-----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, MZYaelihnEi5HdoCdRibqpNMANDXA+RpGN6Rys78D6Sbb1zEjLjYSclYXmlm6ahE pi6gCPVHKpvMRc8xp5a1LA== 0001047469-99-032763.txt : 19990818 0001047469-99-032763.hdr.sgml : 19990818 ACCESSION NUMBER: 0001047469-99-032763 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 9 FILED AS OF DATE: 19990817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TALISMAN ENTERPRISE INC CENTRAL INDEX KEY: 0001076831 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 000000000 STATE OF INCORPORATION: A6 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-83123 FILM NUMBER: 99694716 BUSINESS ADDRESS: STREET 1: 2330 SOUTHFIELD RD STREET 2: UNIT 3-4 CITY: MISSISSAUGA ONTARIO STATE: A6 BUSINESS PHONE: 9058263995 MAIL ADDRESS: STREET 1: 2330 SOUTH, FIELD ROAD STREET 2: MISSISSAUGA, ONTARIO SB-2/A 1 FORM SB-2/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 17, 1999 REGISTRATION FILE NO. 333-83123 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ AMENDMENT NO. 1 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ TALISMAN ENTERPRISES INC. (Exact name of registrant as specified in its charter) ONTARIO 3600 N/A (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No)
------------------------------ 2330 SOUTHFIELD ROAD MISSISSAUGA, ONTARIO CANADA L5N 2W8 (905) 826-3995 (Address and telephone number of registrant's principal executive offices) ------------------------------ JAMES A. OGLE PRESIDENT & CHIEF EXECUTIVE OFFICER TALISMAN ENTERPRISES INC. 2330 SOUTHFIELD ROAD MISSISSAUGA, ONTARIO CANADA L5N 2W8 (905) 826-3995 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: RICHARD A. FRIEDMAN, ESQ. BRUCE W. DAY, ESQ. Sichenzia, Ross & Friedman LLP Day, Edwards, Federman, 135 West 50th Street, 20th Flr. Propester & Christensen, P.C. New York, New York 10020 210 Park Avenue, Suite 2900 (212) 664-1200 Oklahoma City, OK 73102 Fax: (212) 664-7329 (405) 239-2121 Fax: (405) 236-1012
------------------------------ APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------------ If any 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/ If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / ------------------------------ CALCULATION OF REGISTRATION FEE
MAXIMUM OFFERING AMOUNT TO BE PRICE PER MAXIMUM AGGREGATE TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED SECURITY(1) OFFERING PRICE(1) REGISTRATION FEE Common stock, par value per share(2).............. 1,714,627 $5.00 $8,573,135.00 $2,956.25 Common stock underlying warrants(3)............... 1,014,627 $7.50 $7,609,702.50 $2,624.04 Underwriters' warrants(4)......................... 1 $10.00 $10.00 N/A(5) Common stock underlying underwriter's warrants(6)..................................... 60,000 $6.00 $360,000.00 $124.14 Total............................................. $16,542,847.50 $5,704.43
(1) Total estimated solely for the purpose of determining the registration fee. (2) Includes 690,000 shares being sold by Talisman, including underwriter's over-allotment, and 1,024,627 shares being sold by selling shareholders. (3) Represents shares of common stock issuable upon exercise of class A warrants being sold by selling shareholders, together with such indeterminate number of securities as may be issuable by reason of antidilution provisions contained therein. (4) Represent warrants to be issued to the underwriters to purchase 60,000 shares of common stock. (5) No fee due pursuant to Rule 457(g). (6) Represents shares of common stock issuable upon the exercise of the warrants issued to underwriters, together with such indeterminate number of securities as may be issuable by reason of anti-dilution provisions contained therein. The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TALISMAN ENTERPRISES INC. CROSS-REFERENCE SHEET
FORM SB-2 ITEM NUMBER AND CAPTION CAPTIONS IN PROSPECTUS - ----------------------------------------------------------------- ------------------------------------------------------ 1. Front of Registration Statement and Outside Front Cover of Prospectus................................... Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus............................................ Cover Page, Inside Cover Page, Outside Back Page 3. Summary Information and Risk Factors.................. Prospectus Summary, Risk Factors 4. Use of Proceeds....................................... Use of Proceeds 5. Determination of Offering Price....................... Cover Page, Underwriting 6. Dilution.............................................. Dilution 7. Selling Security Holders.............................. Selling Stockholders 8. Plan of Distribution.................................. Prospectus Summary, Underwriting 9. Legal Proceedings..................................... Business 10. Directors, Executive Officers, Promoters and Control Persons............................................... Management, Principal Stockholders 11. Security Ownership of Certain Beneficial Owners and Management............................................ Principal Stockholders 12. Description of Securities............................. Description of Securities 13. Interest of Named Experts and Counsel................. Legal Matters; Experts 14. Disclosure of Commission Position on Indemnification for Securities Act.................................... Liabilities Management 15. Organization Within Last Five Years................... Prospectus Summary, Business 16. Description of Business............................... Prospectus Summary, Business 17. Management's Discussion and Analysis or Plan of Operation............................................. Management's Discussion and Analysis of 18. Description of Property............................... Business 19. Certain Relationships and Related Transactions........ Certain Transactions 20. Market for Common Equity and Related Stockholder Matters............................................... Front Cover Page, Description of Securities 21. Executive Compensation................................ Management 22. Financial Statements.................................. Financial Statements 23. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... Change in Auditors
Subject to Completion Preliminary Prospectus dated August 17, 1999. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. PROSPECTUS , 1999 [LOGO] 1,624,627 SHARES OF COMMON STOCK - ---------------------------------------------------------------------- TALISMAN ENTERPRISES INC.: - - Talisman manufactures and distributes private label alkaline batteries. - - Talisman Enterprises Inc. 2330 Southfield Road Mississauga, Ontario Canada L5N 2W8 (905) 826-3995 - - PROPOSED NASDAQ SMALLCAP MARKET SYMBOL: BATT THE OFFERING: - - Talisman is offering 600,000 shares of common stock through Capital West Securities Inc. The selling stockholders are offering 1,024,627 shares of common stock. - - This prospectus also relates to an offering by the selling stockholders of 1,014,627 shares of common stock underlying class A common stock purchase warrants. - - There is no underwriter or coordinating broker acting in connection with the offering of common shares by the selling stockholders. - - The underwriter has an option to purchase an additional 90,000 shares from Talisman to cover any over-allotments. - - We intend to use the offering proceeds for expansion and development of battery production lines, advertising and sales development, and for providing working capital and other general corporate purposes. ---------------------------------------------------------------------------
PER SHARE TOTAL ----------- --------------- Public offering price............................................ $ 5.00 $ 8,123,135.00 Underwriting discounts and commissions........................... $ 0.50 $ 300,000.00 Proceeds, before expenses, to Talisman........................... $ 4.50 $ 2,700,000.00 Gross Proceeds to selling stockholders........................... $ 5.00 $ 5,123,135.00
------------------------------------------------------------------------ THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5. ------------------------------------------------------------------------ Neither the SEC nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ------------------------------------------------------------------------ CAPITAL WEST SECURITIES, INC. PROSPECTUS SUMMARY THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS. BEFORE MAKING AN INVESTMENT DECISION, YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES, IN ORDER TO UNDERSTAND OUR BUSINESS AND THIS OFFERING FULLY. REFERENCES IN THIS PROSPECTUS TO "TALISMAN," "WE," "OUR," AND "US," REFER TO TALISMAN ENTERPRISES INC., AN ONTARIO, CANADA CORPORATION, TOGETHER WITH ITS SUBSIDIARY AND THEIR PREDECESSORS. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO DOLLAR ($) AMOUNTS ARE TO U.S. DOLLARS. REFERENCES TO CDN$ ARE TO CANADIAN DOLLARS. ALL INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO REFLECT A 1-FOR-25 REVERSE STOCK SPLIT OF THE COMMON STOCK EFFECTED IN JANUARY 1999. TALISMAN ENTERPRISES INC. OUR BUSINESS Talisman Enterprises Inc., through our wholly-owned operating subsidiary, Talisman International Inc., manufactures and distributes high-quality disposable alkaline batteries. These batteries are used in products such as toys, flashlights and Walkmans(R), for private label sale by medium to large retail chains. We are currently, to our knowledge, the only North American-based battery manufacturer that focuses primarily on the private label market. Our objective is to leverage our unique strategic position to capitalize on the North American private label market and significantly increase the private label share of the overall alkaline battery market. OUR MARKET Alkaline batteries are the most widely used type of battery in North America with a greater than 65% share of the overall battery market. Industry analysts estimate that the North American market for disposable alkaline batteries was approximately $3 billion in 1997, representing consumption of approximately 4 billion batteries. An estimated 40% increase in battery-operated devices has driven growth in the use of disposable batteries over the past 10 years. According to industry data, within the North American battery market, the alkaline segment is the fastest growing. Frost & Sullivan, Inc. estimates that the consumption of alkaline batteries is expected to continue to grow at a rate of 5-8% per year. The market for private label products has grown significantly in recent years. In order to generate greater customer loyalty, many retailers have sought to develop private label or corporate brands in numerous consumer product categories. Private label affords retailers an opportunity to enhance their chains' identity by offering high quality products that are less expensive than brand-name alternatives. According to information supplied by the Private Label Manufacturers Association, in a number of product categories, including light bulbs, disposable cameras and tape, private label items have achieved a market share of 20-25%. The study also shows that, on average, retailers are projecting a private label category growth rate of 24% over the next three years. While private label batteries now comprise only approximately 9% of the overall disposable alkaline battery market, batteries are one of the fastest growing segments within the private label market. We believe, that despite a limited supply of private label product, the battery segment has grown at nearly double the rate of other private label categories. Currently, most private label batteries are supplied either by offshore manufacturers or by brand-name battery manufacturers such as Duracell, Inc., a subsidiary of The Gillette Company, and Eveready Battery Co., a subsidiary of Ralston Purina Company. It is our belief that offshore battery suppliers, however, have limited available alkaline production capacities, suffer from high shipping and transportation costs, have long lead times and large quantity purchase requirements, and often produce carbon zinc technology batteries that have a much shorter life than alkaline batteries. We believe companies such as Duracell and Eveready have participated in private label manufacturing only when pressured by certain large retailers. This is primarily because it is not in the best interest of current branded manufacturers to produce private label products. The growth of private label sales comes at the expense of higher margin branded product sales. Profit margins are significantly reduced due to the lower retail price of private label batteries, while advertising expenses remain high and line changeovers result in substantial manufacturing inefficiencies. Consequently, brand-name manufacturers do not actively solicit sales of private label batteries, but provide such products reactively in order to satisfy demands by their large retail accounts. Private label batteries are therefore generally sold to such accounts as a way of improving the branded suppliers position. OUR MARKET OPPORTUNITY We believe we are the only dedicated private label alkaline battery manufacturer in North America. Our manufacturing technology and expertise enable us to produce batteries of comparable quality to leading brand-name batteries. Our location allows us to streamline logistics costs and develop close marketing and sales relationships with leading North American retailers. During 1998, we supplied private label batteries to 15 customers, including A&P Canada, Drug Emporium and Discount Drug Mart. Management estimates that we currently have the capacity to ship in excess of 25 million batteries annually. Through the end of 1998, we manufactured approximately 5.4 million AA batteries. During the first six months of 1999, we manufactured approximately an additional 3.2 million AA batteries. OUR GROWTH STRATEGY We intend to utilize our unique market position and substantial manufacturing capabilities to capitalize on the growth in private label alkaline battery product sales. Talisman's mission is to be the predominate supplier of high-quality, private-label alkaline batteries to all retail channels in North America. OUR HISTORY We were incorporated under the laws of the Province of Ontario on July 28, 1978 under the name Firespur Explorations Ltd. In May 1989, we changed our name to Firesand Explorations Ltd. and, in September 1997, our name changed to its present name. Our offices are located at 2330 Southfield Road, Unit 3-4, Mississauga, Ontario, Canada, L5N 2W8; our telephone number is (905) 826-3995. 2 THE OFFERING Securities offered: Common stock: By Talisman............................ 600,000 shares through Capital West Securities, Inc. By selling stockholders................ 1,024,627 shares and 1,014,627 shares underlying class A common stock purchase warrants. Common stock outstanding before offering............................... 1,055,560 shares Common stock outstanding after offering............................... 2,670,187 shares Use of proceeds.......................... We intend to use the offering proceeds for expansion and development of battery production lines, advertising and sales development, and for providing working capital and other general corporate purposes. Risk factors............................. Investing in these securities involves a high degree of risk and immediate substantial dilution of your investment. As an investor, you should be able to bear a complete loss of your investment. See "Risk Factors" and "Dilution" for a more detailed discussion. Proposed NASDAQ Symbol: BATT
The 2,670,187 shares of common stock to be outstanding after this offering is based on the 1,055,560 shares of common stock outstanding prior to the offering, 600,000 shares of common stock being sold by us in this offering and 1,024,627 shares of common stock being sold by the selling shareholders. The shares of common stock to be outstanding after this offering excludes: - 90,000 shares of common stock subject to the underwriters' over-allotment option - 60,000 shares of common stock issuable upon the exercise of the underwriters' warrants - 31,200 shares of common stock reserved for issuance pursuant to our 1997 Stock Option Plan - 225,000 shares of common stock reserved for issuance pursuant to our 1999 Senior Executive Stock Option Plan - 84,770 shares of common stock reserved for issuance pursuant to our 1999 Directors Company Stock Plan - 1,014,627 shares of common stock issuable upon the exercise of 1,014,627 class A warrants, all of which are currently exercisable - 1,058,615 shares of common stock issuable upon the exercise of additional warrants and options, all of which are currently exercisable The proposed trading symbol does not imply that a liquid and active market will be developed or sustained for the securities upon completion of this offering. 3 SUMMARY FINANCIAL DATA The summary financial data set forth below for the years ended December 31, 1997 and 1998 and at December 31, 1997 and 1998 is derived from and should be read in conjunction with Talisman's consolidated financial statements, including the notes thereto, appearing elsewhere in this prospectus. The summary financial data set forth below for the interim periods ended June 30, 1999 and 1998 has been prepared from Talisman's books and records and reflects, in our opinion, all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows of Talisman, as at the periods indicated therein. Results for interim periods are not necessarily indicative of results which can be expected for the entire year. CONSOLIDATED STATEMENT OF OPERATIONS DATA:
YEAR SEVEN MONTHS SIX MONTHS ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, JUNE 30, ------------- ------------- ---------------------------- 1997 1998 1998 1999 ------------- ------------- ------------- ------------- (UNAUDITED) Revenues............................................. $ 139,646 $ 748,254 $ 348,605 $ 70,688 Operating Expenses................................... 180,582 1,487,052 628,527 639,566 Gross Profit......................................... (40,936) (738,798) (279,922) (568,878) Expenses: Selling, general and administrative................ 597,558 1,136,516 243,229 872,648 Amortization....................................... 27,670 304,182 187,234 370,003 Interest and bank charges.......................... 11,236 99,292 25,749 105,133 Total expenses................................... 636,464 1,539,990 456,212 1,347,784 Loss for the period.................................. (640,340) (2,274,202) (733,733) (1,887,672) Deficit, beginning of period......................... (324,440) (964,780) (964,780) (3,238,982) Deficit, end of period............................... (964,780) (3,238,982) (1,698,553) (5,126,654) Loss per share....................................... (1.35) (3.69) (1.55) (1.83)
CONSOLIDATED BALANCE SHEET DATA:
AS AT DECEMBER 31, AS AT JUNE 30, 1999 --------------------------- --------------------------- 1997 1998 ACTUAL ADJUSTED(1) ------------ ------------- ------------- ------------ (UNAUDITED) Working capital(2)...................................... $ (90,957) $ (1,063,387) $ (3,424,930) $ 3,260,528 Total current assets.................................... 354,591 839,659 3,234,415 4,846,738 Total current liabilities............................... 445,548 1,903,046 6,659,345 1,586,210 Total shareholder's equity.............................. 1,961,368 1,142,461 (586,708) 6,098,750
- ------------------------ (1) As adjusted to reflect (i) the issuance of 1,014,297 shares of common stock upon conversion of $5,073,135 principal amount of 8% convertible subordinated promissory notes, and (ii) the issuance of the 600,000 shares of common stock offered hereby and the application of the net proceeds therefrom. (2) Working capital represents current assets less current liabilities. 4 RISK FACTORS YOU SHOULD CAREFULLY CONSIDER EACH OF THE FOLLOWING RISKS AND ALL OF THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS BEFORE DECIDING TO INVEST IN SHARES OF OUR COMMON STOCK. SOME OF THE FOLLOWING RISKS RELATE PRINCIPALLY TO OUR BUSINESS IN GENERAL AND THE INDUSTRY IN WHICH WE OPERATE. OTHER RISKS RELATE PRINCIPALLY TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS THAT GENERALLY APPLY TO PUBLICLY TRADED COMPANIES, THAT ARE NOT YET IDENTIFIED OR THAT WE CURRENTLY THINK ARE IMMATERIAL, MAY ALSO IMPAIR OUR BUSINESS OPERATIONS AND ADVERSELY AFFECT OUR BUSINESS. IF ANY OF THE FOLLOWING RISKS AND UNCERTAINTIES DEVELOP INTO ACTUAL EVENTS, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS COULD BE MATERIALLY ADVERSELY AFFECTED. IN SUCH A CASE, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO: - OUR FUTURE PLANS; - OBJECTIVES; - EXPECTATIONS AND INTENTIONS; AND - THE ASSUMPTIONS UNDERLYING OR RELATING TO ANY OF THESE STATEMENTS. WE USE WORDS SUCH AS "EXPECTS," "ANTICIPATES," "INTENDS," AND "PLANS" AND SIMILAR EXPRESSIONS TO IDENTIFY FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THESE STATEMENTS AS A RESULT OF CERTAIN FACTORS, AS MORE FULLY DESCRIBED BELOW AND ELSEWHERE IN THIS PROSPECTUS. WE BELIEVE THAT OUR FORWARD-LOOKING STATEMENTS ARE WITHIN THE MEANING OF THE SAFE HARBOR PROVIDED BY THE SECURITIES EXCHANGE ACT OF 1934. RISK FACTORS RELATING TO OUR BUSINESS OUR BUSINESS IS SUBJECT TO THE FOLLOWING RISKS, WHICH INCLUDE RISKS RELATING TO THE INDUSTRY IN WHICH WE OPERATE. WE ARE IN AN EARLY STAGE OF DEVELOPMENT AND WE EXPECT TO ENCOUNTER RISKS ASSOCIATED WITH EARLY-STAGE COMPANIES. Our company was incorporated under the name Firesand Resources Ltd. on July 28, 1978, but has only been engaged in the manufacture and sale of private label alkaline batteries since September 1997. Accordingly, we have a limited operating history in the battery business. Our proposed business operations will be subject to numerous risks associated with early stage enterprises that you should consider. For example, there is no assurance that our operations will be profitable, and that substantial losses will not be sustained or that the we will be able to obtain additional financing when needed. If we fail to adequately address these risks, our business, financial condition and results of operations will be materially adversely affected and the trading price of our common stock could decline, and you may lose all or part of your investment. WE HAVE A HISTORY OF OPERATING LOSSES, AND OUR GROWTH PROGRAM AND FUTURE PROFITABILITY REMAINS UNCERTAIN. Our company generated revenues of $139,646 and $748,254 for the seven months ended December 31, 1997, and the year ending December 31, 1998, and we incurred net losses from our operations of $640,340 and $2,274,202 for such periods, respectively. We expect our operating expenses to increase significantly in connection with our proposed growth program and, accordingly, our future 5 profitability may depend on corresponding increases in revenues from our expanded business operations, of which there can be no assurance. We believe that operating results will be adversely effected if start-up expenses associated with our new product lines are incurred without sufficient offsetting revenues. Moreover, future events, including unanticipated expenses or increased competition could have an adverse effect on our long-term operating margins and results of operations. There can be no assurance that our company's growth program will result in an increase in the profitability of our operations. WE DO NOT HAVE ADEQUATE CASH TO MEET OUR SHORT-TERM OR LONG-TERM NEEDS. We do no presently have adequate cash from operations or financing activities to meet either our short-term or long-term needs. In order to meet our needs for cash to fund our operations, we must either generate cash from operations or obtain additional financing. In the event that we are unable to obtain sufficient cash to pay our obligations as they come due, our business, financial condition and results of operations could be materially adversely affected. In such case, you may lose all or part of your investment. WE ARE DEPENDENT UPON THE CONTINUED SUPPORT OF OUR LENDERS AND SHAREHOLDERS AND THE GENERATION OF PROFITABLE OPERATIONS. The notes to our audited financial statements state that we are in the early stages of our operations and have, therefore, not generated revenues on a consistent basis. The notes further state that the recoverability of our assets is, therefore, dependent on the continued support of our lenders and shareholders and the generation of profitable operations. We may require substantial additional funds in the future, and there can be no assurance that our future financial statements will not include a similar explanatory paragraph if we are unable to raise sufficient funds or generate sufficient cash flow from operations to cover the cost of our operations. The existence of the explanatory paragraph may materially adversely affect our relationship with prospective customers and suppliers, and therefore could have a material adverse effect on our business, financial condition and results of operations. WE MAY HAVE DIFFICULTY DEVELOPING OUR EXPANDING BUSINESS OPERATIONS. Our ability to complete the expansion of our operations into the production and marketing of AAA batteries, increase the production capacity of our AA cell size, and to commence the expansion of our operations into the production and marketing of C and D battery cell sizes is dependent upon the receipt of the proceeds of this offering. In addition, our ability to complete the proposed expansion of our operations into the production and marketing of C and D battery cell sizes is dependent upon obtaining additional financing. In the event that this offering is not completed and additional financing is not obtained, we may be unable to complete and/or implement our plans to expand our operations, and our business, financial condition and results of operations may be materially adversely affected. OUR SUCCESS DEPENDS ON MAINTAINING RELATIONSHIPS WITH KEY CUSTOMERS. Our company has several large customers upon which we depend on for the sale of our battery products. Specifically, for the year ended December 31, 1998, sales to Discount Drug Mart represented 28.6%, Drug Emporium represented 23.7%, Zellers Inc. represented 9.1% and A&P Fireco represented 7.0% of our overall sales. Further, no other retail customer accounted for more than 5% of our overall sales. Customers' orders are dependent upon their markets and customers and may vary significantly in the future based upon the demand for our products. The loss of one or more of such customers, or a declining market in which such customers reduce orders or request reduced prices, could have a material adverse effect on our business. 6 WE DO NOT HAVE ANY CUSTOMER AGREEMENTS We do not have any agreements with our customers for any fixed or minimum amount of sales or revenues. All of our customers order products from us by way of purchase orders. Accordingly, there can be no assurance of a minimum amount of sales which we may expect to achieve. In addition, although we have not, to date, experienced any material cancellations, in the event of the cancellation of a customer order, we may incur losses to the extent that we have produced but not shipped such customer's private label branded batteries. WE DEPEND UPON OUR SUPPLIERS FOR RAW MATERIALS AND MAY NOT BE ABLE TO REPLACE THEM. We rely on other companies to supply us with raw materials. Our company has a number of key suppliers who are also shareholders of the company. They include Burlington Stamping Inc. of Burlington, Ontario and Hibar Systems Limited of Richmond Hill, Ontario. BSI supplies all of our battery cans while Hibar supplies all of our battery pre-assemblies. If we lose one or more of such suppliers or are unable to obtain the raw materials or products in the quantities required by us, our business, financial condition and results of operations may be materially adversely affected. WE CANNOT PREDICT OUR SUCCESS BECAUSE WE HAVE A LIMITED MANUFACTURING HISTORY. We have a limited operating history upon which to evaluate our ability to manufacture profitably alkaline batteries. Although we have two AA cell lines capable of producing at a rate of 100 pieces per minute, or 24,000,000 pieces per year, to date, our company has only manufactured approximately 8.6 million AA batteries. Our existing manufacturing capabilities for AA alkaline cells currently exceed the market for our AA battery products, however there can be no assurance that we will be able to expand successfully our operations in response to a rapid increase in market demand for our products. Following the offering, we intend to introduce a third cell line in 1999, capable of producing 100 AAA cells per minute. Subject to financing, our current plans include building a D line in early 2000 followed by a C line in mid 2000. Our expanded manufacturing facilities may be subject to risks of delay or difficulty in manufacturing and may require substantial additional capital to establish the expanded facilities. Accordingly, there can be no assurance that we will be successful in implementing and expanding our manufacturing capabilities, or that, once implemented, the expanded manufacturing capabilities will generate substantial revenues or attain profitable operations. BECAUSE WE HAVE LIMITED MARKETING AND SALES CAPACITY WE MAY HAVE TO RELY ON THIRD PARTIES FOR SUCH SERVICES. After completion of the development of our new battery cell lines, in order to generate additional revenues, we will be required to market successfully our alkaline batteries to customers. We currently have a full time sales organization consisting of four qualified sales professionals who generate a majority of business through a network of brokers. We have developed a relationship with two out of the four major, national, private label brokers dedicated to the food class of trade. In addition, we have established relationships with twelve independent regional sales agencies, which handled a myriad of non-food, and drug battery customers throughout Canada and the United States. Our agreements with our independent sales representative groups and brokers are on mutually cancelable terms. There can be no assurance that we will be able to market successfully our alkaline batteries. Further, to the extent that we arrange with third parties to market our proposed products, the success of such products may depend on the efforts of such third parties. 7 WE MAY BE UNABLE TO COMPETE FAVORABLY IN THE HIGHLY COMPETITIVE BATTERY INDUSTRY. The manufacture and sale of alkaline batteries is highly competitive and there are no substantial barriers to entry into the market. We believe that the principal competitive factors affecting the market for battery products are: - the quality of the product - price - technological developments - turn around time for production orders - payment terms of customers - marketing and sales Most of our competitors are large, well-established companies with considerably greater financial, marketing, sales and technical resources than those available to us. Additionally, many of our present and potential competitors have research and development capabilities that may allow such competitors to develop new or improved products that may compete with our product lines. These companies may succeed in developing proposed products that are more effective or less costly than our proposed products or such companies may be more successful in manufacturing and marketing their proposed products. An increase in competition could result in a loss of market share. OUR BATTERY PRODUCTS MAY HAVE A POTENTIAL FOR TECHNOLOGICAL OBSOLESCENCE. The battery industry is characterized by intense competition. Our battery products could be rendered obsolete or uneconomical by the development of new products, technological advances affecting the cost of production, or marketing or pricing actions by one or more of our competitors. Any one or more of the foregoing developments or a fundamental shift in technology in our product markets could have a material adverse effect on our business, financial condition or results of operations. WE MAY NOT BE ABLE TO RETAIN KEY PERSONNEL WE DEPEND ON TO SUCCEED. We are highly dependent on the experience of our management in the continuing development of our retail operations. The loss of the services of certain of these individuals, particularly James Ogle, President, or Garry Syme, Senior Vice President, may have a material adverse effect on the company's business. We have employment agreements with Mr. Ogle and Mr. Syme, which expire in December 2002 and January 2002, respectively. Further, we have purchased key-man life insurance in the amount of CDN$1,500,000 on the lives of each of Mr. Syme and Mr. Ogle, with our company as the named beneficiary. WE MAY NOT BE ABLE TO RETAIN THE KEY PERSONNEL WE NEED TO SUCCEED. Our future success will depend in part on our ability to attract and retain qualified personnel to manage the development and future growth of our company. There can be no assurance that we will be successful in attracting and retaining such personnel. The failure to recruit additional key personnel could have a material adverse effect on our business, financial condition and results of operations. MANAGEMENT HAS BROAD DISCRETION AS TO THE USE OF PROCEEDS OF THE OFFERING. Our management may spend the proceeds from this offering in ways which differ from the specific proposed uses described in this prospectus. We have allocated a large portion of the proceeds from this offering to discretionary uses. You will be relying on the judgement of our management regarding the 8 application of the proceeds of this offering. As a stockholder, you may not agree with management's spending decisions. Please see "Use of Proceeds." CHANGES IN GOVERNMENT REGULATIONS MAY ADVERSELY AFFECT OUR BUSINESS. Federal, state, provincial and local laws, particularly relating to the protection of the environment, may materially affect our operations. We have made every attempt to ensure that our manufacturing facilities do not contravene any environmental laws. Although we believe that we are in compliance with existing laws and regulations, there can be no assurance that substantial costs for compliance will not be incurred if there are changes in government regulations. Any substantial violations of these rules and regulations could have an adverse affect upon our operations. WE HAVE NO REGISTERED TRADEMARKS AND THERE MAY BE CLAIMS OF INFRINGEMENTS. We are aware that the use or registration of trademarks entails the risk of claims of infringement or opposition from third parties. Although there are no pending lawsuits against us regarding claims of trademark infringement, there can be no assurance that third parties will not initiate such litigation against us or that any such litigation will be resolved in our favor. WE HAVE A LIMITED AMOUNT OF INSURANCE COVERAGE AND MAY NOT BE ABLE TO COVER LIABILITY CLAIMS. Our company carries product liability insurance coverage on its battery products in the amount of CDN$1,000,000, with an additional umbrella protection of CDN$14,000,000. There can be no assurance that such insurance will be adequate to cover potential product liability claims or that a loss of insurance coverage or the assertion of a product liability claim or claims would not materially adversely affect our business, financial condition and results of operations. See "Business--Product Liability Insurance." WE MAY BE ADVERSELY AFFECTED IF OUR YEAR 2000 REMEDIATION EFFORTS ARE NOT SUCCESSFUL. Our business could be adversely impacted by information technology issues related to the Year 2000. We have been engaged in assessing this Year 2000 issue as it relates to our business. This review covers information and non-information technology systems of both our own operating systems and the systems of our third party vendors and manufacturers. We have completed surveying our suppliers and service providers for Year 2000 compliance. We currently believe that the most reasonably likely worst case scenario is that there will be some localized disruptions of systems that will affect individual, process, facilities or suppliers for a short time rather than systematic or long-term problems affecting our business operations as a whole. There is still uncertainty about the broader scope of the Year 2000 issue as it may affect our company and third parties, including our suppliers and customers, that are critical to our operations. For example, lack of readiness by electrical and water utilities, financial institutions, governmental agencies or others, pose significant impediments to our ability to carry on our normal operations. In the event that we are unable to complete our remedial actions and are unable to implement adequate contingency plans in the event problems are encountered, there could be a material adverse effect on our business, results of operations or financial condition. For more information regarding our Year 2000 program see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000." 9 RISK FACTORS RELATING TO SECURITIES MARKETS THERE ARE RISKS RELATING TO THE SECURITIES MARKET THAT YOU SHOULD CONSIDER IN CONNECTION WITH YOUR INVESTMENT IN AND OWNERSHIP OF OUR STOCK. FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY NEGATIVELY IMPACT OUR STOCK PRICE. Our quarterly operating results have generally fluctuated, with the highest results coinciding with increased production and sales in anticipation of peak buying periods events such as back-to-school and holidays such as Christmas. The Company has experienced a substantial increase in sales in these seasons as a result of increases in sales of third party products requiring battery power including battery-operated toys, appliances and audio/video equipment. Our results of operations may vary significantly in the future depending on factors which may include: - the size, timing and recognition of revenue derived from customer's sales of its products; - increased competition; - changes in our pricing policies or those of its competitors; - the financial stability of major customers; new product introductions or enhancements by competitors; - the degree of success of new products; - any changes in operating expenses; and - general economic conditions. As a result, there may be significant fluctuations in our revenues from period to period. Our expense levels are based, in part, on our expectations for future orders and sales, and if sales are below expectations, operating results are likely to be adversely affected. Net income may be disproportionately affected by a reduction of sales because a significant portion of our expenses do not vary with revenues. We may also choose to reduce prices or increase spending in response to competition or in order to pursue new market opportunities. These issues could affect our operating margins in the future and our company may be materially adversely affected. OUR COMMON STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN LOSSES OR DIFFICULTIES IN LIQUIDATING SHARES FOR STOCKHOLDERS. No assurance can be given that an active market will be available for our common stock or as to the liquidity of the trading market for our common stock. If a trading market is not maintained, holders of our common stock may experience difficulty in reselling their shares or may be unable to resell them at all. Any such market may be discontinued at any time. In addition, there is no assurance that the price of our common stock in the market will be equal to or greater than the offering price hereof. See "Description of Securities." THE EXERCISE OF OUR CLASS A WARRANTS MAY ADVERSELY EFFECT THE MARKET PRICE OF OUR SECURITIES. We have an aggregate of approximately 1,055,560 shares of common stock outstanding, an unlimited number of shares of common stock authorized but unissued, 1,014,627 shares of common stock unissued but reserved for issuance upon exercise of the class A warrants, and 1,014,627 shares of common stock unissued but reserved for issuance upon conversion of promissory notes. The exercise of the class A warrants and the sale of the underlying shares of common stock may have a depressive effect on the market price of our securities. Moreover, the terms upon which we will be able to obtain additional equity capital may be adversely affected since the holders of outstanding warrants can be expected to exercise them, to the extent they are able, at a time when we would, in all likelihood, be 10 able to obtain any needed capital on terms more favorable to us than those provided in the class A warrants. For a complete description of the terms and conditions of exercise of the class A warrants, see "Description of Securities." WE DO NOT ANTICIPATE PAYING ANY DIVIDENDS. To date, we have paid no cash dividends. Payment of dividends is up to the discretion of our board of directors. For the foreseeable future, the board of directors intends to retain earnings generated from our operations for use in our business and do not anticipate paying any dividends. THE REDEMPTION OF OUR CLASS A WARRANTS HAS THE POTENTIAL TO ADVERSELY EFFECT OUR COMPANY. Our class A warrants are redeemable at a price of $0.10 provided that (A) prior notice of not less than 30 days is given to the warrant holders, (B) the last sale price of our common stock shall have been at least $9.00 per share for a period not less than 30 consecutive days trading period ending on the third day prior to the date on which the notice of redemption is given. Warrant holders have these exercise rights until the close of the business day preceding the date fixed for redemption. Notice of redemption of the class A warrants could force the holders to exercise the class A warrants at the current market price when they might otherwise wish to hold them, or to accept the redemption price, which may be substantially less than the market value of the class A warrants at the time of redemption. For a complete description of the terms and conditions of redemption of the class A warrants, see "Description of Securities--class A warrants." WE WILL CONTINUE TO BE CONTROLLED BY PRESENT SHAREHOLDERS. Our present shareholders of common stock have acquired a controlling interest in Talisman at a cost of substantially less than that which the investors pursuant to this offering may purchase their securities. Therefore, the investors pursuant to this offering will bear a substantial portion of the risk of loss, while control of Talisman will remain in the hands of the current shareholders. WE MAY ISSUE ADDITIONAL SECURITIES THEREBY DILUTING SHAREHOLDERS' INTERESTS. The board of directors of Talisman will have authority to issue further common stock or other securities without the consent or vote of the shareholders of the company. The issuance of additional common stock by our management, whether in respect of a transaction involving a business opportunity or otherwise, may have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock, including investors under this offering. Although, we are prohibited from issuing any additional securities, except pursuant to our 1997 Stock Option Plan, 1999 Senior Executive Stock Option Plan, and 1999 Directors Company Stock Plan, for a period of two years from March 19, 1999 without the prior written consent of Spencer Trask Securities, Inc. 11 WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION Talisman files reports, proxy statements and other information with the Commission. Those reports, proxy statements and other information may be obtained: - At the public reference room of the Commission, Room 1024--Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; - At the public reference facilities at the Commission's regional offices located at Seven World Trade Center, 13th Floor, New York, New York 10048 or Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; - By writing to the Commission, Public Reference Section, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; - At the offices of The Nasdaq Stock Market, Reports Section, 1735 K Street, N.W., Washington, D.C. 20006; or - From the Internet site maintained by the Commission at http://www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. Talisman has filed with the Commission a registration statement under the Securities Act of 1933, as amended, with respect to the common stock offered hereby. This prospectus, which is a part of the registration statement, does not contain all the information set forth in, or annexed as exhibits to, such registration statement, certain portions of which have been omitted pursuant to rules and regulations of the Commission. For further information with respect to Talisman and the common stock, reference is made to such registration statement, including the exhibits thereto, copies of which may be inspected and copied at the aforementioned facilities of the Commission. Copies of such registration statement, including the exhibits, may be obtained from the Public Reference Section of the Commission at the aforementioned address upon payment of the fee prescribed by the Commission. Information regarding the operation of the Commission's public reference facilities may be obtained by calling the SEC at 1-800-SEC-0330. Talisman intends to distribute to its stockholders annual reports containing financial statements audited and reported upon by its independent public accountants after the close of each fiscal year, and will make such other periodic reports as the company may determine to be appropriate or as may be required by law. Talisman's fiscal year ends December 31st of each year. 12 USE OF PROCEEDS We estimate that the net proceeds to Talisman from the sale of the 600,000 shares of common stock will be approximately $2,210,000 ($2,435,000 if the underwriters' over-allotment option is exercised in full), based upon the public offering price of $5.00 per share, and after deducting underwriting discounts and estimated offering expenses. We intend to use the net proceeds of the offering as follows:
APPROXIMATE APPLICATION OF APPROXIMATE PERCENTAGE OF NET PROCEEDS DOLLAR AMOUNT NET PROCEEDS - ------------------------------------------------------------------------------------ -------------- --------------- Expansion and development of battery production lines............................... 1,400,000 63.4% Advertising and sales development................................................... 350,000 15.8% Working capital and general corporate purposes...................................... 460,000 20.8% -------------- ----- Total....................................................................... $ 2,210,000 100.0% -------------- ----- -------------- -----
Any money received by Talisman upon the exercise of the class A common stock purchase warrants will be used for working capital and general corporate purposes. The maximum amount of proceeds that Talisman will receive upon the exercise of the class A common stock purchase warrants is $7,609,702.50 (assuming the current exercise price of $7.50 per share). There can be no assurance that any or all of the class A common stock purchase warrants will be exercised and that Talisman will receive any proceeds therefrom. We reserve the right to reallocate proceeds to different uses if, in management's view, the needs of the business so require. In addition, a large portion of the proceeds is allocated to discretionary purposes. Investors may not agree with any such allocation or reallocation. Based on our operating plan, we believe that the net proceeds of this offering, together with available funds on hand and cash flow from future operations, will be sufficient to satisfy our working capital requirements for at least 12 months following this offering. Such belief is based upon certain assumptions (including assumptions as to our contemplated operations and business plan and economic and industry conditions). We cannot be certain that such resources will be sufficient for such purpose. Furthermore, if we were to make significant acquisitions for cash consideration, we would require additional capital. In addition, contingencies may arise that may require us to obtain additional capital. We cannot be certain that we will be able to obtain such capital on favorable terms or at all. Pending use of the net proceeds of this offering, we intend to invest the net proceeds in short-term, interest-bearing, investment grade securities. Please see "Capitalization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." 13 DILUTION At June 30, 1999, the net tangible deficit attributable to exchange of indebtedness and additional share issuance of Talisman was $(2,871,468), or approximately $(2.79) per share. After giving effect to conversion of all the outstanding promissory notes into an aggregate of 1,014,627 shares of common stock upon listing of Talisman's common stock on the Nasdaq SmallCap Market, our net tangible book value as of June 30, 1999, was approximately $2,201,667, or $1.08 per share of common stock. After giving effect to the sale by Talisman of the 600,000 shares of common stock offered hereby, at the public offering price of $5.00 per share, the net tangible book value of Talisman is $4,411,667, or $1.67 per share. This represents an immediate increase in the pro forma net tangible book value of $4.46 per share to existing stockholders and an immediate dilution in pro forma net tangible book value of $3.33 per share to new investors. Please see "Certain Transactions" and "Description of Securities." The following table illustrates this per share dilution. Initial public offering price per share..................... $ 5.00 Net tangible book value per share as of June 30, 1999..... $ (2.79) Increase in net tangible book value attributable to exchange of indebtedness and additional share issuance................................................ 3.87 Increase in net tangible book value per share attributable to new investors........................................ 0.59 --------- Net tangible book value per share after the offering........ 1.67 Dilution per share to new investors......................... $ 3.33 --------- ---------
The following table summarizes, as of June 30, 1999, the differences between the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by existing stockholders and by new investors at the offering price of $5.00 per share and before deducting estimated underwriting discounts and commissions and estimated offering expenses for new investors:
PERCENTAGE PERCENTAGE AVERAGE OF TOTAL AGGREGATE OF TOTAL PRICE SHARES PURCHASED SHARES CONSIDERATION CONSIDERATION PER SHARE ---------------- -------------- ------------- ------------- ----------- Existing Shareholders................ 1,030,330 63% $ 2,590,287 46% $ 2.51 New Investors........................ 600,000 37% $ 3,000,000 54% $ 5.00 ---------------- ------- ------------- ------------- Total................................ 1,630,330 100.0% $ 5,590,287 100.0% ---------------- ------- ------------- ------------- ---------------- ------- ------------- -------------
The foregoing discussion and table does not give effect to: - 25,230 shares of common stock issued subsequent to June 30, 1999, of which 15,230 shares were issued under our 1999 Directors Company Stock Plan, and 10,000 shares were issued in connection with legal services rendered. - 90,000 shares of common stock subject to the underwriters' over-allotment option - 60,000 shares of common stock issuable upon the exercise of the underwriters' warrants - 31,200 shares of common stock reserved for issuance pursuant to our 1997 Stock Option Plan - 225,000 shares of common stock reserved for issuance pursuant to our 1999 Senior Executive Stock Option Plan - 84,770 shares of common stock reserved for issuance pursuant to our 1999 Directors Company Stock Plan 14 - 1,014,627 shares of common stock issuable upon the exercise of 1,014,627 class A warrants, all of which are currently exercisable - 1,058,615 shares of common stock issuable upon the exercise of additional warrants and options, all of which are currently exercisable - the automatic conversion of $5,073,135 principal amount of 8% convertible subordinated promissory notes into 1,014,627 shares of common stock upon listing of Talisman's common stock on a U.S. based exchange 15 CAPITALIZATION The following table sets forth the actual capitalization of Talisman as of June 30, 1999, and as adjusted to reflect the sale of 600,000 shares of common stock offered hereby at an initial public offering price of $5.00 per share, after deducting the underwriting discounts and estimated offering expenses payable by Talisman, and the application of the net proceeds from this offering and the automatic conversion of all outstanding 8% convertible subordinated promissory notes into 1,014,627 shares of common stock upon listing of Talisman's common stock on the Nasdaq SmallCap Market. This table should be read in conjunction with the consolidated financial statements and the notes thereto appearing elsewhere in this prospectus.
JUNE 30, 1999 -------------------------- ACTUAL AS ADJUSTED ------------ ------------ Total current liabilities............................................................. $ 6,659,345 $ 1,586,210 Total long-term liabilities........................................................... 539,198 539,198 Shareholders equity: Common stock, an unlimited number of shares authorized; 1,030,330 shares issued and outstanding on an actual basis; 2,644,957 shares issued and outstanding as adjusted............................................................................ 2,590,287 9,377,208 Class A special shares, an unlimited number of shares authorized; 3,300 shares issued and outstanding on an actual and as adjusted basis.................................. 1,687,083 1,687,083 Class A warrants, 1,014,627 outstanding............................................... 101,463 -- Retained earnings (accumulated deficit)............................................... (5,126,654) (5,126,654) Accumulated other comprehensive loss.................................................. (148,120) (148,120) Contributed surplus................................................................... 309,233 309,233 Total shareholders' equity............................................................ (586,708) 6,098,750 Total capitalization.................................................................. 6,611,835 8,224,158
The 2,644,957 shares as adjusted for this offering excludes: - 25,230 shares of common stock issued subsequent to June 30, 1999, of which 15,230 shares were issued under our 1999 Directors Company Stock Plan, and 10,000 shares were issued in connection with legal services rendered. - 90,000 shares of common stock subject to the underwriters' over-allotment option - 60,000 shares of common stock issuable upon the exercise of the underwriters' warrants - 31,200 shares of common stock reserved for issuance pursuant to our 1997 Stock Option Plan - 225,000 shares of common stock reserved for issuance pursuant to our 1999 Senior Executive Stock Option Plan - 84,770 shares of common stock reserved for issuance pursuant to our 1999 Directors Company Stock Plan - 1,014,627 shares of common stock issuable upon the exercise of 1,014,627 class A warrants, all of which are currently exercisable - 1,058,615 shares of common stock issuable upon the exercise of additional warrants and options, all of which are currently exercisable 16 EXCHANGE RATE DATA We maintain our books of account in Canadian dollars, but have provided the financial data in this prospectus in United States dollars with our audit conducted in accordance with generally accepted auditing standards in the United States of America. The following table sets forth, for the periods indicated, certain exchange rates based on the noon buying rate in New York City for cable transfers in Canadian dollars. Such rates are the number of United States dollars per one Canadian dollar and are the inverse of rates quoted by the Federal Reserve Bank of New York for Canadian dollars per US$1.00. The average exchange rate is based on the average of the daily exchange rates during such periods. On July 31, 1999, the exchange rate was approximately CDN.$1.00 per US$.6716.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- Rate at end of period............................................ $ .7128 $ .7323 $ .7301 $ .6999 $ .6505 Average rate during period....................................... .7320 .7288 .7333 .7222 .6740 High............................................................. .7632 .7527 .7513 .7487 .7104 Low.............................................................. .7103 .7023 .7235 .6945 .6422
PRICE RANGE FOR COMMON STOCK AND DIVIDEND POLICY On December 30, 1997, Talisman's common stock began trading on the Canadian Dealing Network Inc., a subsidiary of The Toronto Stock Exchange, under the symbol "TALS." The Canadian Dealing Network is a trade reporting and quotation system for over-the-counter trading in the Province of Ontario, Canada. On January 27, 1999, Talisman effected a 1-for-25 reverse split of our common stock, which upon consummation, Talisman requested the Canadian Dealing Network to formally halt public quotation of the shares of Talisman. This requested suspension does not affect the ability of market makers and other dealers to report trades of the common shares of Talisman through the facilities of the Canadian Dealing Network. We have applied for quotation of our common stock on the Nasdaq SmallCap Market under the symbols "BATT" and "BATTW." The following table sets forth, for the periods indicated, the high and low closing trading prices of the common stock as reported by the Canadian Dealing Network.
MONTH HIGH LOW - ------------------------------------------------------------------------------------------------- --------- --------- December, 1997................................................................................... 34.03 34.03 January, 1998.................................................................................... 34.03 22.12 February, 1998................................................................................... 23.65 14.46 March, 1998...................................................................................... 12.76 8.50 April, 1998...................................................................................... 13.61 7.66 May, 1998........................................................................................ 11.06 7.66 June, 1998....................................................................................... 7.66 5.96 July, 1998....................................................................................... 6.81 3.40 August, 1998..................................................................................... 6.47 4.25 September, 1998.................................................................................. 4.25 3.06 October, 1998.................................................................................... 3.91 2.70 November, 1998................................................................................... 3.40 2.21 December, 1998................................................................................... 5.10 2.04 January, 1999.................................................................................... 5.10 3.40
17 The closing trading prices set forth above have been stated in dollars, and have been calculated based upon the Exchange Rate in effect as of July 31, 1999, which was approximately CDN.$1.00 per US$.6716. As of August 1, 1999, there were 1,055,560 shares of common stock outstanding, there were approximately 2,000 registered holders of Talisman's common stock. DIVIDEND POLICY To date, Talisman has paid no dividends on any shares of its common stock and Talisman's board of directors has no present intention of paying any dividends on its common stock in the foreseeable future, as we intend to use our earnings, if any, to generate increased growth. The payment by Talisman of dividends in the future, if any, rests solely within the discretion of the board of directors and will depend upon, among other things, Talisman's earnings, capital requirements and financial condition, as well as other factors deemed relevant by Talisman's board of directors. Although dividends are not limited currently by any agreements, it is anticipated that future agreements, if any, with institutional lenders or others may also limit Talisman's ability to pay dividends. 18 SELECTED FINANCIAL DATA The selected financial data set forth below for the years ended December 31, 1997 and 1998 and at December 31, 1997 and 1998 is derived from and should be read in conjunction with Talisman's consolidated financial statements, including the notes thereto, appearing elsewhere in this prospectus. The summary financial data set forth below for the interim periods ended June 30, 1999 and 1998 has been prepared from Talisman's books and records and reflects, in our opinion, all adjustments necessary for a fair presentation of the financial position, results of operations, and cash flows of Talisman, as at the periods indicated therein. Results for interim periods are not necessarily indicative of results which can be expected for the entire year. CONSOLIDATED STATEMENT OF OPERATIONS DATA:
SIX MONTHS YEAR ENDED SEVEN MONTHS ENDED ENDED JUNE 30, DECEMBER 31, DECEMBER 31, ---------------------------- 1997 1998 1998 1999 ------------------- ------------- ------------- ------------- (UNAUDITED) Revenues....................................... $ 139,646 $ 748,254 $ 348,605 $ 70,688 Operating Expenses............................. 180,582 1,487,052 628,527 639,566 Gross Profit................................... (40,936) (738,798) (279,922) (568,878) Expenses: Selling, general and administrative........ 597,558 1,136,516 243,229 872,648 Amortization............................... 27,670 304,182 187,234 370,003 Interest and bank charges.................. 11,236 99,292 25,749 105,133 Total expenses......................... 636,464 1,539,990 456,212 1,347,784 Loss for the period............................ (640,340) (2,274,202) (733,773) (1,887,672) Deficit, beginning of period................... (324,440) (964,780) (964,780) (3,238,982) Deficit, end of period......................... (964,780) (3,238,982) (1,698,553) (5,126,654) Loss per share................................. (1.35) (3.69) (1.55) (1.83)
CONSOLIDATED BALANCE SHEET DATA:
AS AT DECEMBER 31, AS AT JUNE 30, 1999 ------------------------- --------------------------- 1997 1998 ACTUAL ADJUSTED(1) ---------- ------------- ------------- ------------ (UNAUDITED) Working capita1(2)....................................... $ (90,957) $ (1,063,387) $ (3,424,930) $ 3,260,528 Total current assets..................................... 354,591 839,659 3,234,415 4,846,738 Total current liabilities................................ 445,548 1,903,046 6,659,345 1,586,210 Total shareholder's equity............................... 1,961,368 1,142,461 (586,708) 6,098,750
- ------------------------ (1) As adjusted to reflect (i) the issuance of 1,014,297 shares of common stock upon conversion of $5,073,135 principal amount of 8% convertible subordinated promissory notes, and (ii) the issuance of the 600,000 shares of common stock offered hereby and the application of the net proceeds therefrom. (2) Working capital represents current assets less current liabilities. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this prospectus that are not historical are forward looking statements, including statements regarding our expectations, intentions, beliefs or strategies regarding the future. Forward looking statements include statements regarding liquidity, anticipated cash needs and availability and anticipated expense levels. All forward looking statements included in this prospectus are based on information available to us on the date hereof and we assume no obligation to update any such forward looking statements. It is important to note that our actual results could differ materially from those in such forward looking statements. Among the factors that could cause actual results to differ materially are the factors detailed in the risks discussed in the "Risk Factors" section included in this prospectus beginning at page 6. GENERAL Talisman was incorporated in July 1978 and for almost 20 years carried on business as a junior mineral exploration company in the Province of Ontario, Canada. In September 1997, Talisman (then known as Firesand Resources Ltd.) entered into a share exchange agreement with Talisman International Inc. pursuant to which Talisman acquired all of the issued and outstanding shares of common stock of Talisman International in exchange for shares of Talisman. Upon completion of the share exchange, Talisman changed its name to its current name, Talisman Enterprises Inc. The share exchange was accounted for as a reverse takeover and accordingly, the results of Talisman (formerly constituted as Firesand) have been included with those of Talisman International from the date of the share exchange. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998 REVENUES. Total revenues for the six months ended June 30, 1999 decreased 80% to $70,688 from $348,605 for the six months ended June 30, 1998. This decrease was primarily attributable to the timing of sales orders placed by Drug Emporium as a result of a start-up program. OPERATING EXPENSES AND GROSS MARGINS. Operating expenses increased slightly to $639,566 for the six months ended June 30, 1999, from $628,527 for the six month period ended June 30, 1998. The increase was caused by continued spending in direct material costs in anticipation of future sales. Gross margins, as a percentage of revenues, decreased (805%) for the six months ended June 30, 1999, from (81%) for the six month period ended June 30, 1998. The decline in gross margin percentage resulted from a decrease in sales without a decrease in fixed operating costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense for the six months ended June 30, 1999 increased 259% to $872,648 from $243,229 for the six months ended June 30, 1998. This increase was primarily attributable to the hiring of two key employees, specifically James A. Ogle, President and Chief Executive Officer, and Christian H. Bunger, Vice President of Sales-U.S., along with accruing for a management bonus program. AMORTIZATION EXPENSE. Amortization expense for the six months ended June 30, 1999 increased 98% to $370,003 from $187,234 for the six months ended June 30, 1998. INTEREST EXPENSE AND BANK CHARGES. Interest expense and bank charges for the six months ended June 30, 1999 increased 309% to $105,133 from $25,749 for the six months ended June 30, 1998. This increase was primarily attributable to higher term loan principal balance in 1999 due to replacing credit institutions from the Bank of Hongkong to Canadian Imperial Bank of Commerce, in addition to commencement fees paid to General Electric Capital Canada Inc. in regards to the loan agreement. 20 YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE SEVEN MONTHS ENDED DECEMBER 31, 1997 REVENUES. Revenues increased to $748,254 for the year ended December 31, 1998, from $139,646 for the seven month period ended December 31, 1997. This increase in sales was attributable to a growth in Talisman's customer base from 11 to 34 customers, as a result of the increased ability of Talisman to supply our customers. For the year ended December 31, 1998, approximately 77% of Talisman's sales (representing an aggregate of approximately $576,159 of revenues) were made to customers located in the United States, including sales to Drug Emporium, Discount Drug Mart, and Save-On. For the seven month period ended December 31, 1997, Talisman had only minimal sales to customers located in the United States (representing an aggregate of approximately $6,204 of revenues). OPERATING EXPENSES AND GROSS MARGINS. Operating expenses increased to $1,487,052 for the year ended December 31, 1998, from $180,582 for the seven month period ended December 31, 1997. Gross margins, as a percentage of revenues, decreased to (99%) for the year ended December 31, 1998, from (29%) for the seven month period ended December 31, 1997. The gross margin percentage (99%) is in a negative position because these expenses were incurred in advance of the increase in the customers sales base (approximately 50% of sales occurred during the last 2 months of the period). SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and administrative expense increased to $1,136,516 for the year ended December 31, 1998, as compared to $597,558 for the seven month period ended December 31, 1997. The increase reflects the impact of 10 months of selling, general and administrative expense compared to seven months manufacturing overhead and selling, general and administrative expense for the prior period. AMORTIZATION EXPENSE. Amortization expense consisting exclusively of equipment depreciation, was $304,182 for the year ended December 31, 1998, as compared to amortization expense of $27,670 for the seven month period ended December 31, 1997. This increase is attributable to the fact that manufacturing did not begin until the last quarter of 1997. Therefore, only a small amount of equipment depreciation was recognized for the period ended December 31, 1997. INTEREST EXPENSE AND BANK CHARGES. Interest expense and bank charges increased to $99,292 for the year ended December 31, 1998 from $11,236 for the seven month period ended December 31, 1997. For the year ended December 31, 1998, two loans were outstanding namely a term loan and an operating loan. The term loan had an average principal balance for the period of $386,536 bearing interest at a rate of 7.75% per annum. The operating loan had an average principal balance for the period of $221,563 bearing interest at a rate of 7.75% per annum. Both loans were outstanding for the entire period consequently interest expense totaled $47,137. The remaining $52,155 includes service charges of $8,877, short term bridge loans of $12,415 and financing charges of $30,863. The only interest charge relative to the seven month period ending December 31, 1997 is the term loan with a principal balance of $320,401 at December 31, 1997 bearing interest at a rate of 7.75%, which was outstanding from August 1997 through December 1997. FOREIGN EXCHANGE Historically, Talisman had minimal sales (approximately $6,204 of revenues) to United States customers for the period ended December 31, 1997. Accordingly, Talisman did not experience any material foreign exchange gains or losses in its operations in the period ended December 31, 1997. For the year ended December 31, 1998, Talisman had a foreign exchange gain of approximately $500, which was included in Talisman's earnings. This amount consisted of foreign exchange gains on sales/ receivables to/from U.S. customers offset by losses on U.S. purchases/payables from U.S. suppliers. 21 As Talisman's sales to foreign customers grow, Talisman may be subjected to increased risks of foreign currency gains or losses. Currently, a majority of the revenues from sales are received in US dollars and a majority of expenses from goods purchased for resale are purchased in US dollars. Since Talisman is based in Ontario, Canada, approximately 75% of Talisman's combined operational and selling, general and administrative expenses for the period ended December 31, 1998 were incurred in Canadian dollars. Upward variations in the value of the Canadian dollar, as compared to the value of the US dollar, could adversely effect Talisman's results. STOCK BASED COMPENSATION We account for our stock options and warrants under APB Opinion 25. If Talisman was required to account for the stock options and warrants using the fair value method, the net loss for the seven months ended December 31, 1997 would have increased by $497,706. Such amounts represent the fair value of options and warrants at the time they vested. Since these options and warrants vested at the time they were granted, there will be no future charge to income with respect to these options and warrants. INFLATION Talisman has experienced minimal impact from inflation and changing prices on its net sales and on its income from continuing operations for the periods it has been engaged in business. LIQUIDITY AND CAPITAL RESOURCES Prior to the completion of the share exchange with Talisman International, Talisman had limited working capital and its prospects were severely limited. Upon completion of the share exchange, Talisman International became a wholly-owned subsidiary of Talisman. Up until the completion of the share exchange, Talisman International had sustained its operations from its inception (September 26, 1996) primarily from the sale of equity. Specifically, from September 1996 to immediately prior to the share exchange (September 1997), Talisman International sold (i) 428,371 shares of common stock for an aggregate of CDN$1,518,264 in cash, (ii) 50,000 shares of common stock for machinery and equipment having a fair market value of CDN$200,000 and inventory having a fair market value of CDN$50,000 and (iii) 3,300 Class A Special shares for machinery and equipment having a fair market value of CDN$2,300,000 and technological and intellectual property having a fair market value of CDN$1,000,000 for Canadian GAAP purposes. It should be noted, however, that no value has been ascribed to the technological and intellectual property assets for U.S. GAAP purposes. International also had operating credit facilities (both term and revolving) from the Hongkong Bank of Canada, such facilities being secured by all the assets of International. Subsequent to the completion of the share exchange, Talisman sold an additional 542,787 shares of common stock for an aggregate of CDN$3,293,208 in cash. Of this new equity, CDN$2,395,000 was provided by Talisman Partners, a private investment partnership, through the completion of two separate private placements. For a complete description of the private placement completed with Talisman Partners, see "CERTAIN TRANSACTIONS." The proceeds of such financings were used by Talisman (i) to pay approximately CDN$670,000 owing to a prior short term secured lender to Talisman, (ii) to expand Talisman's battery manufacturing capabilities and (iii) for general working capital purposes. From December 1998 through March 1999, Talisman completed a CDN$700,000 convertible note financing. The notes were converted into securities of Talisman in connection with the first closing of Talisman's private placement offering which was completed in March 1999. For a complete description of the private placement completed in March 1999, see "CERTAIN TRANSACTIONS."The holders of the notes also received warrants to acquire an aggregate of 72,465 shares of common stock of Talisman exercisable at CDN$7.50 per share. 22 In June 1999, Talisman established new financing arrangements with General Electric Capital Canada Inc. In connection with the implementation of such new facilities, Talisman paid out, in full, its previous secured lender, Canadian Imperial Bank of Commerce. The financing facilities provided by General Electric Capital currently consist of a CDN$705,000 term loan. The term loan is due and payable on or before June 30, 2002. Interest charged on the General Electric Capital facilities is, (i) with respect to funds advanced in Canadian dollars, calculated at the average rate per annum established by the Royal Bank of Canada as its discount rate for 30-day Canadian bankers acceptances plus 4.0% per year, and (ii) with respect to funds advanced in U.S. dollars, the latest rate for 30-day dealer placed commercial paper, which normally is published in the "Money Rates" section of the Wall Street Journal. Furthermore, all indebtedness of Talisman under the General Electric Capital facilities is secured by Talisman's assets. In addition to the term loan with General Electric Capital and upon satisfaction of certain conditions precedent, including (i) the entering into of a Factoring Agreement to be entered into between Red Cell Canada Inc. and Talisman International Inc., in form and substance satisfactory to General Electric Capital Canada Inc.; (ii) updated personal property security searches; (iii) a financial due diligence review of Talisman by General Electric Capital Canada Inc. to ensure that their net borrowing availability will not be less than CDN$150,000 after giving effect to the initial revolving credit advance; and (iv) an assignment by Talisman to General Electric Capital Canada Inc. for all future payments from the Canadian Economic Development Corp., the General Electric Capital financing arrangement will be expanded to include (1) a revolving credit line of up to CDN$7,500,000, and (2) a "capex" loan of up to CDN$2,059,200. As of the date of this prospectus, a draft of the Factoring Agreement is being reviewed by General Electric Capital and its counsel. While we believe that we will be able to satisfy these conditions, there can be no assurances that these conditions to the additional General Electric Capital financing will be satisfied. Talisman's working capital deficit at June 30, 1999 was ($3,424,930). The negative working capital represents the indebtedness incurred in connection with the closing of a recently completed private placement offering. The private placement offering, which was completed with Spencer Trask Securities, Inc. as placement agent, resulted in the sale of an aggregate of 50.72985 units solely to U.S. investors for gross proceeds to Talisman of $5,174,472.70 (such proceeds being inclusive of the $700,000 raised from December 1998 through March 1999 described above). The units consisted of an aggregate of (1) $5,073,135 principal amount of 8% convertible promissory notes, and (2) 1,014,627 warrants to purchase shares of common stock, which warrants are exercisable at $7.50 per share. In connection with such closings, Spencer Trask received a placement fee equal to 10% of the aggregate purchase price of the securities sold by it, plus a non-accountable expense allowance equal to three percent of the aggregate purchase price of the securities sold and a warrant, granted by Talisman for $1.00 consideration, to purchase an amount of common stock equal to 20% of the common stock sold in the offering at an exercise price equal to 120% of the price of the common stock sold. Additionally, upon the first closing of the offering, Talisman entered into (1) an agreement whereby Spencer Trask was granted a right of first refusal to act as underwriter or agent for any proposed private or public offering of Talisman's securities by Talisman or by any of its principal stockholders, and (2) a non-exclusive finder's agreement pursuant to which Spencer Trask is entitled to receive a fee based upon a percentage of the value of any business combination or financing arrangement, including but not limited to a merger or purchase of assets, which is introduced to Talisman by Spencer Trask. For a complete description of the agreements entered into between Talisman and Spencer Trask, see "CERTAIN TRANSACTIONS." We have, with the proceeds of the recently completed private placement offering, commenced expanding our operations into the production and marketing of AAA batteries. We intend to use a portion of the proceeds from this offering to complete the expansion of our operations into the production and marketing of AAA batteries, to increase the production capacity of our AA cell size, 23 and to commence the expansion of our operations into the production and marketing of C and D battery cell sizes. Our ability to complete the proposed expansion of our operations into the production and marketing of C and D battery cell sizes is dependent upon obtaining additional financing. Except for this offering and the existing CDN$705,000 term loan facility with General Electric Capital Canada Inc., which is due and payable on or before June 30, 2002, Talisman has no other current arrangements in place with respect to financing. As stated above, Talisman recently established new financing arrangements with General Electric Capital Canada Inc. which may, subject to satisfaction of certain conditions, be expanded to include (i) a revolving credit line of up to CDN$7,500,000, and (ii) a "capex" loan of up to CDN$2,059,200. There can be no assurances that the conditions to the additional General Electric Capital financing will be satisfied or that additional financing will be available on acceptable terms, if at all. Moreover, no assurance can be given that this offering will be achieved. If this offering is not successfully completed and additional financing arrangements are not obtained, we may be unable to fully fund our operations, pursue our business strategy, take advantage of new opportunities, develop or enhance our products, or respond to competitive pressures and financial or marketing hurdles. Such inability could have a materially adverse effect on Talisman's business, operating results and financial condition. Moreover, the estimated cost of the proposed expansion of our production and marketing activities is subject to numerous uncertainties, including the problems, expenses, difficulties, complications and delays, many of which are beyond our control, frequently encountered in connection with the establishment and development of new business activities, and may be affected by the competitive environment in which we are operating. Accordingly, there can be no assurance that we will complete the proposed expansion of our production and marketing activities described herein. Talisman's management believes that upon full implementation of Talisman's business plan, sufficient revenues will be generated to meet operating requirements. However, no assurance can be given that such goal will be obtained or that any expected revenues will be realized. YEAR 2000 Our business could be adversely impacted by information technology issues related to Year 2000. We have been engaged in assessing this Year 2000 issue as it relates to our business. This review covers information and non-information technology systems of both Talisman's own operating systems and the systems of Talisman's third party vendors and manufacturers. Talisman does not currently utilize any equipment in our battery assembly process which utilizes programmable logic controllers (PLC). Accordingly, such systems do not require any Year 2000 solutions. In addition, we have replaced our phone system in the summer of 1999; therefore, any Year 2000 issues relating to our phone system are now covered. Finally, Talisman currently utilizes only several personal computers and individualized software programs which, in the event some are not Year 2000 compliant, are easily replaceable without any significant delay or cost to Talisman. Talisman estimates that the cost associated with replacing nine personal computers will not exceed an aggregate of $50,000. We do not expect to encounter any long-term Year 2000 problems from our customers, most of which are major retail corporations. Any loss of information or data by such customers can be easily replaced by Talisman manually providing them with relevant information. Except for three single sourced vendors, Talisman utilizes multiple suppliers from whom we obtain the raw materials which are used in the manufacturing process. Talisman intends to monitor carefully these sources and carry additional inventory until the end of the first quarter of Year 2000. With the exception of the cost which we expect to incur for replacing nine personal computers, we do not believe that we will incur any additional costs in connection with implementing solutions to year 2000 issues which could have a material impact on our financial results or position. 24 OUR HISTORY Talisman was incorporated under the laws of the Province of Ontario on July 28, 1978 under the name Firespur Explorations Ltd. In May 1989, we changed our name to Firesand Explorations Ltd. and, in September 1997, our name changed to our present name. From 1978 to early 1997, Talisman operated as a mineral exploration company in the Province of Ontario, Canada. During such period, Talisman conducted various exploration programs on patented mining claims held by us on lands situated in Esquega Township, Province of Ontario, Canada. In spite of our exploration efforts, no significant ore deposit or other mineralized targets were identified which justified additional exploration expenditures. Effective January 1997, Talisman wrote-off the value of all mineral exploration assets then held and, as a result of such actions, Talisman now has no mining assets or other mineral related interests. In August 1997, Talisman entered into a share exchange agreement with the shareholders of Talisman International pursuant to which the shareholders of Talisman International exchanged 11,959,265 common shares of Talisman International for 478,371 of Talisman's common shares. Prior to the share exchange, there was no affiliation between Firesand and Talisman International. As a result of the share exchange, Talisman International became a wholly-owned subsidiary of Talisman. Upon completion of such transaction in September 1997, we changed our name from Firesand to our present name--Talisman Enterprises Inc. 25 BUSINESS OVERVIEW Talisman, through our wholly-owned operating subsidiary, Talisman International Inc., manufacturers high-quality AA size disposable alkaline batteries for private label sale by retailers. We are currently, to our knowledge, the only North American-based battery manufacturer that focuses primarily on the private label market. Our objective is to leverage our unique strategic position to build market share in the private label battery market and capitalize on the significant growth in private label battery sales in North America. INDUSTRY BACKGROUND The worldwide battery market is predominately comprised of four major chemical systems: 1. Alkaline 2. Heavy Duty--Zinc Chloride 3. General Purpose--Zinc Carbon 4. Rechargeable--Nickel Cadmium Alkaline batteries offer the best performance and are the most widely used type of battery in North America with a greater than 65% market share. Industry analysts estimate the North American market for disposable alkaline batteries was approximately $3 billion in 1997, representing consumption of an estimated 4 billion batteries. An estimated 40% increase in battery-operated devices has driven growth in the use of disposable batteries over the past 10 years. Furthermore, industry data reveals that within the North American market, the alkaline segment is the fastest growing. Consumption of alkaline batteries is expected to continue to grow at a rate of 5-8% per year. The consumer battery market consists primarily of five major cell sizes--AA, AAA, C, D and 9 volt. The AA cell accounts for approximately 65% of the total unit sales, the AAA cell accounts for approximately 15% and the C, D and 9 volt cell sizes account for approximately 7% each. We believe branded manufacturer gross margins on the AA and AAA (80%) are approximately double that of the C, D and 9 volt (40%). We believe that, upon implementation of our business plan, our gross margin for our AA batteries will be approximately 33%, compared to an approximately 80% gross margin for branded manufacturers. Duracell Inc. and Eveready Battery Co., Inc. are the major manufacturers of alkaline batteries and currently supply approximately 83% of the alkaline batteries sold in the North American market. PRIVATE LABEL BATTERY MARKET OPPORTUNITY The market for private label consumer products has grown significantly in recent years. In order to generate greater customer loyalty, many retailers have sought to develop private label or corporate brands in numerous consumer product categories. Private label affords retailers an opportunity to enhance their store's identity by offering high quality products that are significantly less expensive than brand-name alternatives. According to information supplied by the Private Label Manufacturers Association, in a number of product categories, including light bulbs, disposable cameras and tape, private label items have achieved a market share of 20-25%. On average, the study also shows retailers are projecting a private label category growth rate of 24% over the next three years across all major product categories. While private label batteries only comprise approximately 9% of the overall disposable alkaline battery market, batteries are the fastest growing segment within the private label market (source: PLMA). We believe, that despite a limited supply of private label product, the battery segment has grown at almost double the rate of other private label products. Currently, most private label batteries 26 are supplied either by offshore manufacturers or by brand-name battery manufacturers such as Duracell and Eveready. It is our belief that offshore battery suppliers, however, have limited available alkaline production capacities, suffer from higher logistics costs, and typically produce batteries with less than 25% of the life of alkaline batteries because of their use of carbon zinc technology. Offshore manufacturers are those manufacturers not located in the three North American Free Trade Agreement countries (USA, Mexico, Canada). While there are several manufacturers in Europe, most are located in Asia. Among the large number of manufacturers in Asia, a large majority, particularly those located in the Peoples Republic of China, only produce old technology general purpose or heavy duty batteries, or produce alkaline batteries with mercury added to the formula. Testing done by Talisman identified fewer than ten mercury-free producers. Management of Talisman believes that, for brand-name manufacturers, supplying private label batteries represents a significant conflict of interest: the growth of private label sales comes at the expense of higher margin branded product sales. To date, major companies such as Duracell and Eveready have, in our opinion, participated in private label manufacturing only when pressured by certain large retailers. This is primarily because it is not in the best interests of current branded manufacturers to provide a private label product. Due to the lower retail prices of private label batteries, profit margins are lowered significantly and line changeovers result in manufacturing inefficiencies. Accordingly, Talisman believes that brand-name manufacturers do not actively solicit private label sales, but serve demand reactively in order to maintain or secure large retail accounts for branded products. Accounts requesting private label product from a major branded supplier are therefore generally sold with the understanding that their branded product be carried as a preferred or exclusive product line. Given the general reluctance of major suppliers to provide private label product to their customers, Talisman believes that a tremendous growth opportunity exists. OUR STRATEGY Our objective is to become the industry leader in the marketing, sale and manufacture of private label alkaline batteries in North America. We believe we are the first and only dedicated private label alkaline battery manufacturer in North America. We intend to utilize our unique market position to capitalize on the growth in private label product sales. Our manufacturing technology and expertise enables us to produce batteries of comparable quality to leading brand-name batteries. In addition, our location in Southern Ontario allows us to streamline logistics costs and develop close working marketing and sales relationships with leading North American retailers. We currently supply private label batteries to 15 customers. Management estimates that we have the capacity to ship in excess of 25 million batteries during 1999. The key elements of our strategy include plans to: - Focus exclusively on alkaline batteries; - Manufacture batteries that are equivalent in performance to brand-name batteries; - Sell batteries exclusively for private label purposes at a lower cost than brand-name alternatives; - Initially manufacture AA size batteries, which comprise the largest percentage of the market and provide high gross margins; - Expand into the production and marketing of AAA, C and D battery cell sizes and increase production capacity of the AA cell size. We believe that the addition of other cell sizes (i.e. AAA, C and D) will allow us to expand existing customer sales and enhance sales opportunities with new customers that require all cell sizes; 27 - Further develop an already established North American sales broker network; - Focus on private label retail customers with sales potential that will optimize production run costs and thereby maximize margins. In addition to selling high-quality products with the name of our customers on them, it is our belief that our retail customers typically improve their profitability from 30-35% on the sale of a branded equivalent product to 50-60% for private label. This also typically results in more profit per unit measured in dollars and cents than typically realized from the sale of a branded equivalent. PRIVATE LABEL MANUFACTURING We currently manufacture a high quality AA alkaline cell for sale to an established and growing customer base. We currently have two (2) cell lines capable of producing AA alkaline cells at the rate of 100 pieces per minute per cell line. Subject to financing, our current plans include building a D line in early 2000 followed by a C line in mid 2000. We believe that our AA cell is: - Comparable in performance to the competition on a majority of applications (source: ACTS Testing Labs Ltd.); - Advantageously priced compared to branded products, resulting in prices which are approximately 20-25% lower in retail price; - Environmentally friendly because we do not add mercury or cadmium. Supply of the AAA, C, D and 9 volt is currently "out sourced" by Talisman for certain accounts that desire to carry all five cell sizes. Such sourced product is labeled, packaged and shipped by us. We have, with the proceeds of the recently completed private placement offering, commenced expanding our operations into the production and marketing of AAA batteries. We intend to use a portion of the proceeds from this offering to complete the expansion of our operations into the production and marketing of AAA batteries, to increase the production capacity of our AA batteries, and to commence the expansion of our operations into the production and marketing of C and D battery cell sizes. Our ability to complete the proposed expansion of our operations into the production and marketing of C and D battery cell sizes is dependent upon obtaining additional financing. We intend to continue to out source our need for 9 volt battery cells from other manufacturers as the volume requirements for the 9 volt cell size are not sufficient to justify the expense of producing the product in house. Our strategy is to manufacture bare cell batteries in bulk in anticipation of receipt of customer orders. Such bare cell batteries are kept on hand and make up a substantial portion of our inventory. We are then in a position to prepare finished goods upon receipt of customer orders. Further, after such goods are packaged and labeled they are shipped to customers. To date, we have been able to fill orders as they are received, and we have not experienced any delays due to lack of manufacturing capacity or otherwise. Moreover, as previously stated, we intend to expand our production capacity with the proceeds from our financing activities. Accordingly, we do not expect that we will encounter any delays due to lack of manufacturing capacity or otherwise. 28 BATTERY CUSTOMERS The following is a list of 1998 customer accounts: A&PFireco--Canada Drug Emporium--U.S. Robert & James--U.S. RedCell--Canada Cash Convertors--Canada Save-On--U.S. Win--Leader--Canada Pirate Wholesale--U.S. Daisytek--U.S. Discount Drug Mart--U.S. Food Basics--Canada Best Buy--Canada Murphy Distributor--Canada North Carolina Mutual Drug--U.S. Zellers--Canada
All of our sales are made to our customers pursuant to purchase orders. Our company has several large customers upon which we depend on for the sale of our battery products. For the year ended December 31, 1998, sales to Discount Drug Mart represented 28.6%, Drug Emporium represented 23.6%, Zellers Inc. represented 9.1% and A&P Fireco represented 7.0% of our overall sales. No other retail customer accounted for more than 5% of our overall sales. COMPETITION The manufacture and sale of alkaline batteries is highly competitive and there are no substantial barriers to entry into the market. We believe that the principal competitive factors affecting the market for battery products are the quality of the product, price, environmental issues, turn around time for production orders, payment terms for customers, and marketing and sales. The private label AA alkaline battery products which we currently produce compete with products imported from the Pacific Rim countries of Indonesia, China, Hongkong, Japan and South Korea. We believe we offer to our customers key advantages over offshore suppliers. Such advantages include: - PROVIDING SUPERIOR AND CONSISTENT PRODUCT PERFORMANCE. It is our observation that some Pacific Rim producers utilize domestic raw materials which result in sub-standard performance. - PRICE. Our private label batteries offer our customers an attractively priced alternative to the batteries sold by their competitors. - WE DO NOT ADD MERCURY TO OUR BATTERIES. Mercury is considered to be environmentally hazardous and, accordingly, the disposal of used batteries to which mercury has been added is problematic. - EFFICIENT TURN AROUND TIME. It is our experience that offshore suppliers generally require a minimum of 30 to 60 days notice prior to producing an order. Delivery time is a minimum of 30 days beyond that and full container loads are required. In contrast, we inventory "bare" cells and can package required orders within a 2-10 day period, depending on the order size. - CONSUMER PRODUCTS' INDUSTRY STANDARD PAYMENT TERMS. We provide creditworthy customers with terms calling for payment within 30-45 days of shipment of its product to retailers. By comparison, it is our experience that off-shore suppliers require either a deposit in advance of shipping or full payment prior to shipping in the form of a letter of credit or bank transfer. - MARKETING AND SALES SUPPORT. We provide retailers with on-going sales expertise and promotional concepts in order to maximize sales and profits. Various pack sizes are available to meet the needs of retailers and product displays are supplied to ensure greater in-store visibility and product movement. In contrast, offshore suppliers, generally speaking, only supply product and do not offer any on-going marketing support. 29 We believe that approximately two-thirds (66.6%) of the private label battery market is controlled by our three major competitors (Duracell, Eveready and Ray-O-Vac), while the remaining one-third (33.3%) is controlled by offshore manufacturers. At present, we do not directly compete (nor do we seek to) with any major North American battery manufacturer (such as Duracell, Eveready and Ray-O-Vac) to supply private label batteries to large retail chains. This is because we have, at present, limited production capability and limited marketing resources compared to the significant and dominant market capabilities of the established branded manufacturers. We believe that the overall private label market is sufficiently large enough that we have an opportunity to penetrate significantly into this market, and thereby gain significant market share. STRATEGIC PARTNERS AND KEY SUPPLIERS Our battery manufacturing lines have been custom made by Pragmatek Inc. of Mississauga, Ontario, Turning Point Inc. of Oakville, Ontario and Gwinnett Industrial Machine Inc. of Norcross, Georgia. These companies have over 25 years of combined experience in the manufacture of reliable battery equipment to numerous established battery manufacturers. Pragmatek, Turning Point and Gwinnett are all shareholders of Talisman. We have a number of key suppliers of raw materials who are also shareholders in Talisman. They include Burlington Stamping Inc. of Burlington, Ontario and Hibar Systems Limited of Richmond Hill, Ontario. Burlington Stamping supplies all of our battery cans while Hibar supplies all of our battery pre-assemblies. James C. McGavin, a director of Talisman, is also a director, officer and shareholder of Burlington Stamping. In September 1996, we purchased certain equipment from Burlington Stamping, consisting of battery can molds, in exchange for shares of common stock of Talisman. The equipment purchased by us from Burlington Stamping has been provided to Burlington Stamping by us for the purpose of having Burlington Stamping manufacture additional battery cans from dies. PERSONNEL As of August 1, 1999, we employed a total of 34 full time employees and one part time employee. Twelve of such persons are engaged in the areas of administration, finance, production planning, marketing and sales. In addition, 18 of our 34 employees have prior battery industry experience. None of our employees are represented by a union. Management considers its relations with its employees to be satisfactory. MARKETING, SALES AND DISTRIBUTION Talisman currently has an established North American sales network that is directed by individuals with considerable experience in selling private label batteries to established customers. With the exception of Randy O. Curtis and Christian H. Bunger, all sales agents and brokers are compensated on a commission basis only (generally 5%). We currently have a full time sales organization consisting of four qualified sales professionals who generate a majority of business through a network of brokers. We have developed a relationship with two out of the four major, national, private label brokers dedicated to the food class of trade. In addition, we have established relationships with twelve independent regional sales agencies, which handled a myriad of non-food, and drug battery customers throughout Canada and the United States. In addition, we support our product merchandised in retail outlets with a variety of packaging designs and displays intended to create consumer interest in retail customers' private label disposable alkaline battery product line. We also develop special pack sizes and styles intended to coincide with peak buying periods such as back-to-school and Christmas. 30 We have made every effort to ensure that key positions at Talisman are filled by qualified individuals with previous battery or private label experience. These individuals include: Garry J. Syme, Sr. Vice President Former Project Manager Duracell Duncan C. MacFadyen, VP Finance Former Controller Bossman Randy O. Curtis, VP Mktg. Canada Former Managing Director--Eveready de Mexico Sales Christian H. Bunger, VP Sales--US Former South East Regional Mgr.--Eveready Dennis Hughey, Bus. Dev. Consultant Former President--Beatrice Private Label David J. Trudel, VP Mkt. Dev. Former VP Business Dev. BTI Billie Burke, Purchasing Mgr. Former Purchasing Dept. Duracell Stan Jackson, Whrhse. Mgr. Former Whrhse. Mgr. Bossman
For a more detailed description of the professional backgrounds of many of the above noted persons, see "Management." PRODUCT LIABILITY INSURANCE We carry product liability insurance coverage on our battery products in the amount of CDN$1,000,000, with an additional umbrella protection of CDN$14,000,000. We believe that the amount of insurance which we maintain is adequate. ENVIRONMENTAL AND SAFETY ISSUES We have made every attempt to ensure that our manufacturing facilities do not contravene any environmental laws. Our AA battery cell is mercury free and currently meets North American standards. Certain materials used in our battery products, as well as one product used in the manufacturing process, are considered hazardous under the Occupational Safety and Health Act hazard communication standards as to workplace care and employee notification. Employees handling these chemicals are required to wear appropriate over protective gear. Once the product is assembled, chemicals are sealed within a metal container that seals the chemicals from both the environment and the atmosphere. All product designated for "waste disposal," including defective goods, are neutralized immediately and stored in an isolated location at our premises prior to final disposal. As required by provincial regulations, we have adopted a procedure of registering all hazardous waste products requiring disposal. We receive a registration number for all such products and communicate such registration number to the approved waste disposal company before the product is transported to a certified landfill waste site. We have factored into our budgeting process an average cost per battery of CDN$0.001 for waste disposal purposes. TECHNOLOGICAL ISSUES/SCIENTIFIC ADVISORS We constantly test our product to ensure consistent quality of production. Qualified Talisman employees test samples of each production run and additional samples are sent to an independent consultant for evaluation. Our batteries also meet the standard as set by the National Electronic Distributors Association and the American National Standards Institute, which are European and North American standardization groups that are comprised of representatives of battery manufacturers around the world. Product improvement is on-going through in-house quality control protocols and through independent consulting contracted to Dr. Klaus Tomantschger, President, Rosecreek Technologies Inc., of Mississauga, Ontario. Dr. Tomantschger was the co-inventor of the rechargeable alkaline battery and has a wealth of knowledge in the area of battery performance improvements. 31 FACILITIES We are currently housed in a 21,000 square foot leased head office and production facility located at 2330 Southfield Road, Units 3-4, Mississauga, Ontario, Canada. The location is situated close to major highways and is only 15 minutes from Toronto's Pearson International Airport. Significant leasehold improvements have been undertaken to accommodate state-of-the-art quality control facilities, manufacturing facilities, and sales and marketing offices. Our current lease expires July 31, 2002; however, an understanding has been reached with our landlord that should additional space be required, then a new facility would be made available to us without penalty. In addition, we have leased an additional 39,400 sq. ft. of manufacturing space adjacent to our current facility. The extra space was considered necessary to accommodate the planned addition of the AAA, C and D cell lines into our manufacturing operations. We pay approximately CDN$43,000 rent per month. LEGAL PROCEEDINGS We are not a party to any material legal proceeding. ENFORCEABILITY OF CIVIL LIABILITY AGAINST FOREIGN PERSONS Talisman's headquarters are located in, and its officers, directors and auditors are residents of, Canada and a substantial portion of Talisman's assets are, or may be, located outside the United States. Accordingly, it may be difficult for investors to effect service of process within the United States upon non-resident officers and directors, or to enforce against them judgments obtained in the United States courts predicated upon the civil liability provision of the Securities Act or state securities laws. Talisman has been advised by its Canadian legal counsel, Aird & Berlis, that there is doubt as to the enforceability in Canada against Talisman or against any of its directors, controlling persons, officers or the experts named herein, who are not residents of the United States, in original actions or in actions for enforcement of judgments of U.S. courts, of liabilities predicated solely upon U.S. federal securities laws. Service of process may be effected, however, upon Talisman's duly appointed agent for service of process, Sichenzia, Ross & Friedman LLP, New York, New York. If investors have questions with regard to these issues, they should seek the advice of their individual counsel. Talisman has also been informed by its legal counsel, Aird & Berlis, that pursuant to the Currency Act (Canada), a judgment by a court in any Province of Canada may only be awarded in Canadian currency. Pursuant to the provision of the Courts of Justice Act (Ontario), however, a court in the Province of Ontario shall give effect to the manner of conversion to Canadian currency of an amount in a foreign currency, where such manner of conversion is provided for in an obligation enforceable in Ontario. 32 MANAGEMENT The following table sets forth certain information concerning the directors and executive Officers of Talisman:
NAME AGE POSITION - ------------------------------------------------ --- ---------------------------------------------------------- James A. Ogle 52 President, Chief Executive Officer & Director Norman R. Proulx 51 Chairman of the Board Garry J. Syme 47 Senior Vice-President, Manufacturing Thomas O'Dowd 40 Vice-President & Chief Financial Officer Duncan C. MacFadyen 47 Vice-President, Finance & Controller Randy O. Curtis 43 Vice-President, Global Marketing & Canada Sales Christian H. Bunger 54 Vice-President, Sales--U.S. David J. Trudel 45 Vice-President, Market Development James C. McGavin 57 Director Donald L. Matheson 49 Director Thomas A. Fenton 39 Director D. Graham Avery 51 Director
Set forth below is a biographical description of each director and senior executive officer of Talisman based on information supplied by each of them. JAMES A. OGLE, 52, has been the President, CEO, and a director of Talisman since January 21, 1999. Prior thereto, from January 1998 to January 1999, Mr. Ogle was Vice President of Operations for U.S. Industries, Inc., Elger Plumbingware/U.S. Brass Division, a leading manufacturer of bath and kitchen china and cast iron fixtures. From 1992 to 1997, Mr. Ogle was Senior Vice President, Operations, for Tyco Toys, Inc., a leading international toy manufacturer and distributor. From 1989 to 1992, Mr. Ogle was Vice President, Operations for Wilkinson Sword, Inc., an international producer of shaving products and disposable lighters. From 1978 to 1989, Mr. Ogle held various positions with BIC Corporation, a leading producer of disposable pens, razors and disposable lighters. Prior thereto, Mr. Ogle held various positions with General Motors Corporation. Mr. Ogle obtained an Executive MBA from the University of New Haven. NORMAN R. PROULX, 51, is the Chairman of the Board of Talisman. Mr. Proulx was first appointed a director of Talisman in August 1998. From December 1998 through January 1999, Mr. Proulx was the interim President and CEO of Talisman replacing the former President and CEO, David R. Guy. Since March 1998, Mr. Proulx has been a managing director of Spencer Trask Securities Incorporated, a New York based venture capital investment firm that provides financial and operational support to start-up and early-stage companies. In such position, Mr. Proulx concentrates his efforts on consumer products and retailing. In 1997, Mr. Proulx was a managing director of the Cortec Group ("Cortec"), a private New York equity investment firm which makes controlling investments in middle-market manufacturing and distribution businesses. In connection with same, Mr. Proulx was responsible for overseeing Cortec's investment n Gemeinhardt, Inc., a US based company which is a market leader in the manufacture and distribution of flutes and piccolos. Mr. Proulx was also responsible for overseeing Cortec's investment in Manco Products, Inc., a US based company which is a leading designer and manufacturer of fun karts. From 1990 to 1996, Mr. Proulx was President and CEO of Seymour Housewares Corporation of Seymour, Indiana, a leading manufacturer of ironing boards. Prior thereto, Mr. Proulx was, from 1984 to 1990, the President, North America of Wilkinson Sword Limited. Prior thereto, Mr. Proulx held different positions from 1969 to 1984 with Scripto/Wilkinson Sword and The Gillette Company. Mr. Proulx obtained his Bachelor of Science, Business Administration degree from Boston College in 1969. 33 GARRY J. SYME, 47, is the Senior Vice President, Manufacturing of Talisman and has been since September 1997. Between August 1996 and September 1997, Mr. Syme was the Senior Vice President Operations for International, Talisman's wholly-owned subsidiary. Prior thereto, Mr. Syme was the Vice President Operations, from January 1996 to August 1996, at Infinity Plus Battery Corporation of Mississauga, Ontario. Prior thereto, from 1992 to 1995, Mr. Syme was President of GJS International Inc., a company providing consulting advice to major battery manufacturers. In such capacity, Mr. Syme was responsible for the development of manufacturing facilities for Cegasa (Spain), Power Plus Battery Corporation (United States), Euram (Europe), Infinity Plus (Canada) and two facilities in the Peoples Republic of China. In addition, Mr. Syme was retained as President of Power Plus of America Inc. to implement a 100,000 sq. ft. $20 U.S. million dollar manufacturing plant in Georgia, USA. Mr. Syme has also spent approximately 20 years with Duracell, 8 years of which were with the Duracell U.S. R&D Centre and 12 of which were with Duracell Canada Inc. of Mississauga, Ontario. THOMAS O'DOWD, 40, is Vice President and Chief Financial Officer of Talisman and has been since July 1999. From August 1992 to June 1998, Mr. O'Dowd was a Financial Analyst for Seymour Housewares Corporation, the world's largest manufacturer of ironing boards and covers and pads. From October 1990 to August 1991, Mr. O'Dowd was a Senior Auditor for Forstman Little & Co. From April 1986 to September 1990, Mr. O'Dowd held senior level accounting positions for two subsidiaries of GenCorp, a $3 billion Fortune 100 conglomerate. From June 1981 to March 1986, Mr. O'Dowd was a Corporate Audit Supervisor for AMF Incorporated. Mr. O'Dowd obtained a B.S. in Accounting from Marist College. DUNCAN C. MACFADYEN, 47, is Vice President Finance of Talisman and has been since October 1, 1997. Prior thereto, Mr. MacFadyen was, from September 1996 to September 1997, a financial planer with Investors Group, a Canadian based financial planner and mutual fund company. Prior thereto, from May 1991 to September 1996, Mr. MacFadyen was comptroller for Glen Oak Inc., a wholesale supplier of various consumer products including "Bossman" batteries and flashlights. Mr. MacFadyen obtained a C.M.A. and B.A. from the University of Waterloo. RANDY O. CURTIS, 43, is Vice President of Global Marketing and Canadian Sales of Talisman, since May 1999. From January 1997 to April 1998, Mr. Curtis was a Principal at R.O. Curtis Associates Inc. From February 1992 to December 1997, Mr. Curtis was Managing Director for Eveready de Mexico. From November 1979 to January 1992, Mr. Curtis held senior level positions at Eveready Canada. Mr. Curtis obtained a degree in Industrial Engineering Technology from Ryerson Polytechnical Institute. CHRISTIAN H. BUNGER, 54, has been the Vice President of Sales--U.S., since January 1999. Since 1992, Mr. Bunger has been the Southeast Regional Manager (Atlanta, Georgia) for the Eveready Battery Company, a subsidiary of the Ralston Purina Corporation. From 1986 through 1992, Mr. Bunger was the South East Division Manager (Atlanta, Georgia) of the Eveready Battery Company and from 1980 through 1986 he had held the title of South Central Division Manager(Atlanta, Georgia). Mr. Bunger joined the Eveready Battery Company in 1974 as a Manager of National Accounts (New York, New York) and has also held positions of Product Manager as well as District Manager and merchandising positions in Portland Oregon, Boston Massachusetts and Providence Rhode Island. Mr. Bunger obtained a B.B.A. from Tulane University. DAVID J. TRUDEL, 45, is Vice President Market Development for Talisman, currently responsible for the marketing, sales and administration of alkaline equipment turnkey systems. Prior thereto, Mr. Trudel was, from May 1995 to August 1997, Vice President Market Development with Battery Technologies Inc. responsible for licensing RAM (Rechargeable Alkaline Manganese) Technology, equipment sales and development of industrial markets for RAM batteries. Prior thereto, Mr. Trudel was, from November 1993 to April 1995, President of RMI International Inc., a private battery 34 marketing consulting company. Prior thereto, Mr. Trudel was Vice President of Operations and Sales of a division of Indal Limited. JAMES C. MCGAVIN, 56, is the President and a major shareholder of Burlington Stamping Inc. of Burlington, Ontario and has been since December 1981. BSI manufacturers small deep drawn shells and stampings principally sourcing the alkaline, rechargeable, military and OEM battery cell markets. Prior to founding Burlington, Mr. McGavin was a partner in the public accounting firm Ward Mallette (now BDO Dunwoody Ward Mallette) for approximately 10 years. Mr. McGavin obtained his Chartered Accountant designation in 1970. DONALD L. MATHESON, 48, a director of Talisman, is the President of Imark Corporation (a Toronto Stock Exchange listed company) and has been since August 1997. Prior thereto, Mr. Matheson was, from December 1994 to July 1997, Vice President Finance and Chief Financial Officer of Imark Corporation. Prior thereto, Mr. Matheson was, from January 1992 to December 1994, the Director of Finance for a heating and air-conditioning business operated through Clare Brothers of Cambridge, Ontario. Mr. Matheson is also an officer and director of Animazing Entertainment Inc., a childrens entertainment company. THOMAS A. FENTON, 39, a director of Talisman, is a partner in the Toronto based law firm of Aird & Berlis and has been since June, 1997. Prior thereto, Mr. Fenton was a partner in another Toronto based law firm and prior thereto, an associate with such firm. His practice encompasses corporate and securities law. Mr. Fenton acquired his LL.B. degree from the University of Western Ontario in 1986 and was called to the Bar in Ontario in 1988. Mr. Fenton is a director of a number of public and private companies. D. GRAHAM AVERY, 51, has been a director of Talisman since September 1997. From September 1997 to January 1998, Mr. Avery also served as the Chairman of the Board of Talisman. Mr. Avery is President of Anderson Advertising and has been since September, 1996. Prior thereto, Mr. Avery was, from November 1995 to September 1996, Vice President, Group Account Director of Anderson Advertising. Prior thereto, Mr. Avery was, from May 1995 to November 1995, President of Avery & Associates Limited. Prior thereto, Mr. Avery was, from November 1992 to May 1995, Director of Client Services at Bozell Palmer Bonner, a Toronto based advertising agency. Prior thereto, Mr. Avery held various positions in Marketing with Colgate-Palmolive Limited, Beecham Canada Limited and Pepsi-Cola Canada Limited. The term of office of each Director is until the next annual meeting of stockholders and until a successor is elected and qualified or until the Director's earlier death, resignation or removal from office. Executive Officers hold office until their successors are chosen and qualified, subject to earlier removal by the board of directors. 35 EMPLOYMENT AGREEMENTS On January 4, 1999, James Ogle entered into an employment agreement with Talisman pursuant to which Mr. Ogle has been retained as the President and Chief Executive Officer of Talisman. The term of the employment agreement commenced on January 21, 1999 and continues until December 31, 2002; provided, however, that the termination date may be extended for an additional one year period at each anniversary of Mr. Ogle's employment agreement dated January 21, 1999. Pursuant to the employment agreement, Mr. Ogle will receive an annual salary of $182,000 based on the exchange rate in effect on January 21, 1999. The exchange rate upon which Mr. Ogle's annual salary is based shall be adjusted as of June 14 and December 14 of each year during Mr. Ogle's employment by Talisman. Mr. Ogle will also receive a bonus of a maximum of 50% of one year's base salary, which bonus shall be payable within 30 days of the completion of the audit of Talisman's financial statements, provided Talisman achieves financial objectives as determined by the Talisman's board of directors. The employment agreement also provides for additional compensation and/or benefits to be paid or provided to Mr. Ogle as follows: - On the first anniversary of January 21, 1999, Mr. Ogle shall receive an additional bonus, to be paid in the form of shares of the Talisman's common stock, in an amount equal to $45,000. The shares are to be valued at the price per share at the close of the January 20, 1999 trading day. - On the first anniversary of January 21, 1999, Mr. Ogle shall also be obligated to purchase from Talisman shares of common stock having a total market value on January 21, 1999 equal to $55,000 and Talisman has agreed to loan Mr. Ogle the necessary funds to purchase such shares. - Talisman shall pay Mr. Ogle a tax adjustment in an amount equal to the amount by which the actual income taxes to be paid by Mr. Ogle exceed his hypothetical United States income tax (assuming certain deductions to which he would be entitled to) if he were living in Texas. - Mr. Ogle shall be granted options to purchase shares of Talisman's common stock equal to 5% of Talisman's total outstanding shares as of January 21, 1999 (on a fully diluted basis), which options shall be exercisable at a price equal to 25% of the average of the high bid and low asked prices per share on the Canadian Dealing Network on January 21, 1999. The exercisability and vesting of such options are subject to certain conditions, including, but not limited to (i) Mr. Ogle's continued employment by Talisman, (ii) the achievement of specified levels of annual performance to be established by the board of directors, and (iii) the achievement of specified levels of investor returns. The employment agreement also provides that in the event that Mr. Ogle exercises any of the options while he is employed by Talisman, Talisman shall loan him the amount of the exercise price for the options at an interest rate equal to the applicable federal rate, such loan to be repaid within six months of the exercise of the options. The note shall be forgiven in the event that Mr. Ogle remains in the employment of Talisman for a period of at least six months following the exercise of the options or his employment is terminated as a result of death, disability or other termination entitling Mr. Ogle to severance under the terms of the employment agreement. - Mr. Ogle is entitled to participate in any benefit plans extended to Talisman's employees or executives. - Mr. Ogle is entitled to receive reimbursement for all reasonable expenses incurred by him in the course of his employment by Talisman. The Employment Agreement may be terminated (i) by Talisman for cause; (ii) at any time by Talisman, without cause, by paying to the employee up to a maximum of his then current base salary and the annual bonus to be paid in an amount pro-rated through the date of termination calculated as if all performance goals for the year have been achieved; or (iii) at any time by the employee upon written notice. The employment agreement also contains a prohibition against competing with Talisman 36 for a period of one year after the termination of the agreement and soliciting customers or employees from Talisman for a period of two years after the termination of the agreement. On January 6, 1999, Garry J. Syme entered into an employment agreement with Talisman. Mr. Syme has been retained as the Senior Vice President, Manufacturing of Talisman. The term of his employment agreement is until January 4, 2002, and thereafter, is renewable for successive one year terms. Pursuant to the employment agreement, Mr. Syme will receive an annual salary of $150,000, which shall be reviewed annually, and Mr. Syme shall be entitled to receive a bonus up to a maximum of 40% of his annual base salary, payable within 30 days of the completion of the audit of Talisman's financial statements, provided Talisman achieves financial objectives as determined by Talisman's board of directors. The employment agreement also provides for additional compensation and/or benefits to be paid or provided to Mr. Syme as follows: - Mr. Syme shall be granted options to purchase shares of Talisman's common stock equal to 2% of Talisman's total outstanding shares as of January 21, 1999 (on a fully diluted basis), which options shall be exercisable at a price equal to 25% of the average of the high bid and low asked prices per share on the Canadian Dealing Network on January 21, 1999. The exercisability and vesting of such options are subject to certain conditions, including, but not limited to (i) Mr. Syme's continued employment by Talisman, (ii) the achievement of specified levels of annual performance to be established by the board of directors, and (iii) the achievement of specified levels of investor returns. The employment agreement also provides that in the event that Mr. Syme exercises any of the options while he is employed by Talisman, Talisman shall loan him the amount of the exercise price for the options at an interest rate equal to the applicable federal rate, such loan to be repaid within six months of the exercise of the options. The note shall be forgiven in the event that Mr. Syme remains in the employment of Talisman for a period of at least six months following the exercise of the options or his employment is terminated as a result of death, disability or other termination entitling Mr. Syme to severance under the terms of the employment agreement. - Mr. Syme is entitled to participate in any benefit plans extended to Talisman's employees or executives. The employment agreement may be terminated (i) by Talisman for cause; (ii) at any time by Talisman, without cause, by paying to the employee a maximum of one year's current annual salary; or (iii) at any time by the employee upon written notice. The employment agreement also contains a prohibition against competing with Talisman for a period of one year after the termination of the agreement. On January 7, 1999, Christian H. Bunger entered into an employment agreement with Talisman. Mr. Bunger has been retained as Vice President, Sales--U.S. of Talisman. The term of the employment agreement commenced on January 25, 1999. Pursuant to the employment agreement, Mr. Bunger will receive an annual salary of $75,000, which shall be reviewed annually, and Mr. Bunger shall be entitled to receive a bonus up to a maximum of 35% of his annual base salary at the end of each calendar year. The bonus award will be based on the attainment of profitability targets and other objectives approved by the board of directors. The employment agreement also provides for additional compensation and/or benefits to be paid or provided to Mr. Bunger as follows: - Mr. Bunger shall be granted options to purchase shares of Talisman's common stock equal to 1.5% of Talisman's total outstanding shares as of January 21, 1999 (on a fully diluted basis), which options shall be exercisable at a price equal to 25% of the average of the high bid and low asked prices per share on the Canadian Dealing Network on January 21, 1999. The exercisability and vesting of such options are subject to certain conditions, including, but not limited to (i) Mr. Bunger's continued employment by Talisman, (ii) the achievement of specified levels of annual performance to be established by the board of directors, and (iii) the 37 achievement of specified levels of investor returns. The employment agreement also provides that in the event that Mr. Bunger exercises any of the options while he is employed by Talisman, Talisman shall loan him the amount of the exercise price for the options at an interest rate equal to the applicable federal rate, such loan to be repaid within six months of the exercise of the options. The note shall be forgiven in the event that Mr. Bunger remains in the employment of Talisman for a period of at least six months following the exercise of the options or his employment is terminated as a result of death, disability or other termination entitling Mr. Bunger to severance under the terms of the employment agreement. - Mr. Bunger is entitled to receive a car allowance of $600 payable on the first day of each month. The employment agreement may be terminated (i) by Talisman for cause; (ii) at any time by Talisman, without cause, by paying to the employee a maximum of six months severance pay; or (iii) at any time by the employee upon written notice. The employment agreement also contains a prohibition against competing with Talisman for a period of six months after the termination of the agreement. EXECUTIVE COMPENSATION The following table sets forth certain information concerning all cash and non-cash compensation for the years ended December 31, 1998 and 1997 paid by Talisman to our chief executive officer and all other executive officers whose total cash compensation exceeded $100,000 in the year ended December 31, 1998 SUMMARY COMPENSATION TABLE
LONG-TERM ALL OTHER COMPENSATION NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION* AWARDS/OPTIONS - ------------------------------------------------------- --------- --------- ----------- --------------- -------------- David R. Guy, President(1)............................. 1998 94,000 Nil 8,213(5) Nil 1997 33,333 Nil 2,245(5) 500,000(6) Norman R. Proulx, Interim President(7)................. 1998 Nil Nil Nil Nil James W. Gemmell, President(2)......................... 1997 13,000(3) Nil Nil Nil 1996 Nil Nil 100(4) Nil
- ------------------------ * Talisman does not have any pension, retirement or similar benefits for directors and officers. The benefit plans which Talisman currently has for its employees consist of health and disability insurance plans, which benefits are included in the dollar amounts set forth hereunder. (1) Mr. Guy became the President and a director of Talisman on September 26, 1997. Effective December 1, 1998, Mr. Guy ceased to be the interim President and CEO of Talisman. The amounts indicated above for Mr. Guy in 1997 are for the period September 26, 1997 to December 31, 1997. All payments made to date to Mr. Guy have been on account of consulting fees. For full particulars of the settlement agreement reached with Mr. Guy, see "CERTAIN TRANSACTIONS." (2) Mr. Gemmell resigned as the President and a director of Talisman on September 26, 1997. (3) Received on account of management and consulting services rendered to Talisman. (4) Received on account of director's fees. (5) Paid on account of car allowance and other normal course benefits. (6) Mr. Guy also holds warrants to acquire 20,000 common shares at an exercise price of $16.25 per share exercisable until August 15, 2000. (7) Mr. Proulx, a director of Talisman, served as the interim President and Chief Executive Officer of Talisman from December 1998 to January 1999. To date, Mr. Proulx has not been paid any remuneration by Talisman for acting in such capacity. 38 The following table shows the value at December 31, 1998, of unexercised options held by the named executive officer: AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT AT FISCAL YEAR-END (#) FISCAL YEAR-END ($) -------------------- --------------------- SHARES ACQUIRED VALUE REALIZED EXERCISABLE / EXERCISABLE / NAME ON EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE - ----------------------------------- ------------------- ----------------- -------------------- --------------------- David R. Guy(1).................... Nil Nil 20,000/Nil Nil/Nil
- ------------------------ (1) Mr. Guy ceased to be the President, Chief Executive Officer and director of Talisman effective December 1, 1998. COMPENSATION OF DIRECTORS To date, no amount has been paid to a director for the services of such individual on the board of directors except for Mr. Gemmell. In 1996 and 1997, Mr. Gemmell received $100 on account for director's fees. Talisman has a Stock Option Plan (more particularly described below) for which directors may participate. To date, options under the Talisman's Stock Option Plan have been awarded to three (3) directors. They are Donald L. Matheson, D. Graham Avery and Thomas A. Fenton. Each director holds options to acquire 1,000 shares at Cdn.$16.25 per share until November 13, 2002. STOCK OPTION PLANS 1997 STOCK OPTION PLAN Talisman has in place a stock option plan as an incentive for directors, officers and key employees and other persons who provide ongoing services to Talisman and its subsidiaries. Under the stock option plan, non-assignable options may be granted by the board of directors of Talisman, to directors, officers, key employees and other persons who provide ongoing services to Talisman to purchase common shares of Talisman for a term not exceeding five (5) years (subject to earlier termination of the optionee's employment, upon the optionee ceasing to be a director, officer or other service provider, as applicable, or upon the optionee retiring, becoming disabled or dying) at an exercise price not less than the market price for common shares of Talisman. The granting of options is subject to the further conditions under the stock option plan that: (i) not more than 10% of the number of shares issued and outstanding from time to time may be reserved for the granting of options to insiders at any time or to insiders in any one-year period; (ii) that no more than 5% of the outstanding issue may be issued to any one insider of Talisman in a one-year period, and (iii) the maximum number of common shares issuable under the stock option plan is 31,200 shares. The options are non-transferrable. As of August 1, 1999, options were outstanding to acquire 10,760 common shares under the stock option plan, at exercise prices ranging between $16.25 and $31.25. 1999 SENIOR EXECUTIVE STOCK OPTION PLAN The 1999 Senior Executive Stock Option Plan acts as an incentive to selected senior executives and employees of Talisman and any of its subsidiary companies by enabling such individuals to acquire a proprietary interest in Talisman and thereby to increase their efforts on behalf of Talisman and to promote the success of Talisman's business. The maximum number of shares that may be granted under the 1999 Senior Executive Stock Option Plan is, initially, not to exceed 225,000. Under the terms of the 1999 Senior Executive Stock Option Plan, options are non-transferrable, except pursuant to the laws of descent and distribution. 39 Any options granted under the 1999 Senior Executive Stock Option Plan is subject to certain vesting and other requirements contained in the 1999 Senior Executive Stock Option Plan. Specifically, any options granted under the 1999 Senior Executive Stock Option Plan will vest (and therefore become exercisable): (i) with respect to one-third of all options granted, in sixty (60) equal monthly installments, (ii) with respect to one-third of all options granted, upon the attainment of prescribed annual performance targets over a five (5) year period as established by the board of directors for the optionee(s) in question and, (iii) with respect to the remaining one-third of all options granted, only in the event of an "Investor Sale" (as such term is defined in the Plan). The 1999 Senior Executive Stock Option Plan is administered by a committee of the board of directors which consists of two (2) members who are non-employee directors and thereby not entitled to participate under the 1999 Senior Executive Stock Option Plan. The committee shall have all powers necessary to administer the 1999 Senior Executive Stock Option Plan including, without limitation, the authority to grant options, to determine the type and number of options to be granted, the number of shares of common stock to which an option may relate and the exercise price, terms and conditions and restrictions relating to any option. Eligible participants under the 1999 Senior Executive Stock Option Plan shall not be entitled to participate in any other share compensation arrangement or other plan established by Talisman. To date, three senior officers and employees of Talisman have been granted options under the 1999 Senior Executive Stock Option Plan in connection with employment agreements entered into between Talisman and such individuals. Specifically, James A Ogle, President and Chief Executive Officer, Garry J. Syme, Senior Vice President of Manufacturing, and Christian H. Bunger, Vise President of Sales-- U.S., have been granted 82,955, 44,477 and 24,886 options, respectively under the 1999 Senior Executive Stock Option Plan. Such options vest incrementally over a period of five years commencing on the date of their employment agreements. 1999 DIRECTORS COMPANY STOCK PLAN The 1999 Directors Stock Plan provides a compensation program for non-employee directors of Talisman (currently five (5) in number) that will allow Talisman to attract and retain highly qualified individuals to serve as non-employee members of Talisman's board of directors. The maximum number of shares that may be granted under the directors stock plan is, initially, not to exceed 100,000. Under the terms of the directors stock plan, options are non-transferrable, except pursuant to the laws of descent and distribution. Under the 1999 Directors Stock Plan, each non-employee director of Talisman who served as such on June 30, 1999 has the right to receive, subject to certain conditions, 15,230 common shares of Talisman for no consideration. For each director, 3,046 of such shares (or a total of 15,230) were issued while additional installments of 3,046 shares will be granted to each non-employee director upon the first, second, third and fourth anniversary dates of the June 30, 1999 date. In order to earn the right to receive subsequent installment grants on the aforesaid anniversary dates, each director recipient must have continuously served as a director for the year ending on such anniversary. As of the date of this prospectus, the candidates for participation under the directors stock plan are Norman R. Proulx, James C. McGavin, D. Graham Avery, Donald L. Matheson and Thomas A. Fenton. The directors stock plan is administered by a committee of the board of directors which consists of three (3) members, one of which is the President and Chief Executive Officer of Talisman. The Committee shall have 40 responsibility for interpreting the directors stock plan and taking all other action necessary for the administration of the directors stock plan. Eligible participants under the 1999 Directors Stock Plan shall not be entitled to participate in any other share compensation arrangement or plan established by Talisman. SHAREHOLDERS RIGHTS PROTECTION PLAN On September 26, 1997, the shareholders of Talisman approved a shareholders rights protection plan. The plan applies to all common shares and all future issues of common shares. The term of the plan is five (5) years, subject to reconfirmation by the shareholders at the first annual meeting of shareholders called after September 26, 2000. The Plan is intended to ensure that, in the event of a bid which could affect control of Talisman, holders of common shares will receive full and fair value for their shares and that there will be sufficient time for the fairness of the bid to be properly assessed, to negotiate with the bidder and to explore, develop and evaluate alternatives to maximize shareholder value. Under the terms of the plan, one right has been granted for each common share. Each right entitles the registered holder to purchase additional shares of common stock for $1,500 but is not exercisable until certain events occur. If a person or group wishes to acquire 20% or more of Talisman's common shares, the plan effectively requires the acquiring person to (i) negotiate terms which the Directors approve as being fair to the shareholders or, alternatively, (ii) without board approval, make a "permitted bid" which must contain certain provisions and which must be accepted by more than 50% of the common shares not held by the acquiring person. In the event that an acquiring person acquires 20% or more of Talisman's voting shares other than as described in (i) and (ii) above, then the rights become exercisable and will automatically allow all holders except the acquiring person to purchase, upon payment of the exercise price, shares of common stock with a total market value of two times (x) the exercise price (i.e., at a 50% discount from the then current market price of the common stock). 41 PRINCIPAL STOCKHOLDERS The following table sets forth certain information concerning beneficial ownership of Talisman common stock as of August 1, 1999 and as adjusted to reflect the sale of the shares offered hereby (1) by each person owning 5% or more of the outstanding shares of common stock, (2) each director, (3) each executive officer named in the Summary Compensation Table under "Management", and (4) all directors and officers as a group: The applicable percentage is based on 1,055,560 shares outstanding on August 1, 1999 and 2,670,187 to be outstanding upon consummation of this offering. The percentage calculations do not include shares to be issued if the over-allotment option is exercised. OUTSTANDING COMMON STOCK BENEFICIALLY OWNED
PERCENTAGE BENEFICIALLY OWNED* NUMBER OF ------------------------ SHARES OF PRIOR TO AFTER NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK OFFERING OFFERING - ------------------------------------------------------------------------- -------------- ----------- ----------- Kevin Kimberlin.......................................................... 826,416(1) 56.3% 26.7% New York, New York Norman R. Proulx......................................................... 74,272(2) 6.8% 2.7% New York, New York James A. Ogle............................................................ 2,688(3) ** ** Mississuaga, Ontario Garry J. Syme............................................................ 41,246(4) 3.9% 1.5% Mississauga, Ontario D. Graham Avery.......................................................... 4,046(5) ** ** Palgrave, Ontario James C. McGavin......................................................... 28,046(6) 2.7% ** Burlington, Ontario Donald L. Matheson....................................................... 4,046(7) ** ** Toronto, Ontario Thomas A. Fenton......................................................... 4,092(8) ** ** Mississauga, Ontario John E. Aderhold......................................................... 400,000(9) ** 13.9% Atlanta, Georgia Directors and Officers as a Group (9 persons)............................ 163,321(10) 14.5% 5.9%
- ------------------------ * Percentages are based upon the assumption that the named shareholder has exercised all of the currently exercisable options he or she owns which are currently exercisable or exercisable within 60 days and that no other shareholder has exercised any options he or she owns. The information with respect to shares owned beneficially by those named above not being within the knowledge of Talisman, has been furnished by each shareholder respectively. Unless otherwise provided herein, Talisman believes that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. 42 * * Less than One Percent. (1) Includes (i) 362,332 shares owned by Kimberlin Family Partners LP and 50,876 shares owned by Spencer Trask Securities, Inc.; and (ii) 362,333 shares and 50,875 shares which may be issued pursuant to options owned by Kimberlin Family Partners LP and Spencer Trask Securities, Inc., respectively, which options are currently exercisable. (2) Includes 35,613 shares which may be issued pursuant to options owned by Mr. Proulx, which options are currently exercisable. (3) Includes 2,688 shares which may be issued pursuant to options issued to Mr. Ogle under the 1999 Senior Executive Stock Option Plan, which options are currently exercisable. Does not include an additional 80,267 shares which may be issued pursuant to options issued to Mr. Ogle under the 1999 Senior Executive Stock Option Plan, which options are not currently exercisable. (4) Includes (i) 3,902 shares which may be issued pursuant to options issued to Mr. Syme under the 1997 Stock Option Plan, and (ii) 1,344 shares which may be issued pursuant to options issued to Mr. Syme under the 1999 Senior Executive Stock Option Plan, all of which options are currently exercisable. Does not include an additional 43,133 shares which may be issued pursuant to options issued to Mr. Syme under the 1999 Senior Executive Stock Option Plan, which options are not currently exercisable. (5) Includes 1,000 shares which may be issued pursuant to options owned by Mr. Avery, which options are currently exercisable. (6) Includes 20,000 shares which may be issued pursuant to options owned by Mr. McGavin, which options are currently exercisable. (7) Includes 1,000 shares which may be issued pursuant to options owned by Mr. Matheson, which options are currently exercisable. (8) Includes (i) 3,046 shares of common stock own by Aird & Berlis, Barristers & Solicitors, in which Mr. Fenton is a member, and (ii) 1,000 shares which may be issued pursuant to options owned by Mr. Fenton, which options are currently exercisable. (9) Includes 200,000 shares to be issued upon the automatic conversion of $1,000,000 principal amount of 8% convertible subordinated promissory note and 200,000 shares to be issued upon the exercise of outstanding class A common stock purchase warrants held by Mr. Aderhold. (10) Includes 35,613 shares which may be issued pursuant to options beneficially owned by Norman R. Proulx, which options are currently exercisable, (ii) 3,902 shares which may be issued pursuant to options owned by Garry Syme, which options are currently exercisable, (iii) 1,000 shares which may be issued pursuant to options owned by D. Graham Avery, which options are currently exercisable, (iv) 20,000 shares which may be issued pursuant to options owned by James C. McGavin, which options are currently exercisable, (v) 1,000 shares which may be issued pursuant to options owned by Donald L. Matheson, which options are currently exercisable, (vi) 1,000 shares which may be issued pursuant to options owned by Thomas A. Fenton, and (vii) 2,688 shares which may be issued pursuant to options owned by Duncan C. MacFadyen, (viii) 2,304 shares which may be issued pursuant to options owned by James A. Ogle, which options are currently exercisable, and (ix) 1,344 shares which may be issued pursuant to options owned by Garry J. Syme, which options are currently exercisable and (x) 805 shares which may be issued pursuant to options owned by Christian H. Bunger, which options are currently exercisable. Does not include (i) an additional 80,267 shares which may be issued pursuant to options issued to Mr. Ogle, which options are not currently exercisable,(ii) an additional 43,133 shares which may be issued pursuant to options issued to Mr. Syme, which options are not currently exercisable, and (iii) an additional 24,081 shares which may be issued pursuant to options issued to Mr. Bunger, which options are not currently exercisable. 43 SELLING STOCKHOLDERS The following table sets forth certain information regarding beneficial ownership of Talisman at August 1, 1999 on a pro forma basis adjusted to reflect the automatic conversion of $5,073,135 of 8% convertible subordinated promissory notes into 1,014,627 shares of common stock upon listing of Talisman's common stock on a U.S. based exchange and the issuance of 1,014,627 shares upon the exercise of outstanding class A common stock purchase warrants. It should be noted that 25% of 1,014,627 shares are currently subject to lock-up which expires three months after the date of this prospectus and 50% of 1,014,627 shares are currently subject to a nine month lock-up which expires on March 21, 2000. It also should be noted that all the shares to be issued upon exercise of the outstanding class A common stock purchase warrants are currently subject to a nine month lock-up, which expires on March 21, 2000.
SHARES SHARES BENEFICIALLY BENEFICIALLY OWNED OWNED PRIOR TO AFTER THE SHARES THE SELLING STOCKHOLDERS OFFERING OFFERED OFFERING - ------------------------------------------------------------------------------ ----------- --------- ----------- Bloom JT/WROS, Lee & Lisa..................................................... 10,000 10,000 -- Bloom, Roslyn................................................................. 10,000 10,000 -- Frischling, Carl.............................................................. 20,000 20,000 -- Hurwitz--Tenants by the Entirety, Robert & Connie............................. 10,000 10,000 -- Lerner, Lawrence.............................................................. 10,000 10,000 -- Bel Air Associates LLC........................................................ 40,000 40,000 -- Grohowski,Frank............................................................... 10,000 10,000 -- Gross,Donald.................................................................. 20,000 20,000 -- Persson Tenants in Common, Stig & Anita....................................... 10,000 10,000 -- Francis, Baylus M............................................................. 80,000 80,000 -- Peed, Wayne L................................................................. 4,000 4,000 -- Pou, James W.................................................................. 10,000 10,000 -- Rolinski, Sylvia J............................................................ 5,000 5,000 -- Walker, Thomas E.............................................................. 4,000 4,000 -- Wooten III, John E............................................................ 4,000 4,000 -- Badgett IRA, DCG&T FBO of Jack T.............................................. 5,000 5,000 -- Baroni, Philip................................................................ 10,000 10,000 -- Kessel MD, Daniel............................................................. 5,000 5,000 -- Keys, Shirley................................................................. 5,000 5,000 -- Mandell JT/WROS,Richard & Audrey.............................................. 20,000 20,000 -- Schrodt, Joseph............................................................... 20,000 20,000 -- Advent Fund LLC............................................................... 40,000 40,000 -- Bernard Oleyar Trust--UAD 2/1/96--Bernard Oleyar, TTEE........................ 10,000 10,000 -- Butler,Marshall............................................................... 20,000 20,000 -- Estate of Mary Goodman........................................................ 5,000 5,000 -- Mennie, Hubert J.............................................................. 5,000 5,000 -- Weir, Paul J.................................................................. 20,000 20,000 -- Arnett, Dr. Jan............................................................... 40,000 40,000 -- De Nigris IRA, Bear Stearns Custodian for Peter............................... 40,000 40,000 -- Gruverman, Irwin.............................................................. 10,000 10,000 -- Humphrey, Layton.............................................................. 5,000 5,000 -- Low, Nathan................................................................... 20,000 20,000 -- Rusbasan JT/WROS, CharlesJ. & Susan H......................................... 20,000 20,000 -- Sanders, Arthur D............................................................. 15,000 15,000 --
44
SHARES SHARES BENEFICIALLY BENEFICIALLY OWNED OWNED PRIOR TO AFTER THE SHARES THE SELLING STOCKHOLDERS OFFERING OFFERED OFFERING - ------------------------------------------------------------------------------ ----------- --------- ----------- Schantz, Philip L............................................................. 10,000 10,000 -- Weinberger, Mark S............................................................ 10,000 10,000 -- Windsor Partners.............................................................. 40,000 40,000 -- Bain II, Travis W............................................................. 5,000 5,000 -- Cardwell Jr. J.A.............................................................. 20,000 20,000 -- Cardwell, Jack A.............................................................. 40,000 40,000 -- Karpoff IRA, DCG&T c/f Marilyn................................................ 10,000 10,000 -- Karpoff, Marilyn.............................................................. 10,000 10,000 -- Katzenstein Community Property Trust, The Henry S. Katzenstein & Constance A........................................................................... 20,000 20,000 -- Koehler, Roger L. & Susan E................................................... 10,000 10,000 -- Terral, W. Timothy............................................................ 9,802 9,802 -- Ward, David A................................................................. 20,000 20,000 -- Brensilver JT/WROS, Howard & Marcia........................................... 5,000 5,000 -- Investment Fund, LLC.......................................................... 19,606 19,606 -- Martelli Jr,Vincent A......................................................... 5,882 5,882 -- Rego, Richard................................................................. 5,000 5,000 -- Garfield Associates LLC....................................................... 19,608 19,608 -- Bel Air Associates LLC........................................................ 19,608 19,608 -- Dacus, Lanny.................................................................. 19,608 19,608 -- Egan, George.................................................................. 19,608 19,608 -- Elkin, Richard................................................................ 9,804 9,804 -- Farley, Don F................................................................. 19,608 19,608 -- Jansen, Vic................................................................... 19,608 19,608 -- Greenbaum Doll & McDonald PLLC (Carmin D. Grandinetti)........................ 9,804 9,804 -- Greenbaum Doll & (McDonald PLLC (Patrick J. Welsh)............................ 9,804 9,804 -- Greenebaum Doll & McDonald PLLC (Edwin Perry)................................. 9,804 9,804 -- Greenebaum Doll & McDonald PLLC (Ivan M. Diamond)............................. 9,804 9,804 -- Greenebaum Doll & McDonald PLLC (Lawrence K. Banks)........................... 9,804 9,804 -- Greenebaum Doll & McDonald PLLC (Mark S. Ament)............................... 9,804 9,804 -- Greenbaum Doll & McDonald PLLC (P. Richard Anderson).......................... 9,804 9,804 -- Raesly JT/ WROS, Lee H. & Janet............................................... 9,804 9,804 -- Sura, Dr. Steven M............................................................ 9,804 9,804 -- Black Trust, The George L..................................................... 9,804 9,804 -- Family Revocable Trust, The ABR............................................... 19,608 19,608 -- Garnick, Michael.............................................................. 29,412 29,412 -- John & Janet Morse JT/WROSZ................................................... 20,000 20,000 -- Bernardet, Sophie............................................................. 3,920 3,920 -- Doyle, William................................................................ 3,920 3,920 -- Joyce Kramer TTEE Joyce Kramer Rev Trust dtd 6/15/89.......................... 3,920 3,920 -- Wiesenberg, James H........................................................... 10,000 10,000 -- Zelman, Martin................................................................ 20,000 20,000 -- Mazurosky, Rudolph............................................................ 10,000 10,000 -- Moran, John A................................................................. 100,000 100,000 -- Fischhoff, Brian & Andrea..................................................... 4,000 4,000 -- Holmes, Donnie & Donna........................................................ 5,000 5,000 --
45
SHARES SHARES BENEFICIALLY BENEFICIALLY OWNED OWNED PRIOR TO AFTER THE SHARES THE SELLING STOCKHOLDERS OFFERING OFFERED OFFERING - ------------------------------------------------------------------------------ ----------- --------- ----------- Krueger Trust, John D......................................................... 10,000 10,000 -- Shrawder, J. Edward........................................................... 15,000 15,000 -- Millison, David R............................................................. 4,000 4,000 -- Aderhold, John E.............................................................. 400,000 400,000 -- KL Rabinoff-Goldman, DC, PC Defined Benefit Pension Trust..................... 5,000 5,000 -- Benefit Pension Plan.......................................................... 80,000 80,000 -- Haboush, Howard............................................................... 10,000 10,000 -- Johnson Jr. C. Gordon......................................................... 10,000 10,000 -- Quick, Carl J................................................................. 10,000 10,000 -- Seplowitz, Sheldon............................................................ 10,000 10,000 -- Stollwerk JT/WROS............................................................. 10,000 10,000 -- Winoker, Sidney............................................................... 5,000 5,000 -- Incontro IRA. DCG&T fbo Richard............................................... 5,000 5,000 -- Koplan Henry.................................................................. 5,000 5,000 -- Sango, Jason A & Brenda L..................................................... 40,000 40,000 -- Donald B. Shackelford Trust................................................... 5,000 5,000 -- Watts Jr., James.............................................................. 5,000 5,000 -- Dean L. Patrick Revocable Trust............................................... 5,000 5,000 -- Mathis L. Becker, MD, P.A. Profit Sharing Trust FBO Mathis L. Becker, M.D..... 10,000 10,000 -- McInerney, Timothy............................................................ 10,000 10,000 -- Reilly, K.L................................................................... 10,000 10,000 -- Schreiber, Joel M............................................................. 5,000 5,000 -- Domino, Carl J................................................................ 40,000 40,000 -- Jutta & Peter Scholla JT/ WROS................................................ 5,000 5,000 -- R & S Limited Partnership..................................................... 2,500 2,500 -- Richard S. Incandela Trust dtd 9/15/91........................................ 4,900 4,900 -- Fifth Third Bank Custodian for Stephen Bachelder IRA.......................... 10,000 10,000 -- Karnofsky, Neil............................................................... 5,000 5,000 -- Paul M. Brown & Annette J. Brown Family Trust................................. 4,900 4,900 -- Reardon, Robert............................................................... 20,000 20,000 -- Toombs, Walter F.............................................................. 10,000 10,000 -- Schulte IRA, DCG&T FBO Scott F................................................ 5,000 5,000 -- Williams, John................................................................ 20,000 20,000 -- Sichenzia, Ross & Friedman LLP................................................ 10,000 10,000 --
46 PLAN OF DISTRIBUTION Sales of the shares may be effected by or for the account of the selling stockholders from time to time in transactions (which may include block transactions) on the Nasdaq SmallCap Market, in negotiated transactions, through a combination of such methods of sale, or otherwise, at fixed prices that may be changed, at market prices prevailing at the time of sale or at negotiated prices. The selling stockholders may effect such transactions by selling the shares directly to purchasers, through broker-dealers acting as agents of the selling stockholders, or to broker-dealers acting as agents for the selling stockholders, or to broker-dealers who may purchase shares as principals and thereafter sell the shares from time to time in transactions (which may include block transactions) on the Nasdaq SmallCap Market, in negotiated transactions, through a combination of such methods of sale, or otherwise. In effecting sales, broker-dealers engaged by a selling stockholder may arrange for other broker-dealers to participate. Such broker-dealers, if any, may receive compensation in the form of discounts, concessions or commissions from the selling stockholders and/or the purchasers of the shares for whom such broker-dealers may act as agents or to whom they may sell as principals, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions). The selling stockholders and any broker-dealers or agents that participate with the selling stockholders in the distribution of the shares may be deemed to be "underwriters" within the meaning of the Securities Act of 1933. Any commissions paid or any discounts or concessions allowed to any such persons, and any profits received on the resale of the shares purchased by them may be deemed to be underwriting commission or discounts under the Securities Act of 1933. We have agreed to bear all expenses of registration of the shares other than legal fees and expenses, if any, of counsel or other advisors of the selling stockholders. The selling stockholders will bear any commissions, discounts, concessions or other fees, if any, payable to broker-dealers in connection with any sale of their shares. We have agreed to indemnify the selling stockholders, or their transferees or assignees, against certain liabilities, including liabilities under the Securities Act of 1933 or to contribute to payments the selling stockholders or their respective pledgees, donees, transferees or other successors in interest, may be required to make in respect thereof. CERTAIN TRANSACTIONS Thomas A. Fenton, LL.B., a director of Talisman, is a partner of the Toronto based law firm Aird & Berlis, Barristers and Solicitors, which is Canadian legal counsel to Talisman. During the fiscal period ended December 31, 1997, Talisman paid to Aird & Berlis CDN$45,695 in consideration of legal services performed, and during fiscal period ended December 31, 1998, Talisman paid to Aird & Berlis CDN$66,425 in consideration of legal services performed. James C. McGavin, a director of Talisman, is a director, officer and shareholder of Burlington Stamping Inc., a key supplier to Talisman. During fiscal period ended December 31, 1997, Talisman paid to Burlington Stamping an aggregate of approximately CDN$108,836 in consideration of battery cans manufactured and sold by Burlington Stamping to Talisman, and during fiscal period ended December 31, 1998, Talisman paid to Burlington Stamping an aggregate of approximately CDN$50,790 in consideration of battery cans manufactured and sold by Burlington Stamping to Talisman. In addition, during fiscal period ended December 31, 1997, Talisman paid to James C. McGavin an aggregate of approximately CDN$4,320 in consideration of a car allowance, and during fiscal period ended December 31, 1998, Talisman paid to James C. McGavin an aggregate of approximately CDN$6,480 in consideration of a car allowance. 47 On January and March 1998, Garry J. Syme exercised warrants to acquire 16,098 common shares, in aggregate, for gross cash consideration of CDN$104,098 and CDN$160,500 in property and equipment. On August 5, 1998, Talisman raised CDN$1,495,000 in connection with a private offering of 263,504 shares of Talisman's common stock and warrants to purchase an additional 263,504 shares of common stock at an exercise price of $7.50 per share, with Talisman Partners. Prior to the private offering with Talisman Partners, there was no affiliation between Talisman and Talisman Partners. Talisman Partners is a private investment partnership located in New York, New York. Effective with the completion of the private offering, Norman R. Proulx, the appointed nominee of Talisman Partners, became a director of Talisman. Effective December 4, 1998, Mr. Proulx was appointed Talisman's interim President and Chief Executive Officer. Mr. Proulx was a partner with a minority interest in Talisman Partners and an employee of Spencer Trask Securities Inc., a securities dealer based in New York, New York. Talisman Partners was majority owned by the Kevin Kimberlin Partnership, L.P., a New York limited partnership, which was controlled by Kevin Kimberlin, Chairman of Spencer Trask, and minority owned by certain other Spencer Trask employees. On October 19, 1998, Talisman raised a further CDN$900,000 in connection with a private offering of 240,000 shares of Talisman's Common stock and warrants to purchase an additional 240,000 shares of Common stock at an exercise price of $5.00 per share, with Talisman Partners. From December 1998 to March 1999, Talisman sold an aggregate of $700,000 of 8% convertible promissory notes to nineteen persons. The principal amount of the notes were converted into securities of Talisman in connection with the completion of the first closing of Talisman's private placement offering with Spencer Trask in March 1999. The holders of the notes also received warrants to acquire an aggregate of 72,465 shares of common stock of Talisman exercisable at $7.50 per share. On December 22, 1998, Talisman entered into a severance agreement with David R. Guy. Pursuant to the terms of the severance agreement, Mr. Guy agreed to resign as a director and officer of Talisman and Talisman International effective December 1, 1998. The severance agreement provides that Talisman will pay to Mr. Guy $144,000 over a 12 month period commencing December 1, 1998. Talisman will also continue to underwrite the costs of certain benefits to be provided to Mr. Guy over the severance period. In return, Mr. Guy has agreed not to compete, directly or indirectly, in any business involving the manufacture or sale of private label disposable alkaline batteries, until May 1, 1999, subject to certain exceptions. Furthermore, until December 1, 1999, Mr. Guy has agreed not to solicit or attempt to solicit any employee or customer of Talisman away from Talisman. In June 1999, David R. Guy, a former officer and director of Talisman, and Garry J. Syme each contributed 15,000 shares of common stock to the settlement of a lawsuit involving Talisman, Talisman International, and Messrs. Guy and Syme. On January 4, 1999, Talisman entered into an employment agreement with James A. Ogle, a senior officer of Talisman. For a complete description of the terms and conditions of the employment agreement between Talisman and Mr. Ogle, see "Management--Employment Contracts." On January 6, 1999, Talisman entered into an employment agreement with Garry J. Syme, a senior officer of Talisman. For a complete description of the terms and conditions of the employment agreement between Talisman and Mr. Syme, see "Management--Employment Contracts." On January 7, 1999, Talisman entered into an employment agreement with Christian H. Bunger, an officer of Talisman. For a complete description of the terms and conditions of the employment agreement between Talisman and Mr. Bunger, see "Management--Employment Contracts." In March, April and June 1999, Talisman completed three closings of a private placement offering, with Spencer Trask Securities, Inc., as placement agent, in which it sold an aggregate of 50.72985 units 48 solely to U.S. investors for gross proceeds to Talisman of $5,174,472.70 (such proceeds being inclusive of the $700,000 raised from December 1998 through March 1999 described above). The units consisted of an aggregate of (1) $5,073,135 principal amount of 8% convertible promissory notes, and (2) 1,014,627 warrants to purchase shares of common stock, which warrants are exercisable at $7.50 per share. In connection with such closings, Spencer Trask received a placement fee equal to 10% of the aggregate purchase price of the securities sold by it, plus a non-accountable expense allowance equal to three percent of the aggregate purchase price of the securities sold and a warrant, granted by Talisman for $1.00 consideration, to purchase an amount of common stock equal to 20% of the common stock sold in the offering at an exercise price equal to 120% of the price of the common stock sold. Additionally, upon the first closing of the offering, Talisman entered into (1) an agreement whereby Spencer Trask has the right of first refusal to act as underwriter or agent for any proposed private or public offering of Talisman's securities by Talisman or by any of its principal stockholders, and (2) a non-exclusive finder's agreement pursuant to which Spencer Trask is entitled to receive a fee based upon a percentage of the value of any business combination or financing arrangement, including but not limited to a merger or purchase of assets, which is introduced to Talisman by Spencer Trask. None of the transactions with officers or shareholders of Talisman and their affiliates were made on terms less favorable to Talisman than those available from unaffiliated parties. In future transactions of this nature, Talisman will ensure that more favorable terms are not available to it from unaffiliated third parties before engaging officers or shareholders of Talisman or their affiliates. 49 DESCRIPTION OF SECURITIES Our authorized capital stock consists of an unlimited number of shares of common stock, with no par value. The following descriptions contain all material terms and features of our securities, are qualified in all respects by reference to our Certificate of Incorporation and Bylaws, copies of which have been filed with the Securities and Exchange Commission. COMMON STOCK We are authorized to issue an unlimited number of shares of common stock, no par value per share, of which as of the date of this prospectus, 1,055,560 shares of common stock are outstanding, not including the 600,000 shares offered in this offering by Talisman or 1,014,627 of the shares offered by the selling stockholders. The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Holders of common stock are entitled to receive ratably dividends as may be declared by the board of directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of Talisman, holders of the common stock are entitled to share ratably in all assets remaining, if any, after payment of liabilities. Holders of common stock have no preemptive rights and have no rights to convert their common stock into any other securities. Pursuant to the Business Corporation Act (Ontario), a shareholder of an Ontario Corporation has the right to have the corporation pay the shareholder the fair market value for his shares of the corporation in the event such shareholder dissents to certain actions taken by the corporation such as amalgamation or the sale of all or substantially all of the assets of the corporation and such shareholder follows the procedures set forth in the Business Corporation Act (Ontario). CLASS A WARRANTS Each class A warrant entitles the holder to purchase one share of common stock from Talisman at the exercise price of $7.50 per share. The number of shares of common stock issuable upon exercise of the warrants and the exercise price will be adjusted in the event of stock splits, stock dividends or recapitalization. The warrants are exercisable at any time within five years after March 19, 1999. Warrants not exercised by that time will expire. The warrants do not confer upon the holder any voting rights, preemptive rights or any other rights as Talisman stockholder. Upon notice to the holders of the warrants, Talisman has the right to reduce the exercise price or extend the expiration date of the warrants. The warrants are redeemable by Talisman commencing on June 21, 2000 (or sooner with the consent of Spencer Trask Securities, Inc.) at a redemption price of $0.10 per warrant on not less that 30 days written notice, provided that the last sale price per share of common stock, for 20 consecutive trading days ending on the third business day prior to the date of redemption notice, is at least $9.00 (subject to adjustment for certain events). The warrants shall be exercisable until the close of the business day preceding the date fixed for redemption. No warrant will be exercisable unless at the time of exercise Talisman has filed with the Securities and Exchange Commission a current prospectus covering the issuance of common stock issuable upon the exercise of the warrant 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. This prospectus covers the proposed offering by the selling stockholders of the 1,024,627 shares of common stock underlying the outstanding class A common stock purchase warrants. Talisman has undertaken to use its best efforts to maintain a current prospectus relating to the issuance of the shares of common stock upon the exercise of the warrants until the expiration of the warrants. 50 While it is Talisman's intention to maintain a current prospectus, there is no assurance that it will be able to do so. CLASS A SPECIAL SHARES Talisman's subsidiary, Talisman International, has class A special shares, which shares are without par value and are entitled to receive if, as and when declared by the board of directors of Talisman International, a fixed preferential 6% non-cumulative cash dividend. The class A special shares are not retractable by the holders, but rather are redeemable only by Talisman International at $1,000 per Class "A" share plus all declared and unpaid preferential dividends. The class A special shares are non-voting, non convertible and, in the event of the liquidation, dissolution or winding up of Talisman International, are entitled to receive a sum equivalent to the redemption amount (plus all accrued and unpaid dividends) attaching to such shares in priority to any payment on the common stock. No dividends on the class A special shares have ever been declared by the board of directors of Talisman International, and no dividends are anticipated to be declared in the future. At present, there are 3,300 Class "A" special shares outstanding. OTHER WARRANTS AND OPTIONS As of August 1, 1999, the Company had outstanding options to acquire 10,760 shares of common stock, exercisable at prices ranging between CDN$16.25 and CDN$31.25, and warrants to acquire approximately 642,005 shares of common stock, exercisable at prices ranging between CDN$5.00 and CDN$62.50. All of such options and warrants are currently exercisable and are fully vested. In addition, Spencer Trask Securities, Inc. received warrants to purchase an aggregate of 405,850 shares and 405,850 class A warrants, which warrants are exercisable at $6.00 per share and $.12 per warrant. The class A warrants issuable to Spencer Trask upon exercise of the warrant issued to Spencer Trask are identical to the class A warrants described above. See "Certain Transactions". TRANSFER AGENT The transfer agent for the common stock is Equity Transfer Services, Inc., Toronto, Ontario. SHARES ELIGIBLE FOR FUTURE SALE Upon the consummation of this offering, Talisman will have 2,670,187 shares of common stock outstanding. In addition, Talisman has reserved for issuance the following shares: - 31,200 shares upon the exercise of options eligible for grant under Talisman's 1997 Stock option plan; - 225,000 shares upon the exercise of options eligible for grant under Talisman's 1999 Senior Executive Stock Option Plan; - 84,770 shares upon the exercise of options eligible for grant under Talisman's 1999 Directors Company Stock Plan; - 1,014,627 shares upon the exercise of 1,014,627 class A warrants; and - 1,058,615 shares upon the exercise of additional warrants and options. All the shares to be issued and outstanding after this offering (plus any additional shares sold upon exercise of the over-allotment option and any shares to be issued upon exercise of the class A warrants) will be freely tradeable without restriction or further registration under the Act, except for any shares purchased or held by an "affiliate" of Talisman (in general, a person who has a control relationship with Talisman) which will be subject to the limitations of Rule 144 adopted under the Act ("Rule 144"). In general, under Rule 144, subject to the satisfaction of certain other conditions, a person, including 51 an affiliate of Talisman, who has beneficially owned restricted shares of common stock for at least one year is permitted to sell in a brokerage transaction, within any three-month period, a number of shares that does not exceed the greater of 1% of the total number of outstanding shares of the same class, or if the common stock is quoted on Nasdaq or a stock exchange, the average weekly trading volume during the four calendar weeks preceding the sale. Rule 144 also permits a person who presently is not and who has not been an affiliate of Talisman for at least three months immediately preceding the sale and who has beneficially owned the shares of common stock for at least two years to sell such shares without regard to any of the volume limitations as described above. Notwithstanding the foregoing, the owners of 1,014,627 shares and 1,014,627 class A warrants have agreed not to sell or otherwise dispose their securities except as follows: - 25% of 1,014,627 shares are currently subject to lock-up which expires three months after the date of this prospectus; - 50% of 1,014,627 shares are currently subject to a nine month lock-up which expires on March 21, 2000; and - all the shares to be issued upon exercise of the outstanding class A common stock purchase warrants are currently subject to a nine month lock-up, which expires on March 21, 2000. In addition to the foregoing, in connection with our recently completed private placement offering, we entered into a Stockholders' Agreement with the Spencer Trask Securities, Inc., Talisman Partners, and Messrs. Garry J. Syme, D. Graham Avery, James C. McGavin, Donald L. Matheson, Thomas A. Fenton, James A. Ogle, Christian Bunger and Norman R. Proulx pursuant to which the parties to the Stockholders' Agreement, who own an aggregate of 544,550 shares and 532,553 options or warrants, agreed not to sell, transfer, or otherwise dispose of any shares of our common stock owned by them or issuable to them pursuant to the exercise of options or warrants for a 24 month period ending on March 19, 2001 (and Talisman Partners and Norman Proulx agreed under the Stockholders' Agreement not to sell, transfer, or otherwise dispose of any shares of the Company's Common Stock owned by them or issuable to them pursuant to the exercise of options or warrants for a 12 month period ending on March 19, 2000) without the prior written consent of Spencer Trask, not to be unreasonably withheld or delayed, provided that Spencer Trask may require that any such permitted transferees be made subject to a voting agreement pursuant to which the transferring stockholder retains the right to vote transferred shares until March 19, 2001. Sales of Talisman's common stock by certain of the present stockholders in the future, under Rule 144, may have a depressive effect on the price of Talisman's common stock. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS The following describes the principal United States federal income tax consequences of the purchase, ownership and disposition of the common stock and the warrants and upon the exercise, redemption or expiration of the warrants by a warrant holder, that is a citizen or resident of the United States or a United States domestic corporation or that otherwise will be subject to United States federal income tax. This summary is based on the United States Internal Revenue Code of 1986, as amended, administrative pronouncements, judicial decisions and existing and proposed treasury regulations, changes to any of which subsequent to the date of this prospectus may affect the tax consequences described herein. This summary discusses only the principal United States federal income tax consequences to those beneficial owners holding the securities as capital assets within the meaning of Section 1221 of the Code and does not address the tax treatment of a beneficial owner that owns 10% or more of the common stock. It does not address the consequences applicable to certain specialized classes of taxpayers such as certain financial institutions, insurance companies, dealers in securities or foreign currencies, or United States persons whose functional currency (as defined in Section 985 of the Code) is not the United States dollar. Persons considering the purchase of these 52 securities should consult their tax advisors with regard to the application of the United States and other income tax laws to their particular situations. In particular, a U.S. Holder should consult his tax advisor with regard to the application of the United States federal income tax laws to his situation. COMMON STOCK A U.S. Holder generally will realize, to the extent of Talisman's current and accumulated earnings and profits, foreign source ordinary income on the receipt of cash dividends, if any, on the common stock equal to the United States dollar value of such dividends determined by reference to the exchange rate in effect on the day they are received by the U.S. Holder (with the value of such dividends computed before any reduction for any Canadian withholding tax). U.S. Holders should consult their own tax advisors regarding the treatment of foreign currency gain or loss, if any, on any dividends received which are converted into United States dollars on a date subsequent to receipt. Subject to the requirements and limitations imposed by the Code, a U.S. Holder may elect to claim Canadian tax withheld or paid with respect to dividends on the common stock as a foreign credit against the United States federal income tax liability of such holder. Dividends on the common stock generally will constitute "passive income" or, in the case of certain U.S. Holders, "financial services income" for United States foreign tax credit purposes. U.S. Holders who do not elect to claim any foreign tax credits may claim a deduction for Canadian income tax withheld. Dividends paid on the common stock will not be eligible for the dividends received deduction available in certain cases to United States corporations. Upon a sale or exchange of a share of common stock, a U.S. Holder will recognize gain or loss equal to the difference between the amount realized on such sale or exchange and the tax basis of such common stock. Any such gain or loss will be capital gain or loss, and will be long term capital gain or loss if at the time of sale or exchange the common stock has been held for more than one year. WARRANTS No gain or loss will be recognized by the holder of a warrant upon the exercise of the warrant. The cost basis of the common stock acquired upon such exercise will be the cost basis of the warrant plus any additional amount paid upon the exercise of the warrant. Gain or loss will be recognized upon the subsequent sale or exchange of the common stock acquired by the exercise of the warrant, measured by the difference between the amount realized upon the sale or exchange and the cost basis of the common stock so acquired. If a warrant is not exercised, but is sold or exchanged (whether pursuant to redemption or otherwise), gain or loss will be recognized upon such event, measured by the difference between the amount realized by the holder of the warrant as a result of sale, exchange or redemption and the cost basis of the warrant. If a warrant is not exercised and is allowed to expire, the warrants will be deemed to be sold or exchanged on the date of expiration. In such event, the holder of the warrant will recognize a loss to the extent of the cost basis of the warrant. Generally, any gain or loss recognized as a result of the foregoing will be a capital gain or loss and will either be long-term or short-term depending upon the period of time the common stock sold or exchanged or the warrant sold, exchanged, redeemed, or allowed to expire, as the case may be, was held. A holding period of more than one year results in long-term gain or loss treatment. If a warrant is exercised, the holding period of the common stock so acquired will not include the period during which the warrant was held. THIS SUMMARY IS OF GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY PROSPECTIVE 53 INVESTOR AND NO REPRESENTATION WITH RESPECT TO THE TAX CONSEQUENCES TO ANY PARTICULAR INVESTOR IS MADE. INVESTMENT CANADA ACT The Investment Canada Act is a federal Canadian statute which regulates the acquisition of control of existing Canadian businesses and the establishment of new Canadian businesses by an individual, a government or entity that is a "non-Canadian" as that term is defined in the Investment Canada Act. Talisman believes that it is not currently a "non-Canadian" for purposes of the Investment Canada Act. If Talisman were to become a "non-Canadian" in the future, acquisitions of control of Canadian businesses by Talisman would become subject to the Investment Canada Act. Generally, the direct acquisition by a "non-Canadian" of an existing Canadian business with gross assets of CDN$5,000,000 or more is reviewable under the Investment Canada Act, with a threshold of CDN$184 million for transactions closing in 1999 for "WTO investors" as defined under the Investment Canada Act. If Talisman were to become a "non-Canadian" in the future, Talisman believes that it would likely become a "non-Canadian" which is a "WTO investor." Generally, indirect acquisitions of existing Canadian businesses (with gross assets over certain threshold levels) are reviewable under the Investment Canada Act, except in situations involving "WTO investors" where indirect acquisitions are generally not reviewable. In transactions involving Canadian businesses engaged in the production of uranium, providing financial services, providing transportation services or which are cultural businesses, the benefit of the higher "WTO investor" thresholds do not apply. Acquisitions of businesses related to Canada's cultural heritage or national identity (regardless of the value of assets involved) may also be reviewable under the Investment Canada Act. In addition, investments to establish new, unrelated businesses are not generally reviewable. An investment to establish a new business that is related to the non-Canadian's existing business in Canada is not notifiable under the Investment Canada Act unless such investment relates to Canada's cultural heritage or national identity. Investments which are reviewable under the Investment Canada Act are reviewed by the Minister, designated as being responsible for the administration of the Investment Canada Act. Reviewable investments, generally, may not be implemented prior to the Minister's determining that the investment is likely to be of "net benefit to Canada" based on the criteria set out in the Investment Canada Act. Generally investments by non-Canadians consisting of the acquisition of control of Canadian businesses which acquisitions are otherwise non-reviewable or the establishment of new Canadian businesses require that a notice be given under the Investment Canada Act in the prescribed form and manner. To date, the Investment Canada Act has had no practical affect on Talisman's operations and/or financial condition. Moreover the Investment Canada Act has not and will not create an impediment to an unsolicited take-over of Talisman as Talisman's asset base is approximately CDN$6,900,000 as at March 31, 1999. Accordingly any proposed take-over of Talisman by a "non-Canadian" would likely be subject only to the simple "notification" requirements of the Investment Canada Act as in all likelihood that non-Canadian would be a "WTO investor" for purposes of the Investment Canada Act. Generally, a "WTO investor" is an individual, other than a Canadian, who is a national of a country which is a member of the World Trade Organization. In the case of a person which is not an individual, a WTO investor is a person which, generally, is ultimately controlled by individuals, other than Canadians, who are nationals of a WTO member. Currently there are 134 countries which are members of the WTO, including virtually all countries of the Western world. Talisman would have to have an asset base of at least CDN$184 million before the "reviewable" transaction provisions of the Investment Canada Act became relevant for consideration by a third party non-Canadian acquiror, which is not a WTO investor. 54 UNDERWRITING Subject to the terms and conditions set forth in an underwriting agreement among us and the underwriters, each of the underwriters named below, for whom Capital West Securities, Inc. is acting as a representative, has severally agreed to purchase from us the number of shares of common stock set forth opposite its name below:
UNDERWRITER NUMBER OF SHARES - ----------------------------------------------------------------------------------------------- ----------------- Capital West Securities, Inc................................................................... ----------------- Total..................................................................................
The underwriting agreement provides that the obligations of the underwriters are subject to certain conditions. The nature of the underwriters' obligations is that they are committed to purchase and pay for all of the above shares of common stock if any are purchased. PUBLIC OFFERING PRICE AND DEALERS CONCESSION The underwriters propose initially to offer the shares of common stock offered by this prospectus to the public at the public offering price per share set forth on the cover page of this prospectus and to certain dealers, who are members of the National Association of Securities Dealers, Inc., at that price less a concession not in excess of $ per share. The underwriters may allow, and these dealers may reallow, a discount not in excess of $ per share on sales to certain other NASD member dealers. After commencement of this offering, the offering price, discount price and reallowance may be changed by the underwriters. No such change will alter the amount of proceeds to be received by us as set forth on the cover page of this prospectus. OVER-ALLOTMENT OPTION We have granted the underwriters an option, which may be exercised within 45 days after the date of this prospectus, to purchase up to 90,000 additional shares of common stock to cover over-allotments, if any, at the initial public offering price, less the underwriting discount set forth on the cover page of this prospectus. If the underwriters exercise their over-allotment option to purchase any of these additional 90,000 shares of common stock, these additional shares will be sold by the underwriters on the same terms as those on which the shares offered by this prospectus are being sold. We will be obligated, pursuant to the over-allotment option, to sell shares to the underwriters if the underwriters exercise their over-allotment option. The underwriters may exercise their over-allotment option only to cover over-allotments made in connection with the sale of the shares of common stock offered by this prospectus. NON-ACCOUNTABLE EXPENSE ALLOWANCE We have agreed to pay the underwriters a non-accountable expense allowance of 3% of the gross proceeds derived from the sale of the shares of common stock underwritten (including the sale of any 55 shares of common stock that the underwriters' may sell to cover over-allotments, if any, pursuant to the over-allotment option), $ of which has been paid as of the date of this prospectus. We have also agreed to pay all expenses in connection with qualifying the common stock offered hereby for sale under the laws of such states as we and the underwriters may designate and registering the offering with the NASD, including filing fees and fees and expenses of counsel retained for these purposes. UNDERWRITING COMPENSATION The following table summarizes the compensation to be paid to the underwriters by us:
TOTAL ------------------------------ WITHOUT WITH PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT ---------- -------------- -------------- Underwriting discounts paid by us.................................... Underwriting discounts paid by the selling shareholders..............
INDEMNIFICATION OF UNDERWRITERS We have agreed to indemnify the underwriters against certain civil liabilities, including liabilities under the Securities Act, or to contribute to payments the underwriters may be required to make in connection with these liabilities. UNDERWRITERS' WARRANTS Upon completion of this offering, we will sell to the underwriters, for their own accounts, warrants covering an aggregate of up to 60,000 shares of common stock exercisable at a price of $6.00 per share. The underwriters will pay a price of $0.001 per warrant. The underwriters may exercise these warrants as to all or any lesser number of the underlying shares of common stock commencing on the first anniversary of the date of this offering until the fifth anniversary of the date of this offering. The terms of these warrants require us to register the common stock for which these warrants are exercisable within one year from the date of the prospectus. These underwriters' warrants are not transferable by the warrant holders other than to officers and partners of the underwriters. The exercise price of these underwriters' warrants and the number of shares of common stock for which these warrants are exercisable are subject to adjustment to protect the warrant holders against dilution in certain events. LOCK-UP AGREEMENTS In connection with our recently completed private placement offering, we entered into a Stockholders' Agreement with the Spencer Trask Securities, Inc., Talisman Partners, and Messrs. Garry J. Syme, D. Graham Avery, James C. McGavin, Donald L. Matheson, Thomas A. Fenton, James A. Ogle, Christian Bunger and Norman R. Proulx. The parties to the Stockholders' Agreement agreed not to sell, transfer, or otherwise dispose of any shares of our common stock owned by them or issuable to them pursuant to the exercise of options or warrants for a 24 month period ending on March 19, 2001 (except that with respect to Talisman Partners and Norman Proulx, such parties agreed under the Stockholders' Agreement not to sell, transfer, or otherwise dispose of any shares of the Company's Common Stock owned by them or issuable to them pursuant to the exercise of options or warrants for a 12 month period ending on March 19, 2000) without the prior written consent of Spencer Trask, not to be unreasonably withheld or delayed, provided that Spencer Trask may require that any such permitted transferees be made subject to a voting agreement pursuant to which the transferring stockholder retains the right to vote transferred shares until March 19, 2001. 56 In addition, owners of 1,014,627 shares and 1,014,627 class A warrants have agreed not to sell or otherwise dispose their securities except as follows: - 25% of 1,014,627 shares are currently subject to lock-up which expires three months after the date of this prospectus; - 50% of 1,014,627 shares are currently subject to a nine month lock-up which expires on March 21, 2000; and - moreover, all the shares to be issued upon exercise of the outstanding class A common stock purchase warrants are currently subject to a nine month lock-up, which expires on March 21, 2000. Further, the holders of the securities purchased in the private placement have the right to cause the Company to (i) offer to redeem their securities, or (ii) give such holders the ability to elect a majority of Talisman's board of directors in the event that Talisman failed to prepare and file a registration under the Securities Act of 1933 for the resale of all shares of common stock issued or issuable upon conversion of the notes and upon exercise of the class A warrants sold in the private placement offering by August 20, 1999. STABILIZATION AND OTHER TRANSACTIONS In connection with this offering, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of the common stock. These transactions may include stabilization transactions effected in accordance with Rule 104 of Regulation M under the Exchange Act, pursuant to which the underwriters may bid for, or purchase, common stock for the purpose of stabilizing the market price. The underwriters also may create a short position by selling more common stock in connection with this offering than they are committed to purchase from us, and in such case may purchase common stock in the open market following completion of this offering to cover all or a portion of such short position. In addition, the underwriters may impose "penalty bids" whereby they may reclaim from a dealer participating in this offering, the selling concession with respect to the common stock that it distributed in this offering, but which was subsequently purchased for the accounts of the underwriters in the open market. Any of the transactions described in this paragraph may result in the maintenance of the price of the common stock at a level above that which might otherwise prevail in the open market. None of the transactions described in the paragraph is required, and, if they are undertaken, they may be discontinued at any time. DISCRETIONARY ACCOUNTS The underwriters have informed us that they do not intend to confirm sales to any account over which they exercise discretionary authority. DETERMINATION OF OFFERING PRICE Prior to this offering, there has been no market for our common stock. Accordingly, the initial public offering price for the common stock was determined by negotiation between us and the underwriters. Among the factors considered in determining the initial public offering price were our results of operations, our current financial condition, our future prospects, the state of the markets for our services, the experience of our management, the economics of the online information industry in general, the general condition of the equity securities market and the demand for similar securities of companies considered comparable to us. 57 LEGAL MATTERS Certain legal matters relating to Ontario law, including the validity of the issuance of the shares offered hereby, will be passed upon for Talisman by Aird & Berlis, Barristers and Solicitors, Ontario Canada. Members of the firm of Aird & Berlis, Barristers and Solicitors own 3,092 shares of common stock of Talisman, and Mr. Fenton, a member of the firm, owns 1,000 options to purchase shares of common stock of Talisman. The validity of the issuance of the shares offered hereby will be passed upon for Talisman by its United States Counsel, Sichenzia, Ross & Friedman LLP, New York, New York. Sichenzia, Ross & Friedman LLP owns 10,000 shares of common stock of Talisman. Certain legal matters in connection with this offering will be passed upon for the underwriters by Day, Edwards, Federman, Propester & Christensen, P.C., Oklahoma City, Oklahoma. EXPERTS The consolidated financial statements of Talisman Enterprises Inc. at December 31, 1998 and 1997, and for each of the two years in the period ended December 31, 1997, appearing in this prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein. 58 TALISMAN ENTERPRISES INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- Report of Independent Public Accountants................................................................... F-2 Consolidated Balance Sheets--As at December 31, 1997 and December 31, 1998................................. F-3 Consolidated Statements of Loss and Deficit--For the seven months period ended December 31, 1997 and year ended December 31, 1998.................................................................................. F-4 Consolidated Statements of Shareholders' Equity............................................................ F-5 Consolidated Statement of Cash Flows--For the seven months period ended December 31, 1997 and year ended December 31, 1998........................................................................................ F-6 Notes to Consolidated Financial Statements................................................................. F-7 Notice to Reader........................................................................................... F-19 Consolidated Balance Sheets--As at June 30, 1998 and June 30, 1999......................................... F-20 Consolidated Statement of Loss and Deficit--For the six months period ended June 30, 1998 and June 30, 1999..................................................................................................... F-21 Consolidated Statement of Cash Flows--For the six months period ended June 30, 1998 and June 30, 1999...... F-22 Notes to Consolidated Financial Statements................................................................. F-23
F-1 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of TALISMAN ENTERPRISES INC. We have audited the accompanying consolidated balance sheets of Talisman Enterprises Inc. as of December 31, 1998 and 1997 and the related consolidated statements of loss and deficit, shareholders' equity and cash flows for the year ended December 31, 1998 and the seven months ended December 31, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform an audit to obtain reasonable assurance 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 consolidated financial position of Talisman Enterprises Inc. as at December 31, 1998 and 1997 and the consolidated results of its operations and cash flows for the year ended December 31, 1998 and the seven months ended December 31, 1997, in conformity with accounting principles generally accepted in the United States. On March 29, 1999, we reported separately to the Shareholders of Talisman Enterprises Inc. on the consolidated financial statements for the same periods, prepared in Canadian dollars and in accordance with accounting principles generally accepted in Canada. [LOGO] Hamilton, Canada, Chartered Accountants March 29, 1999 [except as to NOTE 16 which is as at August 16, 1999]. F-2 TALISMAN ENTERPRISES INC. INCORPORATED UNDER THE LAWS OF ONTARIO CONSOLIDATED BALANCE SHEETS [IN U.S. DOLLARS] AS AT DECEMBER 31
1998 1997 $ $ ----------- ---------- ASSETS CURRENT Cash.................................................................................... 16,701 26,739 Accounts receivable..................................................................... 361,826 55,030 Inventories [NOTE 3].................................................................... 409,180 258,737 Prepaid expenses........................................................................ 51,952 14,085 ----------- ---------- Total current assets.................................................................... 839,659 354,591 ----------- ---------- Capital assets [NOTE 4]................................................................. 2,752,663 2,892,617 ----------- ---------- 3,592,322 3,247,208 ----------- ---------- ----------- ---------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT Bank operating line..................................................................... 423,656 -- Accounts payable and accrued liabilities................................................ 905,169 295,572 Note payable [NOTE 5]................................................................... -- 80,073 Current portion of long-term debt [NOTE 6].............................................. 574,221 69,903 ----------- ---------- TOTAL CURRENT LIABILITIES............................................................... 1,903,046 445,548 ----------- ---------- Long-term debt [NOTE 6]................................................................. -- 250,498 Deferred income tax liability........................................................... 546,815 589,794 Shareholders' equity [STATEMENT]........................................................ Share capital [NOTE 7].................................................................. 4,277,370 3,025,230 Contributed surplus..................................................................... 309,233 -- Deficit................................................................................. (3,238,982) (964,780) Accumulated other comprehensive loss.................................................... (205,160) (99,082) ----------- ---------- TOTAL SHAREHOLDERS' EQUITY.............................................................. 1,142,461 1,961,368 ----------- ---------- 3,592,322 3,247,208 ----------- ---------- ----------- ----------
Commitments and contingencies [NOTE 11] SEE ACCOMPANYING NOTES On behalf of the Board: Director Director F-3 TALISMAN ENTERPRISES INC. CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT [IN U.S. DOLLARS]
YEAR ENDED 7 MONTHS ENDED DECEMBER 31, DECEMBER 31, 1998 1997 $ $ ------------ -------------- REVENUES........................................................................... 748,254 139,646 Operating expenses [exclusive of amortization shown separately below].............. 1,487,052 180,582 ------------ -------------- Gross profit....................................................................... (738,798) (40,936) ------------ -------------- EXPENSES Selling, general and administrative................................................ 1,136,516 597,558 Amortization....................................................................... 304,182 27,670 Interest and bank charges [NOTE 6]................................................. 99,292 11,236 ------------ -------------- 1,539,990 636,464 ------------ -------------- Loss before income taxes........................................................... (2,278,788) (677,400) Income taxes--deferred............................................................. (4,586) (37,060) ------------ -------------- LOSS FOR THE PERIOD................................................................ (2,274,202) (640,340) Deficit, beginning of period....................................................... (964,780) (324,440) ------------ -------------- DEFICIT, END OF PERIOD............................................................. (3,238,982) (964,780) ------------ -------------- ------------ -------------- Loss per share..................................................................... (3.69) (1.35) ------------ -------------- ------------ --------------
SEE ACCOMPANYING NOTES F-4 TALISMAN ENTERPRISES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY [IN U.S. DOLLARS]
ACCUMULATED CLASS "A" OTHER COMMON NUMBER OF SPECIAL CONTRIBUTED COMPREHENSIVE NUMBER OF SHARES CLASS "A" SHARES SURPLUS DEFICIT LOSS COMMON SHARES $ SPECIAL SHARES $ $ $ $ -------------- --------- --------------- ------------- ------------- --------- ----------------- BALANCE MAY 31, 1997... 452,600 801,089 3,300 1,687,083 -- (324,440) (159,108) Issuance of Firesand shares on acquisition of Talisman.......... 478,371 20,112 -- -- -- -- -- Elimination of prior number of shares of Talisman............. (478,371) -- -- -- -- -- -- Prior common shares of Firesand............. 34,970 -- -- -- -- -- -- Issued for cash and exercise of warrants............. 28,386 516,946 -- -- -- -- -- Cumulative translation adjustment........... -- -- -- -- -- -- 60,026 Net loss............... -- -- -- -- -- (640,340) -- -------------- --------- ----- ------------- ------------- --------- -------- BALANCE DECEMBER 31, 1997................. 515,956 1,338,147 3,300 1,687,083 -- (964,780) (99,082) -------------- --------- ----- ------------- ------------- --------- -------- Issued for exercise of warrants............. 10,893 119,391 -- -- -- -- -- Issued for cash [net of expenses] services and capital assets... 503,481 1,132,749 -- -- 309,233 -- -- Cumulative translation adjustment........... -- -- -- -- -- -- (106,078) Net loss............... -- -- -- -- -- (2,274,202) -- -------------- --------- ----- ------------- ------------- --------- -------- BALANCE DECEMBER 31, 1998................. 1,030,330 2,590,287 3,300 1,687,083 309,233 (3,238,982) (205,160) -------------- --------- ----- ------------- ------------- --------- -------- -------------- --------- ----- ------------- ------------- --------- -------- TOTAL $ --------- BALANCE MAY 31, 1997... 2,004,624 Issuance of Firesand shares on acquisition of Talisman.......... 20,112 Elimination of prior number of shares of Talisman............. -- Prior common shares of Firesand............. -- Issued for cash and exercise of warrants............. 516,946 Cumulative translation adjustment........... 60,026 Net loss............... (640,340) --------- BALANCE DECEMBER 31, 1997................. 1,961,368 --------- Issued for exercise of warrants............. 119,391 Issued for cash [net of expenses] services and capital assets... 1,441,982 Cumulative translation adjustment........... (106,078) Net loss............... (2,274,202) --------- BALANCE DECEMBER 31, 1998................. 1,142,461 --------- ---------
SEE ACCOMPANYING NOTES F-5 TALISMAN ENTERPRISES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS [IN U.S. DOLLARS]
YEAR ENDED 7 MONTHS ENDED DECEMBER 31, DECEMBER 31, 1998 1997 $ $ ------------ -------------- OPERATING ACTIVITIES Loss for the period................................................................ (2,274,202) (640,340) Charges to income not affecting cash Amortization of capital assets..................................................... 304,182 27,670 Deferred income taxes.............................................................. (4,586) (37,060) Change in non-cash working capital items........................................... 114,490 (89,304) ------------ -------------- CASH USED IN OPERATING ACTIVITIES.................................................. (1,860,116) (739,034) ------------ -------------- INVESTING ACTIVITY Purchase of capital assets......................................................... (286,862) 13,324 ------------ -------------- FINANCING ACTIVITIES Issuance of long-term debt......................................................... 609,430 358,423 Repayment of long-term debt........................................................ (325,894) (29,869) Repayment of note payable.......................................................... -- (60,932) Reduction in note payable.......................................................... (77,233) (104,269) Issue of common shares............................................................. 1,493,441 537,059 Bank operating line................................................................ 437,196 -- ------------ -------------- CASH PROVIDED BY FINANCING ACTIVITIES.............................................. 2,136,940 700,412 ------------ -------------- DECREASE IN CASH DURING THE PERIOD................................................. (10,038) (25,298) Cash, beginning of period.......................................................... 26,739 52,037 ------------ -------------- CASH, END OF PERIOD................................................................ 16,701 26,739 ------------ -------------- ------------ -------------- NON-CASH INVESTING ACTIVITY Contribution by shareholders of capital assets..................................... 68,000 -- ------------ -------------- ------------ -------------- NON-CASH FINANCING ACTIVITY Contribution by shareholders of professional services.............................. 241,233 -- ------------ -------------- ------------ -------------- SUPPLEMENTARY INFORMATION Cash interest paid................................................................. 26,431 8,746 Cash income taxes paid............................................................. -- -- ------------ -------------- ------------ --------------
SEE ACCOMPANYING NOTES F-6 TALISMAN ENTERPRISES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [IN U.S. DOLLARS] DECEMBER 31, 1998 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Talisman Enterprises Inc. is a company incorporated to primarily produce premium private label alkaline batteries. The company is in the early stages of its operations and has, therefore, not generated revenues on a consistent basis. The recoverability of the company's assets is, therefore, dependent on the continued support of its lenders and shareholders and the generation of profitable operations. BASIS OF PRESENTATION The consolidated financial statements have been prepared in United States dollars and in accordance with accounting principles generally accepted in the United States and include certain estimates based on management's judgments. These estimates affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from those estimates. Consolidated financial statements prepared in Canadian dollars and in accordance with accounting principles generally accepted in Canada were previously made available to shareholders and filed with various securities regulatory authorities. For purposes of these consolidated financial statements, the company has adopted the U.S. dollar as the reporting currency. This improves investors' ability to compare the company's results with those of most other publicly traded businesses in the industry. These consolidated financial statements have been translated from Canadian dollars to U.S. dollars by translating assets and liabilities at the rate in effect at the respective balance sheet date and revenues and expenses at the average rate for the period. Any resulting foreign exchange gains or losses are recorded in accumulated other comprehensive income (loss). PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the company and its wholly-owned subsidiary, Talisman International Inc. INVENTORIES Inventories are valued at the lower of average cost and net realizable value. CAPITAL ASSETS Capital assets are stated at cost. Amortization is provided at rates designed to write-off the assets over their estimated useful lives at the following rates: Production and warehouse equipment basis 10 years straight-line Dies and molds basis 5 years straight-line Furniture and fixtures basis 5 years straight-line Computer equipment basis 3 years straight-line Leasehold improvements Straight-line basis over the term of the lease
F-7 TALISMAN ENTERPRISES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [IN U.S. DOLLARS] DECEMBER 31, 1998 AND 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION Revenue from the sales of products is recognized at the time title transfers, which is generally when the goods are shipped. LOSS PER SHARE The calculation of loss per common share is based on the reported net loss divided by the weighted average number of shares outstanding during the period. The weighted average number of common shares outstanding for the year ended December 31, 1998 was 615,581 [474,446 for the seven months ended December 31, 1997]. FINANCIAL INSTRUMENTS The carrying amount of cash, accounts receivable, bank operating line and accounts payable and accrued liabilities are considered to be representative of their respective fair values due to their short maturities. The company has no derivative financial instruments or any financial instruments that potentially subject the company to concentrations of credit risk. The company is exposed to credit risk on the accounts receivable from its customers. Management has adopted credit policies in an effort to minimize those risks. The company does not have a significant exposure to any individual customer or counter-party. INCOME TAXES The company follows the liability method of accounting for income taxes. Under this method, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. 2. ACQUISITION On September 26, 1997, Firesand Resources Ltd. ["Firesand"] which was a public company with a year-end of December 31, trading on the Canadian Dealer Network, acquired 100% of Talisman International Inc., which was incorporated on September 26, 1996 and had a year-end of May 31, through the issuance of 478,371 common shares. The transaction was accounted for as a reverse takeover, with the results of Firesand being included from the date of acquisition. For periods prior to the date of acquisition, the information presented is that of Talisman International Inc. The following is F-8 TALISMAN ENTERPRISES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [IN U.S. DOLLARS] DECEMBER 31, 1998 AND 1997 2. ACQUISITION (CONTINUED) a summary of the net assets acquired and values assigned thereto based on an allocation of the purchase price to Firesand's assets and liabilities:
$ --------- Working capital......................................................................................... 20,112 Common shares issued.................................................................................... (20,112) --------- -- --------- ---------
Contemporaneously with the transaction, Firesand changed its name to Talisman Enterprises Inc. ["Talisman"]. 3. INVENTORIES
1998 1997 $ $ --------- --------- Raw materials and packaging................................................................. 243,801 201,968 Finished goods.............................................................................. 165,379 56,769 --------- --------- 409,180 258,737 --------- --------- --------- ---------
F-9 TALISMAN ENTERPRISES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [IN U.S. DOLLARS] DECEMBER 31, 1998 AND 1997 4. CAPITAL ASSETS
1998 ------------------------------------ ACCUMULATED NET BOOK COST AMORTIZATION VALUE $ $ $ ---------- ------------ ---------- Production equipment...................................................... 2,741,827 292,910 2,448,917 Warehouse equipment....................................................... 32,568 3,196 29,372 Computer equipment........................................................ 11,763 4,028 7,735 Dies and molds............................................................ 26,112 2,968 23,144 Furniture and fixtures.................................................... 20,657 4,525 16,132 Leasehold improvements.................................................... 59,718 12,355 47,363 Construction in progress.................................................. 180,000 -- 180,000 ---------- ------------ ---------- 3,072,645 319,982 2,752,663 ---------- ------------ ---------- ---------- ------------ ----------
1997 ------------------------------------- ACCUMULATED NET BOOK COST AMORTIZATION VALUE $ $ $ ---------- ------------- ---------- Production equipment...................................................... 2,796,787 24,607 2,772,180 Warehouse equipment....................................................... 25,560 210 25,350 Computer equipment........................................................ 10,095 280 9,815 Dies and molds............................................................ 9,396 140 9,256 Furniture and fixtures.................................................... 21,350 560 20,790 Leasehold improvements.................................................... 56,414 1,188 55,226 ---------- ------ ---------- 2,919,602 26,985 2,892,617 ---------- ------ ---------- ---------- ------ ----------
Certain of the above production equipment was acquired pursuant to a s.85 rollover under the Canadian tax laws. Although the equipment was recorded in the financial statements based on its fair value, it has no tax basis to the company. In total, the above capital assets have an estimated tax value at December 31, 1998 of $695,200. 5. NOTE PAYABLE The non-interest bearing note payable to a shareholder was repaid during 1998. F-10 TALISMAN ENTERPRISES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [IN U.S. DOLLARS] DECEMBER 31, 1998 AND 1997 6. LONG-TERM DEBT AND LINES OF CREDIT
1998 1997 $ $ --------- --------- Term loan, bearing interest at prime plus 1 1/4% [8% at December 31, 1998] with monthly principal repayments of $12,500 Cdn., maturing October 23, 2003........................... 474,221 -- Term demand loan, bearing interest at prime plus 1 1/4% [8% at December 31, 1998] with monthly principal repayments of $8,333 Cdn., maturing March 31, 2001, repaid during 1998...................................................................................... -- 320,401 Convertible U.S. dollar promissory note bearing interest at 8%, interest and principal on the note shall be paid in cash one year from the date of issuance of the note, or interest on the conversion of the note into securities of the company.............................. 100,000 -- --------- --------- 574,221 320,401 Less current portion........................................................................ 574,221 69,903 --------- --------- Long-term debt.............................................................................. -- 250,498 --------- --------- --------- ---------
The company has available operating line of credit of $490,000 [$66,344 was available at December 31, 1998] which bears interest at prime plus 1 1/4%. In addition, the company may draw down an additional $653,400 term loan facility for the purchase of battery manufacturing equipment up to 75% of cost, payable over 5 years, at prime plus 1 1/4% provided the company has an additional equity injection of a minimum of $2,940,200. All indebtedness of the company is collaterialized by the company's assets. Under the operating line of credit and term loan facility, the company has undertaken to maintain certain financial covenants. As at December 31, 1998, the company was not in compliance with certain of the financial covenants and accordingly, the loan has been reflected as a current liability. Pursuant to a confidential private placement memorandum prepared by the company dated January 28, 1999, a minimum of 25 units and a maximum of 50 units may be sold to accredited investors for net proceeds, after deducting agent fees and placement allowance but before the expenses of the offering of $2,118,500 and $4,337,000. The units will be offered for a period of 90 days, which period may be extended for up to an additional 90 days. Each unit consists of an 8% convertible subordinated promissory note in the principal amount of $100,000 and 20,000 Class "A" common stock purchase warrants to purchase common shares of the company until 2004. The notes are convertible into common shares at a conversion rate of one common share for every $5 in principal amount of note, and the warrants are exercisable at a price of $7.50 per share, subject to adjustments in certain events. In addition, the notes shall be automatically converted into common shares of the company upon the company's common shares becoming traded on the OTC Bulletin Board in the United States or any other U.S. based securities exchange. Subsequent to the year-end, the company completed a first closing in which it sold an aggregate of 26 units for net proceeds of $2,220,390, after deducting agents fee and placement allowance [such proceeds being inclusive of the $100,000 convertible debenture outstanding at December 31, 1998]. F-11 TALISMAN ENTERPRISES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [IN U.S. DOLLARS] DECEMBER 31, 1998 AND 1997 6. LONG-TERM DEBT AND LINES OF CREDIT (CONTINUED) The fair value of the long-term debt has been calculated on the contractual cash flows of the financial instruments discounted using market rates currently available to the company. At December 31, 1998, the fair value of the long-term debt approximated the carrying value. During the year, interest on long-term debt amounted to $26,431 [$8,746 for the seven months ended December 31, 1997]. 7. SHARE CAPITAL AUTHORIZED Unlimited 6% non-cumulative, non-voting Class "A" special shares, redeemable at the company's option, with a redemption value of $1,000 each Unlimited common shares without nominal par value On January 27, 1999, the company implemented a consolidation of the outstanding common shares on the basis of exchanging 1 new common share for each 25 common shares previously held. Reverse takeover accounting requires that the amount shown as the issued capital in the consolidated balance sheet be calculated by adding to the issued capital of the legal subsidiary company, Talisman International Inc., the amount of the cost of the purchase. However, the number of common shares reflect that of the legal parent company, Talisman Enterprises Inc. During 1998, shareholders transferred 45,000 common shares to individuals in exchange for machinery and professional services, the value of which [$309,233] was contributed to capital. The company has in place a stock option plan [the "Stock Option Plan"] as an incentive for directors, officers and key employees and other persons who provide ongoing services to the company and its subsidiaries. Under the Stock Option Plan, non-assignable options may be granted by the board of directors of the company, to directors, officers, key employees and other persons who provide ongoing services to the company to purchase common shares of the company for a term not exceeding 5 years [subject to earlier termination of the optionee's employment, upon the optionee ceasing to be a director, officer of other service provider, as applicable, or upon the optionee retiring, becoming disabled or dying] at an exercise price not less than the market price for common shares of the company. The granting of options is subject to the further conditions under the Stock Option Plan that: [i] not more than 10% of the number of shares issued and outstanding from time to time [the "Outstanding Issue"] may be reserved for the granting of options to insiders at any time or to insiders in any one-year period; [ii] that no more than 5% of the outstanding issue may be issued to any one insider of the company in a one-year period; and, [iii] the maximum number of common shares issuable under the Stock Option Plan is 31,200 shares. The options are non-transferrable. In connection with the private placements during the year, the company granted 618,006 warrants to acquire common shares of the company. F-12 TALISMAN ENTERPRISES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [IN U.S. DOLLARS] DECEMBER 31, 1998 AND 1997 7. SHARE CAPITAL (CONTINUED) The company options and warrants to acquire common shares at various exercise prices are summarized below:
EXERCISE PRICE EXPIRATION NUMBER $ DATE --------- ----------- ---------------- [CANADIAN] Options.................................................................... 10,000 16.25 Nov. 13, 2001 760 31.25 Nov. 13, 2001 Warrants................................................................... 4,600 62.50 Sept. 15, 1999 2,000 12.50 Apr. 15, 2000 2,000 20.00 Apr. 15, 2000 93,902 16.25 Aug. 15, 2000 12,000 12.50 June 7, 2001 263,504 7.50 July 31, 2001 240,000 5.00 Oct. 14, 2001 --------- ----- ---------------- Total options and warrants................................................. 628,766 --------- ----- ---------------- --------- ----- ----------------
8. SHAREHOLDERS RIGHTS PLAN On September 26, 1997, the shareholders approved a Shareholders Rights Protection Plan [the "Plan"]. The Plan applies to all common shares and all future issues of common shares. The term of the Plan is for 5 years, subject to reconfirmation by the shareholders at the first annual meeting of shareholders called after September 26, 2000. The Plan is intended to ensure that, in the event of a bid which could affect control of the company, holders of common shares will receive full and fair value for their shares and that there will be sufficient time for the fairness of the bid to be properly assessed, to negotiate with the bidder and to explore, develop and evaluate alternatives to maximize shareholder value. Under the terms of the Plan, one Right has been granted for each common share. Each Right entitles the registered holder to purchase additional shares of common stock for $1,500 Cdn. but is not exercisable until certain events occur. If a person or group wishes to acquire 20% or more of the company's common shares [an "acquiring person"], the Plan effectively requires the acquiring person to [i] negotiate terms which the Directors approve as being fair to the shareholders or, alternatively, [ii] without Board approval, make a "permitted bid" which must contain certain provisions and which must be accepted by more than 50% of the common shares not held by the acquiring person. In the event that an acquiring person acquires 20% or more of the company's voting shares other than as described in [i] and [ii] above, then the Rights become exercisable and will automatically change to allow all holders except the acquiring person to purchase, upon payment of the exercise price, shares of common stock with a total market value of two times the exercise price [ie. at a 50% discount from the then current market price of the common stock]. F-13 TALISMAN ENTERPRISES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [IN U.S. DOLLARS] DECEMBER 31, 1998 AND 1997 9. STOCK BASED COMPENSATION The company applies APB Opinion 25 in accounting for its employee stock options and warrants. The exercise price of all employee stock options and warrants is equal to the market price of the stock at the time of granting. Accordingly, no compensation cost has been recognized in the financial statements for its employee stock options and warrants. For purposes of meeting requirements of FASB Statement No. 123, the fair value was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998 and 1997, respectively; risk-free interest rates of 6%, 6%, dividend yields of 0%, 0%, volatility factors of the expected market price of the company's common stock of 30%, 30%, and weighted average expected life per option and warrant of 4 years. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected stock price volatility. Because the company's employee stock options and warrants have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's options, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and warrants. For purposes of the pro-forma disclosures, the estimated fair value of the options and warrants is amortized to expense over their vesting period. The company's pro-forma net loss would be increased by $497,706 for the 7 months ended December 31, 1997. The company's pro-forma loss per share would be [$2.03] for the 7 months ended December 31, 1997. There were no employee stock options and warrants issued or which vested during 1998. F-14 TALISMAN ENTERPRISES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [IN U.S. DOLLARS] DECEMBER 31, 1998 AND 1997 9. STOCK BASED COMPENSATION (CONTINUED) A summary of the company's stock option and warrant activity and related information is as follows:
YEAR ENDED 7 MONTHS ENDED DECEMBER 31, DECEMBER 31, 1998 1997 $ $ [CANADIAN] [CANADIAN] ----------------------------- ----------------------------- WEIGHTED WEIGHTED -AVERAGE -AVERAGE EXERCISE PRICE EXERCISE PRICE --------------- --------------- EMPLOYEE OPTIONS Outstanding, beginning of period....................... 10,760 17.25 -- -- Granted................................................ -- -- 10,760 17.25 ------------ ----- ------------ ----- OUTSTANDING AND EXERCISABLE, END OF PERIOD............. 10,760 17.25 10,760 17.25 ------------ ----- ------------ ----- EMPLOYEE WARRANTS Outstanding, beginning of period....................... 44,798 16.25 -- -- Granted................................................ -- -- 50,000 16.25 Exercised.............................................. (10,896) 16.25 (5,202) 16.25 ------------ ----- ------------ ----- OUTSTANDING AND EXERCISABLE, END OF PERIOD............. 33,902 16.25 44,798 16.25 ------------ ----- ------------ ----- TOTAL EMPLOYEE OPTIONS AND WARRANTS OUTSTANDING AND EXERCISABLE, END OF PERIOD........................... 44,662 16.50 55,558 16.50 ------------ ----- ------------ ----- WEIGHTED--AVERAGE FAIR VALUE OF EMPLOYEE OPTIONS AND WARRANTS GRANTED DURING THE PERIOD................... -- -- 10,760 12.25 ------------ ----- ------------ ----- OTHER WARRANTS Outstanding, beginning of period....................... 68,600 -- 68,600 -- Granted................................................ 515,504 -- -- -- ------------ ----- ------------ ----- 584,104 -- 68,600 -- ------------ ----- ------------ ----- TOTAL OPTIONS AND WARRANTS, END OF PERIOD.............. 628,766 -- 124,158 -- ------------ ----- ------------ ----- ------------ ----- ------------ -----
10. INCOME TAXES The significant components of the company's deferred tax liabilities and assets are as follows:
YEAR ENDED 7 MONTHS ENDED DECEMBER 31, DECEMBER 31, 1998 1997 $ $ ------------ -------------- DEFERRED TAX ASSETS Income tax losses available for carryforward....................................... 537,500 122,800 Share issue costs.................................................................. 191,441 32,087 ------------ ------- 728,941 154,887
F-15 TALISMAN ENTERPRISES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [IN U.S. DOLLARS] DECEMBER 31, 1998 AND 1997 10. INCOME TAXES (CONTINUED)
YEAR ENDED 7 MONTHS ENDED DECEMBER 31, DECEMBER 31, 1998 1997 $ $ ------------ -------------- Less valuation allowance........................................................... 728,941 154,887 ------------ ------- NET DEFERRED TAX ASSETS............................................................ -- -- ------------ ------- ------------ ------- DEFERRED TAX LIABILITIES Temporary differences on capital assets............................................ 546,815 589,794 ------------ ------- TOTAL DEFERRED TAX LIABILITIES..................................................... 546,815 589,794 ------------ ------- ------------ -------
The operating company has a tax year-end of May 31(st) which differs from its reporting year of December 31(st). As at May 31, 1998, the company has available non-capital loss carryovers of approximately $1,493,000 [$2,285,000 Cdn.] available to offset future taxable income. These non-capital loss carryovers expire as follows:
$ ---------- May 31, 2004......................................................................................... 341,000 May 31, 2005......................................................................................... 1,152,000
11. COMMITMENTS AND CONTINGENCIES The minimum lease payments for building and equipment leases over the next 5 years are as follows:
$ --------- 1999................................................................................................... 87,947 2000................................................................................................... 83,987 2001................................................................................................... 73,058 2002................................................................................................... 35,176 2003................................................................................................... -- --------- 280,168 --------- ---------
YEAR ENDED 7 MONTHS ENDED DECEMBER 31, DECEMBER 31, 1998 1997 $ $ ------------ --------------- Rent expense....................................................................... 125,480 57,993 ------------ ------ ------------ ------
In the ordinary course of business activities, the company may be contingently liable for litigation and claims with third parties. Management believes that adequate provisions have been recorded in the accounts where required. Although it is not possible to estimate the potential costs and losses, if any, F-16 TALISMAN ENTERPRISES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [IN U.S. DOLLARS] DECEMBER 31, 1998 AND 1997 11. COMMITMENTS AND CONTINGENCIES (CONTINUED) management believes that the ultimate resolution of such contingencies will not have a material adverse effect on the consolidated financial statements or financial position of the company. 12. SEGMENTED INFORMATION The company is organized and managed as a single business segment being the production of batteries and the company is viewed as a single operating segment by the chief operating decision maker for the purposes of resource allocations and assessing performance. The geographic sources of the company's revenues based on location of customers is as follows:
YEAR ENDED 7 MONTHS ENDED DECEMBER 31, DECEMBER 31, 1998 1997 $ $ ------------ -------------- Canada............................................................................. 172,098 134,060 United States...................................................................... 576,156 5,586 ------------ ------- 748,254 139,646 ------------ ------- ------------ -------
In addition, sales to two of the company's largest customers accounted for 28.6%, and 23.7% of revenues for the year ended December 31, 1998. 13. RELATED PARTY TRANSACTIONS During the year, the company had $120,900 of loans due from a former senior executive officer bearing interest at 8% per annum. The amount was repaid by December 31, 1998. The company had the following transactions with a company that is a shareholder, key supplier and whose president is also a director and officer of the company:
YEAR ENDED 7 MONTHS ENDED DECEMBER 31, DECEMBER 31, 1998 1997 $ $ ------------- ------------------- Acquisition of raw materials....................................................... 34,246 --
In addition, in 1996 the company purchased capital assets [$73,400] which remain in the possession of the related party who uses them to produce raw materials for the company. 14. RECENT REPORTING DEVELOPMENTS The Financial Accounting Standards Board has issued FAS133, Accounting for Derivative Instruments and Hedging Activities which introduces revised standards for the recognition and measurement of derivatives and hedging activities. The company must adopt this standard in the first quarter of fiscal 2001. Implementation of this standard is currently expected to have no impact on the company's financial position or results of operation since the company has no derivative financial instruments or hedging activities. F-17 TALISMAN ENTERPRISES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) [IN U.S. DOLLARS] DECEMBER 31, 1998 AND 1997 15. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE [UNAUDITED] Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming change in the century. If not corrected, many computer applications could fail or create erroneous results by, or at, the Year 2000. Management has assessed the Year 2000 issue and has determined that the company may have to replace nine personal computers for proper functioning in the Year 2000 and thereafter. As at December 31, 1998, no amounts had been expensed relating to becoming Year 2000 compliant. The estimated future costs to become Year 2000 compliant will not exceed an aggregate of $50,000. Management has determined that it has no exposure to contingencies related to Year 2000 issues for the products it has sold. Management has used its best estimate of the Year 2000 issues, and there is no guarantee that these estimates will be achieved and actual results could differ from those anticipated. In addition, disruptions in the economy generally resulting from the Year 2000 could also materially adversely affect the company. 16. SUBSEQUENT EVENTS On July 16, 1999, the company filed a registration statement with the SEC for the issue of 1,774,627 common shares and 1,014,627 common stock purchase warrants. F-18 NOTICE TO READER We have compiled the consolidated balance sheet of TALISMAN ENTERPRISES INC. as at June 30, 1999 and the consolidated statements of loss and deficit and cash flows for the period then ended from information provided by management. We have not audited, reviewed or otherwise attempted to verify the accuracy or completeness of such information. Readers are cautioned that these statements may not be appropriate for their purposes. [LOGO] Hamilton, Canada, August 16, 1999. Chartered Accountants F-19 TALISMAN ENTERPRISES INC. INCORPORATED UNDER THE LAWS OF ONTARIO CONSOLIDATED BALANCE SHEET [IN U.S. DOLLARS] AS AT JUNE 30 Unaudited--See Notice to Reader
1999 1998 $ $ ----------- ----------- ASSETS CURRENT Cash................................................................................... 662,224 20,228 Accounts receivable.................................................................... 175,228 195,858 Inventories [note 2]................................................................... 1,326,939 301,230 Prepaid expenses....................................................................... 472,347 191,946 Deferred financing costs............................................................... 597,677 -- ----------- ----------- TOTAL CURRENT ASSETS................................................................... 3,234,415 709,262 ----------- ----------- Capital assets......................................................................... 3,377,420 2,617,654 ----------- ----------- 6,611,835 3,326,916 ----------- ----------- ----------- ----------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT Bank operating line.................................................................... 100,548 374,627 Accounts payable and accrued liabilities............................................... 1,044,086 527,892 Note payable........................................................................... -- 292,199 Convertible promissory note............................................................ 5,073,135 -- Current portion of long-term debt...................................................... 441,576 283,139 ----------- ----------- TOTAL CURRENT LIABILITIES.............................................................. 6,659,345 1,477,857 ----------- ----------- Deferred income tax liability.......................................................... 539,198 571,011 Shareholders' equity Share capital.......................................................................... 4,277,370 3,116,668 Warrants............................................................................... 101,463 -- Contributed surplus.................................................................... 309,233 -- Deficit................................................................................ (5,126,654) (1,698,553) Accumulated other comprehensive loss................................................... (148,120) (140,067) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY............................................................. (586,708) 1,278,048 ----------- ----------- 6,611,835 3,326,916 ----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES On behalf of the Board: Director Director F-20 TALISMAN ENTERPRISES INC. CONSOLIDATED STATEMENT OF LOSS AND DEFICIT [IN U.S. DOLLARS] FOR THE SIX MONTHS ENDED JUNE 30 Unaudited--See Notice to Reader
1999 1998 $ $ ----------- ----------- Revenues............................................................................... 70,688 348,605 Operating expenses [exclusive of amortization shown separately below].................. 639,566 628,527 ----------- ----------- Gross profit........................................................................... (568,878) (279,922) ----------- ----------- EXPENSES Selling, general and administrative.................................................... 872,648 243,229 Amortization........................................................................... 370,003 187,234 Interest and bank charges.............................................................. 105,133 25,749 ----------- ----------- 1,347,784 456,212 ----------- ----------- Loss before income taxes............................................................... (1,916,662) (736,134) Income taxes--deferred................................................................. (28,990) (2,361) ----------- ----------- LOSS FOR THE PERIOD.................................................................... (1,887,672) (733,773) Deficit, beginning of period........................................................... (3,238,982) (964,780) ----------- ----------- DEFICIT, END OF PERIOD................................................................. (5,126,654) (1,698,553) ----------- ----------- LOSS PER SHARE......................................................................... (1.83) (1.55) ----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES F-21 TALISMAN ENTERPRISES INC. CONSOLIDATED STATEMENT OF CASH FLOWS [IN U.S. DOLLARS] FOR THE SIX MONTHS ENDED JUNE 30 Unaudited--See Notice to Reader
1999 1998 $ $ ----------- ---------- OPERATING ACTIVITIES Loss for the period..................................................................... (1,887,672) (733,773) Charges to income not affecting cash Amortization of capital assets........................................................ 370,003 187,234 Deferred income taxes................................................................. (28,990) (2,361) Change in non-cash working capital items................................................ (1,031,593) (124,986) ----------- ---------- CASH USED IN OPERATING ACTIVITIES....................................................... (2,578,252) (673,886) ----------- ---------- INVESTING ACTIVITY Purchase of capital assets.............................................................. (676,325) 11,221 ----------- ---------- FINANCING ACTIVITIES Issue of convertible promissory note.................................................... 5,174,473 -- Deferred financing costs................................................................ (797,677) -- Repayment of long-term debt............................................................. (153,588) (28,977) Increase in note payable................................................................ -- 219,066 Issue of common shares.................................................................. -- 91,438 Bank operating line..................................................................... (323,108) 374,627 ----------- ---------- Cash provided by financing activities................................................... 3,900,100 656,154 ----------- ---------- Increase (decrease) in cash during the period........................................... 645,523 (6,511) Cash, beginning of period............................................................... 16,701 26,739 ----------- ---------- CASH, END OF PERIOD..................................................................... 662,224 20,228 ----------- ---------- ----------- ----------
SEE ACCOMPANYING NOTES F-22 TALISMAN ENTERPRISES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN U.S. DOLLARS) JUNE 30, 1999 Unaudited-See Notice to Reader 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Talisman Enterprises Inc. is a company incorporated to primarily produce premium private label alkaline batteries. The company is in the early stages of its operations and has, therefore, not generated revenues on a consistent basis. The recoverability of the company's assets is, therefore, dependent on the continued support of its lenders and shareholders and the generation of profitable operations. BASIS OF PRESENTATION The consolidated financial statements have been prepared in United States dollars and in accordance with accounting principles generally accepted in the United States and include certain estimates based on management's judgments. These estimates affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amount of revenues and expenses during the period. Actual results may differ from those estimates. Consolidated financial statements prepared in Canadian dollars and in accordance with accounting principles generally accepted in Canada were previously made available to shareholders and filed with various securities regulatory authorities. For purposes of these consolidated financial statements, the company has adopted the U.S. dollar as the reporting currency. This improves investors' ability to compare the company's results with those of most other publicly traded businesses in the industry. These consolidated financial statements have been translated from Canadian dollars to U.S. dollars by translating assets and liabilities at the rate in effect at the respective balance sheet date and revenues and expenses at the average rate for the period. Any resulting foreign exchange gains or losses are recorded in accumulated other comprehensive income (loss). 2. INVENTORIES
1999 1998 $ $ ---------- --------- Raw materials and packaging............................................................... 470,395 138,290 Finished goods............................................................................ 856,544 162,940 ---------- --------- 1,326,939 301,230 ---------- --------- ---------- ---------
3. SUBSEQUENT EVENTS On July 16, 1999, the company filed a registration statement with the SEC for the issue of 1,774,627 common shares and 1,014,627 common stock purchase warrants. F-23 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR ANY OTHER PERSON TO PROVIDE PROSPECTIVE INVESTORS WITH INFORMATION OR REPRESENTATIONS DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. PROSPECTIVE INVESTORS SHOULD NOT RELY ON ANY UNAUTHORIZED INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL ANY SECURITY OTHER THAN THE COMMON STOCK AND COMMON STOCK PURCHASE WARRANTS OFFERED BY THIS PROSPECTUS, NOR DOES THIS PROSPECTUS OFFER TO BUY OR SELL ANY SECURITIES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE INFORMATION IN THIS PROSPECTUS IS CURRENT AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES. ------------------------ TABLE OF CONTENTS
PAGE --------- Prospectus Summary.............................. 1 Risk Factors.................................... 5 Use of Proceeds................................. 13 Dilution........................................ 14 Capitalization.................................. 16 Exchange Rate Data.............................. 17 Dividend Policy................................. 18 Selected Financial Data......................... 19 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 20 Our History..................................... 25 Business........................................ 26 Management...................................... 33 Principal Stockholders.......................... 42 Selling Stockholders............................ 44 Plan of Distribution............................ 47 Certain Transactions............................ 47 Description of Securities....................... 50 Investment Canada Act........................... 54 Underwriting.................................... 55 Legal Matters................................... 58 Experts......................................... 58 Index to Financial Statements................... F-1
------------------------ UNTIL , 1999 (25 DAYS AFTER DATE OF THIS PROSPECTUS), ALL DEALERS THAT BUY, SELL OR TRADE THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT O THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. [LOGO] 1,624,627 SHARES OF COMMON STOCK --------------------- PROSPECTUS --------------------- CAPITAL WEST SECURITIES, INC. ,1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS. The by-laws of Talisman provide that Talisman shall indemnify directors and officers of Talisman. The pertinent section of Canadian law is set forth below in full. In addition, upon effectiveness of this registration statement, management intends to obtain officers and directors liability insurance. See the second and third paragraphs of Item 28 below for information regarding the position of the Securities and Exchange Commission (the "Commission") with respect to the effect of any indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"). Section 136 of the Business Corporation Act (Ontario) provides as follows: (1) INDEMNIFICATION OF DIRECTORS--A corporation may indemnify a director or officer of the corporation, a former director or officer of the corporation or a person who acts or acted at the corporation's request as a director or officer of a body corporate of which the corporation is or was a shareholder or creditor, and his or her heirs and legal representatives, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or her in respect of any civil, criminal or administrative action or proceeding to which he or she is a party by reason of being or having been a director or officer of such corporation or body corporate, if, (a) he or she acted honestly and in good faith with a view to the best interests of the corporation; and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he or she has reasonable grounds for believing that his or her conduct was lawful. (2) IDEM.--A corporation may, with the approval of the court, indemnify a person referred to in subsection (1) in respect of an action by or behalf of the corporation or body corporate to procure a judgment n its favor, to which the person is made a party by reason of being or having been a director or an officer of the corporation or body corporate, against all costs, charges and expenses reasonably incurred by the person in connection with such action if he or she fulfills the conditions set out in clauses (1)(a) and (b). (3) IDEM.--Despite anything in this section, a person referred to in subsection (1) is entitled to indemnity from the corporation in respect of all costs, charges and expenses reasonably incurred by him in connection with the defense of any civil, criminal or administrative action or proceeding to which he or she is made a party by reason of being or having been a director or officer of the corporation or body corporate, if the person seeking indemnity; (a) was substantially successful on the merits in his or her defense of the action or proceeding; and (b) fulfills the conditions set out in clauses (1)(a) and (b). (4) LIABILITY INSURANCE-A corporation may purchase and maintain insurance for the benefit of any person referred to in subsection (1) against any liability incurred by the person, (a) in his or her capacity as a director or officer of the corporation, except where the liability relates to the person's failure to act honestly and in good faith with a view to the best interests of the corporation; or II-1 (b) in his or her capacity as a director or officer of another body corporate where the person acts or acted in that capacity at the corporation's request, except where the liability relates to the person's failure to act honestly and in good faith with a view to the best interests of the body corporate. (5) APPLICATION TO COURT--A Corporation or a person referred to in subsection (1) may apply to the court for an order approving an indemnity under this section and the court may so order and make any further order it thinks fit. (6) IDEM--Upon application under subsection (5), the court may order notice to be given to any interested person and such person is entitled to appear and be heard in person or by counsel. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses of this offering, all of which are to be paid by the Registrant, in connection with the issuance and distribution of the securities being registered are as follows: SEC registration fee........................................... $ 5,704.43* NASD filing fee................................................ 2,149.28* NASDAQ listing and filing fee.................................. 10,000.00* Printing and engraving expenses................................ 100,000.00* Accounting fees and expenses................................... 125,000.00* Legal fees and expenses........................................ 100,000.00* Blue sky fees and expenses..................................... 25,000.00* Non-accountable expense allowance.............................. 90,000.00* Transfer agent fees............................................ 5,000.00* Miscellaneous expenses......................................... 27,155.29* ---------- Total...................................................... $490,000.00 ---------- ----------
- ------------------------ * Estimated ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES. Except as set forth below, there were no sales of unregistered securities by the Registrant during the past three (3) years: In January and March 1998, Garry J. Syme exercised warrants to acquire 16,098 common shares, in aggregate, for gross cash consideration of $86,628 and $177,970 in property and equipment. These transactions were exempt from registration under the Act, under Section 4(2) and Rule 506 of Regulation D of the Act as not involving a public offering. The recipient of the foregoing securities represented that such securities were being acquired for investment and not with a view to the distribution thereof. In addition, restrictive legends were placed on the certificates evidencing such securities. On August 5, 1998, Talisman raised CDN$1,495,000 in connection with a private offering of 263,504 shares of Talisman's common stock and warrants to purchase an additional 263,504 shares of common stock at an exercise price of $7.50 per share, with Talisman Partners. These transactions were exempt from registration under the Act, under Section 4(2) of the Act as not involving a public offering. The recipient of the foregoing securities represented that such securities were being acquired for investment and not with a view to the distribution thereof. In addition, restrictive legends were placed on the certificates evidencing such securities. II-2 On October 19, 1998, Talisman raised a further CDN$900,000 in connection with a private offering of 240,000 shares of Talisman's Common stock and warrants to purchase an additional 240,000 shares of Common stock at an exercise price of $5.00 per share, with Talisman Partners. These transactions were exempt from registration under the Act, under Section 4(2) of the Act as not involving a public offering. The recipient of the foregoing securities represented that such securities were being acquired for investment and not with a view to the distribution thereof. In addition, restrictive legends were placed on the certificates evidencing such securities. From December 1998 to March 1999, Talisman sold an aggregate of $700,000 of 8% convertible promissory notes to nineteen persons. The holders of the Notes also received warrants to acquire an aggregate of 72,465 shares of common stock of Talisman exercisable at $7.50 per share. These transactions were exempt from registration under the Act, under Section 4(2) and Rule 506 of Regulation D of the Act as not involving a public offering. The recipient of the foregoing securities represented that such securities were being acquired for investment and not with a view to the distribution thereof. In addition, restrictive legends were placed on the certificates evidencing such securities. In March, April, and June 1999, Talisman completed three closings of a private placement offering, with Spencer Trask Securities, Inc. as placement agent, in which it sold an aggregate of approximately 50.72985 units solely to U.S. investors for gross proceeds to Talisman of approximately $5,174,472.70 (such proceeds being inclusive of the $700,000 raised from December 1998 through March 1999 described above). The units consisted of an aggregate of (1) $5,073,135 principal amount of 8% convertible promissory notes, and (2) 1,014,627 warrants to purchase shares of common stock, which warrants are exercisable at $7.50 per share. In connection with such closings, Spencer Trask received a placement fee equal to 10% of the aggregate purchase price of the securities sold by it, plus a non-accountable expense allowance equal to three percent of the aggregate purchase price of the securities sold and a warrant, granted by Talisman for $1.00 consideration, to purchase an amount of common stock equal to 20% of the common stock sold in the offering at an exercise price equal to 120% of the price of the common stock sold. Additionally, upon the first closing of the offering, Talisman entered into (1) an agreement whereby Spencer Trask shall have the right of first refusal to act as underwriter or agent for any proposed private or public offering of Talisman's securities by Talisman or by any of its principal stockholders, and (2) a non-exclusive finder's agreement pursuant to which Spencer Trask shall be entitled to receive a fee based upon a percentage of the value of any business combination or financing arrangement, including but not limited to a merger or purchase of assets, which is introduced to Talisman by Spencer Trask. In July 1999, Talisman issued an aggregate of 25,230 shares of common stock to six persons. These transactions were exempt from registration under the Act, under Section 4(2) and Rule 506 of Regulation D of the Act as not involving a public offering. The recipient of the foregoing securities represented that such securities were being acquired for investment and not with a view to the distribution thereof. In addition, restrictive legends were placed on the certificates evidencing such securities. II-3 ITEM 27. EXHIBITS
EXHIBIT NO. DESCRIPTION - ------------- ----------------------------------------------------------------------------------------------------- 1.1 Form of Underwriting Agreement 1.2 Form of Selected Dealers Agreement 3.1 Articles of Incorporation, as amended* 3.2 By-Laws* 4.1 Form of Underwriter's Warrants 4.2 Form of Common Stock Certificate* 5.1 Opinion of Aird & Berlis 10.1 Registrant's 1997 Stock Option Plan * 10.2 1999 Senior Executive Stock Option Plan*** 10.3 1999 Directors Company Stock Plan*** 10.4 Employment Agreement with Gary J. Syme* 10.5 Employment Agreement with James A. Ogle* 10.5 Employment Agreement with Christian H. Bunger 21.1 List of Subsidiaries of the Registrant** 23.1 Consent of Sichenzia, Ross & Friedman LLP 23.2 Consent of Ernst & Young LLP 23.3 Consent of Aird & Berlis (to be included in Exhibit 5.1) 27.1 Financial Data Schedule--Year Ended December 31, 1998** 27.2 Financial Data Schedule--Six Months Ended June 30, 1999
- ------------------------ * Incorporated by reference to the Form 20-F filed by the Registrant with the Commission on January 19, 1999 under SEC File No. 0-29972. ** Previously filed. *** Incorporated by reference to the Form 6-K filed by the Registrant with the commission on June 7, 1999 under SEC File No. 0-29972. All other schedules are omitted, as the required information is either inapplicable or presented in the financial statements or related notes. ITEM 28. UNDERTAKINGS. The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (a) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; II-4 (b) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (c) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; (4) 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 registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of 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. (5) The undersigned registrant hereby undertakes to provide to the underwriters, at the closing, specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 1 to Registration Statement on Form SB-2 to be signed on its behalf by the undersigned, thereunto duly authorized, in Mississauga, Ontario, on the 17th day of August, 1999. TALISMAN ENTERPRISES INC. BY: /S/ JAMES A. OGLE ----------------------------------------- James A. Ogle, PRESIDENT & CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 1 to Registration Statement on Form SB-2 has been signed below by the following persons in the capacities and on the dates indicated: SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- /s/ JAMES A. OGLE President, Chief Executive - ------------------------------ Officer & Director August 17, 1999 James A. Ogle /s/ NORMAN R. PROULX Chairman of the Board - ------------------------------ August 17, 1999 Norman R. Proulx /s/ THOMAS O'DOWD Vice President & Chief - ------------------------------ Financial Officer August 17, 1999 Thomas O'Dowd /s/ JAMES C. MCGAVIN Director - ------------------------------ August , 1999 James C. McGavin /s/ DONALD L. MATHESON Director - ------------------------------ August , 1999 Donald L. Matheson /s/ THOMAS A. FENTON Director - ------------------------------ August 17, 1999 Thomas A. Fenton Director - ------------------------------ August , 1999 D. Graham Avery II-6 EXHIBIT INDEX
NUMBER DESCRIPTION PAGE - ----------- ------------------------------------------------------------------------------------------------ --------- 1.1 Form of Underwriting Agreement 1.2 Form of Selected Dealers Agreement 3.1 Articles of Incorporation, as amended* 3.2 By-Laws* 4.1 Form of Underwriter's Warrants 4.2 Form of Common Stock Certificate* 5.1 Opinion of Aird & Berlis 10.1 Registrant's 1997 Stock Option Plan * 10.2 1999 Senior Executive Stock Option Plan*** 10.3 1999 Directors Company Stock Plan*** 10.4 Employment Agreement with Gary J. Syme* 10.5 Employment Agreement with James A. Ogle* 10.6 Employment Agreement with Christian H. Bunger 21.1 List of Subsidiaries of the Registrant** 23.1 Consent of Sichenzia, Ross & Friedman LLP 23.2 Consent of Ernst & Young LLP 23.3 Consent of Aird & Berlis (to be included in Exhibit 5.1) 27.1 Financial Data Index--Year Ended December 31, 1998** 27.2 Financial Data Index--Six Months Ended June 30, 1999
- ------------------------ * Incorporated by reference to the Form 20-F filed by the Registrant with the Commission on January 19, 1999 under SEC File No. 0-29972. ** Previously filed. *** Incorporated by reference to the Form 6-K filed by the Registrant with the Commission on June 7, 1999 under SEC File No. 0-29972. EX-1.1 2 EXHIBIT 1.1 600,000 Shares TALISMAN ENTERPRISES INC. (an Ontario, Canada corporation) (No Par Value Per Share) UNDERWRITING AGREEMENT October __, 1999 CAPITAL WEST SECURITIES, INC. 211 N. Robinson 2nd Floor, One Leadership Square Oklahoma City, Oklahoma 73102 Ladies/Gentlemen: Talisman Enterprises Inc., an Ontario, Canada corporation (the "Company"), hereby confirms its agreement with Capital West Securities, Inc. ("Capital West") and additional underwriters (along with Capital West, each an "Underwriter and, collectively, the "Underwriters") as follows: 1. DESCRIPTION OF SHARES. The Company proposes to issue and sell 600,000 shares of its authorized and unissued common stock, no par value, to the several Underwriters. The Company also proposes to grant to the Underwriters an option as provided in Section 7 hereof. As used in this Agreement, the term "Shares" shall include the Shares, the Option Shares, as defined in Section 7 and, if the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Act registering additional shares of common stock, no par value, such shares of common stock. All shares of common stock of the Company, no par value per share, including the Shares, shall hereinafter be referred to as "Common Stock." 2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY. Unless otherwise indicated or the context otherwise requires, references to the "Company" in this Section 2 are references to Talisman Enterprises Inc., an Ontario, Canada corporation. The Company represents and warrants to and agrees with each Underwriter, as follows: (a) A registration statement on Form SB-2 (File No. 333-[________]) with respect to the Shares, including a prospectus subject to completion, has been carefully and accurately prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the applicable rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") under the Act and has been filed with the Commission; such amendments to such registration statement and such amended prospectuses subject to completion, as may have been required prior to the date hereof have been similarly prepared and filed with the Commission; and the Company will file such additional amendments to such registration statement and such amended prospectuses -1- subject to completion, as may hereafter be required. Copies of such registration statement and any amendments and of each related prospectus subject to completion have been delivered to the Company. If requested by Capital West, the Company shall file a Rule 462(b) Registration Statement with the Commission registering shares of Common Stock in compliance with Rule 462(b) by 5:30 P.M., New York City time, on the date of this Agreement and to pay to the Commission the filing fee for such Rule 462(b) Registration Statement at the time of the filing thereof or to give irrevocable instructions for the payment of such fee pursuant to Rule 111(b) under the Act. If the registration statement has been declared effective under the Act by the Commission, the Company will prepare and promptly file with the Commission the information omitted from the registration statement pursuant to Rule 430A(a) of the Rules and Regulations or as part of a post-effective amendment to the registration statement (including a final form of prospectus). If the registration statement has not been declared effective under the Act by the Commission, the Company will prepare and promptly file a further amendment to the registration statement, including a final form of prospectus. The term "Registration Statement" as used in this Agreement shall mean such registration statement, including financial statements, schedules and exhibits, in the form in which it became or becomes, as the case may be, effective (including, if the Company omitted information from the registration statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the registration statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations) and, in the event of any amendment thereto after the effective date of such registration statement, shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended and if the Company has filed or is required pursuant to the terms hereof to file a registration statement pursuant to Rule 462(b) under the Act registering additional shares of Common Stock (a "Rule 462(b) Registration Statement"), then, unless otherwise specified, any reference herein to the term "Registration Statement" shall be deemed to include such Rule 462(b) Registration Statement. The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares as included in such Registration Statement at the time it becomes effective (including, if the Company omitted information from the Registration Statement pursuant to Rule 430A(a) of the Rules and Regulations, the information deemed to be a part of the Registration Statement at the time it became effective pursuant to Rule 430A(b) of the Rules and Regulations), except that if any revised prospectus shall be provided to the Underwriters by the Company for use in connection with the offering of the Shares that differs from the Prospectus on file with the Commission at the time the Registration Statement became or becomes, as the case may be, effective (whether or not such revised prospectus is required to be filed with the Commission pursuant to Rule 424(b)(3) of the Rules and Regulations), the term "Prospectus" shall refer to such revised prospectus from and after the time it is first provided to the Underwriters for such use. -2- (b) The Commission has not issued any order preventing or suspending the use of any preliminary prospectus or instituted proceedings for that purpose, and each such preliminary prospectus has conformed in all material respects to the requirements of the Act and the Rules and Regulations and, as of its date, has not included any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement and any amendments thereto, when they become effective (i) will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) will comply in all material respects with the Act; and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up, to and on the Closing Date (hereinafter defined) and on any later date on which Option Shares are to be purchased, (i) the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained and will contain all material information required to be included therein by the Act and the Rules and Regulations and will in all material respects conform to the requirements of the Act and the Rules and Regulations, and (ii) neither the Registration Statement nor the Prospectus, nor any amendments or supplements thereto, will include 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 the light of the circumstances under which they were made, not misleading. (c) Each of the Company and Talisman International Inc., its sole Subsidiary (as such term is defined in Rule 405 under the Act) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its organization, with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement; each of the Company and its Subsidiary is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of its properties or the conduct of its business requires such qualification except where the failure to be so qualified or to be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its Subsidiary considered as a whole; each of the Company and its Subsidiary is in possession of and operating in compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal, foreign and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect; neither the Company nor its Subsidiary is in violation of its charter or bylaws or in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any material indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, or any material lease, contract, joint venture, or other agreement or instrument to which it is a party or by which its property is bound or in violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any government, governmental agency or body or court, domestic or foreign, except such failures to comply as would not, individually or in the aggregate, have a material adverse effect on the Company and its Subsidiary considered as a whole. -3- (d) The Company has full legal right, power and authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement and the Warrant Agreement dated of even date herewith by and between the Company and the Underwriters (the "Warrant Agreement") have been duly authorized, executed and delivered by the Company and are valid and binding agreements on the part of the Company, enforceable in accordance with their respective terms, except as rights to indemnification and contribution hereunder may be limited by applicable law and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally, or by general equitable principles; the performance of this Agreement and the Warrant Agreement and the consummation of the transactions herein and therein contemplated will not result in a breach or violation of any of the terms and provisions of, or constitute a default under, (i) any material indenture, mortgage, deed of trust, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, or any material lease, contract, joint venture or other agreement or instrument to which the Company is a party or by which the property of the Company is bound including any licenses from third parties, or (ii) the charter and bylaws of the Company or its Subsidiary, or (iii) any law, order, rule, regulation, writ, injunction, judgment or decree of any government or governmental agency or body or court, domestic or foreign, having jurisdiction over the Company or its Subsidiary or over the properties of the Company or its Subsidiary, except for breaches, violations or defaults that individually or in the aggregate, would not have a material adverse effect on the Company; and no consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions herein contemplated, except such as may be required under the Act, the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), or under state or other securities or Blue Sky laws, all of which requirements have been satisfied in all material respects. (e) Except as disclosed in the Registration Statement or the Prospectus, there is no action, suit or proceeding before or by any court or governmental agency or body, domestic or foreign, now pending or threatened, against or affecting the Company or its Subsidiary which (i) is required to be disclosed in the Registration Statement or the Prospectus or which might result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise, or which might materially and adversely affect the properties or assets thereof; or (ii) which might be expected to materially and adversely affect the consummation of the transactions contemplated by this Agreement; all pending legal or governmental proceedings to which the Company or its Subsidiary is a party or of which any of their respective properties or assets is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the Company's business, could not reasonably be expected to result in a material adverse change in the condition, financial or otherwise, or the earnings, business affairs or business properties of the Company and its Subsidiary considered as one enterprise; and there are no contracts or documents of the Company or its Subsidiary which are required to be described in the Registration Statement or the Prospectus, or to be filed as exhibits thereto, by the Act or by the Rules and Regulations which have not been accurately described in all material respects and filed as exhibits to the Registration -4- Statement. The contracts so described in the Prospectus are in full force and effect on the date hereof, and neither the Company nor its Subsidiary is in breach of or default under, and, to the Company's knowledge, no other party is in material breach of or material default under, any of such contracts. (f) All outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all federal, state and foreign securities laws, were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities (other than such preemptive rights or other rights to subscribe for or purchase securities as were fully complied with or expressly waived or with respect to the violation of which the right to make claim is barred by the applicable statute of limitations), and the authorized and outstanding capital stock of the Company conforms in all material respects to the statements relating thereto contained in the Registration Statement and the Prospectus (and such statements correctly state the substance of the instruments defining the capitalization of the Company); the Shares and the Option Shares to be purchased from the Company hereunder have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of this Agreement, will be duly and validly issued and fully paid and nonassessable; the shares of Common Stock issuable under the warrant to be granted to the Underwriters under the Warrant Agreement (the "Underwriters' Warrant") have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company against payment therefor in accordance with the terms of the Warrant Agreement, will be duly and validly issued and fully paid and nonassessable; and no preemptive right, co-sale right, registration right, right of first refusal or other similar right of stockholders exists with respect to any of the Shares, Option Shares or shares of Common Stock issuable under the Underwriters' Warrant or the issuance and sale thereof other than those that have been expressly waived prior to the date hereof and those that will automatically expire upon the consummation of the transactions contemplated on the Closing Date. No further approval or authorization of any stockholder, the Board of Directors or others is required for the issuance and sale or transfer of the Shares except as may be required under the Act, the Exchange Act or under state or other securities or Blue Sky laws. Except as disclosed in or contemplated by the Prospectus and the financial statements of the Company (including the notes thereto) included in the Prospectus, the Company has no outstanding options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of its capital stock or any such options, rights, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. The shares of Common Stock reserved for issuance upon exercise of the Company's outstanding options and warrants have been duly and validly authorized and are sufficient in number to meet the exercise requirements of such options. -5- (g) Ernst & Young LLP, which has examined the financial statements (together with related schedules and notes) of the Company filed with the Commission as a part of the Registration Statement and which are included in the Prospectus, are independent accountants within the meaning of the Act and the Rules and Regulations; the audited and pro forma financial statements of the Company, together with the related schedules and notes, and the unaudited financial information, forming part of the Registration Statement and Prospectus, fairly present the financial position and the results of operations of the Company at the respective dates and for the respective periods to which they apply; and all audited and pro forma financial statements, together with the related schedules and notes, and the unaudited and pro forma financial information, filed with the Commission as part of the Registration Statement, have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved except as may be otherwise stated therein. The selected and summary financial and statistical data included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (h) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (i) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company, whether or not arising in the ordinary course of business, (ii) there have been no transactions entered into by the Company other than those in the ordinary course of business, which are material with respect to the Company, (iii) there has been no obligation that is material to the Company, direct or contingent, incurred by the Company or any Subsidiary, except obligations incurred in the ordinary course of business, (iv) there has been no change in the capital stock of the Company, (v) there has been no change in the outstanding indebtedness of the Company which is material to the Company, (vi) there has been no dividend or distribution of any kind declared, paid or made by the Company on behalf of any class of its respective capital stock, or (vii) there has been no change in any federal, state, foreign or other laws, rules, or regulations (or interpretations thereof) applicable to the business of the Company that would have a material adverse effect on the Company, and, to the knowledge of the Company, no such change is pending other than as described in the Prospectus. (i) Except as described in the Prospectus, (i) the Company and its Subsidiary have good and marketable title to all properties and assets described in the Prospectus as owned by them, free and clear of all liens, charges, encumbrances or restrictions of any kind or those not material, singly or in the aggregate, to the business of the Company and its Subsidiary considered as a whole, (ii) the agreements to which the Company is a party described in the Prospectus are valid agreements, enforceable by the Company, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally or by general equitable principles, and (iii) the Company has valid and enforceable leases for the properties described in the Prospectus as leased by it except as enforcement may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or -6- other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (j) All federal, state, local and foreign tax returns required to be filed by the Company or its Subsidiary in any jurisdiction have been filed, and all material taxes, including withholding taxes, penalties and interest, assessments, fees and other charges due or claimed to be due from such entities have been paid other than those being contested in good faith and for which adequate reserves have been provided or those currently payable without penalty or interest; and adequate charges, accruals and reserves have been provided for in the financial statements referred to in Section 2(g) above in respect of all federal, state, local and foreign taxes for all periods as to which the tax liability of the Company or its Subsidiary has not been finally determined or remains open to examination by applicable taxing authorities. (k) No labor dispute with the employees of the Company or its Subsidiary exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, manufacturers, contractors or customers which might be expected to result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. No collective bargaining agreement exists with any of the Company's employees and, to the Company's knowledge, no such agreement is imminent. (l) The Company and its Subsidiary own or possess, or can acquire on reasonable terms, the patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks and trade names presently employed by them in connection with the business now operated by them and neither the Company nor its Subsidiary has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any patent or proprietary rights or of any facts or circumstances which would render any patent and proprietary rights invalid or inadequate to protect the interest of the Company or its Subsidiary therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy singly or in the aggregate, would result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. (m) Except as set forth in the Prospectus, the Company and its Subsidiary are in compliance in all material respects with all applicable laws, statutes, ordinances, rules or regulations, the enforcement of which, individually or in the aggregate, would be reasonably expected to have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. (n) The Common Stock has been approved for quotation on the Nasdaq SmallCap Market. -7- (o) The Company has been advised concerning the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations thereunder, and has in the past conducted, and intends in the future to conduct, its affairs in such a manner as to ensure that it will not become an "investment company" within the meaning of the 1940 Act and such rules and regulations. (p) The Company has not distributed and will not distribute prior to the Closing Date or on any date on which Option Shares are to be purchased, as the case may be, any offering material in connection with the offering and sale of the Shares other than the Prospectus, the Registration Statement and other materials permitted by the Act. (q) The Company has not at any time during the last five years (i) made any unlawful contribution to any candidate for foreign office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any foreign, federal or state governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any jurisdiction thereof. (r) The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. The Company has not effected any sales of securities required to be disclosed in Item 26 of Form SB-2 under the Act, other than as disclosed in the Registration Statement. (s) Each officer and director of the Company, each beneficial owner of at least 5% of the outstanding shares of Common Stock and options and warrants to purchase Common Stock outstanding prior to the effective date of the Registration Statement have agreed in writing that such persons will not, for a period expiring 12 months after the effective date of the Registration Statement, offer to sell, contract to sell, sell short, or otherwise sell or dispose of any shares of Common Stock of the Company, any options or warrants to purchase any shares of Common Stock of the Company, or any securities convertible into or exchangeable for shares of the Common Stock owned directly by such person or with respect to which such person has the power of disposition otherwise than (i) as a gift or gifts, provided the donee or donees thereof agree to be bound by this restriction or (ii) with the prior written consent of Capital West. (t) Except as described in the Registration Statement, (i) neither the Company nor its Subsidiary is in violation of any federal, state, local or foreign laws or regulations relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Environmental Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Environmental Materials (collectively, the "Environmental Laws"), except such violations as would not, singly or in the aggregate, have a -8- material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise, and (ii) there are no events or circumstances that could form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or its Subsidiary relating to any Environmental Materials or the violation of any Environmental Laws, which, singly or in the aggregate, could reasonably be expected to have a material adverse effect on the condition, financial or otherwise, or the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. (u) The Company and its Subsidiary maintain a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles as in effect in the United States and to maintain asset accountability; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (v) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus. Neither the Company nor any 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. (w) On the Closing Date and upon delivery of the Option Shares, as applicable, all transfer and other taxes (other than income taxes) that are required to be paid in connection with the sale and transfer of the Shares to the Underwriters will have been paid. (x) The Company does not currently have and has never had any pension plan subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder and/or the equivalent of such legislation in Canada ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability, the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. -9- (y) The Company confirms as of the date hereof that it is in compliance with all provisions of Section 517.075, Florida Statutes (Chapter 92-198, Laws of Florida) AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA (the "Cuba Act"), and the Company further agrees that if it commences engaging in business with the government of Cuba or with any person or affiliate located in Cuba after the date the Registration Statement becomes or has become effective with the Commission or the Florida Department of Banking and Finance (the "Department"), whichever date is later, or if the information reported or incorporated by reference in the Prospectus, if any, concerning the Company's business in Cuba or with any person or affiliate located in Cuba changes in any material way, the Company will provide the Department notice of such business or change, as appropriate, in a form acceptable to the Department. (z) Any certificate signed by any officer of the Company and delivered to the Underwriters or to counsel for the Underwriters shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby. 3. PURCHASE, SALE AND DELIVERY OF SHARES. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each Underwriter, severally, and not jointly, and each Underwriter, severally and not jointly, agrees to purchase from the Company, respectively, at a purchase price per share of [$_____] per Share, the number of Shares set forth in SCHEDULE A hereto (subject to adjustment as provided in Section 10). Delivery of definitive certificates for the Shares to be purchased by the Underwriters pursuant to this Section 3 shall be made against payment of the purchase price therefor by the several Underwriters by certified or official bank check in next day funds, payable to the order of the Company at the offices of Capital West Securities, Inc., 211 N. Robinson, 2nd Floor, One Leadership Square, Oklahoma City, Oklahoma 73102, or at such other place as shall be agreed upon by the Underwriters and the Company, at 9:30 a.m. on the fourth business day following the first day that Shares are traded (or at such time and date to which payments and delivery shall have been postponed pursuant to Section 10 hereof), such time and date of payment and delivery being herein called the "Closing Date." The certificates for the Shares to be so delivered will be made available to Capital West at such office or at such other location as Capital West may reasonably request for checking at least one business day prior to the Closing Date and will be in such names and denominations as Capital West may request. If the Underwriters so elect, delivery of the Shares may be made by credit through full fast transfer to the accounts at Depository Trust Company designated by the Underwriters. It is understood that Capital West, individually and not as representative of the several Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by Capital West prior to the Closing Date for the Shares to be purchased by such Underwriter or Underwriters. Any such payment by Capital West shall not relieve any such Underwriter or Underwriters of any of its or their obligations hereunder. -10- After the Registration Statement becomes effective, the several Underwriters intend to offer the Shares to the public as set forth in the Prospectus. The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters) and under "Underwriting" in any preliminary prospectus and in the final form of Prospectus filed pursuant to Rule 424(b) constitutes the only information furnished by the Underwriters to the Company for inclusion in any preliminary prospectus, the Prospectus or the Registration Statement, and Capital West, on behalf of the respective Underwriters, represent and warrant to the Company that the statements made therein do not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make such statements, in the light of the circumstances in which they were made, not misleading. 4. FURTHER COVENANTS OF THE COMPANY. The Company covenants with the several Underwriters as follows: (a) The Company will cause the Registration Statement and any amendment thereof, if not effective at the time and date that this Agreement is executed and delivered by the parties hereto, to become effective as promptly as possible (other than any Rule 462(b) Registration Statement to be filed by the Company, which if filed after the effectiveness of this Agreement will become effective no later than 5:30 P.M., New York City time, on the date of this Agreement); it will notify Capital West, promptly after it shall receive notice thereof, of the time when the Registration Statement or any subsequent amendment to the Registration Statement has become effective or any supplement to the Prospectus has been filed and if the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, when the Rule 462(b) Registration Statement has become effective; if the Company omitted information from the Registration Statement at the time it was originally declared effective in reliance upon Rule 430A(a) of the Rules and Regulations, the Company will provide evidence satisfactory to Capital West that the Prospectus contains such information and has been filed, within the time period prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule 424(b) of the Rules and Regulations or as part of a post-effective amendment to such Registration Statement as originally declared effective which is declared effective by the Commission; if for any reason the filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, it will provide evidence satisfactory to Capital West that the Prospectus contains such information and has been filed with the Commission within the time period prescribed; it will notify Capital West promptly of any request by the Commission for the amending or supplementing of the Registration Statement or Prospectus or for additional information; promptly upon Capital West request, it will prepare and file with the Commission any amendments or supplements to the Registration Statement or Prospectus which, in the opinion of counsel for the several Underwriters, may be necessary or advisable in connection with the distribution of the Shares by the Underwriters; it will promptly prepare and file with the Commission, and promptly notify Capital West of the filing of, any amendments or supplements to the Registration Statement or Prospectus which may be necessary -11- to correct any statements or omissions, if, at any time when a prospectus relating to the Shares is required to be delivered under the Act, any event shall have occurred as a result of which the Prospectus or any other prospectus relating to the Shares as then in effect would include any untrue statement of a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; in case any Underwriter is required to deliver a prospectus nine months or more after the effective date of the Registration Statement in connection with the sale of the Shares, it will prepare promptly upon request, but at the expense of such Underwriter, such amendment or amendments to the Registration Statement and such prospectus or prospectuses as may be necessary to permit compliance with the requirements of Section 10(a)(3) of the Act; and it will file no amendment or supplement to the Registration Statement or Prospectus which shall not previously have been submitted to Capital West a reasonable time prior to the proposed filing thereof or to which Capital West shall reasonably object in writing, subject, however, to compliance with the Act, the Rules and Regulations thereunder and the provisions of this Agreement. (b) The Company will advise Capital West, promptly after it shall receive notice or obtain knowledge thereof of the issuance of any stop order by the Commission suspending the effectiveness of the Registration Statement or of the initiation or threat of any proceeding for that purpose; and it will promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal at the earliest possible moment if such stop order should be issued. (c) The Company will use its best efforts to qualify the Shares for offering and sale under the securities laws of such jurisdictions as Capital West may designate and to continue such qualifications in effect for so long as may be required for purposes of the distribution of the Shares. In each jurisdiction in which the Shares shall have been qualified as above provided, the Company will make and file such statements and reports in each year as are or may be reasonably required by the laws of such jurisdiction. (d) The Company will furnish Capital West, as soon as available, copies of the Registration Statement (three of which will be signed and which will include all exhibits), each preliminary prospectus, the Prospectus and any amendments or supplements to such documents, including any prospectus prepared to permit compliance with Section 10(a)(3) of the Act, all in such quantities as Capital West may from time to time reasonably request. (e) The Company will make generally available to its stockholders as soon as practicable, but in any event not later than the 45th day following the end of the fiscal quarter first occurring after the first anniversary of the effective date of the Registration Statement, an earnings statement (which will be in reasonable detail but need not be audited) complying with the provisions of Section 11(a) of the Act and covering a twelve-month period beginning after the effective date of the Registration Statement. (f) The Company will furnish to its stockholders, as soon as practicable after the end of each respective period, annual reports (including financial statements audited by independent -12- certified public accountants) and unaudited quarterly reports of operations for each of the first three quarters of the fiscal year, and for a period of five years after the effective date of the Registration Statement, the Company will furnish to the several Underwriters hereunder, upon request (i) concurrently with furnishing such reports to its stockholders, statements of operations of the Company for each of the first three quarters in the form furnished to the Company's stockholders; (ii) concurrently with furnishing to its stockholders, a balance sheet of the Company as of the end of such fiscal year, together with statements of operations, of stockholders' equity, and of cash flows of the Company for such fiscal year, accompanied by a copy of the certificate or report thereon of independent accountants; (iii) as soon as they are available, copies of all reports and financial statements furnished to or filed with the Commission, any securities exchange or the National Association of Securities Dealers, Inc. ("NASD"); (iv) every material press release and every material news item or article in respect of the Company or its affairs which was released or prepared by the Company (excluding, in each case customary product-related press releases and articles); and (v) any additional information of a public nature concerning the Company, or its business which Capital West may reasonably request. During such five-year period, if the Company shall have active subsidiaries, the foregoing financial statements shall be on a consolidated basis to the extent that the accounts of the Company and its Subsidiary are consolidated, and shall be accompanied by similar financial statements for any significant subsidiary which is not so consolidated. For a period of five years from the date of the Registration Statement, the Company will furnish to Capital West and, upon request, to each of the other Underwriters, as soon as available, a copy of each report of the Company mailed to holders of the Common Stock or publicly filed with the Commission or any automated quotation system or national securities exchange on which any class of securities of the Company is listed. Regardless of whether the Company is a reporting company under the Exchange Act, the Company shall in a timely manner file reports with the Commission pursuant to and as required by the Exchange Act as if the Company is a reporting company under the Exchange Act, including without limitation the filing as appropriate of Form 10-K's, Form 10-Q's, Form 8-K's, Form 4's, and Form 3's. (g) The Company will apply the net proceeds from the sale of the Shares being sold by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (h) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (i) The Company will file Form SR in conformity with the requirements of the Act and the Rules and Regulations. (j) If the transactions contemplated hereby are not consummated by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed hereunder or to fulfill any condition of the Underwriters' obligations hereunder, or if the Company shall terminate this Agreement under Section 11(a), the Company will reimburse the several Underwriters for all out-of-pocket accountable expenses (including fees and disbursements -13- of counsel for the several Underwriters) actually incurred by the Underwriters in investigating, preparing to market or marketing the Shares. (k) If at any time during the 90-day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in Capital West's opinion the market price of the Common Stock has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from Capital West advising the Company to the effect set forth above, forthwith prepare, consult with Capital West concerning the substance of, and disseminate a press release or other public statement, reasonably satisfactory to Capital West, responding to or commenting on such rumor, publication or event. (l) During a period of 90 days from the effective date of the Registration Statement, the Company will not file a registration statement registering shares under any employee benefit plan. (m) On the Closing Date, the Company will sell to Capital West, for $.001 per share of Common Stock covered by each warrant, the Underwriters' Warrants to purchase one share of Common Stock of the Company for each ten shares of the Company's Common Stock which have been sold (or purchased by the Underwriters), excluding any over-allotment shares, as set forth in the Prospectus. The Underwriters' Warrants shall have the terms and be in the form filed as an exhibit to the Registration Statement. At any time during the period commencing 12 months and ending five years after the effective date of the offering and at the written request of the then-holders of 51% of the Underwriters' Warrants and the Common Stock of the Company issued upon the exercise of the Underwriters' Warrants, and the Company will file with the Commission and process to effectiveness a registration statement covering not less than 51% of the shares of the Common Stock of the Company issuable and/or issued upon the exercise of the Underwriters' Warrants. The Company agrees to use its commercially reasonable best efforts to cause the filing to become effective. The costs of the filing of such registration statement, including but not limited to, legal (including legal fees relating to clearance in the various states, limited however to such states as may be reasonably requested), accounting and printing fees, shall be borne by the Company, but the Company shall not be responsible for the cost of any separate counsel to review the registration statement on behalf of or to advise the selling stockholders and shall not be responsible for the payment of any underwriting discount or commissions with respect to such sale. Such registration statement shall comply with any undertaking applicable to such shares. If the Company, otherwise than upon the request of the owners of the Underwriters' Warrants or the shares of Common Stock issuable upon the exercise thereof, files a registration statement under the Act with respect to any of its securities at any time (other than on Form S-4, S-8, or any other form that does not provide for resales by selling security holders), the Company will give Capital West 30 days' notice of its intention to do so, and at Capital West's written request given within 10 days of the receipt of such notice, will include in such registration statement such number of such Shares as Capital West may specify, all at no cost to Capital West or the other Underwriters. In connection with any such -14- registration statement covering all or a part of such shares, the Company agrees that it will covenant with the owners of such shares with respect to such shares and the offering thereof, in customary form substantially to the effect contained in this Section 4. If the offering pursuant to any registration statement provided for herein is made through underwriters, the Company agrees to enter into an underwriting agreement in customary form with such underwriters in which the Company and the underwriters and each person who controls such underwriters within the meaning of the Act grant to each other customary reciprocal indemnities against liabilities under the Act. (n) The Company will, as if the Company were a reporting company under the Exchange Act, comply with the Act, the Exchange Act, the rules and regulations of the NASD and applicable state securities or Blue Sky laws so as to permit the continuance of sales and dealings in the Common Stock under the Act, the Exchange Act, the rules and regulations of the NASD, and applicable state securities or Blue Sky laws, including the filing with the NASD and the Commission of all reports required to be filed pursuant to the applicable provisions of the rules and regulations of the NASD, the Act, and the Exchange Act, and will deliver to the holders of the Common Stock all reports required to be provided to such holders pursuant to the applicable provisions of the rules and regulations of the NASD, the Act, the Exchange Act, and applicable state securities or Blue Sky laws. (o) The Company has and will, with respect to the Selling Shareholders as defined in the Registration Statement, instruct the Company's transfer agent to issue to the Selling Shareholders three (3) stock certificates for the shares of common stock of the Company held by such Selling Shareholder as follows: (i) 25% of such shares shall contain no restrictive legend and shall be tradeable in the manner described in the Propectus; (ii) an additional 25% of such shares shall contain the following restrictive legend: THE SHARES EVIDENCED BY THIS CERTIFICATE ARE RESTRICTED UNDER THE TERMS OF THAT CERTAIN LOCK-UP DESCRIBED IN THE PROSPECTUS DATED [ ], AS MAY BE AMENDED FROM TIME TO TIME, THE PROVISIONS OF WHICH ARE HEREIN INCORPORATED BY REFERENCE. SUCH PROSPECTUS PROVIDES, AMONG OTHER THINGS, THAT THE SHARES EVIDENCED BY THIS CERTIFICATE MAY NOT BE SOLD OR TRANSFERRED UNTIL [ ]. A COPY OF THE PROSPECTUS IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. UPON THE WRITTEN REQUEST OF THE HOLDER HEREOF, THE COMPANY SHALL FURNISH A COPY WITHOUT CHARGE. and (iii) an additional 50% of such shares shall contain the following restrictive legend: THE SHARES EVIDENCED BY THIS CERTIFICATE ARE RESTRICTED UNDER THE TERMS OF THAT CERTAIN LOCK-UP DESCRIBED IN THE PROSPECTUS DATED [ ], AS MAY BE AMENDED FROM TIME TO TIME, THE PROVISIONS OF WHICH ARE HEREIN INCORPORATED BY REFERENCE. SUCH PROSPECTUS PROVIDES, AMONG OTHER THINGS, THAT THE SHARES EVIDENCED BY THIS CERTIFICATE MAY NOT BE SOLD OR TRANSFERRED UNTIL [ ]. A COPY OF THE PROSPECTUS IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. UPON THE WRITTEN REQUEST OF THE HOLDER HEREOF, THE COMPANY SHALL FURNISH A COPY WITHOUT CHARGE. -15- 5. EXPENSES. (a) The Company agrees with each Underwriter that the Company will pay and bear all costs and expenses in connection with the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), preliminary prospectuses and the Prospectus and any amendments or supplements thereto; the printing of this Agreement, the preliminary blue sky survey and any supplemental blue sky survey, the Underwriters' Questionnaire and Power of Attorney and any instruments related to any of the foregoing; the issuance and delivery of the Shares hereunder to the several Underwriters, including transfer taxes, if any, and the cost of all certificates representing the Shares and transfer agents' and registrars' fees; the fees and disbursements of counsel for the Company; all fees and other charges of the Company's independent public accountants; the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), preliminary prospectus and the Prospectus, and any amendments or supplements to any of the foregoing; NASD filing fees (including filing fees, expenses and disbursements of counsel to the Underwriters in connection with such NASD filings), and all postage costs incurred in connection with the qualification of the Shares under the laws of such jurisdictions as Capital West may designate; and all other expenses directly incurred by the Company in connection with the performance of its obligations hereunder. (b) Capital West shall be entitled to receive from the Company, for itself and not as representative of the Underwriters, a nonaccountable expense allowance equal to three percent of the aggregate public offering price of Shares sold to the Underwriters in connection with the Offering, reduced by any amounts advanced by the Company to Capital West pursuant to the terms of the Letter of Intent dated June 1, 1999. The Company shall pay to Capital West the balance of the nonaccountable expense allowance on the Closing Date. 6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the Underwriters to purchase and pay for Shares as provided herein shall be subject to the accuracy, as of the date hereof and the Closing Date and any later date on which Option Shares are to be purchased (the "Option Closing Date"), as the case may be, of the representations and warranties of the Company herein, to the performance by the Company of its obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:30 p.m. on the date hereof, or with the consent of the Underwriters, at a later time and date, not later, however, than 5:30 p.m. on the first business day following the date hereof, or at such later time and date as may be approved by a majority in interest of the Underwriters; and no stop order suspending the effectiveness of the Registration Statement shall have been issued under the Act or proceedings therefor initiated or threatened by the Commission and any request on the part of the Commission for additional information (to be included in the Registration Statement or the Prospectus or -16- otherwise) shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. If the Company has elected to rely upon Rule 430A of the Rules and Regulations, the price of the Shares and any price-related information previously omitted from the effective Registration Statement pursuant to such Rule 430A shall have been transmitted to the Commission for filing pursuant to Rule 424(b) of the Rules and Regulations within the prescribed time period, and prior to the Closing Date the Company shall have provided evidence satisfactory to the Underwriters of such timely filing, or a post-effective amendment providing such information shall have been promptly filed and declared effective in accordance with the requirements of Rule 430A of the Rules and Regulations. Qualification under the securities laws of such states as Capital West may deem necessary to the success of the underwriting of the issue and sale of the Shares upon the terms and conditions set forth in this Agreement or contemplated by this Agreement and containing no provisions unacceptable to Capital West will have been secured, and no stop order (or the equivalent thereof) will be in effect denying or suspending effectiveness of such qualification, nor will any stop order proceedings (or the equivalent thereof) with respect thereto be instituted or pending or threatened under such laws. (b) At the Closing Date and the Option Closing Date, if any, counsel for the Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Shares as contemplated herein and related proceedings or in order to evidence the accuracy of any of the representations and warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Shares as herein contemplated shall be satisfactory in form and substance to the Underwriters and counsel for the Underwriters (c) There shall not have been, since the date hereof or since the respective dates as of which information is given in the Registration Statement and the Prospectus, any change in the condition (financial or otherwise), earnings, operations, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise, whether or not arising in the ordinary course of business which, in Capital West's sole judgment, is material and adverse and that makes it, in Capital West's sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus, and the Underwriters shall have received a certificate of the President or Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of the Closing Date, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 2 hereof are true and correct with the same force and effect as though expressly made at and as of the Closing Date, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Date, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or threatened by the Commission or any Blue Sky jurisdiction. (d) At the Closing Date, the Underwriters shall have received: -17- (1) The opinion, dated as of the Closing Date of Sichenzia, Ross & Friedman, LLP, counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the Province of Ontario, Canada. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus and to enter into and perform its obligations under this Agreement and to issue, sell and deliver to the Underwriters the Shares or the Option Shares, as the case may be, to be issued and sold by it hereunder. (iii) The Company is duly qualified to do business as a foreign corporation and is in good standing in the jurisdictions where such qualification is required, and is not required to be qualified to do business as a foreign corporation in any other jurisdiction. (iv) At the Closing Date, after giving effect to the sale of the Shares, the authorized capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein; the issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable and have not been issued in violation of any preemptive right contained in the charter or bylaws of the Company or any co-sale right, registration right, right of first refusal or other similar right (other than such preemptive rights or other rights to subscribe for or purchase securities as were fully complied with or expressly waived or with respect to the violation of which the right to make a claim is barred by the applicable statute of limitation). (v) The Shares and the Option Shares, as the case may be, to be purchased from the Company hereunder have been duly authorized for issuance and sale to the Underwriters pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement against payment therefor in accordance with the terms hereof, will be validly issued and fully paid and nonassessable, and will not be issued in violation of any preemptive right under the charter or bylaws of the Company or any co-sale right, right of first refusal or other similar right and the stockholders of the Company have no preemptive right under the charter or bylaws of the Company or other rights to purchase any of the Shares; the shares of Common Stock reserved for issuance upon the exercise of the Underwriters' Warrants have been duly and validly authorized and are sufficient in number to meet the exercise requirements thereof, and such shares of Common Stock, when issued upon exercise, will be duly and validly issued, fully paid (assuming exercise in accordance with the Warrant Agreement and receipt by the Company of the exercise price thereof) and nonassessable; the stockholders of the Company have no preemptive right under the charter or bylaws of the Company or other rights to purchase any of the Shares; and the shares of Common Stock reserved for issuance upon the exercise of the Company's outstanding options have been duly and validly authorized and are sufficient in number to meet the exercise requirements of such -18- options, and such shares of Common Stock, when issued upon exercise, will be duly and validly issued, fully paid (assuming exercise in accordance with the governing instruments therefor and receipt by the Company of the exercise price thereof) and nonassessable. (vi) The issuance of the Shares to be purchased hereunder is not subject to preemptive or other similar rights arising by operation of law or otherwise. (vii) The Subsidiary has been duly incorporated and is validly existing as a corporation and is in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own, lease and operate its properties and to conduct it business as described in the Registration Statement, and is duly qualified as a foreign corporation to transact business and is in good standing in every jurisdiction in which the Company's business requires such qualification and the Subsidiary is not required to be qualified to do business as a foreign corporation in any other jurisdiction; all of the issued and outstanding capital stock of such Subsidiary have been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Company directly free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. (viii) This Agreement and the Warrant Agreement have been duly authorized by all necessary corporate action on the part of the Company and have been duly executed and delivered by the Company and assuming due authorization, execution and delivery by the Underwriters, are valid and binding agreements of the Company, except insofar as indemnification and contribution provisions may be limited by applicable law or equitable principles, and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally or any general equitable principles. (ix) The Registration Statement has been declared effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b) and no stop order suspending the effectiveness of the Registration Statement has been issued under the Act or proceedings therefor have been initiated or are pending or threatened by the Commission. (x) The Registration Statement, Prospectus and each amendment or supplement to the Registration Statement and Prospectus, as of their respective effective or issue dates (other than the financial statements and supporting schedules included therein, as to which no opinion need be rendered) complied as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations. (xi) The terms and provisions of the capital stock of the Company conform in all material respects to the description thereof contained in the Prospectus under the caption "Description of Securities." (xii) The information in the Prospectus under the caption "Description of Securities" to the extent that it constitutes matters of law or legal conclusions, has been reviewed by -19- such counsel and accurately and fairly summarizes in such counsel's opinion the matters described therein and there are no outstanding options, warrants, convertible securities, or other rights to acquire from the Company any capital stock, except as described in the Registration Statement. (xiii) Except as set forth in the Prospectus, there is not pending or threatened any action, suit, proceeding, inquiry or investigation, to which the Company or its Subsidiary is a party, or to which the property of the Company or its Subsidiary is subject, before or brought by any court or government agency or body, which might reasonably be expected to result in any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise, or which might reasonably be expected to materially and adversely affect the properties or assets thereof or the consummation of this Agreement or the performance by the Company of its obligations hereunder; and all pending legal or governmental proceedings to which the Company or its Subsidiary is a party or that affect any of their respective properties that are not described in the Prospectus, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its Subsidiary considered as one enterprise. (xiv) The information in the Prospectus under the captions ["Business and Properties - Legal Proceedings," "- Governmental Regulation" and "- Properties," "Certain Transactions" and "Description of Capital Stock" in the Prospectus and Items 24 and 26 of Part II] of the Registration Statement to the extent that such items constitute matter of law, summaries of legal matters, documents or proceedings, or legal conclusions, has been reviewed by such counsel and is correct in all material respects, and there are no legal or governmental actions, suits or proceedings pending or threatened against the Company or its Subsidiary that are required to be described in the Prospectus are not described as required by the Act or the applicable Rules and Regulations. (xv) All descriptions in the Prospectus of contracts and other documents are accurate in all material respects; to the best of their knowledge and information, there are no agreements, no contracts, indentures, mortgages, loan agreements, notes, leases or other instrument required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed as exhibits thereto, the descriptions thereof or references thereto are correct in all material respects, and the Company is not in default, and no other party is in default in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other instrument so described, referred to or filed as exhibits thereto. (xvi) No authorization, approval, consent or order of any court or governmental authority or agency (other than under the Act or the Rules and Regulations, which have been obtained, or as may be required under the securities or Blue Sky laws of the various states) is required in connection with the due authorization, execution and delivery of this Agreement or for -20- the offering, issuance or sale of the Shares to the Underwriters; and the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated herein and compliance by the Company with its obligations hereunder will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach or violation of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or its Subsidiary pursuant to any material contract, indenture, mortgage, loan agreement, note, lease or other instrument to which the Company or its Subsidiary is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or its Subsidiary is subject, nor will such action result in any violation of the provisions of the charter or bylaws of the Company, or any applicable law, administrative regulation or court decree. (xvii) With the exception of the Underwriters' Warrants, no holder of any security of the Company has any right to require registration of any shares of Common Stock or any other security of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights to registration of such shares of Common Stock, or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement, or have included securities in the Registration Statement pursuant to the exercise of such rights. (xviii) The Company is not an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the 1940 Act. (xix) Neither the Company nor its Subsidiary are in violation of their charter or bylaws. In rendering such opinion, such counsel may rely as to matters of fact (but not as to legal conclusions), to the extent they deem proper, on certificates of responsible officers of the Company and public officials. Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including with limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991). In giving its opinion required by subsection (d)(1) of this Section, Sichenzia, Ross & Friedman, LLP, shall additionally state that nothing has come to their attention that would lead them to believe that the Registration Statement, at the time it became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, at the effective date of the Registration Statement (unless the term "Prospectus" refers to a prospectus which has been provided to the Underwriters by the Company for use in connection with the offering of the Shares which differs from the Prospectus declared effective by the Commission, in which case at the time -21- it is first provided to the Underwriters for such use) or at the Closing Date, included an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Such opinion may state that such counsel does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement and the Prospectus except as otherwise expressly provided in such opinion, and such counsel need express no opinion or belief as to the financial statements, schedules, and other financial or statistical data included in the Registration Statement or Prospectus. (2) The opinion, dated as of Closing Date, of Day, Edwards, Federman, Propester & Christensen, P.C., counsel for the Underwriters, in form and substance satisfactory to Capital West, with respect to the sufficiency of all such corporate proceedings and other legal matters relating to this Agreement and the transactions contemplated hereby as Capital West may reasonably require, and the Company shall have furnished to such counsel such papers, opinions and information as they request to enable them to pass upon such matters. (e) At the time of the execution of this Agreement, the Underwriters shall have received from Ernst & Young LLP a letter dated such date, in form and substance satisfactory to the Underwriters, to the effect that: (1) they are independent public accountants with respect to the Company and its Subsidiary within the meaning of the Act and the Rules and Regulations; (2) it is their opinion that the consolidated balance sheet included in the Registration Statement and covered by their opinion therein complies as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations; (3) based upon limited procedures set forth in detail in such letter, nothing has come to their attention which causes them to believe that, at a specified date not more than three days prior to the date of this Agreement, (A) the audited consolidated balance sheet of the Company and its Subsidiary included in the Registration Statement does not comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations or is not presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the other audited financial statements included in the Registration Statement, or (B) at a specified date not more than three days prior to the date of this Agreement, there has been any change in the capital stock of the Company or any increase in the combined long term debt of the Company and its Subsidiary or any decrease in combined net current assets or net assets as compared with the amounts shown in the [ ] balance sheet included in the Registration Statement or, during the period from [ ] to a specified date not more than three days prior to the date of this Agreement, there were any decreases, as compared with the corresponding period in the preceding year, in combined revenues, net income or net income per share of the Company and its Subsidiary, except in all instances for changes, -22- increases or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur; (4) in addition to the examination referred to in their opinion and the limited procedures referred to in clause (3) above, they have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information which are included in the Registration Statement and Prospectus and which are specified by the Underwriters, and have found such amounts, percentages and financial information to be in agreement with the relevant accounting, financial and other records of the Company and its Subsidiary identified in such letter; and (5) they have compared the information in the Prospectus under selected captions with the disclosure requirements of Regulation S-B and on the basis of limited procedures specified in such letter nothing came to their attention as a result of the foregoing procedures that caused them to believe that this information does not conform in all material respects with the disclosure requirements of Regulation S-B. (f) At the Closing Date, the Underwriters shall have received from Ernst & Young LLP a letter, dated as of the Closing Date, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section 6, except that the specified date referred to shall be a date not more than three days prior to the Closing Date and, if the Company has elected to rely on Rule 430A of the 1933 Act Regulations, to the further effect that they have carried out procedures as specified in clause (4) of subsection (e) of this Section 6 with respect to certain amounts, percentages and financial information specified by the Underwriters and deemed to be a part of the Registration Statement pursuant to Rule 430(A)(b) and have found such amounts, percentages and financial information to be in agreement with the records specified in such clause (4). (g) At the Closing Date, the Common Stock shall have been approved for listing on the Nasdaq SmallCap Market. (h) In the event that the Underwriters exercise their option provided in Section 7 hereof to purchase all or any portion of the Option Shares, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company hereunder shall be true and correct as of the Option Closing Date and, at the Option Closing Date, the Underwriters shall have received: (1) A certificate, dated the Option Closing Date, of the President or a Vice President of the Company and of the Chief Financial or Chief Accounting Officer of the Company confirming that the certificate delivered at the Closing Date pursuant to Section 6(c) hereof remains true and correct as of the Option Closing Date (except that all references in such Section to "Closing Date" shall be deemed to refer to the "Option Closing Date"). -23- (2) The opinions of Sichenzia, Ross & Friedman LLP, counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, dated the Option Closing Date, relating to the Option Shares and otherwise to the same effect as the opinion required by Section 6(d)(1) hereof (except that all references in such Section to "Closing Date" shall be deemed to refer to the "Option Closing Date"). (3) The opinion of Day, Edwards, Federman, Propester & Christensen, P.C., counsel for the Underwriters, dated the Option Closing Date, relating to the Option Shares to be purchased on the Option Closing Date and otherwise to the same effect as the opinion required by Section 6(b)(2) hereof (except that all references in such Section to "Closing Date" shall be deemed to refer to the "Option Closing Date"). (4) A letter from Ernst & Young LLP, in form and substance satisfactory to the Underwriters and dated the Option Closing Date, substantially the same in form and substance as the letter furnished to the Underwriters pursuant to Section 6(e) hereof, except that the "specified date" in the letter furnished pursuant to this Section 6(h)(4) shall be a date not more than three days prior to the Option Closing Date. (i) The Company and the Underwriters shall have entered into the Warrant Agreement and the Company shall have sold to the Underwriters the Underwriters' Warrants, which shall be in the form attached as an exhibit to the Warrant Agreement. (j) If the Company is required to file a Rule 462(b) Registration Statement after the effectiveness of this Agreement, such Rule 462(b) Registration Statement shall have become effective by 5:30 P.M., New York City time, on the date of this Agreement; and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been commenced or shall be pending before or contemplated by the Commission. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement may be terminated by Capital West by notice to the Company at any time at or prior to Closing Date, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 4(j) and 8 shall survive any such termination and remain in full force and effect. 7. OPTION SHARES. (a) On the basis of the representations and warranties herein contained, but subject to the terms and conditions herein set forth, the Company hereby grants to the Underwriters, for the purpose of covering over-allotments in connection with the distribution and sale of the Shares only, a non-transferable option to purchase up to an aggregate 90,000 option shares at the purchase price per share for the Shares set forth in Section 3 hereof (the "Option Shares"). Such option may be exercised by the Underwriters on behalf of the several Underwriters on one occasion in whole or -24- in part during the period of 45 days from and after the date on which the Shares are initially offered to the public, by giving notice to the Company. At the discretion of Capital West, the number of Option Shares to be purchased by each Underwriter upon the exercise of such option shall be the same proportion of the total number of Option Shares to be purchased by the several Underwriters pursuant to the exercise of such option as the number of Shares purchased by such Underwriter (set forth in SCHEDULE A hereto) bears to the total number of Shares purchased by the several Underwriters (set forth in SCHEDULE A hereto), adjusted by the Underwriters in such manner as to avoid fractional shares. Delivery of definitive certificates for the Option Shares to be purchased by the Underwriters pursuant to the exercise of the option granted by this Section 7 shall be made against payment of the purchase price therefor by the Underwriters by certified or official bank check or checks drawn in same day funds, payable to the order of the Company. Such delivery and payment shall take place at the offices of Capital West, 211 N. Robinson, 2nd Floor, Oklahoma City, Oklahoma 73102 or at such other place as may be agreed upon between the Underwriters and the Company on the Closing Date, if written notice of the exercise of such option is received by the Company not later than three full business days prior to the Closing Date. The certificates for the Options Shares so to be delivered will be made available to Capital West at such office or other location including, without limitation, in Oklahoma City, as Capital West may reasonably request for checking at least two full business days prior to the date of payment and delivery and will be in such names and denominations as Capital West may request, such request to be made at least three full days prior to such date of payment and delivery. If Capital West so elects, delivery of the Shares may be made by credit through full fast transfer to the accounts at Depository Trust Company by the Underwriters. It is understood that Capital West, individually, and not as the representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price on behalf of any Underwriter or Underwriters whose check or checks shall not have been received by Capital West prior to the date of payment and delivery for the Option Shares to be purchased by such Underwriter or Underwriters. Any such payment by Capital West shall not relieve any Underwriters of any of its or their obligations hereunder. (b) Upon exercise of any option provided for in Section 7(a) hereof, the obligations of the Underwriters to purchase such Option Shares will be subject (as of the date hereof and as of the date of payment for such Option Shares) to the accuracy of and compliance with the representations and warranties of the Company herein, to the accuracy of the statements of the Company and officers of the Company made pursuant to the provisions hereof, to the performance by the Company of their respective obligations hereunder, and to the condition that all proceedings taken at or prior to the payment date in connection with the sale and transfer of such Option Shares shall be satisfactory in form and substance to Capital West and to Underwriters' counsel, and Capital West shall have been furnished with all such documents, certificates and opinions as Capital West may reasonably request in order to evidence the accuracy and completeness of any of the -25- representations, warranties or statements, the performance of any of the covenants of the Company or the compliance with any of the conditions herein contained. 8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter against any losses, claims, damages or liabilities, joint or several, as incurred, to which such Underwriter may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any breach of any representation, warranty, agreement or covenant of the Company herein contained, or (ii) any untrue statement or alleged untrue statement made by the Company in Section 2 hereof, or (iv) any untrue statement or alleged untrue statement of a material fact contained (A) in the Registration Statement, any preliminary prospectus, the Prospectus or any amendment or supplement thereto, or (B) in any blue sky application or other document executed by the Company specifically for that purpose or based upon written information furnished by the Company filed in any state or other jurisdiction in order to qualify any or all of the Shares under the securities laws thereof (any such application, documents or information being hereinafter called a "Blue Sky Application"), or (iii) the omission or alleged omission to state in the Registration Statement or any amendment thereto a material fact required to be stated therein or necessary to make the statements therein not misleading, or the omission or alleged omission to state in any preliminary prospectus, the Prospectus or any supplement thereto or in any Blue Sky Application a 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; and shall reimburse each Underwriter on a monthly basis for any legal or other reasonable expenses as incurred by such Underwriter in connection with investigating or defending against or appearing as a third-party witness in connection with any such loss, claim, damage, liability or action, notwithstanding the possibility that payments for such expenses might later be held to be improper, in which case the person receiving them shall promptly refund them; except that the Company shall not be liable in any such case to the extent, but only to the extent, that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, such preliminary prospectus or the Prospectus, or any amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter specifically for use in the preparation thereof and, provided further, that the indemnity agreement provided in this Section 8(a) with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any losses, claims, charges, liabilities or litigation based upon any untrue statement or alleged untrue statement of material fact or omission or alleged omission to state therein a material fact purchased Shares, if a copy of the Prospectus in which such untrue statement or alleged untrue statement or omission or alleged omission was corrected has not been sent or given to such person within the time required by the Act and the Rules and Regulations thereunder, unless such failure is the result of noncompliance by the Company with Section 4(c) hereof. -26- (b) Each Underwriter severally, but not jointly, shall indemnify and hold harmless the Company against any losses, claims, damages or liabilities, joint or several, as incurred, to which the Company 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 (i) any untrue statement or alleged untrue statement of a material fact contained (A) in the Registration Statement, preliminary prospectus, the Prospectus or any amendment or supplement thereto, or (B) in any Blue Sky Application, or (ii) the omission or alleged omission to state in the Registration Statement or any amendment thereto a material fact required to be stated therein or necessary to make the statements therein not misleading, or the omission or alleged omission to state in any preliminary prospectus, the Prospectus or any supplement thereto or in any Blue Sky Application a 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; except that such indemnification shall be available in each such case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company through the Underwriters by or on behalf of such Underwriter specifically for use in the preparation thereof; and shall reimburse any legal or other expenses reasonably incurred by the Company in connection with investigation or defending against any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under subsection (a) or (b) above of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify the indemnifying party in writing of the claim or the commencement of that action; the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under such subsection. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party; provided, however, if the defendants in any such action include both the indemnified parties and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under such subsection for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with appropriate local counsel) approved by the indemnifying party, representing all the indemnified parties under Section 8(a) and 8(b) hereof who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to -27- represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. In no event shall any indemnifying party be liable in respect of any amounts paid in settlement of any action unless the indemnifying party shall have approved the terms of such settlement; provided, however, that such consent shall not be unreasonably withheld. (d) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 8 for which it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 8 provides for indemnification in such case, all the parties hereto shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Underwriters are responsible pro rata for the portion represented by the percentage that the underwriting discount bears to the initial public offering price, and the Company is responsible for the remaining portion; provided, however, that (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter, and (ii) no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to a contribution from any person who is not guilty of such fraudulent misrepresentation. This subsection (d) shall not be operative as to any Underwriter to the extent that the Company has received indemnity under this Section 8. (e) The obligations of the Company under this Section 8 shall be in addition to any liability which the Company may otherwise have, and shall extend, upon the same terms and conditions, to each officer and director of each Underwriter and to each person, if any, who controls any Underwriter within the meaning of the Act; and the obligations of the Underwriters under this Section 8 shall be in addition to any liability that the respective Underwriters may otherwise have, and shall extend, upon the same terms and conditions, to each director of the Company (including any person who, with his consent, is named in the Registration Statement as about to become a director of the Company), to each officer of the Company who has signed the Registration Statement and to each person, if any, who controls the Company within the meaning of the Securities Act, in either case, whether or not such person is a party to any action or proceeding. (f) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including without limitation the provisions of this Section 8, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 8 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act and the Exchange Act. The parties are advised that federal or state public policy, as interpreted by the courts in certain jurisdictions, may be contrary to certain of the provisions of this Section 8, and the parties hereto hereby expressly waive and relinquish any right or ability to assert -28- such public policy as a defense to a claim under this Section 8 and further agree not to attempt to assert any such defense. 9. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE DELIVERY. All representations, warranties, covenants and agreements of the Company contained in this Agreement (including, without limitation, the agreements of the Company set forth in Sections 4(i)-(l)), or contained in certificates of officers of the Company submitted pursuant hereto, and the indemnity and contribution agreements contained in Section 8 hereof, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or controlling person, or by or on behalf of the Company, or any of its officers, controlling persons or directors and shall survive delivery of the Shares to the several Underwriters hereunder or termination of this Agreement. 10. SUBSTITUTION OF UNDERWRITERS. If any Underwriter or Underwriters shall fail to take up and pay for the number of Shares agreed by such Underwriter or Underwriters to be purchased hereunder upon tender of such Shares in accordance with the terms hereof, and if the aggregate number of Shares which such defaulting Underwriter or Underwriters so agreed but failed to purchase does not exceed 10% of the Shares, the remaining Underwriters shall be obligated, severally in proportion to their respective commitments hereunder, to take up and pay for the Shares of such defaulting Underwriter or Underwriters. If any Underwriter or Underwriters so defaults and the aggregate number of Shares which such defaulting Underwriter or Underwriters agreed but failed to take up and pay for exceeds 10% of the Shares, the remaining Underwriters shall have the right, but shall not be obligated, to take up and pay for (in such proportions as may be agreed upon among them) the Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If such remaining Underwriters do not, at the Closing Date, take up and pay for the Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase, the Closing Date shall be postponed for twenty-four hours to allow the several Underwriters the privilege of substituting within twenty-four hours (including non-business hours) another underwriter or underwriters (which may include any nondefaulting Underwriter) satisfactory to the Company. If no such underwriter or underwriters shall have been substituted as aforesaid by such postponed Closing Date, the Closing Date may, at the option of the Company, be postponed for a further twenty-four hours, if necessary to allow the Company the privilege of finding another underwriter or underwriters, satisfactory to Capital West, to purchase the Shares which the defaulting Underwriter or Underwriters so agreed but failed to purchase. If it shall be arranged for the remaining Underwriters or substituted underwriters to take up the Shares of the defaulting Underwriter or Underwriters as provided in this Section, (i) the Company shall have the right to postpone the time of delivery for a period of not more than seven full business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus, or in any other documents or arrangements, and the Company agrees promptly to file any amendments to the Registration Statement or supplements to the Prospectus which may thereby be made necessary, and (ii) the respective number of Shares to be purchased by the remaining Underwriters and substitute underwriters shall be taken as the basis -29- of their underwriting obligation. If the remaining Underwriters shall not take up and pay for all such Shares so agreed to be purchased by the defaulting Underwriter or Underwriters or substitute another underwriter or underwriters as aforesaid and the Company shall not find or shall not elect to seek another underwriter or underwriters for such Shares as aforesaid, then this Agreement shall terminate. In the event of any termination of this Agreement pursuant to the preceding paragraph of this Section, neither the Company shall be liable to any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any Underwriter (other than an Underwriter who shall have failed, otherwise than for some reason permitted under this Agreement, to purchase the number of Shares agreed by such Underwriter to be purchased hereunder, which Underwriter shall remain liable to the Company and the other Underwriters for damages, if any, resulting from such default) be liable to the Company (except to the extent provided in Sections 5 and 8 hereof). The term "Underwriter" in this Agreement shall include any person substituted for an Underwriter under this Section. 11. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION. (a) This Agreement shall become effective at the later of (i) execution of this Agreement, or (ii) when notification of the effectiveness of the Registration Statement has been released by the Commission. -30- (b) Capital West shall have the right to terminate this Agreement by giving notice as hereinafter specified at any time at or prior to the Closing Date (i) if the Company shall have failed, refused or been unable, to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the Company is not fulfilled including, without limitation, any change in the financial condition, earnings, operations, business, management, technical staff, or business prospects of the Company from that set forth in the Registration Statement or Prospectus which, in Capital West's sole judgment, is material and adverse, or (ii) if trading on the New York Stock Exchange or the Nasdaq Stock Market or the Nasdaq Stock Market SmallCap 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 New York Stock Exchange or the Nasdaq Stock Market or the Nasdaq Stock Market SmallCap, by the New York Stock Exchange, the Nasdaq Stock Market, or the Nasdaq Stock Market SmallCap or by order of the Commission or any other governmental authority having jurisdiction, or if a banking moratorium shall have been declared by federal, Canadian, provincial, New York, or Oklahoma authorities, or (iii) if on or prior to the Closing Date, or on or prior to any later date on which Option Shares are to be purchased, as the case may be, the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as to interfere materially and adversely with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured, or (iv) if there shall have been a material adverse change in the general political or economic conditions or financial markets in the United States as in Capital West's reasonable judgment makes it inadvisable or impracticable to proceed with the offering, sale and delivery of the Shares, or (v) if on or prior to the Closing Date, or on or prior to any later date on which Option Shares are to be purchased, as the case may be, there shall have been an outbreak or escalation of hostilities or other international or domestic calamity, crises or material adverse change in political, financial or economic conditions, the effect of which on the financial markets of the United States is such as to make it in Capital West's reasonable judgment, inadvisable to proceed with the marketing of the Shares. In the event of termination pursuant to this Section 11(b), the Company shall remain obligated to pay costs and expenses pursuant to Section 4(j), 5 and 8 hereof. If Capital West elects to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Section 11, Capital West shall promptly notify the Company by telephone or telecopy, in each case confirmed by letter. If the Company shall elect to prevent this Agreement from becoming effective, the Company shall promptly notify Capital West by telephone or telecopy, in each case, confirmed by letter. 12. NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed to have been given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to the Underwriters in care of Capital West Securities, Inc., 211 N. Robinson, 2nd Floor, One Leadership Square, Oklahoma City, Oklahoma 73102, attention of Robert O. McDonald; notices to the Company shall be directed to it at 2330 Southfield Road, Mississauga, Ontario, Canada, L5N2W8, attention of Chief Executive Officer. -31- 13. PARTIES. This Agreement shall inure to the benefit of and be binding upon the several Underwriters and the Company and their respective executors, administrators, successors, and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person or corporation, other than the parties hereto and their respective executors, administrators, successors, and assigns and the controlling persons and officers and directors referred to in Section 8 hereof any legal or equitable right, remedy or claim under or in respect of this Agreement or any provisions herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the parties hereto and their respective executors, administrators, successors, and assigns and said controlling persons and said officers and directors, and for the benefit of no other person or corporation. No purchaser of the Shares from any Underwriter shall be construed to be a successor by reason merely of such purchase. 14. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Oklahoma applicable to agreements made and to be performed in said State, without regard to conflict of laws principles. Specified times of day refer to Central Daylight Time. 15. COUNTERPARTS. This Agreement may be signed in several counterparts, each of which will constitute an original. 16. BINDING ARBITRATION. Each party to this Agreement agrees that any dispute or controversy arising between any of the parties to this agreement, or any person or entity in privity therewith, out of the transactions effected and relationships created pursuant to this Agreement and each other agreement created in connection herewith, including any dispute or controversy regarding the formation, terms, or construction of this Agreement, regardless of kind or character, must be resolved through binding arbitration. Each party to this Agreement agrees to submit such dispute or controversy to arbitration before the American Arbitration Association (the "Association") in Oklahoma City, Oklahoma, and further agrees to be bound by the determination of an arbitration panel consisting of three (3) persons. If demand for arbitration is made, each party will have the right to select one independent arbitrator. If the party upon whom the demand for arbitration is served fails to select an arbitrator within twenty days, then the Association may select a second arbitrator upon application by either party. The two arbitrators shall select a third arbitrator. If the two arbitrators fail to select a third arbitrator within twenty days, the third arbitrator may be selected and appointed by the Association upon application by either party. The arbitrators' decision concerning the claim, controversy or dispute, including allocation among the parties of costs and expenses associated with the arbitration, shall be final and binding on the parties and judgment on the award may be entered in any court of competent jurisdiction. Any party to this Agreement may bring an action, including a summary or expedited proceeding, to compel arbitration of any such dispute or controversy in a court of competent jurisdiction and, further, may seek provisional or ancillary remedies including temporary or injunctive relief in connection with such dispute or controversy in a court of competent jurisdiction, provided that the dispute or controversy is -32- ultimately resolved through binding arbitration conducted in accordance with the terms and conditions of this section. If the foregoing correctly sets forth your understanding of our agreement, please sign in the space provided below for that purpose, whereupon this instrument, along with all counterparts, will become a binding agreement among the several Underwriters and the Company in accordance with its terms. Very truly yours, TALISMAN ENTERPRISES INC. By:_______________________________________ Norman R. Proulx, Chairman CONFIRMED AND ACCEPTED, as of the date first above written: CAPITAL WEST SECURITIES, INC. as Representative of the several Underwriters By:___________________________________ Robert O. McDonald, Chairman -33- SCHEDULE A
UNDERWRITER SHARES PURCHASED ----------- ---------------- Capital West Securities, Inc. --------------- [ ] --------------- [ ] --------------- Total 600,000
EX-1.2 3 EXHIBIT 1.2 Exhibit 1.2 A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. NO OFFER TO BUY THE SECURITIES CAN BE ACCEPTED AND NO PART OF THE PURCHASE PRICE CAN BE RECEIVED UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE, AND ANY SUCH OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT OBLIGATION OR COMMITMENT OF ANY KIND, AT ANY TIME PRIOR TO NOTICE OF ITS ACCEPTANCE GIVEN AFTER THE EFFECTIVE DATE. YOUR EXECUTION HEREOF WILL INVOLVE NO OBLIGATION OR COMMITMENT OF ANY KIND UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE. TALISMAN ENTERPRISES INC. SELECTED DEALERS AGREEMENT September __, 1999 Dear Ladies/Gentlemen: 1. Capital West Securities, Inc. named as the Underwriter ("Underwriter") in the enclosed preliminary Prospectus, proposes to offer on a firm commitment basis, subject to the terms and conditions and execution of the Underwriting Agreement, 600,000 Shares of Common Stock at [$ ] per share (the "Securities") of the above Company. The Securities are more particularly described in the enclosed preliminary Prospectus, additional copies of which will be supplied in reasonable quantities upon request. Copies of the definitive Prospectus will be supplied after the effective date of the Registration Statement. 2. The Underwriter is soliciting offers to buy, upon the terms and conditions hereof, a part of the Securities from Selected Dealers, including you who are to act as principal and who are (i) registered with the Securities and Exchange Commission ("Commission") as broker-dealers under the Securities Exchange Act of 1934, as amended ("1934 Act"), and members in good standing with the National Association of Securities Dealers, Inc. ("NASD"), or (ii) dealers or institutions with their principal place of business located outside the United States, its territories and possessions who are not eligible for membership in the NASD and who agree to make no sales within the United States, its territories or possessions or to persons who are nationals thereof or residents therein and, in making sales, to comply with the NASD's Interpretation with Respect to FreeRiding and Withholding and with Rules 2730, 2740 and 2420, to the extent applicable to foreign nonmember brokers or dealers, and Rule 2750 of the NASD's Conduct Rules. The Securities are to be offered at a public price of [$ ] per share of Common Stock. Selected Dealers will be allowed a concession of not less than [$ ] per share, except as provided below. You will be notified of the precise amount of such concession prior to the effective date of the Registration Statement. You may reallow not in excess of [$ ] per share to dealers who meet the requirements set forth in this paragraph 2. This offer is solicited subject to the issuance and delivery of the Securities and their acceptance by the Underwriter, to the approval of legal matters by counsel and to the terms and conditions as herein set forth. 3. Your offer to purchase may be revoked in whole or in part without obligation or commitment of any kind by you and any time prior to acceptance and no offer may be accepted by us and no sale can be made until after the registration statement covering the Securities has become effective with the Commission. Subject to the foregoing, upon execution by you of the Offer to Purchase below and the return of same to us, you shall be deemed to have offered to purchase the number of Securities set forth in your offer on the basis set forth in paragraph 2 above. Any oral notice by us of acceptance of your offer shall be immediately followed by written or telegraphic confirmation preceded or accompanied by a copy of the Prospectus. If a contractual commitment arises hereunder, all the terms of this Selected Dealers Agreement shall be applicable. We may also make available to you an allotment to purchase Talisman Enterprises Inc. Selected Dealers Agreement Page 1 Securities, but such allotment shall be subject to modification or termination upon notice from us any time prior to an exchange of confirmations reflecting completed transactions. All references hereafter in this Agreement to the purchase and sale of Securities assume and are applicable only if contractual commitments to purchase are completed in accordance with the foregoing. 4. You agree that in reoffering said Securities, if your offer is accepted after the effective date, you will make a bona fide public distribution of same. You will advise us upon request of Securities purchased by you remaining unsold and we shall have the right to repurchase such Securities upon demand at the public offering price without paying the concession with respect to any Securities so repurchased. Any of the Securities purchased by you pursuant to this Agreement are to be subject to the terms hereof. Securities shall not be offered or sold by you below the public offering price before the termination of this Agreement. 5. Payment for Securities which you purchase hereunder shall be made by you on or before five (5) business days after the date of each confirmation by certified or bank cashier's check payable to the Underwriter. Certificates for the Securities shall be delivered as soon as practicable after delivery instructions are received by the Underwriter. 6. A registration statement covering the offering has been filed with the Securities and Exchange Commission in respect to the Securities. You will be promptly advised when the registration statement becomes effective. Each Selected Dealer in selling Securities pursuant hereto agrees (which agreement shall also be for the benefit of the Company) that it will comply with the applicable requirements of the Securities Act of 1933 and of the Securities Exchange Act of 1934 and any applicable rules and regulations issued under said Acts. No person is authorized by the Company or by the Underwriter to give any information or to make any representations other than those contained in the Prospectus in connection with the sale of the Securities. Nothing contained herein shall render the Selected Dealers a member of the Underwriting Group or partners with the Underwriter or with one another. 7. You will be informed by us as to the states in which we have been advised by counsel the Securities have been qualified for sale or are exempt under the respective securities or blue sky laws of such states, but we have not assumed and will not assume any obligation or responsibility as to the right of any Selected Dealer to sell Securities in any state. You agree not to sell Securities in any other state or jurisdiction and to not sell Securities in any state or jurisdiction unless you are qualified or licensed to sell securities in such state or jurisdiction. 8. The Underwriter shall have full authority to take such action as it may deem advisable in respect of all matters pertaining to the offering or arising thereunder. The Underwriter shall not be under any liability to you, except such as may be incurred under the Securities Act of 1933 and the rules and regulations thereunder, except for lack of good faith and except for obligations assumed by us in this Agreement, and no obligation on our part shall be implied or inferred herefrom. 9. Selected Dealers will be governed by the conditions herein set forth until this Agreement is terminated. This Agreement will terminate when the offering is completed. Nothing herein contained shall be deemed a commitment on our part to sell you any Securities; such contractual commitment can only be made in accordance with the provisions of paragraph 3 hereof. 10. You represent that you are a member in good standing of the NASD and registered as a broker-dealer with the Commission, or that you are a foreign broker-dealer not eligible for membership under Article III, Section 1 of the Bylaws of the NASD who agrees to make no sales within the United States, its territories or possessions or to persons who are nationals thereof or residents therein and, in Talisman Enterprises Inc. Selected Dealers Agreement Page 2 making sales, to comply with the NASD's interpretation with Respect to FreeRiding and Withholding and with Rules 2730, 2740 and 2420 to the extent applicable to foreign nonmember brokers and dealers, and Rule 2750 of the NASD's Conduct Rules. Your attention is called to and you agree to comply with the following: (a) Article III, Section 1 of the Bylaws of the NASD and the interpretations of said Section promulgated by the Board of Governors of the NASD including Rule 2740 and the interpretation with respect to "Free-Riding and Withholding;" (b) Section 10(b) of the 1934 Act, Rule 10b-10 and Regulation M of the general rules and regulations promulgated under the 1934 Act; and (c) Rule 15c2-8 of the general rules and regulations promulgated under the 1934 Act requiring the distribution of a preliminary Prospectus to all persons reasonably expected to be purchasers of the Securities from you at least 48 hours prior to the time you expect to mail confirmations. You, as a member of the NASD, by signing this Agreement, acknowledge that you are familiar with the cited laws and rules and agree that you will not directly and/or indirectly violate any provisions of applicable law in connection with your participation in the distribution of the Securities. 11. In addition to compliance with the provisions of paragraph 10 hereof, you will not, until advised by us in writing or by wire that the entire offering has been distributed and closed, bid for or purchase Securities in the open market or otherwise make a market in the Securities or otherwise attempt to induce others to purchase the Securities in the open market. Nothing contained in this paragraph 11 shall, however, preclude you from acting as agent in the execution of unsolicited orders of customers in transactions effectuated for them through a market maker. 12. You understand that the Underwriter may in connection with the offering engage in stabilizing transactions. If the Underwriter contracts for or purchases in the open market in connection with such stabilization any Securities sold to you hereunder and not effectively placed by you, the Underwriter may charge you the Selected Dealer's concession originally allowed you on the Securities so purchased and you agree to pay such amount to us on demand. 13. By submitting an Offer to Purchase you confirm that you may, in accordance with Rule 15c-1 adopted under the 1934 Act, agree to purchase the number of Securities you may become obligated to purchase under the provisions of this Agreement. 14. All communications from you should be directed to us at Capital West Securities, Inc., One Leadership Square, Suite 200, 211 North Robinson, Oklahoma City, OK 73102, Attention: Bob Rader, Vice President ((405) 235-5700 and fax (405) 231-0664). All communications from us to you shall be directed to the address to which this letter is mailed. Very truly yours, Capital West Securities, Inc. By: ________________________________ (Authorized Officer) Talisman Enterprises Inc. Selected Dealers Agreement Page 3 OFFER TO PURCHASE The undersigned does hereby offer to purchase (subject to the right to revoke as set forth in paragraph 3) ____________________* Securities in accordance with the terms and conditions set forth above. We hereby acknowledge receipt of the Prospectus referred to in paragraph 1 hereof relating to such Securities. We further state that in purchasing such Securities we have relied upon such Prospectus and upon no other statement whatsoever, written or oral. _________________________________ By ______________________________ (Authorized Officer) *If a number appears here which does not correspond with what you wish to offer to purchase, you may change the number by crossing out the number, inserting a different number and initializing the change. Talisman Enterprises Inc. Selected Dealers Agreement Page 4 EX-4.1 4 EXHIBIT 4.1 TALISMAN ENTERPRISES INC. WARRANT AGREEMENT September ___, 1999 CAPITAL WEST SECURITIES, INC. 211 N. Robinson 2nd Floor, One Leadership Square Oklahoma City, Oklahoma 73102 Ladies and Gentlemen: Talisman Enterprises Inc., an Ontario, Canada corporation (the "Company"), agrees to issue and sell to you warrants (the "Warrants") to purchase the number of shares of common stock, no par value per share, of the Company (the "Common Stock") set forth herein, subject to the terms and conditions contained herein. 1. ISSUANCE OF WARRANTS; EXERCISE PRICE. The Warrants, which shall be in the form attached hereto as EXHIBIT "A," shall be issued to you concurrently with the execution hereof in consideration of the payment by you to the Company of the sum of $0.001 cash per share of Common Stock subject to the Warrants, the receipt and sufficiency of which are hereby acknowledged. The Warrant shall provide that you, or such other holder or holders of the Warrants to whom transfer is authorized in accordance with the terms of this Agreement, shall have the right to purchase an aggregate of 60,000 shares of Common Stock for an exercise price equal to $6.00 per share (the "Exercise Price") or $360,000 in the aggregate. The number, character and Exercise Price of such shares of Common Stock are subject to adjustment as hereinafter provided, and the term "Common Stock" shall mean, unless the context otherwise requires, the stock and other securities and property receivable upon exercise of the Warrants. The term "Exercise Price" shall mean, unless the context otherwise requires, the price per share of the Common Stock purchasable under the Warrants as set forth in this Section 1, as adjusted from time to time pursuant to Section 6. 2. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants to you and to each subsequent holder of Warrants and agrees that: (a) This Agreement has been duly authorized, executed and delivered by the Company and constitutes the valid and binding obligation of the Company enforceable in accordance with its terms; and neither the issuance of the Warrants nor the issuance of the shares of Common Stock issuable upon exercise of the Warrants will result in a breach or violation of any terms or provisions of, or constitute a default under, any contract, indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company is a party or by which the Company is bound, the charter or bylaws of the Company, or any law, order, rule, regulation or decree of any government, governmental instrumentality or court, domestic or foreign, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company. (b) No consent, approval, authorization or order of any court or governmental agency or body is required for the sale and issuance of the Warrants or the sale and issuance of the shares of Common Stock issuable upon exercise of the Warrants, except such as have been obtained or may be Talisman Enterprises Inc. Warrant Agreement Page 1 required under the Securities Act of 1933, as amended (the "Act"), and such as may be required under state securities or blue sky laws in connection with the issuance of the Warrants and the shares of Common Stock issuable upon exercise of the Warrants. Upon exercise of the Warrants by the holder thereof, the shares of Common Stock with respect to which the Warrants are exercised will be validly issued, fully paid, and nonassessable, and good and marketable title to such shares of Common Stock shall be delivered to such holder free and clear of all liens, encumbrances, equities, claims or preemptive or similar rights. (c) As if the Company were a United States issuer of securities, during the term of this Agreement, the Company shall make timely filings of all periodic and other reports and forms and other materials required (but only to the extent required) to be filed with the Securities and Exchange Commission (the "Commission") pursuant to the Act or the Securities Exchange Act of 1934, as amended, and with any national securities exchange or quotation system upon which any of the securities of the Company may be listed, including by way of example, but not limited to, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Initial Statement of Beneficial Ownership of Securities on Form 3, and Statement of Changes of Beneficial Ownership of Securities on Form 4. 3. NOTICES OF RECORD DATE; ETC. In the event of (a) any taking by the Company of a record date with respect to the holders of any class of securities of the Company for purposes of determining which of such holders are entitled to dividends or other distributions (other than regular quarterly dividends), or any right to subscribe for, purchase or otherwise acquire shares of stock of any class or any other securities or property, or to receive any other right, (b) any capital reorganization of the Company, or reclassification or recapitalization of capital stock of the Company or any transfer in one or more related transactions of all or a majority of the assets or revenue or income generating capacity of the Company to, or consolidation or merger of the Company with or into, any other entity or person, or (c) any voluntary or involuntary dissolution or winding up of the Company, then and in each such event the Company will mail or cause to be mailed to each holder of a Warrant at the time outstanding a notice specifying, as the case may be, (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right; or (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place and the time, if any is to be fixed, as of which the holders of record of Common Stock (or any other class of stock or securities of the Company, or another issuer pursuant to Section 6, receivable upon the exercise of the Warrants) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such event. Any such notice shall be deposited in the United States mail, postage prepaid, at least ten (10) days prior to the date therein specified, and the holders(s) of the Warrant(s) may exercise the Warrant(s) and participate in such event as a registered holder of Common Stock, upon exercise of the Warrant(s) so held, within the ten (10) day period from the date of mailing of such notice. 4. NO IMPAIRMENT. The Company shall not, by amendment of its organizational documents or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other action, avoid or seek to avoid the observance or performance of any of the terms of this Agreement or of the Warrants, but will at all times in good faith take any and all action as may be necessary in order to protect the rights of the holders of the Warrants against impairment. Without limiting the generality of the foregoing, the Company (a) will at all times reserve and keep available, solely for issuance and delivery upon exercise of the Warrants, shares of Common Stock issuable from time to time upon exercise of the Warrants, (b) will not increase the par value of any shares of stock receivable upon exercise of the Warrants above the amount payable in respect thereof upon such exercise, and (c) will take Talisman Enterprises Inc. Warrant Agreement Page 2 all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable stock upon the exercise of the Warrants, or any of them. 5. EXERCISE OF WARRANTS. At any time and from time to time on and after the first anniversary of the date hereof and expiring on the fifth anniversary of the effective date of the registration statement filed by the Company with the Securities and Exchange Commission on Form SB-2 (File No. 333-[_______]), September __, 1999, at 5:00 p.m., Oklahoma City, Oklahoma time, Warrants may be exercised as to all or any portion of the whole number of shares of Common Stock covered by the Warrants by the holder thereof by surrender of the Warrants, accompanied by a subscription for shares to be purchased as marked on the form attached hereto as EXHIBIT "B" and by a check payable to the order of the Company in the amount required for purchase of the shares as to which the Warrant is being exercised, delivered to the Company at its principal office at 2330 Southfield Road, Mississauga, Ontario, Canada, L5N2W8, Attention: President. Warrants may also be exercised from time to time, without any payment required for the purchase of the shares as to which the Warrant is being exercised, as to all or any portion of the number of shares of Common Stock covered by the Warrant(s) by the holder thereof by surrender of the Warrants, accompanied by a subscription for shares as marked on the form attached as EXHIBIT "B," pursuant to which the holder thereof will be entitled to receive upon such surrender of the Warrant(s) (and without any further payment) that number of shares of Common Stock equal to the product of the number of shares of Common Stock obtainable upon exercise of the Warrant(s) (or the portion thereof as to which the exercise relates) multiplied by a fraction: (i) the numerator of which shall be the difference between the then Current Value (as defined in this Section 5 and Section 7(d)) of one full share of Common Stock on the date of exercise and the Exercise Price, and (ii) the denominator of which shall be the Current Value of one full share of Common Stock on the date of exercise. Upon the exercise of a Warrant in whole or in part, the Company will within five (5) days thereafter, at its expense (including the payment by the Company of any applicable issue or transfer taxes), cause to be issued in the name of and delivered to the Warrant holder a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock to which such holder is entitled upon exercise of the Warrant. In the event such holder is entitled to a fractional share, in lieu thereof such holder shall be paid a cash amount equal to such fraction, multiplied by the Current Value of one full share of Common Stock on the date of exercise. Certificates for shares of Common Stock issuable by reason of the exercise of the Warrant or Warrants shall be dated and shall be effective as of the date of the surrendering of the Warrant for exercise, notwithstanding any delays in the actual execution, issuance or delivery of the certificates for the shares so purchased. In the event a Warrant (or Warrants) is exercised as to less than the aggregate amount of all shares of Common Stock issuable upon exercise of all Warrants held by such person, the Company shall issue a new Warrant to the holder of the Warrant so exercised covering the aggregate number of shares of Common Stock as to which Warrants remain unexercised. For purposes of this section, Current Value is defined (i) in the case for which a public market exists for the Common Stock at the time of such exercise, according to Section 7(d), and (ii) in the case no public market exists at the time of such exercise, at the Appraised Value. For the purposes of this Agreement, "Appraised Value" is the value determined in accordance with the following procedures. For a period of five (5) days after the date of an event (a "Valuation Event") requiring determination of Current Value at a time when no public market exists for the Common Stock (the "Negotiation Period"), each party to this Agreement agrees to negotiate in good faith to reach agreement upon the Appraised Value of the securities or property at issue, as of the date of the Valuation Event, which will be the fair market value of such securities or property, without premium for control or discount for minority interests, illiquidity or restrictions on transfer. In the event that the parties are unable to agree upon the Appraised Value of such securities or other property by the end of the Negotiation Period, then the Appraised Value of such securities Talisman Enterprises Inc. Warrant Agreement Page 3 or property will be determined for purposes of this Agreement by a recognized appraisal or investment banking firm mutually agreeable to the holders of the Warrants and the Company (the "Appraiser"). If the holders of the Warrants and the Company cannot agree on an Appraiser within two (2) business days after the end of the Negotiation Period, the Company, on the one hand, and the holders of the Warrants, on the other hand, will each select an Appraiser within ten (10) business days after the end of the Negotiation Period and those two Appraisers will select, ten (10) days after the end of the Negotiation Period, an independent Appraiser to determine the fair market value of such securities or property, without premium for control or discount for minority interests. Such independent Appraiser will be directed to determine fair market value of such securities or property as soon as practicable, but in no event later than thirty (30) days from the date of its selection. The determination by an Appraiser of the fair market value will be conclusive and binding on all parties to this Agreement. Appraised Value of each share of Common Stock at a time when (i) the Company is not a reporting company under the Exchange Act and (ii) the Common Stock is not traded in the organized securities markets, will, in all cases, be calculated by determining the Appraised Value of the entire Company taken as a whole and dividing that value by the number of shares of Common Stock then outstanding, without premium for control or discount for minority interests, illiquidity or restrictions on transfer. The costs of the Appraiser will be borne by the Company. In no event will the Appraised Value of the Common Stock be less than the per share consideration received or receivable with respect to the Common Stock or securities or property of the same class in connection with a pending transaction involving a sale, merger, recapitalization, reorganization, consolidation, or share exchange, dissolution of the Company, sale or transfer of all or a majority of its assets or revenue or income generating capacity, or similar transaction. 6. PROTECTION AGAINST DILUTION. The Exercise Price for the shares of Common Stock and number of shares of Common Stock issuable upon exercise of the Warrants is subject to adjustment from time to time as follows: (a) STOCK DIVIDENDS, SUBDIVISIONS, RECLASSIFICATIONS, ETC.. In case at any time or from time to time after the date of execution of this Agreement, the Company shall (i) take a record of the holders of Common Stock for the purpose of entitling them to receive a dividend or a distribution on shares of Common Stock payable in shares of Common Stock or other class of securities, (ii) subdivide or reclassify its outstanding shares of Common Stock into a greater number of shares, or (iii) combine or reclassify its outstanding Common Stock into a smaller number of shares, then, and in each such case, the Exercise Price in effect at the time of the record date for such dividend or distribution or the effective date of such subdivision, combination or reclassification shall be adjusted in such a manner that the Exercise Price for the shares issuable upon exercise of the Warrants immediately after such event shall bear the same ratio to the Exercise Price in effect immediately prior to any such event as the total number of shares of Common Stock outstanding immediately prior to such event shall bear to the total number of shares of Common Stock outstanding immediately after such event. (b) ADJUSTMENT OF NUMBER OF SHARES PURCHASABLE. When any adjustment is required to be made in the Exercise Price under this Section 6, (i) the number of shares of Common Stock issuable upon exercise of the Warrants shall be changed (upward to the nearest full share) to the number of shares determined by dividing (x) an amount equal to the number of shares issuable pursuant to the exercise of the Warrants immediately prior to the adjustment, multiplied by the Exercise Price in effect immediately prior to the adjustment, by (y) the Exercise Price in effect immediately after such adjustment, and (ii) upon exercise of the Warrant, the holder will be entitled to receive the number of shares of other securities referred Talisman Enterprises Inc. Warrant Agreement Page 4 to in Section 6(a) that such holder would have received had the Warrant been exercised prior to the events referred to in Section 6(a). (c) ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC.. In case of any reorganization or consolidation of the Company with, or any merger of the Company with or into, another entity (other than a consolidation or merger in which the Company is the surviving corporation) or in case of any sale or transfer to another entity of the majority of assets of the Company, the entity resulting from such reorganization or consolidation or surviving such merger or to which such sale or transfer shall be made, as the case may be, shall make suitable provision (which shall be fair and equitable to the holders of Warrants) and shall assume the obligations of the Company hereunder (by written instrument executed and mailed to each holder of the Warrants then outstanding) pursuant to which, upon exercise of the Warrants, at any time after the consummation of such reorganization, consolidation, merger or conveyance, the holder shall be entitled to receive the stock or other securities or property that such holder would have been entitled to upon consummation if such holder had exercised the Warrants immediately prior thereto, all subject to further adjustment as provided in this Section 6. (d) CERTIFICATE AS TO ADJUSTMENTS. In the event of adjustment as herein provided in the subparagraphs of this Section 6, the Company shall promptly mail to each Warrant holder a certificate setting forth the Exercise Price and number of shares of Common Stock issuable upon exercise after such adjustment and setting forth a brief statement of facts requiring such adjustment. Such certificate shall also set forth a brief statement of facts requiring such adjustment. Such certificate shall also set forth the kind and amount of stock or other securities or property into which the Warrants shall be exercisable after any adjustment of the Exercise Price as provided in this Agreement. (e) MINIMUM ADJUSTMENT. Notwithstanding the foregoing, no certificate as to adjustment of the Exercise Price hereunder shall be made if such adjustment results in a change in the Exercise Price then in effect of less than five cents ($0.05) and any adjustment of less than five cents ($0.05) of any Exercise Price shall be carried forward and shall be made at the time of and together with any subsequent adjustment that, together with the adjustment or adjustments so carried forward, amounts to five cents ($0.05) or more; provided however, that upon the exercise of a Warrant, the Company shall have made all necessary adjustments (to the nearest cent) not theretofore made to the Exercise Price up to and including the date upon which such Warrant is exercised. 7. INDEMNIFICATION; CONTRIBUTION. (a) The Company will indemnify and hold harmless each holder and each affiliate thereof of Common Stock registered pursuant to this Agreement with the Commission, or under any Blue Sky Law or regulation against any losses, claims, damages, or liabilities, joint or several, to which such 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 an untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, registration statement, prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each such holder and affiliate for any legal or other expenses reasonably incurred by such holder in connection with investigating or defending any such action or claim regardless of the negligence of any such holder or affiliate; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, or liability arises out of or is based upon Talisman Enterprises Inc. Warrant Agreement Page 5 an untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary prospectus, registration statement or prospectus, or any such amendment or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by any such holder expressly for use therein. (b) Each holder of Common Stock registered pursuant to this Agreement will indemnify and hold harmless the Company against any losses, claims, damages, or liabilities to which the Company 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 an untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, registration statement or prospectus, or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any preliminary prospectus, registration statement or prospectus, or any amendment or supplement thereto, in reliance upon and in conformity with written information furnished to the Company by such holder expressly for use therein. (c) Promptly after receipt by an indemnified party under Sections 7(a) or (b) above of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under either such subsection, notify the indemnifying party in writing of the commencement thereof; but the omission so to notify the indemnifying party shall not relieve it from any liability that it may otherwise have to any indemnified party. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof the indemnifying party shall be entitled to assume the defense thereof by notice in writing to the indemnified party. After notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party shall not be liable to such indemnified party under either of such subsections for any legal expenses of other counsel or any other expense, in each case subsequently incurred by such indemnified party, in connection with the defense thereof other than reasonable costs of investigation incurred prior to the assumption by the indemnifying party, unless such expenses have been specifically authorized in writing by the indemnifying party, the indemnifying party has failed to assume the defense and employ counsel, or the named parties to any such action include both the indemnified party and the indemnifying party, as appropriate, and such indemnified party has been advised by counsel that the representation of such indemnified party and the indemnifying party by the same counsel would be inappropriate due to actual or potential differing interests between them, in each of which cases the fees of counsel for the indemnified party will be paid by the indemnifying party. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under Section 7(a) or 7(b) in respect of any losses, claims, damages, or liabilities (or action in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the holder or holders from this Agreement and from the offering of the shares of Common Stock. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the holders in connection with the statement or omissions that resulted in such losses, claims, damages, or liabilities (or actions in respect thereof), as well as any other Talisman Enterprises Inc. Warrant Agreement Page 6 relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the holders agree that it would not be just and equitable if contribution pursuant to this Section 7(d) were determined by pro rata allocation (even if the holders were treated as one entity for such purpose) or by any other method of allocation that does not take into account the equitable considerations referred to above in this subsection (d). Except as provided in Section 7(c), the amount paid or payable by an indemnified party as a result of the losses, claims, damages, or liabilities (or actions in respect thereof) referred to above in this Section 7(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigation or defending any such action or claim. No person guilty of 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. Notwithstanding any provision in this Section 7(d) to the contrary, no holder shall be liable for any amount, in the aggregate, in excess of the net proceeds to such holder from the sale of such holder's shares (obtained upon exercise of Warrants) giving rise to such losses, claims, damages, or liabilities. (e) The obligations of the Company under this Section 7 shall be in addition to any liability that the Company may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any holder of Warrants within the meaning of the Act. The obligations of the holders of Common Stock under this Section 7 shall be in addition to any liability that such holders may otherwise have and shall extend, upon the same terms and conditions to each person, if any, who controls the Company within the meaning of the Act. 8. STOCK EXCHANGE LISTING. In the event the Company lists its Common Stock on any national securities exchange, the Company will, at its expense, also list on such exchange, upon exercise of a Warrant, all shares of Common Stock issuable pursuant to such Warrant. 9. SPECIFIC PERFORMANCE. The Company stipulates that remedies at law, in money damages, available to the holder of a Warrant, or of a holder of Common Stock issued pursuant to exercise of a Warrant, in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Agreement are not and will not be adequate. Therefore, the Company agrees that the terms of this Agreement may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise. 10. SUCCESSORS AND ASSIGNS; BINDING EFFECT. This Agreement shall be binding upon and inure to the benefit of you and the Company and their respective successors and permitted assigns. 11. NOTICES. Any notice hereunder shall be given by registered or certified mail, if to the Company, at its principal office referred to in Section 5 and, if to the holders, to their respective addresses shown in the Warrant ledger of the Company, provided that any holder may at any time on three (3) days' written notice to the Company designate or substitute another address where notice is to be given. Notice shall be deemed given and received after a certified or registered letter, properly addressed with postage prepaid, is deposited in the U.S. mail. Talisman Enterprises Inc. Warrant Agreement Page 7 12. SEVERABILITY. Every provision of this Agreement is intended to be severable. If any term or provision hereof is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the remainder of this Agreement. 13. ASSIGNMENT; REPLACEMENT OF WARRANTS. If the Warrant or Warrants are assigned, in whole or in part, the Warrants shall be surrendered at the principal office of the Company, and thereupon, in the case of a partial assignment, a new Warrant shall be issued to the holder thereof covering the number of shares not assigned, and the assignee shall be entitled to receive a new Warrant covering the number of shares so assigned. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of any Warrant and appropriate bond or indemnification protection, the Company shall issue a new Warrant of like tenor. Except as contemplated by Section 7 of this Agreement, the Warrants will not be transferred, sold, or otherwise hypothecated by you or any other person and the Warrants will be nontransferable, except to (i) one or more persons, each of which on the date of transfer is an officer, shareholder, or employee of you; (ii) a partnership or partnerships, the partners of which are you and one or more persons, each of whom on the date of transfer is an officer of you; (iii) a successor to you in merger or consolidation; (iv) a purchaser of all or substantially all of your assets; or (v) a person that receives a Warrant upon death of a Holder pursuant to will, trust, or the laws of intestate succession. 14. GOVERNING LAW. This Agreement shall be governed and construed in accordance with the laws of the State of Oklahoma without giving effect to the principles of choice of laws thereof. 15. DEFINITION. All references to the word "you," and to "Capital West Securities, Inc." in this Agreement shall be deemed to apply with equal effect to any persons or entities to whom Warrants have been transferred in accordance with the terms hereof, and, where appropriate, to any persons or entities holding shares of Common Stock issuable upon exercise of Warrants. 16. HEADINGS. The headings herein are for purposes of reference only and shall not limit or otherwise affect the meaning of any of the provisions hereof. 17. BINDING ARBITRATION. Each party to this Agreement agrees that any dispute or controversy arising between any of the parties to this agreement, or any person or entity in privity therewith, out of the transactions effected and relationships created pursuant to this Agreement and each other agreement created in connection herewith, including any dispute or controversy regarding the formation, terms, or construction of this Agreement, regardless of kind or character, must be resolved through binding arbitration. Each party to this Agreement agrees to submit such dispute or controversy to arbitration before the American Arbitration Association (the "Association") in Oklahoma City, Oklahoma, and further agrees to be bound by the determination of an arbitration panel consisting of three (3) persons. If demand for arbitration is made, each party will have the right to select one independent arbitrator. If the party upon whom the demand for arbitration is served fails to select an arbitrator within twenty days, then the Association may select a second arbitrator upon application by either party. The two arbitrators shall select a third arbitrator. If the two arbitrators fail to select a third arbitrator within twenty days, the third arbitrator may be selected and appointed by the Association upon application by either party. The arbitrators' decision concerning the claim, controversy or dispute, including allocation among the parties of costs and expenses associated with the arbitration, shall be final and binding on the parties and judgment on the award may be entered in any court of competent jurisdiction. Any party to this Agreement may bring an action, including a summary or expedited proceeding, to compel arbitration of any such dispute or controversy in a court of competent jurisdiction and, further, may seek provisional or ancillary remedies including temporary or injunctive relief Talisman Enterprises Inc. Warrant Agreement Page 8 in connection with such dispute or controversy in a court of competent jurisdiction, provided that the dispute or controversy is ultimately resolved through binding arbitration conducted in accordance with the terms and conditions of this section. Very truly yours, TALISMAN ENTERPRISES INC. By:____________________________________ Norman R. Proulx, Chairman CONFIRMED AND ACCEPTED, as of the date first above written: CAPITAL WEST SECURITIES, INC. By:___________________________________ Robert O. McDonald, Chairman Talisman Enterprises Inc. Warrant Agreement Page 9 EXHIBIT A WARRANT THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF ARE SUBJECT TO THE TERMS AND PROVISIONS OF A WARRANT AGREEMENT DATED AS OF SEPTEMBER __, 1999 (THE "AGREEMENT"), AS SUCH AGREEMENT MAY BE SUPPLEMENTED, MODIFIED, AMENDED OR RESTATED FROM TIME TO TIME. COPIES OF THE AGREEMENT ARE AVAILABLE AT THE EXECUTIVE OFFICES OF THE COMPANY. TRANSFER OF THIS WARRANT IS RESTRICTED AS PROVIDED IN SECTION 14 OF THE AGREEMENT. 60,000 SHARES WARRANT NO. 99-001 WARRANT TO PURCHASE SHARES OF COMMON STOCK TALISMAN ENTERPRISES INC. THIS IS TO CERTIFY that _________________________________ or its assigns as permitted in that certain Warrant Agreement dated September __, 1999, between the Company (as hereinafter defined) and Capital West Securities, Inc., [ ] and [ ] is entitled to purchase at any time or from time to time on or after September __, 2000 until 5:00 p.m., Oklahoma City, Oklahoma time on September __, 2004, an aggregate of 60,000 shares of Common Stock, no par value per share, of Talisman Enterprises Inc., an Ontario, Canada corporation (the "Company"), for an exercise price per share as set forth in the Warrant Agreement referred to herein. This Warrant is issued pursuant to the Warrant Agreement, and all rights of the holder of this Warrant are further governed by, and subject to the terms and provisions of such Warrant Agreement, copies of which are available upon request to the Company. The holder of this Warrant and the shares issuable upon the exercise hereof shall be entitled to the benefits, rights and privileges and subject to the obligations, duties and liabilities provided in the Warrant Agreement. Subject to the provisions of the Act, of the Warrant Agreement and of this Warrant, this Warrant and all rights hereunder are transferable, in whole or in part, only to the extent expressly permitted in such documents and then only at the office of the Company at 2330 Southfield Road, Mississauga, Ontario, Canada L5N2W8, by the holder hereof or by a duly authorized attorney-in-fact, upon surrender of this Warrant duly endorsed, together with the Assignment hereof duly endorsed. Until transfer hereof on the books of the Company, the Company may treat the registered holder hereof as the owner hereof for all purposes. IN WITNESS WHEREOF, the Company has caused this Warrant to be executed and its corporate seal to be hereunto affixed by its proper corporate officers thereunto duly authorized. TALISMAN ENTERPRISES INC. By:_________________________________ Norman Proulx, Chairman (SEAL) Attest: - ------------------------------- Name: Title: Secretary EXHIBIT B SUBSCRIPTION TO BE SIGNED ONLY UPON EXERCISE (IN WHOLE OR IN PART) OF THE WARRANTS TO: TALISMAN ENTERPRISES INC. 2330 Southfield Road Mississauga, Ontario Canada L5N2W8 1. The undersigned, _______________________________, pursuant to the provisions of that certain Warrant Agreement dated September __, 1999 (the "Warrant Agreement"), and the attached Warrant Certificate, hereby agrees to subscribe for the purchase of ___________ shares of common stock of TALISMAN ENTERPRISES INC., no par value per share (the "Common Stock"), covered by the attached Warrant Certificate, and makes payment therefor in full at the price per share provided by the Warrant Agreement. 2. The undersigned Holder (check one): ___ a. elects to pay the aggregate purchase price for such shares of Common Stock (i) by lawful money of the United States or the enclosed certified or official bank check payable in United States dollars to the order of the Company in the amount of $______________, or (ii) by wire transfer of United States funds to the account of the Company in the amount of $___________, which transfer has been made before or simultaneously with the delivery of this Subscription pursuant to the instructions of the Company; or ___ b. elects to pay the aggregate purchase price by implementing the cashless exercise procedure pursuant to Section 5 of the Warrant Agreement. 3. Please issue a stock certificate or certificates representing the appropriate number of shares of Common Stock in the name of the undersigned or in such other name(s) as is specified below: Name: Address: Certificates shall be issued in such name and delivered to such address unless otherwise specified by written instructions, signed by the undersigned and accompanying this subscription. If exercised in part, the balance of the shares of Common Stock subject to the Warrant, as constituted at the date of the Warrant, shall be covered by a new Warrant Certificate, which shall be issued in the name of the Holder and delivered to the address for the Holder on the books of the Company. Dated: ___________________________ Signature: ___________________________ Name: ___________________________ Address: _____________________________ Soc. Sec. # or Fed. ID #: ____________________________________________ EX-5.1 5 EXHIBIT 5.1 Exhibit 5.1 [Letterhead of Aird & Berlis, Barristers and Solicitors] August __, 1999 Talisman Enterprises Inc. 2330 Southfield Road Mississauga, Ontario Canada L5N 2W8 Dear Sirs: RE: REGISTRATION STATEMENT ON FORM SB-2/REGISTRATION NO. 333-83123 We act as Canadian corporate counsel to Talisman Enterprises Inc. (the "Company") which is incorporated pursuant to the laws of the Province of Ontario and which has retained legal counsel in the United States of America in connection with the registration of certain securities of the Company pursuant to the SECURITIES ACT OF 1933, as amended (the "Securities Act"). In that regard, the above captioned registration statement on Form SB-2 (the "Registration Statement") is being filed under the Securities Act by the Company with the Securities and Exchange Commission (the "Commission") for the purpose of registering the proposed public offering of: a. 1,714,627 common shares in the capital of the Company with no par value (the "Common Stock") being offered for sale by the Company inclusive of securities issuable on the exercise of the over-allotment option described in the Registration Statement (the "Over-allotment Option"); b. 1,014,627 common shares in the capital of the Company reserved for issuance upon exercise of the certain warrants; c. An Underwriters' Warrant exercisable for 60,000 common shares in the capital of the Company, with no par value and 1 Warrant (the "Underwriters' Warrant"); d. 60,000 shares in the capital of the Company with no par value underlying the Underwriters' Warrant; In rendering this opinion, we have examined a copy of the Registration Statement, coupled with the Articles of Incorporation, By-laws of the Company, as amended, minutes and resolutions of the Page 2 board of directors, of the Company and such other documents as we have deemed relevant and necessary as a basis for this opinion. In our examination we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such latter documents. As to our opinion expressed in paragraph (1) below, we have relied solely upon a Certificate of Status issued by the Ministry of Consumer and Commercial Relations of the Province of Ontario dated August __, 1999 as to the existence of the Company. Capitalized terms used in the context of the opinion not otherwise herein defined, shall have the same meaning ascribed thereto within the Registration Statement. We are qualified to practise law only in the Province of Ontario, Canada and accordingly express no opinion as to the laws of any other jurisdiction other than the federal laws of Canada applicable in said Province. Based upon the foregoing, we are of the opinion that: (1) The Company is a corporation duly incorporated and validly subsisting under the laws of the Province of Ontario with corporate power to conduct the business which it conducts as described in the Registration Statement; (2) Under the laws of the Province of Ontario, shareholders of the Company are not personally liable for debts of the Company arising solely from their ownership of the common shares in the capital of the Company; and (3) The Common Stock and Warrants, and the common shares in the capital of the Company issuable upon exercise of the Warrants have been duly and validly authorized for issuance by the Company, and when issued, delivered and paid for, by purchasers thereof, such securities will be fully paid and non-assessable and conform to the description contained in the section "Description of Securities" in the Registration Statement. We consent to the filing of this opinion as an Exhibit to the Registration Statement and to the reference to this firm under the section entitled "Legal Matters" in the Registration Statement. Yours truly, Aird & Berlis, Barristers and Solicitors EX-10.6 6 EXHIBIT 10.6 [TALISMAN LETTERHEAD] 7 January 1999 Mr. Christian H. Bunger 9800 Huntcliff Trace Atlanta, GA 30350 Re: EMPLOYMENT AGREEMENT Dear Chris: This letter defines our agreement regarding your appointment to the position of Vice President, Sales - USA for Talisman Enterprises, Inc., and outlines your compensation plan. We have agreed that you will join the company on January 25, 1999. 1. SALARY - US $75,000 per year, payable twice monthly in arrears. You will receive an annual performance evaluation and, based on both personal and Company performance, an increase in base salary will be considered. 2. You will be included in the senior management bonus plan allowing you to earn up to 35% of your base salary that is in effect at the end of each calendar year. Bonus awards will be based on the attainment of board-approved company profitability targets, as well as results from two measurable personal objectives. 3. You will participate in the senior management earned equity plan, a copy of which is attached to this letter. 4. You will be provided with a car allowance of US $600 per month. This amount will be paid on the first day of each month starting February 1, 1999. All expenses related to your automobile, including insurance, will be paid by you. 5. You are eligible for three weeks paid vacation per year after six months of employment. No carry over of unused vacation is permitted. 6. In the event of your termination from the Company without cause, you will be given six months' severance pay on the condition that you agree not to compete or solicit Company employees or customers for a like period. 7. You are currently covered by a full benefits program from a previous employer, and are therefore ineligible for Company-paid benefits. Christian H. Bunger 7 January 1999 Re: EMPLOYMENT AGREEMENT Page 2 In your new position, you will have overall responsibility for the development of the private label primary alkaline battery market in the United States. Chris, we are very pleased to have you join Talisman and look forward to a long and prosperous relationship. If you accept the terms of this Agreement, including the attachment, please sign in the space provided below and return one original to me. Regards, /s/ Norman R. Proulx NORMAN R. PROULX Acting President & CEO NRP/j Attachment I hereby accept the terms of this Employment Agreement: /s/ Christian H. Bunger 1-8-99 - ------------------------ --------- Christian H. Bunger Date EXHIBIT I EQUITY ARRANGEMENT: GENERAL. The Executive shall be granted options ("Options") on shares of the common stock of the Company ("Shares") equal to two percent (1 1/2%) fully diluted as of the Trigger Date, at an exercise price per Share equal to 25% of the mean between the high bid and low asked prices per Share on the Canadian Dealing Network (the "Market Price") on that date. Capitalized terms not defined herein are as defined in the Attachment. 1. TIME VESTING OPTIONS. One third of the options (the "Time Vested Options") shall become exercisable in equal monthly increments over a period of 60 months beginning with the month in which the Trigger Date occurs. The Time Vesting Options shall accelerate in the event of a Change of Control or a Purchase of the Company. 2. ANNUAL TARGET OPTIONS. One third of the options (the "Annual Target Options") shall become exercisable upon the achievement of specified levels of annual performance to be established by the Board, in consultation with the Executive, which levels shall be consistent with the levels applicable to other senior managers of the Company (the "Annual Targets") over a five-year period beginning with the Trigger Date. The following special rules shall apply to exercisability of the Annual Target Options: - ONE YEAR CATCH-UP. If an Annual Target is not achieved for a particular year (the difference between the Annual Target and actual performance being the "Shortfall"), but in the next following year the Annual Target is exceeded by an amount equal to or 1 greater than the Shortfall, the Annual Target Options that would have become exercisable in the Shortfall year shall become exercisable. - EARLY TRANSFER BY INVESTOR. If, after the first year, but on or before the fifth anniversary of the Trigger Date, there is (i) a Purchase, or (ii) a sale, transfer or other disposition of Shares by Talisman Partners as a result of which Talisman Partners has sold, transferred or otherwise disposed of more than half of the Shares it held on the Trigger Date, taking into account Shares which were then acquirable by Talisman Partners on exercise of conversion (or other acquisition) rights then held by Talisman Partners, but only to the extent that the conversion (or other acquisition) price per Share was then equal to or less than the Market Price per Share on that Date (either of the above being referred to as an "Investor Sale"), all or a portion of the unexercisable Annual Target Options may become exercisable in one of the following two ways: (1) If the Annual Targets have been achieved for each of the years ending prior to such "Measurement Date", as defined below, then all unexercisable Annual Target Options will become exercisable. (2) If the immediately prior year's Annual Target has been achieved, but one or more previous periods' Annual Targets have not been achieved, then a portion of the unexercisable Options shall become exercisable. The percentage of unexercisable Annual Target Options which will become exercisable is determined by dividing (x) the number of Annual Target Options which have already become exercisable by (y) the total number of Annual Target Options 2 which would have been exercisable if all the Annual Targets had been achieved. For example, if two out of three years' Targets were achieved, 66.66% of the unexercisable Annual Target Options would become exercisable. - MINIMUM 50% VESTING FOR INVESTOR RETURN OF 30%. If there is an Investor Sale, and the "Cumulative Compounded Return" is 30% or more, then an additional number of Annual Target Options shall become exercisable, if necessary, so that the total number of exercisable Annual Target Options (including previously exercised Annual Target Options) is at least equal to 50% of the original number of Annual Target Options. The Annual Target Options shall become exercisable upon the 7th anniversary of the Trigger Date, so long as the Executive remains in employment with the Company. 3. INVESTOR RETURN VESTING OPTIONS. One third of the options shall vest and become exercisable based on achievement of investor returns as determined by per share market price of the Company's stock on the date of an Investor Sale compared with the market price per share on the Trigger Date. Specifically, on the date of the Investor Sale (the "Measurement Date") the Measurement Date Price, as defined below, will be measured against the Trigger Date market price to calculate a cumulative return as per the following formula: A = B + ((1 + C) ^ (D/12)) WHERE: A = THE MEASUREMENT DATE PRICE B = THE EMPLOYMENT DATE MARKET PRICE 3 C = THE CUMULATIVE COMPOUNDED RETURN D = THE NUMBER OF WHOLE MONTHS FROM THE EMPLOYMENT DATE THROUGH THE MEASUREMENT DATE. If the Cumulative Compounded Return is less that 28%, none of the Investor Return Options shall become exercisable. If the Cumulative Compounded Return is at least 28% but less than 29%, one third of the Investor Return Options will become exercisable. If the Cumulative Compounded Return is at least 29% but less than 30%, two thirds of the Investor Return Options will become exercisable. If the Cumulative Compounded Return is greater than 30%, all of the Investor Return Options will become exercisable. The "Measurement Date Price" is the price paid by the purchaser in either transaction described immediately above. Provisions for valuation of non-cash consideration will be reasonably agreed. The Investor Return Options shall become exercisable upon the 7th anniversary of the Trigger Date, so long as the Executive remains in employment with the Company. 4. SPECIAL LOAN/BONUS PROVISION: If the Executive exercises the Option while he is employed by the Company, the Company shall loan the Executive the amount of the exercise price for the Option at an interest rate determined by the Company to be reasonably favorable to the Executive, such loan to be repaid six months and a day following exercise of the Option. If the Executive remains in employment for six months following the exercise of the Option or if the 4 Executive's employment is terminated on account of death or disability, the note shall be forgiven. If the Option is exercised on or after a Change of Control or Purchase or otherwise on the occurrence of a Measurement Date, the Company shall pay the Executive a bonus in an amount equal to the exercise price. 5. TIMING OF ACCELERATED EXERCISABILITY UPON GOING PRIVATE TRANSACTION: Notwithstanding the above, all Options which are exercisable as of, or otherwise become exercisable (as provided above) upon, any transaction by which the Shares cease to be publicly tradable shall be deemed to have become exercisable immediately prior to such transaction. 6. GENERAL PROVISIONS: All options which are not exercisable, and do not become exercisable, shall expire upon the termination of the employment of the Executive with the Company, except as specified in Section 4 of this Agreement. Options which are or become exercisable as of the date of termination of employment shall remain exercisable for a period of ninety (30) days following termination of employment. Exercise shall be by cash or cash equivalent, unless the Board, in its sole discretion permits a form of cashless exercise. Options are not transferable or assignable except for estate planning purposes. 5 ATTACHMENT 1. Company: Talisman Enterprises, Inc., an Ontario corporation. 2. Trigger Date: January 21, 1999. 3. Change of Control: any "Person" (as defined under Section 3(a)(9) of the (United States) Securities Exchange Act of 1934, as amended (the "Exchange Act")) or "Group" of persons (as provided under Rule 13d-3 of the Exchange Act), other than Spencer-Trask is or becomes the "Beneficial Owners" (as defined in Rule 13d-3 or otherwise under the Exchange Act), directly or indirectly (including as provided in Rule 13d-3(d)(1) of the Exchange Act), of voting stock of the Company ("Voting Stock"), giving effect to the deemed ownership of securities by such person or group, as provided in Rule 13d-3(d)(1) of the Exchange Act (but not giving effect to any such deemed ownership of securities by another person or group), equal to or greater than the aggregate percentage of Voting Stock owned by (A) Spencer-Trask, (B) any Affiliate of Spencer-Trask, (C) Talisman Partners, and (D) Kevin Kimberlin (collectively the "Spencer-Trask Investment Group") as determined at the time of such acquisition on a fully diluted basis. 4. Purchase: any "Person" (as defined under Section 3(a)(9) of the Exchange Act) or "Group" of persons (as provided under Rule 13d-3 of the Exchange Act), other than Spencer-Trask, is or 1 becomes the "Beneficial Owner" (as defined in Rule 13d-3 or otherwise under the Exchange Act), directly or indirectly (including as provided in Rule 13d-3(d)(1) of the Exchange Act), of voting stock of the Company ("Voting Stock"), giving effect to the deemed ownership of securities by such person or group, as provided in Rule 13d-3(d)(1) of the Exchange Act, but not giving effect to any such deemed ownership of securities by another person or group, greater than fifty percent (50%) of all such Voting Stock. 5. Board: The Board of Directors of the Company. 2 EX-23.1 7 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF COUNSEL We hereby consent to the reference to our firm under "Legal Matters" in the Prospectus forming a part of the Registration Statement. In giving the foregoing consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Securities and Exchange Commission. Very truly yours, /s/ Sichenzia, Ross & Friedman LLP SICHENZIA, ROSS & FRIEDMAN LLP August 16, 1999 EX-23.2 8 EXHIBIT 23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated March 29, 1999 (except as to note 16 which is as at August 16, 1999), in the Amendment No. 1 to the Registration Statement on Form SB-2 and related prospectus of Talisman Enterprises Inc. dated August 16, 1999. /s/ Ernst & Young LLP Hamilton, Canada Ernst & Young LLP August 16, 1999 EX-27.2 9 EXHIBIT 27.2
5 This schedule contains summary financial information extracted from Talisman Enterprises, Inc. December 31, 1998 and June 30, 1999 and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS JUN-30-1999 JAN-01-1999 JUN-30-1999 662 0 175 0 1327 3234 3879 (502) 6612 6659 0 0 1687 2590 (4864) 6612 71 71 640 1243 0 0 105 (1917) (29) (1888) 0 0 0 (1888) (0.002) (0.002)
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