<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 17, 1997.
REGISTRATION NO. 333-22895
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PIVOT RULES, INC.
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
NEW YORK 5136 13-3612110
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
80 WEST 40TH STREET
NEW YORK, NEW YORK 10018
(212) 944-8000
(Address and telephone number of principal executive offices)
E. KENNETH SEIFF, CHIEF EXECUTIVE OFFICER
PIVOT RULES, INC.
80 WEST 40TH STREET
NEW YORK, NEW YORK 10018
(212) 944-8000
(Name, address and telephone number of agent for service)
Copies to:
<TABLE>
<CAPTION>
<S> <C>
RICHARD A. GOLDBERG, ESQ. DAVID ALAN MILLER, ESQ.
Shereff, Friedman, Hoffman & Goodman, LLP Graubard Mollen & Miller
919 Third Avenue 600 Third Avenue
New York, New York 10022 New York, New York 10016
(212) 758-9500 (212) 818-8800
</TABLE>
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration
Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933 check the following box: [X]
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 THE 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.
SUBJECT TO COMPLETION, DATED APRIL 17, 1997
PROSPECTUS
[PIVOT RULES LOGO] [THREE GOLFER LOGO]
1,500,000 SHARES OF COMMON STOCK AND
1,500,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
All of the 1,500,000 shares of common stock ("Common Stock") and 1,500,000
Redeemable Common Stock Purchase Warrants ("Warrants") offered hereby
(collectively, "Securities") are being sold by Pivot Rules, Inc. ("Company").
Each Warrant entitles the holder to purchase one share of Common Stock for
$ [100% of the per-share offering price] during the four-year period
commencing one year after the date of this Prospectus. The Company may redeem
the Warrants, at any time after they become exercisable, 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 165% of the then exercise price
of the Warrants (initially $ ) on 20 out of the 30 consecutive trading
days ending on the third day prior to the day on which such notice is given.
See "Description of Securities."
Prior to this offering ("Offering"), there has been no public market for the
Securities and there can be no assurance that any such market will develop.
It is currently anticipated that the initial public offering prices will be
between $5 and $6 per share of Common Stock and $.10 per Warrant. 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 Small Cap Market under the symbols
"PVTR" and "PVTRW," respectively, and for listing of the Common Stock and
Warrants on the Boston Stock Exchange under the trading symbols "PVR" and
"PVRW," respectively.
The registration statement of which this Prospectus forms a part also relates
to the offer and sale by certain persons ("Selling Securityholders") of
Warrants ("Bridge Warrants") issued to the Selling Securityholders in
connection with the Company's January 1997 bridge financing ("Bridge
Financing"). The securities offered by the Selling Securityholders are not
part of the underwritten Offering and the Company will not receive any
proceeds from the sale of the Bridge Warrants. The Selling Securityholders
may not sell such securities for a period of one year from the date of this
Prospectus.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE IN NATURE AND INVOLVE A HIGH
DEGREE OF RISK AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" AT PAGE 7 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 ...... $ $ $
- --------------- --------------- ----------------- ---------------
Per Warrant..... $ $ $
- --------------- --------------- ----------------- ---------------
Total(3)........ $ $ $
- --------------- --------------- ----------------- ---------------
</TABLE>
- -----------------------------------------------------------------------------
(1) Does not include a 3% nonaccountable expense allowance which the
Company has agreed to pay to the Underwriter. The Company has also
agreed to sell to the Underwriter an option to purchase 150,000 shares
of Common Stock and/or 150,000 Warrants ("Underwriter's Purchase
Option") and to indemnify the Underwriter against certain liabilities,
including liabilities under the Securities Act of 1933, as amended
<PAGE>
("Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at
approximately $ .
(3) The Company has granted the Underwriter an option, exercisable within
45 days from the date of this Prospectus, to purchase up to an
additional 225,000 shares of Common Stock and/or 225,000 Warrants on
the same terms as 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 the Company will be $ , $ and $ ,
respectively. See "Underwriting."
The Securities are being offered by the Underwriter subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to
the approval of certain legal matters by counsel and certain other
conditions. The Underwriter reserves 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 the Underwriter in New York City
on or about , 1997.
[GKN SECURITIES LOGO]
, 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OR WARRANTS, INCLUDING SYNDICATE SHORT COVERING TRANSACTIONS AND PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
"Pivot Rules"(Registered Trademark), "The Rules Have Changed"(Registered
Trademark), "Clothes To Play A Round In"(Registered Trademark), the "Three
Golfer" design mark and the "Three Golfer and Flag" design mark are
registered trademarks of Pivot Rules, Inc.
<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
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 an 8,862.6292-to-1 stock split
effected on January 2, 1997.
THE COMPANY
The Company designs, sources and markets a full collection of golf
lifestyle sportswear for men under the Pivot Rules brand name and registered
trademark. Its current products include knit and woven shirts, sweaters,
sweatshirts, pants, shorts, outerwear, hats and socks, many of which carry
the Company's distinctive "Three Golfer" logo. The Company focuses its design
efforts on creating products with updated styling, innovative design and
superior comfort and fit, utilizing natural fibers and bright colors. The
Company seeks to distinguish its products from its competitors' products by
incorporating many unique details into its garments, thereby creating a
"branded" look. The Company believes that by integrating its marketing,
packaging and in-store fixturing programs, it will be able to build a
lifestyle image that consumers will link with the Pivot Rules brand name.
Historically, golf apparel has been marketed largely to avid golfers and
has been sold primarily at country clubs and pro shops. In recent years,
however, these products increasingly have appealed to a broader group of
consumers. As golf apparel has become more fashionable, a new market segment
has developed--golf lifestyle sportswear. The Company believes that this new
market segment results from the confluence of several trends, including (i)
the increased interest among the general population in quality of life and
leisure activities, (ii) the general success of lifestyle-oriented
sportswear, (iii) the increasing prominence of both professional and
celebrity golfers, (iv) the increased media coverage of golf, and (v) the
advent of "casual Fridays" and the increasing acceptance of casual apparel in
the workplace. Golf lifestyle sportswear is now sold not only to avid golfers
but also to consumers who identify with the lifestyle associated with golf
and similar leisure activities. As a result, department stores, catalogs,
sporting goods stores, discounters and specialty stores have joined country
clubs and pro shops as popular places to purchase golf apparel.
In 1991, having recognized these changes in the golf apparel market in
their incipience, the Company became one of the pioneers in selling golf
lifestyle apparel collections through these new channels of distribution.
Initially, the Company sold its products in the "upper moderate" price
segment, primarily to better department stores, specialty stores and
catalogs. Because such retailers typically purchased small quantities of a
given product style, the Company utilized small production runs and its
profitability was dependent upon high margins. Based on this strategy, the
Company's net sales grew from approximately $2.2 million in 1992 to $6.3
million in 1995.
By 1996, an increasing number of new market entrants had begun to sell
golf lifestyle apparel collections in the "upper moderate" price segment and
the Company determined that a disproportionate amount of competition existed
in this market. As a result, the Company decided to refocus its marketing
efforts on the "moderate" price segment of the golf lifestyle apparel market.
Based upon the superior design and quality of its products and its ability to
offer the fully integrated golf lifestyle concept and brand image that it had
developed in the "upper moderate" price segment of the market, the Company
believed that it could achieve significant competitive advantages by
repositioning its products into the "moderate" price segment. Accordingly,
the Company reduced its prices and redirected its sales efforts to focus on
the higher-volume retailers and other customers in the "moderate" price
segment, such as department stores, sporting goods stores, catalogs and
corporations, as well as discounters, including warehouse clubs. Based on
this new strategy, the Company's net sales increased to $8.6 million in 1996.
The Company believes that this strategy will lead to further increased sales
volume and that the increased purchasing leverage resulting from this sales
growth will allow it to reduce sourcing costs while maintaining product
quality.
3
<PAGE>
The Company's goal is to become the leading golf lifestyle apparel
collection in the "moderate" price segment. The Company has planned several
marketing and advertising initiatives in order to reinforce its strategic
shift in product positioning. These initiatives consist of a trade market
campaign that commenced in October 1996, a national consumer advertising
campaign that will be launched in the Spring of 1997, the expansion of the
categories of "Pivot Rules" products offered, and the installation of concept
shops and/or concept areas within targeted retailers' stores. The Company may
develop or acquire new labels in order to take advantage of opportunities in
a variety of other segments of the retail market.
The Company's executive offices are located at 80 West 40th Street, New
York, New York 10018 and its phone number is (212) 944-8000. The Company was
founded in 1991 as Pivot Corporation and in 1994 changed its name to Pivot
Rules, Inc.
4
<PAGE>
THE OFFERING
Securities Offered ............ 1,500,000 shares of Common Stock and
1,500,000 Warrants. Each Warrant entitles
the holder to purchase one share of Common
Stock for $ [100% of the per-share
offering price] during the four year period
commencing one year after the date of this
Prospectus. The Company may redeem the
Warrants, at any time after they become
exercisable, 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 165% of the then
exercise price of the Warrants (initially
$ ) on 20 out of the 30 consecutive trading
days ending on the third day prior to the
date on which such notice is given. See
"Description of Securities."
Common Stock Outstanding Prior
to the Offering .............. 1,200,000 shares
Common Stock to be Outstanding
After the Offering ........... 2,700,000 shares
Proposed Nasdaq Small Cap
Market Symbols ............... Common Stock: PVTR
Warrants: PVTRW
Proposed Boston Stock
Exchange Symbols ............. Common Stock: PVR
Warrants: PVRW
USE OF PROCEEDS
The Company intends to apply approximately $3,000,000 of the net proceeds
of this Offering to its marketing and advertising activities, approximately
$2,029,000 to repay indebtedness and obligations of the Company and
approximately $500,000 to the installation of concept shops and/or concept
areas within targeted retailers' stores. The remaining proceeds will be used
for working capital and general corporate purposes. See "Use of Proceeds."
RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk, including, without limitation, risks related to uncertainties in
apparel retailing and unexpected changes in fashion trends; the acceptance of
the Company's efforts to reposition its products and the risk of loss of
existing and targeted retailers as a result of such repositioning; the
potential failure of the Company's advertising and marketing initiatives; and
the Company's limited working capital and possible need for additional
financing. 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."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
The summary financial data presented below as of and for the year ended
December 31, 1996 is derived from the financial statements audited by Grant
Thornton LLP. The summary financial data for the year ended December 31, 1995
is derived from the financial statements audited by Richard A. Eisner &
Company, LLP. The summary financial data for the years ended December 31,
1994, 1993, and 1992 are derived from the unaudited financial statements of
the Company. In the opinion of management, such unaudited financial
statements include all adjustments necessary for the fair presentation of
such data. The summary financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited financial statements of the Company, including
the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ....................... $2,247 $4,488 $6,417 $6,337 $8,596
Gross profit .................... 768 1,604 2,383 2,341 2,025
Selling, marketing, design and
administrative expenses ........ 646 1,231 1,661 2,288 1,502
Operating profit ................ 122 373 722 53 523
Net income (loss) ............... $ 41 $ 159 $ 355 $(208) $ 135
Net earnings (loss) per share .. $ .03 $ .09 $ .22 $ (.17) $ .11
Weighted average number of
shares of Common Stock and
common stock equivalents
outstanding .................... 1,317,253 1,772,526 1,629,394 1,200,000 1,200,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED (1)
-------- ---------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital .... $ 175 $6,688
Total current assets 1,255 7,259
Total assets ........ 1,636 7,510
Total liabilities .. 1,227 583
Shareholders' equity $ 409 $6,927
</TABLE>
- ------------
(1) The pro forma as adjusted balance sheet information gives effect to the
(i) receipt of the $1,500,000 gross proceeds of the Bridge Financing,
(ii) the consummation of this Offering at an assumed public offering
price of $5.50 per share of Common Stock and $.10 per Warrant, net of
underwriting discounts and commissions and other expenses of this
Offering, and the use of a portion of the net proceeds thereof to repay
approximately $2,029,000 in indebtedness and certain other obligations,
and (iii) the write-off of $138,000 of debt discount and $287,000 of
debt issuance costs incurred in connection with the Bridge Financing.
Unless otherwise indicated, the information in this Prospectus does not
give effect to the exercise of the Warrants, the Underwriter's over-allotment
option or the Underwriter's Purchase Option, and does not include: (i)
200,000 shares of Common Stock reserved for issuance upon exercise of stock
options which may be granted under the Company's 1997 Stock Option Plan
("Plan"), of which options to purchase 83,000 shares of Common Stock have
been granted to date, and (ii) 600,000 shares of Common Stock reserved for
issuance upon the exercise of the Bridge Warrants. See "Management--Executive
Compensation" and "--Stock Option Plan" and "Description of
Securities--Warrants."
6
<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 or her investment.
Uncertainties in Apparel Retailing; Unexpected Changes in Fashion Trends.
The apparel industry historically has been subject to substantial cyclical
variations. The Company and other apparel manufacturers rely on the
expenditure of discretionary income for most, if not all, of their sales. Any
downturn, whether real or perceived, in economic conditions or prospects
could adversely affect consumer spending habits and the Company's business,
financial condition and operating results. In addition, some of the retailers
to whom the Company sells or may sell are highly leveraged. To date, these
developments have not had a material adverse effect on the Company. However,
any material financial or other difficulties encountered by the Company's
major customers could have a material adverse effect on the Company's
business, financial condition and operating results. Fashion trends can
change rapidly, and the Company's business is particularly sensitive to such
changes because the Company typically designs and contracts for the
manufacture of its products substantially in advance of sales. There can be
no assurance that the Company will accurately anticipate shifts in fashion
trends and adjust its merchandise mix to appeal to changing consumer tastes
in a timely manner. If the Company misjudges the market for its products or
is unsuccessful in responding to changes in fashion trends or in market
demand, the Company could experience insufficient or excess inventory levels
or higher markdowns, either of which would have a material adverse effect on
the Company's business, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Sourcing" and "--Product and Design."
Acceptance of Repositioning. The Company has commenced a new strategy
entailing the repositioning of its products at a lower price level and the
marketing of its products to higher-volume retailers. In order for this
strategy to succeed, the Company must sell its products to several of such
retailers. The business of these retailers is extremely large in comparison
to that of the Company and there can be no assurance that the Company's
products will impact the retailers' business in a favorable manner, and,
therefore, that such retailers will continue to carry the Company's products,
even if there is a high consumer demand for such products. Accordingly, there
can be no assurance that the Company's new strategy will be successful.
Moreover, it is anticipated that, even if the strategy is successful, it will
take some time to affect the Company's operating results. See
"Business--Corporate Strategy."
Risk of Loss of Existing and Targeted Retailers. It is likely that some or
all of the Company's existing high-end retail customers will cease to do
business with the Company as it moves into the higher-volume distribution
channels. Moreover, the Company has recently begun testing the sale of its
products to certain other discounters, including warehouse clubs. While such
sales may generate significant revenue for the Company, some or all of the
Company's existing or targeted retailers may refuse to purchase the Company's
products if it sells to such discounters on a regular basis. Any such refusal
could have a material adverse effect on the Company's business, financial
condition and operating results. See "Business--Corporate Strategy."
Potential Failure of Advertising and Marketing Initiatives. In conjunction
with the Company's efforts to reposition its products, it has instituted new
advertising and marketing initiatives. These initiatives are likely to
require continuous expenditures to be effective. There can be no assurance
that such initiatives will be successful, and even if successful, it may take
some time for their effects to translate into increased sales. The failure of
these advertising and marketing initiatives could have a material adverse
effect on the Company's efforts to reposition its products and, consequently,
the Company's business, financial condition and operating results. See
"Business--Corporate Strategy."
Limited Working Capital; Possible Need for Additional Financing.
Historically, the Company has been undercapitalized. To date, the
Company has obtained working capital through cash flow from operations,
private financing and a revolving credit facility from Heller Financial, Inc.
("Heller"), to whom it has granted a senior security interest in
substantially all of its assets. The Company anticipates,
7
<PAGE>
based on current plans and assumptions relating to its operations, that the
proceeds of the Offering, together with existing resources and cash generated
from operations, should be sufficient to satisfy the Company's contemplated
cash requirements for at least 18 months after completion of the Offering.
There can be no assurance, however, that the Company will not require
additional financing during or after such 18-month period. The Company's
current borrowing arrangements substantially limit the Company's flexibility
in obtaining additional financing. There can be no assurance that any
additional financing or other sources of capital will be available to the
Company upon acceptable terms, if at all. The inability to obtain additional
financing if and when needed would have a material adverse effect on the
Company's business, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Risk of Retailer's Refusal to Place Concept Shops. A significant component
of the Company's corporate strategy is the installation of concept shops
and/or concept areas within stores of the Company's targeted retailers. There
can be no assurance, however, that such retailers will be willing to place
the Company's concept shops and/or concept areas in their stores, or that, if
such shops and/or areas are installed, their performance will meet the
Company's expectations. The Company's failure to persuade such retailers to
place concept shops and/or concept areas in their stores, or the failure of
such shops and/or areas to perform up to expectations, could have a material
adverse effect on the Company's future business. See "Business--Corporate
Strategy."
Significant Reduction in Sales of Women's Sportswear Collection.
Historically, the Company has experienced a significant amount of
sales of its women's sportswear collection, including approximately 33.4% of
net sales in 1995 and 12.8% of net sales in 1996. Due to limited retailer
interest in continuing to carry the women's sportswear collection on a
year-round basis, the Company has made a strategic decision to discontinue
the development of the collection and to consolidate the remainder of its
women's design operations into its men's operations. The Company may continue
to produce a limited amount of women's apparel on a contract basis as
requested by certain retailers. Although the decrease in sales of the women's
sportswear collection in 1996 was offset by increased sales of the men's
sportswear collection, there can be no assurance that sales of the men's
collection will continue to increase at a rate sufficient to offset the
reduction in sales of the women's collection. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation."
Competition. The men's sportswear segment of the apparel market is highly
competitive. The Company encounters substantial competition at a variety of
price points from a number of apparel brands, including Polo, Tommy Hilfiger,
Nautica, Chaps, Izod, Gant, Dockers, Nike, Munsingwear, Grand Slam, Greg
Norman, Ashworth, Cross Creek and Jack Nicklaus. Virtually all of the
Company's targeted retailers also offer their own private label brands which
compete at significantly lower prices. Moreover, the current success of
golf-inspired lines leaves open the possibility of new entrants into the
market. For example, Nike recently signed a $40 million contract with Tiger
Woods and is developing a line of clothing under his name. In addition to
competing with golf-apparel manufacturers, the Company competes with
manufacturers of high quality men's sportswear and general leisure wear. The
Company competes primarily on the basis of design, image, value and quality.
Many of the Company's competitors are significantly larger than the Company,
have substantially greater financial, marketing and other resources and have
achieved greater recognition for their brand names than the Company. See
"Business--Competition."
Dependence on Foreign Sourcing; Future Status of Hong Kong &
China. Substantially all of the Company's products are manufactured by third
parties in the Far East and India. The use of contractors and the resulting
lack of direct control could make it difficult for the Company to obtain
timely delivery of products of acceptable quality. Delays in shipments to the
Company, inconsistent or inferior garment quality and other factors beyond
the Company's control could adversely affect the Company's relationships with
its customers, its reputation in the industry and its sales and operating
results. Moreover, foreign manufacturing is subject to numerous risks,
including work stoppages, transportation delays, political instability,
foreign currency fluctuations, the imposition of tariffs and import and
export controls, customs laws, changes in governmental policies and other
factors that could have a material adverse effect on the Company's business,
financial condition and operating results. In particular, there have been a
8
<PAGE>
number of recent trade disputes between China and the United States during
which the United States threatened to impose tariffs and duties on some
products imported from China and to withdraw China's "most favored nation"
trade status. In addition, since the Company's sourcing activities are based
in Hong Kong, such activities may be affected by the return of Hong Kong to
Chinese control in July 1997. Furthermore, because the Company's foreign
manufacturers are located at great distances from the Company, the Company
must generally allow for a significant amount of lead time for the delivery
of products. This reduces the Company's manufacturing flexibility, which
increases the risks associated with changes in fashion trends and consumer
preferences. These risks will increase as the Company seeks to source some of
its products through manufacturers in areas where labor and fabric costs are
lower than those in areas where the Company's products are currently
produced. See "Business--Sourcing."
Risk that Markdown Expenses Could Exceed Historical Levels. In the apparel
industry, the prices of products that are not sold by retailers in a timely
manner are often marked down. It is customary in the industry for the seller
of such products to share markdown costs with the retailers. The Company has
in the past shared such costs with its major customers in order to maintain
its relationships with such customers. The Company establishes reserves as a
deduction from gross sales for such markdown expenses. In 1996, markdown
expenses were approximately 2% of gross sales. Although the Company believes
that its reserves are adequate, there can be no assurance that markdown
expenses in the future will not exceed historical levels. In the event that
markdowns exceed historical levels, the Company's business, financial
condition and operating results will be adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Dependence on Limited Number of Customers; Lack of Long-Term Sales
Agreements. In 1996, the Company stopped using independent sales
representatives and consolidated all selling efforts to its New York
showroom. This consolidation, coupled with the Company's focus on
higher-volume retailers, resulted in a 44.6% concentration of gross sales
among its four largest customers in 1996, including Sam's Club, which
accounted for approximately 24.7% of the Company's gross sales during 1996.
The Company does not have long-term sales agreements with any of its
customers. The loss or significant decrease in business from any of these
customers could have a material adverse effect on the Company's business,
financial condition and operating results. See "Business--Corporate
Strategy."
Management of Growth. The Company intends to expand its operations
substantially following the completion of this Offering. This expansion may
place a significant strain on the Company's management, financial and other
resources. In order to manage its growth effectively, the Company will be
required to hire additional management personnel to improve its operational,
financial and management information systems, to accurately forecast sales
demand and calibrate manufacturing to match such demand, to improve its
design capability, to oversee the installation of concept shops and/or
concept areas, to manage its advertising and marketing programs, and to
attract, train, motivate and manage its employees effectively. If the Company
is unable to manage growth effectively, the Company's business, financial
condition and operating results will be adversely affected. See "Business"
and "Management."
Recent Loss. Although the Company was profitable in 1992, 1993, 1994 and
1996, and had operating profits in 1995, it incurred a net loss of
approximately $208,000 in 1995. The loss in 1995 was attributable primarily
to the costs associated with a test advertising campaign for the Company's
Father's Day collection which failed to have a significant effect on the
Company's sales and, to a lesser extent, to an increase in interest expense
resulting from financing the repurchase of stock from certain shareholders in
September 1994. Notwithstanding the Company's profits in 1996, there can be
no assurance that the Company will be able to maintain profitability as its
business grows. See Financial Statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Use of Proceeds to Repay Indebtedness; Benefit to Insiders. The Company
intends to use approximately $2,029,000 to repay indebtedness and other
obligations. Approximately $75,000 of such amount will be used to prepay the
remaining outstanding indebtedness due under a note issued by the Company in
favor of Edward H. Mank ("Mank") in the original principal amount of $240,000
("Mank
9
<PAGE>
Note"). E. Kenneth Seiff, the Company's Chief Executive Officer, has granted
Mank a security interest in 177,253 shares of Common Stock held by Mr. Seiff
in order to secure the Company's obligations under the Mank Note. Such
security interest will be released upon the repayment of such obligations out
of the proceeds of this Offering. See "Use of Proceeds."
Broad Discretion in Application of Net Proceeds. At an assumed public
offering price of $5.50 per share of Common Stock and $.10 per Warrant,
approximately $1,329,000, or 19.4%, of the net proceeds of this Offering will
be allocated to working capital and general corporate purposes. Accordingly,
management will have broad discretion as to how and when such proceeds will
be applied and may use a portion of such proceeds to pay salaries, including
salaries of its executive officers. See "Use of Proceeds."
Uncertainty and Expense of Intellectual Property Litigation. The Company
currently has several registered trademarks, and has been assigned a design
patent, and may seek additional legal protection for its products and trade
names. The Company has invested substantial resources in developing several
distinctive trademarks as well as branded products and product lines. There
can be no assurance that the steps taken by the Company to protect its rights
will be sufficient to deter misappropriation. Failure to protect these
intellectual property assets could have a material adverse effect on the
Company's business operations. Moreover, although the Company is not aware of
any pending or threatened action alleging the Company's infringement of
intellectual property rights that could have a material adverse effect on the
Company's business, there can be no assurance that any such action will not
be commenced against the Company in the future or, if such action is
commenced, that the Company would ultimately prevail. See "Legal
Proceedings."
Seasonality and Quarterly Fluctuations. Historically, the Company's sales
and operating results fluctuate by quarter, with most sales occurring in the
Company's second and fourth quarters. It is in these quarters that the
Company's Father's Day and Holiday product lines, which traditionally have
had the highest volume of net sales, are shipped to customers. The Company
can exercise very little control over the timing of customer orders; thus,
orders anticipated in the second calendar quarter, for example, may fall into
the third calendar quarter, thereby affecting both quarters' results. Due to
the long manufacturing cycle of apparel (three to six months), the Company
sometimes enters into manufacturing commitments prior to having firm orders.
In any quarter in which sales fall below the Company's expectations, the
Company's financial results will be negatively impacted because certain costs
will have been incurred in advance of actual receipt of orders. As a result,
there can be no assurance that the Company can maintain sufficient
flexibility with respect to its working capital needs and its ability to
arrange for the manufacture of products to be able to minimize the adverse
effects of an unanticipated shortfall or increase in the demand for its
products. Failure to predict accurately and respond to consumer demand may
reduce profitability. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dependence on Key Personnel. The Company believes its success will depend
to a significant extent on the efforts and abilities of E. Kenneth Seiff, its
Chief Executive Officer. The Company has entered into an employment agreement
with Mr. Seiff which expires on January 1, 2000. The loss of the services of
Mr. Seiff could have a material adverse effect on the Company. The Company
maintains a $1.2 million key person life insurance policy on the life of Mr.
Seiff. See "Management."
Immediate and Substantial Dilution. Purchasers of the Securities offered
hereby will incur an immediate and substantial dilution of approximately 56%
of their investment in the Common Stock because the net tangible book value
of the Common Stock after the Offering will be approximately $2.48 per share
as compared with the assumed initial public offering price of $5.50 per share
of Common Stock and $.10 per Warrant. See "Dilution."
Dividends Unlikely. The Company has never declared or paid cash dividends
on its Common Stock and does not intend to pay such dividends in the
foreseeable future. The payment of dividends in the future will be at the
discretion of the Company's Board of Directors. See "Dividend Policy."
No Prior Market; Potentially Limited Trading Market; Potential Effects of
"Penny Stock" Rules. There has been no prior market for the Common Stock or
Warrants and there can be no assurance that
10
<PAGE>
a public market for the Common Stock or Warrants will develop or be sustained
after the Offering. Although the Company has applied to have the Common Stock
and Warrants approved for quotation on the Nasdaq SmallCap Market, in order
to maintain such quotation, the Company must satisfy certain maintenance
criteria. The failure to meet these maintenance criteria may result in the
Common Stock and Warrants no longer being eligible for quotation on Nasdaq
and trading, if any, of the Common Stock and 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. If
the Common Stock was to become delisted from trading on Nasdaq and the
trading price of the Common Stock was less than $5.00 per share, trading in
the Common Stock would also be subject to the requirements of certain rules
promulgated under the Securities Exchange Act of 1934, as amended ("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 the 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. See "Underwriting."
Possible Volatility of Stock Price. 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
Underwriter 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, general conditions in the general retail apparel and golf apparel
industries 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."
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 "Securities 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 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 after they become exercisable for 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 165% of
the then exercise price of the Warrants (initially $ ) on 20 out of the
30 consecutive trading days
11
<PAGE>
ending on the third day prior to the day on which such notice is given.
Notice of a redemption of the Warrants could force the holders thereof 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 Warrants and Options. As of the date of this
Prospectus, there are outstanding Bridge Warrants to purchase 600,000 shares
of Common Stock and options to purchase 83,000 shares of Common Stock issued
under the Plan. In addition, in connection with this Offering, the Company
will issue the Warrants and the Underwriter's Purchase Option. The exercise
of such outstanding warrants and options would dilute the then-existing
shareholders' percentage ownership of the Company's stock, and any sales in
the public market of Common Stock underlying such securities 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 by such securities. See "Description of
Securities" and "Underwriting."
Anti-takeover Matters; Potential Adverse Effect of Future Issuances of
Authorized Preferred Stock. The Company's certificate of incorporation, as
restated ("Restated Certificate"), and by-laws, as amended and restated
("Restated By-Laws"), will contain certain provisions that may delay, defer
or prevent a takeover of the Company. The Company's Board of Directors will
have the authority to issue up to 2,000,000 shares of preferred stock, par
value $.01 per share ("Preferred Stock"), and to determine the price, rights,
preferences and restrictions, including voting rights, of those shares,
without any further vote or action by the shareholders. Accordingly, the
Board of Directors will be empowered, without shareholder approval, to issue
Preferred Stock, for any reason and at any time, with such rates of
dividends, redemption provisions, liquidation preferences, voting rights,
conversion privileges and other characteristics as the Board of Directors may
deem necessary. The rights of holders of Common Stock will be subject to, and
may be adversely affected by, the rights of holders of any Preferred Stock
that may be issued in the future. In addition, the Company's Restated
Certificate and Restated By-Laws will include provisions establishing a
classified Board of Directors. The Company is also subject to the
anti-takeover provisions of Section 912 of the Business Corporation Law of
the State of New York ("BCL"), which could have the effect of delaying or
preventing a change of control of the Company. See "Description of
Securities."
Limited Liability of Directors. As permitted by the BCL, the Restated
Certificate limits the personal liability of a director to the Company and
its shareholders for monetary damages for breach of duty as a director except
in certain circumstances. Accordingly, except in such circumstances, the
Company's directors will not be liable to the Company or its shareholders for
breach of such duty. See "Description of Securities--Limitation of Liability
of Directors."
12
<PAGE>
DILUTION
The difference between the initial public offering price per share of
Common Stock (attributing no value to the Warrants) and the pro forma net
tangible book value per share of Common Stock after the Offering constitutes
the dilution per share of Common Stock to investors in the Offering. Net
tangible book value per share 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 December 31, 1996, based on
1,200,000 shares of Common Stock outstanding, the Company had a pro forma net
tangible book value of $40,000, or approximately $.03 per share of Common
Stock. After giving effect to the sale of the Securities offered hereby at an
assumed initial offering price of $5.50 per share of Common Stock and $.10
per Warrant (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 $6,687,000, or
approximately $2.48 per share of Common Stock. This represents an immediate
increase in net tangible book value of approximately $2.45 per share to
existing shareholders and an immediate dilution of approximately $3.12 per
share or approximately 56% to investors in this Offering.
The following table illustrates the per share dilution without giving
effect to operating results of the Company subsequent to December 31, 1996.
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed public offering price ........................ $5.60
Pro forma net tangible book value before Offering .. $ .03
Increase attributable to investors in this Offering $2.45
-------
Pro forma net tangible book value after Offering .... 2.48
-------
Dilution to investors in this Offering ............... $3.12
=======
</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
shareholders 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 shareholders 1,200,000 44.4% $ 629,874 7.0% $ .52
New investors ......... 1,500,000 55.6% 8,400,000 93.0% $5.60
----------- --------- ------------- --------- -----------
Total ................ 2,700,000 100.0% $9,029,874 100.0%
=========== ========= ============= =========
</TABLE>
The foregoing analysis assumes no exercise of the Bridge Warrants, the
Warrants, outstanding options, the Underwriter's Purchase Option or the
Warrants included in the Underwriter's Purchase Option. In the event any such
securities 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 may 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 (assuming an
initial public offering price of $5.50 per share of Common Stock and $.10 per
Warrant), are estimated to be approximately $6,858,000 (approximately
$7,954,200 if the Underwriter's 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 ............ $3,000,000 43.7%
Repayment of indebtedness and other
obligations ......................... 2,029,000 29.6
Installation of concept shops and/or
concept areas ....................... 500,000 7.3
Working capital and general corporate
purposes ............................ 1,329,000 19.4
------------ ---------
Total .............................. $6,858,000 100.0%
============ =========
</TABLE>
Approximately $3,000,000 of the net proceeds will be used for marketing
and advertising purposes, including the continued implementation of the
Company's national advertising campaign. Such expenses may include costs
relating to consumer research, the development and placement of
advertisements in various forms of media including print and direct mail, and
payments to professional and/or celebrity golfers in consideration of their
endorsement of the Company's products. See "Business--Corporate Strategy."
Approximately $2,029,000 of the net proceeds will be used to repay
indebtedness and other obligations of the Company, as follows:
Approximately $1,550,000 of the net proceeds will be used to repay the
notes issued by the Company in connection with the Bridge Financing in
January 1997 ("Bridge Notes"). The Bridge Notes consist of 45 notes in the
aggregate principal amount of $1,500,000, bearing interest at the rate of 10%
per annum through April 30, 1997 and 12% per annum thereafter, and are
payable upon the consummation of this Offering. Assuming the Offering is
consummated by April 30, 1997, the interest to be paid on the Bridge Notes
will be approximately $50,000. The net proceeds from the sale of the Bridge
Notes are being used for the development of a national advertising campaign
and the continuation of the Company's trade campaign, the hiring of key
personnel, the development and installation of concept shops and/or concept
areas in various targeted retail stores, the payment of expenses in
connection with this Offering, the payment of approximately $60,000 to
Leisure Wear Inc., David M. Goldblatt Inc. Profit Sharing Plan, David
Goldblatt, Anita Goldblatt and Jeffrey Goldstein (collectively, the "Leisure
Wear Group") in accordance with the terms of a Stock Purchase Agreement by
and between the Leisure Wear Group and the Company dated September 30, 1994
and an amendment to such agreement dated September 24, 1996 (collectively,
the "Stock Purchase Agreement"), pursuant to which the Company repurchased
572,526 shares of Common Stock from the Leisure Wear Group, and for working
capital and general corporate purposes. See "Certain Transactions."
Approximately $219,000 of the net proceeds will be paid to the Leisure
Wear Group pursuant to the terms of the Stock Purchase Agreement, which
obligates the Company to make certain cash incentive payments to the Leisure
Wear Group, including, but not limited to, payments equal to 5% of the net
cash proceeds to the Company resulting from the issuance of securities of the
Company in any public offering or private placement, up to an aggregate of
$279,000. The Company paid the Leisure Wear Group cash incentive payments
equal to approximately $60,000 of the net cash proceeds of the Bridge
Financing. Under the terms of the Stock Purchase Agreement, the Company is
also obligated to use its best efforts to allow the Leisure Wear Group to
invest an amount equal to the cash incentive payments to be paid as a result
of the Bridge Financing and this Offering in the Securities to be sold in
this Offering. The Company has been informed by the Underwriter that the
Leisure Wear Group intends to purchase 7,500 shares of Common Stock and 7,500
Warrants in the Offering.
14
<PAGE>
Approximately $185,000 of the net proceeds will be used to prepay the
remaining outstanding indebtedness under a term loan in the principal amount
of $325,000 from Heller to the Company, dated December 8, 1994 ("Heller Term
Loan"). Principal on the Heller Term Loan is payable in monthly installments
of $5,420 through and including December 1997 and a balloon payment of
$135,300 is due on January 1, 1998. Interest on the unpaid principal of the
Heller Term Loan is payable monthly in arrears at 2% above the prime rate.
The proceeds of the Heller Term Loan were used to make certain payments to
the Leisure Wear Group pursuant to the Stock Purchase Agreement.
Approximately $75,000 of the net proceeds will be used to prepay the
remaining outstanding indebtedness under the Mank Note. Interest on the
unpaid principal of the Mank Note accrues at the rate of 12% per year.
Principal and interest under the Mank Note are payable in monthly
installments of $25,339.70 through and including July 1997. The proceeds of
the Mank Note were used to make certain payments to the Leisure Wear Group
pursuant to the Stock Purchase Agreement.
Approximately $500,000 of the net proceeds will be used for the
installation of concept shops and/or concept areas within targeted retailers'
stores. The Company anticipates that the cost of installing a typical concept
area will be approximately $15,000. Initial installation costs will be paid
by the Company and subsequent installation costs may be shared by the
retailer and the Company.
The balance of the net proceeds of this Offering will be used for working
capital and general corporate purposes, which may include, among other
things, payment of expenses incurred or to be incurred by the Company in
connection with its operations and the payment of general corporate expenses,
including the costs of being a publicly-held company, consulting fees and
salaries payable to additional officers and financial and management
personnel and the costs incurred by the Company in moving to larger office
space. See "Business--Properties." If the Underwriter exercises the
over-allotment option in full the Company will realize additional net
proceeds of approximately $1,096,000 which also will be added to working
capital.
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 and business plans, as well as current economic and
industry conditions, and is subject to reapportionment among the categories
listed above 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 which, in the opinion of management, facilitate the growth of
the Company and/or enhance the market penetration or reputation of its
products. To the extent that the Company identifies any such opportunities,
an acquisition may involve the expenditure of significant cash and/or the
issuance of capital stock of the Company. Any expenditure of cash will reduce
the amount of cash available for working capital or marketing and advertising
purposes. The Company currently has no commitments, understandings or
arrangements with respect to any such acquisition.
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 (i) as of
December 31, 1996, and (ii) pro forma as adjusted to give effect to the sale
of the Securities offered hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds." This table should be read in
conjunction with the audited financial statements of the Company, including
the notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(1)
-------- --------------
(IN THOUSANDS)
<S> <C> <C>
Notes payable, current portion ..................... $230 $ --
Short-term debt .................................... 279 --
-------- --------------
Total short-term debt ............................ $509 $ --
======== ==============
Notes payable, less current portion ................ 135 --
-------- --------------
Shareholders' equity:
Preferred Stock: $.01 par value, 2,000,000 shares
authorized, pro forma, as adjusted
Common Stock: $.01 par value, 10,000,000 shares
authorized; 15,000,000 shares authorized, pro
forma, as adjusted; 1,200,000 shares issued and
outstanding, actual; 2,700,000 shares issued and
outstanding, pro forma, as adjusted .............. 12 27
Additional paid-in capital ......................... 397 7,325
Accumulated deficit ................................ -- (425)
-------- --------------
Total shareholders' equity ......................... 409 6,927
-------- --------------
Total capitalization ............................. $544 $6,927
======== ==============
</TABLE>
- ------------
(1) The pro forma as adjusted balance sheet information gives effect to the
(i) receipt of the $1,500,000 gross proceeds of the Bridge Financing,
(ii) the consummation of this Offering at an assumed public offering
price of $5.50 per share of Common Stock and $.10 per Warrant, net of
underwriting discounts and commissions and other expenses of this
Offering, and the use of a portion of the net proceeds thereof to repay
approximately $2,029,000 in indebtedness and certain other obligations,
and (iii) the write-off of $138,000 of debt discount and $287,000 of
debt issuance costs incurred in connection with the Bridge Financing.
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.
16
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data presented below as of and for the year ended
December 31, 1996 is derived from the financial statements audited by Grant
Thornton LLP. The selected financial data for the year ended December 31,
1995 is derived from the financial statements audited by Richard A. Eisner &
Company, LLP. The selected financial data for the years ended December 31,
1994, 1993, and 1992 are derived from the unaudited financial statements of
the Company. In the opinion of management, such unaudited financial
statements include all adjustments necessary for the fair presentation of
such data. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the audited financial statements of the Company, including
the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales ............................ $2,247 $4,488 $6,417 $6,337 $8,596
Cost of sales ........................ 1,479 2,884 4,034 3,996 6,571
----------- ----------- ----------- ----------- -----------
Gross profit ......................... 768 1,604 2,383 2,341 2,025
Selling, marketing, design and
administrative expenses ............. 646 1,231 1,661 2,288 1,502
----------- ----------- ----------- ----------- -----------
Operating profit ..................... 122 373 722 53 523
Other income ......................... -- -- -- 68 125
Interest expense and factoring
charges.............................. (78) (108) (176) (418) (443)
----------- ----------- ----------- ----------- -----------
Income (loss) before taxes ........... 44 265 546 (297) 205
Net income (loss) .................... $ 41 $ 159 $ 355 $ (208) $ 135
Net earnings (loss) per share ....... $ .03 $ .09 $ .22 $ (.17) $ .11
Weighted average number of shares of
Common Stock and Common Stock
equivalents outstanding ............. 1,317,253 1,772,526 1,629,394 1,200,000 1,200,000
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996 AS ADJUSTED (1)
------- ------- ------- ------- ------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital .... $ 747 $ 919 $ 974 $ 620 $ 175 $6,688
Total assets ........ 1,071 1,472 2,232 2,287 1,636 7,510
Long-term debt ...... -- -- 745 608 135 --
Shareholders' equity $ 840 $ 999 $ 482 $ 274 $ 409 $6,927
</TABLE>
- ------------
(1) The pro forma as adjusted balance sheet information gives effect to the
(i) receipt of the $1,500,000 gross proceeds of the Bridge Financing,
(ii) the consummation of this Offering at an assumed public offering
price of $5.50 per share of Common Stock and $.10 per Warrant, net of
underwriting discounts and commissions and other expenses of this
Offering, and the use of a portion of the net proceeds thereof to repay
approximately $2,029,000 in indebtedness and certain other obligations,
and (iii) the write-off of $138,000 of debt discount and $287,000 of
debt issuance costs incurred in connection with the Bridge Financing.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements, including the notes thereto, and the Selected Financial Data
included elsewhere in this Prospectus.
OVERVIEW
The Company designs, sources and markets a full collection of golf
lifestyle sportswear for men under the Pivot Rules brand name and registered
trademark. Its current products include knit and woven shirts, sweaters,
sweatshirts, pants, shorts, outerwear, hats and socks, many of which carry
the Company's distinctive "Three Golfer" logo. The Company focuses its design
efforts on creating products with updated styling, innovative design and
superior comfort and fit, utilizing natural fibers and bright colors.
Although the Company was increasingly profitable during 1992, 1993 and
1994, it had losses of approximately $208,000 in 1995. In September 1996, as
a result of increasing competition in the "upper moderate" price segment of
the golf lifestyle apparel market, the Company initiated a strategy of
repositioning its products into the "moderate" price segment and expanding
distribution to focus on higher-volume retailers. As a result of this new
strategy, net sales increased by approximately $2,259,000, or 35.6%, from
approximately $6,337,000 in 1995 to approximately $8,596,000 in 1996. The
Company recorded net income of approximately $135,000 during the fiscal year
ended December 31, 1996.
Historically, the Company sold its products in the "upper moderate" price
segment, to better department stores, specialty stores and catalogs. Because
such retailers typically purchased small quantities of a given product style,
the Company utilized small production runs and its profitability was
dependent upon high margins. By refocusing its marketing efforts on the
"moderate" price segment of the golf lifestyle apparel market, the Company is
taking advantage of the greater distribution opportunities available and the
resulting larger order sizes to increase profitability through improved
sourcing. The Company is also seeking to reduce sourcing costs in some cases
by sourcing materials for a garment separately from the production of the
garment. The Company retained an experienced sourcing director to capitalize
on this opportunity. For example, since the beginning of 1996, the Company
has reduced the sourcing costs of its largest volume product style by
approximately 20%, and reduced the average selling price of this product by
approximately 29%.
The Company has not historically incurred significant marketing and
advertising expenditures with the exception of the Company's test campaign in
1995. Although the Company believes the test campaign generated a higher
level of awareness in its target market area, the campaign's duration and
geographic scope were too limited to impact the Company's financial
performance favorably. The Company has instituted new advertising and
marketing initiatives that will require increased and continuous expenditures
to be effective. If sales do not increase in proportion to the costs of the
Company's new marketing and advertising initiatives, these increased
expenditures could have a material adverse effect on the Company's business,
financial condition and operating results.
The Company's net sales consist of gross sales less the amount of returns,
allowances and markdowns. It is customary in the industry for the producer of
apparel to share markdown costs with the retailers.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
The Company's net sales increased by $2,259,000, or 35.6%, from $6,337,000
in 1995 to $8,596,000 in 1996 due to an increase in unit volume of its men's
sportswear collection of approximately 86%, which more than offset the
decrease in the Company's average prices of approximately 30%. Net sales
attributable to the men's sportswear collection increased by 77.5%, primarily
due to purchases by new customers, while net sales attributable to the
women's sportswear collection decreased by 47.9%. This decrease resulted from
the Company's decision to discontinue development of its women's sportswear
collection. The Company continues to sell a limited amount of women's apparel
on a contract basis.
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Returns and allowances decreased by $91,000, or 11.6%, from $787,000 in
1995 to $696,000 in 1996. Returns and allowances represented 11% of gross
sales in 1995 as compared to 7.5% in 1996. This improvement resulted
principally from a shift in sales to larger volume retailers who had lower
return and discount rates, and the policy established by the Company limiting
returns to defective and damaged goods.
Gross profit decreased by $316,000, or 13.5%, from $2,341,000 in 1995 to
$2,025,000 in 1996. Consistent with the change in strategy, gross margin as a
percentage of net sales decreased from 36.9% in 1995 to 23.6% in 1996,
primarily due to the decrease in average sales prices of approximately 30%,
which was partially offset by a decrease in the average cost of sales of
approximately 12%. In addition, gross profit was impacted by approximately
$112,000 of commissions incurred pursuant to a contract with a purchasing
agent as well as the close-out of women's sportswear inventory.
Selling, marketing, design and administrative expenses decreased by
$786,000, or 34.3%, from $2,288,000 in 1995 to $1,502,000 in 1996. As a
percentage of net sales, selling, marketing, design and administrative
expenses declined from 36.1% in 1995 to 17.5% in 1996. This decrease was due
in part to a reduction of $472,000, or 72.8%, in advertising expense,
primarily as a result of the costs of a test advertising campaign conducted
in 1995. In addition, salaries and sales commissions decreased by $196,000,
or 20.9%, due primarily to the discontinuation of the women's sportswear
collection.
Net interest expense and bank fees increased by $25,000, or 6.0%, from
$418,000 in 1995 to $443,000 in 1996, as a result of the Company's increased
working capital requirements.
Other income increased by $57,000, or 83.8%, from $68,000 in 1995 to
$125,000 in 1996, primarily as a result of an increase in licensing royalties
received by the Company and proceeds from lawsuit settlements, net of related
costs.
Net income increased by $343,000 from a loss of $208,000 for 1995 to net
income of $135,000 in 1996. The loss in 1995 was attributable primarily to
the costs associated with a test advertising campaign for the 1995 Father's
Day collection which failed to have a significant effect on the Company's
sales. The Company believes that the 1995 test advertising campaign failed
because its duration and geographic scope were too limited to impact the
Company's financial performance favorably. Management intends to take these
factors into consideration for all future advertising campaigns. The loss in
1995 was also due, to a lesser extent, to an increase in interest expense
from financing the payments made to the Leisure Wear Group pursuant to the
Stock Purchase Agreement and to higher markdown expenses resulting from
increased competition.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has been undercapitalized. The Company expends
significant amounts of working capital for advertising and inventory in
advance of revenues generated by these items. To date, the Company has
obtained working capital through cash flow from operations, private financing
and a revolving credit facility from Heller, to whom it has granted a senior
security interest in substantially all of its assets. The Company
anticipates, based on current plans and assumptions relating to its
operations, that the proceeds of the Offering, together with existing
resources and cash generated from operations, should be sufficient to satisfy
the Company's contemplated cash requirements for at least 18 months after
completion of the Offering. There can be no assurance, however, that the
Company will not require additional cash during or after such 18-month
period.
During 1996, net cash provided by operating activities was $1,406,000,
compared to net cash used in operations of $362,000 in 1995. The increase in
cash provided by operations was primarily a result of an increase in sales
and a reduction in inventory.
During 1996, the net cash used in investing activities was $42,000,
compared to $101,000 in 1995. The cash used in 1996 and 1995 was for purchase
of property and equipment. The cash used in 1995 was also attributable to
costs associated with the registration of several trademarks in the United
States and foreign countries.
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During 1996, the cash used in financing activities was $1,385,000,
compared to cash provided by financing activities of $397,000 in 1995. This
change was primarily attributable to an increase in receivables factored in
excess of advances received from Heller.
Factoring Agreement. The Company is party to a Retail Collection Factoring
Agreement ("Factoring Agreement") with Heller pursuant to which the Company
sells all of its eligible accounts receivable to Heller. The Company may take
advances from Heller, at Heller's discretion, for up to 80% of the net
balance due on eligible accounts receivable. At December 31, 1996 there were
approximately $3,025,000 of outstanding advances under the Factoring
Agreement, offset by $3,732,000 in gross receivables. Interest on such
advances is payable monthly in arrears at the rate of 2% above the Chase
Manhattan Bank, N.A. prime rate. The Company paid interest under the
Factoring Agreement at an average rate of 10.28% per annum in 1996.
Bridge Financing. In January 1997, in connection with the Bridge
Financing, the Company issued Bridge Notes in the aggregate principal amount
of $1,500,000, bearing interest at the rate of 10% per annum through April
30, 1997 and 12% per annum thereafter, and Bridge Warrants to purchase an
aggregate of 600,000 shares of the Company's Common Stock at an exercise
price equal to the initial public offering price per share. The proceeds of
the Bridge Financing were used (i) to repay approximately $183,000 of
indebtedness, including principal and interest, consisting of $101,000 to
Mank, $22,000 to pay a portion of the Heller Term Loan and $60,000 to the
Leisure Wear Group, (ii) to pay approximately $450,000 to commence the
national advertising campaign, (iii) to pay approximately $102,000 to hire
key personnel, (iv) to pay approximately $25,000 to construct fixtures to be
used in the installation of concept shops and concept areas and (v) for
general working capital purposes. All amounts due under the Bridge Notes will
be paid out of the proceeds of this Offering. After giving effect to debt
issuance costs of approximately $287,000 and a debt discount of $138,000, the
effective annual interest rate on the Bridge Notes was approximately 115%.
Upon the date of this Prospectus, the Bridge Warrants will be automatically
converted into Warrants on a one-for-one basis. Upon repayment of the amounts
due under the Bridge Notes, the related unamortized debt issuance cost and
debt discount of approximately $425,000 will be expensed.
The Company estimates that it will incur additional capital expenditures
of approximately $500,000 during the twelve months following consummation of
this Offering in connection with the installation of concept shops and/or
concept areas, expansion of office and warehouse facilities and procurement
of computer systems. See "Business--Corporate Strategy."
SEASONALITY
The apparel industry is seasonal in nature and, as a result, the Company
experiences significant variability in its quarterly results and working
capital requirements. A significant portion of the Company's sales occur
during the quarters in which the Father's Day and Holiday lines are shipped.
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.
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BUSINESS
GENERAL
The Company designs, sources and markets a full collection of golf
lifestyle sportswear for men under the Pivot Rules brand name and registered
trademark. Its current products include knit and woven shirts, sweaters,
sweatshirts, pants, shorts, outerwear, hats and socks, many of which carry
the Company's distinctive "Three Golfer" logo. The Company focuses its design
efforts on creating products with updated styling, innovative design and
superior comfort and fit, utilizing natural fibers and bright colors. The
Company seeks to distinguish its products from its competitors' products by
incorporating many unique details into its garments, thereby creating a
"branded" look. The Company believes that by integrating its marketing,
packaging and in-store fixturing programs, it will be able to build a
lifestyle image that consumers will link with the Pivot Rules brand name.
Historically, golf apparel has been marketed largely to avid golfers and
has been sold primarily at country clubs and pro shops. In recent years,
however, these products increasingly have appealed to a broader group of
consumers. As golf apparel has become more fashionable, a new market segment
has developed--golf lifestyle sportswear. The Company believes that this new
market segment results from the confluence of several trends, including (i)
the increased interest among the general population in quality of life and
leisure activities, (ii) the general success of lifestyle-oriented
sportswear, (iii) the increasing prominence of both professional and
celebrity golfers, (iv) the increased media coverage of golf, and (v) the
advent of "casual Fridays" and the increasing acceptance of casual apparel in
the workplace. Golf lifestyle sportswear is now sold not only to avid golfers
but also to consumers who identify with the lifestyle associated with golf
and similar leisure activities. As a result, department stores, catalogs,
sporting goods stores, discounters and specialty stores have joined country
clubs and pro shops as popular places to purchase golf apparel.
In 1991, having recognized these changes in the golf apparel market in
their incipience, the Company became one of the pioneers in selling golf
lifestyle apparel collections through these new channels of distribution.
Initially, the Company sold its products in the "upper moderate" price
segment, primarily to better department stores, specialty stores and
catalogs. Because such retailers typically purchased small quantities of a
given product style, the Company utilized small production runs and its
profitability was dependent upon high margins. Based on this strategy, the
Company's net sales grew from approximately $2.2 million in 1992 to $6.3
million in 1995.
CORPORATE STRATEGY
By 1996, an increasing number of new market entrants had begun to sell
golf lifestyle apparel collections in the "upper moderate" price segment and
the Company determined that a disproportionate amount of competition existed
in this market. As a result, the Company decided to refocus its marketing
efforts on the "moderate" price segment of the golf lifestyle apparel market.
Based upon the superior design and quality of its products and its ability to
offer the fully integrated golf lifestyle concept and brand image that it had
developed in the "upper moderate" price segment of the market, the Company
believed that it could achieve significant competitive advantages by
repositioning its products into the "moderate" price segment. Accordingly,
the Company reduced its prices and redirected its sales efforts to focus on
the higher-volume retailers and other customers in the "moderate" price
segment, such as department stores, sporting goods stores, catalogs and
corporations, as well as discounters, including warehouse clubs. Based on
this new strategy, the Company's net sales increased to $8.6 million in 1996.
The Company believes that this strategy will lead to further increased sales
volume and that the increased purchasing leverage resulting from this sales
growth will allow it to reduce sourcing costs while maintaining product
quality.
The Company's goal is to become the leading golf lifestyle apparel
collection in the "moderate" price segment. The Company has planned several
marketing, advertising and management initiatives in order to reinforce its
strategic shift in product positioning. The following discussion summarizes
the major aspects of the Company's corporate strategy:
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Gain Access to High Volume Distribution Channels. The Company has
refocused its marketing strategy to concentrate its sales efforts on high
volume retailers. The Company believes that it has the opportunity to
increase sales substantially by marketing its products to such retailers.
Although this entails a reduction of the wholesale and retail prices of its
products, the Company believes that it can maintain product quality through
the additional purchasing leverage gained through larger production runs and
more efficient sourcing it expects to obtain.
Increase Trade Market Support. Historically, the Company has had a limited
budget to build trade and consumer awareness of its products. In October
1996, the Company launched a marketing initiative aimed at members of the
apparel trade consisting of full-page black and white advertisements in the
trade paper, the Daily News Record. These advertisements ran approximately 20
times during the important October and November selling periods. The Company
expects that the trade campaign will serve to educate targeted retailers
about the Company's products and, therefore, support the Company's overall
business strategy. The Company intends to continue running trade
advertisements frequently during key selling periods and less frequently at
other times. The Company plans to expand its trade marketing campaign in 1997
and beyond.
National Consumer Advertising Campaign. The Company is developing a
national consumer advertising print campaign built around its trademarked
slogan "The Rules Have Changed." The first two advertisements in this
campaign have already been created. The Company anticipates launching this
campaign in May 1997. The Company believes that its brand name recognition
will be significantly enhanced by its first national advertising campaign,
although there can be no assurance that the campaign will be successful.
Install Concept Shops and/or Concept Areas. The Company believes that a
key to growth in the Company's sales will be the installation of Pivot Rules
concept shops and/or concept areas within targeted retailers' stores in order
to draw greater attention to the Company's products. Concept shops and
concept areas enable the retailer to create an environment consistent with
the Company's image and encourages the retailer to display and stock a
greater volume of the Company's products. Such shops and areas foster
long-term commitment by the retailer to the Company's products. These shops
also increase consumer product recognition and loyalty because they
facilitate the retail customer's familiarity with the location of the
Company's products in the store. The Company plans to install between 10 and
20 of such concept areas during 1997. The Company anticipates that the cost
of installing a typical concept area will be approximately $15,000. Initial
installation costs will be paid by the Company and subsequent installation
costs may be shared by the retailer and the Company. In order to introduce
the design of the concept shops to targeted retailers, the Company intends to
build a prototype concept shop in its showroom.
Expand Products Offered through the Company and its Licensees. The Company
seeks to expand the types of products offered under the Pivot Rules brand
name both through its own design and sales operations and through licensing
agreements with third parties. The Company believes that the broadening of
the Company's product line will build consumer awareness, make the Company's
product line more meaningful to its targeted retailers' business operations
and enhance the Company's reputation as a leading marketer of golf lifestyle
sportswear. Moreover, to the extent that any potential licensees of the
Company advertise their products, the Company anticipates that such
advertising will augment its own advertising efforts. See
"Business--Licensing."
The Company believes that, as the appeal of golf lifestyle sportswear has
broadened to include virtually all demographic segments of the market,
opportunities will exist to increase its revenues and retail customer base
through the development or acquisition of additional labels. To take
advantage of such opportunities the Company may offer products under one or
more new labels to selected retailers.
Expand Management Team. The Company is seeking to strengthen its
management team by recruiting seasoned industry professionals. The Company
has recently hired a Chief Financial Officer, a Vice President of Operations
and a Director of Design and is seeking to hire a Director of Sales. See
"Management" and "Business--Product and Design."
Introduce Quick Response Inventory Replenishment to Targeted Retailers.
The Company is equipped to offer quick response inventory replenishment to
retailers for certain of the Company's most
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popular products. This program is designed to keep key items in stock on a
year-round basis without the need for the retailer to place advance purchase
orders. Quick response inventory allows the retailer to improve margins by
decreasing markdowns that might otherwise occur when items do not sell on a
timely basis. Because this program is offered only for the Company's most
popular items, inventory increases can be limited to products that have a
proven sales history. The Company believes that its ability to make this
program available to retailers will increase revenues and improve the
Company's ability to forecast its sales for these key items. The Company is
working with its retailers to place key items, including short-sleeve shirts,
shorts and hats, on its quick response inventory program.
PRODUCT AND DESIGN
The Company offers a full collection of golf lifestyle sportswear for men,
including knit and woven shirts, sweaters, sweatshirts, pants, shorts,
outerwear, hats and socks. The Company focuses its design efforts on creating
products with updated styling, innovative design and superior comfort and
fit, utilizing natural fibers and bright colors. The Company aims to
incorporate the newest fabrics and styles into its products. Each season, the
Company designs its products from a single color palette to enhance
retailers' presentations of the product as a "collection" and encourage the
consumer to purchase well-coordinated outfits rather than a single item. The
Company seeks to distinguish its products from its competitors' products by
incorporating many unique details into its garments in order to create a
"branded" look. For example, a cotton tape of the Company's slogan is sewn
into the neck and tail of every shirt, pants and shirts have a spare logoed
button sewn into the seam and hangtags are printed with one of several
different messages designed to convey the Company's spirit. Additionally, the
Company incorporates its trademarked and patented "Three Golfer" logo into
most of its products.
The Company recently hired Christopher Dioguardi to head its Design
Department. Mr. Dioguardi is a former Senior Menswear Designer for Izod Golf
and the U.S. Open Golf Collection, both divisions of Crystal Brands, Inc.
Prior to that, Mr. Dioguardi worked in menswear product development and
design research for Nautica International. Mr. Dioguardi and Mr. Seiff work
with freelance designers to create the Company's products.
SOURCING
Substantially all of the Company's products are manufactured by third
parties in the Far East and India. The Company sources substantially all of
its products through Textiles Network, Ltd. ("Textiles Network"), a Hong Kong
agency that oversees production and quality control. Textiles Network
negotiates prices, identifies factories to manufacture the products and
conducts quality control on the Company's behalf. The Company works closely
with Textiles Network to monitor each of these phases of the production
process. The Company makes substantially all final decisions with regard to
pricing and the selection of factories. Additionally, the Company approves
samples of each garment prior to the commencement of production. The Company
pays Textiles Network an 8% commission on the first $1 million of goods
shipped to the Company and 7% thereafter.
In May 1996, the Company entered into a purchase management agreement with
IDL International, LLC ("IDL"). David Lewis is the President and principal
owner of IDL. Under the agreement, as amended in July 1996 ("IDL Agreement"),
the Company has paid IDL a commission of 5% on the first $1 million of goods
shipped to the Company in a given year and 2.5% thereafter. In addition, IDL
received a bonus based on the Company's gross margins. The IDL Agreement has
been terminated effective as of March 1, 1997 in connection with the hiring
of David Lewis as Vice President of Operations. See "Management" and "Certain
Transactions."
The Company is not obligated to source its products at any particular
factory. However, the Company maintains consistent orders with a number of
different factories in order to encourage competitive pricing and delivery.
The Company is seeking to source some of its products through
manufacturers in areas where labor and fabric costs are lower than those in
areas where the Company's products are currently manufactured. The Company is
also seeking to reduce sourcing costs in some cases by sourcing materials for
a garment
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separately from the production of the garment. These strategies, together
with increased purchasing leverage from selling to high-volume retailers,
have enabled the Company to reduce the sourcing costs of its largest volume
product style by approximately 20% since the beginning of 1996.
PATENTS AND TRADEMARKS
The Company has trademarked many of its brand names and slogans in the
United States and in numerous countries worldwide. In the United States, the
Company owns a variety of trademarks, including "Pivot Rules," "The Rules
Have Changed" and "Clothes To Play A Round In," as well as its "Three Golfer"
design mark and "Three Golfer and Flag" design mark. The Company has also
been assigned a design patent for its Three Golfer and Flag design mark
("Design Patent"). The Design Patent covers the interaction between an
element on the chest of a garment, for example, a golfer, and a separate
related element on the sleeve of the garment, for example, a putting green.
WAREHOUSING/DISTRIBUTION
The Company leases 18,000 square feet of warehouse space in Tukwila,
Washington. The Company selected Tukwila as the site for the warehouse
because of its proximity to ports from which the Company receives shipments
from its manufacturers in the Far East. The warehouse is staffed by two full
time employees and is managed by Dean Seiff (brother of E. Kenneth Seiff).
Additional temporary personnel are hired during peak shipping periods. The
Company is linked by Electronic Data Interchange ("EDI") to several of its
largest customers and, as a result, can receive orders via computer. During
key holiday periods, the warehouse maintains a same day shipping policy for
orders received before 3:00 p.m., Eastern Standard Time. See
"Business--Properties."
MANAGEMENT INFORMATION SYSTEM
The Company utilizes a management information system designed for the
apparel industry which facilitates planning, production scheduling, product
tracking and standard cost control, and which provides a perpetual inventory
record. The management information system also permits the Company's customer
service personnel to have access to real-time inventory availability.
LICENSING
The Company has licensing agreements with foreign licensees for the sale
of its sportswear products in a number of countries, including Japan,
Thailand, Singapore, Malaysia, Indonesia and Brunei. Although revenues from
licensing arrangements have not been material to date (approximately $58,000
in 1995 and $90,000 in 1996), the Company believes that both domestic and
foreign licensing revenues can become significant within the next several
years.
The Company has entered into a worldwide representation agreement
("Representation Agreement") with International Management Corporation
("IMC"), a member company of International Management Group ("IMG"), under
which IMC has been retained as the Company's sole and exclusive agent to
identify, qualify and negotiate with prospective international licensing
partners. IMG is a worldwide sports representation and marketing organization
with offices in 74 countries worldwide. Under the terms of the Representation
Agreement, IMC receives commissions from the Company equal to 30% of gross
income for the first $1 million of gross income covered by the agreement and
35% thereafter on all international licensing revenues generated by the
Company through licensing agreements negotiated or entered into while the
Representation Agreement remains in effect. The Representation Agreement
provides for an original term expiring on June 30, 1997, with automatic one
year renewal periods. The Company has identified several targeted categories
for future domestic licensing deals, including socks, hats, belts, cologne,
underwear, robes, golf clubs, golf accessories and eyeglasses. However, there
can be no assurance that licensing revenues will increase during this time
period or that the Company will continue to receive any licensing revenue at
all.
COMPETITION
The men's sportswear segment of the apparel market is highly competitive.
The Company encounters substantial competition at a variety of price points
from a number of apparel brands including Polo,
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Tommy Hilfiger, Nautica, Chaps, Izod, Gant, Dockers, Nike, Munsingwear, Grand
Slam, Greg Norman, Ashworth, Cross Creek and Jack Nicklaus. The Company
competes primarily on the basis of design, image, value and quality. Many of
the companies selling such brands are significantly larger than the Company,
have substantially greater financial, marketing and other resources and have
achieved greater recognition for their brand names than the Company. The
Company believes that its competitive position depends upon its ability to
anticipate and respond effectively to changing consumer demands and to offer
quality conscious sportswear at competitive prices. Virtually all of the
Company's targeted retailers also offer their own private label brands which
compete at significantly lower prices. In addition, the current success of
golf-inspired lines leaves open the possibility of new entrants into the
market. For example, Nike recently signed a $40 million contract with Tiger
Woods and is developing a line of clothing under his name. Increased
competition in the golf apparel and general sportswear apparel markets could
result in price reductions, reduced margins or loss of market share, all of
which could have a material adverse effect on the Company's business,
financial condition and operating results.
EMPLOYEES
As of March 5, 1997, the Company had nine full-time and two part-time
employees, of whom three were in management, two were in the sales
department, two were in the design department, two were in the warehouse
department, one was in the production department and one was in the finance
department. None of the Company's employees are represented by a labor union
and the Company considers its relations with its employees to be good.
PROPERTIES
The Company leases 2,400 square feet of office space in New York City and
18,000 square feet of warehouse space in Tukwila, Washington under
noncancelable operating leases. The New York City lease expires in October
1998 and the Tukwila lease expires in August 1999. The Company's total lease
payments under both leases for the current fiscal year will be approximately
$123,000. The Company anticipates either subleasing its office or reaching
some other arrangement with the landlord and moving to larger office space
sometime in 1997. The costs associated with moving to such larger office
space are expected to be approximately $250,000.
LEGAL PROCEEDINGS
The Company is, from time to time, a party to routine litigation arising
in the normal course of its business. The Company believes that none of these
actions will have a material adverse effect on the business, financial
condition or operating results of the Company.
The Company currently has several registered trademarks, and has been
assigned a design patent, and may seek additional legal protection for its
products and trade names. The Company has invested substantial resources in
registering the trademarks and developing branded products and product lines.
There can be no assurance that the steps taken by the Company to protect
these intellectual property assets will be sufficient to deter
misappropriation. Failure to protect these intellectual property assets could
have a material adverse effect on the Company's business operations.
Moreover, although the Company is not aware of any lawsuit alleging the
Company's infringement of intellectual property rights that could have a
material adverse effect on the Company's business, there can be no assurance
that any such lawsuit will not be filed against the Company in the future or,
if such a lawsuit is filed, that the Company would ultimately prevail.
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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>
E. Kenneth Seiff .. 32 Chairman of the Board of Directors, Chief Executive
Officer, President and Treasurer
William T. McLoone 41 Executive Vice President of Sales
David Lewis ........ 44 Vice President of Operations
Meena N. Bhatia ... 29 Chief Financial Officer
Martin Miller ...... 66 Director
Alan G. Millstein . 53 Director
Fred Rosenfeld ..... 51 Director
Robert G. Stevens . 43 Director
</TABLE>
E. KENNETH SEIFF, the founder of the Company, has served as the Company's
Chairman of the Board, Chief Executive Officer and Treasurer since its
inception in April 1991. He became President of the Company in October 1996.
From 1989 to 1991, Mr. Seiff was a Vice President of Founders Equity, a New
York based leveraged buyout firm. From 1988 to 1989, he was the President and
sole shareholder of EKS Capital Corp., a leveraged buyout firm. Mr. Seiff was
an associate at Lorne Weil, Inc., a New York based strategic planning and
corporate development consulting firm, from 1986 until 1988.
WILLIAM T. MCLOONE has served as Executive Vice President of Sales of the
Company since March 1997. From July 1993 to June 1996, Mr. McLoone was
Executive Vice President of Sales and Marketing of Salant Corporation, a New
York based wholesaler. From September 1991 to July 1993, Mr. McLoone was
Executive Vice President of Sales and Marketing of Warnaco Inc., a New York
based wholesaler.
DAVID LEWIS has served as Vice President of Operations of the Company
since March 1997. From March 1996 to March 1997, Mr. Lewis was President of
IDL, a principal consultant to the Company. From March 1991 to March 1996,
Mr. Lewis was Vice President of Production and Sourcing at Baxter
International, Inc. ("Baxter"), a New York based apparel wholesaler. From
1987 to 1991, Mr. Lewis was a Divisional Product Manager at Federated Allied
Merchandising Services.
MEENA N. BHATIA has served as Chief Financial Officer of the Company since
January 1997. From June 1995 to January 1997, Ms. Bhatia was the Assistant
Treasurer of DVL, Inc. ("DVL"), a publicly-traded commercial real estate and
finance company, and from June 1993 to January 1997, she was the Controller
of DVL. From November 1990 to June 1993, Ms. Bhatia was a member of the audit
staff at Richard A. Eisner & Company, LLP, the Company's former accounting
firm. Ms. Bhatia is a Certified Public Accountant.
MARTIN MILLER has served as a director of the Company since July 1991.
Since September 1986, Mr. Miller has been President and a director of Baxter.
From January 1990 to April 1996, Mr. Miller was Chairman of Ocean Apparel,
Inc., a Florida based sportswear firm. From 1970 to 1986, Mr. Miller was the
President and Chief Executive Officer of RPM, Inc., a New York based apparel
wholesaler.
ALAN G. MILLSTEIN has served as a director of the Company since December
1996. Since 1979, Mr. Millstein has been a retail consultant and the Chairman
of the Board of Fashion Network, Inc., a consulting organization specializing
in marketing communications and the publisher of Fashion Network Report, a
monthly retail and fashion newsletter.
FRED ROSENFELD has served as a director of the Company since July 1991.
Mr. Rosenfeld currently works as a consultant in the apparel industry. From
October 1993 to December 1995, Mr. Rosenfeld was President of the Jockey
Sportswear Division of Baxter. From October 1991 to October 1993, he was a
consultant in the apparel industry. Mr. Rosenfeld was Chief Operating Officer
of Collections Clothing Corporation, a company engaged in the manufacture of
men's sportswear, from March 1990 to March 1991.
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<PAGE>
ROBERT G. STEVENS has served as a director of the Company since December
1996. Since December 1994, Mr. Stevens has been a Vice President of Mercer
Management Consulting, Inc. ("Mercer"), a management consulting firm. From
November 1992 to December 1994, Mr. Stevens was a Principal at Mercer. From
1983 to November 1992, Mr. Stevens was a consultant at Lorne Weil, Inc.
The Board of Directors has established an Audit Committee comprised of
Alan Millstein, Fred Rosenfeld and Martin Miller. Mr. Millstein serves as
chairman of the committee. The Audit Committee is responsible for
recommending to the Board of Directors the appointment of the Company's
outside auditors, examining the results of audits, reviewing internal
accounting controls and reviewing related party transactions.
The Board of Directors has also established an Option Plan/Compensation
Committee ("Option Plan/Compensation Committee") consisting of Messrs.
Stevens, Millstein and Rosenfeld. Mr. Stevens serves as chairman of this
committee. The Option Plan/Compensation Committee administers the Plan,
establishes the compensation levels for executive officers and key personnel
and oversees the Company's bonus plans. See "--Stock Option Plan."
The Company's executive officers are appointed annually by, and serve at
the discretion of, the Board of Directors. All directors hold office until
the next annual meeting of the Company or until their successors have been
duly elected and qualified. There are no family relationships among any of
the executive officers or directors of the Company.
The Company maintains a "key person" life insurance policy in the amount
of $1.2 million on the life of Mr. Seiff.
DIRECTOR COMPENSATION
The Company's directors do not receive any cash compensation for their
services as members of the Board of Directors, although they are reimbursed
for expenses incurred on behalf of the Company. Each current non-employee
director has received options to purchase 5,000 shares of Common Stock under
the Plan and is eligible to receive annual option grants to purchase 2,500
shares of Common Stock under the Plan. See "--Stock Option Plan."
EXECUTIVE COMPENSATION
The following tables sets forth information concerning the compensation
paid by the Company during the fiscal year ended December 31, 1996 to E.
Kenneth Seiff, the Company's Chief Executive Officer. No other executive
officer of the Company received a total annual salary and bonus from the
Company in excess of $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ---------------------------------------------------------------------------------------
NAME AND PRINCIPAL POSITIONS ANNUAL COMPENSATION
- ------------------------------------------------------- ------------------------------
YEAR SALARY BONUS
----------------------------------------------------- ---- ------- --------
<S> <C> <C> <C>
E. Kenneth Seiff .................................... 1996 $89,115 $144,759
Chief Executive Officer, President and Treasurer
----------------------------------------------------- ------ --------- -------
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with its Chief
Executive Officer, E. Kenneth Seiff, which expires on January 1, 2000.
Pursuant to the agreement, Mr. Seiff will serve as the Company's Chief
Executive Officer and Chairman of its Board of Directors for an annual salary
of $165,000, subject to increase by the Board of Directors, and an annual
bonus to be determined by the Board of Directors but not to exceed Mr.
Seiff's annual salary for the year in question. At the discretion of the
Board of Directors, all or part of such bonus may be paid through the
issuance to Mr. Seiff of capital stock of the Company or stock options issued
pursuant to the Plan, provided that at the request of Mr.
27
<PAGE>
Seiff a portion of such bonus sufficient to pay any income taxes arising from
such bonus will be paid in cash rather than in capital stock of the Company.
In the event the agreement is terminated by the Company without cause or
through a Constructive Termination (as defined therein), the Company is
obligated to pay Mr. Seiff severance payments equal to the base salary
payments that Mr. Seiff would be entitled to receive over the entire
remaining term of the agreement. The employment agreement further provides
that Mr. Seiff will not engage in activities competitive with the Company for
the term of the agreement and for two years thereafter. In the event the
agreement is terminated by the Company without cause or through a
Constructive Termination the restriction on competition will not extend
beyond the term of the agreement. Under the terms of Mr. Seiff's employment
agreement, the Company maintains a $1 million life insurance policy on the
life of Mr. Seiff for the benefit of his named beneficiaries.
The Company has also entered into an employment agreement with William T.
McLoone, which expires on March 16, 2002. Pursuant to Mr. McLoone's
employment agreement, he will serve as Executive Vice President of Sales for
an annual salary of $125,000 and devote his full professional and business
time to the affairs of the Company. The employment agreement also provides
that Mr. McLoone is eligible to receive an annual bonus in 1997 based on such
factors as the Company's President and Board of Directors deem appropriate
and in subsequent years contingent on achieving certain performance objectives.
Pursuant to the employment agreement, Mr. McLoone is entitled to annual raises
to be determined by the Board of Directors in its discretion but subject to
certain specified minimums, and an annual option grant. In the event the
employment agreement is terminated by the Company without cause or through a
Constructive Termination (as defined therein), the Company is obligated to
pay Mr. McLoone severance payments equal to his base salary for a three to
five month period depending upon the date of termination. The employment
agreement further provides that Mr. McLoone will not engage in activities
competitive with the Company for the term of the agreement and for two years
thereafter. In addition, the employment agreement provides for a five year
loan payable to Mr. McLoone in the amount of $50,000 at an interest rate of
8% per annum, of which amount approximately 50% will be forgiven over the
five year term of the employment agreement, with the balance to be repaid out
of annual bonuses, if any, or on March 17, 2002.
In addition, the Company has entered into an employment agreement with
David Lewis, President and principal owner of IDL, which expires on February
28, 2001. Upon execution of the employment agreement, the IDL Agreement was
terminated by mutual consent. Pursuant to Mr. Lewis' employment agreement, he
will serve as Vice President of Operations for an annual salary of $100,000
and devote his full professional and business time to the affairs of the
Company. The employment agreement also provides that Mr. Lewis is eligible to
receive an annual bonus based on such factors as the Company's Board of
Directors deems appropriate. In addition, the employment agreement provides
that Mr. Lewis is entitled to annual raises to be determined by the Board of
Directors in its discretion but subject to certain specified minimums, and an
annual option grant contingent on achieving certain specified performance
objectives. In the event the employment agreement is terminated by the
Company without cause or through a Constructive Termination (as defined
therein), the Company is obligated to pay Mr. Lewis severance payments equal
to his base salary for a three to five month period depending upon the date
of termination. The employment agreement further provides that Mr. Lewis will
not engage in activities competitive with the Company for the term of the
agreement and for two years thereafter. Under the terms of Mr. Lewis'
employment agreement, the Company maintains a life insurance policy on the
life of Mr. Lewis in the amount of at least $250,000 for the benefit of his
named beneficiaries.
STOCK OPTION PLAN
The Plan was adopted by the Company's Board of Directors in March 1997 for
the purpose of encouraging key employees and consultants and directors who
are not employees ("Non-Employee Directors") to acquire a proprietary
interest in the growth and performance of the Company. Messrs. Miller,
Millstein, Rosenfeld and Stevens are currently Non-Employee Directors.
Options for 83,000 shares have been granted under the Plan, all of which have
an exercise price equal to the initial public offering price.
Under the Plan, the maximum number of shares with respect to which options
may be granted is 200,000. The Company may in its sole discretion grant
options to key employees and consultants and shall grant options to the
Company's Non-Employee Directors subject to specified terms and conditions
and in
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<PAGE>
accordance with a specified formula ("Formula") as discussed below. Options
granted to key employees may be either incentive stock options ("ISOs")
meeting the requirements of Section 422 of the Internal Revenue Code of 1986,
as amended ("Code"), or non-qualified stock options ("NQSOs") not meeting the
requirements of Section 422 of the Code. Options granted to Non-Employee
Directors and consultants shall be NQSOs. The Plan is currently administered
by the Option Plan/Compensation Committee, which is generally empowered to
interpret the Plan, prescribe rules and regulations relating thereto and
determine the individuals to whom options are to be granted. The future
exercise price of all ISOs granted under the Plan, and the future exercise
price of all NQSOs granted under the Plan within three years after this
Offering, will be at least 100% of the fair market value of the Common Stock
on the date of grant. Thereafter, the exercise price of all NQSOs granted
under the Plan will be at least 85% of the fair market value of the Common
Stock on the date of grant.
Under the Formula, each Non-Employee Director has been granted on the date
of this Prospectus an option to purchase 5,000 shares of Common Stock at an
exercise price equal to the initial public offering price per share. Further,
each person who subsequently becomes a Non-Employee Director will be
automatically granted an option to purchase 5,000 shares on the date such
person becomes a Non-Employee Director. In addition, each Non-Employee
Director who is a member of the Board of Directors on April 30 of a year
beginning in calendar year 1998 will be automatically granted an option to
purchase 2,500 shares of Common Stock on May 1 of the following year. All
options issued to Non-Employee Directors pursuant to the Formula will have an
exercise price equal to the Fair Market Value (as defined in the Plan) on the
date of grant and have a term of 10 years.
The Board of Directors may modify, suspend or terminate the Plan;
provided, however, that certain material modifications affecting the Plan
must be approved by the shareholders and any change in the Plan that may
adversely affect an optionee's rights under an option previously granted
under the Plan requires the consent of the optionee.
E. Kenneth Seiff, the Company's Chief Executive Officer, was not granted
any stock options by the Company during the year ended December 31, 1996.
29
<PAGE>
PRINCIPAL SHAREHOLDERS
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 own
beneficially more than 5% of the capital stock, (ii) each of the Company's
directors, (iii) the Company's Chief Executive Officer, and (iv) all
directors and executive officers as a group. Unless otherwise indicated, the
address of all persons named in the table is 80 West 40th Street, New York,
New York 10018.
<TABLE>
<CAPTION>
PERCENTAGE(1)
----------------------
NUMBER OF SHARES BEFORE AFTER
NAME BENEFICIALLY OWNED OFFERING OFFERING
- ----------------------------------------------------------- ------------------ ---------- ----------
<S> <C> <C> <C>
E. Kenneth Seiff ........................................... 502,157(2) 41.8% 18.6%
Martin Miller .............................................. 0(3) * *
Alan G. Millstein .......................................... 0(3) * *
Fred Rosenfeld ............................................. 0(3) * *
Robert G. Stevens .......................................... 12,939(3) 1.1 *
Joseph Boughton, Jr.(4) .................................... 207,548(5) 16.3 7.5
Jennifer Miller Symonds(6) ................................. 68,597 5.7 2.5
All directors and executive officers as a group (7 persons) 515,096(7) 42.9% 19.1%
</TABLE>
- ------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission ("Commission") and generally
includes voting or investment power with respect to securities. Shares
of Common Stock issuable upon the exercise of options or warrants
currently exercisable or exercisable within 60 days are deemed
outstanding for computing the percentage ownership of the person
holding such options or warrants but are not deemed outstanding for
computing the percentage ownership of any other person.
(2) Does not include 3,000 shares of Common Stock underlying options
granted under the Plan to Nicole Seiff, an employee of the Company and
the wife of E. Kenneth Seiff, which options are not currently
exercisable. Mr. Seiff disclaims beneficial ownership with respect to
such shares.
(3) Does not include 5,000 shares of Common Stock underlying options
granted under the Plan which are not currently exercisable.
(4) Mr. Boughton's address is c/o Middlemarket Capital Management Co., 2627
Sandy Plains Road, Suite 201, Marietta, Georgia 30066.
(5) Includes 70,000 shares of Common Stock underlying Bridge Warrants
issued to Northstar Investment Group, Ltd. ("Northstar"). Mr. Boughton
is the President of Northstar. Does not include up to 14,052 shares of
Common Stock and 14,052 shares of Common Stock underlying Warrants
which may be purchased in the Offering by Mr. Boughton pursuant to
certain preemptive rights held by Mr. Boughton. See "Certain
Transactions."
(6) Ms. Symonds' address is 116 East 66th Street, New York, New York 10021.
Ms. Symonds is the daughter of Martin Miller.
(7) Does not include 43,000 shares underlying options granted under the
Plan which are not currently exercisable.
CERTAIN TRANSACTIONS
In February 1992, the Company and Joseph J. Boughton, Jr., an
approximately 16% shareholder in the Company, entered into a loan agreement
pursuant to which Mr. Boughton loaned the Company $100,000. Under the terms
of such loan agreement, Mr. Boughton received preemptive rights such that he
would have the opportunity to maintain at least an 8% equity interest in the
Company. In November 1996, the Company and Mr. Boughton entered into a letter
agreement pursuant to which, in return for the right to subscribe to
approximately 11.5% of the Bridge Notes and Bridge Warrants, Mr. Boughton
agreed that
30
<PAGE>
his contractual preemptive rights would terminate upon the closing of this
Offering. Pursuant to the terms of such letter agreement, Northstar, an
entity controlled by Mr. Boughton, purchased 1.75 of the 15 Units sold in the
Bridge Financing upon the same terms and conditions as the other investors in
the Bridge Financing.
In September 1994, pursuant to the Stock Purchase Agreement between the
Company and the Leisure Wear Group, the Company repurchased 572,526 shares of
Common Stock from the Leisure Wear Group for a cash payment of $50,000 and a
promissory note in the principal amount of $822,291. Prior to September 1996,
the Company paid an aggregate of $343,111 in principal, plus accrued
interest, on the promissory note. In September 1996, in lieu of any further
payments of principal or interest under the promissory note, the Company
agreed to pay the Leisure Wear Group $240,000 and to make certain cash
incentive payments to the Leisure Wear Group, including, but not limited to,
payments equal to 5% of the net cash proceeds to the Company resulting from
the issuance of securities of the Company in any public offering or private
placement, up to an aggregate of $279,000. Further, the Company agreed to pay
David Goldblatt and Jeffrey Goldstein an aggregate of $60,000 in consulting
and noncompetition fees on December 31, 1998. The Company paid the Leisure
Wear Group cash incentive payments equal to approximately $60,000 of the net
cash proceeds of the Bridge Financing and will pay the Leisure Wear Group
cash incentive payments equal to approximately $219,000 of the net proceeds
of this Offering. Under the terms of the Stock Purchase Agreement, the
Company is also obligated to use its best efforts to allow the Leisure Wear
Group to invest an amount equal to the cash incentive payments to be paid as
a result of this Offering in the Securities to be sold in this Offering. In
addition, prior to the Stock Purchase Agreement, David Goldblatt and Jeffrey
Goldstein were directors of the Company. In connection with the repurchase,
Messrs. Goldblatt and Goldstein resigned from such positions.
In May 1996, the Company entered into the IDL Agreement with IDL. David
Lewis is the President and principal owner of IDL. Under the IDL Agreement,
the Company has paid IDL a commission of 5% on the first $1 million of goods
shipped to the Company in a given year and 2.5% thereafter. In addition, IDL
received a bonus based on the Company's gross margins. The IDL Agreement has
been terminated effective as of March 1, 1997 in connection with the hiring
of David Lewis as Vice President of Operations.
The Company has adopted a policy whereby all future transactions between
the Company and its officers, directors, principal shareholders or affiliates
will be approved by a majority of the Board of Directors, including all of
the independent and disinterested members of the Board of Directors or, if
required by law, a majority of disinterested shareholders, and will be on
terms no less favorable to the Company than could be obtained in arm's length
transactions from unaffiliated third parties.
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company is 17,000,000 shares,
consisting of 15,000,000 shares of Common Stock, $.01 par value per share,
and 2,000,000 shares of Preferred Stock, $.01 par value per share. As of the
date of this Prospectus, 1,200,000 shares of Common Stock are outstanding.
Upon the completion of this Offering there will be 2,700,000 shares of Common
Stock outstanding (2,925,000 if the Underwriter's over-allotment option is
exercised in full). As of the date of this Prospectus, no shares of Preferred
Stock are outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held
of record on all matters to be voted on by shareholders. There is no
cumulative voting with respect to the election of directors, with the result
that the holders of more than 50% of the shares voted can elect all of the
directors then being elected. 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. In the
event of a liquidation, dissolution or winding up of the Company, the holders
of Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities. Holders of shares of Common
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<PAGE>
Stock, as such, have no redemption, preemptive or other subscription rights,
and there are no conversion provisions applicable to Common Stock. All of the
outstanding shares of Common Stock are, and the shares of Common Stock to be
issued upon completion of the Offering, when issued and paid for as set forth
in this Prospectus, will be, fully paid and non-assessable.
Under Section 630 of the BCL, the 10 largest shareholders of the Company
may become personally liable for unpaid wages and debts to the Company's
employees if the Company's capital stock ceases to be listed on a national
securities exchange or regularly quoted in an over-the-counter market by one
or more members of a national or an affiliated securities association.
PREFERRED STOCK
The Company's authorized shares of Preferred Stock may be issued in one or
more series, and the Board of Directors is authorized, without further action
by the shareholders, to designate the rights, preferences, limitations and
restrictions of and upon shares of each series, including dividend, voting,
redemption and conversion rights. The Board of Directors also may designate
par value, preferences in liquidation and the number of shares constituting
any series. The Company believes that the availability of Preferred Stock
issuable in series will provide increased flexibility for structuring
possible future financings and acquisitions, if any, and in meeting other
corporate needs. It is not possible to state the actual effect of the
authorization and issuance of any series of Preferred Stock upon the rights
of holders of Common Stock until the Board of Directors determines the
specific terms, rights and preferences of a series of Preferred Stock.
However, such effects might include, among other things, restricting
dividends on the Common Stock, diluting the voting power of the Common Stock,
or impairing liquidation rights of such shares without further action by
holders of the Common Stock. In addition, under various circumstances, the
issuance of Preferred Stock may have the effect of facilitating, as well as
impeding or discouraging, a merger, tender offer, proxy contest, the
assumption of control by a holder of a large block of the Company's
securities or the removal of incumbent management. The issuance of Preferred
Stock could also adversely affect the market price of the Common Stock. The
Company has no present plan to issue any shares of Preferred Stock.
WARRANTS
Each Warrant offered hereby, including Warrants converted from Bridge
Warrants and each Warrant included in the Underwriter's Purchase Option, will
entitle the registered holder to purchase one share of the Company's Common
Stock at an exercise price of $ per share [100% of the per-share offering
price] during a four-year period commencing one year after the Effective
Date. 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.
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 the
Warrants, at any time after they become exercisable, 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 165% of the then exercise price
of the Warrants (initially $ ) on 20 out of the 30 consecutive trading days
ending on the third day prior to the day on which 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. The Company has undertaken and intends to file and
keep current a prospectus which will permit the purchase
32
<PAGE>
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 where the Securities are being offered, 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 shareholder 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 Company's Common Stock will exceed the exercise price of the
Warrants at any time during the exercise period.
LIMITATION OF LIABILITY OF DIRECTORS
The Restated Certificate provides that a director will not be personally
liable for damages to the Company or its shareholders for breach of duty as a
director, except to the extent such exemption or limitation is not permitted
under the BCL (i.e, liability (i) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (ii) for
any transaction from which the director derived a financial profit or other
advantage to which he was not legally entitled, (iii) for violating certain
provisions of the BCL prohibiting the payment of dividends in certain
circumstances, prohibiting certain payments to shareholders after dissolution
and prohibiting particular types of loans), or (iv) for any act or omission
prior to the adoption of this provision.
The limitation of liability described above does not alter the liability
of directors under federal securities laws.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Restated Certificate and Restated By-Laws provides that officers and
directors of the Company shall be indemnified by the Company to the fullest
extent permissible under New York law. Insofar as indemnification for
liability under the Securities Act of 1933, as amended ("Securities Act"),
may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions or otherwise, the Company, has
been advised that, in the opinion of the Commission, such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable.
NEW YORK ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Generally, Section 912(b) of the BCL prohibits a New York corporation from
engaging in a "business combination" with an "interested shareholder" for a
period of five years after the date of the transaction in which the person
became an interested shareholder unless the combination or the transaction in
which the person became an interested shareholder is approved by the board of
directors of the corporation before the date such person became an interested
shareholder. If the business combination is not previously approved, the
interested shareholder may effect a business combination after the five-year
period only if a majority of the shares not owned by the interested
shareholder is voted in favor of the combination or the aggregate amount of
the offer meets certain fair price criteria. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the shareholder. An "interested shareholder" is a person who
beneficially owns, or is an affiliate or associate of a corporation and
within the past five years beneficially owned, 20% or more of the
corporation's voting stock.
The Restated Certificate and Restated By-Laws contains certain provisions
intended to enhance the likelihood of continuity and stability in the
composition of the Company's Board of Directors and of the policies
formulated by the Board of Directors which may discourage a future
unsolicited takeover of the
33
<PAGE>
Company. These provisions could have the effect of discouraging certain
attempts to acquire the Company or remove incumbent management, including
incumbent members of the Company's Board of Directors, even if some or a
majority of the Company's shareholders deemed such an attempt to be in their
best interests.
The Restated Certificate or Restated By-Laws, as applicable, among other
things (i) provides that the number of directors will be not fewer than three
nor more than seven, with the exact number of directors to be determined in
accordance with the Restated By-Laws; (ii) provides that whenever there are
at least six directors, the Board of Directors will consist of two classes of
directors having staggered terms of two years each, with each of the classes
consisting of at least three directors; (iii) requires any shareholder who
wishes to bring any proposal before a meeting of shareholders or to nominate
a person to serve as a director to give written notice thereof and certain
related information at least 90 but no more than 120 days prior to the date
one year from the date of the immediately preceding annual meeting, if such
proposal or nomination is to be submitted at an annual meeting, and within
ten days of the giving of notice to shareholders, if such proposal or
nomination is to be submitted at a special meeting; and (iv) provides that
the Board of Directors, without action by the shareholders, may issue and fix
the rights and preferences of shares of Preferred Stock. These provisions may
have the effect of delaying, deferring or preventing a change of control of
the Company without further action by the shareholders, may discourage bids
for the Common Stock at a premium over the market price of the Common Stock
and may adversely affect the market price of, and the voting and other rights
of the holders of, Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's securities is American
Stock Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
COMMON STOCK
Upon completion of this Offering, the Company will have outstanding
2,700,000 shares of Common Stock, not including shares of Common Stock
issuable upon exercise of outstanding options and warrants, and assuming no
exercise of the over-allotment option granted to the Underwriter. Of those
shares, the 1,500,000 shares of Common Stock sold to the public in the
Offering (1,725,000 if the Underwriter's over-allotment option is exercised
in full) may be freely traded without restriction or further registration
under the Securities Act, except for 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) which 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. For purposes of determining when
outstanding shares of Common Stock may first be sold, it is assumed that the
amendment of Rule 144 adopted by the Commission on February 20, 1997 and
effective April 29, 1997 is in effect.
The 1,200,000 shares of Common Stock outstanding prior to this Offering
are "restricted securities" as that term is defined in Rule 144 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, 684,904 shares
may be sold pursuant to Rule 144 beginning on the date of this Prospectus and
the remaining 515,096 shares may be sold beginning 90 days thereafter,
subject to the Lock-Up Agreements discussed below.
In general, under Rule 144, a shareholder (or shareholders whose shares
are aggregated) who has beneficially owned any restricted securities for at
least one year (including a shareholder 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
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<PAGE>
preceding the date on which notice of such sale is given to the Commission,
provided certain public information, manner of sale and notice requirements
are satisfied. A shareholder who is deemed to be an affiliate of the Company,
including members of the Board of Directors and executive officers of the
Company, will still need to comply with the restrictions and requirements of
Rule 144, other than the one-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 shareholder (or shareholders
whose 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
shareholder, and who has beneficially owned restricted securities for at
least two years, will be entitled to sell such restricted securities under
Rule 144 without regard to the volume limitations described above.
Of the 1,200,000 restricted shares, all of the shares held by the
Company's directors, officers and shareholders holding 1% or more of the
outstanding shares of Common Stock ("1% or Greater Holder"), 1,154,890 shares
in the aggregate, are subject to lock-up agreements ("Lock-Up Agreements")
pursuant to which each such director, officer or 1% or Greater Holder has
agreed not to offer, sell, transfer or otherwise dispose of any shares of
Common Stock (other than shares of Common Stock acquired in the Offering or
in the after market after the closing date of the Offering) without the prior
written consent of the Underwriter. Holders of 515,096 shares of Common Stock
have agreed to be subject to such restrictions for a period of 24 months from
the date of this Prospectus and holders of 639,794 shares of Common Stock
have agreed to be subject to such restrictions for a period of 18 months from
the date of this Prospectus.
The Company has agreed to register the Warrants converted from the Bridge
Warrants for resale under the Securities Act and to pay certain expenses in
connection therewith. An aggregate of 600,000 Warrants are being registered
in the registration statement of which this Prospectus forms a part. The
securities offered by such holders ("Selling Securityholders") are not part
of the underwritten offering. The Company will not receive any of the
proceeds from the sale of such Warrants. Notwithstanding that such securities
are being registered, the Selling Securityholders may not sell any of such
securities prior to one year from the date of this Prospectus. This
restriction on resale is unconditional and may not be waived by the
Underwriter.
Prior to this Offering, there has been no public trading market for the
Common Stock, and no predictions can be made as to the effect, if any, that
future sales of shares or the availability of shares for sale will have on
the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of the Common Stock in the public market could adversely
affect the then-prevailing market price.
35
<PAGE>
UNDERWRITING
GKN Securities Corp. ("Underwriter") has agreed, subject to the terms and
conditions of the Underwriting Agreement, to purchase from the Company a
total of 1,500,000 shares of Common Stock and 1,500,000 Warrants. The
obligations of the Underwriter under the Underwriting Agreement are subject
to approval of certain legal matters by counsel and various other conditions
precedent, and the Underwriter is 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 Underwriter has advised the Company that it proposes to offer the
Securities to the public at the initial public offering prices set forth on
the cover page of this Prospectus and to certain dealers at those prices less
a concession not in excess of $ per share of Common Stock and $ per
Warrant. The Underwriter may allow, and such dealers may reallow, a
concession not in excess of $ per share of Common Stock and $ per
Warrant to certain other dealers. After the Offering, the offering prices and
other terms may be changed by the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter an expense allowance on a
nonaccountable basis equal to 3% of the gross proceeds derived from the sale
of the Securities offered by this Prospectus (including the sale of any
Securities subject to the Underwriter's 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 Underwriter may designate and registering this
Offering with the National Association of Securities Dealers, Inc. ("NASD"),
including fees and expenses of counsel retained for such purposes by the
Underwriter.
The Company has granted the Underwriter an option, exercisable during the
45-day period after the date of this Prospectus, to purchase from the Company
at the initial offering price, less underwriting discounts and the
nonaccountable expense allowance, up to an aggregate of 225,000 additional
shares of Common Stock and/or an aggregate of 225,000 additional Warrants for
the sole purpose of covering over-allotments, if any.
The Company has engaged the Underwriter, on a non-exclusive basis, as its
agent 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 Underwriter for bona fide
services rendered a commission equal to 5% of the exercise price of each
Warrant exercised after one year from the date of this Prospectus if the
exercise was solicited by the Underwriter. 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 the Warrants. No compensation
will be paid to the Underwriter 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 the Underwriter 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 Regulation M
under the Exchange Act, any broker-dealer soliciting the exercise of the
Warrants, including the Underwriter, may be prohibited from engaging in any
market activities or solicited brokerage activities with regard to the
Company's securities. If one or more broker-dealers making a market in the
Company's securities are required temporarily to suspend such market making,
such suspension could adversely affect the liquidity of the market for such
securities.
In connection with this Offering, the Company has agreed to sell to the
Underwriter, for an aggregate purchase price of $100, the Underwriter's
Purchase Option, consisting of the right to purchase up to an aggregate of
150,000 shares of Common Stock and/or an aggregate of 150,000 Warrants. The
Underwriter's Purchase Option is exercisable initially at a price equal to
% of the initial public offering price of such Securities for a period of
four years commencing one year from the date hereof. The
36
<PAGE>
Underwriter's Purchase Option may not be transferred, sold, assigned or
hypothecated during the one year period following the date of this Prospectus
except to officers of the Underwriter and the selected dealers and their
officers or partners. The Underwriter's Purchase Option grants to the holders
thereof certain "piggyback" and demand rights for periods 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 Underwriter's Purchase Option.
Pursuant to the Underwriting Agreement, all of the officers, directors and
1% or Greater Holders (collectively, "Insiders") have executed Lock-Up
Agreements pursuant to which they each have agreed not to offer, sell,
transfer or otherwise dispose of any shares of Common Stock (other than
shares of Common Stock acquired in the Offering or in the after market after
the closing date of the Offering) without the prior written consent of the
Underwriter; each 1% or Greater Holder who holds no other position with the
Company and who does not reside in the same household as any other Insider
has agreed to be subject to such restrictions for a period of 18 months and
each other Insider has agreed to be subject to such restrictions for a period
of 24 months. During the four year period following the date of this
Prospectus, the Underwriter shall have the right to purchase for the
Underwriter's account or to sell for the account of the Insiders, any
securities sold by any of such persons in the open market.
The Underwriting Agreement provides that, for a period of four years from
the date of this Prospectus, the Company will recommend and use its best
efforts to elect a designee of the Underwriter as a member of the Board of
Directors. Alternatively, the Underwriter will have the right to send a
representative to observe each meeting of the Board of Directors. The
Underwriter has not yet selected such designee or representative.
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 Underwriter 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, include an assessment
of the prospects for the industry in which the Company competes, the
Company's management and the Company's capital structure.
In connection with this Offering, the Underwriter may engage in
transactions that stabilize or maintain the price of the Common Stock or
Warrants at levels above those which might otherwise prevail in the open
market, including syndicate short covering transactions and penalty bids.
Such transactions may be effected on Nasdaq, in the over-the-counter market
or otherwise. Such stabilizing, if commenced, may be discontinued at any
time.
In January 1997, the Underwriter acted as placement agent for the Bridge
Financing and was paid a commission of $150,000 (10%) and a nonaccountable
expense allowance of $45,000 (3%).
CHANGE IN ACCOUNTANTS
Effective January 1997, Grant Thornton LLP was engaged as the Company's
independent auditors, replacing Richard A. Eisner & Company, LLP, the
Company's former auditors. The appointment of Grant Thornton LLP has been
approved by the Company's Board of Directors. The former auditors' report on
the Company's financial statements for the year ended December 31, 1995 is
included in the financial statements of the Company included in this
Prospectus. There were no disagreements with the former auditors on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedure with respect to the Company's financial
statements for the fiscal year ended December 31, 1995 or up through the time
of replacement, which, if not resolved to the former auditors' satisfaction,
would have caused it to make reference to the subject matter of the
disagreement in connection with its report. The report of Richard A. Eisner &
Company, LLP in connection with such audit did not contain any adverse
opinion or disclaimer of opinion, and was not modified as to uncertainty,
audit scope, or accounting principles. Prior to retaining Grant Thornton LLP,
the Company had not consulted with Grant Thornton LLP regarding accounting
principles.
37
<PAGE>
LEGAL MATTERS
The legality of the securities offered hereby will be passed upon for the
Company by Shereff, Friedman, Hoffman & Goodman, LLP, New York, New York.
Graubard Mollen & Miller, New York, New York, has served as counsel to the
Underwriter in connection with this Offering.
EXPERTS
The financial statements of Pivot Rules, Inc. at December 31, 1996
included herein have been audited by Grant Thornton LLP, independent
auditors, as set forth in their report thereon appearing herein, and are
included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
The financial statements of Pivot Rules, Inc. for the year ended December
31, 1995 included herein have been audited by Richard A. Eisner & Company,
LLP, independent auditors, as set forth in their report thereon appearing
herein, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing. In
consideration of the inclusion of such report, the Company has agreed to
indemnify Richard A. Eisner & Company, LLP against any legal costs incurred
by it and any damages assessed against it in the event that Richard A. Eisner
& Company, LLP becomes a party to, or is threatened with, any litigation
resulting from any sale of Securities pursuant to the Registration Statement
or any transaction made in reliance upon information contained herein,
provided that such indemnification shall not be effective with regard to any
liability for professional malpractice or payment of settlement or judgment
costs.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement under
the Securities Act 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, certain portions 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, 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 information requirements of the Exchange Act, 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 its shareholders 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.
38
<PAGE>
PIVOT RULES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Independent Auditors' Reports
Grant Thornton LLP.............................................................. F-2
Richard A. Eisner & Company, LLP................................................ F-3
Financial Statements
Balance Sheet as of December 31, 1996........................................... F-4
Statements of Operations for the Years Ended December 31, 1995 and 1996......... F-5
Statements of Changes in Shareholders' Equity for the Years Ended December 31,
1995 and 1996 ................................................................. F-6
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996......... F-7
Notes to Financial Statements................................................... F-8 -F-18
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Shareholders
PIVOT RULES, INC.
We have audited the accompanying balance sheet of Pivot Rules, Inc. as of
December 31, 1996, and the related statements of operations, changes in
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pivot Rules, Inc. at
December 31, 1996 and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
New York, New York
February 18, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
To the Shareholders
Pivot Rules, Inc.
New York, New York
We have audited the accompanying statements of operations, changes in
shareholders' equity and cash flows of Pivot Rules, Inc. for the year ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements enumerated above present fairly,
in all material respects, the results of operations and cash flows of Pivot
Rules, Inc. for the year ended December 31, 1995 in conformity with generally
accepted accounting principles.
RICHARD A. EISNER & COMPANY, LLP
New York, New York
October 21, 1996
F-3
<PAGE>
PIVOT RULES, INC.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS
Cash......................................................................... $ 33,000
Due from factor ............................................................. 176,000
Inventories ................................................................. 835,000
Prepaid expenses and other current assets ................................... 114,000
Deferred income taxes ....................................................... 97,000
------------
Total current assets ...................................................... 1,255,000
PROPERTY AND EQUIPMENT, NET .................................................. 89,000
DEFERRED COSTS AND OTHER ASSETS .............................................. 292,000
------------
Total ..................................................................... $1,636,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of notes payable ............................................ $ 230,000
Short-term loan payable ..................................................... 279,000
Due to factor ............................................................... 123,000
Accounts payable, accrued expenses and other current liabilities ........... 336,000
Income taxes payable ........................................................ 112,000
------------
Total current liabilities ................................................. 1,080,000
NOTES PAYABLE, less current portion .......................................... 135,000
DEFERRED INCOME TAXES ........................................................ 12,000
------------
1,227,000
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock -$.01 par value; 10,000,000 shares authorized; 1,200,000 shares
issued and outstanding ..................................................... 12,000
Additional paid-in capital .................................................. 397,000
------------
409,000
------------
Total ..................................................................... $1,636,000
============
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
PIVOT RULES, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Sales .................................................. $7,124,000 $9,292,000
Less returns and allowances ............................ 787,000 696,000
------------ ------------
Net sales ............................................ 6,337,000 8,596,000
Cost of sales .......................................... 3,996,000 6,571,000
------------ ------------
Gross profit ......................................... 2,341,000 2,025,000
Selling, marketing, design and administrative expenses 2,288,000 1,502,000
------------ ------------
Operating profit ..................................... 53,000 523,000
Other income (expense)
License fee income .................................... 58,000 90,000
Other income .......................................... 10,000 35,000
Interest expense and factoring charges ................ (418,000) (443,000)
------------ ------------
(350,000) (318,000)
------------ ------------
Income (loss) before taxes ........................... (297,000) 205,000
Provision (benefit) for income taxes ................... (89,000) 70,000
------------ ------------
NET INCOME (LOSS) .................................... $ (208,000) $ 135,000
============ ============
Net income (loss) per share ............................ (.17) $.11
============ ============
Weighted average shares outstanding .................... 1,200,000 1,200,000
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
PIVOT RULES, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK, COMMON STOCK,
NO PAR VALUE $.01 PAR VALUE
--------------------- ----------------------
NUMBER NUMBER
OF OF
SHARES AMOUNT SHARES AMOUNT
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 200 $ 955,000
Net loss for the year ended
December 31, 1995............
-------- -----------
Balance at December 31, 1995 200 955,000
Stock-split recapitalization . (200) (955,000) 1,200,000 $12,000
Net income for the year ended
December 31, 1996............
-------- ----------- ----------- ---------
Balance at December 31, 1996 -- $ -- 1,200,000 $12,000
======== =========== =========== =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TREASURY STOCK
----------------------
NUMBER
PAID-IN RETAINED OF
CAPITAL EARNINGS SHARES AMOUNT TOTAL
---------- ----------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ 399,000 (64) $(872,000) $ 482,000
Net loss for the year ended
December 31, 1995............ (208,000) (208,000)
---------- ----------- -------- ------------ -----------
Balance at December 31, 1995 191,000 (64) (872,000) 274,000
Stock-split recapitalization . $397,000 (326,000) 64 872,000 --
Net income for the year ended
December 31, 1996............ 135,000 135,000
---------- ----------- -------- ------------ -----------
Balance at December 31, 1996 $397,000 $ -- -- $ -- $ 409,000
========== =========== ======== ============ ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
PIVOT RULES, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
------------ -------------
<S> <C> <C>
Cash flows from operating activities
Net (loss) income ............................................... $(208,000) $ 135,000
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities
Loss on equipment disposition .................................. -- 8,000
Depreciation and amortization .................................. 43,000 55,000
Deferred income taxes .......................................... (8,000) (40,000)
Changes in operating assets and liabilities
(Increase) decrease in
Inventories .................................................. 78,000 792,000
Prepaid expenses and other current assets ................... (67,000) 89,000
Income taxes receivable ..................................... (72,000) --
Increase (decrease) in
Accounts payable and accrued expenses ....................... (128,000) 183,000
Income taxes payable ........................................ -- 184,000
------------ -------------
Net cash (used in) provided by operating activities ............. (362,000) 1,406,000
------------ -------------
Cash flows from investing activities
Purchase of property and equipment .............................. (23,000) (42,000)
Trademark costs ................................................. (78,000) --
------------ -------------
Net cash used in investing activities ........................... (101,000) (42,000)
Cash flows from financing activities
Costs associated with bridge financing and initial public
offering ...................................................... -- (128,000)
Proceeds from notes payable ..................................... 67,000 240,000
Payments of notes payable ....................................... (59,000) (492,000)
Net increase (decrease) in advances from factor ................. 389,000 (1,005,000)
------------ -------------
Net cash provided by (used in) financing activities ............ 397,000 (1,385,000)
------------ -------------
NET DECREASE IN CASH ............................................ (66,000) (21,000)
Cash balance--January 1 ........................................... 120,000 54,000
------------ -------------
Cash balance--December 31 ......................................... $ 54,000 $ 33,000
============ =============
Supplemental disclosure of cash flow information:
Cash paid during the year for
Interest ........................................................ $ 308,000 $ 209,000
============ =============
Income taxes .................................................... $ 15,000 $ --
============ =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
NOTE A--SUMMARY OF ACCOUNTING POLICIES
1. COMPANY
Pivot Rules, Inc. ("Company") designs, sources and markets a full
collection of golf lifestyle sportswear for men under the Pivot Rules brand
name and registered trademark.
2. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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.
3. INVENTORIES
Inventories, which consist of finished goods, are valued at the lower of
cost or market. Cost is determined by the first-in, first-out ("FIFO")
method.
4. PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment is depreciated on a
straight-line basis over five to seven years. Leasehold improvements are
amortized over the shorter of their estimated useful lives or the term of the
lease. Maintenance and repairs are expensed as incurred.
5. DEFERRED COSTS
Deferred costs are composed of trademark, organization and financing
costs. The trademark and organization costs are amortized on the
straight-line basis over their estimated lives of 10 years. The unamortized
financing costs were costs incurred to obtain bridge financing in January
1997 and for costs incurred for the planned initial public offering scheduled
for 1997. The Company's policy is to defer the initial public offering costs.
If the initial public offering is successful, the Company will reduce
additional paid-in capital. If the initial public offering is not successful,
all costs pertaining to the offering will be expensed (Note O).
6. INCOME TAXES
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates in effect for the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
7. ADVERTISING EXPENSE
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 1995 and 1996 amounted to approximately $648,000 and
$176,000, respectively.
8. PREPAID EXPENSES
Sample costs for upcoming seasons are deferred and charged to expenses in
the season to which they pertain. Costs are deferred for a period of
approximately six to nine months.
F-8
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
NOTE A--SUMMARY OF ACCOUNTING POLICIES (Continued)
9. REVENUE RECOGNITION
Revenue is recognized when merchandise is shipped to a customer.
10. STOCK SPLIT
As discussed in Note J, on January 2, 1997, the Company effected a
8,862.6292-to-1 stock split of its common stock. All share and per share
amounts included in the accompanying financial statements and footnotes have
been restated to reflect the stock split.
11. EARNINGS PER SHARE
Earnings per share are computed by dividing net income by the weighted
average number of common shares outstanding and after giving effect to the
stock split.
12. IMPACT OF NEW ACCOUNTING PRONOUNCEMENT
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
125"). SFAS No. 125 particularly affects the accounting for transfers of
financial assets in which the seller has some type of continuing involvement
with the transferred assets. The carrying amounts of the financial assets
transferred are allocated to the various components of the transaction based
on their relative fair values. The components are then accounted for
separately, with parties to the transaction recognizing only assets they
control and liabilities incurred, and removing from the balance sheet assets
if control is surrendered and liabilities if extinguished. If the transfer
does not qualify as a sale, it is accounted for as a secured borrowing. SFAS
No. 125 provides that a liability is removed from the balance sheet only if
the debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor. Provisions
of SFAS No. 125 are generally effective for transactions occurring after
December 31, 1996. However, provisions with respect to secured borrowings and
transfers of financial assets that are part of repurchase agreement,
dollar-roll, securities lending, and similar transactions are effective for
transactions occurring after December 31, 1997. The Company has made no
assessment of the potential impact of adopting SFAS No. 125 at this time.
NOTE B--NOTES PAYABLE
Notes payable at December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Factor (a) ................. $ 195,000
Unrelated third party (b)... 170,000
-----------
365,000
Less current portion ..... (230,000)
-----------
$ 135,000
===========
</TABLE>
(a) The factor's note bears interest at 2% over the prime interest rate
and requires monthly principal payments of $5,420 plus accrued interest. A
balloon payment of approximately $135,000 is due upon maturity in January
1998. The note is collateralized by accounts receivable, inventory, other
assets and 18 shares of the Company's treasury stock (159,527 after giving
effect to the stock split).
F-9
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
NOTE B--NOTES PAYABLE (Continued)
Such treasury shares were retired subsequent to December 31, 1996. In the
event of a default of the factoring agreement, this note shall become
immediately due.
(b) Notes payable from unrelated third party. Proceeds from this note
were used to repay the amended treasury stock note. This loan bears
interest at 12% per annum and is payable in ten monthly equal installments
of $25,339.70, inclusive of interest. The final payment on the note is due
in July 1997. This note is collateralized by a second position in
inventory and receivables and 20 shares of a shareholder's stock (177,253
after giving effect to the stock split).
Annual principal payments required as of December 31, 1996 on the
aforementioned debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 ... $230,000
1998 ... 135,000
----------
$365,000
==========
</TABLE>
NOTE C--SHORT-TERM LOAN PAYABLE
As of December 31, 1995, the Company had a note payable for the purchase
of treasury stock with interest at 12% per annum, payable in annual
installments ranging from approximately $104,000 to $243,000 each December
31, through maturity in 1999. The payments originally due on December 31,
1995 were extended and payable in three monthly installments of $25,000 in
January, February and March of 1996 and $75,000 in June of 1996. The note was
collateralized by 44 shares of treasury stock (389,956 after giving effect to
the stock split) held in escrow. Such treasury shares were retired subsequent
to December 31, 1996.
In September 1996, the agreement to purchase treasury stock was amended,
and the outstanding balance plus accrued interest, of $39,000, was reduced to
an aggregate of $240,000 plus certain contingent payments (not to exceed
$279,000) based upon future distributions to remaining shareholders, or the
sale of additional debt or equity securities.
The Company borrowed $240,000 from an unrelated third party and used the
proceeds to repay the amended treasury stock note. The new loan bears
interest at 12% per annum and is payable in ten monthly installments
commencing in October 1996 (Note B).
In January 1997, the Company paid $60,000 regarding the contingent
payments due under the above-referenced loan. The payment represented 5% of
the net proceeds from the bridge loan (Note P).
NOTE D--FACTORING AGREEMENTS
In April 1992, the Company entered into factoring and financing agreements
whereby the Company sells substantially all of its trade receivables without
recourse, to a commercial factor. Advances bear interest at 2% over the prime
interest rate. In addition, the Company will also pay the factor an annual
commission aggregating at least $30,000. Any amounts due to the factor are
collateralized by accounts receivable, inventories and other assets.
The amounts due to the factor at the balance sheet date represent the
difference between charges and advances from the factor and accounts
receivable assigned to the factor. Accrued letters of credit convert into
advances from the factor when the letter of credit is presented and therefore
are accounted for as due to factor.
F-10
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
NOTE D--FACTORING AGREEMENTS (Continued)
The Company incurred $388,000 and $415,000 of factoring commissions and
interest charges on receivables sold and on advances for the years ended
December 31, 1995 and 1996, respectively. In addition, the Company incurred
interest expense of approximately $30,000 and $25,000 for the years ended
December 31, 1995 and 1996, respectively, on the term note described in Note
B.
The amounts due to the factor as of December 31, 1996 consist of the
following:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable assigned ............. $ 3,732,000
Less allowance for credits and bad debts (256,000)
-------------
3,476,000
Accrued letters of credit ................ (574,000)
Advances from factor ..................... (3,025,000)
-------------
Due to factor ............................ $ (123,000)
=============
</TABLE>
In addition, the Company used a second factor for one customer during
1996. The net amount due from this factor amounted to approximately $176,000
as of December 31, 1996. Commissions associated with this agreement
approximated $26,000.
NOTE E--PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Office equipment ............................... $171,000
Leasehold improvements ......................... 29,000
----------
200,000
Less accumulated depreciation and amortization 111,000
----------
$ 89,000
==========
</TABLE>
F-11
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
NOTE F--DEFERRED COSTS AND OTHER ASSETS
As of December 31, 1996, deferred costs and other assets consist of the
following:
<TABLE>
<CAPTION>
<S> <C>
Organization costs ............................... $ 7,000
Deferred financing costs for bridge financing and
initial public offering ......................... 129,000
Trademarks ....................................... 170,000
Deposits ......................................... 17,000
----------
323,000
Less accumulated amortization .................... (31,000)
----------
$292,000
==========
</TABLE>
NOTE G--ACCOUNTS PAYABLE, ACCRUED EXPENSES AND
OTHER CURRENT LIABILITIES
As of December 31, 1996, accounts payable, accrued expenses and other
current liabilities consist of the following:
<TABLE>
<CAPTION>
<S> <C>
Accrued bonuses........... $144,000
Accrued professional
fees..................... 111,000
Accrued sample costs ..... 41,000
Other..................... 40,000
----------
$336,000
==========
</TABLE>
NOTE H--INCOME TAXES
As of December 31, 1995, the Company had available approximately $212,000
of net operating loss carryforwards for state and city income tax purposes.
During 1996, the Company utilized the entire carryforward, which resulted in
a tax benefit of approximately $10,000.
The components of deferred tax assets and liabilities as of December 31,
1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets
Accounts receivable
reserves.................... $ 97,000
Deferred tax liabilities
Tax over book depreciation . (12,000)
----------
Net deferred tax asset....... $ 85,000
==========
</TABLE>
F-12
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
NOTE H--INCOME TAXES (Continued)
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Current
Federal .. $(82,000) $ 92,000
State..... l,000 5,000
Foreign .. 13,000
----------- ----------
(81,000) 110,000
----------- ----------
Deferred
Federal .. (8,000) (45,000)
State..... 5,000
----------- ----------
(8,000) (40,000)
----------- ----------
$(89,000) $ 70,000
=========== ==========
</TABLE>
Differences between book and tax are primarily due to temporary
differences resulting from use of accelerated depreciation for income tax
purposes and using the direct write-off method for receivables for tax
purposes.
The statutory Federal income tax rate and the effective rate of the
provision for income taxes for the years ended December 31, 1995 and December
31, 1996 is reconciled as follows:
<TABLE>
<CAPTION>
1995 1996
--------- -------
<S> <C> <C>
Statutory Federal income tax rate............... (34.0)% 34.0%
State taxes, net of Federal income tax
benefits....................................... 0.0 3.2
Other........................................... 4.0 (3.1)
--------- -------
Effective tax rate.............................. (30.0)% 34.1%
========= =======
</TABLE>
NOTE I--COMMITMENTS AND CONTINGENCIES
1. LETTERS OF CREDIT
The Company had outstanding letters of credit in the aggregate amount of
$952,000 as of December 31, 1996, of which $574,000 was reflected in the
year-end balance sheet as due to factor. The Company's letter of credit
facility with its factor provides that the factor has sole and complete
discretion as to the extent to which the factor is willing to extend such
credit.
2. EMPLOYMENT CONTRACTS
The Company has an employment contract, which was amended on December 30,
1996, with the Chief Executive Officer and shareholder ("CEO"). The amended
employment agreement, which expires on January 1, 2000, provides for a base
salary plus annual bonuses at the discretion of the Board of Directors based
upon operating profits before taxes and financing costs. In addition, the
Company maintains a $1.2 million key person life insurance policy on the life
of the CEO.
3. OPERATING LEASE
The Company leases office, showroom and warehouse space under operating
leases which expire through August 1999. Rent expense aggregated
approximately $125,000 and $126,000 for the years ended December 31, 1995 and
1996.
F-13
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
NOTE I--COMMITMENTS AND CONTINGENCIES (Continued)
Future minimum annual rentals are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997.... $123,000
1998.... 112,000
1999 ... 43,000
----------
$278,000
==========
</TABLE>
4. CONSULTING AGREEMENT
The Company entered into agreements with two former shareholders which
originally provided that the Company will pay each former shareholder $37,500
on December 31, 2000 for consulting services. In September 1996, the
agreements were amended so that if the Company is in compliance with the
modified stock purchase agreement, the Company will only be obligated to pay
$30,000 to each former shareholder in December 1998 for their future
services.
5. PURCHASE MANAGEMENT AGREEMENTS
In May 1996, the Company entered into a purchase management agreement with
IDL International, LLC ("IDL"). Under the agreement, as amended in July 1996,
the Company pays IDL a commission of 5% on the first $1 million of goods
shipped to the Company in a given year and 2.5% thereafter. In addition, IDL
is entitled to a bonus based on the Company's gross margins. This agreement
expires December 31, 1998, unless cancelled by either party as per the terms
of the agreement. Total fees incurred to IDL for the year ended December 31,
1996 amounted to approximately $112,000. The Company is in the process of
negotiating an employment agreement with the president and principal owner of
IDL. In the event the employment agreement is executed, the purchase
management agreement between IDL and the Company will be terminated.
The Company sources substantially all of its products through Textiles
Network, Ltd. ("Textiles Network"), a Hong Kong agency that oversees
production and quality control. Textiles Network negotiates prices,
identifies factories to manufacture the products and conducts quality control
on the Company's behalf. The Company works closely with Textiles Network to
monitor each of these phases of the production process. The Company makes
substantially all final decisions with regard to pricing and the selection of
factories. Additionally, the Company approves samples of each garment prior
to the commencement of production. The Company pays Textiles Network an 8%
commission on the first $1 million of goods shipped to the Company and 7%
thereafter. Total fees incurred to Textiles Network amounted to approximately
$168,000 and $268,000 for the years ended December 31, 1995 and 1996,
respectively.
6. LICENSING
The Company has licensing agreements with licensees in a number of
countries for its sportswear products, including Japan, Thailand, Singapore,
Malaysia, Indonesia and Brunei. Under these licensing agreements, the Company
designs the "Pivot Rules" product and the licensee either produces the
product in accordance with the Company's quality standards or arranges for
the manufacture of the product through the Company's sourcing arrangements.
Licensing arrangements provided for minimum revenues of $58,000 in 1995 and
$90,000 in 1996. These minimum licensing fees are recorded pro rata in the
periods for which the minimums apply. Any amounts received in excess of
minimums are recorded as revenues at the time they are received.
F-14
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
NOTE I--COMMITMENTS AND CONTINGENCIES (Continued)
The Company has entered into a worldwide representation agreement
("Representation Agreement") with International Management Corporation
("IMC") (a member company of International Management Group ("IMG")) under
which IMC has been retained as the Company's sole and exclusive agent to
identify, qualify and negotiate with prospective international licensing
partners. IMG is a worldwide sports representation and marketing organization
with offices in 74 countries worldwide. Under the terms of the Representation
Agreement, IMC receives commissions equal to 30% of gross income for the
first $1 million of gross income covered by the agreement and 35% thereafter
from the Company on all international licensing revenues generated by the
Company through licensing agreements negotiated or entered into while the
Representation Agreement remains in effect. The Representation Agreement
provides for an original term expiring on June 30, 1997, with automatic
one-year renewal periods.
NOTE J--SHAREHOLDERS' EQUITY
1. SHAREHOLDERS' AGREEMENT
The shareholders of the Company entered into an agreement which includes
provisions, among others, related to the purchase and sale of stock by
shareholders of the Company, granting of options, voting requirements, and
with respect to the CEO of the Company, the repurchase of his shares by the
Company upon termination, without cause, of his employment agreement. The
shareholders' agreement was amended as of December 18, 1996 to provide that
it will terminate automatically immediately before the registration statement
filed in connection with the proposed initial public offering is declared
effective by the Securities and Exchange Commission.
The Company maintains a life insurance policy on the CEO's life. The
amount of coverage provided by the policy is required to be the greater of
$1,000,000 or the fair value of the common shares owned by the CEO. The
proceeds of the policy are required to be used to purchase the shares of the
Company's common stock held by the CEO's estate.
On December 30, 1996, the CEO's employment agreement was amended such
that, in the event of constructive termination as defined in the employment
agreement, the CEO shall have the right to: (a) keep his stock; (b) require
the Company to purchase all his stock at fair market value as defined in the
agreement; or (c) sell his stock to a third party after giving the Company
the right of first refusal. In addition, the Company's obligation to purchase
shares of the Company's stock held by the CEO upon termination of CEO's
employment will terminate automatically upon consummation of the proposed
initial public offering.
2. TREASURY STOCK
During 1994, the Company entered into a stock purchase agreement to
purchase 64.6 shares of common stock (572,526 after giving effect to the
stock split) from four shareholders for a purchase price of approximately
$872,000, of which $50,000 was paid in cash and the balance was financed by
the former shareholders (Note B). During December 1994, the Company borrowed
approximately $325,000 under a term loan from its factor (Note B) to make the
first debt service payment on the note due to the shareholders. As is more
fully described in Note C, during 1996, the terms of the stock purchase
agreement were amended.
3. RECAPITALIZATION
In December 1996, the Board of Directors approved a plan of
recapitalization through the use of a stock split. The recapitalization,
which was effected on January 2, 1997, resulted in the authorization of
F-15
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
NOTE J--SHAREHOLDERS' EQUITY (Continued)
10,000,000 shares of $.01 par value common stock. Shareholders received
8,862.6292 shares for each share of the previous no par value common stock.
In connection with the recapitalization, the Company's Board of Directors
approved the retirement of the 64.6 shares of treasury stock (572,526 after
giving effect to the stock split). Of the $872,000 in treasury stock,
$546,000 was first offset against the common stock account with the
remainder, totalling $326,000, reducing retained earnings.
NOTE K--OTHER INCOME
Included in other income are non-recurring items which do not relate
directly to ongoing business activity. Primarily included in this
classification are net proceeds from settlements regarding trademark
infringements settled in the favor of the Company. The settlements,
individually and in the aggregate, are not considered material to the
financial statements.
NOTE L--CONCENTRATIONS
The Company sells its products to department stores, sporting goods
stores, catalogs, corporations and discounters, including warehouse clubs.
The Company utilizes a factor to evaluate the creditworthiness of most of its
customers. The Company sells substantially all of its receivables to the
factor. For approved accounts, the factor assumes all credit risk. For
approved accounts, the factor has recourse in cases of disputes, chargebacks
and reserves. For nonapproved accounts, the factor has full recourse. For
nonfactored sales, credit losses have been within management's expectations.
As of December 31, 1996, all accounts were approved by the factor. For the
year ended December 31, 1996, four customers accounted for 45% of the
Company's sales, including one customer accounting for approximately 24.7% of
the Company's sales.
Substantially all of the Company's products are manufactured by third
parties in the Far East and India. The use of contractors and the resulting
lack of direct control could make it difficult for the Company to obtain
timely delivery of products of acceptable quality. Delays in shipments to the
Company, inconsistent or inferior garment quality and other factors beyond
the Company's control could adversely affect the Company's relationships with
its customers, its reputation in the industry and its sales and operating
results. Moreover, foreign manufacturing is subject to numerous risks,
including work stoppages, transportation delays, political instability,
foreign currency fluctuations, the imposition of tariffs and import and
export controls, customs laws, changes in governmental policies and other
factors that could have a material adverse effect on the Company's business,
financial condition and operating results. In particular, there have been a
number of recent trade disputes between China and the United States during
which the United States threatened to impose tariffs and duties on some
products imported from China and to withdraw China's "most favored nation"
trade status. In addition, since the Company's sourcing activities are based
in Hong Kong, such activities may be affected by the return of Hong Kong to
Chinese control in July 1997. Furthermore, because the Company's foreign
manufacturers are located at great distances from the Company, the Company
must generally allow for a significant amount of lead time for the delivery
of products. This reduces the Company's manufacturing flexibility, which
increases the risks associated with changes in fashion trends and consumer
preferences. These risks will increase as the Company seeks to source some of
its products through manufacturers in areas where labor and fabric costs are
lower than those in areas where the Company's products are currently
produced.
F-16
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
NOTE M--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash, Short-term loan payable--the carrying amount approximates fair
value due to the short-term maturities of these instruments.
Letters of Credit--letters of credit collateralize the Company's
obligations to the factor and have terms ranging from 30 days to 120 days;
the face amount of the letters of credit approximate fair value since the
value for each is fixed over a relatively short period of time.
Long-term Debt--fair value is estimated based on current rates offered to
the Company for debt of the same remaining maturities.
The carrying amount and fair value of the Company's financial instruments
as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
---------- ------------
<S> <C> <C>
Cash.................... $ 33,000 $ 33,000
Long-term debt.......... 365,000 365,000
Short-term loan
payable................ 279,000 279,000
Letters of credit....... 574,000 574,000
</TABLE>
NOTE N--NONCASH ACTIVITY
During 1996, the Company amended its agreement with a former shareholder
which resulted in a reclassification of approximately $279,000 from notes
payable to short-term loan payable. This transaction has been excluded on the
statement of cash flows.
NOTE O--LEGAL PROCEEDINGS
The Company is, from time to time, a party to routine litigation arising
in the normal course of its business. The Company believes that none of these
actions will have a material adverse effect on the business, financial
condition or operating results of the Company.
NOTE P--SUBSEQUENT EVENTS
BRIDGE FINANCING
On January 2, 1997, the Company issued 15 units, each consisting of one
convertible subordinated secured promissory note in the principal amount of
$100,000 per unit, ("Note") and warrants to purchase 40,000 shares of common
stock of the Company, no par value, at an exercise price of $2.50
("Warrants"). The issuance resulted in $1,500,000 of gross proceeds. Net
proceeds amounted to $1,290,000 after underwriter expenses and brokerage
fees, but before additional debt issuance costs. A portion of the gross
proceeds has been allocated to the warrants based on their estimate of fair
market value, resulting in an estimate of $138,000 of original issue discount
and a $138,000 increase in paid-in capital.
Interest on the Notes will accrue at a rate of 10% per annum from January
2, 1997 through April 30, 1997, and at the rate of 12% per annum thereafter
until maturity. Principal and interest on the Note are payable upon the
earliest of: (i) the closing of the Company's initial public offering of
securities, as
F-17
<PAGE>
PIVOT RULES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
DECEMBER 31, 1995 AND 1996
NOTE P--SUBSEQUENT EVENTS (Continued)
described below, (ii) twenty-four months from the date of closing of the
issuance of these securities, (iii) the sale of all or substantially all of
the Company's assets, (iv) the sale or exchange (including by way of merger)
of all or substantially all of the outstanding shares of the Company's common
stock, or (v) Offering Termination, as defined in the Notes.
The Warrants are exercisable at a price of $2.50 per share, commencing on
January 1, 1998 and expiring at the close of business on December 31, 2002.
The Warrants have been valued at $.23 each. The Warrants will be registered
for public resale by the holders thereof in the registration statement to be
filed for the initial public offering. If the initial public offering is
declared effective by the Securities and Exchange Commission, the Warrants
will be converted (on a one-for-one basis) into warrants with the same terms
sold in the initial public offering ("IPO Warrants"). The IPO Warrants will
be exercisable at an anticipated price per share equal to the initial public
offering of the common stock, commencing one year after the effective date
and expiring at the closing of business on the fifth anniversary of the
effective date.
PROPOSED INITIAL PUBLIC OFFERING
On October 3, 1996, the Company entered into an agreement with an
underwriter pursuant to which the Company intends to prepare and file with
the Securities and Exchange Commission a registration statement on Form SB-2
or other appropriate form in order to permit the initial public offering of
1,500,000 shares of the Company's common stock and 1,500,000 IPO Warrants,
each warrant to purchase one share of the Company's common stock. The Company
anticipates that the registration statement will be declared effective during
the second quarter of 1997; however, there can be no assurance that a
registration statement will be declared effective.
COMMITMENTS
In February 1997, the Company committed to purchase approximately $75,000
of fixed assets.
F-18
<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 OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR BY THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A 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 ............................... 7
Dilution ................................... 13
Use of Proceeds ............................ 14
Capitalization ............................. 16
Dividend Policy ............................ 16
Selected Financial Data .................... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................... 18
Business ................................... 21
Management ................................. 26
Principal Shareholders ..................... 30
Certain Transactions ....................... 30
Description of Securities .................. 31
Shares Eligible for Future Sale ............ 34
Underwriting ............................... 36
Change in Accountants ...................... 37
Legal Matters .............................. 38
Experts .................................... 38
Available Information ...................... 38
Index to Financial Statements .............. F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OR 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.
#############################################################################
GRAPHIC OMITTED
IGT: "67977LOGO"
#############################################################################
1,500,000 SHARES OF COMMON STOCK
AND
1,500,000 REDEEMABLE COMMON
STOCK PURCHASE WARRANTS
PROSPECTUS
#############################################################################
GRAPHIC OMITTED
PICKUP: "p1"
=============================================================================
IMAGE: "gkn8"
=============================================================================
#############################################################################
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Certificate of Incorporation and By-Laws provide that the
Registrant shall indemnify its directors, officers, employees and agents to
the fullest extent permitted by New York law.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions and the 3% nonaccountable expense
allowance payable to the Underwriter, payable by the Registrant in connection
with the sale of the Common Stock being registered. Expenses relating to the
offer and sale of the Selling Securityholders' Bridge Warrants (except
commissions or discounts and fees of the Selling Securityholders' own
professionals, if any) will be borne by the Company. All amounts are
estimates except the Commission registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
<S> <C>
Commission registration fee.................... $ 8,006.81
NASD filing fee................................ 3,143.91
Nasdaq and Boston Stock Exchange listing fees 25,000.00
Blue sky fees and expenses .................... 50,000.00
Legal fees and expenses........................ 135,000.00
Accounting fees and expenses................... 60,000.00
Printing and engraving ........................ 75,000.00
Transfer agent fees............................ 2,000.00
Miscellaneous expenses......................... 91,849.28
------------
Total........................................ $450,000.00
============
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Since January 1, 1994, the Registrant has issued and sold the following
securities (as adjusted to reflect an 8,862.6292-for-1 stock split effected
in January 1997):
On January 2, 1997, the Registrant sold to 45 purchasers an aggregate of
$1,500,000 principal amount of the Registrant's secured subordinated
convertible promissory notes ("Bridge Notes") due upon the earliest of (a)
the closing of the Company's initial public offering, (b) January 2, 1999,
(c) the sale of all or substantially all of the Registrant's assets, (d) the
sale or exchange (including by way of merger) of all or substantially all of
the outstanding shares of the Registrant's Common Stock, (e) the merger or
consolidation of the Registrant, or (f) an "Offering Termination" as defined
in the Bridge Notes ("Maturity Date"). Upon an Offering Termination, all
outstanding principal and interest due under the Bridge Notes is convertible
into Common Stock of the Registrant at the rate of $2.50 per share. The
Bridge Notes bear interest at 10% per annum until April 30, 1997 and 12% per
annum thereafter, payable on the Maturity Date. The Bridge Notes were sold as
Units consisting of (a) a promissory note in the principal amount of $100,000
and (b) warrants to purchase 40,000 shares of the Registrant's Common Stock
at an exercise price of $2.50 per share, exercisable during the time period
commencing on January 1, 1998 and ending on December 31, 2002 ("Bridge
Warrants"). Upon consummation of the Registrant's initial public offering,
the Bridge Warrants will automatically convert into Warrants identical to
those sold in the offering covered by this Registration Statement. The price
per Unit was $100,000 and all fifteen Units that were offered were sold. GKN
Securities Corp. acted as the Registrant's placement agent for purposes of
the offering of the Units and received a commission of $150,000 and a
non-accountable expense allowance of $45,000.
II-1
<PAGE>
The transactions described above were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of such Act
as transactions by an issuer not involving any public offering. In addition,
the recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view
to or for sale in connection with any distribution thereof and appropriate
legends were affixed to the share certificates issued in such transactions.
All recipients had adequate access, through their relationships with the
Registrant, to information about the Registrant.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- --------------- ------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated By-Laws of the Company.
* 4.1 Specimen Common Stock certificate.
4.2 Form of Underwriter's Purchase Option.
+ 4.3 Form of Subscription Agreement, dated as of January 2, 1997, by and between the
Company and certain purchasers.
+ 4.4 Form of Bridge Warrant.
* 4.5 Specimen Redeemable Common Stock Purchase Warrant.
4.6 Form of Warrant Agreement.
* 5.1 Opinion of Shereff, Friedman, Hoffman & Goodman, LLP.
+10.1 Loan Agreement by and between the Company and Joseph J. Boughton, Jr., dated
February 6, 1992.
+10.2 Letter Agreement by and between the Company and Joseph J. Boughton, Jr., dated
November 7, 1996.
+10.3 Stock Purchase Agreement, dated as of September 30, 1994, by and between the
Company, Leisure Wear Inc., David M. Goldblatt Inc. Profit Sharing Plan, David
Goldblatt, Anita Goldblatt and Jeffrey Goldstein.
+10.4 Agreement, dated as of September 24, 1996, by and between the Company, Leisure Wear
Inc., David M. Goldblatt Inc. Profit Sharing Plan, David Goldblatt, Anita Goldblatt
and Jeffrey Goldstein.
+10.5 Factoring Agreement by and between the Company and Heller Financial, Inc.
("Heller"), dated April 1992.
+10.6 Letter of Credit Financing Agreement by and between the Company and Heller, dated as
of April 28, 1992.
+10.7 Collateral Installment Note by the Company on behalf of Heller, dated December 8,
1994.
+10.8 Letter Agreement by and between the Company and Heller, dated December 18, 1996.
+10.9 Promissory Note dated September 30, 1996, executed by the Company in favor of Edward
H. Mank ("Mank").
+10.10 Letter Agreement by and between the Company and Mank, dated December 23, 1996.
II-2
<PAGE>
EXHIBIT NO. DESCRIPTION
- --------------- ------------------------------------------------------------------------------------
+10.11 Amended and Restated Employment Agreement by and between the Company and E. Kenneth
Seiff, to be in effect as of the consummation of the Offering.
+10.12 Representation Agreement by and between the Company and International Merchandising
Corporation, dated May 10, 1994.
+10.13 Lease Agreement by and between the Company and 80 West 40th Street Associates, dated
October 1992.
+10.14 Lease Agreement by and between the Company and Sound Floor Coverings, Inc., dated
November 18, 1994.
+10.15 Agreement by and between the Company and Textiles Network, Ltd., dated
August 1996.
10.16 1997 Stock Option Plan.
+10.17 Agreement by and between the Company and IDL International, LLC, dated May 1996.
+10.18 Addendum to Agreement by and between the Company and IDL International, LLC, dated
July 1996.
10.19 Employment Agreement by and between the Company and David Lewis, dated as of March
1, 1997.
10.20 Employment Agreement by and between the Company and William McLoone, dated as of
March 17, 1997.
16 Letter of Richard A. Eisner & Company, LLP, Independent Auditors.
23.1 Consent of Grant Thornton LLP, Independent Auditors.
23.2 Consent of Richard A. Eisner & Company, LLP, Independent Auditors.
*23.3 Consent of Shereff, Friedman, Hoffman & Goodman, LLP (included in Exhibit 5.1).
+24 Power of Attorney (included on the signature page to initial filing).
+27 Financial Data Schedule.
</TABLE>
- ------------
* To be filed by amendment.
+ Previously filed.
ITEM 28. UNDERTAKINGS
The Registrant hereby undertakes that it will file, during any period in
which it offers or sells securities, a post-effective amendment to this
registration statement to:
(1) Include any prospectus required by Section 10(a)(3) of the Securities
Act;
(2) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and
(3) Include any additional or changed material information on the plan of
distribution.
The Registrant hereby undertakes that, in the event the Company is
notified subsequent to the time this registration statement is declared
effective that the Underwriter or any dealer intends to acquire Securities
from the selling securityholders, it will file a post-effective amendment to
this registration statement to reflect an arrangement involving 10% or more
of the Securities registered for resale and will file a supplement to the
prospectus contained in this registration statement to reflect an arrangement
involving between 5% and 9% of the Securities registered for resale.
II-3
<PAGE>
The Registrant hereby undertakes to provide to the Underwriter, at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, 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 hereunder, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes:
(1) that, for the 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) that, 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
that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, 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 the Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York, on this 17th day of April, 1997.
PIVOT RULES, INC.
By: /s/ E. Kenneth Seiff
---------------------------
E. Kenneth Seiff
Chief Executive Officer,
President and
Treasurer (Principal
Executive Officer)
In accordance with the requirements of the Securities Act of 1933, as
amended, this Amendment to the Registration Statement has been signed by the
following persons in the capacities and on this 17th day of April, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------ ---------------------------------------------------- ----
<S> <C> <C>
/s/ E. Kenneth Seiff
- ------------------------- Director, Chief Executive Officer, President and
E. Kenneth Seiff Treasurer (Principal Executive Officer)
*
- ------------------------- Director
Martin Miller
*
- ------------------------- Director
Alan Millstein
*
- ------------------------- Director
Fred Rosenfeld
*
- ------------------------- Director
Robert Stevens
/s/ Meena N. Bhatia
- ------------------------- Chief Financial Officer (Principal Financial and
Meena N. Bhatia Accounting Officer)
- -------------------------
*By: /s/ E. Kenneth Seiff, as Attorney-in-Fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- --------------- ----------------------------------------------------------------------------------- ------------
<S> <C> <C>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated By-Laws of the Company.
*4.1 Specimen Common Stock certificate.
4.2 Form of Underwriter's Purchase Option.
+4.3 Form of Subscription Agreement, dated as of January 2, 1997, by and between the
Company and certain purchasers.
+4.4 Form of Bridge Warrant.
*4.5 Specimen Redeemable Common Stock Purchase Warrant.
4.6 Form of Warrant Agreement.
*5.1 Opinion of Shereff, Friedman, Hoffman & Goodman, LLP.
+10.1 Loan Agreement by and between the Company and Joseph J. Boughton, Jr., dated
February 6, 1992.
+10.2 Letter Agreement by and between the Company and Joseph J. Boughton, Jr., dated
November 7, 1996.
+10.3 Stock Purchase Agreement, dated as of September 30, 1994, by and between the
Company, Leisure Wear Inc., David M. Goldblatt Inc. Profit Sharing Plan, David
Goldblatt, Anita Goldblatt and Jeffrey Goldstein.
+10.4 Agreement, dated as of September 24, 1996, by and between the Company, Leisure Wear
Inc., David M. Goldblatt Inc. Profit Sharing Plan, David Goldblatt, Anita Goldblatt
and Jeffrey Goldstein.
+10.5 Factoring Agreement by and between the Company and Heller Financial, Inc.
("Heller"), dated April 1992.
+10.6 Letter of Credit Financing Agreement by and between the Company and Heller, dated
as of April 28, 1992.
+10.7 Collateral Installment Note by the Company on behalf of Heller, dated December 8,
1994.
+10.8 Letter Agreement by and between the Company and Heller, dated December 18, 1996.
+10.9 Promissory Note dated September 30, 1996, executed by the Company in favor of
Edward H. Mank ("Mank").
+10.10 Letter Agreement by and between the Company and Mank, dated December 23, 1996.
+10.11 Amended and Restated Employment Agreement by and between the Company and E. Kenneth
Seiff, to be in effect as of the consummation of the Offering.
+10.12 Representation Agreement by and between the Company and International Merchandising
Corporation, dated May 10, 1994.
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE NO.
- --------------- ----------------------------------------------------------------------------------- ------------
+10.13 Lease Agreement by and between the Company and 80 West 40th Street Associates,
dated October 1992.
+10.14 Lease Agreement by and between the Company and Sound Floor Coverings, Inc., dated
November 18, 1994.
+10.15 Agreement by and between the Company and Textiles Network, Ltd., dated August 1996.
10.16 1997 Stock Option Plan.
+10.17 Agreement by and between the Company and IDL International, LLC, dated May 1996.
+10.18 Addendum to Agreement by and between the Company and IDL International, LLC, dated
July 1996.
10.19 Employment Agreement by and between the Company and David Lewis, dated as of March
1, 1997.
10.20 Employment Agreement by and between the Company and William McLoone, dated as of
March 17, 1997.
16 Letter of Richard A. Eisner & Company, LLP, Independent Auditors.
23.1 Consent of Grant Thornton LLP, Independent Auditors.
23.2 Consent of Richard A. Eisner & Company, LLP, Independent Auditors.
*23.3 Consent of Shereff, Friedman, Hoffman & Goodman, LLP (included in Exhibit 5.1).
+24 Power of Attorney (included on the signature page to initial filing).
+27 Financial Data Schedule.
<FN>
- ------------
* To be filed by amendment.
+ Previously filed.
</TABLE>
<PAGE>
Exhibit 1.1
UNDERWRITING AGREEMENT
BETWEEN
PIVOT RULES, INC.
AND
GKN SECURITIES CORP.
DATED: APRIL__, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
----
<S> <C>
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
2.1.2 Pursuant to the Exchange 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.......................................................7
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.......................................................8
2.14 Title to Property; Insurance....................................................................8
i
<PAGE>
Page
----
2.15 Litigation; Governmental Proceedings............................................................8
2.16 Good Standing...................................................................................8
2.17 Taxes...........................................................................................8
2.18 Employees' Options..............................................................................9
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 and The Boston Stock Exchange 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
2.26.2 Insider Sales.........................................................................11
2.27 Subsidiaries...................................................................................11
2.28 Unaudited Financials...........................................................................11
2.29 Heller Financial, Inc. Credit Lines............................................................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....................................................13
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 and BSE Maintenance.....................................................................13
3.10 Warrant Solicitation and Registration of Common Stock Underlying the
Warrants.......................................................................................14
3.10.1 Warrant Solicitation and Warrant Solicitation Fees....................................14
3.10.2 Registration of Common Stock..........................................................14
3.11 Reserved.......................................................................................14
3.12 Reports to the Underwriter.....................................................................14
ii
<PAGE>
Page
----
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
3.13 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....................................................................16
3.17 Delivery of Earnings Statements to Security Holders............................................16
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.................................................................................17
3.23 Sale of Securities.............................................................................17
3.24 Exercise Price of Options......................................................................17
4. Conditions of the Underwriter's Obligations.............................................................17
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 Opinion of Intellectual Property Counsel..............................................22
4.2.3 Closing Date and Option Closing Date Opinions of Counsel..............................23
4.2.4 Reliance..............................................................................23
4.2.5 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 Underwriter's Purchase Option......................................................25
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.............................................................................26
5.2 Indemnification of the Company.................................................................27
5.3 Contribution...................................................................................27
iii
<PAGE>
Page
----
5.3.1 Contribution Rights...................................................................27
5.3.2 Contribution Procedure................................................................28
6. Intentionally Omitted...................................................................................28
7. Additional Covenants....................................................................................28
7.1 Board Designee.................................................................................28
7.2 Insider Sales..................................................................................28
7.3 Press Releases.................................................................................29
7.4 Form S-8 or any Similar Form...................................................................29
7.5 Compensation and Other Arrangements............................................................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
</TABLE>
<PAGE>
INDEX OF DEFINITIONS
Term Section
1% or Greater Holders.................................................2.26.1
Act................................................................... 2.1.1
BSE.....................................................................2.21
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.................................................................2.23.2
ERISA Plans...........................................................2.23.2
Exchange Act...........................................................2.1.2
Filing Date...........................................................2.19.2
Firm Securities........................................................1.1.1
Heller..................................................................2.29
Insiders..............................................................2.26.1
Intangibles.............................................................2.22
NASD..................................................................2.19.1
Nasdaq..................................................................2.21
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
SAS......................................................................4.3
Secondary Market Trading Memorandum...................................3.12.3
Securities.............................................................1.3.1
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(s).............................................................1.1.1
Warrant Agreement.......................................................2.25
v
<PAGE>
PIVOT RULES, INC.
1,500,000 Shares of Common Stock
and
1,500,000 Redeemable Common Stock Purchase Warrants
UNDERWRITING AGREEMENT
New York, New York
________ __, 1997
GKN Securities Corp.
61 Broadway
12th Floor
New York, New York 10006
Ladies and Gentlemen:
The undersigned, Pivot Rules, Inc., a New York corporation
("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 1,500,000
shares of the Company's Common Stock ("Common Stock") at a purchase price (net
of commissions) of $_____ per share and 1,500,000 Redeemable Common Stock
Purchase Warrants ("Warrant(s)") at a purchase price (net of commissions) of
$_____ per Warrant, each Warrant to purchase one share of Common Stock at an
initial purchase price of $____ per share commencing one year after 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
wire transfer or by certified or bank cashier's check(s) in New York Clearing
House funds, payable to the
1
<PAGE>
order of the Company upon delivery to you of certificates (in form and
substance 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 225,000 shares of Common Stock and/or 225,000 Warrants from the
Company ("Over-allotment Option"). Such additional 225,000 shares of Common
Stock and 225,000 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 Overallotment 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 "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 wire transfer or 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
2
<PAGE>
Underwriter requests not less than two full business days prior to the Closing
Date or the Option 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 150,000 shares of Common Stock
("Underwriter's Shares") at an initial exercise price of 110% of the initial
offering price of a share of Common Stock (i.e., $ per share of Common Stock)
and/or 150,000 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. 333-22895), including
any related preliminary prospectus ("Preliminary Prospectus"), for the
registration of the 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.
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2.1.2 Pursuant to the Exchange Act. The Company has filed
with the Commission a registration statement on Form 8-A (No. 0-________)
providing for the registration under the Securities Exchange Act of 1934, as
amended ("Exchange Act"), of the Common Stock and Warrants. Such registration
of the Common Stock and Warrants has been declared effective by the Commission
on the date thereof.
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 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 nor 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 complied or will comply in all material respects with the
applicable provisions of the Act and the Regulations and did not contain an
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. 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
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all material respects and is enforceable against the parties thereto in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally, as enforceability of any indemnification provision may be
limited under the federal and state securities laws, and 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. None of such contracts or instru
ments 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 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, 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. Grant Thornton LLP, 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
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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. The pro forma
financial information set forth in the Registration Statement reflects all
significant assumptions and adjustments relating to the business and
operations of the Company.
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 and adjustments 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 obligations to issue any shares 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.
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, 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. 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
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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, the
Underwriter's Purchase Option, and the Warrant Agreement (as hereinafter
defined) 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 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 Underwriter's Purchase Option, and the
Warrant Agreement, the consummation by the Company of the transactions herein
and therein contemplated and the compliance by the Company with the terms
hereof and thereof 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
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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 authorizations,
approvals, orders, licenses, certificates and permits and all federal, state
and local 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 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
defensible 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 or arising by
law. 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, to the best
of the Company's knowledge, 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 questions 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, domestic or foreign, 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.
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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 its properties or business.
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 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. Except as set forth on Schedule
2.19.1, there are no claims, payments, issuances, arrangements or
understandings for services in the nature of a finder's, consulting or
origination fee with respect to the introduction of the Company to the
Underwriter or 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. Except as set forth on
Schedule 2.19.2, and other than payments to the Underwriter, 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.
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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 becomes, directly or indirectly, 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 or 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 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 internal accounting controls and procedures of the Company
are sufficient to cause the Company to comply with the Foreign Corrupt
Practices Act of 1977, as amended.
2.21 Nasdaq and The Boston Stock Exchange Eligibility. As of the
Effective Date, the Public Securities have been approved for designation upon
notice of issuance on the Nasdaq SmallCap Market ("Nasdaq") and for listing on
the Boston Stock Exchange ("BSE").
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, to the best of the
Company's knowledge, 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. Except for alleged violations and
pending claims set forth on Schedule 2.22, to the best of the Company's
knowledge, no others have infringed upon the Intangibles of the Company.
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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. To the best of the Company's knowledge, there are no pending
investigations involving the Company by the U.S. Department of Labor, or any
other governmental agency responsible for the enforcement of such federal,
state and 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 maintain or contribute to, 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, 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 American 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) the payment of a warrant solicitation fee as contemplated
by Section 3.10 hereof.
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2.26 Agreements With Insiders.
2.26.1 Lock-Up Agreements. The Company has caused to be duly
executed legally binding and enforceable agreements pursuant to which all of
the officers and directors of the Company and all holders ("1% or Greater
Holders") of at least one percent (1%) of the outstanding Common Stock of the
Company or warrants or options to purchase, or other securities convertible
into, one percent (1%) or more of the outstanding Common Stock (including
family members who reside in the same household as such persons and affiliates
of such persons) or any option holder who would have the ability to sell the
shares underlying his options under Rule 701 under the Act ("Insiders") agree
not to sell any shares of Common Stock or warrants or options to purchase, or
other securities convertible into 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
(and, if required by applicable state blue sky laws, the securities
commissions in any such states); provided, however, that, with respect to any
person who is a 1% or Greater Holder (who holds no other position with the
Company and who does not reside in the same household as any other Insider),
such agreement shall continue for only 18 months following the Effective Date.
2.26.2 Insider Sales. The company has caused to be executed
legally binding and enforceable agreements pursuant to which each of its
Insiders has granted to the Underwriter the rights described in Section 7.2 of
this Agreement.
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 Heller Financial, Inc. Credit Lines. There exists no default
under the Company's existing credit facilities with Heller Financial, Inc.
("Heller") or a legally effective waiver from any such default has been
obtained from Heller.
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.
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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 Securities in accordance with the
provisions hereof and the Prospectus. If at any time when a Prospectus
relating to the Securities is required to be delivered under the Act any event
shall have occurred as a result of which, in the opinion of counsel for the
Company or counsel for the Underwriter, the Prospectus, as then amended or
supplemented, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein, in 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 Section
12 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 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.
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
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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 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 reports 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
thirty (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 or as soon
thereafter as is permissible.
3.9 Nasdaq and BSE Maintenance. For a period of five years from the
date hereof, the Company will use its best efforts to maintain the quotation
on Nasdaq and the listing on the BSE of the Common Stock and Warrants and, if
the Company satisfies the inclusion standards of the Nasdaq National Market
System, apply for and maintain quotations on the Nasdaq National Market System
of such securities during such period.
3.10 Warrant Solicitation and Registration of Common Stock Underlying
the Warrants.
3.10.1 Warrant Solicitation and 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 to the Underwriter, and
direct the Company's transfer and warrant agent to provide to the Underwriter,
lists of the record and, to the
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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 services to the Company in connection
with the exercise of Warrants and has received written confirmation from the
holder that the Underwriter has solicited such exercise. 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 Warrantholders about the Company or the market for the Company's
securities, and the assisting in the processing of the exercise of Warrants.
The Underwriter may engage sub-agents who are members of the NASD in its
solicitation efforts, provided, however, nothing herein shall obligate the
Company to make any payment to any such sub-agent. 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. The Company shall not be
obligated to reimburse the Underwriter for any of its expenses incurred in
connection with such solicitation.
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 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 Reserved.
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 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,
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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 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
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 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 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 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 Securities by qualified
rating agencies, (v) filing fees, costs and expenses (including fees up to an
aggregate of $5,000 and disbursements for the Underwriter's counsel) incurred
in registering the offering with the NASD, (vi) costs up to an aggregate of
$30,000 of placing "tombstone" advertisements in The Wall Street Journal, The
New York Times and a third publication to be mutually 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;
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(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 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 describe
appropriately and accurately 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 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-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, except as so described, the Company will not
apply any net proceeds from the offering to pay (i) any debt for borrowed
funds, or (ii) any debt or obligation owed to any Insider.
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.
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3.18 Key Person Life Insurance. The Company will maintain key person
life insurance in an amount not less than $1,200,000 on the life of E. Kenneth
Seiff 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 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 $7,500,000 of malpractice insurance covering
offerings of the type contemplated herein, and acceptable to the Underwriter.
Accountants Grant Thornton LLP and lawyers Shereff, Friedman, Hoffman &
Goodman, LLP, are acceptable to the Underwriter.
3.22 Transfer Agent. For a period of five years from the Effective
Date, the Company shall retain a transfer agent for the Common Stock and
Warrants acceptable to the Underwriter. American Stock Transfer & Trust
Company ("Transfer Agent") is acceptable to the Underwriter.
3.23 Sale of Securities. The Company agrees not to permit or cause a
private or public sale or private or public offering of any of its securities
(in any manner, including pursuant to Rule 144 under the Act) owned nominally
or beneficially by the Insiders for a period of 24 months following the
Effective Date without obtaining the prior written approval of the
Underwriter; provided, however, that with respect to any person who is a 1% or
Greater Holder (who holds no other position with the Company and who does not
reside in the same household as any other Insider), the Company shall refuse
to permit or cause any such sale or offering for only 18 months following the
Effective Date.
3.24 Exercise Price of Options. For a period of three years after the
Effective Date, the Company will not grant any option pursuant to the
Company's 1997 Stock Option Plan at an exercise price less than the greater of
[$____] per share or the fair market value of the Common Stock on the date of
the grant.
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
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representations and warranties of the Company 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 such 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 the Underwriter 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 Shereff,
Friedman, Hoffman & Goodman, LLP, 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 in good standing as a foreign
corporation in each jurisdiction in which it owns or leases any real property
or the character of its operations requires such qualification, except where
the failure to so qualify would not have a material adverse effect on the
business of the Company.
(ii) The Company has all requisite corporate power
and authority, and, to the best of such counsel's knowledge, 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, to
the best of such counsel's knowledge, the Company is and has been doing
business in compliance with all such authorizations, approvals, orders,
licenses, certificates and permits. The Company has all corporate power and
authority to enter into this Agreement, the Warrant Agreement and the
Underwriter's Purchase Option and to carry out the provisions and conditions
hereof, and all consents, authorizations, approvals and orders required in
connection therewith have been obtained, except
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where the failure to obtain such consents, authorizations, approvals and
orders would not have a material adverse effect on the Company. 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 offer, 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, to the
best of such counsel's knowledge after due inquiry, 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, 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 public policy, 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. 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 (except to the extent that
certain shareholders of the Company may be liable for employee wages or
salaries pursuant to Section 630 of the New York Business Corporation Law).
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 public policy, 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.
The certificates representing the Securities are in due and proper form.
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(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 the Nasdaq SmallCap Market and have been approved for quotation
on the BSE.
(vii) This Agreement, the Underwriter's Purchase
Option and the Warrant Agreement have each been duly and validly authorized
and, when executed and delivered by the Company, and, assuming the due and
valid authorization, execution and delivery of such agreements by all parties
thereto other than the Company, such agreements 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
public policy, 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 and the
Warrant 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, except for such breaches, defaults,
liens, security interests, charges or encumbrances as would not have a
material adverse effect on the Company, (b) result in any violation of the
provisions of the Certificate of Incorporation or the By-Laws of the Company,
(c) violate any judgment, order or decree of which such counsel has knowledge,
statute, 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 adverse 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 under
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"Risk Factors," "Business," "Management," "Certain Transactions," "Principal
Shareholders," "Description of Securities" and "Shares Eligible for Future
Sale" have been reviewed by such counsel, and insofar as they contain
descriptions of law, 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 which such
counsel has knowledge 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 counsel's opinion),
subject to the qualification that as to determination of materiality of any
factual matters, such counsel may rely, where such counsel concludes that such
reliance is justifiable, on the views of the Chief Executive Officer of the
Company, no facts have come to the attention of such counsel which lead them
to believe that either the Registration Statement or the Prospectus or any
amendment or supplement thereto contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, 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 other
financial and statistical data contained in or omitted from 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 defensible 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, to
the best of such counsel's knowledge, 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 judgment, order or decree of which such counsel has knowledge, franchise,
license, permit, law, rule or regulation applicable to
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the Company, 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.
(xiv) 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.
(xv) 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 or 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 which might materially and adversely
affect the properties or assets thereof.
(xvi) 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.
(xvii) 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,
agreements, under standings, payments or issuances that may affect the
Underwriter's compensation, as determined by the NASD.
(xviii) The Company is not, and upon consummation
of the transactions contemplated by this Agreement will not be, an "investment
company" within the meaning of Section 3 of the Investment Company Act of
1940, as amended.
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.
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4.2.2 Opinion of Intellectual Property Counsel. The opinion
of ____________, intellectual property counsel to the Company, to the effect
that 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 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.
4.2.3 Closing Date and Option Closing Date Opinions of
Counsel. On each of the Closing Date and the Option Closing Date, if any, the
Underwriter shall have received the favorable opinions of Shereff, Friedman,
Hoffman & Goodman, LLP, counsel to the Company, and _________, intellectual
property 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 Shereff, Friedman, Hoffman & Goodman, LLP
and ____________ in their respective opinions delivered on the Effective Date.
4.2.4 Reliance. In rendering such opinions, 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 opinions,
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 jurisdictions having
custody of documents respecting the corporate existence or good standing of
the Company, provided that copies of any such statements or certificates shall
be delivered to Underwriter's counsel if requested. Any opinion relied upon by
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.
4.2.5 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 Grant Thornton
LLP, dated, respectively, as of the date of this Agreement and as of the
Closing Date and the Option Closing Date, if any:
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(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;
(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 Statement on Auditing Standards ("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 shareholders'
equity of the Company as compared with amounts shown in the December 31, 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 December 31, 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;
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(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 SAS 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.
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 President and the Chief Financial
Officer 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 of the Securities on Nasdaq, (v) all correspondence
between the Company or its counsel and the BSE concerning listing on the BSE,
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
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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 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 Underwriter's Purchase Option. The Company has
delivered to the Underwriter an executed copy of the Underwriter's Purchase
Option.
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 to 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 are 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 collec-
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tively 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 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 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
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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 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 are 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 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 the party seeking contribution without the
written consent of the 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.
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6. Intentionally Omitted.
7. Additional Covenants.
7.1 Board Designee. For a period of four 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 person, whether a member of the Board
of Directors 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 directors.
7.2 Insider Sales. During the four year period following the
Effective Date, the Underwriter shall have the right to purchase for the
Underwriter's account or to sell for the account of the Insiders any
securities sold on any United States securities market or exchange, including,
but not limited to, open market sales or sales pursuant to Rule 144 under the
Act. Each of the Insiders will agree to consult with the Underwriter with
regard to any such sales and will offer the Underwriter the exclusive
opportunity to purchase or sell such securities on terms at least as favorable
to the Insiders as they can secure elsewhere. If the Underwriter fails to
accept in writing any such proposal for sale by the Insiders within one
business day after receipt of a notice containing such proposal, then the
Underwriter 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 Insiders shall adopt the same procedures as with respect
to the original proposal.
7.3 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.
7.4 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 prior written
consent.
7.5 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.
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,
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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 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 E.
Kenneth Seiff shall no longer serve the Company in his present capacity, 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.
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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
Copy to:
Graubard Mollen & Miller
600 Third Avenue
New York, New York 10016-2097
Attention: David Alan Miller, Esq.
If to the Company:
Pivot Rules, Inc.
80 West 40th Street
New York, New York 10018
Attention: E. Kenneth Seiff, Chief Executive Officer
Copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022-9928
Attention: Richard A. Goldberg, 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 be amended only by a written
instrument executed by each of the parties hereto.
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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 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.
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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,
PIVOT RULES, INC.
By:
--------------------------------
Name: E. Kenneth Seiff
Title: President and Chief
Executive Officer
Accepted as of the date first above written.
New York, New York
GKN SECURITIES CORP.
By:
--------------------------
Name:
Title:
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Exhibit 3.1
RESTATED
CERTIFICATE OF INCORPORATION
OF
PIVOT RULES, INC.
Under Section 807 of the Business Corporation Law
of the State of New York
The undersigned, being the President and Secretary of Pivot
Rules, Inc., a New York corporation, pursuant to Section 807 of the Business
Corporation Law of the State of New York, do hereby restate, certify and set
forth as follows:
FIRST: The name of the corporation is Pivot Rules, Inc. The
name under which the corporation was formed is PIVOT CORPORATION.
SECOND: The date of filing of the original certificate of
incorporation of the corporation is April 12, 1991.
THIRD: The Certificate of Incorporation, as amended
heretofore, is hereby further amended to effect the following amendments: (i)
to increase the total number of shares of capital stock that the corporation
shall have authority to issue from 10,000,000 shares to 17,000,000 shares, and
to increase the number of shares of Common Stock that the corporation shall
have authority to issue from 10,000,000 shares to 15,000,000 shares, (ii) to
authorize the issuance of 2,000,000 shares of Preferred Stock, par value $.01
per share, (iii) to provide for limitation of liability of directors of the
corporation, (iv) to provide for the election of a classified board of
directors of the corporation, (v) to delete the supermajority requirement for
shareholder
<PAGE>
approval contained in Article 6 of the certificate of incorporation, (vi) to
delete the three-fifths' majority requirement for director approval contained
in Article 7 of the certificate of incorporation and (vii) to delete the
restriction on transferability of shares of Common Stock contained in Article
9 of the certificate of incorporation.
FOURTH: The text of the Certificate of Incorporation is
hereby restated as amended to read as herein set forth in full:
"CERTIFICATE OF INCORPORATION
OF
PIVOT RULES, INC.
Under Section 402 of the Business Corporation Law
1. The name of the corporation is Pivot Rules, Inc.
2. The purpose of the corporation is to engage in any lawful
act or activity for which corporations may be organized under the Business
Corporation Law of the State of New York. The corporation is not formed to
engage in any act or activity requiring the consent or approval of any state
official, department, board, agency, or other body without such consent or
approval first being obtained.
3. The office of the corporation is to be located in the
City, County and State of New York.
4. The corporation is authorized to issue two classes of
shares to be designated, respectively, as Preferred Stock and Common Stock.
The total number of shares of capital stock that the corporation is authorized
to issue is 17,000,000. The total number of shares
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<PAGE>
of Common Stock which the corporation shall have the authority to issue is
15,000,000, par value $.01 per share. The total number of shares of Preferred
Stock which the corporation shall have the authority to issue is 2,000,000,
par value $.01 per share.
Preferred Stock may be issued from time to time in one or
more series. The board of directors of the corporation is expressly authorized
to provide for the issuance of all or any of the shares of the Preferred Stock
in one or more series and to fix the number of shares and to determine or
alter, for each such series, such voting powers, full or limited, or
non-voting powers, and such designations, preferences, and relative,
participating, optional, or other rights and such qualifications, limitations
or restrictions thereof, as shall be stated and expressed in the resolution or
resolutions adopted by the board of directors of the corporation providing for
the issue of such shares and as may be permitted by the Business Corporation
Law. The board of directors of the corporation is also expressly authorized to
increase or decrease (but not below the number of shares of such series of
Preferred Stock then outstanding) the number of shares of any series of
Preferred Stock subsequent to the issue of shares of that series of Preferred
Stock. In case the number of shares of any such series of Preferred Stock
shall be so decreased, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally fixing
the number of shares of such series of Preferred Stock.
5. The Secretary of State of the State of New York is hereby
designated the agent of the corporation upon whom process against the
corporation may be served. The post office address to which the Secretary of
State shall mail a copy of any process against the corporation served upon him
as agent of the corporation is c/o E. Kenneth Seiff, Pivot Rules, Inc., 80
West 40th Street, New York, New York 10018.
3
<PAGE>
6. No holder of any Common Stock or Preferred Stock of the
corporation shall be entitled to any preemptive rights to purchase any capital
stock of the corporation or to acquire any option, warrant, right or other
instrument (including debt instruments) entitling the holder thereof to
acquire any capital stock of the corporation upon the exercise, conversion or
exchange thereof or otherwise.
7. (a) The corporation shall, to the fullest extent
permitted by applicable law, as amended from time to time, indemnify any
person who is made, or threatened to be made, a party to any action or
proceeding, whether civil or criminal, including an action by or in the right
of the corporation to procure a judgment in its favor or in the right of any
other corporation of any type or kind, domestic or foreign, or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
which any director or officer of the corporation served in any capacity at the
request of the corporation, by reason of the fact that he, his testator or
intestate, is or was a director or officer of the corporation, or served such
other corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise in any capacity, against judgments, fines, amounts paid in
settlement, and reasonable expenses, including attorney's fees actually and
necessarily incurred as a result of such action or proceeding, or any appeal
therein, if such director or officer acted, in good faith, for a purpose which
he reasonably believed to be in, or, in the case of service for any other
corporation or any partnership, joint venture, trust, employee benefit plan or
other enterprise, not opposed to, the best interests of the corporation and,
in criminal actions or proceedings, in addition, had no reasonable cause to
believe that his conduct was unlawful; except that, in the case an action by
or in the right of the corporation to procure a judgment in its favor, no
indemnification under this paragraph shall be made in respect
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<PAGE>
of (1) a threatened action, or a pending action which is settled or otherwise
disposed of, or (2) any claim, issue or matter as to which such person shall
have been adjudged to be liable to the corporation, unless and only to the
extent that the court on which the action was brought, or, if no action was
brought, any court of competent jurisdiction, determines upon application
that, in view of all the circumstances of the case, the person is fairly and
reasonably entitled to indemnity for such portion of the settlement amount and
expenses as the court deems proper.
(b) The rights granted pursuant to or provided by this
Section 10 shall be in addition to and shall not be exclusive of any other
rights to indemnification and expenses to which such person may otherwise be
entitled by law, contract or otherwise."
8. A director of the corporation shall not be liable to the
corporation or its shareholders for damages for any breach of duty in such
capacity except for liability in the event a judgment or other final
adjudication adverse to a director establishes that his or her acts or
omissions were in bad faith or involved intentional misconduct or a knowing
violation of law or that the director personally gained, in fact, a financial
profit or other advantage to which he or she was not legally entitled or that
such director's acts violated Section 719 of the Business Corporation Law; or
liability for any act or omission prior to the adoption of this provision.
9. So long as there are at least six directors (including
vacancies), the board of directors shall be divided into two classes,
designated as Class 1 and Class 2. Each class shall consist, as nearly as may
be possible, of one-half of the total number of directors constituting the
entire board of directors; provided, however, that no class shall have less
than three directors, including vacancies. The term of the initial Class 1
directors shall terminate on the date of the 1997 annual meeting of
shareholders; and the term of the initial Class 2 directors shall terminate
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on the date of the 1998 annual meeting of shareholders. At each annual meeting
of shareholders beginning in 1997, successors to each of the directors
included within the class of directors whose term expires at that annual
meeting shall be elected for a two-year term. If the number of directors is
changed, any increase or decrease shall be apportioned among the classes, so
as to maintain the number of directors in each class as nearly equal as
possible, and any additional directors of any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a term that
shall coincide with the remaining term of that class, but in no case will a
decrease in the number of directors shorten the term of any incumbent
director. A director shall hold office until the annual meeting for the year
in which his term expires and until his successor shall be elected and shall
qualify, subject, however, to prior death, resignation, retirement,
disqualification or removal from office.
If there shall be less than six directors, then, at each
annual meeting of the shareholders, directors shall be elected to hold office
until the next annual meeting of shareholders and until their respective
successors have been elected and qualified or until their respective earlier
death, resignation, retirement, disqualification or removal.
FIFTH: The Amended and Restated Certificate of Incorporation
of the corporation was duly authorized by resolution of all of the duly
elected and acting directors of the corporation, dated as of December 26, 1996
and March 5, 1997, unanimous written consent of the holders of all of the
issued and outstanding shares of the Common Stock of the corporation, dated as
of December 18, 1996, and by resolution of a majority of the holders of all of
the issued and outstanding shares of the Common Stock of the corporation,
dated as of March
6
<PAGE>
20, 1997, in accordance with the applicable provisions of Sections 708, 615,
603 and 803 of the Business Corporation Law.
IN WITNESS WHEREOF, the undersigned have executed, signed
and verified this Restated Certificate of Incorporation on April __, 1997, and
each hereby affirms, under penalties of perjury, that the statements contained
herein are true.
--------------------------------
E. Kenneth Seiff, President
--------------------------------
Doug Brown, Secretary
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<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
BY-LAWS
OF
PIVOT RULES, INC.
--------------------------------------------
ARTICLE I - OFFICES
The principal office of the corporation shall be located in the City
of New York, County of New York, State of New York. The corporation may also
have offices at such other places within or without the State of New York as
the board may from time to time determine or the business of the corporation
may require.
ARTICLE II - SHAREHOLDERS
1. PLACE OF MEETINGS.
Meetings of shareholders shall be held at the principal office of the
corporation or at such other place within or without the State of New York as
the board shall authorize.
2. ANNUAL MEETING.
The annual meeting of the shareholders shall be held at such date and
time as shall be determined by the board or the president and stated in the
notice of meeting, at which time the shareholders shall elect a board and
transact such other business as may properly come before the meeting.
3. SPECIAL MEETINGS.
Special meetings of the shareholders may be called by the board or by
the president and shall be called by the president or the secretary at the
request in writing of a majority of the board or at the request in writing by
shareholders owning a majority in amount of the shares issued and outstanding.
Such request shall state the purpose or purposes of the proposed meeting.
Business transacted at a special meeting shall be confined to the purposes
stated in the notice.
4. FIXING RECORD DATE.
For the purpose of determining the shareholders entitled to notice of
or to vote at any meeting of shareholders or any adjournment thereof, or to
express consent to or dissent from any proposal without a meeting, or for the
purpose of determining shareholders entitled to receive payment of any
dividend or the allotment of any rights, or for the purpose of any other
action, the board shall fix, in advance, a date as the record date for any
such determination of shareholders. Such date shall not be more than fifty nor
less than ten days before the date of such meeting, nor
<PAGE>
more than fifty days prior to any other action. If no record date is fixed it
shall be determined in accordance with the provisions of law.
5. NOTICE OF MEETINGS OF SHAREHOLDERS.
Written notice of each meeting of shareholders shall state the
purpose or purposes for which the meeting is called, the place, date and hour
of the meeting and unless it is the annual meeting, shall indicate that it is
being issued by or at the direction of the person or persons calling the
meeting. Notice shall be given either personally or by mail to each
shareholder entitled to vote at such meeting, not less than ten or more than
fifty days before the date of the meeting. If action is proposed to be taken
that might entitle shareholders to payment for their shares, the notice shall
include a statement of that purpose and to that effect. If mailed, the notice
shall be deemed given when deposited in the United States mail, with postage
thereon prepaid, directed to the shareholder at his address as it appears on
the record of shareholders, or, if he shall have filed with the secretary a
written request that notices to him be mailed to some other address, then
directed to him at such other address.
6. WAIVERS.
Notice of meeting need not be given to any shareholder who signs a
waiver of notice, in person or by proxy, whether before or after the meeting.
The attendance of any shareholder at a meeting, in person or by proxy, without
protesting prior to the conclusion of the meeting the lack of notice of such
meeting, shall constitute a waiver of notice by him.
7. QUORUM OF SHAREHOLDERS.
Unless the certificate of incorporation provides otherwise, the
holders of a majority of the shares entitled to vote thereat shall constitute
a quorum at a meeting of shareholders for the transaction of any business,
provided that when a specified item of business is required to be voted on by
a class or series, the holders of a majority of the shares of such class or
series shall constitute a quorum for the transaction of such specified item of
business.
When a quorum is once present to organize a meeting, it is not broken
by the subsequent withdrawal of any shareholders.
The shareholders present may adjourn the meeting despite the absence
of a quorum.
8. PROXIES.
Every shareholder entitled to vote at a meeting of shareholders or to
express consent or dissent without a meeting may authorize another person or
persons to act for him by proxy. Every proxy must be signed by the shareholder
or his attorney-in-fact. No proxy shall be valid after expiration of eleven
months from the date thereof unless otherwise provided in the proxy.
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<PAGE>
Every proxy shall be revocable at the pleasure of the shareholder executing
it, except as otherwise provided by law.
9. QUALIFICATION OF VOTERS.
Every shareholder of record shall be entitled at every meeting of
shareholders to one vote for every share standing in his name on the record of
shareholders, unless otherwise provided in the certificate of incorporation.
10. VOTE OF SHAREHOLDERS.
Except as otherwise required by statute or by the certificate of
incorporation: (a) directors shall be elected by a plurality of the votes cast
at a meeting of shareholders by the holders of shares entitled to vote in the
election; and (b) all other corporate action shall be authorized by a majority
of the votes cast.
11. WRITTEN CONSENT OF SHAREHOLDERS.
Any action that may be taken by vote may be taken without a meeting
on written consent, setting forth the action so taken, signed by the holders
of all the outstanding shares entitled to vote thereon or signed by such
lesser number of holders as may be provided for in the certificate of
incorporation.
12. SHAREHOLDER PROPOSALS.
No proposal for a shareholder vote on any matter shall be submitted
by a shareholder to the corporation's shareholders unless the shareholder
submitting such proposal has submitted to the secretary of the corporation a
written notice setting forth with particularity (i) the name and business
address of the shareholder submitting such proposal and all persons acting in
concert with such shareholder; (ii) the name and address of the persons
identified in clause (i), as they appear on the corporation's books (if they
so appear); (iii) the class and number of shares of the corporation
beneficially owned by the persons identified in clause (i); (iv) a description
of the proposal containing all material information relating thereto,
including, without limitation, the reasons for submitting such proposal; and
(v) such other information as the board reasonably determines is necessary or
appropriate to enable the board and shareholders of the corporation to
consider such proposal. The written notice of a shareholder proposal shall be
delivered to the secretary of the corporation, at the principal office of the
corporation, not later than (i) with respect to a shareholder proposal to be
submitted at an annual meeting of shareholders, ninety days prior to the date
one year from the date of the immediately preceding annual meeting of
shareholders (and no earlier than one hundred-twenty days prior to the date
one year from the date of the immediately preceding annual meeting of
shareholders), and (ii) with respect to a shareholder proposal to be submitted
at a special meeting of shareholders, the close of business on the tenth day
following the date on which notice of such meeting is first given to
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shareholders. The presiding officer at any shareholders meeting may determine
that any shareholder proposal was not permissible under or was not made in
accordance with the procedures prescribed in this Section or is otherwise not
in accordance with law, and if he should so determine, he shall so declare at
the meeting and the shareholder proposal shall be disregarded.
ARTICLE III - DIRECTORS
1. BOARD OF DIRECTORS.
Subject to any provision in the certificate of incorporation, the
business of the corporation shall be managed by its board of directors, each
of whom shall be at least 18 years of age and may be shareholders.
2. NUMBER OF DIRECTORS.
The number of directors constituting the entire board shall be five.
The number of directors constituting the entire board may be increased or
decreased from time to time by resolution of the board of directors, provided
that (a) any amendment by the directors to effect such increase or decrease
shall require the vote of a majority of the entire board, (b) no decrease
shall shorten the term of any incumbent director, (c) the number of directors
constituting the entire board shall not be less than three, and (d) the number
of directors constituting the entire board shall not be more than seven. As
used in these by-laws, "entire board" means the total number of directors
which the corporation would have if there were no vacancies.
3. ELECTION AND TERM OF DIRECTORS.
Directors of the corporation shall be elected in such manner, and
shall hold office for such term, as shall be set forth in the certificate of
incorporation.
Unless otherwise prescribed in the certificate of incorporation,
directors of the corporation shall be elected, and shall serve, in the manner
and for the term set forth in this paragraph. So long as there are at least
six directors (including vacancies), the directors shall be divided into two
classes, designated Class 1 and Class 2. Each class shall consist as nearly as
may be possible, of one-half of the total number of directors constituting the
entire board; provided, however, that no class shall have less than three
directors, including vacancies. The term of the initial Class 1 directors
shall terminate on the date of the 1997 annual meeting of shareholders; and
the term of the initial Class 2 directors shall terminate on the date of the
1998 annual meeting of shareholders. At each annual meeting of shareholders
beginning in 1997, successors to the class of directors whose term expires at
that annual meeting shall be elected for a two-year term. If the number of
directors is changed, any increase or decrease shall be apportioned among the
classes, so as to maintain the number of directors in each class as nearly
equal as possible, and any additional directors of any class elected to fill a
vacancy resulting
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from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class, but in no case will a decrease
in the number of directors shorten the term of any incumbent director. A
director shall hold office until the annual meeting for the year in which his
term expires and until his successor shall be elected and shall qualify,
subject, however, to prior death, resignation, retirement, disqualification or
removal from office.
If there shall be less than six directors, then, at each annual
meeting of the shareholders, directors shall be elected to hold office until
the next annual meeting of the shareholders and until their respective
successors have been elected and qualified or until their respective earlier
death, resignation, retirement, disqualification or removal.
4. NEWLY CREATED DIRECTORSHIPS AND VACANCIES.
Newly created directorships resulting from an increase in the number
of directors and vacancies occurring in the board for any reason except the
removal of directors without cause may be filled by a vote of a majority of
the directors then in office, although less than a quorum exists, unless
otherwise provided in the certificate of incorporation. Vacancies occurring by
reason of the removal of directors without cause shall be filled by vote of
the shareholders unless otherwise provided in the certificate of
incorporation. A director elected to fill a vacancy caused by resignation,
death or removal shall be elected to hold office for the unexpired term of his
predecessor.
5. REMOVAL OF DIRECTORS.
Any or all of the directors may be removed for cause by vote of the
shareholders or by action of the board. Directors may be removed without cause
only by vote of the shareholders.
6. RESIGNATION.
A director may resign at any time by giving written notice to the
board, the president or the secretary of the corporation. Unless otherwise
specified in the notice, the resignation shall take effect upon receipt
thereof by the board or such officer, and the acceptance of the resignation
shall not be necessary to make it effective.
7. QUORUM OF DIRECTORS.
Unless otherwise provided in the certificate of incorporation, a
majority of the entire board shall constitute a quorum for the transaction of
business or of any specified item of business.
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8. ACTION OF THE BOARD.
Unless otherwise required by law, the vote of a majority of the
directors present at the time of the vote, if a quorum is present at such
time, shall be the act of the board. Each director present shall have one vote
regardless of the number of shares, if any, which he may hold.
9. PLACE AND TIME OF BOARD MEETINGS.
The board may hold its meetings at the office of the corporation or
at such other places, either within or without the State of New York, as it
may from time to time determine.
10. REGULAR ANNUAL MEETING.
A regular annual meeting of the board shall be held immediately
following the annual meeting of shareholders at the place of such annual
meeting of shareholders.
11. NOTICE OF MEETINGS OF THE BOARD, ADJOURNMENT.
(a) Regular meetings of the board may be held without notice at such
time and place as it shall from time to time determine. Special meetings of
the board shall be held upon notice to the directors and may be called by the
president upon three days notice to each director either personally or by mail
or by wire; special meetings shall be called by the president or by the
secretary in like manner on written request of two directors. Notice of a
meeting need not be given to any director who submits a waiver of notice
whether before or after the meeting or who attends the meeting without
protesting prior thereto or at its commencement, the lack of notice to him.
(b) A majority of the directors present, whether or not a quorum is
present, may adjourn any meeting to another time and place. Notice of the
adjournment shall be given to all directors who were absent at the time of the
adjournment and, unless such time and place are announced at the meeting, to
the other directors.
12. CHAIRMAN.
At all meetings of the board, the president, or in his absence, a
chairman chosen by the board, shall preside.
13. EXECUTIVE AND OTHER COMMITTEES.
The board, by resolution adopted by a majority of the entire board,
may designate from among its members an executive committee and other
committees, each consisting of three or more directors. Each such committee
shall serve at the pleasure of the board.
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<PAGE>
14. COMPENSATION.
Compensation to be paid to directors, if any, shall be fixed by
resolution of the board and all non employee directors shall receive the same
compensation. Employee directors shall receive no compensation for their
services as director.
15. ACTION WITHOUT A MEETING.
Any action required or permitted to be taken by the board or a
committee thereof may be taken without a meeting if all members of the board
or the committee consent in writing to the adoption of a resolution
authorizing the action. The resolution and the written consents thereto by the
members of the board or committee shall be filed with the minutes of the
proceedings of the board or committee.
16. MEETING BY TELEPHONE CONFERENCE.
One or more of the members of the board or any committee thereof may
participate in a meeting of the board or such committee by means of a
conference telephone or similar communications equipment that allows all
persons participating in the meeting to hear each other at the same time. Such
director and/or committee member shall have theretofore been furnished with
the meeting agenda and copies of all documents and materials to be considered
at such meeting. Participation by such means shall constitute presence in
person at a meeting.
ARTICLE IV - OFFICERS
1. OFFICES, ELECTION, TERM.
(a) Unless otherwise provided for in the certificate of
incorporation, the board may elect or appoint a president, one or more
vice-presidents, a chief financial officer, a secretary and a treasurer, and
such other officers as it may determine, who shall have such duties, powers
and functions as hereinafter provided.
(b) All officers shall be elected or appointed to hold office until
the meeting of the board following the annual meeting of shareholders.
(c) Each officer shall hold office for the term for which he is
elected or appointed and a until his successor has been elected or appointed
and qualified.
2. REMOVAL, RESIGNATION, SALARY, ETC.
(a) Any officer elected or appointed by the board may be removed by
the board with or without cause.
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(b) In any event of the death, resignation or removal of an officer,
the board in its discretion may elect or appoint a successor to fill the
unexpired term.
(c) Any two or more offices may be held by the same person, except
the offices of president and secretary. When all of the issued and outstanding
stock of the corporation is owned by one person, such person may hold all or
any combination of offices.
(d) The salaries of all officers shall be fixed by the board.
(e) The directors may require any officer to give security for the
faithful performance of his duties.
3. PRESIDENT.
The president shall be the chief executive officer of the
corporation; he shall preside at all meetings of the shareholders and of the
board; he shall have the management of the business of the corporation and
shall see that all orders and resolutions of the board are carried into
effect.
4. VICE-PRESIDENTS.
During the absence or disability of the president, the
vice-president, or if there are more than one, the executive vice-president,
shall have all the powers and functions of the president. Each vice-president
shall perform such other duties as the board shall prescribe.
5. SECRETARY.
The secretary shall:
(a) attend all meetings of the board and of the shareholders;
(b) record all votes and minutes of all proceedings in a book to be
kept for that purpose;
(c) give or cause to be given notice of all meetings of shareholders
and of special meetings of the board;
(d) keep in safe custody the seal of the corporation and affix it to
any instrument when authorized by the board;
(e) when required, prepare or cause to be prepared and available at
each meeting of shareholders a certified list in alphabetical order of the
names of shareholders entitled to vote thereat, indicating the number of
shares of each respective class held by each;
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(f) keep all the documents and records of the corporation as required
by law or otherwise in a proper and safe manner; and
(g) perform such other duties as may be prescribed by the board.
6. ASSISTANT-SECRETARIES.
During the absence or disability of the secretary, the
assistant-secretary, or if there are more than one, then one so designated by
the secretary or by the board, shall have all the powers and functions of the
secretary.
7. TREASURER.
The treasurer shall:
(a) have the custody of the corporate funds and securities;
(b) keep full and accurate accounts of receipts and disbursements in
the corporate books;
(c) deposit all money and other valuables in the name and to the
credit of the corporation in such depositories as may be designated by the
board;
(d) disburse the funds of the corporation as may be ordered or
authorized by the board and preserve proper vouchers for such disbursements;
(e) render to the president and board at the regular meetings of the
board, or whenever they require it, an account of all his transactions as
treasurer and of the financial condition of the corporation;
(f) render a full financial report at the annual meeting of the
shareholders if so requested;
(g) be furnished by all corporate officers and agents at his request,
with such reports and statements as he may require as to all financial
transactions of the corporation; and
(h) perform such other duties as are given to him by these by-laws or
as from time to time are assigned to him by the board or the president.
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8. ASSISTANT-TREASURER.
During the absence or disability of the treasurer, the
assistant-treasurer, or if there are more than one, the one so designated by
the treasurer or by the board, shall have all the powers and functions of the
treasurer.
9. SURETIES AND BONDS.
In case the board shall so require, any officer or agent of the
corporation shall execute to the corporation a bond in such sum and with such
surety or sureties as the board may direct, conditioned upon the faithful
performance of his duties to the corporation and including responsibility for
negligence and for the accounting for all property, funds or securities of the
corporation which may come into his hands.
ARTICLE V - CERTIFICATES FOR SHARES
1. CERTIFICATES.
The shares of the corporation shall be represented by certificates.
They shall be numbered and entered in the books of the corporation as they are
issued. They shall exhibit the holder's name and the number of shares and
shall be signed by the president or a vice-president and the treasurer or the
secretary.
2. LOST OR DESTROYED CERTIFICATES.
The board may direct a new certificate or certificates to be issued
in place of any certificate or certificates theretofore issued by the
corporation, alleged to have been lost or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate to be lost or
destroyed. When authorizing such issue of a new certificate or certificates,
the board may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost or destroyed certificate or
certificates, or his legal representative, to advertise the same in such
manner as it shall require and/or give the corporation a bond in such sum and
with such surety or sureties as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate
alleged to have been lost or destroyed.
3. TRANSFERS OF SHARES.
(a) Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, and cancel the old certificate; every such transfer shall be entered
on the transfer book of the corporation which shall be kept at its principal
office. No transfer shall be made within ten days next preceding the annual
meeting of shareholders.
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(b) The corporation shall be entitled to treat the holder of record
of any share as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share
on the part of any other person whether or not it shall have express or other
notice thereof, except as expressly provided by the laws of New York.
4. CLOSING TRANSFER BOOKS.
The board shall have the power to close the share transfer books of
the corporation for a period of not more than ten days during the thirty day
period immediately preceding (1) any shareholders' meeting, or (2) any date
upon which shareholders shall be called upon to or have a right to take action
without a meeting, or (3) any date fixed for the payment of a dividend or any
other form of distribution, and only those shareholders of record at the time
the transfer books are closed, shall be recognized as such for the purpose of
(1) receiving notice of or voting at such meeting, or (2) allowing them to
take appropriate action, or (3) entitling them to receive any dividend or
other form of distribution.
ARTICLE VI - INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER PERSONS
1. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The corporation shall, to the fullest extent permitted by applicable
law, as amended from time to time, indemnify any person who is made, or
threatened to be made, a party to any action or proceeding, whether civil or
criminal, including an action by or in the right of the corporation to procure
a judgment in its favor or in the right of any other corporation of any type
or kind, domestic or foreign, or any partnership, joint venture, trust,
employee benefit plan or other enterprise, which any director or officer of
the corporation served in any capacity at the request of the corporation, by
reason of the fact that he, his testator or intestate, is or was a director or
officer of the corporation, or served such other corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise in any
capacity, against judgments, fines, amounts paid in settlement, and reasonable
expenses, including attorney's fees actually and necessarily incurred as a
result of such action or proceeding, or any appeal therein, if such director
or officer acted, in good faith, for a purpose which he reasonably believed to
be in, or, in the case of service for any other corporation or any
partnership, joint venture, trust, employee benefit plan or other enterprise,
not opposed to, the best interests of the corporation and, in criminal actions
or proceedings, in addition, had no reasonable cause to believe that his
conduct was unlawful; except that, in the case an action by or in the right of
the corporation to procure a judgment in its favor, no indemnification under
this paragraph shall be made in respect of (1) a threatened action, or a
pending action which is settled or otherwise disposed of, or (2) any claim,
issue or matter as to which such person shall have been adjudged to be liable
to the corporation, unless and only to the extent that the court on which the
action was brought, or, if no action was brought, any court of competent
jurisdiction, determines upon application that, in view of all the
circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such portion of the settlement amount and expenses as the court
deems proper.
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2. INDEMNIFICATION OF OTHERS.
The Corporation may indemnify any other person to whom the
corporation is permitted to provide indemnification or the advancement of
expenses to the fullest extent permitted by applicable law, whether pursuant
to rights granted pursuant to, or provided by, the New York Business
Corporation Law or other rights created by (i) a resolution of shareholders,
(ii) a resolution of directors, or (iii) an agreement provided for such
indemnification, it being expressly intended that this Article VI authorizes
the creation of other rights in any such manner.
3. REIMBURSEMENT AND ADVANCES.
The corporation may, from time to time, reimburse or advance to any
person referred to in Section 1 of this Article VI the funds necessary for
payment of expenses (including attorneys' fees, costs and charges) incurred in
connection with any action or proceeding referred to in Section 1 of this
Article VI, upon receipt of a written undertaking by or on behalf of such
person (i) to repay such amount(s) if such person is ultimately found, under
the procedures set forth in Article VII of the New York Business Corporation
Law, not to be entitled to indemnification or (ii) where indemnification is
granted, to repay any amount(s) received in excess of the amount of
indemnification to which such person is entitled. Nothing contained in this
Section 3 shall limit the right of the corporation, from time to time, to
reimburse or advance funds to any person referred to in Section 2 of this
Article VI.
4. SERVING AT THE REQUEST OF THE CORPORATION.
Without limitation of any indemnification provided by Section 1 of
this Article VI, any director or officer of the corporation serving (i)
another corporation, partnership, joint venture or trust of which the majority
of the voting power or residual economic interest is held, directly or
indirectly, by the corporation, or (ii) any employee benefit plan of the
corporation or any entity referred to in clause (i) above, in any capacity,
shall be deemed to be doing so at the request of the corporation.
5. DETERMINATION OF ENTITLEMENT.
Any person entitled to be indemnified or to the reimbursement or
advancement of expenses as a matter of right pursuant to this Article VI may
elect to have the right to indemnification (or advancement of expenses)
interpreted on the basis of the applicable law in effect at the time of the
occurrence of the event or events giving rise to the action or proceeding, to
the extent permitted by law, or on the basis of the applicable law in effect
at the time indemnification is sought.
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6. CONTRACTUAL RIGHT.
The right to be indemnified or to the reimbursement or advancement of
expenses pursuant to Section 1 or 3 of this Article VI or a resolution
authorized pursuant to Section 2 of this Article VI (i) is a contract right
pursuant to which the person entitled thereto may bring suit as if the
provisions hereof (or of any such resolution) were set forth in a separate
written contract between the corporation and such person, (ii) is intended to
be retroactive and shall, to the extent permitted by law, be available with
respect to events occurring prior to the adoption hereof, and (iii) shall
continue to exist after the recision or restrictive modification hereof with
respect to events occurring prior thereto. The corporation shall not be
obligated under this Article VI (including any resolution or agreement
authorized by Section 2 of this Article VI) to make any payment hereunder (or
under any such resolution or agreement) to the extent the person seeking
indemnification hereunder (or under any such resolution or agreement) has
actually received payment (under any such insurance policy, resolution,
agreement or otherwise) of the amounts otherwise indemnifiable hereunder (or
under any such resolution or agreement).
7. JUDICIAL CLAIMS.
If a request to be indemnified or for the reimbursement or
advancement of expenses pursuant to Section 1 or 3 of this Article VI is not
paid in full by the corporation within thirty days after a written claim has
been received by the corporation, the claimant may at any time thereafter
bring suit against the corporation to recover the unpaid amount of the claim
and, if successful in whole or in part, the claimant shall be entitled also to
be paid the expenses of prosecuting such claim. Neither the failure of the
corporation (including its board, independent legal counsel or shareholders)
to have made a determination prior to the commencement of such action that
indemnification of or reimbursement or advancement of expenses to the claimant
is proper in the circumstances, or an actual determination by the corporation
(including its board, independent legal counsel or shareholders) that the
claimant is not entitled to indemnification or to the reimbursement or
advancement of expenses, shall be a defense to the action or create a
presumption that the claimant is not so entitled.
8. SUCCESSOR CORPORATION.
For purposes of this Article VI, the term "the corporation" shall
include any legal successor to the corporation, including any corporation
which acquires all or substantially all of the assets of the corporation in
one or more transactions.
9. NONEXCLUSIVITY.
The rights granted pursuant to or provided by the foregoing
provisions of this Article VI shall be in addition to and shall not be
exclusive of any other rights to indemnification and expenses to which such
person may otherwise be entitled by law, contract or otherwise.
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ARTICLE VII - DIVIDENDS
Subject to the provisions of the certificate of incorporation and to
applicable law, dividends on the outstanding shares of the corporation may be
declared in such amounts and at such time or times as the board may determine.
Before payment of any dividend, there may be set aside out of the net profits
of the corporation available for dividends such sum or sums as the board from
time to time in its absolute discretion deems proper as a reserve fund to meet
contingencies, or for equalizing dividends, or for repairing or maintaining
any property of the corporation, or for such other purpose as the board shall
think conducive to the interests of the corporation, and the board may modify
or abolish any such reserve.
ARTICLE VIII - CORPORATE SEAL
The seal of the corporation shall be circular in form and bear the
name of the corporation, the year of its organization and the words "Corporate
Seal, New York." The seal may be used by causing it to be impressed directly
on the instrument or writing to be sealed, or upon adhesive substance affixed
thereto. The seal on any corporate obligation for the payment of money may be
a facsimile, engraved or printed.
ARTICLE IX - EXECUTION OF INSTRUMENTS
All corporate instruments and documents shall be signed or
countersigned, executed, verified or acknowledged by such officer or officers
or other person or persons as the board may from time to time designate.
ARTICLE X - FISCAL YEAR
The fiscal year shall begin the first day of January in each year, or
otherwise as the board shall, from time to time, determine.
ARTICLE XI - REFERENCES TO CERTIFICATE OF INCORPORATION
Reference to the certificate of incorporation in these by-laws shall
include all amendments thereto or changes thereof unless specifically
excepted.
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ARTICLE XII - BY-LAW CHANGES
AMENDMENT, REPEAL, ADOPTION, ELECTION OF DIRECTORS.
(a) Except as otherwise provided in the certificate of incorporation,
the by-laws may be amended, repealed or adopted by vote of the holders of the
shares at the time entitled to vote in the election of any directors. By-laws
may also be amended, repealed or adopted by the board but any by-law adopted
by the board may be amended by the shareholders entitled to vote thereon as
hereinabove provided.
(b) If any by-law regulating an impending election of directors is
adopted, amended or repealed by the board, there shall be set forth in the
notice of the next meeting of shareholders for the election of directors the
by-law so adopted, amended or repealed, together with a concise statement of
the changes made.
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Exhibit 4.2
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 ________ __, 1998. VOID AFTER 5:00 P.M. EASTERN
TIME, ________ __, 2002.
PURCHASE OPTION
FOR THE PURCHASE OF
150,000 SHARES OF COMMON STOCK
AND/OR
150,000 COMMON STOCK PURCHASE WARRANTS
OF
PIVOT RULES, INC.
(A DELAWARE CORPORATION)
1. Purchase Option.
THIS CERTIFIES THAT, in consideration of $100.00 duly paid
by or on behalf of GKN Securities Corp. ("Holder"), as registered owner of
this Purchase Option, to Pivot Rules, Inc. ("Company"), Holder is entitled, at
any time or from time to time at or after ________ __,1998 ("Commencement
Date"), and at or before 5:00 p.m., Eastern Time, ________ __, 2002
("Expiration Date"), but not thereafter, to subscribe for, purchase and
receive, in whole or in part, up to 150,000 shares of Common Stock of the
Company, $.01 par value ("Common Stock") and/or 150,000 Common Stock Purchase
Warrants, each to purchase one share of Common Stock ("Warrants")
<PAGE>
during the period commencing on ________ __, 1998 and expiring ________ __,
2002, (five years from the effective date of the registration statement on
Form SB-2 No. 333-22895 ("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 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. Each certificate for Securities purchased under this
Purchase Option shall bear a legend as follows unless such Securities have
been registered under the Securities Act of 1933, as amended (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
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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").
(i) Common Stock. Upon exercise of the Cashless
Exercise 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 relating to the
purchase of Common Stock being surrendered at the time the Conversion Right is
exercised by (y) the Market Price. The "Stock Value" of the portion of the
Purchase Option being surrendered shall equal the remainder derived from
subtracting (a) the Exercise Price multiplied by the number of shares of
Common Stock being surrendered from (b) the Market Price of the Common Stock
multiplied by the number of shares of Common Stock being surrendered. As used
herein, the term "Market Price" at any date shall be deemed to be the average
last reported sale price of the Common Stock for the five days immediately
preceding such date, 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.
(ii) Warrants. Upon exercise of the Cashless
Exercise 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 relating to the purchase of the
Warrants being surrendered at the time the Cashless Exercise Right is
exercised by (y) the Market Price. The "Warrant Value" of the portion of the
Purchase Option being surrendered shall equal the remainder derived from
subtracting (a) the Exercise Price multiplied by the number of Warrants being
surrendered from (b) the Market Price of the Warrants multiplied by the number
of Warrants being surrendered. As used herein, the term "Market Price" at any
date shall be deemed to be the average last reported sale price of the
Warrants for the five days immediately preceding such date, as officially
reported by the principal securities exchange on which the Warrants are listed
or admitted to trading, or, if the 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.
(iii) 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 shares of Common Stock
and/or Warrants the Holder will purchase pursuant to such Cashless Exercise
Right.
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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 written 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 been filed by the
Company and declared effective by the Securities and Exchange Commission and
is in 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.
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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 considered
together ("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 four
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.
5.1.2. 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 six 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).
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
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<PAGE>
of the Registrable Securities. In the event of such a proposed registration,
the Company shall furnish the then 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.
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
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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 underwriter representing the Holders whose
Registrable Securities are being registered pursuant to this Section 5. Such
underwriter must be reasonably acceptable to the Company. Such agreement shall
be reasonably satisfactory in form and substance to the Company, each Holder
and such underwriter, 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 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 underwriter 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 underwriter except as they may relate
to such Holders, their shares and their intended methods of distribution.
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:
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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 and Warrants issuable on exercise of the Purchase Option shall be
increased in proportion to such increase in outstanding shares; provided,
however, that nothing in this section is intended to provide for adjustment
with respect to the Warrants beyond that provided for in the Warrant Agreement
between the Company and American Stock Transfer & Trust Company. For example,
if the Company declares a two-for-one stock dividend and at the time of such
dividend this Purchase Option is for the purchase of 1,000 shares at $8.80 per
share and 1,000 Warrants at $0.16 per Warrant (each Warrant exercisable for
$5.50 per share), upon effectiveness of the dividend, the Purchase Option will
be adjusted to allow for the purchase of 2,000 shares at $4.40 per share and
2,000 Warrants at $0.08 (each Warrant exercisable for $2.75 per share).
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 or Warrants 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 or Warrants, as the case may be, 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 or Warrants, as the case may be, so purchasable immediately
thereafter.
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 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
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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 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
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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 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.
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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 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 ________, 1997.
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PIVOT RULES, INC.
By:
--------------------------------------
Name: E. Kenneth Seiff
Title: Chief Executive Officer
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Form to be used to exercise Purchase Option:
PIVOT RULES, INC.
80 West 40th Street
New York, New York 10018
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 Pivot Rules, Inc. 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 shares of Common Stock and Warrants to
purchase ___________ shares of Common Stock of Pivot Rules, Inc. 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 Pivot
Rules, Inc. ("Company") evidenced by the within Purchase Option and does
hereby authorize the Company to transfer such right on the books of the
Company.
Dated:___________________, 19__
------------------------------
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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Exhibit 4.6
WARRANT AGREEMENT
Agreement made as of __________ __, 1997, between Pivot Rules, Inc.,
a New York corporation with offices at 80 West 40th Street, New York, New York
10018 ("Company"), and American Stock Transfer & Trust Company, a New York
corporation with offices at 40 Wall Street, New York, New York 10005 (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) 1,725,000 (including up to 225,000 that may be
issued pursuant to the Underwriter's over-allotment option) Redeemable Common
Stock Purchase Warrants ("Public Warrants") to the public investors and (ii)
an aggregate of 150,000 Warrants to GKN Securities Corp. ("GKN" or the
"Underwriter") or its respective 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 the
Company's common stock, $.01 par value per share ("Common Stock"), for $____;
and
WHEREAS, the Company has filed with the Securities and Exchange
Commission a Registration Statement, No. 333-22895 on Form SB-2 ("Registration
Statement") for the registration, under the Securities Act of 1933, as
amended, of, among other things, the sale of 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.
<PAGE>
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 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.
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 $____ per whole share, subject to the
adjustments provided in Section
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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. A Warrant may be exercised only during the
period ("Exercise Period") commencing on ________ ___, 1998, and terminating
on the earlier of _______ __, 2002, 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 holder of such shares at the close of business on the next succeeding date
on which the stock transfer books are open.
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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
Regulation M (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.
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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 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.,
5
<PAGE>
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 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
6
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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, after they become exercisable and
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-five percent (165%) of the then
effective exercise price of the Public Warrants on twenty (20) out of the
thirty (30) consecutive trading days ending on the third day prior to the day
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 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
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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 date that the Warrants become exercisable it shall file with the
Securities and Exchange Commission a post-effective amendment to the
Registration Statement, if possible, or a new registration statement, to
register, under the Securities Act of 1933, and it shall take such action as
is necessary to qualify for sale, in those states in which the Warrants were
initially offered by the Company, 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 the Warrants become exercisable, and
maintain the effectiveness of such registration statement and keep current a
prospectus thereunder and maintain such qualification 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.
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
8
<PAGE>
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 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.
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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.
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:
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PIVOT RULES, INC.
80 West 40th Street
New York, New York 10018
Attn: E. Kenneth Seiff, Chief Executive Officer
with a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022-9928
Attn: Richard A. Goldberg, 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:
AMERICAN STOCK TRANSFER & TRUST COMPANY
40 Wall Street
New York, New York 10005
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 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 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.
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. The 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.
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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: PIVOT RULES, INC.
By:
- --------------------------- ---------------------------
Name: Name: E. Kenneth Seiff
Title: Title: Chief Executive Officer
Attest: AMERICAN STOCK TRANSFER &
TRUST COMPANY
By:
- --------------------------- ---------------------------
Name: Name:
Title: Title:
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<PAGE>
Exhibit 10.16
PIVOT RULES, INC.
1997 STOCK OPTION PLAN
SECTION 1. PURPOSE
The purposes of this Pivot Rules, Inc. 1997 Stock Option Plan (the
"Plan") are to encourage selected employees, consultants and directors of
Pivot Rules, Inc. (together with any successor thereto, the "Company' ) and
its Affiliates (as defined below) to acquire a proprietary interest in the
growth and performance of the Company, to generate an increased incentive to
contribute to the Company's future success and prosperity, thus enhancing the
value of the Company for the benefit of its shareholders, and to enhance the
ability of the Company and its Affiliates to attract and retain qualified
individuals upon whom, in large measure, the sustained progress, growth, and
profitability of the Company depend.
SECTION 2. DEFINITIONS
As used in the Plan, the following terms shall have the meanings set
forth below:
(a) "Affiliate" shall mean any entity that, directly or through one
or more intermediaries, is controlled by, controls or is under common control
with the Company.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(d) "Committee" shall mean a committee of the Board designated by the
Board to administer the Plan and composed of not less than two directors, each
of whom is both a non-employee director within the meaning of Rule 16b-3 and
an "outside director" as that term is defined for purposes of Section 162(m)
of the Code.
(e) "Consultant" shall mean any Person who contracts to provide
services to the Company as an independent contractor.
(f) "Fair Market Value" shall mean, with respect to Shares or other
securities (i) the closing price per Share of the Shares on the principal
exchange on which the Shares are then trading, if any, on such date, or, if
the Shares were not traded on such date, then on the next preceding trading
day during which a sale occurred; or (ii) if the Shares are not traded on an
exchange but are quoted on NASDAQ or a successor quotation system, (1) the
last sales price (if the Shares are then listed as a National Market Issue
under the NASDAQ National Market System) or (2) the mean between the closing
representative bid and asked prices (in all other cases) for the Shares on
such date as reported by NASDAQ or such successor quotation system; or (iii)
if the Shares are not publicly traded on an exchange and not quoted on NASDAQ
or a
<PAGE>
successor quotation system, the mean between the closing bid and asked prices
for the Shares on such date as determined in good faith by the Committee; or
(iv) if the provisions of clauses (i), (ii) and (iii) shall not be applicable,
the fair market value established by the Committee acting in good faith.
(g) "Incentive Stock Option" shall mean an option granted under
Section 6 of the Plan that meets the requirements of Section 422 of the Code
or any successor provision thereto.
(h) "Key Employee" shall mean any officer, director or other employee
who is a regular full-time employee of the Company or its present and future
Affiliates.
(i) "Non-Employee Director" shall mean each member of the Board who
is not an employee of the Company or any Affiliate.
(j) "Non-Qualified Stock Option" shall mean an option granted under
Section 6 of the Plan that is not an Incentive Stock Option or an Option
granted under Section 7.
(k) "Option" shall mean an Incentive Stock Option or a Non-Qualified
Stock Option.
(1) "Option Agreement" shall mean a written agreement, contract, or
other instrument or document evidencing an Option granted under the Plan.
(m) "Participant" shall mean a Key Employee, Consultant or
Non-Employee Director who has been granted an Option under the Plan.
(n) "Person" shall mean any individual, corporation, partnership,
association, joint-stock company, trust, unincorporated organization, or
government or political subdivision thereof.
(o) "Rule 16b-3" shall mean Rule 16b-3 promulgated by the Securities
and Exchange Commission under the Securities Exchange Act of 1934, as amended,
or any successor rule or regulation thereto.
(p) "Shares" shall mean the common stock of the Company, $.01 par
value, and such other securities or property as may become the subject of
Options pursuant to an adjustment made under Section 4(b) of the Plan.
(q) "Ten Percent Shareholder" shall mean a Person, who together with
his or her spouse, children and trusts and custodial accounts for their
benefit, immediately at the time of the grant of an Option and assuming its
immediate exercise, would beneficially own, within the meaning of Section
424(d) of the Code, Shares possessing more than ten percent (10%) of the total
combined voting power of all of the outstanding capital stock of the Company.
2
<PAGE>
SECTION 3. ADMINISTRATION
(a) Generally. The Plan shall be administered by the Committee.
Unless otherwise expressly provided in the Plan, all designations,
determinations, interpretations and other decisions under or with respect to
the Plan or any Option shall be within the sole discretion of the Committee,
may be made at any time, and shall be final, conclusive, and binding upon all
Persons, including the Company, any Affiliate, any Participant, any holder or
beneficiary of any Option, any shareholder of the Company or any Affiliate,
and any employee of the Company or of any Affiliate.
(b) Powers. Subject to the terms of the Plan and applicable law and
except as provided in Section 7 hereof, the Committee shall have full power
and authority to: (i) designate Participants; (ii) determine the type or types
of Options to be granted to each Participant under the Plan; (iii) determine
the number of Shares to be covered by Options; (iv) determine the terms and
conditions of any Option; (v) determine whether, to what extent, and under
what circumstances Options may be settled or exercised in cash, Shares, other
Options, or other property, or canceled, forfeited, or suspended, and the
method or methods by which Options may be settled, exercised, canceled,
forfeited, or suspended; (vi) interpret and administer the Plan and any
instruments or agreements relating to, or Options granted under, the Plan;
(vii) establish, amend, suspend, or waive such rules and regulations and
appoint such agents as it shall deem appropriate for the proper administration
of the Plan; and (viii) make any other determination and take any other action
that the Committee deems necessary or desirable for the administration of the
Plan.
(c) Reliance, Indemnification. The Committee may employ attorneys,
consultants, accountants or other persons and the Committee, the Company and
its officers and directors shall be entitled to rely upon the advice, opinions
or valuations of any such persons. No member of the Committee shall be
personally liable for any action, determination or interpretation taken or
made in good faith with respect to the Plan, or Options granted thereunder and
all members of the Committee shall be fully indemnified and protected by the
Company in respect of any such action, determination or interpretation.
SECTION 4. SHARES AVAILABLE FOR OPTIONS
(a) Shares Available. Subject to adjustment as provided in Section
4(b):
(i) Limitation on Number of Shares. Options issuable under
the Plan are limited such that the maximum aggregate number of Shares
which may issued pursuant to, or by reason of, Options is 200,000, of
which 162,500 may be issued pursuant to, or by reason of, Options
granted to Key Employees and Consultants and 37,500 may be issued
pursuant to, or by reason of, Options granted to Non-Employee
Directors. Further, no Participant shall be granted in any one fiscal
year Options to purchase more than 100,000 Shares. To the extent that
an Option granted to (A) a Key Employee or
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Consultant or (B) a Non-Employee Director ceases to remain
outstanding by reason of termination of rights granted thereunder,
forfeiture or otherwise, the Shares subject to such Option shall
again become available for award under the Plan to (x) Key Employees
and Consultants and (y) Non-Employee Directors, respectively;
provided, however, that in the case of the cancellation or
termination of an Option in the same fiscal year that such Option was
granted, both the cancelled Option and the newly granted Option shall
be counted in determining whether the recipient has received the
maximum number of such Options under the Plan for such fiscal year.
(ii) Accounting for Awards. For purposes of this Section 4,
the number of Shares covered by an Option to (A) a Key Employee or
Consultant or (B) a Non- Employee Director shall be counted on the
date of grant of such Option against the aggregate number of Shares
available for granting Options under the Plan to (x) Key Employees
and Consultants or (y) Non-Employee Directors, respectively.
(iii) Sources of Shares Deliverable Under Options. Any
Shares delivered pursuant to an Option may consist, in whole or in
part, of authorized and unissued Shares or of treasury Shares.
(b) Adjustments. In the event that the Committee shall determine that
any (i) subdivision or consolidation of Shares, (ii) dividend or other
distribution (in the form of Shares), (iii) recapitalization or other capital
adjustment of the Company or (iv) merger, consolidation or other
reorganization of the Company or other rights to purchase Shares or other
securities of the Company, or other similar corporate transaction or event (of
a type described in Treasury Regulation Section 1.162-27(e)(2)(iii)(C)),
affects the Shares such that an adjustment is determined by the Committee to
be appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan, then the
Committee shall, in such manner as it may deem necessary to prevent dilution
or enlargement of the benefits or potential benefits intended to be made under
the Plan, adjust any or all of (x) the number and type of Shares which
thereafter may be made the subject of Options, (y) the number and type of
Shares subject to outstanding Options, and (z) the grant, purchase, or
exercise price with respect to an Option or, if deemed appropriate, make
provision for a cash payment to the holder of an outstanding Option, provided,
however, in each case, that (i) with respect to Incentive Stock Options no
such adjustment shall be authorized to the extent that such adjustment would
cause the Plan to violate Section 4 of the Code or any successor provision
thereto; (ii) each such adjustment shall be made in such manner as not to
constitute a cancellation and reissuance of a Non-Qualified Stock Option for
purposes of Section 162(m) of the Code, or the regulations promulgated
thereunder, to the extent that such reissuance would result in the grant of
such Options in excess of the maximum permitted to be granted to any
Participant in any fiscal year; and (iii) the number of Shares subject to any
Option denominated in Shares shall always be a whole number.
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SECTION 5. ELIGIBILITY
Except as provided in Section 7, Options may be granted only to Key
Employees and Consultants. In determining the Persons to whom Options shall be
granted and the number of Shares to be covered by each Option, the Committee
shall take into account the nature of the Person's duties, such Person's
present and potential contributions to the success of the Company and such
other factors as it shall deem relevant in connection with accomplishing the
purposes of the Plan. A Key Employee or Consultant who has been granted an
Option or Options under the Plan may be granted an additional Option or
Options, subject to such limitations as may be imposed by the Code on the
grant of incentive Stock Options.
SECTION 6. OPTION
The Committee is hereby authorized to grant Options to Participants
upon the following terms and the conditions (except to the extent otherwise
provided in Section 7) and with such additional terms and conditions, in
either case not inconsistent with the provisions of the Plan, as the Committee
shall determine:
(a) Exercise Price. The purchase price per Share purchasable
under Incentive Stock Options shall not be less than 100% of the Fair
Market Value of a Share on the date of grant; provided that the
purchase price per Share purchasable under Incentive Stock Options
granted to Ten Percent Shareholders shall be not less than 110% of
the Fair Market Value of a Share on the date of grant. The purchase
price per Share purchasable under Non-Qualified Stock Options shall
be the price determined by the Committee.
(b) Option Term. The term of each Non-Qualified Stock Option
shall be fixed by the Committee. The term of each Incentive Stock
Option shall in no event be more than 10 years from the date of
grant, or in the case of an Incentive Stock Option granted to a Ten
Percent Shareholder, 5 years from the date of grant.
(c) Time and Method of Exercise. The Committee shall
determine the time or times at which an Option may be exercised in
whole or in part, and the method or methods by which, and the form or
forms in which, payment of the option price with respect thereto may
be made or deemed to have been made (including, without limitation,
(i) cash, Shares, outstanding Options or other consideration, or any
combination thereof, having a Fair Market Value on the exercise date
equal to the relevant option price and (ii) a broker-assisted
cashless exercise program established by the Committee), provided in
each case that such methods avoid "short-swing" profits to the
Participant under Section 16(b) of the Securities Exchange Act of
1934, as amended. The payment of the exercise price of an Option may
be made in a single payment or transfer, in installments, or on a
deferred basis, in each case in accordance with rules and procedures
established by the Committee.
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(d) Early Termination. The unexercised portion of any Option
granted to a Key Employee under the Plan will generally be terminated
(i) thirty (30) days after the date on which the Key Employee's
employment is terminated for any reason other than (A) Cause (as
defined below), (B) retirement or mental or physical disability, or
(C) death; (ii) immediately upon the termination of the Key
Employee's employment for Cause; (iii) three months after the date on
which the Key Employee's employment is terminated by reason of
retirement or mental or physical disability; or (iv)(A) 12 months
after the date on which the Key Employee's employment is terminated
by reason of the death of the Key Employee, or (B) three months after
the date on which the Key Employee shall die if such death shall
occur during the three-month period following the termination of the
Key Employee's employment by reason of retirement or mental or
physical disability. The term "Cause," as used herein, shall mean (w)
the Key Employee's willful misconduct or fraud in the performance of
his duties under such Key Employee's employment arrangement with the
Company, (x) the continued failure or refusal of the Key Employee
(following written notice thereof) to carry out any reasonable
request of the Board for the provision of services under such Key
Employee's employment arrangement with the Company, (y) the material
breach by the Key Employee of his employment arrangement with the
Company or (z) the entering of a plea of guilty or nolo contendere to
or the conviction of the Key Employee for a felony or any other
criminal act involving moral turpitude, dishonesty, theft or
unethical business conduct. For purposes of this paragraph (d), no
act shall be considered willful unless done or omitted to be done not
in good faith and without reasonable belief that such action or
omission was in the best interest of the Company.
(e) Incentive Stock Options. All terms of any Incentive
Stock Option granted under the Plan shall comply in all respects with
the provisions of Section 422 of the Code, or any successor provision
thereto, and any regulations promulgated thereunder.
(f) No Cash Consideration for Awards. Awards shall be
granted for no cash consideration or such minimal cash consideration
as may be required by applicable law.
(g) Limits on Transfer of Options. Subject to Code Section
422, no Option and no right under any such Option, shall be
assignable, alienable, saleable, or transferable by a Participant
otherwise than by will or by the laws of descent and distribution;
provided, however, that, if so determined by the Committee, a
Participant may, in the manner established by the Committee,
designate a beneficiary or beneficiaries to exercise the rights of
the Participant, and to receive any property distributable, with
respect to any Option upon the death of the Participant. Each Option,
and each right under any such Option, shall be exercisable during the
Participant's lifetime, only by the Participant or, if permissible
under applicable law with respect to any Option that is not an
Incentive Stock Option, by the Participant's guardian or legal
representative. No Option and no right under any such Option, may be
pledged, alienated, attached, or
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otherwise encumbered, and any purported pledge, alienation,
attachment, or encumbrance thereof shall be void and unenforceable
against the Company or any Affiliate.
(h) Term of Options. Except as set forth in Section 6(b) and
Section 7, the term of each Option shall be for such period as may be
determined by the Committee.
(i) Share Certificates. All certificates for Shares or other
securities of the Company delivered under the Plan pursuant to any
Option or the exercise thereof shall be subject to such stop transfer
orders and other restrictions as the Committee may deem advisable
under the Plan or the rules, regulations, and other restrictions of
the Securities and Exchange Commission, any stock exchange upon which
such Shares or other securities are then listed, and any applicable
Federal or state securities laws, and the Committee may cause a
legend or legends to be put on any such certificates to make
appropriate reference to such restrictions.
SECTION 7. OPTIONS AWARDED TO NON-EMPLOYEE DIRECTORS
Each Non-Employee Director who was a member of the Board on the
Effective Date (defined hereafter) shall automatically be granted on such date
a Non-Qualified Stock Option to purchase 5,000 Shares, subject to all of the
provisions of the Plan. Each person who is either elected or appointed a
Non-Employee Director, and who has not previously received a grant of
Non-Qualified Stock Options pursuant to the Plan, shall automatically be
granted a Non- Qualified Stock Option to purchase 5,000 Shares on the date of
their appointment or election, subject to the provisions of the Plan. In
addition, each Non-Employee Director who is a member of the Board on April 30
of a year during the term of the Plan beginning in calendar year 1998 shall
automatically be granted a Non-Qualified Stock Option to purchase 2,500 Shares
on May 1 of the following year. All Options granted pursuant to this Section 7
shall (a) be at an exercise price per Share equal to 100% of the Fair Market
Value of a Share on the date of the grant; (b) have a term of 10 years; (c)
terminate (i) thirty (30) days after termination of a Non-Employee Director's
service as a director of the Company for any reason other than mental or
physical disability or death, (ii) three months after the date the
Non-Employee Director ceases to serve as a director of the Company due to
physical or mental disability or (iii)(A) 12 months after the date the
Non-Employee Director ceases to serve as a director due to the death of the
Non-Employee Director or (B) three months after the death of the Non-Employee
Director if such death shall occur during the three month period following the
date the Non-Employee Director ceased to serve as a director of the Company
due to physical or mental disability; and (d) be otherwise on the same terms
and conditions as all other Options granted pursuant to the Plan.
SECTION 8. AMENDMENT AND TERMINATION
Except to the extent prohibited by applicable law and unless
otherwise expressly provided in an Option Agreement or in the Plan:
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(a) Amendments to the Plan. The Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from
time to time by the Board, but no amendment without the approval of the
shareholders of the Company shall be made if shareholder approval would be
required under Section 162(m) of the Code, Section 422 of the Code, Rule 16b-3
or any other law or rule of any governmental authority, stock exchange or
other self-regulatory organization to which the Company is subject. Neither
the amendment, suspension or termination of the Plan shall, without the
consent of the holder of such Option, alter or impair any rights or
obligations under any Option theretofore granted.
(b) Adjustments of Options Upon the Occurrence of Certain Unusual or
Nonrecurring Events. The Committee shall be authorized to make adjustments in
the terms and conditions of, and the criteria included in, Options in
recognition of unusual or nonrecurring events (including, without limitation,
the events described in Section 4(b) hereof) affecting the Company, any
Affiliate, or the financial statements of the Company or any Affiliate or of
changes in applicable laws, regulations, or accounting principles, whenever
the Committee determines that such adjustments are appropriate in order to
prevent enlargement of the benefits or potential benefits to be made available
under the Plan.
(c) Correction of Defects, Omissions, and Inconsistencies. The
Committee may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option in the manner and to the extent it
shall deem desirable to carry the Plan into effect.
SECTION 9. ELECTION TO HAVE SHARES WITHHELD
(a) In combination with or in substitution for cash withholding or
any other legal method of satisfying federal and state withholding tax
liability, a Participant may elect to have Shares withheld by the Company or
to have Shares sold in a broker-assisted transaction in order to satisfy
federal and state withholding tax liability (a "share withholding election"),
provided (i) the Committee shall have adopted procedures providing for a
withholding election; and (ii) the share withholding election is made on or
prior to the date on which the amount of withholding tax liability is
determined (the "Tax Date"). If a Participant elects within thirty (30) days
of the date of exercise to be subject to withholding tax on the exercise date
pursuant to the provisions of Section 83(b) of the Code, then the share
withholding election may be made during such thirty (30) day period.
Notwithstanding the foregoing, a holder whose transactions in Common Stock are
subject to Section 16(b) of the Securities Exchange Act of 1934, as amended,
may make a share withholding election only if the following additional
conditions are met: (i) the share withholding election is made no sooner than
six (6) months after the date of grant of the Option, except, however, such
six (6) month condition shall not apply if the Participant's death or
disability (as shall be determined by the Committee) occurs within such six
(6) month period; and (ii) the share withholding election is made (x) at least
six (6) months prior to the Tax Date, or (y) during the period beginning on
the third business day following the date of release of the Company's
quarterly or annual financial results and ending on the twelfth business day
following such date.
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(b) A share withholding election shall be deemed made when written
notice of such election, signed by the Participant, has been hand delivered or
transmitted by registered or certified mail to the Secretary of the Company at
its then principal office. Delivery of said notice shall constitute an
irrevocable election to have Shares withheld.
(c) If a Participant has made a share withholding election pursuant
to this Section 9, and (i) within thirty (30) days of the date of exercise of
the Option, the Participant elects pursuant to the provisions of Section 83(b)
of the Code to be subject to withholding tax on the date of exercise of the
Option, then such Participant will be unconditionally obligated to immediately
tender back to the Company the number of Shares having an aggregate fair
market value (as determined in good faith by the Committee), equal to the
amount of tax required to be withheld plus cash for any fractional amount,
together with written notice to the Company informing the Company of the
Participant's election pursuant to Section 83(b) of the Code; or (ii) if the
Participant has not made an election pursuant to the provisions of Section
83(b) of the Code, then on the Tax Date, such Participant will be
unconditionally obligated to tender back to the Company the number of Shares
having an aggregate fair market value (as determined in good faith by the
Committee), equal to the amount of tax required to be withheld plus cash for
any fractional amount.
SECTION 10. VESTING LIMITATION ON INCENTIVE STOCK OPTIONS
The Fair Market Value of Shares subject to Incentive Stock Options
(determined as of the date such Incentive Stock Options are granted)
exercisable for the first time by any individual during any calendar year
shall in no event exceed $100,000.
SECTION 11. GENERAL PROVISIONS
(a) No Rights to Awards. No Key Employee or Consultant shall have any
claim to be granted any Option under the Plan, and there is no obligation for
uniformity of treatment of Key Employees or Consultants or holders or
beneficiaries of Options under the Plan. The terms and conditions of Options
need not be the same with respect to each recipient.
(b) No Limit on Other Plans. Nothing contained in the Plan shall
prevent the Company or any Affiliate from adopting or continuing in effect
other or additional compensation arrangements and such arrangements may be
either generally applicable or applicable only in specific cases.
(c) No Right to Employment. The grant of an Option shall not be
construed as giving a Participant the right to be retained in the employ of
the Company or any Affiliate. Further, the Company or an Affiliate may at any
time dismiss a Participant from employment, free from any liability, or any
claim under the Plan, unless otherwise expressly provided in the Plan or in
any Option Agreement.
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(d) Governing Law. The validity, construction, and effect of the Plan
and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of New York and applicable Federal law.
(e) Severability. If any provision of the Plan or any Option is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction, or would disqualify the Plan or any Option under any law deemed
applicable by the Committee, such provision shall be construed or deemed
amended to conform to applicable laws, or if it cannot be construed or deemed
amended without, in the determination of the Committee, materially altering
the intent of the Plan, such provision shall be deemed void, stricken and the
remainder of the Plan and any such Option shall remain in full force and
effect.
(f) No Trust or Fund Created. Neither the Plan nor any Option shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and a Participant
or any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Option, such right
shall be no greater than the right of any unsecured general creditor of the
Company or any Affiliate.
(g) No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Option, and the Committee shall
determine whether cash, other securities, or other property shall be paid or
transferred in lieu of any fractional Shares or whether such fractional Shares
or any rights thereto shall be canceled, terminated, or otherwise eliminated.
(h) Headings. Headings are given to the Sections and subsections of
the Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision hereof.
SECTION 12. DEDUCTIBILITY OF COMPENSATION
Prior to the end of the "reliance period" as defined in Treasury
Regulation Section 1.162- 27(f)(2), the Committee shall take such actions, if
any, that it deems necessary or appropriate so that the compensation element
of Non-Qualified Stock Options will qualify as "qualified performance-based
compensation," within the meaning of Treasury Regulation Section 1.162- 27(e).
SECTION 13. EFFECTIVE DATE OF THE PLAN
The Plan is effective as of the closing of the Company's initial
public offering (the "Effective Date").
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SECTION 14. TERM OF THE PLAN
The Plan shall continue until the earlier of (i) the date on which
all Options issuable hereunder have been issued, (ii) the termination of the
Plan by the Board or (iii) March 4, 2007. However, unless otherwise expressly
provided in the Plan or in an applicable Option Agreement, any Option
theretofore granted may extend beyond such date and the authority of the
Committee to amend, alter, adjust, suspend, discontinue, or terminate any such
Option or to waive any conditions or rights under any such Option, and the
authority of the Board to amend the Plan, shall extend beyond such date.
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Exhibit 10.19
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT entered into as of March 1, 1997, by and between
Pivot Rules, Inc., a New York corporation (the "Company") and David Lewis
("Lewis").
RECITALS
1. The Company desires to retain the services of Lewis as the Vice
President of Operations of the Company in accordance with the terms and
conditions of this Agreement.
2. Lewis will serve the Company as its Vice President of Operations
in accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and Lewis agree as
follows:
1. TERM
The Company hereby agrees to employ Lewis as the Vice President of
Operations of the Company and Lewis hereby agrees to serve in such capacity,
for a term commencing as of the date hereof, and ending February 28, 2001,
upon the terms and subject to the conditions contained in this Agreement. The
terms of this Agreement may, at the option of the Company and with the
approval of Lewis, be extended from time to time in a written memorandum
signed by the Company and Lewis, after approval by the Board of Directors.
2. DUTIES
During the term of this Agreement, Lewis shall serve as the Vice
President of Operations of the Company, and shall be responsible for the
duties attendant to such office, which duties will be generally consistent
with his position as an executive officer of the Company and such other
managerial duties and responsibilities with the Company as may be assigned by
the President and/or the Board of Directors of the Company.
The principal location of Lewis' employment shall be in the New York
City vicinity, although Lewis understands and agrees that he will be required
to travel frequently for business reasons. Lewis shall devote his full
professional and business time and best efforts to the performance of his
duties as the Vice President of Operations of the Company during the term of
this Agreement. Lewis shall not, directly or indirectly, render services to
any other person or entity, without the consent of the Board of Directors.
<PAGE>
3. COMPENSATION
For services rendered by Lewis to the Company during the
term of this Agreement, the Company shall pay him a base salary of $100,000
per year, payable in accordance with the standard payroll practices of the
Company, subject to annual increases in the sole discretion of the Company's
Board of Directors, taking into account merit, corporate and individual
performance and general business conditions, including changes in the "cost of
living index," but in no event shall his salary, after giving effect to such
increase, be less than the amounts set forth below:
Year Amount
- ---- ------
March 1, 1998, commencing $110,000
March 1, 1999, commencing $121,000
March 1, 2000, commencing $133,100
4. BONUS/OPTIONS
a. For each fiscal year during the term of this Agreement,
Lewis shall be eligible to receive a bonus set by the Board of Directors in
its sole discretion, based on such factors as the Board deems appropriate;
provided that such bonus shall not exceed 25% of Lewis' base salary for such
fiscal year. Bonuses to be paid to Lewis pursuant to this paragraph 4 shall be
paid within 30 days following completion of the audit of the annual financial
statements of the Company for the fiscal year in question.
b. The Company hereby agrees to cause the issuance to Lewis
of stock options ("Options") to purchase shares of the Company's common stock,
$.01 par value ("Common Stock") in accordance with the following schedule: (i)
Options to purchase 15,000 shares of Common Stock to be issued subject to and
effective upon the closing date (the "Closing Date") of the Company's initial
public offering ("IPO Options"); and (ii) Options to purchase up to 5,000,
5,000 and 8,000 shares of Common Stock to be issued on the first, second and
third anniversary dates of the Closing Date, unless Lewis is not, for any
reason, an employee of the Company on such date. All Options (other than the
IPO Options) are contingent upon Lewis satisfying and maintaining the
performance standards set forth on Schedule A attached hereto and all Options
shall not be issued if the initial public offering is not consummated. All
Options shall be issued pursuant to, and in accordance with, the Company's
1997 Stock Option Plan (the "Plan"). The Options shall be Incentive Stock
Options (as defined in the Plan) and shall be exercisable at a price equal to
the Fair Market Value (as defined in the Plan) of the Common Stock on the date
of issuance of such Option, except with respect to the IPO Options, which
shall be exercisable at a price equal to the initial public offering price of
the Company's Common Stock. Each Option shall vest over a four year period
from the date of grant at a rate of 25% per year, commencing with the first
anniversary of the date of grant. In the event of the termination
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of Lewis' employment for any reason, he shall have 30 days within which to
exercise any vested Options and any unvested or unissued Options shall be
forfeited.
5. EXPENSE REIMBURSEMENT AND PERQUISITES
a. During the term of this Agreement, Lewis shall be
entitled to reimbursement of all reasonable and actual out-of-pocket expenses
incurred by him in the performance of his services to the Company consistent
with corporate policies, provided that the expenses are properly accounted
for.
b. During each calendar year of the term of this Agreement,
Lewis shall be entitled to reasonable vacation with full pay; provided,
however, that Lewis shall schedule such vacations at times convenient to the
Company.
c. During the term of this Agreement, the Company shall
provide a life insurance term policy on the life of Lewis, for the benefit of
Lewis' beneficiaries, in the amount of at least $250,000. All premiums on such
policy shall be paid by the Company, subject to availability on commercially
reasonable terms.
d. During the term of this Agreement, the Company shall
provide Lewis with family major medical insurance coverage as determined by
the Company in its sole discretion, and Lewis shall be entitled to participate
in all dental insurance and disability plans and other employee benefit plans
instituted by the Company from time to time on the same terms and conditions
as other employees of the Company, to the extent permitted by law.
6. NON-COMPETITION; NON-SOLICITATION
a. In consideration of the offer of employment, severance
benefits and Options to be granted to Lewis hereunder, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, during the term of this Agreement and for a period equal to two
years thereafter, Lewis shall not, without the prior written consent of the
Company, anywhere in the United States where the Company conducts business or
sells its products, directly or indirectly, (i) enter into the employ of or
render any services to any person, firm or corporation engaged in any business
which now or at the time, has material operations which are engaged in any
business activity competitive (directly or indirectly) with the business of
the Company (currently the design, sourcing and marketing of golf lifestyle
sportswear and/or moderate collections for men) including, for these purposes,
any business in which, at the time of termination of his employment, there is
a bonafide intention on the part of the Company to engage in the future (in
each case, a "Competitive Business"); (ii) engage in any Competitive Business
for his own account; (iii) become associated with or interested in any
Competitive Business as an individual, partner, shareholder, creditor,
director, officer, principal, agent, employee, trustee, consultant, advisor or
in any other relationship or capacity; (iv) employ or retain, or have or cause
any other person or entity to employ or retain, any person who was
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employed or retained by the Company while Lewis was employed by the Company;
or (v) solicit, interfere with, or endeavor to entice away from the Company,
for the benefit of a Competitive Business, any of its customers or other
persons with whom the Company has a contractual relationship. However, nothing
in this Agreement shall preclude Lewis from investing his personal assets in
the securities of any corporation or other business entity which is engaged in
a Competitive Business if such securities are traded on a national stock
exchange or in the over-the-counter market and if such investment does not
result in his beneficially owning, at any time, more than three percent (3%)
of the publicly-traded equity securities of such Competitive Business.
b. Lewis and the Company agree that the covenants of
non-competition and non-solicitation contained in this paragraph 6 are
reasonable covenants under the circumstances, and further agree that if, in
the opinion of any court of competent jurisdiction, such covenants are not
reasonable in any respect, such court shall have the right, power and
authority to excise or modify such provision or provisions of these covenants
as to the court shall appear not reasonable and to enforce the remainder of
these covenants as so amended. Lewis agrees that any breach of the covenants
contained in this paragraph 6 would irreparably injure the Company.
Accordingly, Lewis agrees that the Company, in addition to pursuing any other
remedies it may have in law or in equity, may obtain an injunction against
Lewis from any court having jurisdiction over the matter, restraining any
further violation of this paragraph 6.
7. TERMINATION
a. This Agreement, the employment of Lewis, and Lewis'
position as Vice President of Operations of the Company shall terminate upon
the first to occur of:
(i) his death;
(ii) his "permanent disability," due to injury or
sickness for a continuous period of four (4)
months, or a total of eight months in a twenty-four
month period (vacation time excluded), during which
time Lewis is unable to attend to his ordinary and
regular duties;
(iii) a "Constructive Termination" by the Company, which,
for purposes of this Agreement, shall be deemed to
have occurred upon (A) the removal of Lewis from
his position as Vice President of Operations of the
Company, or (B) the material breach by the Company
of this Agreement; provided that no such breach
shall be considered a Constructive Termination
unless Lewis has provided the Company with at least
sixty (60) days' prior written notice of such
breach and the Company has failed to cure such
breach within such sixty (60) day period;
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(iv) the termination of this Agreement at any time
without cause by the Company;
(v) non-renewal of this Agreement by the Company and/or
the Board of Directors;
(vi) the termination of this Agreement for cause, which,
for purposes of this Agreement, shall mean that (1)
Lewis has been convicted of a felony or any serious
crime involving moral turpitude, or engaged in
materially fraudulent or materially dishonest
actions in connection with the performance of his
duties hereunder, or (2) Lewis has willfully and
materially failed to perform his duties hereunder,
or (3) Lewis has breached the terms and provisions
of this Agreement in any material respect, or (4)
Lewis has failed to comply in any material respect
with the Company's policies of conduct including
with respect to trading in securities; or
(vii) the termination of this Agreement by Lewis, which
shall occur on not less than 60 days prior written
notice from Lewis.
b. In the event that this Agreement is terminated, other
than as a result of a Constructive Termination or by the Company without
cause, the Company shall pay Lewis his base salary only through the date of
termination. In the event that this Agreement is terminated without cause by
the Company pursuant to paragraph 7(a)(iv) or through a Constructive
Termination pursuant to paragraph 7(a)(iii), the Company shall pay Lewis, in
lieu of all salary, compensation payments and perquisites set forth in
paragraphs 3, 4 and 5 (including bonus payments and option grants), severance
payments (the "Severance Payments") as follows:
(i) the then-current base salary for a period of ninety
(90) days, if Lewis is terminated during the first
year of the term of this Agreement;
(ii) the then-current base salary for a period of
one-hundred twenty (120) days, if Lewis is
terminated during the second year of the term of
this Agreement; or
(iii) the then-current base salary for a period of
one-hundred fifty (150) days, if Lewis is
terminated during the third year of the term of
this Agreement or any time thereafter. The
Severance Payments shall be payable in periodic
installments in accordance with the Company's
standard payroll practices.
5
<PAGE>
8. CONFIDENTIALITY
a. Lewis recognizes that the services to be performed by him
are special, unique and extraordinary in that, by reason of his employment
under this Agreement, he may acquire or has acquired confidential information
and trade secrets concerning the operation of the Company, its predecessors,
and/or its affiliates, the use or disclosure of which could cause the Company,
or its affiliates substantial loss and damages which could not be readily
calculated and for which no remedy at law would be adequate. Accordingly,
Lewis covenants and agrees with the Company that he will not at any time
during the term of this Agreement or thereafter, except in the performance of
his obligations to the Company or with the prior written consent of the Board
of Directors or as otherwise required by court order, subpoena or other
government process, directly or indirectly, disclose any secret or
confidential information that he may learn or has learned by reason of his
association with the Company, or any predecessor. If Lewis shall be required
to make such disclosure pursuant to court order, subpoena or other government
process, he shall notify the Company of the same, by personal delivery or
electronic means, confirmed by mail, within twenty-four (24) hours of learning
of such court order, subpoena or other government process and, at the
Company's expense, shall (i) take all reasonably necessary and lawful steps
required by the Company to defend against the enforcement of such subpoena,
court order or government process, and (ii) permit the Company to intervene
and participate with counsel of its choice in any proceeding relating to the
enforcement thereof. The term "confidential information" includes, without
limitation, information not in the public domain and not previously disclosed
to the public or to the trade by the Company's management with respect to the
Company's or its affiliates' facilities and methods, trade secrets and other
intellectual property, designs, manuals, confidential reports, supplier names
and pricing, customer names and prices paid, financial information or business
plans. Lewis understands and agrees that the rights and obligations set forth
in this paragraph 8(a) shall survive the termination or expiration of this
Agreement.
b. Lewis confirms that all confidential information is and
shall remain the exclusive property of the Company. All business records,
papers and documents kept or made by Lewis relating to the business of the
Company shall be and will remain the property of the Company. Upon the
termination of his employment with the Company, Lewis shall promptly deliver
to the Company, and shall not, without the consent of the Company, retain
copies of any written materials prepared by or for the Company not previously
made available to the public or records and documents made by Lewis or coming
into his possession and not in the public domain concerning the business or
affairs of the Company or any predecessors to its business, or any of its
affiliates or subsidiaries. Lewis understands and agrees that the rights and
obligations set forth in this paragraph 8(b) shall survive the termination or
expiration of this Agreement.
9. IDL INTERNATIONAL, LLC
Lewis hereby acknowledges receipt by IDL International, LLC
("IDL") of the amounts (i) listed on invoice #15 billed by IDL to the Company,
and (ii) of $5,000 for work in
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<PAGE>
progress. Lewis, as the principal owner and president of IDL, further
acknowledges that the Company shall not be responsible for any payments or
charges otherwise due IDL. Simultaneously with the execution of this
Agreement, Lewis shall execute, and cause IDL to execute, a general release in
the form of Schedule B attached hereto, reflecting such understanding.
10. REPRESENTATIONS AND WARRANTIES
a. Lewis represents and warrants to the Company that he was
advised to consult with an attorney of Lewis' own choosing concerning this
Agreement and that Lewis has done so.
b. Lewis represents and warrants to the Company that the
execution, delivery and performance of this Agreement by Lewis complies with
all laws applicable to Lewis or to which his properties are subject and does
not violate, breach or conflict with any agreement by which he or his assets
are bound or affected.
11. GOVERNING LAW
This Agreement shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of the State of New
York, without giving effect to its conflict of law provisions.
12. ENTIRE AGREEMENT
This Agreement contains all of the understandings between Lewis and
the Company pertaining to Lewis' employment with the Company, and it
supersedes all undertakings and agreements, whether oral or in writing,
previously entered into between them. The parties hereto acknowledge that the
Agreement dated May 1996 by and between the Company and IDL, as amended by
Addendum dated July 1996, is terminated in all respects and shall be of no
further force or effect.
13. AMENDMENT OR MODIFICATION; WAIVER
No provision of this Agreement may be amended or modified unless such
amendment or modification is agreed to in writing, signed by Lewis and by an
officer of the Company duly authorized to do so. Except as otherwise
specifically provided in this Agreement, no waiver by either party of any
breach by the other party of any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of a similar or
dissimilar provision or condition at the same or any prior or subsequent time.
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<PAGE>
14. NOTICES
Any notice to be given hereunder shall be in writing and delivered
personally or sent by certified mail, postage prepaid, return receipt
requested, addressed to the party concerned at the address indicated below or
to such other address as such party may subsequently designate by like notice:
If to the Company, to:
Pivot Rules, Inc.
80 West 40th Street
New York, NY 10018
Attn: Kenneth Seiff
With a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
Attn: Richard A. Goldberg, Esq.
If to Lewis, to:
David Lewis
8 Crestwood Court
Holmdel, NJ 07733
15. SEVERABILITY
In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, the
remaining provisions or portions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
16. TITLES
Titles of the Sections of this Agreement are intended solely
for convenience of reference and no provision of this Agreement is to be
construed by reference to the title of any Section.
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<PAGE>
17. COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall
be deemed an original, and all of which together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first above written.
PIVOT RULES, INC.
By: /s/ E. Kenneth Seiff
-------------------------
E. Kenneth Seiff
President
/s/ David Lewis
-----------------------------
DAVID LEWIS
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<PAGE>
Schedule A
Performance Standards
(1) Achieve gross margin of 30%.
(2) Integrate warehouse, international freight coordination,
sales, production and finance departments.
(3) Design and implement systems in design department to, among
other things, ensure the timely delivery of quality salesmen
samples as well as the systemization of all design records.
(4) Develop and maintain an organized and systematic production
recordkeeping system.
(5) Oversee the quality control and timely delivery of all
production.
(6) Manage relationships with factories and agents including
regular and frequent visits to most factories.
(7) Develop and implement a time/action calendar from line
conception to receipt of orders by the customer.
<PAGE>
Schedule B
RELEASE
KNOW ALL MEN BY THESE PRESENTS:
In consideration of the sum of $1.00, receipt of which is hereby
acknowledged, and other good and valuable consideration, David Lewis and IDL
International, LLC (individually, a "Releasor," and collectively, as
"Releasors"), hereby release and forever discharge to the fullest extent
permitted by law, Pivot Rules, Inc. (the "Company"), any of its parents,
subsidiaries, partnerships or affiliates thereof, and each of its predecessors
and successors in interest, and each of its past, present or future
principals, officers, directors, employees, agents, representatives, advisors,
shareholders, partners, members, successors and assigns (collectively, the
"Released Parties"), from any and all actions, causes of action, suits,
disputes, debts, dues, sums of money, accounts, costs, expenses, reckonings,
bonds, bills, specialties, covenants, charges, complaints, contracts,
agreements, controversies, promises, variances, trespasses, damages,
judgments, extents, executions, claims, liabilities, obligations, promises and
demands whatsoever, of every nature and any kind, in law, admiralty, or equity
in any way relating to any of the Released Parties (collectively, "Actions"),
which the Releasors, the Releasors' heirs, executors, administrators,
directors, officers, agents, successors and assigns (collectively, the
"Releasing Parties") ever had, now have or hereafter can, shall or may have
against the Released Parties (or any of them), for, upon, or by reason of any
matter, cause or thing whatsoever, whether known or unknown, suspected or
unsuspected, from the beginning of the world to the day of the date of this
RELEASE including, without limitation, any and all claims arising out of, or
matters relating to, the Agreement dated May 1996 by and between the Company
and IDL International, LLC, as amended by Addendum dated July 1996, and the
services performed thereunder.
To the extent that any applicable law provides in substance that a
general release does not extend to claims which a releasor does not know or
suspect to exist in his favor at the time of executing the release, which if
known would have materially affected such releasor's settlement with the
releasee, each Releasor, on behalf of himself, itself and each of the
Releasing Parties, hereby agrees that the provisions of such applicable law
are hereby knowingly and voluntarily waived and relinquished by such Releasor,
on behalf of himself, itself and each of the Releasing Parties, to the full
extent that such rights and benefits pertaining to the matters released herein
may be waived, and each Releasor, on behalf of himself, itself and each of the
Releasing Parties, hereby agrees and acknowledges that this waiver is an
essential term of this RELEASE.
In connection with such waiver and relinquishment, each Releasor, on
behalf of himself, itself and each of the Releasing Parties, hereby
acknowledges that such Releasor is aware that such Releasor, or any of the
Releasing Parties, may hereafter discover claims
<PAGE>
presently unknown or unsuspected, or facts in addition to or different from
those which such Releasor, or any of the Releasing Parties, now knows or
believes to be true, with respect to the matters released herein.
Nevertheless, it is the intention of each Releasor, on behalf of himself,
itself and each of the Releasing Parties, in executing this RELEASE fully,
finally and forever to settle and release all such matters, and all claims
relative thereto, which exist, hereafter may exist or might have existed
(whether or not previously or currently asserted in any Action) and each
Releasor, on behalf of himself, itself and each of the Releasing Parties,
hereby acknowledges that each Releasor and any of the Releasing Parties shall
not be entitled to any additional payments in connection therewith.
This RELEASE may not be changed orally.
This RELEASE shall be construed and enforced in accordance with, and
the rights of the Releasing Parties and the Released Parties shall be governed
by, the laws of the State of New York, without giving effect to the principles
of conflicts of laws thereof.
IN WITNESS WHEREOF, the undersigned (on behalf of themselves and the
Releasing Parties) have caused this RELEASE to be duly executed on the ____
day of April, 1997.
--------------------------------
David Lewis
IDL INTERNATIONAL, LLC
By:
-----------------------------
Name:
Title:
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<PAGE>
STATE OF NEW YORK )
: ss.
COUNTY OF )
On April ___, 1997 before me _______________________ personally came
David Lewis, to me known, and known to me to be the individual described in
and who executed the foregoing Release, and duly acknowledged to me that he
executed the same.
[Seal] ---------------------------
Notary Public
STATE OF NEW YORK )
: ss.
COUNTY OF )
On April __, 1997 before me personally came David Lewis to
me known, who, by me duly sworn, did depose and say that he is the President
of IDL International, LLC, the company described in and which executed the
foregoing Release, and that deponent is duly authorized to sign the foregoing
Release on behalf of that company.
[Seal] ---------------------------
Notary Public
<PAGE>
Exhibit 10.20
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT entered into as of March 17, 1997, by and
between Pivot Rules, Inc., a New York corporation (the "Company") and William
T. McLoone ("McLoone").
RECITALS
1. The Company desires to retain the services of McLoone as the
Executive Vice President of Sales of the Company in accordance with the terms
and conditions of this Agreement.
2. McLoone will serve the Company as its Executive Vice President of
Sales in accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and McLoone agree as
follows:
1. TERM
The Company hereby agrees to employ McLoone as the Executive Vice
President of Sales of the Company and McLoone hereby agrees to serve in such
capacity, for a term commencing as of the date hereof, and ending March 16,
2002, upon the terms and subject to the conditions contained in this
Agreement. The terms of this Agreement may, at the option of the Company and
with the approval of McLoone, be extended from time to time in a written
memorandum signed by the Company and McLoone, after approval by the Board of
Directors.
2. DUTIES
During the term of this Agreement, McLoone shall serve as the
Executive Vice President of Sales of the Company, and shall be responsible for
the duties attendant to such office, which duties will be generally consistent
with his position as an executive officer of the Company and such other
managerial duties and responsibilities with the Company as may be assigned by
the President and/or the Board of Directors of the Company.
The principal location of McLoone's employment shall be in the New
York City vicinity, although McLoone understands and agrees that he will be
required to travel frequently for business reasons. McLoone shall devote his
full professional and business time and best efforts to the performance of his
duties as the Executive Vice President of Sales of the Company during
<PAGE>
the term of this Agreement. McLoone shall not, directly or indirectly, render
services to any other person or entity, without the consent of the Board of
Directors.
3. COMPENSATION
For services rendered by McLoone to the Company during the
term of this Agreement, the Company shall pay him a base salary of $125,000
per year, payable in accordance with the standard payroll practices of the
Company, subject to annual increases in the sole discretion of the Company's
Board of Directors, taking into account merit, corporate and individual
performance and general business conditions, including changes in the "cost of
living index," but in no event shall his salary, after giving effect to such
increase, be less than the amounts set forth below:
Year Amount
- ---- ------
March 17, 1998, commencing $137,500
March 17, 1999, commencing $151,250
March 17, 2000, commencing $166,375
March 17, 2001, commencing $183,012.50
4. BONUS/OPTIONS
a. For 1997, McLoone shall be eligible to receive a bonus
set by E. Kenneth Seiff ("Seiff"), the Company's Chief Executive Officer, and
the Board of Directors in its sole discretion, based on such factors as Seiff
and the Board of Directors deem appropriate including the financial and
operating performance of the Company's business and divisions and a
qualitative assessment of McLoone's performance during such year. For each
other year during the term of this Agreement, McLoone shall be eligible to
receive a bonus contingent upon McLoone satisfying and maintaining certain
established financial goals as determined by McLoone, Seiff and the Option
Plan/Compensation Committee of the Company no later than September 30 of the
prior year and Seiff's and the Board of Director's qualitative assessment of
his performance during such year. Bonuses to be paid to McLoone pursuant to
this paragraph 4 shall not exceed 35% of McLoone's base salary for such year
and shall be paid within 30 days following completion of the audit of the
annual financial statements of the Company for the fiscal year in question.
b. The Company hereby agrees to cause the issuance to
McLoone of stock options ("Options") to purchase shares of the Company's
common stock, $.01 par value ("Common Stock") in accordance with the following
schedule: (i) Options to purchase 8,000 shares of Common Stock to be issued
subject to and effective upon the closing date (the "Closing Date") of the
Company's initial public offering ("IPO Options"); and (ii) Options to
purchase 8,000 shares of Common Stock to be issued on the first, second, third
and fourth anniversary dates of the Closing Date, unless McLoone is not, for
any reason, an employee of the Company
2
<PAGE>
on such date. All Options shall be issued pursuant to, and in accordance with,
the Company's 1997 Stock Option Plan (the "Plan") and shall not be issued if
the initial public offering is not consummated. The Options shall be Incentive
Stock Options (as defined in the Plan) and shall be exercisable at a price
equal to the Fair Market Value (as defined in the Plan) of the Common Stock on
the date of issuance of such Option, except with respect to the IPO Options,
which shall be exercisable at a price equal to the initial public offering
price of the Company's Common Stock. Each Option shall vest over a four year
period from the date of grant at a rate of 25% per year, commencing with the
first anniversary of the date of grant. In the event of the termination of
McLoone's employment for any reason, he shall have 30 days within which to
exercise any vested Options and any unvested or unissued Options shall be
forfeited.
5. EXPENSE REIMBURSEMENT AND PERQUISITES
a. During the term of this Agreement, McLoone shall be
entitled to reimbursement of all reasonable and actual out-of-pocket expenses
incurred by him in the performance of his services to the Company consistent
with corporate policies, if any, provided that the expenses are properly
accounted for.
b. During each calendar year of the term of this Agreement,
McLoone shall be entitled to reasonable vacation with full pay; provided,
however, that McLoone shall schedule such vacations at times convenient to the
Company.
c. During the term of this Agreement, the Company shall
provide McLoone with family major medical insurance coverage as determined by
the Company in its sole discretion, and McLoone shall be entitled to
participate in all dental insurance and disability plans and other employee
benefit plans instituted by the Company from time to time on the same terms
and conditions as other employees of the Company, to the extent permitted by
law.
6. NON-COMPETITION; NON-SOLICITATION
a. In consideration of the offer of employment, severance
benefits and Options to be granted to McLoone hereunder, and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, during the term of this Agreement and for a period equal to two
years thereafter, McLoone shall not, without the prior written consent of the
Company, anywhere in the United States where the Company conducts business or
sells its products, directly or indirectly, (i) enter into the employ of or
render any services to any person, firm or corporation engaged in any business
which now or at the time, has material operations which are engaged in any
business activity competitive (directly or indirectly) with the business of
the Company (currently the design, sourcing and marketing of golf lifestyle
sportswear and/or moderate collections for men) including, for these purposes,
any business in which, at the time of termination of his employment, there is
a bonafide intention on the part of the Company to engage in the future (in
each case, a "Competitive Business"); (ii) engage in any Competitive Business
for his own account; (iii) become associated with or interested in any
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<PAGE>
Competitive Business as an individual, partner, shareholder, creditor,
director, officer, principal, agent, employee, trustee, consultant, advisor or
in any other relationship or capacity; (iv) employ or retain, or have or cause
any other person or entity to employ or retain, any person who was employed or
retained by the Company while McLoone was employed by the Company; or (v)
solicit, interfere with, or endeavor to entice away from the Company, for the
benefit of a Competitive Business, any of its customers or other persons with
whom the Company has a contractual relationship. However, nothing in this
Agreement shall preclude McLoone from investing his personal assets in the
securities of any corporation or other business entity which is engaged in a
Competitive Business if such securities are traded on a national stock
exchange or in the over-the-counter market and if such investment does not
result in his beneficially owning, at any time, more than three percent (3%)
of the publicly-traded equity securities of such Competitive Business.
b. McLoone and the Company agree that the covenants of
non-competition and non-solicitation contained in this paragraph 6 are
reasonable covenants under the circumstances, and further agree that if, in
the opinion of any court of competent jurisdiction, such covenants are not
reasonable in any respect, such court shall have the right, power and
authority to excise or modify such provision or provisions of these covenants
as to the court shall appear not reasonable and to enforce the remainder of
these covenants as so amended. McLoone agrees that any breach of the covenants
contained in this paragraph 6 would irreparably injure the Company.
Accordingly, McLoone agrees that the Company, in addition to pursuing any
other remedies it may have in law or in equity, may obtain an injunction
against McLoone from any court having jurisdiction over the matter,
restraining any further violation of this paragraph 6.
7. TERMINATION
a. This Agreement, the employment of McLoone, and McLoone's
position as Executive Vice President of Sales of the Company shall terminate
upon the first to occur of:
(i) his death;
(ii) his "permanent disability," due to injury or
sickness for a continuous period of four (4)
months, or a total of eight months in a twenty-four
month period (vacation time excluded), during which
time McLoone is unable to attend to his ordinary
and regular duties;
(iii) a "Constructive Termination" by the Company, which,
for purposes of this Agreement, shall be deemed to
have occurred upon (A) the removal of McLoone from
his position as Executive Vice President of Sales
of the Company, or (B) the material breach by the
Company of this Agreement; provided that no such
breach shall be considered a Constructive
Termination unless McLoone has provided the Company
with at least
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<PAGE>
sixty (60) days' prior written notice of such
breach and the Company has failed to cure such
breach within such sixty (60) day period;
(iv) the termination of this Agreement at any time
without cause by the Company;
(v) non-renewal of this Agreement by the Company and/or
the Board of Directors;
(vi) the termination of this Agreement for cause, which,
for purposes of this Agreement, shall mean that (1)
McLoone has been convicted of a felony or any
serious crime involving moral turpitude, or engaged
in materially fraudulent or materially dishonest
actions in connection with the performance of his
duties hereunder, or (2) McLoone has willfully and
materially failed to perform his duties hereunder,
or (3) McLoone has breached the terms and
provisions of this Agreement in any material
respect, or (4) McLoone has failed to comply in any
material respect with the Company's policies of
conduct including with respect to trading in
securities; provided that no such willful and
material failure or breach shall be considered a
termination of this Agreement for cause unless the
Company has provided McLoone with at least ten (10)
days' prior written notice of such willful and
material failure or breach, as the case may be, and
McLoone has failed to cure such willful and
material failure or breach, as the case may be,
within such ten (10) day period; or
(vii) the termination of this Agreement by McLoone, which
shall occur on not less than 60 days prior written
notice from McLoone.
b. In the event that this Agreement is terminated, other
than as a result of a Constructive Termination or by the Company without
cause, the Company shall pay McLoone his base salary only through the date of
termination. In the event that this Agreement is terminated without cause by
the Company pursuant to paragraph 7(a)(iv) or through a Constructive
Termination pursuant to paragraph 7(a)(iii), the Company shall pay McLoone, in
lieu of all salary, compensation payments and perquisites set forth in
paragraphs 3, 4 and 5 (including bonus payments and option grants), severance
payments (the "Severance Payments") as follows:
(i) the then-current base salary for a period of ninety
(90) days, if McLoone is terminated during the
first year of the term of this Agreement;
(ii) the then-current base salary for a period of
one-hundred twenty (120) days, if McLoone is
terminated during the second year of the term of
this Agreement; or
5
<PAGE>
(iii) the then-current base salary for a period of
one-hundred fifty (150) days, if McLoone is
terminated during the third year of the term of
this Agreement or any time thereafter. The
Severance Payments shall be payable in periodic
installments in accordance with the Company's
standard payroll practices.
8. CONFIDENTIALITY
a. McLoone recognizes that the services to be performed by
him are special, unique and extraordinary in that, by reason of his employment
under this Agreement, he may acquire or has acquired confidential information
and trade secrets concerning the operation of the Company, its predecessors,
and/or its affiliates, the use or disclosure of which could cause the Company,
or its affiliates substantial loss and damages which could not be readily
calculated and for which no remedy at law would be adequate. Accordingly,
McLoone covenants and agrees with the Company that he will not at any time
during the term of this Agreement or thereafter, except in the performance of
his obligations to the Company or with the prior written consent of the Board
of Directors or as otherwise required by court order, subpoena or other
government process, directly or indirectly, disclose any secret or
confidential information that he may learn or has learned by reason of his
association with the Company, or any predecessor. If McLoone shall be required
to make such disclosure pursuant to court order, subpoena or other government
process, he shall notify the Company of the same, by personal delivery or
electronic means, confirmed by mail, within twenty-four (24) hours of learning
of such court order, subpoena or other government process and, at the
Company's expense, shall (i) take all reasonably necessary and lawful steps
required by the Company to defend against the enforcement of such subpoena,
court order or government process, and (ii) permit the Company to intervene
and participate with counsel of its choice in any proceeding relating to the
enforcement thereof. The term "confidential information" includes, without
limitation, information not in the public domain and not previously disclosed
to the public or to the trade by the Company's management with respect to the
Company's or its affiliates' facilities and methods, trade secrets and other
intellectual property, designs, manuals, confidential reports, supplier names
and pricing, customer names and prices paid, financial information or business
plans. McLoone understands and agrees that the rights and obligations set
forth in this paragraph 8(a) shall survive the termination or expiration of
this Agreement.
b. McLoone confirms that all confidential information is and
shall remain the exclusive property of the Company. All business records,
papers and documents kept or made by McLoone relating to the business of the
Company shall be and will remain the property of the Company. Upon the
termination of his employment with the Company, McLoone shall promptly deliver
to the Company, and shall not, without the consent of the Company, retain
copies of any written materials prepared by or for the Company not previously
made available to the public or records and documents made by McLoone or
coming into his possession and not in the public domain concerning the
business or affairs of the Company or any predecessors to its business, or any
of its affiliates or subsidiaries. McLoone understands and agrees that the
rights
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<PAGE>
and obligations set forth in this paragraph 8(b) shall survive the termination
or expiration of this Agreement.
9. LOAN
McLoone acknowledges to the Company that he has received a
loan (the "Loan") from the Company in the aggregate principal amount of
$50,000. The terms and provisions of the Loan are as set forth in the
promissory note (the "Note"), in the form of Schedule A attached hereto.
McLoone agrees to, simultaneously with the execution of this Agreement,
execute and deliver the Note to the Company.
10. REPRESENTATIONS AND WARRANTIES
a. McLoone represents and warrants to the Company that he
was advised to consult with an attorney of McLoone's own choosing concerning
this Agreement and that McLoone has done so.
b. McLoone represents and warrants to the Company that the
execution, delivery and performance of this Agreement by McLoone complies with
all laws applicable to McLoone or to which his properties are subject and does
not violate, breach or conflict with any agreement by which he or his assets
are bound or affected.
11. GOVERNING LAW
This Agreement shall be deemed a contract made under, and for all
purposes shall be construed in accordance with, the laws of the State of New
York, without giving effect to its conflict of law provisions.
12. ENTIRE AGREEMENT
This Agreement contains all of the understandings between McLoone and
the Company pertaining to McLoone's employment with the Company, and it
supersedes all undertakings and agreements, whether oral or in writing,
previously entered into between them.
13. AMENDMENT OR MODIFICATION; WAIVER
No provision of this Agreement may be amended or modified unless such
amendment or modification is agreed to in writing, signed by McLoone and by an
officer of the Company duly authorized to do so. Except as otherwise
specifically provided in this Agreement, no waiver by either party of any
breach by the other party of any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of a similar or
dissimilar provision or condition at the same or any prior or subsequent time.
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<PAGE>
14. NOTICES
Any notice to be given hereunder shall be in writing and delivered
personally or sent by certified mail, postage prepaid, return receipt
requested, addressed to the party concerned at the address indicated below or
to such other address as such party may subsequently designate by like notice:
If to the Company, to:
Pivot Rules, Inc.
80 West 40th Street
New York, NY 10018
Attn: Kenneth Seiff
With a copy to:
Shereff, Friedman, Hoffman & Goodman, LLP
919 Third Avenue
New York, New York 10022
Attn: Richard A. Goldberg, Esq.
If to McLoone, to:
William T. McLoone
3 Greenfield Drive North
West Windsor, NJ 08691
15. SEVERABILITY
In the event that any provision or portion of this Agreement
shall be determined to be invalid or unenforceable for any reason, the
remaining provisions or portions of this Agreement shall be unaffected thereby
and shall remain in full force and effect to the fullest extent permitted by
law.
16. TITLES
Titles of the Sections of this Agreement are intended solely
for convenience of reference and no provision of this Agreement is to be
construed by reference to the title of any Section.
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<PAGE>
17. ARBITRATION
In the event of any dispute or difference between the
parties hereto concerning their rights and duties under this Agreement, either
party may, by notice to the other, require such dispute or difference to be
submitted to arbitration. The arbitrator or arbitrators shall be selected by
agreement of the parties or, if they cannot agree on an arbitrator or
arbitrators within thirty (30) days, then the arbitrator or arbitrators shall
be selected by the American Arbitration Association (the "AAA") in New York,
New York upon the application of either party. The determination reached in
such arbitration shall follow a hearing (at which written statements may also
be submitted), shall be contained in a written decision and shall be final and
binding on both parties without any right of appeal or further dispute.
Enforcement of a determination by such arbitrator(s) may be sought in any
court of competent jurisdiction. The fees and expenses of any arbitrators and
the AAA shall be shared equally by the Company and McLoone, unless otherwise
determined by the arbitration. Unless otherwise agreed by the parties, any
such arbitration shall take place in New York, New York and shall be conducted
in accordance with the rules of the AAA, subject to this paragraph 17.
18. BINDING EFFECT: ASSIGNMENT
This Agreement shall be binding upon, and inure to the
benefit of, the Copany and its successors and assigns and upon McLoone and his
successors and assigns. "Successors and assigns" shall mean, in the case of
the Company, any successor pursuant to a merger, consolidation, or sale or a
transfer of all or substantially all of the assets of the Company and, in the
case of McLoone, his heirs and/or legal representatives as determined by will
or by operation of law. Neither this Agreement nor any rights hereunder shall
be assignable or otherwise subject to hypothecation by McLoone (except by will
or by operation of law). The Company may assign this Agreement and all of its
rights hereunder to any of its successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement on the date first above written.
PIVOT RULES, INC.
By: /s/ E. Kenneth Seiff
--------------------------------
E. Kenneth Seiff
President
/s/ William T. McLoone
-----------------------------------
WILLIAM T. MCLOONE
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Schedule A
Promissory Note
$50,000.00 March 17, 1997
FOR VALUE RECEIVED, William T. McLoone (the "Debtor") residing at 3
Greenfield Drive North, West Windsor, NJ 08691, promises to pay to the order
of Pivot Rules, Inc., a New York corporation, with its principal office at 80
West 40th Street, New York, New York 10018 (the "Company"), or registered
assigns, on March 17, 2002 (the "Maturity Date"), on the terms set forth in
this note (this "Note"), the principal amount of Fifty Thousand and no/100
Dollars ($50,000) (or so much thereof as shall not have been prepaid or
forgiven as set forth below), and to pay interest on all unpaid principal from
the date hereof at a rate of 8% per annum, such interest to be payable
semi-annually on each September 17 and March 17 hereafter. Interest shall be
computed on the basis of a 360-day year consisting of twelve (12) 30-day
months. Payments of principal, premium, if any, and interest shall be made in
lawful money of the United States of America at the principal office of the
Company, and all payments shall be applied first to pay accrued but unpaid
interest, and the remainder to reduce the outstanding principal hereof.
Subject to the terms and provisions of this Note, ten percent (10%)
of the original principal amount hereof shall be forgiven by the Company on
each of March 17, 1998, March 17, 1999, March 17, 2000, March 17, 2001 and the
Maturity Date.
In addition, the Debtor shall be obligated to make mandatory annual
payments ("Mandatory Annual Payments") to the Company each year in amounts not
to exceed ten percent (10%) of the original principal amount hereof, which
Mandatory Annual Payments shall be payable solely out of bonus payments
received or to be received by the Debtor under Section 4(a) of the Employment
Agreement (as defined below), if any. To the extent that the Debtor has not
received a bonus payment in such year or the amount of bonus payment received
by the Debtor is insufficient to cover the applicable Mandatory Annual
Payment, the unpaid portion of Mandatory Annual Payment shall be carried over
to the following year(s) and shall be payable out of the following year(s)
bonus payment to the extent such bonus payment is sufficient to cover such
outstanding Mandatory Annual Payment (in addition to the Debtor's obligation
to make his Mandatory Annual Payment(s) in respect of such following year).
<PAGE>
This Note is being issued pursuant to the terms of that certain
Employment Agreement, dated as of the date hereof between the Debtor and the
Company (the "Employment Agreement").
1. Events of Default.
(a) The occurrence of any of the following events, which shall have
occurred and be continuing, shall be deemed to be an "Event of Default" under
this Note:
(i) The Debtor shall default in the payment of the principal
and/or interest of this Note when due; or
(ii) (1) The Debtor shall commence any proceeding or other
action relating to him in bankruptcy or seek reorganization,
arrangement, readjustment of his debts, receivership,
dissolution, liquidation, winding-up, composition or any
other relief under the federal bankruptcy act, as amended,
or under any other insolvency, reorganization, liquidation,
dissolution, arrangement, composition, readjustment of debt
or any other similar act or law, of any jurisdiction,
domestic or foreign, now or hereafter existing; or (2) the
Debtor shall admit the material allegations of any petition
or pleading in connection with any such proceeding; or (3)
the Debtor applies for, or consents or acquiesces to, the
appointment of a receiver, conservator, trustee or similar
officer for him or for all or a substantial part of his
property; or (4) the Debtor makes a general assignment for
the benefit of creditors; or (5) the Debtor generally admits
his inability to pay his debts as they become due and
payable; or
(iii) (1) The commencement of any proceeding or the taking
of any other action against the Debtor in bankruptcy or
seeking reorganization, arrangement, readjustment of his
debts, liquidation, dissolution, arrangement, composition,
readjustment of debt or any other similar act or law of any
jurisdiction, domestic or foreign, now or hereafter existing
and the continuance of any of such events for sixty (60)
days undismissed, unbonded or undischarged; or (2) the
appointment of a receiver, conservator, trustee or similar
officer for the Debtor or for all or substantially all of
the Debtor's property and the continuance of any such event
for sixty (60) days undismissed, unbonded or undischarged;
or (3) the issuance of a warrant or attachment, execution or
similar process against substantially all of the property of
the Debtor and the continuance of such event for thirty (30)
days undismissed, unbonded and undischarged; or
(iv) Debtor's employment by the Company pursuant to the
Employment Agreement shall be terminated for any reason
whatsoever; or
2
<PAGE>
(v) Debtor has breached any of the terms or conditions of
the Employment Agreement in any material respect.
(b) Upon the occurrence of an Event of Default set forth in Section
1(a) (i), (ii), (iii) or (iv) hereof, the entire unpaid principal amount of
this Note outstanding, together with accrued interest thereon, shall become
immediately due and payable, and the forgiveness provision set forth in the
second paragraph of this Note shall be terminated, without presentment,
demand, protest, or other notice of any kind, all of which are expressly
waived, and without any action on the part of the Company. Upon the occurrence
of an Event of Default set forth in Section 1(a)(v) hereof, the Company may,
at its option, by written notice to the Debtor, declare the entire unpaid
principal amount of this Note outstanding, together with accrued interest
thereon to be due and payable, and upon receipt of such notice by the Debtor,
the same shall become due and payable forthwith.
2. Prepayment. This Note may be prepaid by the Debtor at any time, in
whole or in part, from time to time, without penalty at the principal amount
plus accrued but unpaid interest to the date of prepayment.
3. Miscellaneous.
(a) Further Assurances. The Debtor agrees to execute such further
instruments and to take such further action as may reasonably be necessary to
carry out the intent of this Note.
(b) Notice. All notices and other communications hereunder shall be
in writing and shall be deemed to have been given if delivered personally or
sent by facsimile transmission, overnight courier, or certified, registered or
express mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally or sent by facsimile transmission (provided that a
confirmation copy is sent by overnight courier), one day after deposit with an
overnight courier, or if mailed, five (5) days after the date of deposit in
the United States mails, to the Debtor or to the Company at such respective
addresses set forth above, or as may be furnished in writing to the other
party hereto.
(c) Parties in Interest. This Note shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and
permitted assigns.
(d) Waiver. Any waiver by the Company of a breach of any provision of
this Note shall not operate or be construed as a waiver of any subsequent
breach of the same or any other provision hereof. No failure to exercise and
no delay in exercising, on the part of the Company, any right, power or
privilege under this Note shall operate as a waiver thereof nor shall any
partial exercise of any right, power or privilege preclude any other or
further exercise thereof, or the exercise of any other power, right or
privilege.
3
<PAGE>
(e) Governing Law; Consent to Jurisdiction. This Note shall be
construed and enforced in accordance with, and the rights of the Debtor and
the Company shall be governed by, the laws of the State of New York, without
giving effect to the principles of conflicts of laws thereof. The Debtor and
the Company hereby consent to the jurisdiction of the state or federal courts
of New York for all disputes arising under this Note.
(f) Severability. Any term or provision of this Note which is invalid
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Note or affecting the validity or enforceability of any of the terms and
provisions of this Note in any other jurisdiction.
(g) Assignment. The Debtor shall not, without the written consent of
the Company, assign or transfer this Note or any rights or obligations
hereunder.
(h) Amendment. No provision of this Note may be waived, altered or
amended, except by written agreement between the parties.
(i) Arbitration. In the event of any dispute or difference between
the Debtor and the Company concerning their rights and duties under this Note,
either the Debtor or the Company may, by notice to the other, require such
dispute or difference to be submitted to arbitration. The arbitrator or
arbitrators shall be selected by agreement of the Debtor and the Company or,
if they cannot agree on an arbitrator or arbitrators within thirty (30) days,
then the arbitrator or arbitrators shall be selected by the American
Arbitration Association (the "AAA") in New York, New York upon the application
of either party. The determination reached in such arbitration shall follow a
hearing (at which written statements may also be submitted), shall be
contained in a written decision and shall be final and binding on both the
Debtor and the Company without any right of appeal or further dispute.
Enforcement of a determination by such arbitrator(s) may be sought in any
court of competent jurisdiction. The fees and expenses of any arbitrators and
the AAA shall be shared equally by the Company and the Debtor, unless
otherwise determined by the arbitration. Unless otherwise agreed by the Debtor
and the Company, any such arbitration shall take place in New York, New York
and shall be conducted in accordance with the rules of the AAA, subject to
this paragraph 3(i).
IN WITNESS WHEREOF, this Note has been executed and delivered by the
Debtor on the date specified above.
------------------------------
William T. McLoone
4
<PAGE>
Exhibit 16
[LETTERHEAD OF RICHARD A. EISNER & COMPANY, LLP]
April 17, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Pivot Rules, Inc.
Ladies and Gentlemen:
We have read the section entitled "Change in Accountants" of Pivot
Rules, Inc.'s Form SB-2 filed on April 17, 1997 and are in agreement with the
statements contained therein.
Very truly yours,
/s/ Richard A. Eisner & Company, LLP
<PAGE>
Exhibit No. 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 18, 1997 accompanying the financial
statements of Pivot Rules, Inc. contained in Amendment No. 1 to the
Registration Statement and Prospectus (Registration No. 333-22895). We consent
to the use of the aforementioned report in the Registration Statement and
Prospectus, and to the use of our name as it appears under the captions
"Summary Financial Information," "Selected Financial Data," "Change in
Accountants," and "Experts."
/s/ Grant Thornton LLP
- ----------------------
GRANT THORNTON LLP
New York, New York
April 17, 1997
<PAGE>
Exhibit No. 23.2
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the use in this Registration Statement on Form
SB-2 of our report dated October 21, 1996 relating to the financial statements
of Pivot Rules, Inc., and to the reference to our Firm under the captions
"Summary Financial Information", "Selected Financial Data", "Change in
Accountants" and "Experts" in the Prospectus.
/s/ Richard A. Eisner & Company, LLP
New York, New York
April 16, 1997
