<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 5, 1996
REGISTRATION NO. 333-14647
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
TEARDROP GOLF COMPANY
(Name of small business issuer in its charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 3949 57-1056600
(State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
32 BOW CIRCLE, BUILDING #1
HILTON HEAD ISLAND, SOUTH CAROLINA 29928
(803) 686-4995
(Address and telephone number of principal executive offices)
------------------------------
32 BOW CIRCLE, BUILDING #1
HILTON HEAD ISLAND, SOUTH CAROLINA 29928
(Address of principal place of business or intended principal place of business)
------------------------------
MR. RUDY A. SLUCKER
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
32 BOW CIRCLE, BUILDING #1
HILTON HEAD ISLAND, SOUTH CAROLINA 29928
(803) 686-4995
(Name, address and telephone number of agent for service)
------------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
Jeffrey A. Baumel, Esq. David Alan Miller, Esq.
Crummy, Del Deo, Dolan, Graubard Mollen & Miller
Griffinger & Vecchione 600 Third Avenue
One Riverfront Plaza New York, New York 10016
Newark, New Jersey 07102 Telephone: (212) 818-8800
Telephone: (201) 596-4500 Fax: (212) 818-8881
Fax: (201) 639-6260
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / ___
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ___
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED DECEMBER 5, 1996
PROSPECTUS
[LOGO]
1,150,000 SHARES OF COMMON STOCK AND
1,150,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
All of the 1,150,000 shares of common stock ("Common Stock") and 1,150,000
Redeemable Common Stock Purchase Warrants ("Warrants") offered hereby (together,
the "Securities") are being sold by TearDrop Golf Company ("Company" or
"TearDrop"). Each Warrant entitles the holder to purchase one share of Common
Stock for $4.00 during the five-year period commencing on the date of this
Prospectus. The Company may redeem the Warrants at a price of $.01 per Warrant
on not less than 30 days' prior written notice if the last sale price of the
Common Stock has been at least 162.5% of the then-exercise price of the Warrants
(initially $6.50) for the 20 consecutive trading days ending on the third day
prior to the date on which notice is given. See "Description of Securities."
Prior to this Offering, there has been no public market for the Securities and
there can be no assurance that any such market will develop. See "Underwriting"
for information relating to the factors considered in determining the initial
public offering price of the Securities and the exercise price of the Warrants.
The Company has applied for quotation of the Common Stock and Warrants on the
Nasdaq SmallCap Market under the symbols "TDRP" and "TDRPW", respectively.
------------------------
The Securities offered hereby are speculative in nature and involve a high
degree of risk and substantial dilution. See "Risk Factors" at page 6 and
"Dilution" at page 13.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share............................................. $4.75 $.475 $4.275
Per Warrant........................................... $.10 $.01 $.09
Total (3)............................................. $5,577,500 $557,750 $5,019,750
</TABLE>
(1) Does not include a 3% nonaccountable expense allowance which the Company has
agreed to pay to the Underwriters. The Company has also agreed to sell to
the Underwriters an option to purchase 115,000 shares of Common Stock and/or
115,000 Warrants ("Underwriters' Purchase Option"), to retain GKN Securities
Corp. as a financial consultant and to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
See "Underwriting."
(2) Before deducting expenses payable by the Company, including the
nonaccountable expense allowance in the amount of $167,325 ($192,424 if the
Underwriters' over-allotment option is exercised in full), estimated at
approximately $517,325.
(3) The Company has granted the Underwriters an option, exercisable within 45
days from the date of this Prospectus, to purchase up to an additional
172,500 shares of Common Stock and/or 172,500 Warrants on the same terms set
forth above, solely for the purpose of covering over-allotments, if any. If
such over-allotment option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$6,414,125, $641,413 and $5,772,712, respectively. See "Underwriting."
The Securities are being offered by the Underwriters on a firm commitment basis
subject to prior sale, when, as and if delivered to and accepted by the
Underwriters and subject to the approval of certain legal matters by counsel and
certain other conditions. The Underwriters reserve the right to withdraw, cancel
or modify this Offering and to reject any order in whole or in part. It is
expected that delivery of certificates representing the Securities will be made
against payment therefor at the offices of GKN Securities Corp. in New York
City, on or about , 1996.
[LOGO]
Kirlin Securities, Inc.
, 1996
<PAGE>
[GRAPHICS TO BE PROVIDED]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK
OR WARRANTS AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
"TEARDROP-REGISTERED TRADEMARK-" IS A REGISTERED TRADEMARK OF TEARDROP GOLF
COMPANY. THE UNITED STATES PATENT AND TRADEMARK OFFICE HAS ISSUED A NOTICE OF
ALLOWANCE TO TEARDROP GOLF COMPANY FOR THE TRADEMARK "SPIN MASTER-TM-."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE
FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) APPEARING ELSEWHERE IN THIS
PROSPECTUS. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS PROSPECTUS IN ITS
ENTIRETY. UNLESS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS HAS
BEEN ADJUSTED TO REFLECT THE REINCORPORATION OF THE COMPANY IN THE STATE OF
DELAWARE, EFFECTED ON OCTOBER 21, 1996 AND A 3,333.33-FOR-ONE SHARE CONVERSION
IN CONNECTION THEREWITH (THE "REINCORPORATION"). THIS PROSPECTUS CONTAINS, IN
ADDITION TO HISTORICAL INFORMATION, FORWARD LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY
FROM THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS. FACTORS THAT COULD
CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DISCUSSED IN "RISK FACTORS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS
PROSPECTUS.
THE COMPANY
The Company designs, develops and markets high-quality, premium-priced golf
clubs based on its proprietary technologies, including its
TearDrop-Registered Trademark- line of putters and its new line of Spin
Master-TM- wedges. The TearDrop putter is used by professional golfers on the
Professional Golf Association ("PGA") Tour, the Senior PGA Tour and the Nike
Tour, including Brett Ogle (1995 Hawaiian Open and Pebble Beach Golf Tournament
Champion), Dustin Phillips, Dino Lucchesi, Dennis Zinkon and P.J. Cowan. The
TearDrop putter was reported in 1995 as having achieved a top-ten ranking on
both the PGA Tour and the Senior PGA Tour for top-ten finishes among all putters
used. The Company believes that its products address the demand for innovative
short-game clubs that has not been adequately met by the golf equipment
industry, which recently has stressed technological advancement in the design of
drivers.
The Company estimates that gross retail sales of golf clubs in the United
States have grown from approximately $2.1 billion in 1986 to approximately $5.0
billion in 1994. With increasing sales, golf equipment manufacturers have
invested more in research and development, designing clubs by combining new
materials and technologies with advanced remodeling, testing and manufacturing
techniques in order to provide golfers with clubs (primarily drivers) that allow
for greater distance and control. While it is estimated by the Company that
between 10 to 12 million putters were purchased worldwide during 1995, there
have been relatively few advances in the design and manufacture of putters and
other short-game clubs.
To exploit the niche for innovative short-game clubs, the Company introduced
its first product, the TearDrop putter, in 1993, and has since developed and
introduced six additional putters, all based on TearDrop putter technology. The
TearDrop putter features a rounded hitting surface rather than the flat hitting
surface found on most other putters. This technology allows for the striking of
the ball directly at or below center, eliminating most skidding and developing a
high overspin, resulting in a superior roll for more precise putts. The Company
broadened its product line in Spring 1996 with the introduction of its Spin
Master wedges, which feature a titanium-treated friction surface to provide
enhanced backspin and added durability.
The Company's objective is to become a leading supplier of high-quality
specialty clubs, including putters and wedges and, in the longer term, drivers.
To achieve this objective, the Company is focusing on increasing awareness, as
well as enhancing the reputation of its products; increasing market penetration
of its products; and continuing the development of innovative clubs and the
refinement and improvement of existing products. An integral part of this
strategy is the expansion of the Company's marketing and advertising efforts for
which the Company intends to use a substantial portion of the proceeds of this
Offering. The Company's domestic marketing strategy targets on-course golf pro
shops and selected off-course specialty stores and will include print
advertising, television commercials and infomercials and other promotional
activities. An important feature of the Company's overall marketing effort is
the endorsement of its products by touring professional golfers who will
demonstrate the effectiveness of the TearDrop
3
<PAGE>
putter and provide valuable exposure. These professionals also provide important
feedback to the Company regarding future product introductions and existing
product refinements. The Company also intends to expand its line of clubs by
developing, acquiring or licensing advanced technologies for other specialty
clubs, including drivers.
The Company's executive offices are located at 32 Bow Circle, Building #1,
Hilton Head Island, South Carolina 29928 and its telephone number is (803)
686-4995. The Company was incorporated in South Carolina in 1992 under the name
"Teardrop Putter Corporation" and merged into the "TearDrop Golf Company," a
Delaware corporation, in October 1996 as part of the Reincorporation. The
purpose of the Reincorporation was solely to provide for the reincorporation and
3,333.33-for-one stock split and no change in beneficial ownership occurred as a
result of the Reincorporation.
THE OFFERING
<TABLE>
<S> <C>
Securities Offered........................... 1,150,000 shares of Common Stock and
1,150,000 Warrants. Each Warrant entitles
the registered holder thereof to purchase
one share of Common Stock for $4.00 during
the five-year period commencing on the date
of this Prospectus. The Company may redeem
the Warrants at a price of $.01 per Warrant
on not less than 30 days' prior written
notice if the last sale price of Common
Stock has been at least 162.5% of the then-
exercise price of the Warrants (initially
$6.50) for the 20 consecutive trading days
ending on the third day prior to the date
on which notice of redemption is given. See
"Description of Securities."
Common Stock Outstanding Prior to the
Offering................................... 750,000 shares
Common Stock to be Outstanding After the
Offering................................... 1,900,000 shares
Proposed Nasdaq SmallCap
Market Symbols............................. Common Stock: TDRP
Warrants: TDRPW
</TABLE>
USE OF PROCEEDS
The Company intends to apply approximately $2,200,000 of the net proceeds of
this Offering to its marketing and advertising activities, approximately
$300,000 to repay indebtedness to NationsBank of South Carolina ("NationsBank"),
approximately $250,000 to improve its manufacturing operations and approximately
$100,000 to research and development. The remaining $1,652,425 will be used for
working capital and general corporate purposes. See "Use of Proceeds."
RISK FACTORS
The securities offered hereby involve a high degree of risk, including,
without limitation, the Company's limited operating history; a history of losses
and accumulated and stockholders' deficits; recent decreases in net sales and
increases in net loss; the possible need for additional capital; and the highly
competitive nature of the sporting goods industry generally and the golf
equipment segment specifically. An investment in the Securities offered hereby
should be considered only by investors who can afford the loss of their entire
investment. See "Risk Factors."
4
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial data presented below for the fiscal years ended
December 31, 1994 and December 31, 1995 is derived from the audited financial
statements of the Company included herein. The summary financial data as of and
for the nine months ended September 30, 1995 and September 30, 1996 are derived
from the unaudited financial statements of the Company. In the opinion of
management, the summary financial data presented below as of and for the nine
months ended September 30, 1995 and September 30, 1996 include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the financial position and results of operations for these
periods. The nine month results are not necessarily indicative of the results to
be expected for the full year. This information should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Plan of
Operations" and the financial statements of the Company, including the notes
thereto, appearing elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------------ -------------------------
<S> <C> <C> <C> <C>
1996 1995 1995 1994
----------- ----------- ------------ -----------
STATEMENT OF OPERATIONS DATA:
Sales..................................................... $ 715,495 $ 820,746 $ 1,057,306 $ 784,519
Loss from operations...................................... (251,785) (214,602) (434,637) (443,653)
Net loss.................................................. (372,930) (293,135) (542,425) (552,044)
Pro forma net loss per share (1).......................... $ (.50) $ (.39) $ (.72) $ (.74)
Shares used in computing pro forma net loss per share
(1)..................................................... 750,000 750,000 750,000 750,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------------------------------
<S> <C> <C> <C>
PRO FORMA
AS
ACTUAL PRO FORMA(2) ADJUSTED(2)(3)
------------- ------------- ----------------
BALANCE SHEET DATA:
Working capital (deficit)...................................... $ (160,297) $ (160,297) $ 4,342,128
Total current assets........................................... 446,552 446,552 4,648,977
Total assets................................................... 643,820 643,820 4,846,245
Total liabilities.............................................. 2,384,881 1,301,555 1,001,555
Accumulated deficit............................................ (1,741,286) (1,741,286) (1,741,286)
Total stockholders' equity (deficit)........................... $ (1,741,061) $ (657,735) $ 3,844,690
</TABLE>
- ------------------------
(1) See Note 2 of Notes to Financial Statements for an explanation of the
determination of the number of shares used in computing pro forma net loss
per share.
(2) Gives effect to the forgiveness by certain stockholders of the Company of an
aggregate of $1,083,326 of indebtedness of the Company as of September 30,
1996 and the Reincorporation.
(3) Reflects the receipt by the Company of the net proceeds from the sale of the
Securities offered hereby and the application thereof.
UNLESS OTHERWISE INDICATED, ALL SHARE, PER-SHARE AND FINANCIAL INFORMATION
SET FORTH HEREIN HAS BEEN ADJUSTED TO GIVE EFFECT TO THE REINCORPORATION;
ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION, THE WARRANTS,
OTHER OUTSTANDING OPTIONS TO ACQUIRE UP TO AN AGGREGATE OF 250,000 SHARES OF
COMMON STOCK AND OPTIONS TO ACQUIRE UP TO AN AGGREGATE OF 200,000 SHARES OF
COMMON STOCK WHICH MAY BE GRANTED UNDER THE COMPANY'S 1996 EMPLOYEE STOCK OPTION
PLAN; AND GIVES PRO FORMA EFFECT TO THE FORGIVENESS OF AN AGGREGATE OF
$1,083,326 OF INDEBTEDNESS BY CERTAIN STOCKHOLDERS OF THE COMPANY AS OF THE
EFFECTIVE DATE OF THIS OFFERING.
5
<PAGE>
RISK FACTORS
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE IN NATURE AND INVOLVE A HIGH
DEGREE OF RISK. ACCORDINGLY, IN ANALYZING AN INVESTMENT IN THESE SECURITIES,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, ALONG WITH THE OTHER MATTERS
REFERRED TO HEREIN, THE FOLLOWING RISK FACTORS. NO INVESTOR SHOULD PARTICIPATE
IN THIS OFFERING UNLESS SUCH INVESTOR CAN AFFORD A COMPLETE LOSS OF HIS
INVESTMENT.
LIMITED OPERATING HISTORY; HISTORY OF LOSSES; ACCUMULATED DEFICIT;
STOCKHOLDER DEFICIT; RECENT DECREASE IN NET SALES AND INCREASE IN NET LOSS;
INCREASE IN ACCOUNTS RECEIVABLE. The Company has a short operating history. It
commenced operations in August 1992, shipped its first products in 1993 and
commenced substantial sales activities in 1994. Although the Company had net
sales of approximately $1,057,000 during 1995 and net sales of approximately
$785,000 during 1994, the Company has incurred operating losses since its
inception, which losses have continued to date. As of September 30, 1996 and
December 31, 1995, the Company had accumulated deficits of approximately
$1,741,000 and $1,368,000, respectively, and stockholders' deficits of
approximately $1,741,000 and $1,368,000, respectively. During late 1995 and
early 1996, the Company discontinued its previous line of putters and introduced
its current line. However, because of delays in manufacturing, the Company was
not able to ship any products until April 1996. This resulted in a decrease in
sales from approximately $821,000 for the nine months ended September 30, 1995
to approximately $715,000 for the nine months ended September 30, 1996 and an
increase in net loss from approximately $293,000 during the nine months ended
September 30, 1995 to approximately $373,000 during the nine months ended
September 30, 1996. The Company had accounts receivable, less allowance for
doubtful accounts, of $268,242 at September 30, 1996, an increase of 237% from
accounts receivable of $79,497 at December 31, 1995. The Company has provided
extended payment terms to several distributors in order to encourage initial
purchases of its clubs. Accordingly, approximately 49% of such accounts
receivable are over 90 days old at September 30, 1996. The Company does not
anticipate that it generally will extend such liberal payment terms in the
future, except in certain limited circumstances where it is necesary to access
distributors that are perceived by the Company to have the ability to enhance
market exposure and penetration of the Company's products. The Company has not
experienced significant collection problems or credit risks in the past. See
Financial Statements and "Management's Discussion and Analysis and Plan of
Operations."
CONTINUED LOSSES EXPECTED. The Company will not be able to achieve
profitability unless it is able to increase substantially sales of its existing
line of putters and wedges, successfully introduce new products in a timely
manner and finance improvements to its production capabilities. In order to
increase sales, the Company will spend substantially increased amounts for
advertising and marketing. The Company expects that losses will continue for at
least the immediate future because it is not anticipated that such increased
expenditures will result in immediate proportionate increases in sales as the
Company develops its reputation and brand name recognition. There can be no
assurance that the Company will be able to sustain net sales in the future or
achieve or sustain profitability. See Note 12 to the Notes to Financial
Statements, "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Plan of Operations."
GOING CONCERN OPINION. The Company's accountants have included a statement
in their opinion on the financial statements for the Company to the effect that
the Company's loss from operations raises substantial doubt about its ability to
continue as a going concern. See Financial Statements.
WORKING CAPITAL DEFICIT; DEPENDENCE UPON LOANS FROM STOCKHOLDERS; NEED FOR
ADDITIONAL CAPITAL. Since its inception, the Company's internally generated cash
flow has not been sufficient to finance its operations. The Company has
experienced severe working capital shortfalls in the past, which have restricted
the Company's ability to conduct its business. As of September 30, 1996 and
December 31, 1995, the Company had working capital deficits of approximately
$160,000 and $332,000, respectively. Through the date of this Offering, the
Company has been primarily dependent upon loans from its current stockholders in
order to maintain its operations. It can be expected that following this
Offering, additional loans from such stockholders will no longer be available.
Although the Company believes that the proceeds from this Offering will be
sufficient for the Company to maintain its operations as planned for at least
the
6
<PAGE>
next 18 months, if the Company's sales do not increase substantially, it will
likely need additional financing after such time in order to continue
operations. There can be no assurance that any additional financing will be
available to the Company on acceptable terms, if at all, when required by the
Company. The inability to obtain additional financing when needed would have a
material adverse effect on the Company's operating results and, as a result, the
Company could be required to significantly reduce or suspend its operations,
seek a merger partner or sell some or substantially all of its assets. See "Use
of Proceeds" and "Management's Discussion and Analysis of Financial Condition
and Plan of Operations."
LOAN FROM NATIONSBANK; PLEDGE OF SUBSTANTIALLY ALL ASSETS. The Company has
borrowed $300,000 from NationsBank which was originally due and payable on March
15, 1996. NationsBank has extended the due date for such indebtedness to
December 31, 1996. On several occasions, the Company has been in default on this
loan, each of which defaults has been subsequently waived by NationsBank. The
loan is secured by all of the assets of the Company. Although the Company has
designated a portion of the proceeds of this Offering to repay the loan, it may
obtain alternative financing from another lender and it may be expected that any
such debt will also be secured by the assets of the Company. In the event that
alternative financing is obtained from another lender, the Company will use that
portion of the proceeds of this Offering allocated to repay NationsBank for
working capital and general corporate purposes. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Plan of
Operations."
DEPENDENCE ON KEY PERSONNEL; LIMITED INDUSTRY EXPERIENCE. The Company
believes its success will depend to a significant extent on the efforts and
abilities of certain of its senior management, particularly those of its Chief
Executive Officer and Chairman of the Board, Rudy A. Slucker. The Company will
maintain "key person" life insurance in the amount of $1,000,000 on the life of
Mr. Slucker under which the Company will be the sole beneficiary. Although the
Company has entered into an employment agreement with Mr. Slucker, effective
upon consummation of the Offering and expiring on December 31, 1999, the loss of
Mr. Slucker or other key management, marketing or technical employees could have
a material adverse effect on the Company's operating results and financial
condition. Management has only a limited history in the golf club industry.
There is strong competition for qualified personnel in the golf club industry,
and the loss of key personnel or an inability on the Company's part to attract,
retain and motivate key personnel could adversely affect the Company's business,
operating results and financial condition. There can be no assurance that the
Company will be able to retain its existing key personnel or attract additional
qualified personnel. See "Business--Employees" and "Management."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of the Securities offered
hereby will incur an immediate and substantial dilution of approximately 59% of
their investment in the Common Stock because the net tangible book value of the
Company's Common Stock after the Offering will be approximately $2.01 per share
as compared with the initial public offering price of $4.75 per share of Common
Stock and $.10 per Warrant. See "Dilution."
DEPENDENCE UPON ENDORSEMENTS. As an integral part of its marketing
strategy, the Company seeks to obtain endorsements of its clubs from touring
professionals. Typically, the Company's agreements with its endorsing
professionals provide for the use of the professionals' names in connection with
the marketing of the Company's clubs and the use of the clubs by such
professionals in tournament play. The effect of a particular professional's
endorsement on the successful marketing of the Company's clubs, and the
heightening of awareness of the Company's brand name, is directly related to the
success of such professional in tournament play. However, the amount of
remuneration required to be paid or provided by the Company under a typical
endorsement agreement is not substantially dependent on the tournament success
of such professional. Accordingly, if the Company's endorsing professionals do
not have substantial tour victories, the Company likely will receive less
exposure, yet would still be required to pay endorsement fees. To date, only a
limited number of touring professional golfers have signed endorsement
agreements with the Company. The Company has entered into endorsement agreements
with five touring professionals, four of which generally are for a one-year term
and provide for certain payments by the Company to the touring professionals in
consideration for their using a TearDrop putter and bonuses based on tournament
performance. The Company's endorsement agreement with Brett Ogle extends through
7
<PAGE>
December 31, 1998 and provides for certain minimum payments during the years
ended December 31, 1996, 1997 and 1998 and for certain bonuses based on
tournament performances and sales. In order to succeed with its marketing
strategy, the Company will be required to enter into endorsement agreements with
additional professional golfers. The inability of the Company to maintain its
relationships with its existing endorsing professionals, to enter into
endorsement agreements with additional professional golfers, or the failure of
the Company's endorsing professionals to achieve tournament success, would
diminish the effectiveness of the Company's marketing strategy and may result in
declining sales. See "Business--Sales and Marketing."
DEPENDENCE ON INDEPENDENT DESIGNERS. The Company does not employ any
research and development or design personnel, but instead works closely with
component manufacturers, independent design consultants and touring
professionals in the development of new products and the improvement of existing
products. The Company does not have any written agreements with design
consultants, but believes that to the extent design services are needed,
designers having suitable technical design expertise would be readily available.
However, if the Company is unable to retain qualified design consultants who are
able to devote the necessary attention to the Company's needs when required, or
if the cost of utilizing such experts proves to be too high, the Company may be
unable to develop new products or improved products on a cost-effective or
timely basis. The inability of the Company to develop new products and improve
its current products on commercially reasonable terms could have a material
adverse effect on the Company's operating results and financial condition. See
"Business--Products."
DEPENDENCE ON LIMITED NUMBER OF COMPONENT SUPPLIERS. The Company assembles
all of its clubs at its Hilton Head Island, South Carolina facility. The Company
does not manufacture the components required to assemble its golf clubs. The
Company relies on one supplier for putter heads, a different supplier for wedge
heads and a small number of suppliers for shafts and grips. The Company does not
have written supply agreements with any of its current suppliers. Therefore, the
Company's success will be dependent on maintaining its relationships with
existing suppliers and developing relationships with new suppliers. Any
significant delay or disruption in the supply of components from the Company's
suppliers or any diminution of quality resulting from such supplier's
insufficient controls or inadequate component testing, would have a material
adverse effect on the Company's business, operating results and financial
condition. Further, given the highly seasonal nature of the golf equipment
industry, such adverse effect would be exacerbated should any supply delay or
quality problem occur immediately prior to or during the six month period ending
June 30 (the period during which sales of golf equipment generally are expected
to be the highest). See "Management's Discussion and Analysis of Financial
Condition and Plan of Operations" and "Business--Assembly."
RELIANCE ON INDEPENDENT DOMESTIC SALES REPRESENTATIVES. Sales of the
Company's products are dependent, in part, on its nationwide network of
independent sales representatives. While the Company believes that its
relationships with its sales representatives and customers are satisfactory,
there can be no assurance that the Company will be able to maintain such
relationships in the future. The Company's sales representatives may also
provide services for other golf club manufacturers that offer product lines
competitive with those of the Company. Although the Company works closely with
its sales representatives, the Company cannot directly control such
representatives' sales and marketing activities. There can be no assurance that
these representatives will effectively manage the sale of the Company's products
or that their selling efforts will prove effective. See "Business--Sales and
Marketing."
INTERNATIONAL SALES; RELIANCE ON LIMITED NUMBER OF FOREIGN DISTRIBUTORS.
During the years ended December 31, 1994 and 1995, and during the nine months
ended September 30, 1996, sales to international customers, primarily through
one distributor which markets products in Japan, accounted for approximately
21%, 30% and 41% of the Company's net sales, respectively. Accordingly, if this
distributor ceases to purchase golf clubs from the Company, the Company's sales
will be reduced significantly. The Company relies exclusively on this and other
foreign distributors to market and sell the Company's products outside the
United States. The Company is not a party to any agreements with its foreign
distributors other than purchase orders, and although the Company works closely
with its foreign distributors, the Company
8
<PAGE>
cannot directly control such distributors' sales and marketing activities and,
accordingly, cannot manage the Company's product sales in foreign markets. The
Company's foreign distributors may also distribute, either on behalf of
themselves or other golf club manufacturers, other product lines, including
product lines that may be competitive with those of the Company. There can be no
assurance that these distributors will effectively manage the sale of the
Company's products worldwide or that their marketing efforts will prove
effective. Additionally, the Company's international sales may be disrupted or
adversely affected by events beyond the Company's control, including currency
fluctuations and political or regulatory changes. See "Business--Sales and
Marketing."
NEW PRODUCTS; USGA REGULATION. The Company believes that the introduction
of innovative technologies and club designs will be crucial to its future
success. New models and basic design changes are frequently introduced into the
golf club market but are often met with consumer rejection. Although the Company
has achieved certain successes in the introduction of its golf putters, no
assurances can be given that the Company will be able to continue to design and
manufacture golf clubs that meet with market acceptance. In addition, prior
successful designs may be rendered obsolete within a relatively short period of
time as new products are introduced into the market. There can be no assurances
that the Company will be able to continue to design innovative products that can
achieve market acceptance.
The design of new golf clubs is also greatly influenced by rules and
interpretations of the United States Golf Association ("USGA"). Although the
golf equipment standards established by the USGA generally apply only to
competitive events sanctioned by that organization, it has become critical for
designers of new clubs to assure compliance with USGA standards. To the extent
that the Company's clubs are ruled ineligible under USGA standards, even
non-professional golfers will likely be unwilling to purchase them. The Company
has received approval for its primary putter designs by the USGA. However, the
Company's current wedges have not yet been submitted to the USGA for approval,
and the Company believes that further modifications will be necessary to bring
the wedges within USGA guidelines. No assurance can be given that the wedges or
any new products will receive USGA approval or that existing USGA standards will
not be revised in ways that adversely affect the sales of the Company's
products. See "Business--Products" and "--Regulatory Matters."
MANAGEMENT OF GROWTH. Following the completion of this Offering, the
Company will substantially expand its operations. It can be expected that this
expansion will place a significant strain on the Company's management and other
resources. The Company's ability to manage its growth effectively will require
it to hire additional management personnel to improve its operational, financial
and management information systems, to accurately forecast sales demand and
calibrate manufacturing to such demand, to accurately forecast retail sales, to
control its overhead, to manage its advertising and marketing programs in
conjunction with actual demand, and to attract, train, motivate and manage its
employees effectively. If the Company's management is unable to manage growth
effectively, the Company's operating results and financial condition will be
adversely affected.
SEASONAL BUSINESS; QUARTERLY FLUCTUATIONS. Golf is primarily a warm weather
sport. The purchasing decisions of most customers are typically made in the fall
and a vast majority of sales are expected to occur during the first six months
of the year. In addition, quarterly results may vary from year to year due to
the timing of new product introductions, orders and sales, advertising
expenditures, promotional periods and shipments. Accordingly, comparisons of
quarterly information of the Company's results of operations may not be
indicative of the Company's overall annual performance. See "Management's
Discussion and Analysis of Financial Condition and Plan of Operations" and
"Business--Sales and Marketing."
SUSCEPTIBILITY TO GENERAL ECONOMIC CONDITIONS. Sales of golf equipment have
historically been dependent on discretionary consumer spending. As a result, the
Company's revenues will be subject to fluctuations based upon general economic
conditions in the United States and in the foreign countries where the Company
sells its products. If there is a general economic downturn or recession in the
United States or in foreign countries in which the Company markets its clubs,
general consumer spending on golf equipment could be expected to decline, which
would have a material adverse effect on the Company's business, operating
results and financial condition.
9
<PAGE>
UNCERTAINTY OF PROPRIETARY RIGHTS; EXPENSE OF INTELLECTUAL PROPERTY
LITIGATION. The Company relies on a combination of patents, trademarks and
trade secret protection to establish and protect the proprietary rights it has
in its products. The ability of the Company's competitors to acquire
technologies or other proprietary rights equivalent or superior to those of the
Company or the inability of the Company to enforce its proprietary rights would
have a material adverse effect on the Company's operating results and financial
condition. There can be no assurance that the Company's competitors will not
independently develop or acquire patented or other proprietary technologies that
are substantially equivalent or superior to those of the Company. There also can
be no assurance that the measures adopted by the Company to protect its
proprietary rights will be adequate to do so or that the Company's products do
not infringe on third party intellectual property rights, including patents.
Intellectual property matters are frequently litigated on allegations that
third-party proprietary rights have been infringed. The Company may have to
defend against such lawsuits, which could be expensive and time-consuming. See
"Business--Proprietary Rights."
COMPETITION. The market for high quality, premium-priced golf clubs is
highly competitive and includes a number of well-established companies that have
more readily recognizable brand names and larger, more widely known corps of
endorsing golf professionals, as well as greater market access and financial
resources than the Company. Many purchasers of premium clubs desire golf clubs
that feature the most recent technology, innovative designs and recognized brand
names. Additionally, purchases are often made based upon highly subjective
decisions that may be influenced by numerous factors, many of which are out of
the Company's control. Golfers' subjective preferences are subject to rapid and
unanticipated changes. As a result, the Company will face substantial
competition from existing and new companies that market golf clubs which are
perceived to enhance performance, are visually appealing or appeal to other
consumer preferences. Further, the golf club industry is subject to rapid and
widespread imitation of golf club designs which, not withstanding the existence
of any proprietary rights, could further hamper the Company's ability to
compete. In addition, there are several manufacturers that do not currently
compete with the Company that could pose significant competition if they enter
the market for golf putters and wedges, or concentrate greater resources upon
their efforts in this market. The Company faces competition on the basis of
price, reputation and qualitative distinctions among available products. There
can be no assurance as to the market acceptance of the Company's golf clubs in
relation to its competition. See "Business--Competition."
BROAD DISCRETION IN APPLICATION OF NET PROCEEDS. The Company intends to use
approximately $1,652,000, or 36.7%, of the net proceeds of this Offering for
working capital and general corporate purposes, and accordingly, management will
have broad discretion in the application of such proceeds. See "Use of
Proceeds."
USE OF PROCEEDS TO REPAY INDEBTEDNESS; USE OF PORTION OF PROCEEDS OF
OVER-ALLOTMENT OPTION TO REPAY INSIDER INDEBTEDNESS. The Company intends to use
$300,000 of the proceeds to repay NationsBank. Since Rudy Slucker, the Chairman
of the Board, and Fred Hochman, a director and principal stockholder of the
Company, have each provided a personal guarantee for portions of the Company's
$300,000 indebtedness to NationsBank, they will benefit to the extent of the
release of their respective guarantees. Additionally, the Company has agreed to
allocate up to $500,000 from the proceeds, if any, received by the Company upon
the exercise of the Underwriter's over-allotment option, to the repayment of
indebtedness to certain stockholders of the Company, including members of
management. See "Use of Proceeds" and "Certain Transactions."
CONTROL OF THE COMPANY BY OFFICERS AND DIRECTORS. Immediately following
this Offering, the Company's officers and directors will beneficially own
approximately 41.1% of the outstanding shares of the Company's Common Stock. As
a result, such persons, acting together, have the ability to exercise
significant influence over all matters requiring stockholder approval. The
concentration of ownership could delay or prevent a change in control of the
Company. See "Management" and "Principal Stockholders."
10
<PAGE>
NO PRIOR MARKET; POTENTIAL LIMITED TRADING MARKET; POSSIBLE VOLATILITY OF
STOCK PRICE. There has been no prior market for the Company's Common Stock or
Warrants, and there can be no assurance that a public market for the Common
Stock or the Warrants will develop or be sustained after the Offering. Although
the Company has applied for quotation of the Common Stock and Warrants on the
Nasdaq Small Cap Market upon the effective date of this Prospectus, in order to
continue such quotation after the Offering, the Company must satisfy certain
maintenance criteria. The failure to meet these maintenance criteria may result
in the Common Stock or Warrants no longer being eligible for quotation on Nasdaq
and trading, if any, of the Common Stock and the Warrants would thereafter be
conducted in the non-Nasdaq over-the-counter market. As a result of such
delisting, an investor may find it more difficult to dispose of or to obtain
accurate quotations as to the market value of the Company's securities. In
addition, if the Common Stock was to become delisted from trading on Nasdaq and
the trading price of the Common Stock was to fall below $5.00 per share, trading
in the Common Stock would also be subject to the requirements of certain rules
promulgated under the Securites Exchange Act of 1934, as amended (the "Exchange
Act"), which require additional disclosure by broker-dealers in connection with
any trades involving a stock defined as a penny stock (generally, any non-Nasdaq
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors (generally institutions). For these types of
transactions, the broker-dealer must make a special suitability determination
for the purchaser and must have received the purchaser's written consent to the
transaction prior to sale. The additional burdens imposed upon broker-dealers by
such requirements may discourage them from effecting transactions in the Common
Stock and Warrants, which could severely limit the liquidity of the Common Stock
and Warrants and the ability of purchasers in this offering to sell the Common
Stock and Warrants in the secondary market.
The public offering prices of the Securities and the exercise price and
other terms of the Warrants being offered hereby were established by negotiation
between the Company and the Underwriters and may not be indicative of prices
that will prevail in the trading market. In the absence of an active trading
market, purchasers of the Common Stock or the Warrants may experience
substantial difficulty in selling their securities. The trading price of the
Company's Common Stock and Warrants is expected to be subject to significant
fluctuations in response to variations in quarterly operating results, changes
in analysts' earnings estimates, announcements of technological innovations by
the Company or its competitors, general conditions in the golf club industry and
other factors. In addition, the stock market is subject to price and volume
fluctuations that affect the market prices for companies and that are often
unrelated to operating performance. See "Underwriting."
WARRANT PRICE AND EFFECT ON TRADING PRICE OF COMMON STOCK. The Warrants
being offered hereby have an exercise price below the initial offering price of
the Common Stock. It therefore may be possible that a substantial number of the
Warrants will be exercised within a short time following the Effective Date of
the Offering. Such exercise would be dilutive to the net tangible book value of
the Common Stock being offered hereby. In addition, purchasers in the public
offering may be willing to sell their Common Stock into the public market at
prices less than the initial offering price because of gains in the market price
of or realized on the sale or exercise of their Warrants. Such sales could
adversely affect the public market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE. Sales of the Company's Common Stock in the
public market after this Offering could adversely affect the market price of the
Common Stock or the Warrants. See "Shares Eligible for Future Sale."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
WARRANTS. The Company will be able to issue shares of its Common Stock upon
exercise of the Warrants only if there is then a current prospectus relating to
such Common Stock and only if such Common Stock is qualified for sale or exempt
from qualification under applicable state securities laws of the jurisdictions
in which the various holders of
11
<PAGE>
the Warrants reside. The Company has undertaken to file and keep current a
prospectus which will permit the purchase and sale of the Common Stock
underlying the Warrants, but there can be no assurance that the Company will be
able to do so. Although the Company intends to seek to qualify for sale the
shares of Common Stock underlying the Warrants in those states in which the
securities are to be offered, no assurance can be given that such qualification
will occur. The Warrants may be deprived of any value and the market for the
Warrants may be limited if a current prospectus covering the Common Stock
issuable upon the exercise of the Warrants is not kept effective or if such
Common Stock is not qualified or exempt from qualification in the jurisdictions
in which the holders of the Warrants then reside. See "Underwriting."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF WARRANTS. The Warrants may be
redeemed by the Company at any time at a redemption price of $.01 per Warrant on
not less than 30 days' prior written notice if the last sale price of the Common
Stock has been at least 162.5% of the then-exercise price of the Warrants
(initially $6.50) for the 20 consecutive trading days during a period ending on
the third trading day prior to the date of the notice of redemption. Notice of
redemption of the Warrants could force the holders to exercise the Warrants and
pay the exercise price at a time when it may be disadvantageous for them to do
so, to sell the Warrants at the current market price when they might otherwise
wish to hold the Warrants, or to accept the redemption price which would be
substantially less than the market value of the Warrants at the time of
redemption. See "Description of Securities--Warrants."
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS AND POTENTIAL ISSUANCES OF BONUS
SHARES. As of the date of this Prospectus, there are outstanding options to
purchase an aggregate of 250,000 shares of Common Stock at per-share exercise
price of $4.75 and the Company has reserved 200,000 shares for issuance under
the 1996 Employee Stock Option Plan. In addition, in connection with this
Offering, the Company will issue the Warrants and the Underwriters' Purchase
Option. The exercise of such outstanding options, Warrants and Underwriters'
Purchase Option would dilute the then-existing stockholders' percentage
ownership of the Company's stock, and any sales in the public market of Common
Stock underlying such stock options could adversely affect prevailing market
prices for the Common Stock. Moreover, the terms upon which the Company would be
able to obtain additional equity capital could be adversely affected since the
holders of such securities can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital on terms
more favorable to the Company than those provided in such stock options. The
Company's employment agreement with Rudy A. Slucker, its Chairman and Chief
Executive Officer provides that Mr. Slucker is entitled to receive a bonus equal
to 10% of the Company's pre-tax net income starting with the year ending
December 31, 1997. Such bonus will be payable in the form of Common Stock of the
Company. The issuance of these additional shares could also have an adverse
effect on the liquidity of the Company's Common Stock. See "Management--
Employee Benefit Plans," "Certain Transactions," "Description of Securities" and
"Underwriting."
POTENTIAL ADVERSE EFFECTS OF PREFERRED STOCK ISSUANCE. The Board of
Directors has the authority, without further stockholder approval, to issue up
to 1,000,000 shares of preferred stock, in one or more series, and to fix the
number of shares and the rights, preferences and privileges of any such series.
The issuance of preferred stock by the Board of Directors could affect the
rights of the holders of the Common Stock. For example, such an issuance could
result in a class of securities outstanding that would have dividend,
liquidation, or other rights superior to those of the Common Stock or could make
a takeover of the Company or the removal of management of the Company more
difficult. There are no issued and outstanding shares of preferred stock, and
the Board of Directors does not currently intend to issue any such shares. See
"Description of Securities--Preferred Stock."
DIVIDENDS UNLIKELY. The Company has never declared or paid dividends on its
Common Stock and currently does not intend to pay dividends in the foreseeable
future. The payment of dividends in the future will be at the discretion of the
Board of Directors. The Company's credit facility with NationsBank prohibits the
payment of dividends while any amount is outstanding under the credit facility.
See "Dividend Policy."
12
<PAGE>
DILUTION
The difference between the initial public offering price per share of Common
Stock and the pro forma net tangible book value per share of Common Stock after
this Offering constitutes the dilution per share of Common Stock to investors in
this Offering (after giving effect to the forgiveness by certain stockholders of
the Company of $1,083,326 of indebtedness as of September 30, 1996 and to the
Reincorporation). Net tangible book value per share is determined by dividing
the net tangible book value (total tangible assets less total liabilities) by
the number of outstanding shares of Common Stock. As of September 30, 1996, the
Company had a pro forma net tangible book value of $(688,379), or approximately
$(.92) per share of Common Stock (based on 750,000 shares of Common Stock
outstanding at September 30, 1996). After giving effect to the sale of the
Securities offered hereby (less underwriting discounts and estimated expenses of
this Offering) and the application of the net proceeds therefrom, the pro forma
net tangible book value at that date would have been $3,814,046, or
approximately $2.01 per share. This represents an immediate increase in net
tangible book value of approximately $2.93 per share to existing stockholders
and an immediate dilution of approximately $2.84 per share or approximately 59%
to investors in this Offering.
The following table illustrates the per share dilution without giving effect
to operating results of the Company subsequent to September 30, 1996.
<TABLE>
<S> <C> <C>
Public offering price of the Securities....................... $ 4.85
Pro forma net tangible book value before Offering........... $ (.92)
Increase attributable to investors in this Offering......... $ 2.93
---------
Pro forma net tangible book value after Offering.............. $ 2.01
---------
Dilution to investors in this Offering........................ $ 2.84
---------
---------
</TABLE>
The following table summarizes the number and percentage of shares of Common
Stock purchased from the Company, the amount and percentage of consideration
paid, and the average price per share paid by existing stockholders (after
giving effect to the forgiveness by certain stockholders of the Company of
$1,083,326 of indebtedness as of the date of this Prospectus) and by investors
pursuant to this Offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
----------------------- ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ----------- ------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................................ 750,000 39.5% $ 1,083,551 16.3% $ 1.44
Investors in this Offering........................... 1,150,000 60.5 5,577,500 83.7 $ 4.75
---------- ----- ------------ -----
Total............................................ 1,900,000 100.0% $ 6,661,051 100.0%
---------- ----- ------------ -----
</TABLE>
The foregoing analysis assumes no exercise of the Warrants or outstanding
options or the Underwriters' Purchase Option (or the Warrants included in the
Underwriters' Purchase Option). In the event any such options or warrants are
exercised, the percentage ownership of the investors in this Offering will be
reduced and the dilution per share of Common Stock to investors in this Offering
will increase.
13
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Securities offered
hereby, after deducting underwriting discounts and commissions and estimated
expenses payable by the Company in connection with this offering, are estimated
to be approximately $4.5 million (approximately $5.25 million if the
Underwriters' over-allotment option is exercised in full). The Company intends
to apply the net proceeds approximately as follows:
<TABLE>
<CAPTION>
APPLICATION OF PROCEEDS AMOUNT PERCENT
- ------------------------------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
Marketing and advertising.................................................................. $ 2,200,000 48.9%
Repayment of debt.......................................................................... 300,000 6.7
Manufacturing operations................................................................... 250,000 5.5
Research and development................................................................... 100,000 2.2
Working capital and general corporate purposes............................................. 1,652,425 36.7
------------ -----
Total................................................................................ $ 4,502,425 100%
------------ -----
------------ -----
</TABLE>
Approximately $2,200,000 of the net proceeds is allocated for marketing and
advertising purposes, including the development and placement of advertisements
in various forms of media, including print and television, and making payments
to touring professional golfers in consideration of their endorsements of the
Company's products, which will include payment of approximately $320,000 over
the next twelve months under the Company's advertising agreement with the Golf
Channel Inc.-Registered Trademark- (the "Golf Channel") and which may include
payments under the Company's "Player Pool" program under which the Company will
provide rewards on a weekly basis to professional golfers who win tournaments
using TearDrop golf clubs. See "Business--Strategy" and "--Sales and Marketing."
Approximately $300,000 of the net proceeds will be used to repay
indebtedness plus interest to NationsBank that is due December 31, 1996. The
debt accumulates interest at the per annum rate equal to the prime rate plus 1%.
Although the Company has designated a portion of the proceeds of this Offering
to repay the loan, it may obtain alternative financing from another lender and
it may be expected that any such debt will also be secured by the assets of the
Company. In the event that alternative financing is obtained from another
lender, the Company will use that portion of the proceeds of this Offering
allocated to repay NationsBank for working capital and general corporate
purposes.
Approximately $250,000 of the net proceeds of this Offering is allocated for
improving the Company's manufacturing and assembly operations to meet
anticipated growth. In addition, the Company may use such proceeds for the
development of facilities capable of manufacturing certain of its TearDrop club
heads.
The Company is continually seeking to improve the design of the TearDrop
putters and, in addition, is seeking to develop additional golf clubs such as
wedges and drivers. Accordingly, approximately $100,000 of the net proceeds of
this Offering is allocated for the development and/or licensing of new
technologies for golf club design.
The balance of the net proceeds of this Offering is allocated for working
capital and general corporate purposes including, among other things, payment of
expenses incurred or to be incurred by the Company in connection with its
operations, costs associated with additional inventory, payment of general
corporate expenses, including salaries of additional officers and financial and
management personnel, and the fee of $60,000 payable to the Underwriters for
financial consultant services.
If the Underwriters exercise the over-allotment option in full, the Company
will realize additional net proceeds of approximately $725,000, of which up to a
maximum of $400,000 will be used to repay certain indebtedness owed by the
Company to its Chairman and Chief Executive Officer, Rudy A. Slucker, and the
next $100,000 of which will be used to repay certain indebtedness to other
current stockholders of the
14
<PAGE>
Company (including an additional $40,000 to Mr. Slucker), and any remaining
amount will be added to the Company's working capital. The above debt owed to
such stockholders of the Company is payable with interest at the rate of 8% per
annum upon the earlier of the exercise by the Underwriters of the over-allotment
option (to the extent proceeds derived therefrom are sufficient to make
repayment) and two years from the date of this Prospectus.
If the Warrants are exercised in full, the Company will receive additional
net proceeds of approximately $4,370,000, the first $400,000 of which will be
used to repay certain additional indebtedness owed by the Company to Mr.
Slucker. This $400,000 debt owed to Mr. Slucker is payable with interest at 8%
per annum upon the earlier of the exercise of the Warrants offered hereby (to
the extent proceeds derived therefrom are sufficient to make repayment) and
three years from the date of this Prospectus.
The foregoing represents the Company's best estimate of the allocation of
the net proceeds of this Offering based upon the Company's currently
contemplated operations, business plans, as well as current economic and
industry conditions, and is subject to reapportionment among the categories
listed above or to new categories in response to, among other things, changes in
the Company's plans, unanticipated future revenues and expenditures, and
unanticipated industry conditions. The amount and timing of expenditures will
vary depending on a number of factors, including, without limitation, the
results of operations and changing industry conditions. To the extent deemed
appropriate by management, the Company may acquire fully developed products or
businesses that are complementary to the Company's operations and which, in the
opinion of management, facilitate the growth of the Company and enhance the
market penetration or reputation of its products. To the extent that the Company
identifies any such oportunities, an acquisition may involve the expenditure of
significant cash or the issuance of Common Stock. Any expenditure of cash will
reduce the amount of cash available for working capital or marketing and
advertising activities. Although the Company has been engaged in discussions
with a number of potential candidates, the Company currently has no commitments,
understandings or arrangements with respect to any such acquisition. The
Company's current corporate policy would not prohibit any such transactions
between the Company and any business or company in which management or any
affiliate or associate of any member of management have an ownership interest,
but would require that the terms of any such transaction be on terms no less
favorable to the Company as those that could be obtained from an independent
third party. No such transaction is currently under consideration and, in any
case, would require the approval of the Company's audit committee, a majority of
which is comprised of independent directors.
Although the Company believes that the proceeds from this Offering will be
sufficient for the Company to maintain its operations as planned for at least
the next 18 months, if the Company's sales do not increase substantially, it
will likely need additional financing after such time in order to continue
operations. There can be no assurance that any additional financing will be
available to the Company on acceptable terms, if at all, when required by the
Company. The inability to obtain additional financing when needed would have a
material adverse effect on the Company's operating results, and as a result, the
Company could be required to significantly reduce or suspend its operations,
seek a merger partner or sell some or substantially all of its assets. See
"Management's Discussion and Analysis of Financial Condition and Plan of
Operations."
Proceeds not immediately required for the purposes described above will be
invested in United States government securities, short-term certificates of
deposit, money market funds or other investment grade short-term
interest-bearing investments.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996 (i) on a historical basis, (ii) pro forma, to reflect the
forgiveness of certain debt by certain current stockholders of the Company and
the Reincorporation and (iii) pro forma, as adjusted to give effect to the sale
of the 1,150,000 shares of Common Stock and 1,150,000 Warrants offered hereby
and the application of the estimated net proceeds therefrom. See "Use of
Proceeds."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
-----------------------------------
PRO FORMA
PRO AS
ACTUAL FORMA(1) ADJUSTED(1)(2)
---------- ---------- -----------
<S> <C> <C> <C>
Stockholders' loans....................................... $1,713,860 $ 630,534 $ 630,534
---------- ---------- -----------
Obligation under capital lease, less current portion...... 64,172 64,172 64,172
---------- ---------- -----------
Stockholders' equity (deficit):
Common stock, $1.00 par value, authorized 100,000
shares, issued and outstanding 225 shares............. 225
Pro forma-preferred stock, $.01 par value, authorized
1,000,000 shares, issued and outstanding none.........
Pro forma-common stock, $.01 par value, authorized
10,000,000 shares, issued and outstanding 750,000
shares and 1,900,000 shares as adjusted............... 7,500 19,000
Capital in excess of par value.......................... 1,076,051 5,569,976
Accumulated deficit..................................... (1,741,286) (1,741,286) (1,741,286)
---------- ---------- -----------
Total stockholders' equity (deficit)................ (1,741,061) (657,735) 3,844,690
---------- ---------- -----------
Total capitalization.............................. $ 36,971 $ 36,971 $4,539,396
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
- ------------------------
(1) Gives effect to the forgiveness by certain stockholders of the Company of an
aggregate of $1,083,326 of indebtedness and the Reincorporation. See Note 2
of Notes to Financial Statements for an explanation of the determination of
the number of shares used in computing pro forma net loss per share.
(2) Reflects the receipt by the Company of the net proceeds from the sale of the
Securities offered hereby and the application thereof.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and it is currently the intention of the Company not to pay cash dividends
on its Common Stock in the foreseeable future. Management intends to reinvest
earnings, if any, in the development and expansion of the Company's business.
Any future declaration of cash dividends will be at the discretion of the Board
of Directors and will depend upon the earnings, capital requirements and
financial position of the Company, general economic conditions and other
pertinent factors. The Company's credit facility with NationsBank prohibits the
payment of dividends while any amount is outstanding under the credit facility.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND PLAN OF OPERATIONS
OVERVIEW
The Company introduced its first product, the TearDrop putter, in 1993 and
commenced significant marketing and sales activities in 1994. Since the
introduction of the TearDrop putter, the Company has expanded its product line
to include six additional putters and three wedges. A significant percentage of
sales made during the introductory phase of the Company's initial products were
made at discounted prices as part of the Company's marketing strategy to
introduce and increase market awareness of the Company and its clubs.
In order to achieve profitability, the Company will be required to address
numerous issues, including, among others: (i) increasing market awareness of,
and demand for, its existing products, (ii) effectively introducing, over time,
additional innovative golf clubs to the market, (iii) accurately gauging demand
for its products, (iv) determining viable price points for such products, (v)
maintaining and strengthening its supply channels, (vi) designing efficient
manufacturing and assembling systems to meet demand for its products, and (vii)
continuing to build efficient channels of distribution. There can be no
assurance that the Company will ever achieve profitability, or that if such
profitability is obtained, that it can be maintained.
The Company believes that an important element for introducing and
increasing awareness of its golf clubs is the building of a corps of touring
professional golfers that will endorse, use and win with the Company's clubs.
Accordingly, as an integral part of its marketing strategy, the Company
continually seeks to obtain professional endorsements of its clubs. Typically,
the Company's agreements with its endorsing professionals provide for the use of
the professionals' names in connection with the marketing of the Company's clubs
and the use of the clubs by such professionals in tournament play. The effect of
a particular professional's endorsement on the successful marketing of the
Company's clubs, and the heightening of awareness of the Company's name, may be
directly related to the success of such professional in tournament play. To
date, only a limited number of touring professional golfers have signed
endorsement agreements with the Company. In order to succeed with its marketing
strategy, the Company will be required to enter into endorsement agreements with
additional touring professional golfers.
The Company does not maintain an in-house research and development or design
department. Rather, the Company works closely with component manufacturers,
independent design consultants and the Company's endorsing golf professionals in
the design and development of new products and product improvements.
Accordingly, the Company does not incur regular, ongoing expenses relating to
salaries of in-house design personnel, but does incur design consulting fees
when a new club or product improvement is in the development phase. The Company
does not have any agreements with independent design consultants, but has
historically been able to retain the services of qualified designers when
needed. The inability on the part of the Company to retain qualified design
consultants possessing suitable technical expertise when needed in the future
could result in delays in the introduction of a new product or product
improvement, which could adversely affect sales.
The Company does not manufacture the components required to assemble its
golf clubs, relying instead on a small number of component suppliers. The
Company does not have supply agreements with any of its current suppliers.
Therefore, the Company's success will be dependent, in part, on maintaining its
relationships with its existing suppliers and developing relationships with new
suppliers.
The Company believes that there are readily available alternative sources
for each of the components comprising its clubs, although there can be no
assurance of this. Any significant delay or disruption in the supply of
components from the Company's suppliers or any quality problems with the
suppliers' components would delay the Company's delivery of finished products
and adversely affect current sales and could adversely affect future sales
potential if distributors lose faith in the Company's ability to deliver a high-
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quality product on a timely basis. Further, given the highly seasonal nature of
the golf equipment industry, such adverse affect would be exacerbated should any
such supply delay or quality problem occur immediately prior to or during the
six-month period ending June 30 (the period during which sales of golf equipment
have historically been the highest).
Under an agreement with Wayne R. Wooten, the designer of the original
TearDrop putter, the Company has agreed to pay royalties on the sale of putters
developed, designed or modified by Mr. Wooten. The Company has agreed to pay Mr.
Wooten $1.00 per putter for each of the first 40,000 putters sold by the Company
during each of the one-year periods commencing on July 27, 1995, July 27, 1996
and July 27, 1997. The Company is required to pay Mr. Wooten $2.00 per putter
for each putter in excess of 40,000 sold by the Company during each of the
respective one-year periods. The Company is also required to pay Mr. Wooten
$2.00 for every "cavity back" putter and $3.00 per putter for each new putter
design or modification or other product developed or designed by Mr. Wooten and
accepted for production by the Company for a period of four years following the
date of the sale of such putter. Additionally, the Company is required to pay
Mr. Wooten $5,000 each time any major professional golfing event or tournment is
won by a player using a TearDrop putter. Fred K. Hochman, a director and
principal stockholder of the Company, provided a personal guarantee of the
Company's obligations to Mr. Wooten.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
The Company had sales of approximately $715,000 during the nine months ended
September 30, 1996 as compared to sales of approximately $821,000 during the
nine months ended September 30, 1995, a decrease of 13%. This decrease is
attributable to difficulties initially encountered by the Company in developing
the manufacturing molds for its new line of clubs introduced in late 1995, which
resulted in the Company's inability to produce and deliver clubs during the
important Spring 1996 buying season. Because of these delays, the Company was
unable to fill orders until late into Spring 1996, resulting in substantially
reduced sales during the nine months ended September 30, 1996.
The cost of sales primarily consists of amounts paid for the purchase of the
components used in the assembly of the Company's golf clubs and costs relating
to the machining and milling of such components and assemblage thereof into
finished golf clubs. Cost of sales was approximately $300,000 (42% of sales)
during the nine months ended September 30, 1996 as compared to approximately
$390,000 (48% of sales) during the nine months ended September 30, 1995. This
decline in costs is directly attributable to reduced sales during the first half
of 1996 resulting from the difficulties encountered in developing necessary
manufacturing molds. Because of the reduction in production during the nine
months ended September 30, 1996, the Company had reduced machining and milling
costs during such period. However, because the Company purchased the milling
equipment necessary for the production of the golf club heads in April 1996,
reducing the per-club manufacturing cost, there was a slight decline in cost of
sales as a percentage of sales. The Company does not expect to encounter similar
production delays during the remainder of 1996 and, accordingly, expects the
costs of sales to decrease correspondingly with increased production and sales,
if such increases occur.
During the nine months ended September 30, 1996, selling, general and
administrative expenses were approximately $668,000 (93% of sales) as compared
to approximately $645,000 (79% of sales) during the nine months ended September
30, 1995. This increase is attributable to the Company's overall growth,
including the hiring of additional marketing and sales personnel and stepped up
marketing activities.
As a result of increasing expenses and costs relating to the growth of the
Company, the Company experienced a net loss of approximately $373,000 during the
nine months ended September 30, 1996 and $293,000 during the nine months ended
September 30, 1995. The Company's inability to offset such increased costs and
expenses by increasing its sales (as a result of the aforementioned production
delays),
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resulted in the increase in net loss during the nine months ended September 30,
1996 as compared to the same period of the prior year.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company had sales of approximately $1,057,000 during the year ended
December 31, 1995 as compared to sales of approximately $785,000 during the year
ended December 31, 1994, an increase of 35%. This increase is attributable to
the Company's increased marketing efforts and greater awareness and acceptance
of the TearDrop putter, among both the print media and touring professionals.
During 1995, cost of sales was approximately $549,000 (52% of sales) as
compared to $446,000 (57% of sales) during 1994. This increase was primarily a
result of increased production of clubs to address increased sales.
Selling, general and administrative expenses consist of, among other things,
salaries, advertising expenses and endorsement fees. During 1995, these costs
were approximately $943,000 as compared to $782,000 during 1994. This increase
is attributable to the Company's overall growth, including the hiring of
additional personnel and the retention of additional endorsing golf
professionals. The Company anticipates that as it increases substantially its
marketing and sales activities, that marketing costs, including payments to
endorsing golf professionals will be substantially higher during the next 12
months than in the past.
As a result of costs and expenses associated with the growth of the Company
and the ramp up of production, the Company experienced a net loss of
approximately $542,000 during 1995 and a net loss of approximately $552,000
during 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of approximately $160,000 at
September 30, 1996. Since inception, the Company's internally generated cash
flow has not been sufficient to finance operations. Further, the Company has
experienced severe working capital shortfalls in the past, which have restricted
the Company's ability to conduct its business as anticipated. As a result, the
Company has been substantially dependent upon loans from its current
stockholders in order to maintain its operations. Upon the closing of the
Offering, certain stockholders will forgive approximately $1,100,000 of debt
owed by the Company to such stockholders. Of the remaining debt, (i) $500,000
will be payable with interest at the rate of 8% per annum, upon the earlier of
the exercise by the Underwriters of the over-allotment option (to the extent
proceeds derived therefrom are sufficient to make repayment) or two years from
the date of this Prospectus, and (ii) $400,000 will be payable upon the earlier
of the date of exercise of the Warrants offered hereby (to the extent proceeds
derived therefrom are sufficient to make repayment) and three years from the
date of this Prospectus.
The Company had accounts receivable, less allowance for doubtful accounts,
of $268,000 at September 30, 1996. The Company has provided extended payment
terms to several international distributors in order to encourage initial
purchases of its clubs. Accordingly, approximately 49% of such accounts
receivable are over 90 days old at September 30, 1996. The Company does not
anticipate that it will continue to extend such liberal payment terms. However,
as it expands its activities, it may do so again in order to increase its market
exposure. The Company has not experienced significant collection problems or
credit risks in the past.
The Company has borrowed $300,000 from NationsBank, which is payable on
December 31, 1996, with interest at the per annum rate of prime plus 1%.
Although the Company has designated a portion of the proceeds of this Offering
to repay such loan, it may seek an alternative line of credit with which to
repay NationsBank. No assurance can be given that the Company will identify or
obtain any such line of credit.
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<PAGE>
The Company has entered into an advertising agreement with the Golf Channel
which commences January 1, 1997 and ends on December 31, 1998. The agreement
provides that the Company will pay $770,000 to the Golf Channel over the term of
the agreement for the broadcast of commercial advertising during, and
sponsorship of certain television programming produced by the Golf Channel.
Although the Company believes that the proceeds from this Offering will be
sufficient for the Company to maintain its operations as planned for at least
the next 18 months, if the Company's sales do not increase substantially, it
will likely need additional financing after such time in order to continue
operations. There can be no assurance that any additional financing will be
available to the Company on acceptable terms, if at all, when required by the
Company. The inability to obtain additional financing when needed would have a
material adverse effect on the Company's operating results, and, as a result,
the Company could be required to significantly reduce or suspend its operations,
seek a merger partner or sell some or all of its assets.
SEASONALITY
The purchasing decisions of most customers are typically made in the autumn
and a vast majority of sales are expected to occur during the first six months
of the year. In addition, quarterly results may vary from year to year due to
the timing of new product introductions, orders and sales, advertising
expenditures, promotional periods and shipments. Accordingly, comparisons of
quarterly information of the Company's results of operations may not be
indicative of the Company's overall annual performance.
FORWARD LOOKING STATEMENTS
When used in this and in future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases and in oral statements
made with the approval of an authorized executive officer of the Company, the
words or phrases "will likely result," "expects," "plans," "will continue," "is
anticipated," "estimated," "project" or "outlook" or similar expressions
(including confirmations by an authorized executive officer of the Company of
any such expressions made by a third party with respect to the Company) are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements, each
of which speak only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. Such
risks and other aspects of the Company's business and operations are described
in "Risk Factors." The Company has no obligation to publicly release the result
of any revisions which may be made to any forward-looking statements to reflect
anticipated or unanticipated events or circumstances occurring after the date of
such statements.
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BUSINESS
GENERAL
The Company designs, develops and markets high-quality, premium-priced golf
clubs based on its proprietary technologies, including its TearDrop line of
putters and its new line of Spin Master wedges. The TearDrop putter is used by
professional golfers on the Professional Golf Association ("PGA") Tour, the
Senior PGA Tour and the Nike Tour, including Brett Ogle (1995 Hawaiian Open and
Pebble Beach Golf Tournament Champion), Dustin Phillips, Dino Lucchesi, Dennis
Zinkon and P.J. Cowan. The Tear Drop putter was reported in 1995 as having
achieved a top-ten ranking on both the PGA Tour and the Senior PGA Tour for
top-ten finishes among all putters used. The Company believes that its products
address the demand for innovative short-game clubs that has not been adequately
met by the golf equipment industry, which recently has stressed technological
advancement in the design of drivers.
To exploit the niche for innovative short-game clubs, the Company introduced
its first product, the TearDrop putter, in 1993, and has since developed and
introduced six additional putters, all based on the TearDrop putter technology.
The Company broadened its product line in Spring 1996 with the introduction of
its Spin Master Wedges.
The Company estimates that gross retail sales of golf clubs in the United
States has grown from approximately $2.1 billion in 1986, to approximately $5.0
billion in 1994. With increasing sales, the golf club industry has adopted
dramatic new technologies in club design, materials and manufacturing processes
resulting in the introduction of numerous new club designs. Most of the
innovations have been in the design and construction of drivers. Manufacturers
have stressed evolving materials in the shafts and the club head (even
increasing the size of the club head) to enable players to hit their drives
farther. However, while it is estimated by the Company that between 10 to 12
million putters were purchased worldwide during 1995, there have been relatively
few advances in the design and manufacture of putters and other short-game
clubs.
STRATEGY
The Company's objective is to become a leading supplier of high-quality
specialty clubs, including putters and wedges, and, in the longer term, drivers.
To achieve this objective, the Company is focusing on increasing product
awareness, as well as enhancing the reputation of its products; increasing
market penetration of its products; and continuing the development and
introduction of innovative clubs and refinement and improvement of existing
products. An integral part of this strategy is the substantial expansion of the
Company's marketing and advertising efforts for which the Company intends to use
a substantial portion of the proceeds of this Offering. The Company believes
that golfers tend to purchase specialty clubs, such as putters, wedges and
drivers, more frequently than other clubs since these clubs may be purchased
separately and need not necessarily match a set. The Company will focus its
initial efforts on the TearDrop putters and Spin Master wedges.
EXPANDED MARKETING. The Company's domestic marketing strategy targets
on-course golf pro shops and selected off-course specialty stores and will
include print advertising, television commercials and infomercials and other
promotional activities. An important feature of the Company's overall marketing
effort includes the endorsement of its products by touring professional golfers
who will demonstrate the effectiveness of the TearDrop putter and provide
valuable exposure. The Company's domestic marketing strategy targets on-course
golf pro shops and selected off-course specialty stores and includes print
advertising. An important feature of the Company's overall marketing effort
includes the endorsement of its products by touring professional golfers who
will demonstrate the effectiveness of the TearDrop putter and provide invaluable
exposure. The Company intends to use a substantial portion of the proceeds of
this Offering for the expansion of its advertising and marketing activities,
including the production and placement of television commercials, infomercials
and print advertisements and the expansion of the corps of touring pros
endorsing the Company's clubs. The Company also intends to expand its line of
clubs by acquiring or licensing advanced technologies for other specialty clubs,
including drivers.
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HIGH-QUALITY PRODUCTION. The Company assembles all of its products at its
corporate headquarters in Hilton Head Island, South Carolina. After receiving
the components for its products, including clubheads, shafts and grips, the
Company's production personnel review the components for quality control and
assemble the components to exacting specifications. The Company intends to
expand its manufacturing capability by purchasing additional club head milling
machines and overseeing the manufacturing and production of the club heads
itself. This would allow the Company to reduce its costs as well as maintain
more control over the manufacturing process. See "--Manufacturing and Assembly."
CONTINUED DEVELOPMENT OF INNOVATIVE CLUBS. The Company intends to continue
to seek innovative technologies to develop additional specialty clubs, and
eventually, to offer a full line of golf clubs and related equipment. The
Company intends to form a Professional Advisory Board made up of touring
professional golfers to provide design and development advice to the Company for
the development of new products and the improvement of its existing products.
PRODUCTS
TEARDROP PUTTERS
The Company currently manufactures and markets seven putters. The Company's
TearDrop putters are manufactured with the Company's exclusive roll face head
distinguishing them from most other putters, which have a standard flat face.
With a standard flat faced putter, if a golfer twists his wrist forward, he will
tend to hit the ball down into the green, causing it to bounce slightly as it
travels forward. This slight bounce tends to alter the true trajectory of the
ball rolling towards the cup. With the same standard flat faced putter, if the
golfer twists his wrist backward, he will tend to impart backspin on the ball,
causing it to skid slightly as it begins its roll, also affecting its true
trajectory. In both cases, the problem is especially pronounced on long putts,
when the ball is struck harder. The TearDrop putter, however, is designed to
strike the ball directly on or slightly below the center of the ball, which
eliminates most skidding and develops a high overspin, resulting in a superior
roll for a more precise shot. The rounded barrel of the TearDrop roll face
putter is designed to keep ball-to-club contact and the angle of impact
constant.
During assembly, the TearDrop putter is balanced by hand using the Company's
face weighting system to provide uniform weighting across the face of the
putter, providing for a larger "sweet spot." The weighting system is designed to
allow a golfer to strike the ball on a straighter line rather than with a semi-
circular motion, also encouraging a steadier, more constant stroke. In addition,
the heavy milled aluminum-titanium alloy head is designed to slow a golfer's
backswing and encourage acceleration all the way through the moment of impact.
In addition, the TearDrop design, with its rounded fin, helps prevent stubbing
of the club on the swing and follow-through.
Each of the TearDrop putter models incorporates the roll face into different
putter designs to accommodate golfer's varying tastes, preferences and habits.
The original TearDrop design was invented by one of the Company's founders and
further developed by its current management. The designs for the subsequent
models were developed by the Company with assistance and input from its touring
professionals, its component manufacturers and independent design consultants.
The Company does not have any agreements with golf club designers, but believes
that to the extent any services may be needed, designers having suitable
technical design expertise may be located. However, if the Company is unable to
retain qualified experts who may be able to devote the necessary attention
during the time required, or if the cost proves to be too high, the Company may
be unable to develop new products or improved products on a cost effective or a
timely basis. The Company's agreement with Wayne R. Wooten, the designer of the
original TearDrop putter, provides that the Company is obligated to pay Mr.
Wooten a royalty on the sales of certain models. These royalties range from
$1.00 to $3.00 per club.
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The following is a list of the seven TearDrop putters currently manufactured
and marketed by the Company:
ORIGINAL TEARDROP--The Original TearDrop was first introduced in 1993 and
was refined in 1996. The TearDrop features the roll face to eliminate skid and
produce a purer roll. It is precision milled from titanium-aluminum alloy and
has a horizontally hand-weighted and face balanced head to eliminate stubbing
and enhance control.
LADY TEARDROP--The Company's woman's club is designed and weighted
especially for women with a specifically developed lighter weighting system for
more control and a better feel for women.
TEARDROP TOUR II--The TearDrop Tour II was designed specifically in response
to input provided by certain of the Company's touring pros, and has a slightly
modified shape and less pronounced roll, for use on faster, better kept greens.
TEARDROP MALLET--The Company's mallet was designed in response to popular
demand for a wide putter, with horizontal as well as heel and toe weighting and
the Company's roll face for more stable support.
OVERSIZED TEARDROP--The Company's long putter is available in 48 inch and 52
inch lengths. This club is the club used by the Company's primary sponsor, Brett
Ogle, the winner of the Pebble Beach and Hawaiian Open Championships. The
Oversized TearDrop was remodeled in 1996, primarily as a result of Mr. Ogle's
input.
CLASSIC I AND II--The Company designed the Classic series of putters in
response to demand for a putter with more visual similarity to classic looking
putters. The Classic putter is cast from stainless steel and features
traditional heel and toe weighting and design with the Company's roll face. The
Classic II also features a semi-mallet design.
THE TEARDROP SPIN MASTER WEDGE
The TearDrop Spin Master wedge features a classic-shape stainless steel
clubhead with a coarse, abrasive titanium treated surface. The rough face
creates a greater spin, and the liquid titanium prevents the face from becoming
smooth with use. The titanium treated friction face of the Spin Master wedges
are designed to impart a backward spin on the golf ball that will help the ball
resist rolling after it hits the green. The wedges are offered in lofts of 52,
56 and 61 degrees for use as a pitching wedge, a sand wedge and a lob wedge,
respectively. Each of the wedges have a traditional shaft and grip.
SALES AND MARKETING
NATIONWIDE DISTRIBUTION NETWORK. The Company markets its clubs primarily
through sales representatives primarily to on-course golf pro shops and
specialty stores, general sporting goods stores and specialty sporting goods
stores. The Company believes that its marketing approach allows it to maintain
its high-quality reputation while at the same time generating loyalty from its
customer base. At September 30, 1996, the Company had 20 independent sales
representatives who call upon and service the needs of the on-course golf
professionals, off-course specialty store operations and sporting goods stores.
These sales representatives receive a commission on qualifying sales. All of the
sales representatives exclusively sell TearDrop putters and wedges although many
also sell apparel, bags, shoes and gloves made by other companies.
Working together with the on-course golf professionals and off-course
specialty store sales force, the independent sales representatives help
introduce and explain the various characteristics of new golf clubs, respond to
questions concerning product support, prepare customers for new product
introductions, provide liaison services to communicate delivery and special
customer needs, and obtain in-field feedback with respect to the market appeal
of the Company's and competitors' products.
The independent sales representative network is supported by the Company's
executive officers who meet with the sales representatives, customers and
potential new customers, and by technical representatives who demonstrate the
Company's golf equipment at various customer locations. While the Company
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believes that its relationships with its sales representatives and customers are
satisfactory, there can be no assurance that the Company will be able to
maintain such relationships in the future. Although the Company works closely
with its sales representatives, the Company cannot directly control such
representatives' sales and marketing activities. There can be no assurance that
these representatives will effectively manage the sale of the Company's products
or that their marketing efforts will prove effective.
CUSTOMER SERVICE AND SUPPORT. The Company believes that its relationships
with its distributors and golfing customers have contributed significantly to
its past success and should continue to enhance its prospects. The Company
supports these relationships through programs developed to select its customers
in the sale of its products.
DEMONSTRATION/LOANER PROGRAM. The Company believes that a significant
contribution to its sales effort is provided by its demonstration/loaner
program. This program generally permits each qualifying on-course golf
professional and off-course specialty store operator to purchase demonstration
clubs within the Company's product line at a discount dependent upon the number
of clubs purchased for resale. Demonstration clubs are available on the basis of
one demonstration club for each six clubs of the same model ordered. The
customer lends a "demo" set or club to the golfer for on-course trial use,
which, in management's judgment, substantially increases the probability of
purchases by the golfer who might otherwise be reluctant to purchase premium
clubs without having on-course experience with them.
INTERNATIONAL DISTRIBUTION. The Company markets its products
internationally on a limited basis through exclusive licensees and distributors.
The Company's products are sold on a non-exclusive basis through independent
distributors. International sales accounted for 21%, 30% and 41% of the
Company's gross sales in 1994, 1995 and the first nine months of 1996,
respectively. The Company intends to continue to explore opportunities to expand
its activities in international markets. To such end, the Company's distributor
in Japan produced an infomercial in Japan regarding the TearDrop putter which
the Company believes generated significant sales. The Company is not a party to
any agreements with its foreign distributors, other than purchase orders.
PRODUCT WARRANTIES. The Company supports its golf clubs with a lifetime
quality guaranty, entitling the purchaser to return the clubs for repair or
replacement. The Company has not experienced a material level of product
warranty claims.
ADVERTISING AND PROMOTION. The Company uses various forms of media,
including print advertising campaigns, to market and promote its products. In
the United States, the Company concentrates its print advertising in golf
magazines such as Golf World and Golf Illustrated and in trade magazines such as
Golf Shop Operations. The Company has entered into an advertising agreement with
the Golf Channel which commences on January 1, 1997 and ends on December 31,
1998. Pursuant to this Agreement, the Company will broadcast commercial
advertising during, and sponsor certain television programming produced by the
Golf Channel. Following this Offering, the Company intends to begin television
advertising in support of its products and to commence the production of an
infomercial. The Company's advertising spending in the first nine months of 1996
was approximately $101,000 or 14% of net sales, compared with approximately
$139,000, or 17% of net sales, in the first nine months of 1995.
The Company believes that the endorsement of its products by touring
professional golfers is an important feature of its overall marketing effort.
Brett Ogle, an internationally recognized golf professional and 1995 Hawaiian
Open and Pebble Beach Golf Tournament Champion, heads a group of touring
professionals, including Dustin Phillips, Dino Luchesi, Dennis Zinkon and P.J.
Cowan who currently use or endorse the Company's products. The agreements with
Messrs. Phillips, Luchesi, Zinkon and Cowan generally are for a one-year term
and provide for certain payments by the Company to the touring professionals in
consideration for their using a TearDrop Putter and bonuses based on tournament
performance. Mr. Ogle's agreement extends through December 31, 1998 and provides
for certain minimum payments during the years ended December 31, 1996, 1997 and
1998, and for certain bonuses based on tournament performances and sales.
Following the completion of this offering, the Company intends to develop and
institute a "Player Pool" program, under which the Company will provide rewards
on a weekly
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basis to professional players who win tournaments using TearDrop golf clubs.
With the exception of the endorsement contract with Mr. Ogle, endorsement
commitments are made on a year-to-year basis.
ASSEMBLY
The Company assembles all of its putters for the domestic market and for
sales to selected foreign markets at its 4,000 square foot corporate
headquarters in Hilton Head Island, South Carolina. Stainless steel and titanium
aluminum clubheads are cast or forged by outside suppliers utilizing
Company-owned tooling and are inspected on-site by Company representatives.
Production personnel receive and review incoming components, such as steel
shafts and grips, most of which are supplied to the proprietary specifications
of the Company. All assembly operations, including painting, stenciling and the
application of all trade dress, are completed at the corporate headquarters,
which include finishing and warehousing facilities, from which finished clubs
are shipped. In order to maintain a high level of quality control, the Company
performs numerous visual and machine inspections at various points along the
assembly process, intended to detect any non-conforming clubs or subassemblies.
The Company relies on a limited number of suppliers for materials and
clubheads. The Company's primary putter club head manufacturer manufactures club
heads at its facilities using equipment leased by the Company and provided to
the manufacturer. Under the equipment lease, the Company has the option to
purchase the manufacturing equipment at various times during the lease. They may
also remove the equipment from the manufacturer's facilities at any time. While
management believes that alternative sources of supply either exist or could be
developed, in the event that it should lose its present sources of supply for
these materials and components, or experience delays in receiving delivery from
such sources, the Company would sustain at least temporary shortages of
materials and components, which could have a material adverse effect on the
Company's operating results.
NEW CLUB DEVELOPMENT
The Company works closely with component manufacturers, independent design
consultants and touring professionals in the development of new products and the
improvement of its existing designs. The Company relies on the input and advice
of its consulting pros to modify its putters. For example, Brett Ogle was
instrumental in designing the TearDrop Pro Model. The Company intends to form a
Professional Advisory Board consisting of touring professional golfers who will
meet at least two times a year to review design plans and comment on the
Company's expansion plans, club designs and general issues regarding the
Company.
COMPETITION
The Company competes in the premium-priced game-improvement segment of the
golf club manufacturing industry. The market for premium-priced golf clubs is
highly competitive and a number of established companies compete in this market,
many of which have greater financial and other resources than the Company. The
Company's competitors include Callaway Golf Company, Kersten Manufacturing
Corporation (Ping), Taylor-Made Golf Company, Cobra Golf Incorporated and Tommy
Armour Golf Company. The Company also competes with numerous smaller,
specialized companies that may compete effectively on a regional basis.
The golf club industry is generally characterized by rapid and widespread
imitation of popular golf club designs pioneered by new or existing competitors.
Occasionally, new market entrants may develop innovative club designs which meet
with acceptance from golf club purchasers, leading to unanticipated changes in
consumer preferences. Many purchasers of premium-priced game-improvement clubs
desire golf clubs that feature the latest technological innovations and cosmetic
designs, and their purchasing decisions are often the result of highly
subjective preferences which can be influenced by many factors, including, among
others, advertising, media and product endorsement. The Company could therefore
face substantial competition from existing or new competitors that introduce and
successfully promote golf clubs perceived to offer performance advantages and
greater aesthetic appeal. The Company faces competition on the basis of price,
reputation and qualitative distinctions among available products. In
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addition, there are several manufacturers that do not currently compete with the
Company that could pose significant competition if they were to enter the market
of premium-priced high-quality clubs..
REGULATORY MATTERS
The design of new golf clubs is greatly influenced by rules and
interpretations of the USGA. Although the golf equipment standards established
by the USGA generally apply only to competitive events sanctioned by that
organization, it has become critical for designers of new clubs to assure
compliance with USGA standards. To the extent that the Company's clubs are ruled
ineligible by the USGA standards, professional golfers, including the Company's
paid touring professional golfers, will be unable to use the clubs and even
non-professional golfers will likely be unwilling to purchase them. The Company
believes that its putters all comply with USGA standards. However, the Company's
current wedges have not yet been submitted to the USGA for approval, and the
Company believes that further modifications will be necessary to bring the
wedges within USGA guidelines. No assurance can be given that the wedges or any
new products will receive USGA approval or that existing USGA standards will not
be altered in ways that adversely affect the sales of the Company's products.
The Company's facilities are subject to numerous federal, state and local
laws and regulations designed to protect the environment from waste emissions
and hazardous substances. The Company is also subject to the federal
Occupational Safety and Health Act and other laws and regulations affecting the
safety and health of employees in the production areas of its facilities. The
Company believes it is in compliance in all material respects with all
applicable environmental and occupational safety regulations.
EMPLOYEES
At June 30, 1996, the Company had six full-time employees engaged in
manufacturing and assembly, sales support and in management and administration.
The Company intends to use the proceeds from this Offering to expand
substantially its sales and marketing staff and retain personnel for certain
management positions, including a Chief Financial Officer and other
administrative personnel. The Company believes that additional manufacturing
personnel will be available as needed.
PROPRIETARY RIGHTS
The Company relies on a combination of patents, trademark and trade secret
protection to establish and protect the proprietary rights it has in its
products. The Company has been issued three patents relating to various aspects
of the TearDrop putter head. The Company's "TearDrop" trademark is registered
with the United States Patent and Trademark Office (the "U.S. Patent Office"),
and the U.S. Patent Office has issued a notice of allowance to the Company for
the trademark "Spin Master."
LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
PROPERTIES
The Company occupies 4,000 square feet of office, manufacturing and
warehouse and distribution space in Hilton Head Island, South Carolina under a
three-year lease agreement between the Company and Albert H. Politi which
terminates in November 1998. The aggregate minimum rental payments under the
lease for the years ending December 31, 1996, 1997 and 1998 are $38,400, $38,400
and $35,200, respectively. The Company conducts its corporate, research and
development, assembly, warehouse and distribution activities from these
facilities. Following the offering, the Company intends to relocate its facility
to or establish additional facilities in the New York metropolitan area, where
the Company intends to expand its executive and production capabilities. The
Company believes that such operational modifications may be completed without a
significant disruption in its current operations and within one year following
this offering.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
Rudy A. Slucker.................... 47 Chairman of the Board, President and Chief Executive Officer
John Zeravica...................... 41 Vice President
Charles A. Gerber.................. 42 Vice President
Fred K. Hochman.................... 50 Director
Jeffrey Baker...................... 41 Director
Leslie E. Goodman.................. 53 Director
</TABLE>
RUDY A. SLUCKER has served as Chairman of the Board, President and Chief
Executive Officer of the Company since September 1996. Mr. Slucker was the Chief
Executive Officer of the Atlas Group of Companies, Inc. ("Atlas"), which
imported and marketed hardware and consumer products, from 1978 until 1990, when
it was sold. Since 1990, Mr. Slucker has been a venture capital investor. He
currently serves on the board of directors and/or is a principal stockholder of
the following companies: Lilli Group, a knitwear manufacturer; The Sled Dogs
Company, a Nasdaq-listed manufacturer of sporting goods; Diplomat Optical, Inc.,
a manufacturer and distributor of designer brand eyeglass frames under the names
of Playskool, Jones New York, Coventry, Harve Benard and Kathy Ireland; Major
League Fitness, a chain of fitness centers associated with Major League Baseball
through a licensing agreement; and Babylon Enterprises and Beacon Concessions,
which, together, currently own and operate the Beacon Theater in Manhattan.
JOHN ZERAVICA became vice president of the Company in September 1996. From
1990 through May 1996, Mr. Zeravica served as Director of Operations for the
U.S. division of Bridgestone Sports, USA, Inc., an international manufacturer
and distribution of sporting goods. From 1983 to 1990, Mr. Zeravica served as
operating manager of Mizuno, USA, a sports product manufacturing and marketing
company.
CHARLES A. GERBER became vice president of the Company in October 1996. From
April 1994 through September 1996, Mr. Gerber served as vice president of sales
for Bobby Grace Golf Design Inc. From February 1993 to April 1994, Mr. Gerber
served as a director of sales for American Companies. From 1978 to 1992, Mr.
Gerber served as a regional sales manager for the Dial Corporation. From 1976 to
1978, Mr. Gerber served as a sales representative for W.H. Reynolds Company.
FRED K. HOCHMAN has been a director of the Company since its incorporation
and was its Chief Executive Officer from inception through April 1996. In
October 1996, Mr. Hochman became senior vice president of Orix-Commercial
Alliance Corporation, part of the Orix Corporation, a diversified services
corporation. From September 1992 through October 1996, Mr. Hochman served as
President of the finance division of Financial Federal Credit, Inc., a company
listed on the American Stock Exchange which specializes in the financing of
computer numerically controlled machine tools, which are the type of tools used
to manufacture the TearDrop putter heads. From November 1982 through August
1992, he was Chairman of Machine Tool Finance Corporation, a company he
co-founded, which is now a subsidiary of US Bancorporation.
JEFFREY BAKER has been a Director of the Company since September 1996. Since
1986, Mr. Baker has served as Senior Vice President of GoodTimes Entertainment,
where he is responsible for licensing, marketing and merchandising of video
products. Mr. Baker's prior experience includes more than twelve years of
service in various marketing and sales positions including marketing manager for
Prodigy Services, director of national account sales for RCA Video Disc,
director of video sales for Pickwick International and regional sales manager
for Data Packaging Corp.
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<PAGE>
LESLIE E. GOODMAN has been a director of the Company since November 1996.
From January 1996 through November 1996, Mr. Goodman served as North Jersey Area
President of First Union National Bank overseeing consumer and commercial
banking in northern New Jersey. Mr. Goodman also served as a senior executive
vice president of First Union Corporation. From January 1990 through December
1995, Mr. Goodman served as a member of the Office of the Chairman of First
Fidelity Bancorporation overseeing the Community Business Bank, Corporate and
Institutional Trust. Mr. Goodman was a member of the board of directors of First
Fidelity Bancorporation from January 1990 through December 1995. Mr. Goodman
served as President of First Fidelity Bank, N.A., New Jersey from September 1990
to January 1994. From 1988 to 1990, Mr. Goodman served as chairman and chief
executive officer of Fidelity Bank, Philadelphia, a subsidiary of First Fidelity
Bancorporation. Mr. Goodman currently is a member of the board of directors of
Wawa Inc., the board of governors of the Hackensack Medical Center and the board
of trustees of Rutgers University.
DIRECTOR COMPENSATION
The Company intends to compensate directors $500 per meeting attended.
EXECUTIVE COMPENSATION
No executive officer of the Company received cash compensation in excess of
$100,000, or stock options or other long-term compensation during 1995.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Rudy A. Slucker
which commences on the consummation of this Offering and expires on December 31,
1999. Pursuant to the agreement, Mr. Slucker will serve as the Company's Chief
Executive Officer and President for an annual salary of $175,000. Mr. Slucker
will also be entitled to receive bonuses at the discretion of the Board of
Directors and in accordance with certain performance criteria. The employment
agreement also provides that Mr. Slucker is entitled to receive a bonus equal to
10% of the Company's pre-tax net income starting with the year ending December
31, 1997. Such bonus will be payable in the form of Common Stock of the Company.
Mr. Slucker will also be entitled to a cash payment sufficient to satisfy any
income tax consequences related to the issuance of such bonus shares. The
agreement further provides that Mr. Slucker will not engage in activities
competitive with the Company for a period of two years after the expiration of
his employment agreement. In the event that the Company terminates Mr. Slucker's
employment without cause, such provision would not apply.
The Company has also entered into an employment agreement with John
Zeravica. Pursuant to the agreement, Mr. Zeravica will serve as Vice President
of the Company for an annual salary of $100,000. The agreement with Mr. Zeravica
may be terminated either by the Company or Mr. Zeravica upon two weeks notice.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation limits the liability of directors
to the maximum extent permitted by Delaware law. The Company's By-laws provide
that the Company shall indemnify its directors and executive officers and may
indemnify its other officers, employees, agents and other agents to the fullest
extent permitted by law. The Company's By-laws also permit the Company to secure
insurance on behalf of any officer, director, employee or other agent for any
liability arising out of his or her actions in such capacity, regardless of
whether the By-laws would permit indemnification. Although the Company does not
currently maintain liability insurance for its officers and directors, the
Company's By-laws provide that the Company may purchase and maintain such
insurance.
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The Company has entered into indemnification agreements with each of its
executive officers and directors.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where the Company currently
anticipates indemnification will be required.
AUDIT COMMITTEE
The Board of Directors has an audit committee comprised of Jeffrey Baker and
Leslie E. Goodman. The Audit Committee reviews the results and scope of the
audit and other services provided by the Company's independent accountants and
all transactions between the Company and any of its officers, directors or
principal stockholders.
STOCK OPTION PLANS
On October 18, 1996, the Board of Directors and the stockholders of the
Company adopted the 1996 Employee Stock Option Plan ("Plan") and reserved
200,000 shares of Common Stock for issuance thereunder. The Plan provides for
the granting to employees (including employees who are also directors and
officers) of options intended to qualify as incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended
("Code"), and for the granting of nonstatutory stock options to employees and
consultants. The Plan is currently administered by the entire Board of Directors
of the Company.
The exercise price per share of incentive stock options granted under the
Plan must be at least equal to the fair market value of the Common Stock on the
date of grant. In addition, in accordance with the Underwriting Agreement
relating to this Offering, the Company has agreed not to grant any options under
the Plan with an exercise price per share less than the initial public offering
price of the Common Stock. With respect to any participant who owns shares
representing more than 10% of the voting power of all classes of the Company's
outstanding capital stock, the exercise price of any incentive or nonstatutory
stock option must be equal to at least 110% of the fair market value on the
grant date, and the maximum term of the option must not exceed five years. The
terms of all other options granted under the Plan may not exceed ten years. Upon
a merger of the Company, the options outstanding under the Plan will terminate
unless assumed or substituted by the successor corporation. To date, no options
have been granted under the Plan.
OTHER OPTIONS
On October 21, 1996, the Company granted five-year options (outside of the
Plan) to acquire 250,000 shares of Common Stock for $4.75 per share to Rudy A.
Slucker, the Chairman of the Board and Chief Executive Officer of the Company.
In addition, the Company may grant five-year options to purchase up to an
aggregate of 250,000 shares of Common Stock for $4.75 per share to touring golf
professionals who perform consulting and promotional services for the Company.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the capital stock of the Company as of the date of this
Prospectus for (i) each person who is known by the Company to beneficially own
more than 5% of the capital stock, (ii) each of the Company's directors, and
(iii) all directors and executive officers as a group. The Company believes that
each of the beneficial owners of the Common Stock listed in the table, based on
information furnished by such owner, has sole investment and voting power with
respect to such shares.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
BENEFICIALLY ----------------------------------
NAME OWNED BEFORE OFFERING AFTER OFFERING
- --------------------------------------------------------------- ----------------- ----------------- ---------------
<S> <C> <C> <C>
Rudy A. Slucker (1)............................................ 730,000 73.0% 34.0%
Fred K. Hochman(2)............................................. 153,000 20.4% 8.1%
Frank Grace.................................................... 50,000 6.7% 2.6%
518 Route 513
Caliphon, New Jersey 07830
Richard Rizzuto................................................ 41,667 5.6% 2.2%
518 Route 513
Caliphon, New Jersey 07830
Jeffrey Baker.................................................. -0- -- --
Leslie E. Goodman.............................................. -0- -- --
All directors and executive officers as a group
(6 persons).................................................. 883,000 88.3% 41.1%
</TABLE>
- ------------------------
(1) Includes (i) 250,000 shares subject to options exercisable at $4.75 per
share and (ii) an aggregate of 75,000 shares of Common Stock owned by the
children and wife of Mr. Slucker.
(2) Mr. Hochman has pledged his shares to NationsBank to secure the Company's
indebtedness of $300,000 plus interest. See "Certain Transactions."
CERTAIN TRANSACTIONS
The Company was initially capitalized in October 1992 through the sale of
333,333 shares of its Common Stock for $.01 per share, including 133,333 shares
purchased by Fred K. Hochman, 133,333 shares purchased by Wayne R. Wooten, and
50,000 shares purchased by Frank Grace, each of whom was a director and/or
officer of the Company. On March 13, 1994, Messrs. Hochman and Wooten each sold
16,667 shares of Common Stock to Richard Rizzuto, then a director of the
Company.
On July 27, 1994, the Company entered into a Consulting and Non-Competition
Agreement with Mr. Wooten providing for payments by the Company in the form of
royalties on the sale of certain putters through July 26, 1996. An aggregate of
$33,070 was paid through such date to Mr. Wooten under the Agreement. At such
time, Mr. Hochman purchased from Mr. Wooten 116,666 shares of Common Stock of
the Company for approximately $75,000. In addition, Mr. Wooten resigned as an
officer and director of the Company.
In November 1994, the Company borrowed $300,000 from NationsBank. Mr.
Hochman provided a personal guarantee for the loan. In addition, the Company
guaranteed a personal loan of $100,000 from NationsBank to Mr. Hochman, which
guarantee was released in October 1996. Mr. Hochman has pledged all of his
shares of Common Stock of the Company to secure his personal indebtedness.
On December 31, 1994, Mr. Hochman transferred 50,000 shares of Common Stock
to Rudy A. Slucker in consideration of $1.00 and the agreement to loan the
Company $140,000 at an interest rate of 8% per annum and payable over a
three-year term. On October 1, 1995, Mr. Slucker purchased 66,666
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<PAGE>
shares from Mr. Hochman for $1.00 and Mr. Slucker's agreement to loan additional
sums to the Company, to the extent necessary.
In April 1996, in consideration of Mr. Slucker's agreement to loan the
Company up to $300,000, and to guarantee the NationsBank loan, Mr. Slucker was
issued 416,666 shares of Common Stock. In April 1996, Mr. Slucker sold 53,000
shares of Common Stock to Mr. Hochman for $80,000, represented by a promissory
note due April 1, 1998.
From time to time, the Company has borrowed funds from its officers,
directors and stockholders. Since the inception of the Company in August 1992,
the Company has borrowed the following amounts (inclusive of accrued interest
through September 30, 1996) from officers, directors and beneficial owners of 5%
or more of the Company's Securities: $742,276 from Rudy A. Slucker, $406,348
from Fred Hochman, $257,188 from Richard Rizzuto, $44,192 from John Schubert and
$263,856 from Frank Grace. Pursuant to an agreement dated as of October 18,
1996, $400,000 of debt owed by the Company to Mr. Slucker will be extended and
paid with interest from and after the consummation of this Offering at the rate
of 8% per annum until three years after the consummation of the Offering, except
that the Company may prepay such amounts from net proceeds received from the
exercise of the Warrants. In addition, an additional aggregate amount of
$100,000 of debt owed by the Company to Messrs. Slucker, Hochman, Rizzuto,
Schubert and Grace will be extended and paid with interest from and after the
consummation of this Offering at 8% per annum until two years after the
consummation of the Offering, except that the Company may prepay such amounts
from net proceeds received from the exercise by the Underwriters of the
over-allotment option. The balance of $171,742, $376,348, $244,688, $41,692 and
$248,856, plus interest will be forgiven by Messrs. Slucker, Hochman, Rizzuto,
Schubert and Grace upon the consummation of this Offering.
From August 1, 1996 through November 15, 1996, Mr. Slucker advanced an
additional $307,000 to the Company for its business operations. The Company has
agreed to repay the amounts advanced by Mr. Slucker through November 15, 1996
and any additional amounts loaned through the date of this Prospectus (which
amount will not exceed $400,000 in the aggregate), with interest at 8% per annum
payable at maturity no earlier than two years from the date of this Prospectus,
except that the Company may prepay such amounts from net proceeds received from
the exercise by the Underwriters of the over-allotment option. See "Management's
Discussion and Analysis of Financial Condition and Plan of Operations--Liquidity
and Capital Resources."
All ongoing and any future transactions with affiliates of the Company, if
any, will be on terms believed by the Company to be no less favorable than are
available from unaffiliated third parties and will be approved by a majority of
disinterested directors.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company is 11,000,000, consisting of
10,000,000 shares of Common Stock, $.01 par value and 1,000,000 shares of
Preferred Stock, $.01 par value. As of the date of this Prospectus, 750,000
shares of Common Stock are outstanding and held of record by five stockholders.
Upon the completion of this Offering there will be 1,900,000 shares of Common
Stock outstanding (2,072,500 if the Underwriters' over-allotment option is
exercised in full).
PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
1,000,000 shares of Preferred Stock without further stockholder appoval. The
Preferred Stock may be divided into such classes or series as the Board of
Directors may determine by resolution. The Board of Directors is authorized to
determine and alter the rights, preferences, privileges and restrictions granted
to or imposed upon any wholly unissued series of Preferred Stock and to fix the
number of shares of any series of Preferred Stock and the
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<PAGE>
designation of any such series of Preferred Stock. Currently no Preferred Stock
is outstanding, and the Board of Directors has no current plans to issue any
such shares.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders. Subject
to preferences that may be applicable to any outstanding shares of preferred
stock, the holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available for the payment of dividends. See "Dividend Policy." In the
event of a liquidation, dissolution or winding up of the Company, subject to the
liquidation preferences of preferred stock, the holders of Common Stock are
entitled to receive any declared and unpaid dividends, in addition to being
entitled to share ratably in all assets remaining after payment of liabilities
and liquidation preferences of any then outstanding shares of preferred stock.
Holders of Common Stock have no preemptive rights or rights to convert their
Common Stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock.
All outstanding shares of Common Stock have been duly authorized and validly
issued and are fully paid and non-assessable, and the shares of Common Stock
issued upon completion of this Offering have been duly authorized and, when
issued, will be fully paid and nonassessable.
WARRANTS
Each Warrant will entitle the registered holder to purchase one share of the
Company's Common Stock at an exercise price of $4.00 per share for five years
from the date of this Prospectus. No fractional shares of Common Stock will be
issued in connection with the exercise of Warrants. Upon exercise, the Company
will pay the holder the value of any such fractional shares in cash, based upon
the market value of the Common Stock at such time.
Unless extended by the Company at its discretion, the Warrants will expire
at 5:00 p.m., New York time, on the fifth anniversary of the date of this
Prospectus. In the event a holder of Warrants fails to exercise the Warrants
prior to their expiration, the Warrants will expire and the holder thereof will
have no further rights with respect to the Warrants.
The Company may, with the consent of GKN Securities Corp., redeem not less
than all of the outstanding Warrants at a price of $.01 per Warrant upon not
less than 30 days' prior written notice if the last sale price of the Common
Stock has been at least 162.5% of the then-exercise price of the Warrants
(initially $6.50) for the 20 consecutive trading days ending on the third day
prior to the date on which the notice is given.
No Warrants will be exercisable unless at the time of exercise there is a
current prospectus covering the shares of Common Stock issuable upon exercise of
such Warrants under an effective registration statement filed with the
Commission and such shares have been qualified for sale or are exempt from
qualification under the securities laws of the state or residence of the holder
of such Warrants. Although the Company intends to have all shares so qualified
for sale in those states where the Securities are being offered and to maintain
a current prospectus relating thereto until the expiration of the Warrants,
subject to the terms of the Warrant Agreement, there can be no assurance that
the Company will be able to do so.
A holder of Warrants will not have any rights, privileges or liabilities as
a stockholder of the Company prior to the exercise of the Warrants. The Company
is required to keep available a sufficient number of authorized shares of Common
Stock to permit exercise of the Warrants.
The exercise price of the Warrants and the number of shares issuable upon
exercise of the Warrants will be subject to adjustment to protect against
dilution in the event of stock dividends, stock splits, combinations,
subdivisions and reclassifications. No assurance can be given that the market
price of the
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<PAGE>
Company's Common Stock will exceed the exercise price of the Warrants at any
time during the exercise period.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's securities is Continental
Stock Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
1,900,000 shares of Common Stock, not including shares of Common Stock issuable
upon exercise of outstanding options, warrants and assuming no exercise of the
over-allotment option granted to the Underwriters.
Of these outstanding shares, the 1,150,000 shares of Common Stock sold to
the public in this Offering may be freely traded without restriction or further
registration under the Securities Act of 1993, as amended (the "Securities
Act"), except that any shares that may be held by an "affiliate" of the Company
(as that term is defined in the rules and regulations under the Securities Act)
may be sold only pursuant to a registration under the Securities Act or pursuant
to an exemption from registration under the Securities Act, including the
exemption provided by Rule 144 adopted under the Securities Act.
The 750,000 shares of Common Stock outstanding prior to this Offering are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act and may not be sold unless such sale is registered under the Securities Act
or is made pursuant to an exemption from registration under the Securities Act,
including the exemption provided by Rule 144. Of such shares, approximately
333,000 may be sold under Rule 144 within 12 months of the date of this
Prospectus and the remaining shares may be sold within 24 months of the date of
this Prospectus; however, all the stockholders of the Company have agreed that
for a period of 24 months from the date of this Prospectus, they will not sell
any of their securities without the prior consent of GKN Securities Corp.
The shares of Common Stock issuable upon exercise of options outstanding as
of the date hereof are subject to lock-up provisions that prevent their resale
for a period of two years following the date of this Prospectus. See
"Management--Other Options."
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned any
Restricted Securities for at least two years (including a stockholder who may be
deemed to be an affiliate of the Company), will be entitled to sell, within any
three-month period, that number of shares that does not exceed the greater of
(i) 1% of the then outstanding shares of Common Stock or (ii) the average weekly
trading volume of the Common Stock during the four calendar weeks preceding the
date on which such notice of such sale is given to the Securities and Exchange
Commission (the "Commission"), provided certain public information, manner of
sale and notice requirements are satisfied. A stockholder who is deemed to be an
affiliate of the Company, including members of the Board of Directors and senior
management of the Company, will still need to comply with the restrictions and
requirements of Rule 144, other than the two-year holding period requirement, in
order to sell shares of Common Stock that are not Restricted Securities, unless
such sale is registered under the Securities Act. A stockholder (or stockholders
who shares are aggregated) who is deemed not to have been an affiliate of the
Company at any time during the 90 days preceding a sale by such stockholder, and
who has beneficially owned Restricted Securities for at least three years, will
be entitled to sell such shares under Rule 144 without regard to the volume
limitations described above.
The Company is unable to estimate the number of shares that may be sold in
the future by its existing stockholders or in the effect, if any, that sales of
shares by such stockholders will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock by
existing stockholders could adversely affect prevailing market prices.
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<PAGE>
UNDERWRITING
GKN Securities Corp. ("GKN") and Kirlin Securities, Inc. ("Kirlin" and
together with GKN, the "Underwriters") have agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company a total
of 1,150,000 shares of Common Stock and 1,150,000 Warrants. It is anticipated
that GKN and Kirlin will purchase approximately 75% and 25%, respectively, of
the total amount of securities purchased from the Company.
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to approval of certain legal matters by counsel and various other
conditions precedent, and that the Underwriters are obligated to purchase all of
the Securities offered by this Prospectus (other than the Securities covered by
the over-allotment option described below), if any are purchased.
The Underwriters have advised the Company that the Underwriters propose to
offer the Securities to the public at the initial offering prices set forth on
the cover page of this Prospectus and to certain dealers at that price less a
concession not in excess of $ per share of Common Stock and $. per
Warrant. The Underwriters may allow, and such dealers may re-allow, a concession
not in excess of $ per share of Common Stock and $. per Warrant to
certain other dealers. After this Offering, the offering price and other selling
terms may be changed by the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act. The Company has
agreed to pay to the Underwriters an expense allowance on a nonaccountable basis
equal to 3% of the gross proceeds derived from the sale of the Securities
underwritten (including the sale of any Securities subject to the Underwriters'
over-allotment option), $50,000 of which has been paid to date. The Company also
has agreed to pay all expenses in connection with qualifying the Securities
offered hereby for sale under the laws of such states as the Underwriters may
designate, and for obtaining the clearance of this Offering with the National
Association of Securities Dealers, Inc., including fees and expenses of counsel
retained for such purposes by the Underwriters. The Company has agreed to retain
GKN as a financial consultant for a two-year period commencing on the date of
this Prospectus at an annual fee of $30,000 per year, payable in advance at the
closing of this Offering.
The Company has granted to the Underwriters an option, exercisable during
the 45-day period after the date of this Prospectus, to purchase up to an
aggregate of 172,500 additional shares of Common Stock and/or 172,500 additional
Warrants at the offering price, less underwriting discounts and the
nonaccountable expense allowance, for the sole purpose of covering
over-allotments, if any.
The Company has engaged the Underwriters, on a non-exclusive basis, as its
agents for the solicitation of the exercise of the Warrants. To the extent not
inconsistent with the guidelines of the NASD and the rules and regulations of
the Commission, the Company has agreed to pay the Underwriters for bona fide
services rendered a commission equal to 5% of the exercise price for each
Warrant exercised after one year from the date of this Prospectus if the
exercise was solicited by either of the Underwriters. In addition to soliciting,
either orally or in writing, the exercise of the Warrants, such services may
also include disseminating information, either orally or in writing, to warrant
holders about the Company or the market for the Company's securities, and
assisting in the processing of the exercise of Warrants. No compensation will be
paid to the Underwriters in connection with the exercise of the Warrants if the
market price of the underlying shares of Common Stock is lower than the exercise
price, the Warrants are held in a discretionary account, the Warrants are
exercised in an unsolicited transaction, the warrantholder has not confirmed in
writing that one of the Underwriters solicited such exercise or the arrangement
to pay the commission is not disclosed in the prospectus provided to
warrantholders at the time of exercise. In addition, unless granted an exemption
by the Commission from Rule 10b-6 under the Exchange Act, while it is soliciting
exercise of the Warrants, the Underwriters will be prohibited from engaging in
any market activities or solicited brokerage activities with regard to the
Company's securities unless the Underwriters have waived their right to receive
a fee for the exercise of the Warrants.
34
<PAGE>
In connection with this Offering, the Company has agreed to sell to the
Underwriters and its designees, for an aggregate of $100, the Underwriters'
Purchase Option to purchase up to an aggregate of 115,000 shares of Common Stock
and/or 115,000 Warrants. The Underwriters' Purchase Option is exercisable at a
price equal to % of the initial offering price of the securities for a period
of four years commencing one year from the date of this Prospectus. The
securities purchasable upon exercise of the Underwriters' Purchase Option are
identical to those offered hereby. The Underwriters' Purchase Option grants to
the holder thereof certain "piggyback" rights and one demand right for a period
of seven and five years, respectively, from the date of this Prospectus with
respect to the registration under the Securities Act of the securities directly
and indirectly issuable upon exercise of the Underwriters' Purchase Option. The
Underwriters' Purchase Option cannot be transferred, sold, assigned or
hypothecated during the one-year period following the date of this Prospectus,
except to officers of the Underwriters and to selected dealers and their
officers or partners.
Prior to this Offering, there has been no public market for any of the
Company's securities. Accordingly, the offering price of the Securities and the
terms of the Warrants have been determined by negotiation between the Company
and the Underwriters and do not necessarily bear any relation to established
valuation criteria. Factors considered in determining such prices and terms, in
addition to prevailing market conditions, included an assessment of the
prospects for the industry in which the Company will compete, the Company's
management and the Company's capital structure.
Pursuant to the Underwriting Agreement, all of the holders of the
outstanding Common Stock of the Company prior to this Offering have agreed not
to sell any of their shares of Common Stock for a period of two years from the
date of this Prospectus without the prior written consent of GKN. In addition,
the Underwriting Agreement provides that, for a period of five years from the
date of this Prospectus, the Company will permit GKN to designate one person to
the Board of Directors, or alternatively, to send a representative to observe
meetings of the Board of Directors. Such representative will not be a member of
the Board of Directors and will not be entitled to vote on any matters before
the Board. GKN has not yet selected a designee or representative.
LEGAL MATTERS
Certain matters with respect to the legality of the issuance of the
Securities offered hereby will be passed upon for the Company by Crummy, Del
Deo, Dolan, Griffinger & Vecchione, a Professional Corporation, Newark, New
Jersey. Graubard Mollen & Miller, New York, New York, has served as counsel to
the Underwriters in connection with this Offering.
EXPERTS
The financial statements and schedules of TearDrop Golf Company at December
31, 1994 and 1995 appearing in this Prospectus and the Registration Statement
have been audited by Rothstein, Kass & Company, P.C., independent auditors, as
set forth in their report thereon (which contains an explanatory paragraph which
raises substantial doubt about the Company's ability to continue as a going
concern) appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement with
respect to the Securities offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement and the exhibits
thereto, having been omitted from this Prospectus in accordance with the rules
and regulations of the Commission. For further information with respect to the
Company, the securities offered by this Prospectus and such omitted information,
reference is made to the Registration Statement,
35
<PAGE>
including any and all exhibits and amendments thereto. Statements contained in
this Prospectus concerning the provisions of any document filed as an exhibit
are of necessity brief descriptions thereof and are not necessarily complete,
and in each instance reference is made to the copy of the document filed as an
exhibit to the Registration Statement, each such statement being qualified in
its entirety by this reference.
Following the effectiveness of the Registration Statement, the Company will
be subject to the informational requirements of the Exchange Act of 1934 and in
accordance therewith the Company will file reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information may be inspected and copied at public reference facilities of the
Commission at 450 Fifth Street, N.W., Washington D.C. 20549; Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7
World Trade Center, New York, New York 10048. Copies of such material, including
the Registration Statement, can be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed
rates. The Commission maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the Commission.
The Company intends to furnish to its stockholders annual reports containing
financial statements audited and reported on by its independent public
accounting firm and such other periodic reports as the Company may determine to
be appropriate or as may be required by law.
36
<PAGE>
TEARDROP GOLF COMPANY
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report..................................................... F-2
Financial Statements
Balance Sheets................................................................. F-3
Statements of Operations....................................................... F-4
Statements of Stockholders' Deficit............................................ F-5
Statements of Cash Flows....................................................... F-6
Notes to Financial Statements.................................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
TearDrop Golf Company
We have audited the accompanying balance sheet of TearDrop Golf Company as
of December 31, 1995, and the related statements of operations, stockholders'
deficit and cash flows for the years ended December 31, 1995 and 1994. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TearDrop Golf Company as of
December 31, 1995, and the results of its operations and its cash flows for the
years ended December 31, 1995 and 1994 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company has, since inception, an accumulated loss from
operations, which raises substantial doubt about its ability to continue as a
going concern. Management's plans in regard to these matters are also described
in Note 12. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
September 28, 1996, except for Note 13
as to which the date is November 13, 1996
F-2
<PAGE>
TEARDROP GOLF COMPANY
BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SEPTEMBER 30,
SEPTEMBER 30, 1996 DECEMBER 31,
1996 (NOTE 2) 1995
------------- ------------- ------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
ASSETS
Current assets:
Cash...................................................................... $ 4,079 $ 4,079 $ 15,868
Accounts receivable, less allowance for doubtful accounts of $17,000 in
1996 and 1995........................................................... 268,242 268,242 79,497
Inventories............................................................... 101,064 101,064 121,035
Prepaid expenses and other current assets................................. 73,167 73,167 13,333
------------- ------------- ------------
Total current assets.................................................. 446,552 446,552 229,733
Property and equipment, less accumulated depreciation and amortization...... 166,624 166,624 184,927
Other assets, intangible assets, less accumulated amortization.............. 30,644 30,644 33,635
------------- ------------- ------------
$ 643,820 $ 643,820 $ 448,295
------------- ------------- ------------
------------- ------------- ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................................... $ 240,884 $ 240,884 $ 230,284
Notes payable............................................................. 300,000 300,000 300,000
Obligation under capital lease............................................ 15,101 15,101 15,226
Other current liabilities................................................. 50,864 50,864 15,824
------------- ------------- ------------
Total current liabilities............................................. 606,849 606,849 561,334
------------- ------------- ------------
Obligation under capital lease, less current portion........................ 64,172 64,172 76,629
------------- ------------- ------------
Stockholders' loans (Note 8 and 13)......................................... 1,713,860 630,534 1,178,588
------------- ------------- ------------
Commitments and contingencies
(Notes 10 and 11)
Stockholders' deficit:
Common stock, $1 par value in 1996 and 1995, authorized 100,000 shares,
issued and outstanding 225 shares in 1996 and 100 shares in 1995........ 225 100
Pro forma--preferred stock, $.01 par value, authorized 1,000,000 shares,
issued and outstanding none (Note 2)....................................
Pro forma--common stock, $.01 par value, authorized 10,000,000 shares,
issued and outstanding 750,000 shares (Note 2).......................... 7,500
Capital in excess of par value (Note 2)................................... 1,076,051
Accumulated deficit....................................................... (1,741,286) (1,741,286) (1,368,356)
------------- ------------- ------------
Total stockholders' deficit............................................... (1,741,061) (657,735) (1,368,256)
------------- ------------- ------------
$ 643,820 $ 643,820 $ 448,295
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE>
TEARDROP GOLF COMPANY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------ YEARS ENDED DECEMBER 31,
-------------------------
1996 1995 1995 1994
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Sales....................................................... $ 715,495 $ 820,746 $ 1,057,306 $ 784,519
Cost of sales............................................... 299,521 390,396 549,305 446,057
----------- ----------- ------------ -----------
Gross profit................................................ 415,974 430,350 508,001 338,462
Selling, general and administrative expenses................ 667,759 644,952 942,638 782,115
----------- ----------- ------------ -----------
Loss from operations........................................ (251,785) (214,602) (434,637) (443,653)
Interest expense............................................ 121,145 78,533 107,788 108,391
----------- ----------- ------------ -----------
Net loss.................................................... $ (372,930) $ (293,135) $ (542,425) $(552,044)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Loss per common share....................................... $ (.50) $ (.39) $ (.72) $ (.74)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
Weighted average number of common shares outstanding........ 750,000 750,000 750,000 750,000
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE>
TEARDROP GOLF COMPANY
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
------------------------ ACCUMULATED
SHARES AMOUNT DEFICIT
----------- ----------- -------------
<S> <C> <C> <C>
Balances, January 1, 1994....................................................... 100 $ 100 $ (273,887)
Net loss........................................................................ (552,044)
--- ----- -------------
Balances, December 31, 1994..................................................... 100 100 (825,931)
Net loss........................................................................ (542,425)
--- ----- -------------
Balances, December 31, 1995..................................................... 100 100 (1,368,356)
Common stock issued for services (UNAUDITED).................................... 125 125
Net loss (UNAUDITED)............................................................ (372,930)
--- ----- -------------
Balances, September 30, 1996 (UNAUDITED)........................................ 225 $ 225 $ (1,741,286)
--- ----- -------------
--- ----- -------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE>
TEARDROP GOLF COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED DECEMBER
SEPTEMBER 30, 31,
------------------------ --------------------
1996 1995 1995 1994
----------- ----------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $(372,930) $(293,135) $(542,425) $(552,044)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization.............. 26,368 14,761 19,682 18,684
Provision for doubtful accounts............ 3,795 7,355 4,317 27,276
Accrued interest on stockholders' loans.... 74,147 49,122 75,420 83,876
Loss on abandoned assets................... 74,443
Common stock issued for services........... 125
Changes in assets and liabilities:
(Increase) decrease in accounts
receivable............................. (192,540) 10,234 29,297 (77,214)
(Increase) decrease in inventories....... 19,971 (34,387) (93,679) 67,321
(Increase) decrease in prepaid expenses
and other current assets............... (59,834) 1,355 (5,581) 37,964
Increase in accounts payable............. 10,600 30,111 79,678 16,783
Increase in other current liabilities.... 35,040 1,907 7,841 3,811
----------- ----------- --------- ---------
Net cash used in operating
activities..................... (455,258) (212,677) (351,007) (373,543)
----------- ----------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment............. (5,074) (19,140) (29,479) (7,061)
Payments for patents and trademarks............ (18,786)
----------- ----------- --------- ---------
Net cash used in investing
activities..................... (5,074) (19,140) (29,479) (25,847)
----------- ----------- --------- ---------
Cash flows from financing activities:
Payments on capital lease obligations.......... (12,582) (1,202)
Proceeds from notes payable.................... 8,750 8,750 207,250
Loans from stockholders........................ 461,125 225,375 380,577 192,873
----------- ----------- --------- ---------
Net cash provided by financing
activities..................... 448,543 234,125 388,125 400,123
----------- ----------- --------- ---------
Net increase (decrease) in
cash........................... (11,789) 2,308 7,639 733
Cash, beginning of period........................ 15,868 8,229 8,229 7,496
----------- ----------- --------- ---------
Cash, end of period.............................. $ 4,079 $ 10,537 $ 15,868 $ 8,229
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the periods for interest...... $ 28,498 $ 27,584 $ 32,626 $ 22,901
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Supplemental schedules of noncash investing and
financing activities:
Capital lease obligation incurred for lease
of new equipment........................... $ -- $ -- $ 93,057 $ --
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Costs of equipment included in accounts
payable.................................... $ -- $ -- $ 37,000 $ --
----------- ----------- --------- ---------
----------- ----------- --------- ---------
Cost of equipment included in stockholders'
loans...................................... $ -- $ -- $ 18,500 $ --
----------- ----------- --------- ---------
----------- ----------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE>
TEARDROP GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS
NOTE 1--ORGANIZATION AND NATURE OF OPERATIONS
The Teardrop Putter Corporation ("TPC") was formed as a South Carolina
corporation in 1992 and subsequently merged with the Teardrop Golf Company, (the
"Company") a Delaware corporation, (SEE NOTE 13). The Company manufactures and
markets golf putters and wedges within and outside the United States. The
Company intends to relocate its production and executive facilities to or
establish additional facilities in the New York metropolitan area.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVENTORIES--Inventories are stated at cost on a first-in, first-out basis,
which does not exceed market value.
PROPERTY AND EQUIPMENT--Property and equipment is stated at cost less
accumulated depreciation and amortization. The Company provides for depreciation
and amortization as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
ASSET LIVES PRINCIPAL METHOD
- ---------------------------------------------------------- ----------- --------------------
<S> <C> <C>
Office furniture and equipment............................ 5 Years Declining-balance
Machinery and equipment................................... 10 Years Declining-balance
</TABLE>
INTANGIBLE ASSETS--Patents and trademarks relate to costs associated with
obtaining patents and trademarks within and outside the United States. These
costs are amortized on a straight-line basis over 17 years.
Organization costs relate to costs associated with the formation of TPC.
These costs are amortized on a straight-line basis over 5 years.
INCOME TAXES--TPC is an "S" corporation and, as a result, the earnings and
losses have been included in the personal income tax returns of the respective
stockholders. Upon completion of the proposed public offering, the "S" election
will be terminated.
The Company complies with Statement of Financial Accounting Standards (SFAS)
No. 109, "Accounting for Income Taxes," which requires an asset and liability
approach to financial reporting of income taxes. Deferred income tax assets and
liabilities are computed for differences between financial statement and tax
bases of assets and liabilities that will result in taxable or deductible
amounts in the future, based on enacted tax laws and rates applicable to the
periods in which the differences are expected to effect taxable income.
Valuation allowances are established, when necessary, to reduce the deferred
income tax assets to the amount expected to be realized.
LOSS PER COMMON SHARE--Loss per common share is computed based on net loss
applicable to common stockholders divided by the weighted average number of
common shares outstanding, after giving effect to the merger (SEE NOTE 13).
The weighted average includes shares issued within one year of the Company's
proposed initial public offering (IPO) with an issue price less than the IPO
price.
IMPAIRMENT OF LONG-LIVED ASSETS--The Company periodically assesses the
recoverability of the carrying amounts of long-lived assets, including
intangible assets. A loss is recognized when expected undiscounted future cash
flows are less than the carrying amount of the asset. The impairment loss is the
F-7
<PAGE>
TEARDROP GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
difference by which the carrying amount of the asset exceeds its fair value. The
Company does not expect to have any significant losses resulting from its review
of impairment of long-lived assets.
STOCK-BASED COMPENSATION--The Company plans to account for stock options
under SFAS No. 123, which retains the original accounting prescribed by APB
Opinion No. 25. As a result, options granted at fair value will not result in
charges to earnings. Disclosures will be made, however, of compensation costs
determined under SFAS No. 123's fair value methodology.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The fair value of the Company's assets
and liabilities which qualify as financial instruments under SFAS No. 107
approximate the carrying amounts presented in the balance sheet. It is not
practicable to estimate the fair value of amounts due to stockholders since
those transactions were not consummated at arms-length.
UNAUDITED FINANCIAL STATEMENTS--The unaudited financial statements, in the
opinion of management, include all adjustments of a normal and recurring nature,
which are necessary for a fair presentation. The results of operations for the
nine months ended September 30, 1996 and 1995 are not necessarily indicative of
the results expected for the full year.
PRO FORMA--The pro forma amounts shown in the financial statements reflect
the anticipated capitalization of stockholder loans (and accrued interest) as a
contribution to capital in excess of par value upon the effective date of the
Registration Statement relating to the IPO, and after giving effect to the
merger (SEE NOTE 13).
NOTE 3--INVENTORIES
Inventories comprised the following at September 30, 1996 (UNAUDITED) and
December 31, 1995:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
(UNAUDITED)
Raw materials................................................... $ 28,593 $ 111,073
Finished goods.................................................. 72,471 9,962
------------- ------------
$ 101,064 $ 121,035
------------- ------------
------------- ------------
</TABLE>
F-8
<PAGE>
TEARDROP GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consist of the following at September 30, 1996
(UNAUDITED) and December 31, 1995:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
(UNAUDITED)
Office furniture and equipment.................................. $ 33,063 $ 29,489
Machinery and equipment......................................... 174,547 173,047
------------- ------------
207,610 202,536
Accumulated depreciation and amortization (includes $9,974 for
the nine months ended September 30, 1996 (UNAUDITED) under a
capital lease)................................................ 40,986 17,609
------------- ------------
$ 166,624 $ 184,927
------------- ------------
------------- ------------
</TABLE>
NOTE 5--INTANGIBLE ASSETS
Intangible assets consist of the following at September 30, 1996 (UNAUDITED)
and December 31, 1995:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
(UNAUDITED)
Patents and trademarks.......................................... $ 33,786 $ 33,786
Organization costs.............................................. 10,000 10,000
------------- ------------
43,786 43,786
Accumulated amortization........................................ 13,142 10,151
------------- ------------
$ 30,644 $ 33,635
------------- ------------
------------- ------------
</TABLE>
Amortization for the years ended December 31, 1995 and 1994 was $3,987 and
$3,435, respectively, and $2,991 for the nine months ended September 30, 1996
and 1995 (UNAUDITED).
NOTE 6--NOTES PAYABLE
Notes payable consist of two lines of credit under which the Company can
borrow up to $300,000 and bear interest at 1% over the prime lending rate (9.5%
at December 31, 1995 and 9.25% at September 30, 1996 (UNAUDITED)). The lines of
credit are collateralized by a security interest in all assets of the Company
and are guaranteed by a stockholder. These notes became due on March 15, 1996
(SEE NOTE 13).
NOTE 7--OBLIGATION UNDER CAPITAL LEASE
Machinery and equipment includes a milling machine stated at $93,057
recorded under a capital lease which was acquired in December 1995.
F-9
<PAGE>
TEARDROP GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--OBLIGATION UNDER CAPITAL LEASE (CONTINUED):
Aggregate future lease payments at September 30, 1996 (UNAUDITED) and
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
-------------- -------------
<S> <C> <C>
Years ending
1996........................................................... $ -- $ 23,726
1997........................................................... 23,726 23,726
1998........................................................... 23,726 23,726
1999........................................................... 23,726 23,726
2000........................................................... 23,726 21,749
2001........................................................... 1,977
------- -------------
Total future lease payments.................................... 96,881 116,653
Less amount representing interest.............................. 17,608 24,798
------- -------------
Present value of future minimum lease payments................. 79,273 91,855
Less current portion........................................... 15,101 15,226
------- -------------
Long-term portion.............................................. $ 64,172 $ 76,629
------- -------------
------- -------------
</TABLE>
NOTE 8--RELATED PARTY TRANSACTIONS
Stockholders' loans represent cash advances with no stated repayment date.
The loans bear interest at 9% per annum (SEE NOTE 13).
In August 1996, the Company issued a note to the Company's Chief Executive
Officer (CEO) up to a maximum of $300,000 which bears interest at 8% per annum
and is due on the earlier of two years following the effective date the
Company's Registration Statement relating to the IPO, or July 31, 1997 if the
effective date has not yet occurred (SEE NOTE 13). At September 30, 1996
(UNAUDITED), stockholders' loans includes $130,000 under this note.
The Company is a guarantor of a stockholder's personal loan of $100,000.
NOTE 9--PROPOSED PUBLIC OFFERING
In August 1996, the Company signed a letter of intent with an investment
banking firm for the purpose of underwriting an IPO.
NOTE 10--ECONOMIC DEPENDENCY
During the year ended December 31, 1995, the Company derived revenues of
approximately $256,000 from one customer and had international revenues of
approximately $472,000 of which approximately $271,000 were from Japan. During
the nine months ended September 30, 1996 and 1995 (UNAUDITED), the Company
derived revenues of approximately $179,000 from two customers, respectively and
had international revenues of approximately $342,000 and $317,000 of which
approximately $179,000 and $155,000 were from Japan, respectively.
During the years ended December 31, 1995 and 1994, the Company purchased
approximately $389,000 and $165,000 of its inventory from three and two
suppliers, respectively. During the nine months
F-10
<PAGE>
TEARDROP GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--ECONOMIC DEPENDENCY (CONTINUED):
ended September 30, 1996 and 1995 (UNAUDITED), the Company purchased
approximately $132,000 and $165,000 of its inventory from two and one suppliers,
respectively.
NOTE 11--COMMITMENTS AND CONTINGENCIES
In July 1994, the Company entered into a consulting and non-competitive
agreement with a former stockholder of the Company, which provided for payments
by the Company in the form of royalties on the sale of certain putters through
July 1996. In addition, the former stockholder will receive $5,000 for each
major golfing event or tournament (as defined in the agreement) won by a player
using a TearDrop Putter. This agreement is personally guaranteed by one of the
Company's stockholders. The Company paid royalties under this agreement of
$21,652 and $1,445 in the years ended December 31, 1995 and 1994, respectively,
and $9,973 and $14,712 in the nine months ended September 30, 1996 and 1995
(UNAUDITED), respectively.
The Company rents its current office and assembly facilities under a lease
which expires on November 30, 1998. The lease requires that rent be adjusted
annually for cost of living increases.
Future aggregate minimum rental payments are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1996.............................................................. $ 38,400
1997.............................................................. 38,400
1998.............................................................. 35,200
---------
$ 112,000
---------
---------
</TABLE>
Rent expense approximated $27,000 and $19,400 in the years ended December
31, 1995 and 1994, respectively, and $33,600 and $18,400 in the nine months
ended September 30, 1996 and 1995 (UNAUDITED), respectively.
In January 1996, the Company entered into an endorsement agreement with a
PGA touring professional for three years beginning January 1996. The agreement
provides for payments of $55,000, $70,000 and $98,000 during the years ended
December 31, 1996, 1997 and 1998, respectively. In addition, the agreement
provides for certain bonuses based on tournament performances and sales in
Australia and New Zealand, as defined.
On June 26, 1996, the Company entered into an employment agreement with one
of the Company's sales representatives which provides for compensation of
$70,000 annually beginning July 1996 and $100,000 annually upon the effective
date of the Registration Statement relating to the IPO. The agreement may be
terminated by either party upon two weeks notice. In October 1996, the Company
intends to enter into an employment agreement with its CEO (SEE NOTE 13).
NOTE 12--OPERATING RESULTS AND MANAGEMENT'S PLANS
The Company has expended significant amounts in the development and
introduction of its initial products. As a result, the Company incurred a net
loss of $542,425 for 1995 and has incurred substantial net losses for each of
the past two years. At September 30, 1996 (UNAUDITED), current liabilities
exceed current assets by $160,297 and total liabilities exceed total assets by
$1,741,061. These factors raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence. Management plans to raise
equity capital and, in August 1996, has retained the services of an
F-11
<PAGE>
TEARDROP GOLF COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--OPERATING RESULTS AND MANAGEMENT'S PLANS (CONTINUED):
investment banking firm and entered into a letter of intent to raise
approximately $4,500,000 (after registration costs) in an IPO of its common
stock.
NOTE 13--SUBSEQUENT EVENTS
The Company's stockholders intend to execute an agreement under which, upon
the effective date of the Registration Statement relating to the IPO, $1,083,326
of stockholder loans and accrued interest will be contributed to capital in
excess of par value. Of the remaining balance, $500,000 will be converted to (i)
five promissory notes in various amounts, which aggregate $100,000, bearing
interest at 8% per annum and are due no earlier than two years from the date the
Company's Registration Statement relating to the IPO becomes effective, and (ii)
one $400,000 promissory note which bears interest at 8% per annum and is due no
earlier than three years from the date the Company's Registration Statement
relating to the IPO becomes effective. In addition, these notes contain
provisions under which, upon the exercise of certain warrants, the notes became
immediately payable.
On October 18, 1996, the Company's stockholders adopted a stock option plan
("Plan") providing for incentive stock options ("ISOs") and non-qualified stock
options ("NQSOs"). The Company has reserved 200,000 shares of common stock for
issuance upon the exercise of stock options granted under the Plan. The exercise
price of an ISO or NQSO will not be less than 100% of the fair market value of
the Company's common stock at the date of the grant. The exercise price of an
ISO granted to an employee owning greater than 10% of the Company's common stock
will not be less than 110% of the fair market value of the Company's common
stock at the date of the grant and will have a maximum term of five years. All
other options granted under the Plan will have a maximum term of ten years.
On October 21, 1996, TPC merged with Teardrop Golf Company ("TGC"), a
Delaware corporation. Each share of TPC's common stock issued and outstanding
immediately prior to the merger will be converted to 3333.33 shares of TGC's
common stock. The authorized capital stock of TGC is 10,000,000 shares of common
stock, $.01 par value per share, and 1,000,000 shares of preferred stock, $.01
par value per share.
The Company intends to enter into an employment agreement with its CEO as of
the effective date of the Registration Statement relating to the IPO. The
agreement will provide for compensation of $200,000 annually for three years
with a one year renewal term. In addition, the CEO will receive a performance
bonus as defined. The agreement will further provide that he may not engage in
certain competitive activities, as defined, for one year after termination of
the employment agreement.
On October 21, 1996, the Company granted five-year options (outside the
Plan) to acquire 250,000 shares of the Company's common stock for $4.75 per
share to the Company's CEO. In addition, the Company intends to grant five-year
options to purchase up to an aggregate of 250,000 shares of the Company's common
stock for $4.75 per share to touring golf professionals. The granting of these
options is not expected to have a material impact on the Company's financial
statements since the options were granted at the current market value of the
Company's common stock.
At March 15, 1996, the Company was in default of the lines of credit as a
result of the failure to pay when due. The Company's CEO is expected to
guarantee these notes. In addition, the Company expects to receive a waiver of
the defaults and an extension on the notes until December 31, 1996.
On November 13, 1996, the Company entered into an advertising agreement for
two years beginning January 1, 1997 with a one year extension. The Company will
be obligated to pay the aggregate sum of approximately $905,000 for advertising
services, as defined in the agreement.
F-12
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE SECURITIES OFFERED BY THIS PROSPECTUS, OR AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES BY ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE
DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 6
Dilution........................................ 13
Use of Proceeds................................. 14
Capitalization.................................. 16
Dividend Policy................................. 16
Management's Discussion and Analysis
of Financial Condition and Plan
of Operations.................................. 17
Business........................................ 21
Management...................................... 27
Principal Stockholders.......................... 30
Certain Transactions............................ 30
Description of Securities....................... 31
Shares Eligible for Future Sale................. 33
Underwriting.................................... 34
Legal Matters................................... 35
Experts......................................... 35
Available Information........................... 35
Index to Consolidated Financial
Statements..................................... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
AFFECTING TRANSACTIONS IN THE COMMON STOCK AND THE WARRANTS, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
[LOGO]
1,150,000 SHARES OF COMMON STOCK
AND
1,150,000 REDEEMABLE COMMON STOCK
PURCHASE WARRANTS
--------------
PROSPECTUS
--------------
[LOGO]
Kirlin Securities, Inc.
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation contains a provision
eliminating or limiting director liability to the Registrant and its
stockholders for monetary damages arising from acts or omissions in the
director's capacity as director. The provision does not, however, eliminate or
limit the personal liability of a director (i) for any breach of such director's
duty of loyalty to the Registrant or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or knowing
violation of the law, (iii) under the Delaware statutory provision making
directors personally liable, under a negligence standard, for unlawful dividends
or unlawful stock purchases or redemptions or (iv) for any transaction from
which the director derived an improper personal benefit. This provision offers
persons who serve on the Board of Directors of the Registrant protection against
awards of monetary damages resulting from breaches of their duty of care (except
as indicated above). As a result of this provision, the ability of the
Registrant or a stockholder thereof to successfully prosecute an action against
a director for breach of his duty of care is limited. However, the provision
does not affect the availability of equitable remedies such as an injunction or
rescission based upon a director's breach of his duty of care. The Securities
and Exchange Commission has taken the position that the provision will have no
effect on claims arising under the Federal securities laws.
In addition, the Registrant's Certificate of Incorporation and Bylaws
provide for mandatory indemnification rights, subject to limited exceptions, to
any director or officer of the Registrant who by reason of the fact that he or
she is a director or officer of the Registrant, is involved in a legal
proceeding of any nature. Such indemnification rights include reimbursement for
expenses incurred by such director, officer, employee or agent in advance of the
final deposition of such proceeding in accordance with the applicable provisions
of Delaware General Corporation Law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the fees and expenses to be incurred in
connection with the issuance and distribution of the shares of Common Stock, par
value $.01 per share, offered hereby (excluding the Underwriters'
nonacccountable expense allowance).
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 4,407
NASD Filing Fee................................................... $ 1,778
NASDAQ Listing Fee................................................ $ 12,000
Blue Sky Fees and Expenses........................................ $ 50,000
Legal Fees and Expenses........................................... $ 120,000
Accounting Fees................................................... $ 50,000
Printing and Engraving Costs...................................... $ 100,000
Transfer Agent Fees............................................... $ 7,500
Miscellaneous Expenses............................................ $ 4,315
---------
TOTAL....................................................... $ 350,000
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth all sales of unregistered securities by the
Registrant within the past three years.
<TABLE>
<CAPTION>
NATURE OF
TRANSACTION AND AGGREGATE
DATE PURCHASERS SECURITIES SOLD PRICE PER SHARE OFFERING PRICE
- ------------------------ ------------------------ ------------------------ --------------- -----------------
<S> <C> <C> <C> <C>
Initial Capitalization Wayne R. Wooten 333,333 shares of $ .0003 $ 100.00
August, 1992 Fred K. Hochman Common Stock
Frank Grace
Richard Rizzuto
John Schubert
Sale of shares to a Rudy A. Slucker 416,666 shares of $ .0003 $ 125.00
director of the Common Stock
Company
</TABLE>
The Company relied on Section 4(2) of the Securities Act and Rule 701
promulgated thereunder for each issuance. No underwriters were involved nor any
commissions paid in connection with any of the above transactions.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Underwriting Agreement
3.1+ Certificate of Incorporation
3.2+ Certificate of Merger
3.3+ Agreement and Plan of Merger dated October 21, 1996 between the Company and
TearDrop Putter Corporation, a South Carolina Corporation
3.4+ By-Laws
4.1 Warrant Agreement
5.1* Opinion of Crummy, Del Deo, Dolan, Griffinger & Vecchione
10.1* Employment Agreement with Rudy A. Slucker
10.2+ Employment Agreement with John Zeravica
10.3+ Stock Option Plan
10.4+ Form of Stock Option Agreement
10.5+ Form of Agreement dated as of October 18, 1996 between the Company, TearDrop Putter Corporation, a South
Carolina Corporation, Rudy A. Slucker, Fred K. Hochman, Frank Grace, Richard Rizzuto and John Schubert
10.6+ Grid Note with a maximum principal amount of $300,000 dated as of August 1, 1996 issued by the Company to
Rudy A. Slucker
10.7+ Form of Promissory Note in the original principal amount of $400,000 to be issued by the Company to Rudy
A. Slucker
10.8+ Form of Promissory Note in the original principal amount of $40,000 to be issued by the Company to Rudy
A. Slucker
10.9+ Form of Promissory Note in the original principal amount of $30,000 to be issued by the Company to Fred
R. Hochman
10.10+ Form of Promissory Note in the original principal amount of $15,000 to be issued by the Company to Frank
Grace
10.11+ Form of Promissory Note in the original principal amount of $12,500 to be issued by the Company to
Richard Rizzuto
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------------------------------------------
<C> <S>
10.12+ Endorsement Agreement dated January 1, 1996 between the Company and
Consolidated Artists Inc.
10.13+ Agreement dated May 5, 1996 between the Company and Dustin Phillips
10.14+ Agreement dated August 29, 1996 between the Company and Dennis Zinkon
10.15+ Agreement dated September 10, 1996 between the Company and Dino Lucchesi
10.16+ Agreement dated September 25, 1996 between the Company and P.J. Cowan
10.17+ Property Lease dated August 3, 1995 between the Company and Albert H. Politi
10.18+ Equipment Lease dated November 30, 1995 between the Company and
Packaging Management Associates, Inc.
10.19+ Consulting and Non-Competitive Agreement dated July 27, 1994 between the Company and Wayne Richard Wooten
10.20 Form of Purchase Option to be issued by the Company to Underwriters.
10.21 Financial Consulting Agreement between the Company and GKN Securities Corp.
10.22 Advertising Agreement dated November 13, 1996 between the Company and the Golf Channel, Inc.
10.23 Form of Lock-up Agreement
24.1* Consent of Crummy, Del Deo, Dolan, Griffinger & Vecchione (See Item 5.1)
24.4 Consent of Rothstein, Kass & Company, P.C.
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
ITEM 28. UNDERTAKINGS
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 Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to Item 24 hereof, or otherwise, the Registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in the
successful defense of any action, suit, or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, 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 Securities Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant further undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Amendment to be
signed on its behalf by the undersigned, in the City of Hilton Head Island,
State of South Carolina, on December 5, 1996.
TEARDROP GOLF COMPANY
BY: /S/ RUDY A. SLUCKER
-----------------------------------------
Rudy A. Slucker
PRESIDENT AND CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, this
Amendment has been signed by the following persons in the capacities and on the
dates stated.
NAME TITLE DATE
- ------------------------------ --------------------------- -------------------
President, Chief Executive
Officer and Director
/s/ RUDY A. SLUCKER (Principal Executive
- ------------------------------ Officer and Principal December 5, 1996
Rudy A. Slucker Financial and Accounting
Officer)
/s/ FRED K. HOCHMAN Director
- ------------------------------ December 5, 1996
Fred K. Hochman
/s/ JEFFREY BAKER Director
- ------------------------------ December 5, 1996
Jeffrey Baker
/s/ LESLIE E. GOODMAN Director
- ------------------------------ December 5, 1996
Leslie E. Goodman
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------
<C> <S> <C>
1.1 Underwriting Agreement
3.1+ Certificate of Incorporation
3.2+ Certificate of Merger
3.3+ Agreement and Plan of Merger dated October 21, 1996 between the Company and
TearDrop Putter Corporation, a South Carolina Corporation
3.4+ By-Laws
4.1 Warrant Agreement
5.1* Opinion of Crummy, Del Deo, Dolan, Griffinger & Vecchione
10.1* Employment Agreement with Rudy A. Slucker
10.2+ Employment Agreement with John Zeravica
10.3+ Stock Option Plan
10.4+ Form of Stock Option Agreement
10.5+ Form of Agreement dated as of October 18, 1996 between the Company, TearDrop Putter Corporation,
a South Carolina Corporation, Rudy A. Slucker, Fred K. Hochman, Frank Grace, Richard Rizzuto
and John Schubert
10.6+ Grid Note with a maximum principal amount of $300,000 dated as of August 1, 1996 issued by the
Company to Rudy A. Slucker
10.7+ Form of Promissory Note in the original principal amount of $400,000 to be issued by the Company
to Rudy A. Slucker
10.8+ Form of Promissory Note in the original principal amount of $40,000 to be issued by the Company
to Rudy A. Slucker
10.9+ Form of Promissory Note in the original principal amount of $30,000 to be issued by the Company
to Fred R. Hochman
10.10+ Form of Promissory Note in the original principal amount of $15,000 to be issued by the Company
to Frank Grace
10.11+ Form of Promissory Note in the original principal amount of $12,500 to be issued by the Company
to Richard Rizzuto
10.12+ Endorsement Agreement dated January 1, 1996 between the Company and
Consolidated Artists Inc.
10.13+ Agreement dated May 5, 1996 between the Company and Dustin Phillips
10.14+ Agreement dated August 29, 1996 between the Company and Dennis Zinkon
10.15+ Agreement dated September 10, 1996 between the Company and Dino Lucchesi
10.16+ Agreement dated September 25, 1996 between the Company and P.J. Cowan
10.17+ Property Lease dated August 3, 1995 between the Company and Albert H. Politi
10.18+ Equipment Lease dated November 30, 1995 between the Company and
Packaging Management Associates, Inc.
10.19+ Consulting and Non-Competitive Agreement dated July 27, 1994 between the Company and Wayne
Richard Wooten
10.20 Purchase Option issued by the Company to GKN Securities Corp.
10.21 Financial Consulting Agreement between the Company and GKN Securities Corp.
10.22 Advertising Agreement dated November 13, 1996 between the Company and the Golf Channel
10.23 Form of Lock-up Agreement
24.1* Consent of Crummy, Del Deo, Dolan, Griffinger & Vecchione (See Item 5.1)
24.4 Consent of Rothstein, Kass & Company, P.C.
</TABLE>
- ------------------------
* To be filed by amendment.
+ Previously filed.
<PAGE>
UNDERWRITING AGREEMENT
BETWEEN
TEARDROP GOLF COMPANY
AND
GKN SECURITIES CORP.
DATED: ________________
<PAGE>
TABLE OF CONTENTS
PAGE
INDEX OF DEFINITIONS......................................................... v
1. Purchase and Sale of Securities......................................... 1
1.1 Firm Securities.................................................... 1
1.1.1 Purchase of Firm Securities.............................. 1
1.1.2 Payment and Delivery..................................... 1
1.2 Over-Allotment Option.............................................. 2
1.2.1 Option Securities........................................ 2
1.2.2 Exercise of Option....................................... 2
1.2.3 Payment and Delivery..................................... 2
1.3 Underwriter's Purchase Option...................................... 3
1.3.1 Purchase Option.......................................... 3
1.3.2 Payment and Delivery..................................... 3
2. Representations and Warranties of the Company........................... 3
2.1 Filing of Registration Statement................................... 3
2.1.1 Pursuant to the Act...................................... 3
2.2 No Stop Orders, Etc................................................ 3
2.3 Disclosures in Registration Statement.............................. 4
2.3.1 Securities Act and Exchange Act Representation........... 4
2.3.2 Disclosure of Contracts.................................. 4
2.3.3 Prior Securities Transactions............................ 5
2.4 Changes After Dates in Registration Statement...................... 5
2.4.1 No Material Adverse Change............................... 5
2.4.2 Recent Securities Transactions, Etc...................... 5
2.5 Independent Accountants............................................ 5
2.6 Financial Statements............................................... 5
2.7 Authorized Capital; Options; Etc................................... 5
2.8 Valid Issuance of Securities; Etc.................................. 6
2.8.1 Outstanding Securities................................... 6
2.8.2 Securities Sold Pursuant to this Agreement............... 6
2.9 Registration Rights of Third Parties............................... 6
2.10 Validity and Binding Effect of Agreements.......................... 6
2.11 No Conflicts, Etc.................................................. 7
2.12 No Defaults; Violations............................................ 7
2.13 Corporate Power; Licenses; Consents................................ 7
2.13.1 Conduct of Business...................................... 7
2.13.2 Transactions Contemplated Herein......................... 7
2.14 Title to Property; Insurance....................................... 8
2.15 Litigation; Governmental Proceedings............................... 8
2.16 Good Standing...................................................... 8
2.17 Taxes.............................................................. 8
2.18 Employees' Options................................................. 9
i
<PAGE>
PAGE
2.19 Transactions Affecting Disclosure to NASD.......................... 9
2.19.1 Finder's Fees............................................ 9
2.19.2 Payments Within Twelve Months............................ 9
2.19.3 Use of Proceeds.......................................... 9
2.19.4 Insiders' NASD Affiliation............................... 9
2.20 Foreign Corrupt Practices Act...................................... 9
2.21 Nasdaq Eligibility................................................. 10
2.22 Intangibles........................................................ 10
2.23 Relations With Employees........................................... 10
2.23.1 Employee Matters......................................... 10
2.23.2 Employee Benefit Plans................................... 10
2.24 Officers' Certificate.............................................. 11
2.25 Warrant Agreement.................................................. 11
2.26 Agreements With Insiders........................................... 11
2.26.1 Lock-Up Agreements....................................... 11
2.27 Subsidiaries....................................................... 11
2.28 Unaudited Financials............................................... 11
2.29 NationsBank Credit Line............................................ 11
2.30 Wooten Relationship................................................ 11
2.31 Product Liability Insurance........................................ 12
3. Covenants of the Company................................................ 12
3.1 Amendments to Registration Statement............................... 12
3.2 Federal Securities Laws............................................ 12
3.2.1 Compliance............................................... 12
3.2.2 Filing of Final Prospectus............................... 12
3.2.3 Exchange Act Registration................................ 12
3.3 Blue Sky Filing.................................................... 12
3.4 Delivery to the Underwriter of Prospectuses........................ 12
3.5 Events Requiring Notice to the Underwriter......................... 13
3.6 Review of Financial Statements..................................... 13
3.7 Reserved........................................................... 13
3.8 Secondary Market Trading and Standard & Poor's..................... 13
3.9 Nasdaq Maintenance. .............................................. 13
3.10 Warrant Solicitation and Registration of Common Stock Underlying the
Warrants........................................................... 14
3.10.1 Warrant Solicitation Fees................................ 14
3.10.2 Registration of Common Stock............................. 14
3.11 Public Relations Firm.............................................. 14
3.12 Reports to the Underwriter......................................... 14
3.12.1 Periodic Reports, Etc.................................... 14
3.12.2 Transfer Sheets and Weekly Position Listings............. 15
3.12.3 Secondary Market Trading Memorandum...................... 15
3.12.4 Information to Bloomberg News Service.................... 15
3.13 Agreements Between the Underwriter and the Company................. 15
ii
<PAGE>
PAGE
3.13.1 Financial Consulting Agreement.............................. 15
3.13.2 Underwriter's Purchase Option............................ 15
3.14 Disqualification of Form SB-2...................................... 15
3.15 Payment of Expenses................................................ 15
3.15.1 General Expenses......................................... 15
3.15.2 Non-Accountable Expenses................................. 16
3.16 Application of Net Proceeds........................................ 17
3.17 Delivery of Earnings Statements to Security Holders................ 17
3.18 Key Person Life Insurance.......................................... 17
3.19 Stabilization...................................................... 17
3.20 Internal Controls.................................................. 17
3.21 Accountants and Lawyers............................................ 17
3.22 Transfer Agent..................................................... 18
3.23 Sale of Securities................................................. 18
4. Conditions of the Underwriter's Obligations............................. 18
4.1 Regulatory Matters................................................. 18
4.1.1 Effectiveness of Registration Statement.................. 18
4.1.2 NASD Clearance........................................... 18
4.1.3 No Blue Sky Stop Orders.................................. 18
4.2 Company Counsel Matters............................................ 18
4.2.1 Effective Date Opinion of Counsel........................ 18
4.2.2 Closing Date and Option Closing Date Opinion
of Counsel .......................................... 23
4.2.3 Reliance................................................. 23
4.2.4 Secondary Market Trading Memorandum...................... 23
4.3 Cold Comfort Letter................................................ 23
4.4 Officers' Certificates............................................. 24
4.4.1 Officers' Certificate.................................... 24
4.4.2 Secretary's Certificate.................................. 25
4.5 No Material Changes................................................ 25
4.6 Delivery of Agreements............................................. 26
4.7 Opinion of Counsel for the Underwriter............................. 26
5. Indemnification......................................................... 26
5.1 Indemnification of the Underwriter................................. 26
5.1.1 General.................................................. 26
5.1.2 Procedure................................................ 27
5.2 Indemnification of the Company..................................... 27
5.3 Contribution....................................................... 27
5.3.1 Contribution Rights...................................... 27
5.3.2 Contribution Procedure................................... 28
6. [Intentionally Omitted]................................................. 28
7. Additional Covenants.................................................... 28
iii
<PAGE>
PAGE
7.1 Board Designee..................................................... 28
7.2 Press Releases..................................................... 29
7.3 Form S-8 or any Similar Form....................................... 29
7.4 Compensation and Other Arrangements................................ 29
7.5 Key Person Life Insurance.......................................... 29
8. Representations and Agreements to Survive Delivery...................... 29
9. Effective Date of This Agreement and Termination Thereof................ 29
9.1 Effective Date..................................................... 29
9.2 Termination........................................................ 29
9.3 Notice............................................................. 30
9.4 Expenses........................................................... 30
9.5 Indemnification.................................................... 30
10. Miscellaneous........................................................... 30
10.1 Notices............................................................ 30
10.2 Headings........................................................... 31
10.3 Amendment.......................................................... 31
10.4 Entire Agreement................................................... 31
10.5 Binding Effect..................................................... 31
10.6 Governing Law, Jurisdiction........................................ 31
10.7 Execution in Counterparts.......................................... 32
10.8 Waiver, Etc........................................................ 32
iv
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INDEX OF DEFINITIONS
TERM SECTION
Act.................................................................... 2.1.1
Closing Date............................................................1.1.2
Code ..................................................................2.23.2
Commission..............................................................2.1.1
Common Stock............................................................1.1.1
Company.............................................................Introductory
Paragraph
Effective Date..........................................................1.2.2
ERISA Plans............................................................2.23.2
Filing Date............................................................2.19.2
Financial Consulting Agreement.........................................3.13.1
Firm Securities.........................................................1.1.1
Insiders.................................................................3.16
Intangibles..............................................................2.22
NASD...................................................................2.19.1
Option Closing Date.....................................................1.2.2
Option Securities.......................................................1.2.1
Over-allotment Option...................................................1.2.1
Preliminary Prospectus..................................................2.1.1
Prospectus..............................................................2.1.1
Public Securities.......................................................1.2.1
Registration Statement..................................................2.1.1
Regulations.............................................................2.1.1
Secondary Market Trading Memorandum....................................3.12.3
Securities............................................................ .1.3.1
Subsidiary(ies)..........................................................2.27
Transfer Agent...........................................................3.22
Unaudited Financials.....................................................2.28
Underwriter.........................................................Introductory
Paragraph
Underwriter's Purchase
Option................................................................1.3.1
Underwriter's Securities................................................1.3.1
Underwriter's Shares....................................................1.3.1
Underwriter's Warrants..................................................1.3.1
Warrant.................................................................1.1.1
Warrant Agreement........................................................2.25
v
<PAGE>
TEARDROP GOLF COMPANY
1,150,000 Shares of Common Stock
and
1,150,000 Redeemable Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
New York, New York
, 1996
---------- --
GKN Securities Corp.
61 Broadway
12th Floor
New York, New York 10006
Ladies and Gentlemen:
The undersigned, TearDrop Golf Company, a Delaware corporation (the
"Company"), hereby confirms its agreement with GKN Securities Corp. (being
referred to herein variously as "you" or the "Underwriter") as follows:
1. PURCHASE AND SALE OF SECURITIES.
1.1 FIRM SECURITIES.
1.1.1 PURCHASE OF FIRM SECURITIES. On the basis of the
representations and warranties herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue and sell to the
Underwriter and the Underwriter agrees to purchase from the Company 1,150,000
shares of the Company's Common Stock ("Common Stock") at a purchase price (not
of commissions) of $4.275 per share ("Common Stock") and 1,150,000 of Redeemable
Common Stock Purchase Warrants ("Warrant(s)") at a purchase price of $.09 per
Warrant, each Warrant to purchase one share of Common Stock at an initial
purchase price of $4.00 per share commencing on the Effective Date (as
hereinafter defined) until the fifth anniversary of the Effective Date (these
shares of Common Stock and Warrants being referred to herein as "Firm
Securities").
1.1.2 PAYMENT AND DELIVERY. Delivery and payment for the Firm
Securities shall be made at 10:00 A.M., New York time, on or before the third
business day following the date that the Firm Securities commence trading or at
such earlier time as the Underwriter shall determine, or at such other time as
shall be agreed upon by the Underwriter and the Company at the offices of the
Underwriter or at such other place as shall be agreed upon by the Underwriter
and the Company. The hour and date of delivery and payment for the Firm
Securities are called the "Closing Date." Payment for the Firm Securities shall
be made on the Closing Date at the Underwriter's election by certified or bank
cashier's check(s) in New York Clearing House funds, payable to the order of the
Company upon delivery to you of certificates (in form and substance
<PAGE>
satisfactory to the Underwriter) representing the Firm Securities for the
account of the Underwriter. The Firm Securities shall be registered in such
name or names and in such authorized denominations as the Underwriter may
request in writing at least two full business days prior to the Closing Date.
The Company will permit the Underwriter to examine and package the Firm
Securities for delivery, at least one full business day prior to the Closing
Date. The Company shall not be obligated to sell or deliver the Firm Securities
except upon tender of payment by the Underwriter for all the Firm Securities.
1.2 OVER-ALLOTMENT OPTION.
1.2.1 OPTION SECURITIES. For the purposes of covering any
over-allotments in connection with the distribution and sale of the Firm
Securities, the Underwriter is hereby granted an option to purchase up to an
additional 172,500 shares of Common Stock and/or 172,500 Warrants from the
Company ("Over-allotment Option"). Such additional 172,500 shares of Common
Stock and 172,500 Warrants are hereinafter referred to as the "Option
Securities." The Firm Securities and the Option Securities are, together with
the shares of Common Stock issuable upon exercise of the Warrants, hereinafter
referred to collectively as the "Public Securities." The purchase price to be
paid for the Option Securities will be the same price per Option Security as the
price per Firm Security set forth in Section 1.1.1 hereof.
1.2.2 EXERCISE OF OPTION. The Over-allotment Option granted
pursuant to Section 1.2.1 hereof may be exercised by the Underwriter as to all
or any part of the Option Securities at any time, from time to time, within
forty-five days after the effective date ("Effective Date") of the Registration
Statement (as hereinafter defined). The Underwriter will not be under any
obligation to purchase any Option Securities prior to the exercise of the
Over-allotment Option. The Over-allotment Option granted hereby may be
exercised by the giving of oral notice to the Company from the Underwriter,
which must be confirmed by a letter or telecopy setting forth the number of
Option Securities to be purchased, the date and time for delivery of and payment
for the Option Securities and stating that the Option Securities referred to
therein are to be used for the purpose of covering over-allotments in connection
with the distribution and sale of the Firm Securities. If such notice is given
at least two full business days prior to the Closing Date, the date set forth
therein for such delivery and payment will be the Closing Date. If such notice
is given thereafter, the date set forth therein for such delivery and payment
will not be earlier than five full business days after the date of the notice,
unless we mutually agree to an earlier date. If such delivery and payment for
the Option Securities does not occur on the Closing Date, the date and time of
the closing for such Option Securities will be as set forth in the notice
(hereinafter the "Option Closing Date"). Upon exercise of the Over-allotment
Option, the Company will become obligated to convey to the Underwriter, and,
subject to the terms and conditions set forth herein, the Underwriter will
become obligated to purchase, the number of Option Securities specified in such
notice.
1.2.3 PAYMENT AND DELIVERY. Payment for the Option Securities
will be at the Underwriter's election by certified or bank cashier's check(s) in
New York Clearing House funds, payable to the order of the Company at the
offices of the Underwriter or at such other place as shall be agreed upon by the
Underwriter and the Company upon delivery to you of certificates representing
such securities for the Underwriter. The certificates representing the Option
Securities to be delivered will be in such denominations and registered in such
names as the Underwriter requests not less than two full business days prior to
the Closing Date or the Option
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<PAGE>
Closing Date, as the case may be, and will be made available to the Underwriter
for inspection, checking and packaging at the aforesaid office of the Company's
transfer agent or correspondent not less than one full business day prior to
such Closing Date.
1.3 UNDERWRITER'S PURCHASE OPTION.
1.3.1 PURCHASE OPTION. The Company hereby agrees to issue and
sell to the Underwriter (and/or its designees) on the Closing Date for an
aggregate purchase price of $100, an option ("Underwriter's Purchase Option"),
exercisable for a period of four years commencing one year from the Effective
Date, for the purchase of an aggregate of 115,000 shares of Common Stock
("Underwriter's Shares") at an initial exercise price of % of the
initial offering price of a share of common stock (i.e., $ per share of
Common Stock) and/or 115,000 Warrants ("Underwriter's Warrants") at an initial
exercise price 110% of the initial offering price of a Warrant (i.e. $
per Warrant). Each of the Underwriter's Shares and the Underwriter's Warrants
is identical to the Firm Securities. The Underwriter's Purchase Option, the
Underwriter's Shares, the Underwriter's Warrants and the shares of Common Stock
issuable upon exercise of the Underwriter's Warrants are hereinafter referred to
collectively as the "Underwriter's Securities." The Public Securities and the
Underwriter's Securities are hereinafter referred to collectively as the
"Securities."
1.3.2 PAYMENT AND DELIVERY. Delivery and payment for the
Underwriter's Purchase Option shall be made on the Closing Date. The Company
shall deliver to the Underwriter, upon payment therefor, certificates for the
Underwriter's Purchase Option in the name or names and in such authorized
denominations as the Underwriter may request.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and
warrants to the Underwriter as follows:
2.1 FILING OF REGISTRATION STATEMENT.
2.1.1 PURSUANT TO THE ACT. The Company has filed with the
Securities and Exchange Commission ("Commission") a registration statement and
an amendment or amendments thereto, on Form SB-2 (No. 333-14647), including any
related preliminary prospectus ("Preliminary Prospectus"), for the registration
of the Public Securities under the Securities Act of 1933, as amended ("Act"),
which registration statement and amendment or amendments have been prepared by
the Company in conformity with the requirements of the Act, and the rules and
regulations ("Regulations") of the Commission under the Act. Except as the
context may otherwise require, such registration statement, as amended, on file
with the Commission at the time the registration statement becomes effective
(including the prospectus, financial statements, schedules, exhibits and all
other documents filed as a part thereof or incorporated therein and all
information deemed to be a part thereof as of such time pursuant to paragraph
(b) of Rule 430A of the Regulations), is hereinafter called the "Registration
Statement," and the form of the final prospectus dated the Effective Date (or,
if applicable, the form of final prospectus filed with the Commission pursuant
to Rule 424 of the Regulations), is hereinafter called the "Prospectus." The
Registration Statement has been declared effective by the Commission on the date
hereof.
2.2 NO STOP ORDERS, ETC. Neither the Commission nor, to the best of the
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use
3
<PAGE>
of any Preliminary Prospectus or has instituted or, to the best of the Company's
knowledge, threatened to institute any proceedings with respect to such an
order.
2.3 DISCLOSURES IN REGISTRATION STATEMENT.
2.3.1 SECURITIES ACT AND EXCHANGE ACT REPRESENTATION. At the time
the Registration Statement became effective and at all times subsequent thereto
up to and including the Closing Date and the Option Closing Date, if any, the
Registration Statement and the Prospectus and any amendment or supplement
thereto contained and will contain all material statements which are required to
be stated therein in accordance with the Act and the Regulations, and conformed
and will conform in all material respects to the requirements of the Act and the
Regulations; neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, during such time period and on such dates,
contained or will contain any untrue statement of a material fact or omitted or
will omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading, nor did they or will they contain
any untrue statement of a material fact or did they or will they omit to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. When any Preliminary Prospectus was first filed with the
Commission (whether filed as part of the Registration Statement for the
registration of the Securities or any amendment thereto or pursuant to Rule
424(a) of the Regulations) and when any amendment thereof or supplement thereto
was first filed with the Commission, such Preliminary Prospectus and any
amendments thereof and supplements thereto at the time such filing was made
complied in all material respects with the applicable provisions of the Act and
the Regulations. The representation and warranty made in this Section 2.3.1
does not apply to statements made or statements omitted in reliance upon and in
conformity with written information furnished to the Company with respect to the
Underwriter expressly for use in the Registration Statement or Prospectus or any
amendment thereof or supplement thereto.
2.3.2 DISCLOSURE OF CONTRACTS. The description in the
Registration Statement and the Prospectus of contracts and other documents is
accurate and presents fairly the information required to be disclosed and there
are no contracts or other documents required to be described in the Registration
Statement or the Prospectus or to be filed with the Commission as exhibits to
the Registration Statement, which have not been so described or filed. Each
contract or other instrument (however characterized or described) to which the
Company is a party or by which its property or business is or may be bound or
affected and (i) which is referred to in the Prospectus, or (ii) is material to
the Company's business, has been duly and validly executed, is in full force and
effect in all material respects and is enforceable against the parties thereto
in accordance with its terms, and none of such contracts or instruments has been
assigned by the Company, and neither the Company nor, to the best of the
Company's knowledge, any other party is in default thereunder and, to the best
of the Company's knowledge, no event has occurred which, with the lapse of time
or the giving of notice, or both, would constitute a default thereunder. None
of the material provisions of such contracts or instruments violates or will
result in a violation of any existing applicable law, rule, regulation,
judgment, order or decree of any governmental agency or court having
jurisdiction over the Company or any of its respective assets or businesses,
including, without limitation, those relating to environmental laws and
regulations.
2.3.3 PRIOR SECURITIES TRANSACTIONS. No securities of the Company
have been sold by the Company or by or on behalf of, or for the benefit of, any
person or persons controlling,
4
<PAGE>
controlled by, or under common control with the Company within the three years
prior to the date hereof, except as disclosed in the Registration Statement.
2.4 CHANGES AFTER DATES IN REGISTRATION STATEMENT.
2.4.1 NO MATERIAL ADVERSE CHANGE. Since the respective dates as
of which information is given in the Registration Statement and the Prospectus,
except as otherwise specifically stated therein, (i) there has been no material
adverse change in the condition, financial or otherwise, or in the results of
operations, business or business prospects of the Company, including, but not
limited to, a material loss or interference with its business from fire, storm,
explosion, flood or other casualty, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree, whether or
not arising in the ordinary course of business, and (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 condition, financial
or otherwise, or to the results of operations, business or business prospects of
the Company.
2.4.2 RECENT SECURITIES TRANSACTIONS, ETC. Subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, and except as may otherwise be indicated or contemplated
herein or therein, the Company has not (i) issued any securities or incurred any
liability or obligation, direct or contingent, for borrowed money; or
(ii) declared or paid any dividend or made any other distribution on or in
respect to its capital stock.
2.5 INDEPENDENT ACCOUNTANTS. Rothstein, Kass & Company, P.C., whose
report is filed with the Commission as part of the Registration Statement, are
independent accountants as required by the Act and the Regulations.
2.6 FINANCIAL STATEMENTS. The financial statements, including the notes
thereto and supporting schedules included in the Registration Statement and
Prospectus, fairly present the financial position and the results of operations
of the Company at the dates and for the periods to which they apply; and such
financial statements have been prepared in conformity with generally accepted
accounting principles, consistently applied throughout the periods involved; and
the supporting schedules included in the Registration Statement present fairly
the information required to be stated therein.
2.7 AUTHORIZED CAPITAL; OPTIONS; ETC. The Company had at the date or
dates indicated in the Prospectus duly authorized, issued and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
Based on the assumptions stated in the Registration Statement and the
Prospectus, the Company will have on the Closing Date the adjusted stock
capitalization set forth therein. Except as set forth in the Registration
Statement and the Prospectus, on the Effective Date and on the Closing Date
there will be no options, warrants, or other rights to purchase or otherwise
acquire any authorized but unissued shares of Common Stock of the Company,
including any issuances pursuant to anti-dilution provisions, or any security
convertible into shares of Common Stock of the Company, or any contracts or
commitments to issue or sell shares of Common Stock or any such options,
warrants, rights or convertible securities.
5
<PAGE>
2.8 VALID ISSUANCE OF SECURITIES; ETC.
2.8.1 OUTSTANDING SECURITIES. All issued and outstanding
securities of the Company have been duly authorized and validly issued and are
fully paid and non-assessable; the holders thereof have no rights of rescission
with respect thereto, and are not subject to personal liability by reason of
being such holders; and none of such securities were issued in violation of the
preemptive rights of any holders of any security of the Company or similar
contractual rights granted by the Company. The outstanding options and warrants
to purchase shares of Common Stock constitute the valid and binding obligations
of the Company, enforceable in accordance with their terms. The authorized
Common Stock and outstanding options and warrants to purchase shares of Common
Stock conform to all statements relating thereto contained in the Registration
Statement and the Prospectus. The offers and sales of the outstanding Common
Stock, options and warrants to purchase shares of Common Stock were at all
relevant times either registered or qualified under the Act and the applicable
state securities or Blue Sky Laws or exempt from such registration requirements.
2.8.2 SECURITIES SOLD PURSUANT TO THIS AGREEMENT. The Securities
have been duly authorized and, when issued and paid for, will be validly issued,
fully paid and non-assessable; the holders thereof are not and will not be
subject to personal liability by reason of being such holders; the Securities
are not and will not be subject to the preemptive rights of any holders of any
security of the Company or similar contractual rights granted by the Company;
and all corporate action required to be taken for the authorization, issuance
and sale of the Securities has been duly and validly taken. When issued, the
Underwriter's Purchase Option, the Underwriter's Warrants and the Warrants will
constitute valid and binding obligations of the Company to issue and sell, upon
exercise thereof and payment therefor, the number and type of securities of the
Company called for thereby and the Underwriter's Purchase Option, the
Underwriter's Warrants and the Warrants will be enforceable against the Company
in accordance with their respective terms, except (i) as such enforceability may
be limited by bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally, (ii) as enforceability of any indemnification
provision may be limited under the federal and state securities laws, and (iii)
that the remedy of specific performance and injunctive and other forms of
equitable relief may be subject to the equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought.
2.9 REGISTRATION RIGHTS OF THIRD PARTIES. Except as set forth in the
Prospectus, no holders of any securities of the Company or of any options or
warrants of the Company exercisable for or convertible or exchangeable into
securities of the Company have the right to require the Company to register any
such securities of the Company under the Act or to include any such securities
in a registration statement to be filed by the Company.
2.10 VALIDITY AND BINDING EFFECT OF AGREEMENTS. This Agreement has been
duly and validly authorized by the Company, and this Agreement and the Warrant
Agreement (as hereinafter defined) constitute, and the Financial Consulting
Agreement when executed and delivered pursuant to this Agreement, have been duly
and validly authorized by the Company and constitute, or when executed and
delivered, will constitute, the valid and binding agreements of the Company,
enforceable against the Company in accordance with their respective terms,
except (i) as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally, (ii) as
enforceability of any indemnification provision may be
6
<PAGE>
limited under the federal and state securities laws, and (iii) that the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to the equitable defenses and to the discretion of the court before
which any proceeding therefor may be brought.
2.11 NO CONFLICTS, ETC. The execution, delivery, and performance by the
Company of this Agreement, the Warrant Agreement and the Financial Consulting
Agreement, and the consummation by the Company of the transactions herein and
therein contemplated and the compliance by the Company with the terms hereof and
thereof have been duly authorized by all necessary corporate action and do not
and will not, with or without the giving of notice or the lapse of time or both,
(i) result in a breach of, or conflict with any of the terms and provisions of,
or constitute a default under, or result in the creation, modification,
termination or imposition of any lien, charge or encumbrance upon any property
or assets of the Company pursuant to the terms of any indenture, mortgage, deed
of trust, note, loan or credit agreement or any other agreement or instrument
evidencing an obligation for borrowed money, or any other agreement or
instrument to which the Company is a party or by which the Company may be bound
or to which any of the property or assets of the Company is subject; (ii) result
in any violation of the provisions of the Certificate of Incorporation or the
By-Laws of the Company; (iii) violate any existing applicable law, rule,
regulation, judgment, order or decree of any governmental agency or court,
domestic or foreign, having jurisdiction over the Company or any of its
properties or business; or (iv) have a material adverse effect on any permit,
license, certificate, registration, approval, consent, license or franchise
concerning the Company.
2.12 NO DEFAULTS; VIOLATIONS. Except as described in the Prospectus, no
default exists in the due performance and observance of any term, covenant or
condition of any material license, contract, indenture, mortgage, deed of trust,
note, loan or credit agreement, or any other agreement or instrument evidencing
an obligation for borrowed money, or any other material agreement or instrument
to which the Company is a party or by which the Company may be bound or to which
any of the properties or assets of the Company is subject. The Company is not
in violation of any term or provision of its Certificate of Incorporation or
By-Laws or in violation of any franchise, license, permit, applicable law, rule,
regulation, judgment or decree of any governmental agency or court, domestic or
foreign, having jurisdiction over the Company or any of its properties or
business, except as described in the Prospectus.
2.13 CORPORATE POWER; LICENSES; CONSENTS.
2.13.1 CONDUCT OF BUSINESS. The Company has all requisite
corporate power and authority, and has all necessary authorizations, approvals,
orders, licenses, certificates and permits of and from all governmental
regulatory officials and bodies to own or lease its properties and conduct its
business as described in the Prospectus, and the Company is and has been doing
business in compliance with all such material authorizations, approvals, orders,
licenses, certificates and permits and all federal, state and local laws, rules
and regulations. The disclosures in the Registration Statement concerning the
effects of federal, state and local regulation on the Company's business as
currently contemplated are correct in all material respects and do not omit to
state a material fact.
2.13.2 TRANSACTIONS CONTEMPLATED HEREIN. The Company has all
corporate power and authority to enter into this Agreement and to carry out the
provisions and conditions hereof, and all consents, authorizations, approvals
and orders required in connection therewith have been
7
<PAGE>
obtained. No consent, authorization or order of, and no filing with, any court,
government agency or other body is required for the valid issuance, sale and
delivery, of the Securities pursuant to this Agreement, the Warrant Agreement
and the Underwriter's Purchase Option, and as contemplated by the Prospectus,
except with respect to applicable federal and state securities laws.
2.14 TITLE TO PROPERTY; INSURANCE. The Company has good and marketable
title to, or valid and enforceable leasehold estates in, all items of real and
personal property (tangible and intangible) owned or leased by it, free and
clear of all liens, encumbrances, claims, security interests, defects and
restrictions of any material nature whatsoever, other than those referred to in
the Prospectus and liens for taxes not yet due and payable. The Company has
adequately insured its properties against loss or damage by fire or other
casualty and maintains, in adequate amounts, such other insurance as is usually
maintained by companies engaged in the same or similar business.
2.15 LITIGATION; GOVERNMENTAL PROCEEDINGS. Except as set forth in the
Prospectus, there is no action, suit, proceeding, inquiry, arbitration,
investigation, litigation or governmental proceeding pending or threatened
against, or involving the properties or business of, the Company which might
materially and adversely affect the financial position, prospects, value or the
operation or the properties or the business of the Company, or which question
the validity of the capital stock of the Company or this Agreement or of any
action taken or to be taken by the Company pursuant to, or in connection with,
this Agreement. There are no outstanding orders, judgments or decrees of any
court, governmental agency or other tribunal naming the Company and enjoining
the Company from taking, or requiring the Company to take, any action, or to
which the Company, its properties or business is bound or subject.
2.16 GOOD STANDING. The Company has been duly organized and is validly
existing as a corporation and is in good standing under the laws of the state of
its incorporation. The Company is duly qualified and licensed and in good
standing as a foreign corporation in each jurisdiction in which ownership or
leasing of any properties or the character of its operations requires such
qualification or licensing, except where the failure to qualify would not have a
material adverse effect on the Company.
2.17 TAXES. The Company has filed all returns (as hereinafter defined)
required to be filed with taxing authorities prior to the date hereof or has
duly obtained extensions of time for the filing thereof. The Company has paid
all taxes (as hereinafter defined) shown as due on such returns that were filed
and has paid all taxes imposed on or assessed against the Company. The
provisions for taxes payable, if any, shown on the financial statements filed
with or as part of the Registration Statement are sufficient for all accrued and
unpaid taxes, whether or not disputed, and for all periods to and including the
dates of such consolidated financial statements. Except as disclosed in writing
to the Underwriter, (i) no issues have been raised (and are currently pending)
by any taxing authority in connection with any of the returns or taxes asserted
as due from the Company, and (ii) no waivers of statutes of limitation with
respect to the returns or collection of taxes have been given by or requested
from the Company. The term "taxes" mean all federal, state, local, foreign, and
other net income, gross income, gross receipts, sales, use, ad valorem,
transfer, franchise, profits, license, lease, service, service use, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
windfall profits, customs, duties or other taxes, fees, assessments, or charges
of any kind whatever, together with any
8
<PAGE>
interest and any penalties, additions to tax, or additional amounts with respect
thereto. The term "returns" means all returns, declarations, reports,
statements, and other documents required to be filed in respect to taxes.
2.18 EMPLOYEES' OPTIONS. No shares of Common Stock are eligible for sale
pursuant to Rule 701 promulgated under the Act.
2.19 TRANSACTIONS AFFECTING DISCLOSURE TO NASD.
2.19.1 FINDER'S FEES. There are no claims, payments, issuances,
arrangements or understandings for services in the nature of a finder's or
origination fee with respect to the sale of the Securities hereunder or any
other arrangements, agreements, understandings, payments or issuance with
respect to the Company that may affect the Underwriter's compensation, as
determined by the National Association of Securities Dealers, Inc. ("NASD").
2.19.2 PAYMENTS WITHIN TWELVE MONTHS. The Company has not made any
direct or indirect payments (in cash, securities or otherwise) to (i) any
person, as a finder's fee, investing fee or otherwise, in consideration of such
person raising capital for the Company or introducing to the Company persons who
provided capital to the Company, (ii) to any NASD member, or (iii) to any person
or entity that has any direct or indirect affiliation or association with any
NASD member within the twelve month period prior to the date on which the
Registration Statement was filed with the Commission ("Filing Date") or
thereafter, other than payments to the Underwriter.
2.19.3 USE OF PROCEEDS. None of the net proceeds of the offering
will be paid by the Company to any participating NASD member or any affiliate or
associate of any NASD member, except as specifically authorized herein.
2.19.4 INSIDERS' NASD AFFILIATION. No officer or director of the
Company or owner of any of the Company's unregistered securities has any direct
or indirect affiliation or association with any NASD member. The Company will
advise the Underwriter and the NASD if any stockholder of the Company is or
becomes an affiliate or associated person of an NASD member participating in the
offering.
2.20 FOREIGN CORRUPT PRACTICES ACT. Neither the Company nor any of its
officers, directors, employees, agents or any other person acting on behalf of
the Company has, directly or indirectly, given or agreed to give any money, gift
or similar benefit (other than legal price concessions to customers in the
ordinary course of business) to any customer, supplier, employee or agent of a
customer or supplier, or official or employee of any governmental agency or
instrumentality of any government (domestic or foreign) or any political party
or candidate for office (domestic or foreign) or any political party or
candidate for office (domestic or foreign) or other person who was, is, or may
be in a position to help or hinder the business of the Company (or assist it in
connection with any actual or proposed transaction) which (i) might subject the
Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (ii) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company
as reflected in any of the financial statements contained in the Prospectus or
(iii) if not continued in the future, might adversely affect the assets,
business, operations or prospects of the Company. The Company's internal
accounting controls and
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procedures are sufficient to cause the Company to comply with the Foreign
Corrupt Practices Act of 1977, as amended.
2.21 NASDAQ ELIGIBILITY. As of the Effective Date, the Public Securities
have been approved for quotation on the Nasdaq SmallCap Market ("Nasdaq").
2.22 INTANGIBLES. The Company owns or possesses the requisite licenses or
rights to use all trademarks, service marks, service names, trade names, patents
and patent applications, copyrights and other rights (collectively,
"Intangibles") described as being licensed to or owned by it in the Registration
Statement. The Company's Intangibles which have been registered in the United
States Patent and Trademark Office have been fully maintained and are in full
force and effect. There is no claim or action by any person pertaining to, or
proceeding pending or threatened and the Company has not received any notice of
conflict with the asserted rights of others which challenges the exclusive right
of the Company with respect to any Intangibles used in the conduct of the
Company's business except as described in the Prospectus. The Intangibles and
the Company's current products, services and processes do not infringe on any
intangibles held by any third party. To the best of the Company's knowledge, no
others have infringed upon the Intangibles of the Company.
2.23 RELATIONS WITH EMPLOYEES.
2.23.1 EMPLOYEE MATTERS. The Company has generally enjoyed a
satisfactory employer-employee relationship with its employees and is in
compliance in all material respects with all federal, state and local laws and
regulations respecting the employment of its employees and employment practices,
terms and conditions of employment and wages and hours relating thereto. There
are no pending investigations involving the Company by the U.S. Department of
Labor, or any other governmental agency responsible for the enforcement of such
federal, state or local laws and regulations. There is no unfair labor practice
charge or complaint against the Company pending before the National Labor
Relations Board or any strike, picketing, boycott, dispute, slowdown or stoppage
pending or threatened against or involving the Company or any predecessor
entity, and none has ever occurred. No question concerning representation
exists respecting the employees of the Company and no collective bargaining
agreement or modification thereof is currently being negotiated by the Company.
No grievance or arbitration proceeding is pending under any expired or existing
collective bargaining agreements of the Company, if any.
2.23.2 EMPLOYEE BENEFIT PLANS. Other than as set forth in the
Registration Statement, the Company neither maintains, sponsors nor contributes
to, nor is it required to contribute to, any program or arrangement that is an
"employee pension benefit plan," an "employee welfare benefit plan," or a,
"multi-employer plan" as such terms are defined in Sections 3(2), 3(1) and
3(37), respectively, of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA") ("ERISA Plans"). The Company does not, and has at no time,
maintained or contributed to a defined benefit plan, as defined in Section 3(35)
of ERISA. If the Company does maintain or contribute to a defined benefit plan,
any termination of the plan on the date hereof would not give rise to liability
under Title IV of ERISA. No ERISA Plan (or any trust created thereunder) has
engaged in a "prohibited transaction" within the meaning of Section 406 of ERISA
or Section 4975 of the Internal Revenue Code of 1986, as amended ("Code"), which
could subject the Company to any tax penalty for prohibited transactions and
which has not adequately been corrected. Each ERISA Plan is in compliance with
all material reporting,
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disclosure and other requirements of the Code and ERISA as they relate to any
such ERISA Plan. Determination letters have been received from the Internal
Revenue Service with respect to each ERISA Plan which is intended to comply with
Code Section 401(a), stating that such ERISA Plan and the attendant trust are
qualified thereunder. The Company has never completely or partially withdrawn
from a "multi-employer plan".
2.24 OFFICERS' CERTIFICATE. Any certificate signed by any duly authorized
officer of the Company and delivered to you or to your counsel shall be deemed a
representation and warranty by the Company to the Underwriter as to the matters
covered thereby.
2.25 WARRANT AGREEMENT. The Company has entered into a warrant agreement
with respect to the Warrants and the Underwriter's Warrants substantially in the
form filed as an exhibit to the Registration Statement ("Warrant Agreement")
with Continental Stock Transfer & Trust Company, in form and substance
satisfactory to the Underwriter, providing for among other things, (i) no
redemption of the Warrants without the consent of the Underwriter and (ii) for
the payment of a warrant solicitation fee as contemplated by Section 3.10
hereof.
2.26 AGREEMENTS WITH INSIDERS. The Company has caused to be duly executed
a legally binding and enforceable agreement pursuant to which all holders of the
outstanding Common Stock of the Company agree not to sell any shares of Common
Stock owned by them (either pursuant to Rule 144 of the Regulations or
otherwise) for a period of 24 months following the Effective Date except with
the prior consent of the Underwriter.
2.27 SUBSIDIARIES. The representations and warranties made by the Company
in this Agreement shall, in the event that the Company has one or more
subsidiaries (a "subsidiary(ies)") also apply and be true with respect to each
subsidiary, individually and taken as a whole with the Company and all other
subsidiaries, as if each representation and warranty contained herein made
specific reference to the subsidiary each time the term "Company" was used.
2.28 UNAUDITED FINANCIALS. The Company has furnished to the Underwriter as
early as practicable prior to the date hereof a copy of the latest available
unaudited interim financial statements ("Unaudited Financials") of the Company
(which in no event shall be as of a date more than thirty days prior to the
Effective Date) which have been read by the Company's independent accountants,
as stated in their letter to be furnished pursuant to Section 4.3 hereof.
2.29 NATIONSBANK CREDIT LINE. There exists no default under the Company's
existing credit facility with NationsBank of South Carolina ("NationsBank") or a
legally effective waiver from any such default has been obtained from
NationsBank. The payment date for any and all monies due or to become due from
the Company to NationsBank under such financing has been extended, in writing,
by NationsBank to at least December 31, 1996.
2.30 WOOTEN RELATIONSHIP. The Company has paid all royalty and other
licensing fees due to Wayne R. Wooten. Mr. Wooten has completed any and all
obligations he has to the Company with respect to the designing of modifications
to existing products and new products or his failure to do same has not and will
not adversely affect the operations or financial condition of the Company. The
Company has taken all necessary actions to acknowledge Mr. Wooten as the
designer of those certain golf clubs as required under the terms of the
agreements entered
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into between Mr. Wooten and the Company in July, 1994 or has obtained from Mr.
Wooten a legally valid and enforceable waiver of such acknowledgment
obligations.
2.31 PRODUCT LIABILITY INSURANCE. The Company maintains product liability
insurance of the type and in the amounts typically maintained by participants in
the golf equipment industry.
3. COVENANTS OF THE COMPANY. The Company covenants and agrees as follows:
3.1 AMENDMENTS TO REGISTRATION STATEMENT. The Company will deliver to the
Underwriter, prior to filing, any amendment or supplement to the Registration
Statement or Prospectus proposed to be filed after the Effective Date and not
file any such amendment or supplement to which the Underwriter shall reasonably
object.
3.2 FEDERAL SECURITIES LAWS.
3.2.1 COMPLIANCE. During the time when a Prospectus is required
to be delivered under the Act the Company will use all reasonable efforts to
comply with all requirements imposed upon it by the Act, the Regulations and the
Exchange Act and by the regulations under the Exchange Act, as from time to time
in force, so far as necessary to permit the continuance of sales of or dealings
in the Public Securities in accordance with the provisions hereof and the
Prospectus. If at any time when a Prospectus relating to the Public Securities
is required to be delivered under the Act any event shall have occurred as a
result of which, in the opinion of counsel for the Company or counsel for the
Underwriter, the Prospectus, as then amended or supplemented, includes an untrue
statement of a material fact or omits to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or if it is necessary
at any time to amend the Prospectus to comply with the Act, the Company will
notify the Underwriter promptly and prepare and file with the Commission,
subject to Section 3.1 hereof, an appropriate amendment or supplement in
accordance with Section 10 of the Act.
3.2.2 FILING OF FINAL PROSPECTUS. The Company will file the
Prospectus (in form and substance satisfactory to the Underwriter) with the
Commission pursuant to the requirements of Rule 424 of the Regulations.
3.2.3 EXCHANGE ACT REGISTRATION. For a period of five years from
the Effective Date, the Company will use its best efforts to maintain the
registration of the Common Stock and Warrants under the provisions of the
Exchange Act.
3.3 BLUE SKY FILING. The Company will endeavor in good faith, in
cooperation with the Underwriter, at or prior to the time the Registration
Statement becomes effective, to qualify the Public Securities for offering and
sale under the securities laws of such jurisdictions as the Underwriter may
reasonably designate, provided that no such qualification shall be required in
any jurisdiction where, as a result thereof, the Company would be subject to
service of general process or to taxation as a foreign corporation doing
business in such jurisdiction. In each jurisdiction where such qualification
shall be effected, the Company will, unless the Underwriter agrees that such
action is not at the time necessary or advisable, use all reasonable efforts to
file and make such statements or reports at such times as are or may be required
by the laws of such jurisdiction.
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3.4 DELIVERY TO THE UNDERWRITER OF PROSPECTUSES. The Company will deliver
to the Underwriter, without charge, from time to time during the period when the
Prospectus is required to be delivered under the Act or the Exchange Act such
number of copies of each Preliminary Prospectus and the Prospectus as the
Underwriter may reasonably request and, as soon as the Registration Statement or
any amendment or supplement thereto becomes effective, deliver to you two
original executed Registration Statements, including exhibits, and all
post-effective amendments thereto and copies of all exhibits filed therewith or
incorporated therein by reference and all original executed consents of
certified experts.
3.5 EVENTS REQUIRING NOTICE TO THE UNDERWRITER. The Company will notify
the Underwriter immediately and confirm the notice in writing (i) of the
effectiveness of the Registration Statement and any amendment thereto, (ii) of
the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding for that purpose, (iii) of the issuance by any
state securities commission of any proceedings for the suspension of the
qualification of the Public Securities for offering or sale in any jurisdiction
or of the initiation, or the threatening, of any proceeding for that purpose,
(iv) of the mailing and delivery to the Commission for filing of any amendment
or supplement to the Registration Statement or Prospectus, (v) of the receipt of
any comments or request for any additional information from the Commission, and
(vi) of the happening of any event during the period described in Section 3.4
hereof which, in the judgment of the Company, makes any statement of a material
fact made in the Registration Statement or the Prospectus untrue or which
requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. If the Commission or
any state securities commission shall enter a stop order or suspend such
qualification at any time, the Company will make every reasonable effort to
obtain promptly the lifting of such order.
3.6 REVIEW OF FINANCIAL STATEMENTS. For a period of five years from the
Effective Date, the Company, at its expense, shall cause its regularly engaged
independent certified public accountants to review (but not audit) the Company's
financial statements for each of the first three fiscal quarters prior to the
announcement of quarterly financial information, the filing of the Company's
Form 10-Q quarterly report and the mailing of quarterly financial information to
stockholders.
3.7 RESERVED.
3.8 SECONDARY MARKET TRADING AND STANDARD & POOR'S. The Company will take
all necessary and appropriate actions to achieve accelerated publication in
Standard and Poor's Corporation Records Corporate Descriptions (within 30 days
after the Effective Date) and to maintain such publication with updated
quarterly information for a period of five years from the Effective Date,
including the payment of any necessary fees and expenses. The Company shall
take such action as may be reasonably requested by the Underwriter to obtain a
secondary market trading exemption in such States as may be requested by the
Underwriter, including the payment of any necessary fees and expenses and the
filing of a Form (e.g. 25101(b)) for secondary market trading in the State of
California on the Effective Date.
3.9 NASDAQ MAINTENANCE. For a period of five years from the date hereof,
the Company will use its best efforts to maintain the quotation by Nasdaq of the
Common Stock, and, if outstanding, the Warrants and, if the Company satisfies
the inclusion standards of the Nasdaq
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SmallCap, to apply for and maintain quotations by the Nasdaq SmallCap of such
securities during such period.
3.10 WARRANT SOLICITATION AND REGISTRATION OF COMMON STOCK UNDERLYING THE
WARRANTS.
3.10.1 WARRANT SOLICITATION FEES. The Company hereby engages the
Underwriter, on a non-exclusive basis, as its agent for the solicitation of the
exercise of the Warrants. The Company, at its cost, will (i) assist the
Underwriter with respect to such solicitation, if requested by the Underwriter
and will (ii) provide the Underwriter, and direct the Company's transfer and
warrant agent to provide to the Underwriter, lists of the record and, to the
extent known, beneficial owners of the Company's Warrants. Commencing one year
from the Effective Date, the Company will pay to the Underwriter a commission of
five percent of the Warrant exercise price for each Warrant exercised, payable
on the date of such exercise, on the terms provided for in the Warrant
Agreement, if allowed under the rules and regulations of the NASD and only if
the Underwriter has provided bona fide securities to the Company in connection
with the exercise of Warrants. In addition to soliciting either orally or in
writing, the exercise of Warrants, such services may also include disseminating
information, either orally or in writing to Warrant holders about the Company or
the market for the Company's securities, and the assisting in the processing of
Warrants. The Underwriter may engage sub-agents in its solicitation efforts.
The Company will disclose the arrangement to pay such solicitation fees to the
Underwriter in any prospectus used by the Company in connection with the
registration of the shares of Common Stock underlying the Warrants.
3.10.2 REGISTRATION OF COMMON STOCK. The Company agrees that prior
to the date that the Warrants become exercisable, it shall file with the
Commission a post-effective amendment to the Registration Statement, if possible
or a new registration statement, for the registration, under the Act, of the
Common Stock issuable upon exercise of the Warrants. In either case, the
Company shall cause the same to become effective at or prior to the date that
the Warrants become exercisable, and to maintain the effectiveness of such
registration statement and keep current a prospectus thereunder until the
expiration of the Warrants in accordance with the provisions of the Warrant
Agreement.
3.11 PUBLIC RELATIONS FIRM. The Company shall retain a public relations
firm acceptable to the Underwriter for a period of five years from the Effective
Date.
3.12 REPORTS TO THE UNDERWRITER.
3.12.1 PERIODIC REPORTS, ETC. For a period of five years from the
Effective Date, the Company will promptly furnish to the Underwriter copies of
such financial statements and other periodic and special reports as the Company
from time to time files with any governmental authority or furnishes generally
to holders of any class of its securities, and promptly furnish to the
Underwriter (i) a copy of each periodic report the Company shall be required to
file with the Commission, (ii) a copy of every press release and every news item
and article with respect to the Company or its affairs which was released by the
Company, (iii) copies of each Form SR, (iv) a copy of each Form 8-K or Schedules
13D, 13G, 14D-1 or 13E-4 received or prepared by the Company, (v) a copy of
monthly statements setting forth such information regarding the Company's
results of operations and financial position (including balance sheet, profit
and loss statements and data regarding outstanding purchase orders) as is
regularly prepared by
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management of the Company, and (vi) such additional documents and information
with respect to the Company and the affairs of any future subsidiaries of the
Company as the Underwriter may from time to time reasonably request.
3.12.2 TRANSFER SHEETS AND WEEKLY POSITION LISTINGS. For a period
of five years from the Closing Date, the Company will furnish to the Underwriter
at the Company's sole expense such transfer sheets and position listings of the
Company's securities as the Underwriter may request, including the daily, weekly
and monthly consolidated transfer sheets of the transfer agent of the Company
and the weekly position listings of the Depository Trust Company.
3.12.3 SECONDARY MARKET TRADING MEMORANDUM. Until such time as the
Public Securities are listed or quoted, as the case may be, on one of the
following: the New York Stock Exchange, the American Stock Exchange or Nasdaq
National Market, the Company shall cause the Underwriter's legal counsel to
deliver to the Underwriter a written opinion detailing those states in which
Public Securities may be traded in non-issuer transactions under the Blue Sky
laws of the fifty states ("Secondary Market Trading Memorandum") and to update
such memorandum and deliver same to the Underwriter on a timely basis, but in
any event on the Effective Date, and on the first day of every calendar quarter
thereafter. The Company shall pay to the Underwriter's legal counsel a one-time
fee of $5,000 for such services at the Closing.
3.13 AGREEMENTS BETWEEN THE UNDERWRITER AND THE COMPANY.
3.13.1 FINANCIAL CONSULTING AGREEMENT. On the Closing Date, the
Company will enter into a Financial Consulting Agreement with the Underwriter in
the form filed with the Commission pursuant to which the Underwriter shall
receive a consulting fee of $2,500 per month for a two year period from the
Closing Date ("Financial Consulting Agreement"). All $60,000 of the consulting
fees shall be paid in advance on the Closing Date. Such agreement shall also
provide for a finder's fee to be paid to the Underwriter if the Company
participates in any merger, acquisition, consolidation, or other transaction in
which the Underwriter introduced the Company to the other party in an amount
equal to five percent of the first $5,000,000, four percent of the next
$2,000,000, three percent of the next $2,000,000 and two percent of the excess,
if any, over $9,000,000 of the consideration involved in any such transaction,
for a period of five years from the Closing Date.
3.13.2 UNDERWRITER'S PURCHASE OPTION. On the Closing Date, the
Company will execute and deliver the Underwriter's Purchase Option to the
Underwriter substantially in the form filed as an exhibit to the Registration
Statement.
3.14 DISQUALIFICATION OF FORM SB-2. For a period equal to five years from
the date hereof, the Company will not take any action or actions which may
prevent or disqualify the Company's use of Form SB-2 (or other appropriate form)
for the registration of the Warrants and the Underwriter's Purchase Option and
the securities issuable upon exercise of those securities under the Act.
3.15 PAYMENT OF EXPENSES.
3.15.1 GENERAL EXPENSES. The Company hereby agrees to pay on each
of the Closing Date and the Option Closing Date, if any, to the extent not paid
at Closing Date, all
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expenses incident to the performance of the obligations of the Company under
this Agreement, including but not limited to (i) the preparation, printing,
filing, delivery and mailing (including the payment of postage with respect to
such mailing) of the Registration Statement, the Prospectus and the Preliminary
Prospectuses and the printing and mailing of this Agreement and related
documents, including the cost of all copies thereof and any amendments thereof
or supplements thereto supplied to the Underwriter in quantities as may be
required by the Underwriter, (ii) the printing, engraving, issuance and delivery
of the shares of Common Stock, the Warrants and the Underwriter's Purchase
Option, including any transfer or other taxes payable thereon, (iii) the
qualification of the Public Securities under state or foreign securities or Blue
Sky laws, including the filing fees under such Blue Sky laws, the costs of
printing and mailing the "Preliminary Blue Sky Memorandum," and all amendments
and supplements thereto, fees up to an aggregate of $35,000 and disbursements of
the Underwriter's counsel, and fees and disbursements of local counsel, if any,
retained for such purpose, and a one-time fee of $5,000 payable to the
Underwriter's counsel for the preparation of the Secondary Market Trading
Memorandum, (iv) costs associated with applications for assignments of a rating
of the Public Securities by qualified rating agencies, (v) filing fees, costs
and expenses (including fees and disbursements for the Underwriter's counsel)
incurred in registering the offering with the NASD, (vi) costs of placing
"tombstone" advertisements in THE WALL STREET JOURNAL, THE NEW YORK TIMES and a
third publication to be selected by the Underwriter, (vii) fees and
disbursements of the transfer and warrant agent, (viii) the Company's expenses
associated with "due diligence" meetings arranged by the Underwriter; (ix) the
preparation, binding and delivery of transaction "bibles," in number, form and
style reasonably satisfactory to the Underwriter and transaction lucite cubes or
similar commemorative items in a style and quantity as reasonably requested by
the Underwriter, (x) any listing of the Public Securities on Nasdaq SmallCap,
and any securities exchange or any listing in Standard & Poor's, (xi) fees and
disbursements of any counsel engaged to review the Company's intellectual
property rights, and (xii) all other costs and expenses incident to the
performance of its obligations hereunder which are not otherwise specifically
provided for in this Section 3.15.1. Since an important part of the public
offering process is for the Company to appropriately and accurately describe
both the background of the principals of the Company and the Company's
competitive position in its industry, the Company has engaged and will pay for
an investigative search firm of the Underwriter's choice to conduct an
investigation of principals of the Company mutually selected by the Underwriter
and the Company. The Underwriter may deduct from the net proceeds of the
offering payable to the Company on the Closing Date, or the Option Closing Date,
if any, the expenses set forth herein to be paid by the Company to the
Underwriter and/or to third parties.
3.15.2 NON-ACCOUNTABLE EXPENSES. The Company further agrees that,
in addition to the expenses payable pursuant to Section 3.15.1, it will pay to
the Underwriter a non-accountable expense allowance equal to three percent (3%)
of the gross proceeds received by the Company from the sale of the Public
Securities, of which $50,000 has been paid to date, and the Company will pay the
balance on the Closing Date and any additional monies owed attributable to the
Option Securities or otherwise on the Option Closing Date by certified or bank
cashier's check or, at the election of the Underwriter, by deduction from the
proceeds of the offering contemplated herein. If the offering contemplated by
this Agreement is not consummated for any reason whatsoever then the following
provisions shall apply: The Company's liability for payment to the Underwriter
of the non-accountable expense allowance shall be equal to the sum of the
Underwriter's actual out-of-pocket expenses (including, but not limited to,
counsel fees, "road-show" and due diligence expenses). The Underwriter shall
retain such part of the non-
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accountable expense allowance previously paid as shall equal such actual
out-of-pocket expenses. If the amount previously paid is insufficient to cover
such actual out-of-pocket expenses, the Company shall remain liable for and
promptly pay any other actual out-of-pocket expenses. If the amount previously
paid exceeds the amount of actual out-of-pocket expenses, the Underwriter shall
promptly remit to the Company any such excess.
3.16 APPLICATION OF NET PROCEEDS. The Company will apply the net proceeds
from the offering received by it in a manner consistent with the application
described under the caption "USE OF PROCEEDS" in the Prospectus. The Company
hereby agrees that, other than described under "USE OF PROCEEDS" in the
Prospectus, the Company will not apply any net proceeds from the offering to pay
(i) any debt for borrowed funds, other than periodic payments, in the ordinary
course, under bank or other institutional credit lines, or (ii) any debt or
obligation owed to any shareholder owning one percent or more of the outstanding
shares of Common Stock on the Closing Date, or by any family member or affiliate
of any of the foregoing persons, or by any option holder who would have the
ability to sell the shares underlying his option under Rule 701 under the Act
(collectively, "Insiders".
3.17 DELIVERY OF EARNINGS STATEMENTS TO SECURITY HOLDERS. The Company will
make generally available to its security holders as soon as practicable, but not
later than the first day of the fifteenth full calendar month following the
Effective Date, an earnings statement (which need not be certified by
independent public or independent certified public accountants unless required
by the Act or the Regulations, but which shall satisfy the provisions of Rule
158(a) under Section 11(a) of the Act) covering a period of at least twelve
consecutive months beginning after the Effective Date.
3.18 KEY PERSON LIFE INSURANCE. The Company will maintain key person life
insurance in an amount no less than $1,000,000 on the life of Rudy A. Slucker
and pay the annual premiums therefor naming the Company as the sole beneficiary
thereof for at least three years following the Effective Date.
3.19 STABILIZATION. Neither the Company, nor, to its knowledge, any of its
employees, directors or stockholders has taken or will take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in, under the Exchange Act, or
otherwise, stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Public Securities.
3.20 INTERNAL CONTROLS. The Company maintains and will continue to
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 authorization, (ii) transactions are recorded
as necessary in order to permit preparation of financial statements in
accordance with generally accepted accounting principles and to maintain
accountability for assets, (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.
3.21 ACCOUNTANTS AND LAWYERS. For a period of five years from the
Effective Date, the Company shall retain independent public accountants and
securities lawyers with at least $7,500,000 of malpractice insurance covering
offerings of the type contemplated herein, and
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acceptable to the Underwriter. Accountants Rothstein, Kass & Company, P.C. and
lawyers Crummy, Del Deo, Dolan, Griffinger & Vecchione are acceptable to the
Company.
3.22 TRANSFER AGENT. For a period of five years from the Effective Date,
the Company shall retain a transfer agent for the Common Stock and Warrants
acceptable to the Underwriter. Continental Stock Transfer & Trust Company
("Transfer Agent") is acceptable to the Company.
3.23 SALE OF SECURITIES. The Company agrees not to permit or cause a
private or public sale or private or public offering of any of its securities
(in any manner, including pursuant to Rule 144 under the Act) owned nominally or
beneficially by the Insiders for a period of 24 months following the Effective
Date without obtaining the prior written approval of the Underwriter.
4. CONDITIONS OF THE UNDERWRITER'S OBLIGATIONS. The obligations of the
Underwriter to purchase and pay for the Securities, as provided herein, shall be
subject to the continuing accuracy of the representations and warranties of the
Company as of the date hereof and as of each of the Closing Date and the Option
Closing Date, if any, to the accuracy of the statements of officers of the
Company made pursuant to the provisions hereof and to the performance by the
Company of its obligations hereunder and to the following conditions:
4.1 REGULATORY MATTERS.
4.1.1 EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement has been declared effective on the date of this Agreement and, at each
of the Closing Date and the Option Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings for the purpose shall have been instituted or shall be pending or
contemplated by the Commission and any request on the part of the Commission for
additional information shall have been complied with to the reasonable
satisfaction of Graubard Mollen & Miller, counsel to the Underwriter.
4.1.2 NASD CLEARANCE. By the Effective Date, the Underwriter
shall have received clearance from the NASD as to the amount of compensation
allowable or payable to the Underwriter as described in the Registration
Statement.
4.1.3 NO BLUE SKY STOP ORDERS. No order suspending the sale of
the Securities in any jurisdiction designated by you pursuant to Section 3.3
hereof shall have been issued on either on the Closing Date or the Option
Closing Date, and no proceedings for that purpose shall have been instituted or
shall be contemplated.
4.2 COMPANY COUNSEL MATTERS.
4.2.1 EFFECTIVE DATE OPINION OF COUNSEL. On the Effective Date,
the Underwriter shall have received the favorable opinion of Crummy, Del Deo,
Dolan, Griffinger & Vecchione, counsel to the Company, dated the Effective Date,
addressed to the Underwriter and in form and substance satisfactory to Graubard
Mollen & Miller, counsel to the Underwriter, to the effect that:
(i) The Company has been duly organized and is validly existing
as a corporation and is in good standing under the laws of its state of
incorporation. The Company is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction
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in which it owns or leases any real property or the character of its operations
requires such qualification or licensing.
(ii) The Company has all requisite corporate power and
authority, and has all necessary authorizations, approvals, orders, licenses,
certificates and permits of and from all governmental or regulatory officials
and bodies to own or lease its properties and conduct its business as described
in the Prospectus, and the Company is and has been doing business in compliance
with all such authorizations, approvals, orders, licenses, certificates and
permits and all federal, state and local laws, rules and regulations. The
Company has all corporate power and authority to enter into this Agreement and
to carry out the provisions and conditions hereof, and all consents,
authorizations, approvals and orders required in connection therewith have been
obtained. No consents, approvals, authorizations or orders of, and no filing
with any court or governmental agency or body (other than such as may be
required under the Act and applicable Blue Sky laws), is required for the valid
authorization, issuance, sale and delivery of the Securities, and the
consummation of the transactions and agreements contemplated by this Agreement,
the Warrant Agreement and the Underwriter's Purchase Option, and as contemplated
by the Prospectus or if so required, all such authorizations, approvals,
consents, orders, registrations, licenses and permits have been duly obtained
and are in full force and effect and have been disclosed to the Underwriter.
(iii) All issued and outstanding securities of the Company have
been duly authorized and validly issued and are fully paid and non-assessable;
the holders thereof have no rights of rescission with respect thereto, and are
not subject to personal liability by reason of being such holders; and none of
such securities were issued in violation of the preemptive rights of any holders
of any security of the Company or similar contractual rights granted by the
Company. The outstanding options and warrants to purchase shares of Common
Stock constitute the valid and binding obligations of the Company, enforceable
in accordance with their terms. The offers and sales of the outstanding Common
Stock and options and warrants to purchase shares of Common Stock were at all
relevant times either registered under the Act and the applicable state
securities or Blue Sky Laws or exempt from such registration requirements. The
authorized and outstanding capital stock of the Company is as set forth under
the caption "Capitalization" in the Prospectus.
(iv) The Securities have been duly authorized and, when issued
and paid for, will be validly issued, fully paid and non-assessable; the holders
thereof are not and will not be subject to personal liability by reason of being
such holders. The Securities are not and will not be subject to the preemptive
rights of any holders of any security of the Company or, to the best of such
counsel's knowledge after due inquiry, similar contractual rights granted by the
Company. All corporate action required to be taken for the authorization,
issuance and sale of the Securities has been duly and validly taken. When
issued, the Underwriter's Purchase Option, the Underwriter's Warrants and the
Warrants will constitute valid and binding obligations of the Company to issue
and sell, upon exercise thereof and payment therefor, the number and type of
securities of the Company called for thereby and such Warrants, the
Underwriter's Purchase Option, and the Underwriter's Warrants, when issued, in
each case, will be enforceable against the Company in accordance with their
respective terms, except (a) as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, (b) as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and (c) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to the equitable defenses and to the discretion of the
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court before which any proceeding therefor may be brought. The certificates
representing the Securities are in due and proper form.
(v) To the best of such counsel's knowledge, after due inquiry,
except as set forth in the Prospectus, no holders of any securities of the
Company or of any options, warrants or securities of the Company exercisable for
or convertible or exchangeable into securities of the Company have the right to
require the Company to register any such securities of the Company under the Act
or to include any such securities in a registration statement to be filed by the
Company.
(vi) To the best of such counsel's knowledge, after due inquiry,
the shares of Common Stock and the Warrants are eligible for quotation on Nasdaq
SmallCap.
(vii) This Agreement, the Underwriter's Purchase Option, the
Warrant Agreement and the Financial Consulting Agreement have each been duly and
validly authorized and, when executed and delivered by the Company, will
constitute valid and binding obligations of the Company, enforceable against the
Company in accordance with their respective terms, except (a) as such
enforceability may be limited by bankruptcy, insolvency, reorganization or
similar laws affecting creditors' rights generally, (b) as enforceability of any
indemnification provisions may be limited under the federal and state securities
laws, and (c) that the remedy of specific performance and injunctive and other
forms of equitable relief may be subject to the equitable defenses and to the
discretion of the court before which any proceeding therefor may be brought.
(viii) The execution, delivery and performance by the Company of
this Agreement, the Underwriter's Purchase Option, the Warrant Agreement and the
Financial Consulting Agreement, the issuance and sale of the Securities, the
consummation of the transactions contemplated hereby and thereby and the
compliance by the Company with the terms and provisions hereof and thereof, do
not and will not, with or without the giving of notice or the lapse of time, or
both, (a) conflict with, or result in a breach of, any of the terms or
provisions of, or constitute a default under, or result in the creation or
modification of any lien, security interest, charge or encumbrance upon any of
the properties or assets of the Company pursuant to the terms of, any material
mortgage, deed of trust, note, indenture, loan, contract, commitment or other
material agreement or instrument, to which the Company is a party or by which
the Company or any of its properties or assets may be bound, (b) result in any
violation of the provisions of the Certificate of Incorporation or the By-Laws
of the Company, (c) violate any statute or any judgment, order or decree, rule
or regulation applicable to the Company of any court, domestic or foreign, or of
any federal, state or other regulatory authority or other governmental body
having jurisdiction over the Company, its properties or assets, or (d) have a
material effect on any permit, certification, registration, approval, consent,
license or franchise of the Company.
(ix) The Registration Statement, each Preliminary Prospectus and
the Prospectus and any post-effective amendments or supplements thereto (other
than the financial statements included therein, as to which no opinion need be
rendered) comply as to form in all material respects with the requirements of
the Act and Regulations. The Securities and all other securities issued or
issuable by the Company conform in all respects to the description thereof
contained in the Registration Statement and the Prospectus. The statements in
the Prospectus
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under "Business," "Management," "Certain Transactions," "Risk Factors,"
Principal Stockholders," "Description of Securities" and "Shares Eligible for
Future Sale," have been reviewed by such counsel, and insofar as they refer to
statements of law, descriptions of statutes, licenses, rules or regulations or
legal conclusions are correct in all material respects. No statute or
regulation or legal or governmental proceeding required to be described in the
Prospectus is not described as required, nor are any contracts or documents of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement not so
described or filed as required.
(x) Counsel has participated in conferences with officers and
other representatives of the Company, representatives of the independent public
accountants for the Company and representatives of the Underwriter at which the
contents of the Registration Statement, the Prospectus and related matters were
discussed and although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement and Prospectus (except as otherwise set
forth in this opinion), no facts have come to the attention of such counsel
which lead them to believe that either the Registration Statement or the
Prospectus nor any amendment or supplement thereto, as of the date of such
opinion, contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no opinion with
respect to the financial statements and schedules and other financial and
statistical data included in the Registration Statement or Prospectus).
(xi) The Registration Statement is effective under the Act, and,
to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or threatened under the Act
or applicable state securities laws.
(xii) The Company has good and marketable title to, or valid and
enforceable leasehold estates in, all items of real and personal property
(tangible and intangible) stated in the Prospectus to be owned or leased by it,
free and clear of all liens, encumbrances, claims, security interests, defects
and restrictions of any material nature whatsoever, other than those referred to
in the Prospectus and liens for taxes not yet due and payable.
(xiii) Except as described in the Prospectus, no default exists
in the due performance and observance of any term, covenant or condition of any
license, contract, indenture, mortgage, deed of trust, note, loan or credit
agreement, or any other agreement or instrument evidencing an obligation for
borrowed money, or any other agreement or instrument to which the Company is a
party or by which the Company may be bound or to which any of the properties or
assets of the Company is subject, except where such defaults, either singly or
in the aggregate, would not have a material adverse effect on the Company or its
operations. The Company is not in violation of any term or provision of its
Certificate of Incorporation or By-Laws. The Company is not in violation of any
franchise, license, permit, applicable law, rule, regulation, judgment or decree
of any governmental agency or court, domestic or foreign, having jurisdiction
over the Company or any of its properties or business, except where such
violations, either singly or in the aggregate, would not have a material adverse
effect on the Company or its operations.
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(xiv) To the best of such counsel's knowledge after due inquiry,
the Company owns or possesses, free and clear of all liens or encumbrances and
rights thereto or therein by third parties, other than as described in the
Prospectus, the requisite licenses or other rights to use all Intangibles and
other rights necessary to conduct its business (including, without limitation,
any such licenses or rights described in the Prospectus as being licensed to,
owned or possessed by the Company), and there is no claim or action by any
person pertaining to, or proceeding, pending or to the best of such counsel's
knowledge after due inquiry threatened, which challenges the exclusive rights of
the Company with respect to any Intangibles used in the conduct of the its
business (including without limitation any such licenses or rights described in
the Prospectus as being owned or possessed by the Company); to the best of such
counsel's knowledge after due inquiry, the Company's current products, services
and processes do not infringe on any Intangibles held by third parties except as
discussed in the Prospectus; and the Company's Intangibles which have been
registered in the United States Patent and Trademark Office have been fully
maintained and are in full force and effect. The Company is the sole owner of
U.S. Patents No. , and , and the claims
contained in such patents would likely not be found invalid over the prior art.
(xv) To the best of such counsel's knowledge, after due inquiry,
except as described in the Prospectus, the Company does not own an interest in
any corporation, partnership, joint venture, trust or other business entity.
(xvi) To the best of such counsel's knowledge, after due inquiry
except as set forth in the Prospectus, there is no action, suit or proceeding
before or by any court of governmental agency or body, domestic or foreign, now
pending, or threatened against the Company, which might result in any material
and adverse change in the condition (financial or otherwise), business or
prospects of the Company, or might materially and adversely affect the
properties or assets thereof.
(xvii) To the best of such counsel's knowledge after due
inquiry, neither the Company, nor its officers, employees, agents or other
persons acting on their behalf has, directly or indirectly, given or agreed to
give any money, gift or similar benefit (other than legal price concessions to
customers in the ordinary course of business) to any customer or supplier, any
employee or agent of a customer or supplier, any official or employee of any
governmental agency or body (domestic or foreign), any political party or
candidate for office (domestic or foreign) or any other person who was, is or
may be in a position to help or hinder the business of the Company (or assist it
in connection with any actual or proposed transaction) which (a) might subject
the Company to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (b) if not given in the past, might have had a
materially adverse effect on the assets, business or operations of the Company
as reflected in the financial statements contained in the Registration Statement
or (c) if not continued in the future, might adversely affect the assets,
business, operations or prospects of the Company. The Company's internal
accounting controls and procedures are sufficient to cause the Company to comply
with the Foreign Corrupt Practices Act of 1977, as amended.
(xviii) To the best of such counsel's knowledge after due inquiry
except as described in the Prospectus, there are no claims, payments, issuances,
arrangements or understandings for services in the nature of a finder's or
origination fee with respect to the sale of the Securities hereunder or
financial consulting arrangements or any other arrangements,
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agreements, understandings, payments or issuances that may affect the
Underwriter's compensation, as determined by the NASD.
Unless the context clearly indicates otherwise, the term "Company" as
used in this Section 4.2.1 shall include each subsidiary of the Company. The
opinion of counsel for the Company and any opinion relied upon by such counsel
for the Company shall include a statement to the effect that it may be relied
upon by counsel for the Underwriter in its opinion delivered to the Underwriter.
4.2.2 CLOSING DATE AND OPTION CLOSING DATE OPINION OF COUNSEL. On
each of the Closing Date and the Option Closing Date, if any, the Underwriter
shall have received the favorable opinion of Crummy, Del Deo, Dolan, Griffinger
& Vecchione, counsel to the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriter and in form and
substance satisfactory to Graubard Mollen & Miller, counsel to the Underwriter,
confirming as of the Closing Date and, if applicable, the Option Closing Date,
the statements made by Crummy, Del Deo, Dolan, Griffinger & Vecchione, in its
opinion delivered on the Effective Date.
4.2.3 RELIANCE. In rendering such opinion, such counsel may rely
(i) as to matters involving the application of laws other than the laws of the
United States and jurisdictions in which they are admitted, to the extent such
counsel deems proper and to the extent specified in such opinion, if at all,
upon an opinion or opinions (in form and substance reasonably satisfactory to
Underwriter's counsel) of other counsel reasonably acceptable to Underwriter's
counsel, familiar with the applicable laws, and (ii) as to matters of fact, to
the extent they deem proper, on certificates or other written statements of
officers of departments of various jurisdiction having custody of documents
respecting the corporate existence or good standing of the Company, provided
that copies of any such statements or certificates shall be delivered to
Underwriter's counsel if requested. The opinion of counsel for the Company [and
Other Counsel] shall include a statement to the effect that it may be relied
upon by counsel for the Underwriter in its opinion delivered to the Underwriter.
4.2.4 SECONDARY MARKET TRADING MEMORANDUM. On the Effective Date
the Underwriter shall have received the written Secondary Market Trading
Memorandum.
4.3 COLD COMFORT LETTER. At the time this Agreement is executed, and at
each of the Closing Date and the Option Closing Date, if any, you shall have
received a letter, addressed to the Underwriter and in form and substance
satisfactory in all respects (including the non-material nature of the changes
or decreases, if any, referred to in clause (iii) below) to you and to Graubard
Mollen & Miller, counsel for the Underwriter, from Rothstein, Kass & Company,
P.C., dated, respectively, as of the date of this Agreement and as of the
Closing Date and the Option Closing Date, if any:
(i) Confirming that they are independent accountants with respect to
the Company within the meaning of the Act and the applicable Regulations;
(ii) Stating that in their opinion the financial statements of the
Company included in the Registration Statement and Prospectus comply as to form
in all material respects with the applicable accounting requirements of the Act
and the published Regulations thereunder;
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(iii) Stating that, based on the performance of procedures specified
by the American Institute of Certified Public Accountants for a review of the
latest available unaudited interim financial statements of the Company (as
described in SAS No.71 Interim Financial Information), with an indication of the
date of the latest available unaudited interim financial statements, a reading
of the latest available minutes of the stockholders and board of directors and
the various committees of the board of directors, consultations with officers
and other employees of the Company responsible for financial and accounting
matters and other specified procedures and inquiries, nothing has come to their
attention which would lead them to believe that (a) the unaudited financial
statements of the Company included in the Registration Statement do not comply
as to form in all material respects with the applicable accounting requirements
of the Act and the Regulations or any material modification should be made to
the unaudited interim financial statements included in the Registration
Statement for them to be in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the audited
financial statements of the Company included in the Registration Statement, (b)
at a date not later than five days prior to the Effective Date, Closing Date or
Option Closing Date, as the case may be, there was any change in the capital
stock or long-term debt of the Company, or any decrease in the stockholders'
equity of the Company as compared with amounts shown in the September 30, 1996
balance sheet included in the Registration Statement, other than as set forth in
or contemplated by the Registration Statement, or, if there was any decrease,
setting forth the amount of such decrease, and (c) during the period from
October 1, 1996 to a specified date not later than five days prior to the
Effective Date, Closing Date or Option Closing Date, as the case may be, there
was any decrease in revenues, net earnings or net earnings per share of Common
Stock, in each case as compared with the corresponding period in the preceding
year and as compared with the corresponding period in the preceding quarter,
other than as set forth in or contemplated by the Registration Statement, or, if
there was any such decrease, setting forth the amount of such decrease;
(iv) Setting forth, at a date not later than five days prior to the
Effective Date, the amount of liabilities of the Company (including a break-down
of commercial papers and notes payable to banks);
(v) Stating that they have compared specific dollar amounts, numbers
of shares, percentages of revenues and earnings, statements and other financial
information pertaining to the Company set forth in the Prospectus in each case
to the extent that such amounts, numbers, percentages, statements and
information may be derived from the general accounting records, and work sheets,
of the Company with the results obtained from the application of specified
readings, inquiries and other appropriate procedures (which procedures do not
constitute an examination in accordance with generally accepted auditing
standards) set forth in the letter and found them to be in agreement;
(vi) Stating that they have not during the immediately preceding five
year period brought to the attention of the Company's management any reportable
condition related to internal structure, design or operation as defined in the
Statement on Auditing Standards No. 60 -- "Communication of Internal Control
Structure Related Matters Noted in an Audit," in the Company's internal
controls; and
(vii) Statements as to such other matters incident to the transaction
contemplated hereby as you may reasonably request.
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4.4 OFFICERS' CERTIFICATES.
4.4.1 OFFICERS' CERTIFICATE. At each of the Closing Date and the
Option Closing Date, if any, the Underwriter shall have received a certificate
of the Company signed by the Chairman of the Board or the President and the
Secretary of the Company, dated the Closing Date or the Option Closing Date, as
the case may be, respectively, to the effect that the Company has performed all
covenants and complied with all conditions required by this Agreement to be
performed or complied with by the Company prior to and as of the Closing Date,
or the Option Closing Date, as the case may be, and that the conditions set
forth in Section 4.5 hereof have been satisfied as of such date and that, as of
Closing Date and the Option Closing Date, as the case may be, the
representations and warranties of the Company set forth in Section 2 hereof are
true and correct. In addition, the Underwriter will have received such other
and further certificates of officers of the Company as the Underwriter may
reasonably request.
4.4.2 SECRETARY'S CERTIFICATE. At each of the Closing Date and
the Option Closing Date, if any, the Underwriter shall have received a
certificate of the Company signed by the Secretary of the Company, dated the
Closing Date or the Option Date, as the case may be, respectively, certifying
(i) that the By-Laws and Certificate of Incorporation, as amended, of the
Company are true and complete, have not been modified and are in full force and
effect, (ii) that the resolutions relating to the public offering contemplated
by this Agreement are in full force and effect and have not been modified, (iii)
all correspondence between the Company or its counsel and the Commission, (iv)
all correspondence between the Company or its counsel and the NASD concerning
inclusion on Nasdaq, and (vi) as to the incumbency of the officers of the
Company. The documents referred to in such certificate shall be attached to
such certificate.
4.5 NO MATERIAL CHANGES. Prior to and on each of the Closing Date and the
Option Closing Date, if any, (i) there shall have been no material adverse
change or development involving a prospective material change in the condition
or prospects or the business activities, financial or otherwise, of the Company
from the latest dates as of which such condition is set forth in the
Registration Statement and Prospectus, (ii) there shall have been no
transaction, not in the ordinary course of business, entered into by the Company
from the latest date as of which the financial condition of the Company is set
forth in the Registration Statement and Prospectus which is materially adverse
to the Company, taken as a whole, (iii) the Company shall not be in default
under any provision of any instrument relating to any outstanding indebtedness
which default would have a material adverse effect on the Company, (iv) no
material amount of the assets of the Company shall have been pledged or
mortgaged, except as set forth in the Registration Statement and Prospectus, (v)
no action suit or proceeding, at law or in equity, shall have been pending or
threatened against the Company or affecting any of its property or business
before or by any court or federal or state commission, board or other
administrative agency wherein an unfavorable decision, ruling or finding may
materially adversely affect the business, operations, prospects or financial
condition or income of the Company, except as set forth in the Registration
Statement and Prospectus, (vi) no stop order shall have been issued under the
Act and no proceedings therefor shall have been initiated or threatened by the
Commission, and (vii) the Registration Statement and the Prospectus and any
amendments or supplements thereto contain all material statements which are
required to be stated therein in accordance with the Act and the Regulations and
conform in all material respects to the requirements of the Act and the
Regulations, and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto contains any untrue statement of a material fact
or omits to state any material
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fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
4.6 DELIVERY OF AGREEMENTS. The Company has delivered to the Underwriter
an executed copy of the Purchase Option, the Merger and Acquisition Agreement
and the Financial Consulting Agreement.
4.7 OPINION OF COUNSEL FOR THE UNDERWRITER. All proceedings taken in
connection with the authorization, issuance or sale of the Securities as herein
contemplated shall be reasonably satisfactory in form and substance to you and
to Graubard Mollen & Miller, counsel to the Underwriter, and you shall have
received from such counsel a favorable opinion, dated the Closing Date and the
Option Closing Date, if any, with respect to such of these proceedings as you
may reasonably require. On or prior to the Effective Date, the Closing Date and
the Option Closing Date, as the case may be, counsel for the Underwriter shall
have been furnished such documents, certificates and opinions as they may
reasonably require for the purpose of enabling them to review or pass upon the
matters referred to in this Section 4.7, or in order to evidence the accuracy,
completeness or satisfaction of any of the representations, warranties or
conditions herein contained.
5. INDEMNIFICATION.
5.1 INDEMNIFICATION OF THE UNDERWRITER.
5.1.1 GENERAL. Subject to the conditions set forth below, the
Company agrees to indemnify and hold harmless the Underwriter, its directors,
officers, agents and employees and each person, if any, who controls the
Underwriter ("controlling person") within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act, against any and all loss, liability,
claim, damage and expense whatsoever (including but not limited to any and all
legal or other expenses reasonably incurred in investigating, preparing or
defending against any litigation, commenced or threatened, whether arising out
of any action between the Underwriter and the Company or between the Underwriter
and any third-party or otherwise) to which they or any of them may become
subject under the Act, the Exchange Act or any other statute or at common law or
otherwise or under the laws of foreign countries, arising out of or based upon
any untrue statement or alleged untrue statement of a material fact contained in
(i) any Preliminary Prospectus, the Registration Statement or the Prospectus (as
from time to time each may be amended and supplemented); (ii) in any
post-effective amendment or amendments or any new registration statement and
prospectus in which is included securities of the Company issued or issuable
upon exercise of the Underwriter's Purchase Option; or (iii) any application or
other document or written communication (in this Section 5 collectively called
"application") executed by the Company or based upon written information
furnished by the Company in any jurisdiction in order to qualify the Securities
under the securities laws thereof or filed with the Commission, any state
securities commission or agency, Nasdaq or any securities exchange; or the
omission or alleged omission therefrom of a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, unless such statement
or omission was made in reliance upon, and in strict conformity with, written
information furnished to the Company with respect to the Underwriter by or on
behalf of the Underwriter expressly for use in any Preliminary Prospectus, the
Registration Statement or Prospectus, or any amendment or supplement thereof, or
in any application, as the case may
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be. The Company agrees promptly to notify the Underwriter of the commencement
of any litigation or proceedings against the Company or any of its officers,
directors or controlling persons in connection with the issue and sale of the
Securities or in connection with the Registration Statement or Prospectus.
5.1.2 PROCEDURE. If any action is brought against the Underwriter
or controlling person in respect of which indemnity may be sought against the
Company pursuant to Section 5.1.1, the Underwriter shall promptly notify the
Company in writing of the institution of such action and the Company shall
assume the defense of such action, including the employment and fees of counsel
(subject to the approval of the Underwriter) and payment of actual expenses.
The Underwriter or controlling person shall have the right to employ its or
their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of the Underwriter or such controlling person unless (i)
the employment of such counsel shall have been authorized in writing by the
Company in connection with the defense of such action, or (ii) the Company shall
not have employed counsel to have charge of the defense of such action, or (iii)
such indemnified party or parties shall have reasonably concluded that there may
be defenses available to it or them which are different from or additional to
those available to the Company (in which case the Company shall not have the
right to direct the defense of such action on behalf of the indemnified party or
parties), in any of which events the fees and expenses of not more than one
additional firm of attorneys selected by the Underwriter and/or controlling
person shall be borne by the Company. Notwithstanding anything to the contrary
contained herein, if the Underwriter or controlling person shall assume the
defense of such action as provided above, the Company shall have the right to
approve the terms of any settlement of such action which approval shall not be
unreasonably withheld.
5.2 INDEMNIFICATION OF THE COMPANY. The Underwriter agrees to indemnify
and hold harmless the Company against any and all loss, liability, claim, damage
and expense described in the foregoing indemnity from the Company to the
Underwriter, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions directly relating to the
transactions effected by the Underwriter in connection with this offering made
in any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or in any application in reliance upon, and in
strict conformity with, written information furnished to the Company with
respect to the Underwriter by or on behalf of the Underwriter expressly for use
in such Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or in any such application. In case any action
shall be brought against the Company or any other person so indemnified based on
any Preliminary Prospectus, the Registration Statement or Prospectus or any
amendment or supplement thereto or any application, and in respect of which
indemnity may be sought against the Underwriter, the Underwriter shall have the
rights and duties given to the Company, and the Company and each other person so
indemnified shall have the rights and duties given to the Underwriter by the
provisions of Section 5.1.2.
5.3 CONTRIBUTION.
5.3.1 CONTRIBUTION RIGHTS. In order to provide for just and
equitable contribution under the Act in any case in which (i) any person
entitled to indemnification under this Section 5 makes claim for indemnification
pursuant hereto but it is judicially determined (by the entry of a final
judgment or decree by a court of competent jurisdiction and the expiration of
time to appeal
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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 5 provides for
indemnification in such case, or (ii) contribution under the Act, the Exchange
Act or otherwise may be required on the part of any such person in circumstances
for which indemnification is provided under this Section 5, then, and in each
such case, the Company and the Underwriter shall contribute to the aggregate
losses, liabilities, claims, damages and expenses of the nature contemplated by
said indemnity agreement incurred by the Company and the Underwriter, as
incurred, in such proportions that the Underwriter is responsible for that
portion represented by the percentage that the underwriting discount appearing
on the cover page of the Prospectus bears to the initial offering price
appearing thereon and the Company is responsible for the balance; provided,
that, no person guilty of a fraudulent misrepresentation (within the meaning of
Section 11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. Notwithstanding the
provisions of this Section 5.3, the Underwriter shall not be required to
contribute any amount in excess of the amount by which the total price at which
the Public Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which the Underwriter
has otherwise been required to pay in respect of such losses, liabilities,
claims, damages and expenses. For purposes of this Section, each director,
officer and employee of the Underwriter, and each person, if any, who controls
the Underwriter within the meaning of Section 15 of the Act shall have the same
rights to contribution as the Underwriter.
5.3.2 CONTRIBUTION PROCEDURE. Within fifteen days after receipt
by any party to this Agreement (or its representative) of notice of the
commencement of any action, suit or proceeding, such party will, if a claim for
contribution in respect thereof is to be made against another party
("contributing party"), notify the contributing party of the commencement
thereof, but the omission to so notify the contributing party will not relieve
it from any liability which it may have to any other party other than for
contribution hereunder. In case any such action, suit or proceeding is brought
against any party, and such party notifies a contributing party or its
representative of the commencement thereof within the aforesaid fifteen days,
the contributing party will be entitled to participate therein with the
notifying party and any other contributing party similarly notified. Any such
contributing party shall not be liable to any party seeking contribution on
account of any settlement of any claim, action or proceeding effected by such
party seeking contribution on account of any settlement of any claim, action or
proceeding which was effected by such party without the written consent of such
contributing party. The contribution provisions contained in this Section are
intended to supersede, to the extent permitted by law, any right to contribution
under the Act, the Exchange Act or otherwise available.
6. [INTENTIONALLY OMITTED].
7. ADDITIONAL COVENANTS.
7.1 BOARD DESIGNEE. For a period of five years from the Effective Date,
the Company will recommend and use its best efforts to elect a designee of the
Underwriter as a member of the Board of Directors of the Company. Such
designee shall receive no more or less compensation than is paid to other
non-management directors of the Company. If the Underwriter does not exercise
its option to designate a member of the Company's Board of Directors, the
Underwriter shall nevertheless have the right to send a representative (who need
not be the same individual from meeting to meeting) to observe each meeting of
the Board of Directors. Such
28
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person, whether a member of the Board or a representative, shall be entitled to
receive reimbursement for all reasonable costs incurred in attending such
meetings, including, but not limited to, food, lodging and transportation. The
Company agrees to give the Underwriter written notice of each such meeting and
to provide the Underwriter with an agenda and minutes of the meeting no later
than it gives such notice and provides such items to the other directors.
7.2 PRESS RELEASES. The Company will not issue a press release or engage
in any other publicity until 25 days after the Effective Date without the
Underwriter's prior written consent.
7.3 FORM S-8 OR ANY SIMILAR FORM. The Company shall not file a
Registration Statement on Form S-8 (or any similar or successor form) for the
registration of shares of Common Stock underlying stock options for a period of
one year from the Effective Date without the Underwriter's written consent.
7.4 COMPENSATION AND OTHER ARRANGEMENTS. The Company hereby agrees that
for a period of three years from the Effective Date, all compensation and other
arrangements between the Company and its officers, directors and affiliates
shall be approved by the Compensation Committee of the Company's Board of
Directors, a majority of the members of which shall have no affiliation or other
relationship with the Company other than as directors.
7.5 KEY PERSON LIFE INSURANCE. For a period of three years from the
Effective Date, the Company agrees to maintain key person life insurance in an
amount not less than $1,000,000 on the life of Rudy A. Slucker, and agrees to
pay the annual premiums for the policy which shall name the Company as the sole
beneficiary.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. Except as the context
otherwise requires, all representations, warranties and agreements contained in
this Agreement shall be deemed to be representations, warranties and agreements
at the Closing Dates and such representations, warranties and agreements of the
Underwriter and Company, including the indemnity agreements contained in Section
5 hereof, shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Underwriter, the Company or any
controlling person, and shall survive termination of this Agreement or the
issuance and delivery of the Securities to the Underwriter until the earlier of
the expiration of any applicable statute of limitations and the seventh
anniversary of the later of the Closing Date or the Option Closing Date, if any,
at which time the representations, warranties and agreements shall terminate and
be of no further force and effect.
9. EFFECTIVE DATE OF THIS AGREEMENT AND TERMINATION THEREOF.
9.1 EFFECTIVE DATE. This Agreement shall become effective on the
Effective Date at the time that the Registration Statement is declared
effective.
9.2 TERMINATION. You shall have the right to terminate this Agreement at
any time prior to any Closing Date, (i) if any domestic or international event
or act or occurrence has materially disrupted, or in your opinion will in the
immediate future materially disrupt, general securities markets in the United
States; or (ii) if trading on the New York Stock Exchange, the American Stock
Exchange, The Boston Stock Exchange or in the over-the-counter market shall have
been suspended, or minimum or maximum prices for trading shall have been fixed,
or maximum ranges
29
<PAGE>
for prices for securities shall have been fixed, or maximum ranges for prices
for securities shall have been required on the over-the-counter market by the
NASD or by order of the Commission or any other government authority having
jurisdiction, or (iii) if the United States shall have become involved in a war
or major hostilities, or (iv) if a banking moratorium has been declared by a New
York State or federal authority, or (v) if a moratorium on foreign exchange
trading has been declared which materially adversely impacts the United States
securities market, or (vi) if the Company shall have sustained a material loss
by fire, flood, accident, hurricane, earthquake, theft, sabotage or other
calamity or malicious act which, whether or not such loss shall have been
insured, will, in your opinion, make it inadvisable to proceed with the delivery
of the Securities, or (vii) if Rudy Slucker shall no longer serve the Company in
their present capacities, or (viii) if the Company has breached any of its
representations, warranties or obligations hereunder, or (ix) if the Underwriter
shall have become aware after the date hereof of such a material adverse change
in the condition (financial or otherwise), business, or prospects of the
Company, or such adverse material change in general market conditions as in the
Underwriter's judgment would make it impracticable to proceed with the offering,
sale and/or delivery of the Securities or to enforce contracts made by the
Underwriter for the sale of the Securities.
9.3 NOTICE. If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 9, the
Company shall be notified on the same day as such election is made by you by
telephone or telecopy, confirmed by letter.
9.4 EXPENSES. In the event that this Agreement shall not be carried out
for any reason whatsoever, within the time specified herein or any extensions
thereof pursuant to the terms herein, the obligations of the Company to pay the
expenses related to the transactions contemplated herein shall be governed by
Section 3.15 hereof.
9.5 INDEMNIFICATION. Notwithstanding any contrary provision contained in
this Agreement, any election hereunder or any termination of this Agreement, and
whether or not this Agreement is otherwise carried out, the provisions of
Section 5 shall not be in any way affected by, such election or termination or
failure to carry out the terms of this Agreement or any part hereof.
10. MISCELLANEOUS.
10.1 NOTICES. All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and shall be mailed, delivered or
telecopied and confirmed
If to the Underwriter:
GKN Securities Corp.
61 Broadway
12th Floor
New York, New York 10006
Attention: Brian K. Coventry, Vice President
30
<PAGE>
Copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016
Attention: David Alan Miller, Esq.
If to the Company:
TearDrop Golf Company
32 Bow Circle, Building #1
Hilton Head Island, South Carolina 29928
Attention: Rudy A. Slucker, President and Chief
Executive Officer
Copy to:
Crummy, Del Deo, Dolan, Griffinger & Vecchione
One Riverfront Plaza
Newark, New Jersey 07102
Attention: Jeffrey A. Baumel, Esq.
10.2 HEADINGS. The headings contained herein are for the sole purpose of
convenience of reference, and shall not in any way limit or affect the meaning
or interpretation of any of the terms or provisions of this Agreement.
10.3 AMENDMENT. This Agreement may only be amended by a written instrument
executed by each of the parties hereto.
10.4 ENTIRE AGREEMENT. This Agreement (together with the other agreements
and documents being delivered pursuant to or in connection with this Agreement)
constitutes the entire agreement of the parties hereto with respect to the
subject matter hereof, and supersedes all prior agreements and understandings of
the parties, oral and written, with respect to the subject matter hereof.
10.5 BINDING EFFECT. This Agreement shall inure solely to the benefit of
and shall be binding upon, the Underwriter, the Company and the controlling
persons, directors and officers referred to in Section 5 hereof, and their
respective successors, legal representatives and assigns, and no other person
shall have or be construed to have any legal or equitable right, remedy or claim
under or in respect of or by virtue of this Agreement or any provisions herein
contained.
10.6 GOVERNING LAW, JURISDICTION. This Agreement shall be governed by and
construed and enforced in accordance with the law of the State of New York,
without giving effect to conflicts of law. The Company hereby agrees that any
action, proceeding or claim against it arising out
31
<PAGE>
of, relating in any way to this Agreement shall be brought and enforced in the
courts of the State of New York or the United States District Court for the
Southern District of New York, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. The Company hereby waives any objection
to such exclusive jurisdiction and that such courts represent an inconvenient
forum. Any such process or summons to be served upon the Company may be served
by transmitting a copy thereof by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
10.1 hereof. Such mailing shall be deemed personal service and shall be legal
and binding upon the Company in any action, proceeding or claim. The Company
agrees that the prevailing party(ies) in any such action shall be entitled to
recover from the other party(ies) all of its reasonable attorneys' fees and
expenses relating to such action or proceeding and/or incurred in connection
with the preparation therefor.
10.7 EXECUTION IN COUNTERPARTS. This Agreement may be executed in one or
more counterparts, and by the different parties hereto in separate counterparts,
each of which shall be deemed to be an original, but all of which taken together
shall constitute one and the same agreement, and shall become effective when one
or more counterparts has been signed by each of the parties hereto and delivered
to each of the other parties hereto.
10.8 WAIVER, ETC. The failure of any of the parties hereto to at any time
enforce any of the provisions of this Agreement shall not be deemed or construed
to be a waiver of any such provision, nor to in any way effect the validity of
this Agreement or any provision hereof or the right of any of the parties hereto
to thereafter enforce each and every provision of this Agreement. No waiver of
any breach, non-compliance or non-fulfillment of any of the provisions of this
Agreement shall be effective unless set forth in a written instrument executed
by the party or parties against whom or which enforcement of such waiver is
sought; and no waiver of any such breach, non-compliance or non-fulfillment
shall be construed or deemed to be a waiver of any other or subsequent breach,
non-compliance or non-fulfillment.
If the foregoing correctly sets forth the understanding between the
Underwriter and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement between
us.
Very truly yours,
TEARDROP GOLF COMPANY
By:
--------------------------------------
Name: Rudy A. Slucker
Title: President and Chief Executive Officer
32
<PAGE>
Accepted as of the date first
above written.
New York, New York
GKN SECURITIES CORP.
By:
-------------------------------
Name:
Title:
33
<PAGE>
WARRANT AGREEMENT
Agreement made as of ___________ __, 1996, between TearDrop Golf Company, a
Delaware corporation with offices at 32 Bow Circle, Building #1, Hilton Head
Island, South Carolina 29928 ("Company"), and Continental Stock Transfer & Trust
Company, a New York corporation with offices at 2 Broadway, New York, New York
10002, a New York corporation, (herein called "Warrant Agent").
WHEREAS, the Company is engaged in a public offering of Common Stock and
Warrants ("Public Offering") and in connection therewith, has determined to
issue and deliver up to (i) 1,150,000 Redeemable Common Stock Purchase Warrants
("Public Warrants") to the public investors and (ii) 115,000 Warrants to GKN
Securities Corp. ("Underwriter") or its designees ("Underwriter's Warrants" and
together with the Public Warrants, the "Warrant(s)"), each of such Warrants
evidencing the right of the holder thereof to purchase one share of common
stock, $.01 par value per share, of the Company's Common Stock ("Common Stock")
for $4.00; and
WHEREAS, the Company has filed with the Securities and Exchange Commission
a Registration Statement, No. 333-14647 on Form SB-2 ("Registration Statement")
for the registration, under the Securities Act of 1933, as amended, of, among
others, the Warrants and the Common Stock issuable upon exercise of the
Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange, redemption and exercise of the
Warrants; and
WHEREAS, the Company desires to provide for the form and provisions of the
Warrants, the terms upon which they shall be issued and exercised, and the
respective rights, limitation of rights, and immunities of the Company, the
Warrant Agent, and the holders of the Warrants; and
WHEREAS, all acts and things have been done and performed which are
necessary to make the Warrants, when executed on behalf of the Company and
countersigned by or on behalf of the Warrant Agent, as provided herein, the
valid, binding and legal obligations of the Company, and to authorize the
execution and delivery of this Agreement.
NOW, THEREFORE, in consideration of the mutual agreements herein contained,
the parties hereto agree as follows:
1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints the Warrant
Agent to act as agent for the Company for the Warrants, and the Warrant Agent
hereby accepts such appointment and agrees to perform the same in accordance
with the terms and conditions set forth in this Agreement.
2. WARRANTS.
2.1. FORM OF WARRANT. Each Warrant certificate shall be issued in
registered form only, shall be in substantially the form of Exhibit A hereto,
the provisions of which are incorporated herein and shall be signed by, or bear
the facsimile signature of, the Chairman
<PAGE>
of the Board or President and Secretary or Assistant Secretary of the Company
and shall bear a facsimile of the Company's seal. In the event the person whose
facsimile signature has been placed upon any Warrant certificate shall have
ceased to be Chairman of the Board or President and Secretary or Assistant
Secretary of the Company before such Warrant certificate is issued, it may be
issued with the same effect as if he had not ceased to be such at the date of
issuance. The Warrants represented by a Warrant certificate may not be
exercised until such certificate has been countersigned by the Warrant Agent as
provided in Section 2.3 hereof.
2.2. EFFECT OF COUNTERSIGNATURE. Unless and until countersigned by the
Warrant Agent pursuant to this Agreement, a Warrant certificate shall be invalid
and of no effect.
2.3. EVENTS FOR COUNTERSIGNATURE. The Warrant Agent shall countersign a
Warrant certificate only upon the occurrence of either of the following events:
(i) if the Warrant certificate is to be issued in exchange or
substitution for one or more previously countersigned Warrant certificates, as
hereinafter provided, or
(ii) if the Company instructs the Warrant Agent to do so.
2.4. REGISTRATION.
2.4.1. WARRANT REGISTER. The Warrant Agent shall maintain books
("Warrant Register"), for the registration of original issuance and the
registration of transfer of the Warrants. Upon the initial issuance of the
Warrants, the Warrant Agent shall issue and register the Warrants in the names
of the respective holders thereof in such denominations and otherwise in
accordance with instructions delivered to the Warrant Agent by the Company.
2.4.2. REGISTERED HOLDER. Prior to due presentment for
registration of transfer of any Warrant certificate, the Company and the Warrant
Agent may deem and treat the person in whose name such Warrant certificate shall
be registered upon the Warrant Register ("registered holder"), as the absolute
owner of such Warrant and of each Warrant represented thereby (notwithstanding
any notation of ownership or other writing on the Warrant certificate made by
anyone other than the Company or the Warrant Agent), for the purpose of any
exercise thereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary.
2.5. DETACHABILITY OF WARRANTS. The Warrant Agent understands that until
the completion of the Public Offering, the Warrants may only be purchased and
sold together with the Common Stock and, upon completion of the Public Offering,
are immediately separately transferrable.
3. TERMS AND EXERCISE OF WARRANTS
3.1. WARRANT PRICE. Each Warrant certificate shall, when countersigned by
the Warrant Agent, entitle the registered holder thereof, subject to the
provisions of such Warrant certificate and of this Warrant Agreement, to
purchase from the Company the number of shares of Common Stock stated therein,
at the price of $4.00 per whole share, subject to the
2
<PAGE>
adjustments provided in Section 4 hereof. The term "Warrant Price" as used in
this Warrant Agreement refers to the price per share at which Common Stock may
be purchased at the time a Warrant is exercised.
3.2. DURATION OF WARRANTS. Subject to Section 3.3.6 hereof, a Warrant may
be exercised only during the period ("Exercise Period") commencing on
____________, 1996, and terminating on the earlier of _____________,2001, or the
date fixed for redemption of the Warrant as provided in Section 6 of this
Agreement ("Expiration Date"). Each Warrant not exercised on or before its
expiration date shall become void, and all rights thereunder and all rights in
respect thereof under this Agreement shall cease at the close of business on its
Expiration Date. The Company in its sole discretion may extend the duration of
the Warrants by delaying the Expiration Date.
3.3. EXERCISE OF WARRANTS.
3.3.1. PAYMENT. A Warrant, when countersigned by the Warrant
Agent, may be exercised by the registered holder thereof by surrendering the
certificate representing such Warrant, at the office of the Warrant Agent, or at
the office of its successor as Warrant Agent, in the Borough of Manhattan, City
and State of New York, with the subscription form, as set forth on the Warrant
certificate and in substantially the form of Exhibit A hereto, duly executed,
and by paying in full, in lawful money of the United States, in cash, good
certified check or bank draft payable to the order of the Company, the Warrant
Price for each full share of Common Stock as to which the Warrant is exercised
and any and all applicable taxes due in connection with the exercise of the
Warrant, the exchange of the Warrant for the Common Stock, and the issuance of
the Common Stock.
3.3.2. ISSUANCE OF CERTIFICATES. As soon as practicable after the
exercise of any Warrant and the clearance of the funds in payment of the Warrant
Price, the Company shall issue to the registered holder of such Warrant a
certificate or certificates for the number of full shares of Common Stock to
which he is entitled, registered in such name or names as may be directed by
him, and if such Warrant shall not have been exercised in full, a new
countersigned Warrant certificate for the number of shares as to which such
Warrant shall not have been exercised. Notwithstanding the foregoing, the
Company shall not be obligated to deliver any securities pursuant to the
exercise of a Warrant unless a registration statement under the Securities Act
of 1933 with respect to the securities is effective. Warrants may not be
exercised by, or securities issued to, any registered holder in any state in
which such exercise would be unlawful.
3.3.3. VALID ISSUANCE. All shares of Common Stock issued upon the
proper exercise of a Warrant in conformity with this Agreement shall be validly
issued.
3.3.4. DATE OF ISSUANCE. Each person in whose name any such
certificate for shares of Common Stock is issued shall for all purposes be
deemed to have become the holder of record of such shares on the date on which
the Warrant certificate was surrendered and payment of the Warrant Price was
made, irrespective of the date of delivery of such certificate, except that, if
the date of such surrender and payment is a date when the stock transfer books
of the Company are closed, such person shall be deemed to have become the
3
<PAGE>
holder of such shares at the close of business on the next succeeding date on
which the stock transfer books are open.
3.3.5. WARRANT SOLICITATION AND WARRANT SOLICITATION FEE.
a. The Company has engaged the Underwriter, on a non-exclusive
basis, as its agent for the solicitation of the exercise of the Warrants. The
Company, at its cost, will (i) assist the Underwriter with respect to such
solicitation, if requested by the Underwriter and (ii) provide the Underwriter,
and direct the Company's transfer and warrant agent to deliver to the
Underwriter, lists of the record, and to the extent known, beneficial owners of
the Company's Warrants. Accordingly, the Company hereby instructs the Warrant
Agent to cooperate with the Underwriter in every respect in connection with the
Underwriter's solicitation activities, including, but not limited to, providing
to the Underwriter, at the Company's cost, a list of record and beneficial
holders of the Warrants and circulating a prospectus or offering circular
disclosing the compensation arrangements referenced in Section 3.3.5(b)
hereinbelow to holders of the Warrants at the time of exercise of the Warrants.
In addition to the conditions set forth in Section 3.3.5(b) hereinbelow, the
Underwriter shall only accept payment of the warrant solicitation fee provided
in Section 3.3.5(b) if it has provided bona fide services in connection with the
exercise of the Warrants. In addition to soliciting, either orally or in
writing, the exercise of Warrants by a Warrant holder, such services may also
include disseminating information, either orally or in writing, to Warrant
holders about the Company or the market for the Company's securities, or
assisting in the processing of the exercise of Warrants.
b. In each instance in which a Warrant is exercised, the Warrant
Agent shall promptly give written notice of such exercise to the Company and the
Underwriter ("Warrant Agent's Exercise Notice"). If, upon the exercise of any
Warrant more than one year from the Effective Date, (i) the market price of the
Company's Common Stock is greater than the Warrant Price, (ii) disclosure of
compensation arrangements was made both at the time of the original offering and
at the time of exercise (by delivery of the Prospectus or as otherwise required
by applicable law, rule or regulation), (iii) the exercise of the Warrant was
solicited by the Underwriter, (iv) the Warrant was not held in a discretionary
account, and (v) the solicitation of the exercise of the Warrant was not in
violation of Rule 10b-6 (as such rule or any successor rule may be in effect as
of such time of exercise) promulgated under the Securities Exchange Act of 1934,
then the Warrant Agent, simultaneously with the distribution of proceeds to the
Company received upon exercise of the Warrant(s) so exercised, shall, on behalf
of the Company, pay from the proceeds received upon exercise of the Warrant(s),
a fee of 5% of the Warrant Price to the Underwriter, provided that the
Underwriter delivers to the Warrant Agent within ten (10) business days from the
date on which the Underwriter has received the Warrant Agent's Exercise Notice,
a certificate that the conditions set forth in the preceding clauses (iii), (iv)
and (v) have been satisfied. The Underwriter and the Company may at any time
during business hours, examine the records of the Warrant Agent, including its
ledger of original Warrant certificates returned to the Warrant Agent upon
exercise of Warrants.
c. The provisions of this Section 3.3.5. may not be modified,
amended or deleted without the prior written consent of the Underwriter.
4
<PAGE>
4. ADJUSTMENTS.
4.1. STOCK DIVIDENDS - SPLIT-UPS. If after the date hereof, and subject to
the provisions of Section 4.5 below, the number of outstanding shares of Common
Stock is increased by a stock dividend payable in shares of Common Stock or by a
split-up of shares of Common Stock or other similar event, then, on the
effective date thereof, the number of shares issuable on exercise of each
Warrant shall be increased in proportion to such increase in outstanding shares
and the then applicable Warrant Price shall be correspondingly decreased.
4.2. AGGREGATION OF SHARES. If after the date hereof, and subject to the
provisions of Section 4.5, the number of outstanding shares of Common Stock is
decreased by a consolidation, combination or reclassification of shares of
Common Stock or other similar event, then, upon the effective date of such
consolidation, combination or reclassification, the number of shares issuable on
exercise of each Warrant shall be decreased in proportion to such decrease in
outstanding shares and the then applicable Warrant Price shall be
correspondingly increased.
4.3. REPLACEMENT OF SECURITIES UPON REORGANIZATION, ETC. If after the date
hereof any capital reorganization or reclassification of the Common Stock of the
Company, or consolidation or merger of the Company with another corporation, or
the sale of all or substantially all of its assets to another corporation or
other similar event shall be effected, then, as a condition of such
reorganization, reclassification, consolidation, merger, or sale, lawful and
fair provision shall be made whereby the Warrant holders shall thereafter have
the right to purchase and receive, upon the basis and upon the terms and
conditions specified in the Warrants and in lieu of the shares of Common Stock
of the Company immediately theretofore purchasable and receivable upon the
exercise of the rights represented thereby, such shares of stock, securities, or
assets as may be issued or payable with respect to or in exchange for the number
of outstanding shares of such Common Stock equal to the number of shares of such
stock immediately theretofore purchasable and receivable upon the exercise of
the rights represented by the Warrants, had such reorganization,
reclassification, consolidation, merger, or sale not taken place and in such
event appropriate provision shall be made with respect to the rights and
interests of the Warrant holders to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the Warrant Price
and of the number of shares purchasable upon the exercise of the Warrants) shall
thereafter be applicable, as nearly as may be in relation to any share of stock,
securities, or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger, or sale unless prior to
the consummation thereof the successor corporation (if other than the Company)
resulting from such consolidation or merger, or the corporation purchasing such
assets, shall assume by written instrument executed and delivered to the Warrant
Agent the obligation to deliver to the Warrant holders such shares of stock,
securities, or assets as, in accordance with the foregoing provisions, such
holders may be entitled to purchase.
4.4. NOTICES OF CHANGES IN WARRANT. Upon every adjustment of the Warrant
Price or the number of shares issuable on exercise of a Warrant, the Company
shall give written notice thereof to the Warrant Agent, which notice shall state
the Warrant Price resulting from such adjustment and the increase or decrease,
if any, in the number of shares purchasable at such
5
<PAGE>
price upon the exercise of a Warrant, setting forth in reasonable detail the
method of calculation and the facts upon which such calculation is based. Upon
the occurrence of any event specified in Sections 4.1., 4.2., or 4.3., then, in
any such event, the Company shall give written notice in the manner set forth
above of the record date for such dividend, distribution, or subscription
rights, or the effective date of such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation, winding up or issuance.
Such notice shall also specify the date as of which the holders of Common Stock
of record shall participate in such dividend, distribution, or subscription
rights, or shall be entitled to exchange their Common Stock for stock,
securities, or other assets deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation, winding
up or issuance. Failure to give such notice, or any defect therein, shall not
affect the legality or validity of such event.
4.5. NO FRACTIONAL SHARES. Notwithstanding any provision contained in this
Warrant Agreement to the contrary, the Company shall not issue fractional shares
upon exercise of Warrants. If, by reason of any adjustment made pursuant to
this Section 4, the holder of any Warrant would be entitled, upon the exercise
of such Warrant, to receive a fractional interest in a share, the number of
shares of Common Stock to be received shall be rounded off to the nearest whole
number.
4.6. FORM OF WARRANT. The form of Warrant need not be changed because of
any adjustment pursuant to this Section 4, and Warrants issued after such
adjustment may state the same Warrant Price and the same number of shares as is
stated in the Warrants initially issued pursuant to this Agreement. However,
the Company may at any time in its sole discretion make any change in the form
of Warrant that the Company may deem appropriate and that does not affect the
substance thereof, and any Warrant thereafter issued or countersigned, whether
in exchange or substitution for an outstanding Warrant or otherwise, may be in
the form as so changed.
5. TRANSFER AND EXCHANGE OF WARRANTS.
5.1. REGISTRATION OF TRANSFER. The Warrant Agent shall register the
transfer, from time to time, of any outstanding Warrant upon the Warrant
Register, upon surrender of a Warrant certificate for transfer, properly
endorsed with signatures properly guaranteed and accompanied by appropriate
instructions for transfer. Upon any such transfer, a new Warrant certificate
representing an equal aggregate number of Warrants shall be issued and the old
Warrant certificate shall be canceled by the Warrant Agent. The Warrant
certificate so canceled shall be delivered by the Warrant Agent to the Company
from time to time upon request.
5.2. PROCEDURE FOR SURRENDER OF WARRANTS. Warrant certificates may be
surrendered to the Warrant Agent, together with a written request for exchange,
and thereupon the Warrant Agent shall issue in exchange therefor one or more new
Warrant certificates as requested by the registered holder of the Warrant
certificates so surrendered, representing an equal aggregate number of Warrants;
provided, however, that in the event that a Warrant certificate surrendered for
transfer bears a restrictive legend, the Warrant Agent shall not cancel such
Warrant certificate and issue new Warrant certificates in exchange therefor
until the Warrant Agent has received an opinion of counsel for the Company
stating that such
6
<PAGE>
transfer may be made and indicating whether the new Warrant certificates must
also bear a restrictive legend.
5.3. FRACTIONAL WARRANTS. The Warrant Agent shall not be required to
effect any registration of transfer or exchange which will result in the
issuance of a warrant certificate for a fraction of a warrant. The number of
Warrants to be delivered shall be rounded off to the nearest whole number.
5.4. SERVICE CHARGES. No service charge shall be made for any exchange or
registration of transfer of Warrants.
5.5. WARRANT EXECUTION AND COUNTERSIGNATURE. The Warrant Agent is hereby
authorized to countersign and to deliver, in accordance with the terms of this
Agreement, the Warrants required to be issued pursuant to the provisions hereof,
and the Company, whenever required by the Warrant Agent, will supply the Warrant
Agent with Warrant certificates duly executed on behalf of the Company for such
purpose.
6. REDEMPTION.
6.1. REDEMPTION. Not less than all of the outstanding Warrants may be
redeemed, at the option of the Company, prior to the Expiration Date, at the
office of the Warrant Agent, upon the notice referred to in Section 6.2., at the
price of $.01 per Warrant ("Redemption Price"), provided that (a) the last sale
price of the Common Stock has been at least one hundred and sixty two and a half
percent (162.5%) of the then effective exercise price of the Public Warrants on
each of the twenty (20) consecutive trading days ending on the third business
day prior to the date on which notice of redemption is given, the satisfaction
of which condition shall be certified by the Company and (b) the Company has
obtained the prior written consent of the Underwriter. The provisions of this
Section 6.1 may not be modified, amended or deleted without the prior written
consent of the Underwriter.
6.2. DATE FIXED FOR, AND NOTICE OF, REDEMPTION. In the event the Company
shall elect to redeem all or any part of the outstanding Warrants, the Company
shall fix a date for the redemption. Notice of redemption shall be mailed by
first class mail, postage prepaid, by the Company or the Company's agent at its
direction not less than 30 days from the date fixed for redemption to the
registered holders of the outstanding Warrants to be redeemed at their last
address as they shall appear on the registration books. Any notice mailed in
the manner herein provided shall be conclusively presumed to have been duly
given whether or not the registered holder received such notice.
6.3. EXERCISE AFTER NOTICE OF REDEMPTION. The outstanding Warrants may be
exercised in accordance with Section 3 of this Agreement at any time after
notice of redemption shall have been given by the Company pursuant to
Section 6.2. hereof and prior to the date fixed for redemption. On and after
the redemption date, the record holder of the outstanding Warrants shall have no
further rights except to receive, upon surrender of the outstanding Warrants,
the redemption price.
6.4. OUTSTANDING WARRANTS ONLY. The Company understands that the
redemption rights provided for by this Section 6 apply only to outstanding
Warrants. To the extent a
7
<PAGE>
person holds rights to purchase Warrants, such purchase rights shall not be
extinguished by redemption. However, once such purchase rights are exercised,
the Company may redeem the Warrants issued upon such exercise provided that the
criteria for redemption is met. The provisions of this Section 6.4 may not be
modified, amended or deleted without the prior written consent of the
Underwriter.
7. OTHER PROVISIONS RELATING TO RIGHTS OF HOLDERS OF WARRANTS.
7.1. NO RIGHTS AS STOCKHOLDER. A Warrant does not entitle the registered
holder thereof to any of the rights of a stockholder of the Company, including,
without limitation, the right to receive dividends, or other distributions,
exercise any preemptive rights to vote or to consent or to receive notice as
stockholders in respect of the meetings of stockholders or the election of
directors of the Company or any other matter.
7.2. LOST, STOLEN, MUTILATED, OR DESTROYED WARRANTS. If any Warrant
certificate is lost, stolen, mutilated, or destroyed, the Company and the
Warrant Agent may on such terms as to indemnity or otherwise as they may in
their discretion impose (which shall, in the case of a mutilated Warrant
certificate, include the surrender thereof), issue a new Warrant certificate of
like denomination, tenor, and date as the Warrant certificate so lost, stolen,
mutilated, or destroyed. Any such new Warrant certificate shall constitute a
substitute contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated, or destroyed Warrant certificate shall be at any time
enforceable by anyone.
7.3. RESERVATION OF COMMON STOCK. The Company shall at all times reserve
and keep available a number of its authorized but unissued shares of Common
Stock that will be sufficient to permit the exercise in full of all outstanding
Warrants issued pursuant to this Agreement.
7.4. REGISTRATION OF COMMON STOCK. The Company agrees that prior to the
commencement of the Exercise Period it shall file with the Securities and
Exchange Commission a post-effective amendment to the Registration Statement, if
possible or a new registration statement, for the registration, under the
Securities Act of 1933, of the Common Stock issuable upon exercise of the
Warrants. In either case, the Company shall cause the same to become effective
at or prior to the commencement of the Exercise Period and to maintain the
effectiveness of such registration statement and keep current a prospectus
thereunder until the expiration of the Public Warrants and the Underwriter's
Warrants in accordance with the provisions of this Agreement. The provisions of
this Section 7.4 may not be modified, amended or deleted without the prior
written consent of the Underwriter.
8. CONCERNING THE WARRANT AGENT AND OTHER MATTERS.
8.1. PAYMENT OF TAXES. The Company will from time to time promptly pay all
taxes and charges that may be imposed upon the Company or the Warrant Agent in
respect of the issuance or delivery of shares of Common Stock upon the exercise
of Warrants, but the Company shall not be obligated to pay any transfer taxes in
respect of the Warrants or such shares.
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<PAGE>
8.2. RESIGNATION, CONSOLIDATION, OR MERGER OF WARRANT AGENT.
8.2.1. APPOINTMENT OF SUCCESSOR WARRANT AGENT. The Warrant Agent,
or any successor to it hereafter appointed, may resign its duties and be
discharged from all further duties and liabilities (other than those incurred
prior to such resignation or discharge) hereunder after giving sixty (60) days'
notice in writing to the Company. If the office of the Warrant Agent becomes
vacant by resignation or incapacity to act or otherwise, the Company shall
appoint in writing a successor Warrant Agent in place of the Warrant Agent. If
the Company shall fail to make such appointment within a period of 30 days after
it has been notified in writing of such resignation or incapacity by the Warrant
Agent or by a holder of Warrants (who shall, with such notice, submit his
Warrant for inspection by the Company), then the holder of any Warrant may apply
to the Supreme Court of the State of New York for the County of New York for the
appointment of a successor Warrant Agent. Any successor Warrant Agent, whether
appointed by the Company or by such court, shall be a corporation organized,
existing and in good standing and authorized under the laws of the state in
which it was incorporated to exercise corporate trust powers, shall maintain an
office in the Borough of Manhattan, City and State of New York for the transfer
of the Warrants and, if not incorporated in the State of New York, shall be
authorized to do business in the State of New York as a foreign corporation, and
subject to supervision or examination by federal or state authority and shall be
authorized to serve as Warrant Agent for the Warrants under the Securities
Exchange Act of 1934, as amended. After appointment, any successor Warrant
Agent shall be vested with all the authority, powers, rights, immunities,
duties, and obligations of its predecessor Warrant Agent with like effect as if
originally named as Warrant Agent hereunder, without any further act or deed;
but if for any reason it becomes necessary or appropriate, the predecessor
Warrant Agent shall execute and deliver, at the expense of the Company, an
instrument transferring to such successor Warrant Agent all the authority,
powers, and rights of such predecessor Warrant Agent hereunder; and upon request
of any successor Warrant Agent the Company shall make, execute, acknowledge, and
deliver any and all instruments in writing for more fully and effectually
vesting in and confirming to such successor Warrant Agent all such authority,
powers, rights, immunities, duties, and obligations.
8.2.2. NOTICE OF SUCCESSOR WARRANT AGENT. In the event a successor
Warrant Agent shall be appointed, the Company shall give notice thereof to the
predecessor Warrant Agent and the transfer agent for the Common Stock not later
than the effective date of any such appointment.
8.2.3. MERGER OR CONSOLIDATION OF WARRANT AGENT. Any corporation
into which the Warrant Agent may be merged or with which it may be consolidated
or any corporation resulting from any merger or consolidation to which the
Warrant Agent shall be a party, if it shall be eligible to serve as Warrant
Agent under Section 8.2.1, shall be the successor Warrant Agent under this
Agreement without any further act.
8.3. FEES AND EXPENSES OF WARRANT AGENT.
8.3.1. REMUNERATION. The Company agrees to pay the Warrant Agent
reasonable remuneration for its services as such Warrant Agent hereunder and
will reimburse
9
<PAGE>
the Warrant Agent upon demand for all expenditures that the Warrant Agent may
reasonably incur in the execution of its duties hereunder.
8.3.2. FURTHER ASSURANCES. The Company agrees to perform, execute,
acknowledge, and deliver or cause to be performed, executed, acknowledged, and
delivered all such further and other acts, instruments, and assurances as may
reasonably be required by the Warrant Agent for the carrying out or performing
of the provisions of this Agreement.
8.4. LIABILITY OF WARRANT AGENT.
8.4.1. RELIANCE ON COMPANY STATEMENT. Whenever in the performance
of its duties under this Warrant Agreement, the Warrant Agent shall deem it
necessary or desirable that any fact or matter be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by a statement signed by the
President of the Company and delivered to the Warrant Agent. The Warrant Agent
may rely upon such statement for any action taken or suffered in good faith by
it pursuant to the provisions of this Agreement.
8.4.2. INDEMNITY. The Warrant Agent shall be liable hereunder only
for its own negligence or willful misconduct. The Company agrees to indemnify
the Warrant Agent and save it harmless against any and all liabilities,
including judgments, costs and reasonable counsel fees, for anything done or
omitted by the Warrant Agent in the execution of this Agreement except as a
result of the Warrant Agent's negligence, willful misconduct, or bad faith.
8.4.3. EXCLUSIONS. The Warrant Agent shall have no responsibility
with respect to the validity of this Agreement or with respect to the validity
or execution of any Warrant (except its countersignature thereof); nor shall it
be responsible for any breach by the Company of any covenant or condition
contained in this Agreement or in any Warrant; nor shall it be responsible to
make any adjustments required under the provisions of Section 4. hereof or
responsible for the manner, method, or amount of any such adjustment or the
ascertaining of the existence of facts that would require any such adjustment;
nor shall it by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any shares of Common Stock to
be issued pursuant to this Agreement or any Warrant or as to whether any shares
of Common Stock will when issued be valid and fully paid and nonassessable.
8.5. ACCEPTANCE OF AGENCY. The Warrant Agent hereby accepts the agency
established by this Agreement and agrees to perform the same upon the terms and
conditions herein set forth and among other things, shall account promptly to
the Company with respect to Warrants exercised and concurrently account for, and
pay to the Company, all moneys received by the Warrant Agent for the purchase of
shares of the Company's Common Stock through the exercise of Warrants.
10
<PAGE>
9. MISCELLANEOUS PROVISIONS.
9.1. SUCCESSORS. All the covenants and provisions of this Agreement by or
for the benefit of the Company or the Warrant Agent shall bind and inure to the
benefit of their respective successors and assigns.
9.2. NOTICES. Any notice, statement or demand authorized by this Warrant
Agreement to be given or made by the Warrant Agent or by the holder of any
Warrant to or by the Company shall be sufficiently given or made if sent by
certified mail, or private courier service, postage prepaid, addressed (until
another address is filed in writing by the Company with the Warrant Agent), as
follows:
TEARDROP GOLF COMPANY
32 Bow Circle, Building #1
Hilton Head Island, South Carolina 29928
Attn: Rudy A. Slucker, President and Chief
Executive Officer
with a copy to:
CRUMMY, DEL DEO, DOLAN, GRIFFINGER & VECCHIONE
One Riverfront Plaza
Newark, New Jersey 07102
Attn: Jeffrey A. Baumel, Esq.
Any notice, statement or demand authorized by this Agreement to be given or made
by the holder of any Warrant or by the Company to or on the Warrant Agent shall
be sufficiently given or made if sent by certified mail or private courier
service, postage prepaid, addressed (until another address is filed in writing
by the Warrant Agent with the Company), as follows:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
2 Broadway
New York, New York 10002
9.3. APPLICABLE LAW; JURISDICTION. The validity, interpretation, and
performance of this Agreement and of the Warrants shall be governed in all
respects by the law of the State of New York, without giving effect to
principles of conflicts of law. The Company hereby agrees that any action,
proceeding or claim against it arising out of or relating in any way to this
Agreement shall be brought and enforced in the courts of the State of New York
or the United States District Court for the Southern District of New York, and
irrevocably submits, to such jurisdiction, which jurisdiction shall be
exclusive. The Company hereby waives any objection to such exclusive
jurisdiction and that such courts represent an inconvenience forum. Any such
process or summons to be served upon the Company may be served by transmitting a
copy thereof by registered or certified mail, return receipt requested, postage
prepaid, addressed to it at the address set forth in Section 9.2 hereof. Such
mailing shall be deemed personal service and shall be legal and binding upon the
Company in any action, proceeding or claim.
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<PAGE>
9.4. PERSONS HAVING RIGHTS UNDER THIS AGREEMENT. Nothing in this Agreement
expressed and nothing that may be implied from any of the provisions hereof is
intended, or shall be construed, to confer upon, or give to, any person or
corporation other than the parties hereto and the registered holders of the
Warrants and, for the purposes of Sections 3.3.5, 6.1 through 6.4 and 7.4
hereof, the Underwriter, any right, remedy, or claim under or by reason of this
Warrant Agreement or of any covenant, condition, stipulation, promise, or
agreement hereof. Underwriter shall be deemed to be a third-party beneficiary
of this Agreement with respect to such Sections. All covenants, conditions,
stipulations, promises, and agreements contained in this Warrant Agreement shall
be for the sole and exclusive benefit of the parties hereto (and the Underwriter
to the extent set forth above) and their successors and assigns and of the
registered holders of the Warrants.
9.5. EXAMINATION OF THE WARRANT AGREEMENT. A copy of this Agreement shall
be available at all reasonable times at the office of the Warrant Agent in the
Borough of Manhattan, City and State of New York, for inspection by the
registered holder of any Warrant. The Warrant Agent may require any such holder
to submit his or her Warrant for inspection by it.
9.6. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
9.7. EFFECT OF HEADINGS. The Section headings herein are for convenience
only and are not part of this Warrant Agreement and shall not affect the
interpretation thereof.
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
hereto under their respective corporate seals as of the day and year first above
written.
Attest TEARDROP GOLF COMPANY
By:
- ------------------------ --------------------------------------
Name: Name: Rudy A. Slucker
Title: Title: President and Chief Executive
Officer
CONTINENTAL STOCK TRANSFER & TRUST
COMPANY
Attest:
By:
- ------------------------ --------------------------------------
Name: Name:
Title: Title:
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<PAGE>
THE REGISTERED HOLDER OF THIS PURCHASE OPTION BY ITS ACCEPTANCE HEREOF, AGREES
THAT IT WILL NOT SELL, TRANSFER OR ASSIGN THIS PURCHASE OPTION EXCEPT AS HEREIN
PROVIDED.
NOT EXERCISABLE PRIOR TO________________, 1997. VOID AFTER 5:00 P.M. EASTERN
TIME, _______________________, 2001.
PURCHASE OPTION
FOR THE PURCHASE OF
115,000 SHARES OF COMMON STOCK
AND/OR
115,000 COMMON STOCK PURCHASE WARRANTS
OF
TEARDROP GOLF COMPANY
(A DELAWARE CORPORATION)
1 PURCHASE OPTION.
THIS CERTIFIES THAT, in consideration of $100 duly paid by or on
behalf of GKN Securities Corp. ("Holder"), as registered owner of this Purchase
Option, to TearDrop Golf Company ("Company"), Holder is entitled, at any time or
from time to time at or after _______________,1997 ("Commencement Date"), and at
or before 5:00 p.m., Eastern Time, _______________, 2001 ("Expiration Date"),
but not thereafter, to subscribe for, purchase and receive, in whole or in part,
up to 115,000 shares of Common Stock of the Company, $.01 par value ("Common
Stock") and/or 115,000 Common Stock Purchase Warrants, each to purchase one
share of Common Stock ("Warrants") during the period commencing on
_______________, 1997 and expiring _______________, 2001, (five years from the
effective date of the registration statement on Form SB-2 No. 333-14647
("Registration Statement") pursuant to which the Company has registered shares
of Common Stock and warrants to purchase Common Stock ("Effective Date")). Each
Warrant is the same as the warrants that have been registered for sale to the
public pursuant to the Registration
<PAGE>
Statement ("Public Warrants"). The shares of Common Stock and Warrants are
sometimes collectively referred to herein as the "Securities." The Holder can
purchase, upon exercise of the Purchase Option, either shares of Common Stock or
Warrants or both. If the Expiration Date is a day on which banking institutions
are authorized by law to close, then this Purchase Option may be exercised on
the next succeeding day which is not such a day in accordance with the terms
herein. During the period ending on the Expiration Date, the Company agrees not
to take any action that would terminate the Purchase Option. This Purchase
Option is initially exercisable at $____per share of Common Stock and $____per
Warrant purchased; provided, however, that upon the occurrence of any of the
events specified in Section 6 hereof, the rights granted by this Purchase
Option, including the exercise price and the number of shares of Common Stock
and Warrants to be received upon such exercise, shall be adjusted as therein
specified. The term "Exercise Price" shall mean the initial exercise price or
the adjusted exercise price, depending on the context of a share of Common Stock
or a Warrant.
2 EXERCISE.
2.1 EXERCISE FORM. In order to exercise this Purchase Option,
the exercise form attached hereto must be duly executed and completed
and delivered to the Company, together with this Purchase Option and
payment of the Exercise Price in cash or by certified check or
official bank check for the Securities being purchased. If the
subscription rights represented hereby shall not be exercised at or
before 5:00 p.m., Eastern time, on the Expiration Date this Purchase
Option shall become and be void without further force or effect, and
all rights represented hereby shall cease and expire.
2.2 LEGEND. Unless registered under the Securities Act of 1933,
as amended (the "Act"), each certificate for Securities purchased
under this Purchase Option shall bear a legend as follows unless such
Securities have been registered under the Act:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended
("Act") or applicable state law. The securities may not be
offered for sale, sold or otherwise transferred except
pursuant to an effective registration statement under the
Act, or pursuant to an exemption from registration under the
Act and applicable state law."
2.3 CASHLESS EXERCISE.
2.3.1 DETERMINATION OF AMOUNT. In lieu of the payment of the
Exercise Price in the manner required by Section 2.1, the
Holder shall have the right (but not the obligation) to pay
the Exercise Price for the Securities being purchased with
this Purchase Option by the surrender to the Company of any
exercisable but unexercised portion of this Purchase Option
having a "Stock Value" or "Warrant Value" (as defined below),
as the case may be, at the close of trading on the last
trading day immediately preceding the exercise of this
Purchase Option, equal to the Exercise Price multiplied by
the number of Securities being purchased upon exercise
("Cashless Exercise Right").
2
<PAGE>
2.3.1.1 COMMON STOCK. Upon exercise of the Conversion Right, the
Company shall deliver to the Holder (without payment by the
Holder of any of the Exercise Price in cash) that number of
shares of Common Stock equal to the quotient obtained by
dividing (x) the "Stock Value" (as defined below) of the
portion of the Purchase Option being converted at the time
the Conversion Right is exercised by (y) the Exercise Price.
The "Stock Value" of the portion of the Purchase Option being
converted shall equal the remainder derived from subtracting
(a) the Exercise Price multiplied by the number of shares of
Common Stock being converted from (b) the Market Price of the
Common Stock multiplied by the number of shares of Common
Stock being converted. As used herein, the term "Market
Price" at any date shall be deemed to be the last reported
sale price of the Common Stock on such date, or, in case no
such reported sale takes place on such day, the average of
the last reported sale prices for the immediately preceding
three trading days, in either case as officially reported by
the principal securities exchange on which the Common Stock
is listed or admitted to trading, or, if the Common Stock is
not listed or admitted to trading on any national securities
exchange or if any such exchange on which the Common Stock is
listed is not its principal trading market, the last reported
sale price as furnished by the NASD through the Nasdaq
National Market or SmallCap Market, or, if applicable, the
OTC Bulletin Board, or if the Common Stock is not listed or
admitted to trading on any of the foregoing markets, or
similar organization, as determined in good faith by
resolution of the Board of Directors of the Company, based on
the best information available to it.
2.3.1.2 WARRANTS. Upon exercise of the Conversion Right, the Company
shall deliver to the Holder (without payment by the Holder of
any of the Exercise Price in cash) that number of Warrants
equal to the quotient obtained by dividing (x) the "Warrant
Value" (as defined below) of the portion of the Purchase
Option being converted at the time the Conversion Right is
exercised by (y) the Exercise Price. The "Warrant Value" of
the portion of the Purchase Option being converted shall
equal the remainder derived from subtracting (a) the Exercise
Price multiplied by the number of Warrants being converted
from (b) the Market Price of the Warrants multiplied by the
number of Warrants being converted. As used herein, the term
"Market Price" at any date shall be deemed to be the last
reported sale price of the Warrants on such date, or, in case
no such reported sale takes place on such day, the average of
the last reported sale prices for the immediately preceding
three trading days, in either case as officially reported by
the principal securities exchange on which the Warrants are
listed or admitted to trading, or, if the
3
<PAGE>
Warrants are not listed or admitted to trading on any
national securities exchange or if any such exchange on which
the Warrants are listed is not its principal trading market,
the last reported sale price as furnished by the NASD through
the Nasdaq National Market or SmallCap Market, or, if
applicable, the OTC Bulletin Board, or if the Warrants are
not listed or admitted to trading on any of the foregoing
markets, or similar organization, as determined in good faith
by resolution of the Board of Directors of the Company, based
on the best information available to it.
2.3.1.3 MECHANICS OF CASHLESS EXERCISE. The Cashless Exercise Right
may be exercised by the Holder on any business day on or
after the Commencement Date and not later than the Expiration
Date by delivering the Purchase Option with a duly executed
exercise form attached hereto with the cashless exercise
section completed to the Company, exercising the Cashless
Exercise Right and specifying the total number of Units will
purchase pursuant to such Cashless Exercise Right.
3 TRANSFER.
3.1 GENERAL RESTRICTIONS. The registered Holder of this Purchase
Option, by its acceptance hereof, agrees that it will not sell,
transfer or assign or hypothecate this Purchase Option prior to the
Commencement Date to anyone other than (i) an officer of GKN
Securities Corp. ("Underwriter") or an officer or partner of any
Selected Dealer in connection with the Company's public offering with
respect to which this Purchase Option has been issued, or (ii) any
Selected Dealer. On and after the Commencement Date, transfers to
others may be made subject to compliance with or exemptions from
applicable securities laws. In order to make any permitted
assignment, the Holder must deliver to the Company the assignment form
attached hereto duly executed and completed, together with the
Purchase Option and payment of all transfer taxes, if any, payable in
connection therewith. The Company shall immediately transfer this
Purchase Option on the books of the Company and shall execute and
deliver a new Purchase Option or Purchase Options of like tenor to the
appropriate assignee(s) expressly evidencing the right to purchase the
aggregate number of shares of Common Stock and Warrants purchasable
hereunder or such portion of such number as shall be contemplated by
any such assignment.
3.2 RESTRICTIONS IMPOSED BY THE ACT. This Purchase Option and
the Securities underlying this Purchase Option shall not be
transferred unless and until (i) the Company has received the opinion
of counsel for the Holder that this Purchase Option or the Securities,
as the case may be, may be transferred pursuant to an exemption from
registration under the Act and applicable state law, the availability
of which is established to the reasonable satisfaction of the Company
(the Company hereby agreeing that the opinion of Graubard Mollen &
Miller shall be deemed satisfactory evidence of the availability of an
exemption), or (ii) a registration statement relating to such Purchase
Option or Securities, as the case may be, has
4
<PAGE>
been filed by the Company and declared effective by the Securities and
Exchange Commission and compliance with applicable state law.
4 NEW PURCHASE OPTIONS TO BE ISSUED.
4.1 PARTIAL EXERCISE OR TRANSFER. Subject to the restrictions in
Section 3 hereof, this Purchase Option may be exercised or assigned in
whole or in part. In the event of the exercise or assignment hereof
in part only, upon surrender of this Purchase Option for cancellation,
together with the duly executed exercise or assignment form and funds
sufficient to pay any Exercise Price and/or transfer tax, the Company
shall cause to be delivered to the Holder without charge a new
Purchase Option of like tenor to this Purchase Option in the name of
the Holder evidencing the right of the Holder to purchase the
aggregate number of shares of Common Stock and Warrants purchasable
hereunder as to which this Purchase Option has not been exercised or
assigned.
4.2 LOST CERTIFICATE. Upon receipt by the Company of evidence
satisfactory to it of the loss, theft, destruction or mutilation of
this Purchase Option and of reasonably satisfactory indemnification,
the Company shall execute and deliver a new Purchase Option of like
tenor and date. Any such new Purchase Option executed and delivered
as a result of such loss, theft, mutilation or destruction shall
constitute a substitute contractual obligation on the part of the
Company.
5 REGISTRATION RIGHTS.
5.1 DEMAND REGISTRATION.
5.1.1 GRANT OF RIGHT. The Company, upon written demand
("Initial Demand Notice") of the Holder(s) of at least 51% of
the Purchase Options and/or the underlying shares of Common
Stock and Warrants ("Majority Holders"), agrees to register
on one occasion, all or any portion of the Purchase Options
requested by the Majority Holders in the Initial Demand
Notice and all of the Securities underlying such Purchase
Options, including the Common Stock, the Warrants and the
Common Stock underlying the Warrants (collectively the
"Registrable Securities"). On such occasion, the Company
will file a Registration Statement covering the Registrable
Securities within sixty days after receipt of the Initial
Demand Notice and use its best efforts to have such
registration statement declared effective promptly
thereafter. If the Company fails to comply with the
provisions of this Section 5.1.1, the Company shall, in
addition to any other equitable or other relief available to
the Holder(s), be liable for any and all incidental, special
and consequential damages sustained by the Holder(s). The
demand for registration may be made at any time during a
period of five years beginning one year from the Effective
Date. The Company covenants and agrees to give written
notice of its receipt of any Initial Demand Notice by any
Holder(s) to all other registered Holders of the Purchase
Options and/or the Registrable Securities within ten days
from the date of the receipt of any such Initial Demand
Notice.
5
<PAGE>
5.1.2 TERMS. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but the
Holders shall pay any and all underwriting commissions and
the expenses of any legal counsel selected by the Holders to
represent them in connection with the sale of the Registrable
Securities. The Company agrees to use its best efforts to
cause the filing required herein to become effective promptly
and to qualify or register the Registrable Securities in such
States as are reasonably requested by the Holder(s);
provided, however, that in no event shall the Company be
required to register the Registrable Securities in a State in
which such registration would cause (i) the Company to be
obligated to register or license to do business in such
State, or (ii) the principal stockholders of the Company to
be obligated to escrow their shares of capital stock of the
Company. The Company shall cause any registration statement
filed pursuant to the demand rights granted under Section
5.1.1 to remain effective for a period of at least nine
consecutive months from the date that the Holders of the
Registrable Securities covered by such registration statement
are first given the opportunity to sell all of such
securities.
5.2 "PIGGY-BACK" REGISTRATION.
5.2.1 GRANT OF RIGHT. In addition to the demand right of
registration, the Holders of the Purchase Options shall have
the right for a period of seven years commencing one year
from the Effective Date, to include the Registrable
Securities as part of any other registration of securities
filed by the Company (other than in connection with a
transaction contemplated by Rule 145(a) promulgated under the
Act or pursuant to Form S-8 or any equivalent form) provided,
however, that if, in the written opinion of the Company's
managing underwriter or underwriters, if any, for such
offering, the inclusion of the Registrable Securities, when
added to the securities being registered by the Company or
the selling stockholder(s), will exceed the maximum amount
of the Company's securities which can be marketed (i) at a
price reasonably related to their then current market value,
or (ii) without materially and adversely affecting the entire
offering, the Company shall nevertheless register all or any
portion of the Registrable Securities required to be so
registered but such Registrable Securities shall not be sold
by the Holders until 180 days after the registration
statement for such offering has become effective and provided
further that, if any securities are registered for sale on
behalf of other stockholders in such offering and such
stockholders have not agreed to defer such sale until the
expiration of such 180 day period, the number of securities
to be sold by all stockholders in such public offering during
such 180 day period shall be apportioned PRO RATA among all
such selling stockholders, including all holders of the
Registrable Securities, according to the total amount of
securities of the Company owned by said selling stockholders,
including all holders of the Registrable Securities.
5.2.2 TERMS. The Company shall bear all fees and expenses
attendant to registering the Registrable Securities, but
the Holders shall pay any and all underwriting commissions
and the expenses of any legal counsel selected by the Holders
to represent them in connection with the sale of the
Registrable Securities. In the event of such a proposed
registration, the Company shall furnish the then
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Holders of outstanding Registrable Securities with not less
than thirty days written notice prior to the proposed date of
filing of such registration statement. Such notice to the
Holders shall continue to be given for each registration
statement filed by the Company until such time as all of the
Registrable Securities have been sold by the Holder. The
holders of the Registrable Securities shall exercise the
"piggy-back" rights provided for herein by giving written
notice, within twenty days of the receipt of the Company's
notice of its intention to file a registration statement.
The Company shall cause any registration statement filed
pursuant to the above "piggyback" rights to remain effective
for at least nine months from the date that the Holders of
the Registrable Securities are first given the opportunity to
sell all of such securities.
5.3 GENERAL TERMS.
5.3.1 INDEMNIFICATION. The Company shall indemnify the
Holder(s) of the Registrable Securities to be sold pursuant
to any registration statement hereunder and each person, if
any, who controls such Holders within the meaning of Section
15 of the Act or Section 20(a) of the Securities Exchange Act
of 1934, as amended ("Exchange Act"), against all loss,
claim, damage, expense or liability (including all reasonable
attorneys' fees and other expenses reasonably incurred in
investigating, preparing or defending against any claim
whatsoever) to which any of them may become subject under the
Act, the Exchange Act or otherwise, arising from such
registration statement but only to the same extent and with
the same effect as the provisions pursuant to which the
Company has agreed to indemnify the Underwriter contained in
Section 5 of the Underwriting Agreement between the
Underwriter and the Company, dated the Effective Date. The
Holder(s) of the Registrable Securities to be sold pursuant
to such registration statement, and their successors and
assigns, shall severally, and not jointly, indemnify the
Company, against all loss, claim, damage, expense or
liability (including all reasonable attorneys' fees and other
expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which they may
become subject under the Act, the Exchange Act or otherwise,
arising from information furnished by or on behalf of such
Holders, or their successors or assigns, in writing, for
specific inclusion in such registration statement to the same
extent and with the same effect as the provisions contained
in Section 5 of the Underwriting Agreement pursuant to which
the Underwriter has agreed to indemnify the Company.
5.3.2 EXERCISE OF WARRANTS. Nothing contained in this
Purchase Option shall be construed as requiring the Holder(s)
to exercise their Purchase Options or Warrants prior to or
after the initial filing of any registration statement or the
effectiveness thereof.
5.3.3 EXCLUSIVITY. The Company shall not permit the
inclusion of any securities other than the Registrable
Securities to be included in any registration statement filed
pursuant to Section 5.1 hereof without the prior written
consent of the Majority Holders of the Registrable
Securities.
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5.3.4 DOCUMENTS DELIVERED TO HOLDERS. The Company shall
furnish to each Holder participating in any of the foregoing
offerings and to each underwriter of any such offering, if
any, a signed counterpart, addressed to such Holder or
underwriter, of (i) an opinion of counsel to the Company,
dated the effective date of such registration statement (and,
if such registration includes an underwritten public
offering, an opinion dated the date of the closing under any
underwriting agreement related thereto), and (ii) a "cold
comfort" letter dated the effective date of such registration
statement (and, if such registration includes an underwritten
public offering, a letter dated the date of the closing under
the underwriting agreement) signed by the independent public
accountants who have issued a report on the Company's
financial statements included in such registration statement,
in each case covering substantially the same matters with
respect to such registration statement (and the prospectus
included therein) and, in the case of such accountants'
letter, with respect to events subsequent to the date of such
financial statements, as are customarily covered in opinions
of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
The Company shall also deliver promptly to each Holder
participating in the offering requesting the correspondence
and memoranda described below and to the managing underwriter
copies of all correspondence between the Commission and the
Company, its counsel or auditors and all memoranda relating
to discussions with the Commission or its staff with respect
to the registration statement and permit each Holder and
underwriter to do such investigation, upon reasonable advance
notice, with respect to information contained in or omitted
from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules
of the National Association of Securities Dealers, Inc.
("NASD"). Such investigation shall include access to books,
records and properties and opportunities to discuss the
business of the Company with its officers and independent
auditors, all to such reasonable extent and at such
reasonable times and as often as any such Holder shall
reasonably request.
5.3.5 UNDERWRITING AGREEMENT. The Company shall enter into
an underwriting agreement with the managing underwriter(s)
selected by any Holders whose Registrable Securities are
being registered pursuant to this Section 5. Such agreement
shall be reasonably satisfactory in form and substance to the
Company, each Holder and such managing underwriters, and
shall contain such representations, warranties and covenants
by the Company and such other terms as are customarily
contained in agreements of that type used by the managing
underwriter. The Holders shall be parties to any
underwriting agreement relating to an underwritten sale of
their Registrable Securities and may, at their option,
require that any or all the representations, warranties and
covenants of the Company to or for the benefit of such
underwriters shall also be made to and for the benefit of
such Holders. Such Holders shall not be required to make any
representations or warranties to or agreements with the
Company or the underwriters except as they may relate to such
Holders, their shares and their intended methods of
distribution.
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5.3.6 DOCUMENTS TO BE DELIVERED BY HOLDER(S). Each of the
Holder(s) participating in any of the foregoing offerings
shall furnish to the Company a completed and executed
questionnaire provided by the Company requesting information
customarily sought of selling security holders.
6 ADJUSTMENTS.
6.1 ADJUSTMENTS TO EXERCISE PRICE AND NUMBER OF SECURITIES. The
Exercise Price and the number of shares of Common Stock underlying the
Purchase Option (and underlying the Warrants underlying the Purchase
Option) shall be subject to adjustment from time to time as
hereinafter set forth:
6.1.1 STOCK DIVIDENDS - RECAPITALIZATION, RECLASSIFICATION,
SPLIT-UPS. If after the date hereof, and subject to the
provisions of Section 6.3 below, the number of outstanding
shares of Common Stock is increased by a stock dividend
payable in shares of Common Stock or by a split-up,
recapitalization or reclassification of shares of Common
Stock or other similar event, then, on the effective date
thereof, the number of shares of Common Stock issuable on
exercise of the Purchase Option and the Warrants underlying
the Purchase Option shall be increased in proportion to such
increase in outstanding shares.
6.1.2 AGGREGATION OF SHARES. If after the date hereof, and
subject to the provisions of Section 6.3, the number of
outstanding shares of Common Stock is decreased by a
consolidation, combination or reclassification of shares of
Common Stock or other similar event, then, upon the effective
date thereof, the number of shares of Common Stock issuable
on exercise of the Purchase Option and the Warrants
underlying the Purchase Option shall be decreased in
proportion to such decrease in outstanding shares.
6.1.3 ADJUSTMENTS IN EXERCISE PRICE. Whenever the number of
shares of Common Stock purchasable upon the exercise of this
Purchase Option is adjusted, as provided in this Section 6.1,
the Exercise Price shall be adjusted (to the nearest cent) by
multiplying such Exercise Price immediately prior to such
adjustment by a fraction (x) the numerator of which shall be
the number of shares of Common Stock purchasable upon the
exercise of this Purchase Option immediately prior to such
adjustment, and (y) the denominator of which shall be the
number of shares of Common Stock so purchasable immediately
thereafter. If it is determined that such Exercise Price and
number of shares of Common Stock must be adjusted, then the
Exercise Price of the Purchase Option with respect to the
underlying Warrants and the number of Warrants purchasable
hereunder shall also be adjusted pro rata. For example, if
the Exercise Price of this Purchase Option for a share of
Common Stock decreases to $[5.00] then the Exercise Price of
this Purchase Option for a Warrant will decrease to $[0.10].
6.1.4 REPLACEMENT OF SECURITIES UPON REORGANIZATION, ETC. In
case of any reclassification or reorganization of the
outstanding shares of Common Stock other than a change
covered by Section 6.1.1 hereof or which solely
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affects the par value of such shares of Common Stock, or in
the case of any merger or consolidation of the Company with
or into another corporation (other than a consolidation or
merger in which the Company is the continuing corporation and
which does not result in any reclassification or
reorganization of the outstanding shares of Common Stock), or
in the case of any sale or conveyance to another corporation
or entity of the property of the Company as an entirety or
substantially as an entirety in connection with which the
Company is dissolved, the Holder of this Purchase Option
shall have the right thereafter (until the expiration of the
right of exercise of this Purchase Option) to receive upon
the exercise hereof, for the same aggregate Exercise Price
payable hereunder immediately prior to such event, the kind
and amount of shares of stock or other securities or property
(including cash) receivable upon such reclassification,
reorganization, merger or consolidation, or upon a
dissolution following any such sale or other transfer, by a
Holder of the number of shares of Common Stock of the Company
obtainable upon exercise of this Purchase Option immediately
prior to such event; and if any reclassification also results
in a change in shares of Common Stock covered by
Section 6.1.1, then such adjustment shall be made pursuant to
Sections 6.1.1, 6.1.3 and this Section 6.1.4. The provisions
of this Section 6.1.4 shall similarly apply to successive
reclassifications, reorganizations, mergers or
consolidations, sales or other transfers.
6.1.5 CHANGES IN FORM OF PURCHASE OPTION. This form of
Purchase Option need not be changed because of any change
pursuant to this Section, and Purchase Options issued after
such change may state the same Exercise Price and the same
number of shares of Common Stock and Warrants as are stated
in the Purchase Options initially issued pursuant to this
Agreement. The acceptance by any Holder of the issuance of
new Purchase Options reflecting a required or permissive
change shall not be deemed to waive any rights to a prior
adjustment or the computation thereof.
6.2 [Intentionally Omitted]
6.3 ELIMINATION OF FRACTIONAL INTERESTS. The Company shall not
be required to issue certificates representing fractions of shares of
Common Stock or Warrants upon the exercise or transfer of the Purchase
Option, nor shall it be required to issue scrip or pay cash in lieu of
any fractional interests, it being the intent of the parties that all
fractional interests shall be eliminated by rounding any fraction up
or down to the nearest whole number of Warrants, shares of Common
Stock or other securities, properties or rights.
7 RESERVATION AND LISTING. The Company shall at all times reserve and
keep available out of its authorized shares of Common Stock, solely for the
purpose of issuance upon exercise of the Purchase Options or the Warrants,
such number of shares of Common Stock or other securities, properties or
rights as shall be issuable upon the exercise thereof. The Company
covenants and agrees that, upon exercise of the Purchase Options and
payment of the Exercise Price therefor, all shares of Common Stock and
other securities issuable upon such exercise shall be duly and validly
issued, fully paid and non-assessable and not subject to preemptive rights
of any stockholder. The Company further covenants
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and agrees that upon exercise of the Warrants underlying the Purchase
Options and payment of the respective Warrant exercise price therefor, all
shares of Common Stock and other securities issuable upon such exercises
shall be duly and validly issued, fully paid and non-assessable and not
subject to preemptive rights of any stockholder. As long as the Purchase
Options shall be outstanding, the Company shall use its best efforts to
cause all (i) shares of Common Stock issuable upon exercise of the Purchase
Options and the Warrants, and (ii) the Warrants underlying the Purchase
Options to be listed (subject to official notice of issuance) on all
securities exchanges (or, if applicable on Nasdaq) on which the Common
Stock or the Public Warrants issued to the public in connection herewith
are then listed and/or quoted.
8 CERTAIN NOTICE REQUIREMENTS.
8.1 HOLDER'S RIGHT TO RECEIVE NOTICE. Nothing herein shall be
construed as conferring upon the Holders the right to vote or consent
or to receive notice as a stockholder for the election of directors or
any other matter, or as having any rights whatsoever as a stockholder
of the Company. If, however, at any time prior to the expiration of
the Purchase Options and their exercise, any of the events described
in Section 8.2 shall occur, then, in one or more of said events, the
Company shall give written notice of such event at least fifteen days
prior to the date fixed as a record date or the date of closing the
transfer books for the determination of the stockholders entitled to
such dividend, distribution, conversion or exchange of securities or
subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notice shall specify such
record date or the date of the closing of the transfer books, as the
case may be.
8.2 EVENTS REQUIRING NOTICE. The Company shall be required to
give the notice described in this Section 8 upon one or more of the
following events: (i) if the Company shall take a record of the
holders of its shares of Common Stock for the purpose of entitling
them to receive a dividend or distribution payable otherwise than in
cash, or a cash dividend or distribution payable otherwise than out of
retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company, or (ii) the
Company shall offer to all the holders of its Common Stock any
additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the
Company, or any option, right or warrant to subscribe therefor, or
(iii) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business shall be
proposed.
8.3 NOTICE OF CHANGE IN EXERCISE PRICE. The Company shall,
promptly after an event requiring a change in the Exercise Price
pursuant to Section 6 hereof, send notice to the Holders of such event
and change ("Price Notice"). The Price Notice shall describe the
event causing the change and the method of calculating same and shall
be certified as being true and accurate by the Company's President and
Chief Financial Officer.
8.4 TRANSMITTAL OF NOTICES. All notices, requests, consents and
other communications under this Purchase Option shall be in writing
and shall be deemed to have been duly made on the date of delivery if
delivered personally or sent by overnight
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courier, with acknowledgment of receipt to the party to which notice
is given, or on the fifth day after mailing if mailed to the party to
whom notice is to be given, by registered or certified mail, return
receipt requested, postage prepaid and properly addressed as follows:
(i) if to the registered Holder of the Purchase Option, to the address
of such Holder as shown on the books of the Company, or (ii) if to the
Company, to its principal executive office.
9 MISCELLANEOUS.
9.1 AMENDMENTS. The Company and the Underwriter may from time to
time supplement or amend this Purchase Option without the approval of
any of the Holders in order to cure any ambiguity, to correct or
supplement any provision contained herein which may be defective or
inconsistent with any other provisions herein, or to make any other
provisions in regard to matters or questions arising hereunder which
the Company and the Underwriter may deem necessary or desirable and
which the Company and the Underwriter deem shall not adversely affect
the interest of the Holders. All other modifications or amendments
shall require the written consent of the party against whom
enforcement of the modification or amendment is sought.
9.2 HEADINGS. The headings contained herein are for the sole
purpose of convenience of reference, and shall not in any way limit or
affect the meaning or interpretation of any of the terms or provisions
of this Purchase Option.
9.3 ENTIRE AGREEMENT. This Purchase Option (together with the
other agreements and documents being delivered pursuant to or in
connection with this Purchase Option) constitutes the entire agreement
of the parties hereto with respect to the subject matter hereof, and
supersedes all prior agreements and understandings of the parties,
oral and written, with respect to the subject matter hereof.
9.4 BINDING EFFECT. This Purchase Option shall inure solely to
the benefit of and shall be binding upon, the Holder and the Company
and their respective successors, legal representatives and assigns,
and no other person shall have or be construed to have any legal or
equitable right, remedy or claim under or in respect of or by virtue
of this Purchase Option or any provisions herein contained.
9.5 GOVERNING LAW; SUBMISSION TO JURISDICTION. This Purchase
Option shall be governed by and construed and enforced in accordance
with the laws of the State of New York, without giving effect to
conflict of laws. The Company hereby agrees that any action,
proceeding or claim against it arising out of, or relating in any way
to this Purchase Option shall be brought and enforced in the courts of
the State of New York or of the United States of America for the
Southern District of New York, and irrevocably submits to such
jurisdiction, which jurisdiction shall be exclusive. The Company
hereby waives any objection to such exclusive jurisdiction and that
such courts represent an inconvenient forum. Any process or summons
to be served upon the Company may be served by transmitting a copy
thereof by registered or certified mail, return receipt requested,
postage prepaid, addressed to it at the address set forth in Section 8
hereof. Such mailing shall be deemed personal service and shall be
legal and binding upon the Company in any action, proceeding or claim.
The Company agrees that the prevailing party(ies) in any such
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<PAGE>
action shall be entitled to recover from the other party(ies) all of
its reasonable attorneys' fees and expenses relating to such action
or proceeding and/or incurred in connection with the preparation
therefor.
9.6 WAIVER, ETC. The failure of the Company or the Holder to at
any time enforce any of the provisions of this Purchase Option shall
not be deemed or construed to be a waiver of any such provision, nor
to in any way affect the validity of this Purchase Option or any
provision hereof or the right of the Company or any Holder to
thereafter enforce each and every provision of this Purchase Option.
No waiver of any breach, non-compliance or non-fulfillment of any of
the provisions of this Purchase Option shall be effective unless set
forth in a written instrument executed by the party or parties against
whom or which enforcement of such waiver is sought; and no waiver of
any such breach, non-compliance or non-fulfillment shall be construed
or deemed to be a waiver of any other or subsequent breach, non-
compliance or non-fulfillment.
9.7 EXECUTION IN COUNTERPARTS. This Purchase Option may be
executed in one or more counterparts, and by the different parties
hereto in separate counterparts, each of which shall be deemed to be
an original, but all of which taken together shall constitute one and
the same agreement, and shall become effective when one or more
counterparts has been signed by each of the parties hereto and
delivered to each of the other parties hereto.
IN WITNESS WHEREOF, the Company has caused this Purchase Option to be
signed by its duly authorized officer as of the ____ day of ______________,
1996.
TEARDROP GOLF COMPANY
By:__________________________
Name: Rudy A. Slucker
Title: Chief Executive Officer and
President
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Form to be used to exercise Purchase Option:
TEARDROP GOLF COMPANY
32 Bow Circle, Building #1
Hilton Head Island, South Carolina 29928
Date:_________________, 19__
The undersigned hereby elects irrevocably to exercise the within
Purchase Option and to purchase ____ shares of Common Stock and Warrants to
purchase _____shares of Common Stock of TearDrop Golf Company and hereby makes
payment of $____________ (at the rate of $________per share of Common Stock and
$________per Warrant) in payment of the Exercise Price pursuant thereto. Please
issue the Common Stock and Warrants as to which this Purchase Option is
exercised in accordance with the instructions given below.
OR
The undersigned hereby elects irrevocably to exercise the within
Purchase Option and to purchase __________Securities of TearDrop Golf Company by
surrender of the unexercised portion of the within Purchase Option (with a
"Value" of $___________ based on a "Market Price" of $_________). Please issue
the Common Stock and Warrants comprising the Securities in accordance with the
instructions given below.
______________________________
Signature
______________________________
Signature Guaranteed
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER, AND MUST BE GUARANTEED BY A
BANK, OTHER THAN A SAVINGS BANK, OR BY A TRUST COMPANY OR BY A FIRM HAVING
MEMBERSHIP ON A REGISTERED NATIONAL SECURITIES EXCHANGE.
INSTRUCTIONS FOR REGISTRATION OF SECURITIES
Name ________________________________________________________
(Print in Block Letters)
Address ________________________________________________________
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Form to be used to assign Purchase Option:
ASSIGNMENT
(To be executed by the registered Holder to effect a transfer of the
within Purchase Option):
FOR VALUE RECEIVED,____________________________________
does hereby sell, assign and transfer unto_______________________
the right to purchase _______________________ shares of Common Stock and/or
Warrants to purchase ________ shares of Common Stock of TearDrop Golf Company
("Company") evidenced by the within Purchase Option and does hereby authorize
the Company to transfer such right on the books of the Company.
Dated:___________________, 199_
______________________________
Signature
NOTICE: THE SIGNATURE TO THIS FORM MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE WITHIN PURCHASE OPTION IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
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FINANCIAL CONSULTING AGREEMENT
AGREEMENT made the _________ day of November, 1996, by and between GKN
Securities Corp., a New York corporation, having an address at 61 Broadway, 12th
Floor, New York, New York 10006 ("GKN"), and TearDrop Golf Company, a Delaware
corporation, having an address at 32 Bow Circle, Building #1, Hilton Head
Island, South Carolina 29928 (the "Company").
WHEREAS, the Company has filed a registration statement with the
Securities and Exchange Commission for a proposed public offering of its
securities to be underwritten by GKN ("IPO"); and
WHEREAS, pursuant to the Underwriting Agreement between the Company
and GKN, the Company has agreed to retain GKN as a financial consultant;
NOW, THEREFORE, the parties hereto agree as follows:
1. The Company retains GKN as a nonexclusive financial
consultant to provide to the Company when requested by the Company from time to
time, during normal business hours, upon reasonable notice, consultation
concerning but not limited to shareholder relations, including preparation of
reports and other releases, assisting in long term financial planning, corporate
reorganization and expansion, capital structure, borrowings and other financial
assistance. These services shall be rendered by GKN without any direct
supervision by the Company and at such time and place and in such manner
(whether by conference, telephone, letter or otherwise) as GKN may determine.
GKN shall make available such time as it, in its sole
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discretion, shall deem appropriate for the performance of its obligations under
this Agreement.
2. This Agreement shall become effective as of the closing date
of the IPO and shall continue for a period of two (2) years thereafter.
3. As compensation for its services, the Company shall pay GKN
the sum of $2,500 per month, for an aggregate sum of $60,000 over the term of
this Agreement. The Company agrees to pay such aggregate amount, in advance, at
the closing of the IPO.
4. (a) In the event that any acquisition of and/or merger with
other companies or joint ventures or other contracts or arrangements with any
third parties including, without limitation, the sale of the business, assets or
stock of the Company or any of its subsidiaries or affiliates or any significant
portion thereof (collectively, a "Transaction"), occur which result from or are
caused by, and occur within eighteen (18) months of, introductions made by the
Consultant during the term of this Agreement, the Company shall pay the
Consultant as follows: five percent of the first $5,000,000, four percent of the
next $2,000,000, three percent of the next $2,000,000 and two percent of the
excess, if any, over $9,000,000 of the consideration involved in any such
transaction ("Legal Consideration").
If the Company believes that an introduction made to it by the
Consultant is not subject to the terms of this Section 4, then it shall, within
ten (10) business days after such introduction, give written notice thereof to
the Consultant.
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The phrase "Legal Consideration" for the purpose of this Section 4,
shall mean the total value of the securities (valued as determined in the
applicable agreement governing the terms of the Transaction or, if not so
valued, at market on the day of closing, or if there is no public market, valued
as set forth herein for other property), cash and assets and property or other
benefits exchanged by the Company or received by the Company or its shareholders
as consideration as a result of or arising out of the Transaction, irrespective
of the period of payment or terms (all valued at fair market present value as
agreed or, if not, by an independent appraiser.)
(b) All fees payable under this Section 4 are due and
payable to the Consultant, in cash or by certified check, at the closing or
closings of any Transaction; provided, that if the Legal Consideration on any
Transaction is other than all cash, the payment to the Consultant shall be, at
the option of the Company, either the cash equivalent or such other
consideration proportionate with the types of Legal Consideration paid on such
Transaction. No fees shall be payable under this Section 4 or otherwise if, for
any reason, the Transaction is not consummated.
(c) This Section 4 shall have a term of five years from the
date of the closing of the IPO.
5. GKN covenants that all proprietary or confidential
information which it obtains knowledge of as a result of the services rendered
pursuant to this Agreement shall be kept confidential and shall not be used by
GKN or disclosed by GKN to any third party without the prior written approval of
the Company, except as otherwise required by law.
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6. All expenses incurred by GKN in rendering services hereunder
shall be for the account of GKN, unless otherwise agreed to by the Company.
7. GKN and the Company acknowledge that GKN is an independent
contractor. GKN shall not hold itself out as, nor shall it take any action from
which others might infer that it is, a partner, agent or joint venturer of the
Company. GKN shall not take any action which binds, or purports to bind, the
Company.
8. This Agreement contains the entire agreement between the
parties with respect to the subject matter hereof. It may not be changed except
by agreement in writing signed by the party against whom enforcement or any
waiver, change, discharge, or modification is sought. Waiver of or failure to
exercise any rights provided by this Agreement in any respect shall not be
deemed a waiver of any further or future rights.
9. In the event of any dispute under this Agreement, then and
in such event, each party hereto agrees that the same shall be submitted to the
American Arbitration Association in the City of New York, for its decision and
determination in accordance with its rules and regulations then in effect. Each
of the parties agrees that the decision and/or award made by the Association may
be entered as judgment of the Courts or the State of New York, and shall be
enforceable as such.
10. This Agreement shall be construed and enforced in accordance
with the laws of the State of New York without giving effect to conflict of
laws.
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<PAGE>
11. This Agreement shall be binding upon the parties and their
successors and assigns provided, however, that GKN shall not permit any other
person or entity to assume its obligations hereunder without the prior written
consent of the Company. Notice of the Company's position shall be given within
ten (10) days after such consent has been requested.
12. This Agreement may be terminated by the Company at any time
upon thirty days' prior written notice to GKN; provided, however, that no such
termination shall reduce the amount payable under Section 3 or result in any
refund of amounts previously paid under Section 3, which latter amounts shall be
deemed earned in all respects prior to termination of this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the day and year first above written.
GKN SECURITIES CORP.
By:
---------------------------
Name:
Title:
TEARDROP GOLF COMPANY
By:
---------------------------
Name: Rudy A. Slucker
Title: President and
Chief Executive Officer
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EXHIBIT 10.22
THE GOLF CHANNEL-Registered Trademark-
ADVERTISING AGREEMENT
This Advertising Agreement is made this 13th day of November, 1996 by and
between TEARDROP GOLF, and THE GOLF CHANNEL, INC.-Registered Trademark- a
Delaware corporation ("TGC").
SECTION 1. SPONSORSHIP ADS. Sponsorship includes:
- - GOLF CENTRAL
- 416 :30 units per year in 1997 and 1998
- - TGC ACADEMY
- 416 :30 units per year in 1997 and 1998 in Dave Pelz
programming
- Sponsorship audio and video billboard in all Dave Pelz
programming
- - NIKE Tour Coverage
- 192 :30 units per year in 1997 and 1998
- Sponsorship audio and video billboard in all NIKE Coverage (8
events)
- - Bonus Units
- 200 :30 Bonus units per year in 1997 and 1998, Ten (10) units
will run in twenty TGC Tournaments as selected by Teardrop
providing inventory is available. If inventory is not
available in tournament coverage TGC and Teardrop will mutually
select alternative programming
- - Additional Marketing Elements
- Exclusive Sponsorship of "Putts of the Week", a 1-2 minute
feature highlighting 5-10 putts, to air a minimum of 416 times
per year in 1997 and 1998 with audio and video billboards
billboards
- Promotional signage and tent usage at 3 NIKE events in 1997 and
1998
- 200 daily tickets to 3 NIKE events in 1997 and 1998
- 3 months of United Airlines in flight in 1997 and 1998
- 1 Satellite Dish
2 Caribbean Golf Trips in 1997
<PAGE>
- - Flighting of Sponsorship Ads and Billboards is further detailed in 1997 and
1998 Partnership Marketing plans which are hereby included in this
agreement in its' entirety
- - Infomercials may be purchased on a quarterly basis. Pricing to be
negotiated based on rate card in use for each quarter no earlier than 6
months in advance.
SECTION II. TERM OF AGREEMENT. TEARDROP GOLF agrees to a term beginning
January 1, 1997 and ending December 31, 1998. TEARDROP GOLF retains the right
to extend the agreement through 1999. THE GOLF CHANNEL will produce a similar
package based on a gross investment of $734,117.64 ($624,000.00 net to Teardrop)
for 1999 with an average unit rate not to exceed $750 net per :30 unit.
TEARDROP also retains the right to exclusively sponsor the "Putts of the Week"
feature through 1999. Each option to be exercised no later than August 1, 1998.
SECTION III. PAYMENT SCHEDULE. TEARDROP GOLF agrees to pay to TGC in
consideration of the performance by TGC of its obligations hereunder, the gross
sum of $904,705.88 ($769,000.00 net to Teardrop) beginning January 1, 1997 based
on the following schedule:
Monthly Installments Amount
- -------------------- ------
1/1 - 11/1, 1997 $31,312.94 ($26,616.00 net to Teardrop)
12/1/97 $31,322.35 ($26,624.00 net to Teardrop)
1/1 - 11/1, 1998 $44,077.64 ($37,466.00 net to Teardrop)
12/1, 1998 $44,087.06 ($37,466.00 net to Teardrop)
SECTION IV. GUARANTEES. TGC will guarantee 10 million subscribers by July 1,
1997. If TGC fails to reach the above number, TGC will provide bonus units to
air "run of schedule" over the six (6) month period beginning July 1, 1997. The
number of bonus units shall equal (612) times the percentage subscriber
shortfall measured on July 1, 1997. TGC guarantees 18 million homes by July 1,
1998.
SECTION V. OWNERSHIP ADS. All Ads shall constitute the property of TEARDROP
GOLF. TEARDROP GOLF shall own the copyrights in and to the Ads, and any and all
trademarks or design patents or displays obtained on TEARDROP GOLF'S products,
labels or packages and the like belong solely to TEARDROP GOLF. TEARDROP GOLF
warrants that it possesses all copyrights, music synchronization and other
intellectual property rights, trademarks, service marks, licenses, contents of
third parties and all other necessary rights with respect to the Ads so that TGC
may telecast the Ads without infringing upon
<PAGE>
the legal rights of any third party. TEARDROP GOLF further represents and
warrants that the Ads delivered to TGC will not infringe upon any common law or
statutory copyright, right of privacy or any other right of any third party, and
that no Ad shall contain any matter this is libelous, scandalous or otherwise
objectionable.
SECTION VI. PROGRAMMING CONTROL. TGC retains the exclusive right to the
content of all programming telecast by TGC including the right to change program
format and title. TGC will, however, regardless of programming changes,
telecast the number of Ads during each year of the Term and honor the
obligations as set forth in SECTION 1 hereof in connection with substitute
programming mutually determined by TGC and TEARDROP GOLF to be comparable to the
programming referenced in SECTION 1.
SECTION VII: CONFIRMATION OF CONTRACT.
TEARDROP GOLF
/s/ R. Slucker
---------------------------------
Subject to our successful
completion of our I.P.O. 11/14/96
By: Rudy Slucker
Its President
---------
TGC
/s/ Christopher Murvin
----------------------------------
By: Christopher Murvin
Its Sr. Vice President
------------------------------
<PAGE>
October ___, 1996
GKN Securities Corp.
61 Broadway
New York, New York 10006
Ladies and Gentlemen:
The undersigned officer, director and/or stockholder of TearDrop Golf
Company, ("Company"), in consideration of the underwriting of a public offering
("Offering") of securities of the Company by GKN Securities Corp. ("GKN"),
hereby agrees that, without the prior written consent of GKN for a period of 24
months from the effective date ("Effective Date") of the Company's Registration
Statement on Form SB-2 which relates to the Offering, the undersigned will not
offer, sell, transfer or otherwise dispose of any shares of Common Stock of the
Company now owned or hereafter acquired, whether beneficially* or of record, by
the undersigned, including, but not limited to shares of Common Stock acquired
upon exercise of options or warrants or acquired upon conversion of any other
securities owned by the undersigned (collectively, the "Shares").
Notwithstanding the foregoing, the undersigned shall have the right to sell
securities of the Company purchased by the undersigned in the Offering or in the
aftermarket at any time without the consent of the Underwriter.
The undersigned also acknowledges and agrees that, during the
five-year period following the Effective Date, GKN shall have the right, but not
the obligation, to purchase for its account or to sell for the account of the
undersigned, any securities of the Company sold by the undersigned on the open
market. The undersigned agrees to consult with GKN with regard to any such
sales and will offer GKN the exclusive opportunity to purchase or sell such
securities on terms at least as favorable to the undersigned as the undersigned
can secure elsewhere. If GKN fails to accept such proposal for sale by the
undersigned within three hours after receipt of a written notice containing such
proposal, then GKN shall have no claim or right with respect to any such sales
contained in any such notice. If, thereafter, such proposal is modified in any
material respect, the undersigned shall follow the same procedure as with
respect to the original proposal.
The undersigned acknowledges that a manually signed copy of this
Agreement will be filed with the Pennsylvania Securities Commission as part of
the Company's registration filing and further, that the undersigned will cause:
1. A copy of this Agreement to be available from the Company or the
Company's transfer agent upon request and without charge;
- --------------------------
* It is agreed that, for purposes of this letter, the undersigned
beneficially owns, among other shares, any shares owned by (i) members of
his family and (ii) any person or entity controlled by the undersigned or
under common control with the undersigned.
<PAGE>
2. A notice to be placed on the face of each stock certificate for
Shares stating that the transfer of the Shares is restricted in
accordance with the conditions set forth on the reverse side of
the certificate; and
3. A typed legend to be placed on the reverse side of each stock
certificate representing Shares which states that the sale or
transfer of the Shares is subject to certain restrictions
pursuant to an agreement between the stockholder and GKN, which
agreement is on file with the Company and the stock transfer
agent from which a copy is available upon request and without
charge.
The terms and conditions contained in this Agreement can only be
modified (including premature termination of this Agreement) with the prior
written consent of GKN.
Very truly yours,
Signature:_____________________________
Print Name:____________________________
2
<PAGE>
EXHIBIT 24.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in the Registration Statement of TearDrop Golf Company
on Form SB-2 of our report dated September 28, 1996 except for Note 13 as to
which the date is November 13, 1996 on the financial statements of TearDrop Golf
Company, and to the reference to our firm under the caption "Experts" in such
Prospectus.
ROTHSTEIN, KASS & COMPANY, P.C.
Roseland, New Jersey
December 3, 1996
