) This Underwriter's Warrant may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and such counterparts shall together constitute but one and the same instrument. IN WITNESS WHEREOF, Luminex Lighting, Inc. has caused this Underwriter's Warrant to be signed by its duly authorized officer and dated ____________ __, 1998. LUMINEX LIGHTING, INC. By:___________________________ Wasif Siddiqui, President Its: President 9 11 PURCHASE FORM (To be signed only upon exercise of the Underwriter's Warrant) The undersigned, the Holder of the foregoing Underwriter's Warrant, hereby irrevocably elects to exercise the purchase rights represented by such Underwriter's Warrant for, and to purchase thereunder, ________ shares of Common Stock and/or ___ Warrants of Luminex Lighting, Inc. and herewith makes payment of $______ thereof, and requests that the certificates for Common Stock/or Warrants be issued in the name(s) of, and delivered to ____________ whose address(es) is (are) ___________________________ Dated: __________________ - ------------------------- - ------------------------- Address 12 TRANSFER FORM (To be signed only upon transfer of the Underwriter's Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto _______________________ the right to purchase shares of Common Stock and/or Warrants of Luminex Lighting, Inc. represented by the foregoing Underwriter's Warrant to the extent of _____________ shares of Common Stock and/or ____ Warrants, and appoints ______________, attorney to transfer such rights on the books of Luminex Lighting, Inc., with full power of substitution in the premises. Dated:__________________ - ------------------------ (name of holder) - ------------------------ Address - ------------------------ In the presence of: - ------------------------ - ------------------------ EX-23.1 4 CONSENT OF STONEFIELD JOSEPHSON, INC. 1 EXHIBIT 23.1 CONSENT OF STONEFIELD JOSEPHSON, INC. CERTIFIED PUBLIC ACCOUNTANTS 2 CONSENT OF STONEFIELD JOSEPHSON, INC. CERTIFIED PUBLIC ACCOUNTANTS The undersigned independent certified public accounting firm hereby consents to the inclusion of its report on the financial statements of Luminex Lighting, Inc. for the year ending December 31, 1996 and year ending December 31, 1997, and to the reference to it as experts in accounting and auditing relating to said financial statements, in the Registration Statement for Luminex Lighting, Inc. /s/ Stonefield Josephson, Inc. - -------------------------------------------- STONEFIELD JOSEPHSON, INC. Certified Public Accountants Santa Monica, California Dated: November 9, 1998 -----END PRIVACY-ENHANCED MESSAGE-----