<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER , 1997
REGISTRATION NO. 333-29077
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
--------------
COYOTE SPORTS, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
--------------
NEVADA 3949 88-0326730
(STATE OR JURISDICTION OF (PRIMARY STANDARD (I.R.S. EMPLOYER
INCORPORATION OR INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
ORGANIZATION) CODE NUMBER)
2291 ARAPAHOE AVENUE, BOULDER, COLORADO 80302, (303) 417-0942
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)
--------------
MEL S. STONEBRAKER, PRESIDENT
COYOTE SPORTS, INC.
2291 ARAPAHOE AVENUE
BOULDER, COLORADO 80302
(303) 417-0942
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENTS FOR SERVICE)
COPIES TO:
DAVID J. COOK, ESQ. WARD E. TERRY, JR., ESQ.
LAURIE P. GLASSCOCK, ESQ. DANIEL B. MARKOFSKY, ESQ.
JULIE A. JOHNSON, ESQ. CLANAHAN, TANNER, DOWNING & KNOWLTON, P.C.
CHRISMAN, BYNUM & JOHNSON, P.C. 1600 BROADWAY
1900 FIFTEENTH STREET SUITE 2400
BOULDER, COLORADO 80302 DENVER, CO 80202
(303) 546-1300 (303) 830-9111
--------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER SHARE(1) PRICE(1) FEE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock............. 1,207,500 $5.00 $6,037,500 $1,829.37
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Representative's
Warrants................ 105,000(3) -- $ 100 $ --
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Common Stock Underlying
Representative's
Warrants................ 105,000(4) $5.00 $ 500,000 $ 151.50
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Common Stock, Selling
Stockholders............ 75,000(5) -- -- $ --
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Warrants, Selling
Stockholders............ 250,000(5) -- -- --
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Common Stock Underlying
Warrants, Selling
Stockholders............ 125,000(5) $7.50 $ 937,500 $ 284.06
- ------------------------------------------------------------------------------
Total.................... -- -- -- $2,264.93
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</TABLE>
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(1) Calculated pursuant to Rule 457 of the rules and regulations promulgated
under the Securities Act of 1933, as amended.
(2) These shares will be offered to the public in the registrant's public
offering (including 157,500 shares that the representative of the
underwriters (the "Representative") has the option of purchasing from the
registrant to cover over-allotments, if any).
(3) The registrant will issue to the Representative at the closing of the
registrant's public offering 105,000 warrants to purchase 105,000 shares
of Common Stock (the "Representative's Warrants").
(4) These shares of Common Stock are issuable upon exercise of the
Representative's Warrants. An indeterminate number of additional Shares
are registered hereunder which may be issued as provided in the
Representative's Warrants in the event that the provisions against
dilution in the Representative's Warrant's become operative.
(5) These Shares and Warrants are to be issued upon the effective date of this
offering in connection with the 1997 Private Placement.
--------------
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.
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<PAGE>
COYOTE SPORTS INC.
FORM SB-2 CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND DESCRIPTION CAPTION OR LOCATION IN PROSPECTUS
--------------------------- ---------------------------------
<C> <S> <C>
Item 1. Front of Registration Statement
and Outside Front Cover Page of
Prospectus........................ Facing Page of Registration
Statement; Outside Front Cover
Page of Prospectus
Item 2. Inside Front and Outside Back
Cover Pages of Prospectus......... Inside Front and Outside Back
Cover Pages of Prospectus
Item 3. Summary Information and Risk
Factors........................... Prospectus Summary; Risk Factors
Item 4. Use of Proceeds................... Prospectus Summary; Use of
Proceeds; Risk Factors
Item 5. Determination of Offering Price... Risk Factors; Underwriting
Item 6. Dilution.......................... Risk Factors; Dilution
Item 7. Selling Security Holders.......... Private Placement; Additional
Registered Securities
Item 8. Plan of Distribution.............. Prospectus Summary; Underwriting
Item 9. Legal Proceedings................. Business--Litigation
Item 10. Directors, Executive Officers,
Promoters and Control Persons..... Management; Principal
Shareholders; Certain
Transactions
Item 11. Security Ownership of Certain
Beneficial Owners and Management.. Principal Stockholders
Item 12. Description of Securities......... Description of Securities;
Capitalization
Item 13. Interest of Named Experts and
Counsel........................... Experts
Item 14. Disclosure of Commission Policy on
Indemnification for Securities Act
Liabilities....................... Management--Statement as to
Indemnification; Underwriting
Item 15. Organization Within Last Five
Years............................. The Company; Certain Transactions
Item 16. Description of Business........... Prospectus Summary; Risk Factors;
Business
Item 17. Management's Discussion and
Analysis or Plan of Operation..... Management's Discussion and
Analysis or Plan of Operation
Item 18. Description of Property........... Business--Facilities
Item 19. Certain Relationships and Related
Transactions...................... Certain Transactions
Item 20. Market for Common Equity and
Related Stockholder Matters....... Inside Front Cover Page of
Prospectus; Risk Factors;
Underwriting; Dividend Policy
Item 21. Executive Compensation............ Management
Item 22. Financial Statements.............. Prospectus Summary; Financial
Statements; Selected Consolidated
Financial Data
Item 23. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure.............. Experts
</TABLE>
<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 A +
+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 LAWS OF SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 12, 1997
COYOTE SPORTS, INC.
1,050,000 SHARES OF COMMON STOCK
[LOGOS OF REYNOLDS, APOLLO AND ICE.USA APPEAR HERE]
Coyote Sports, Inc. (the "Company" or "Coyote") is offering 1,050,000 shares
of Common Stock of the Company (the "Shares"). In addition, an aggregate of
75,000 shares of Common Stock owned by certain shareholders of the Company (the
"Bridge Lenders") and Warrants to purchase an additional 125,000 shares are
being registered simultaneously with this offering for resale by such
shareholders from time to time. See "Additional Registered Securities."
The offering price of the Shares will be $5.00 per Share. Prior to the
offering of the Company's securities as described herein, there has been no
public market for the Shares and there can be no assurance that any such market
will develop. The initial offering price has been determined by negotiation
between the Company and Cohig & Associates, Inc., the Representative of the
Underwriters (the "Representative"). For a discussion of the factors considered
in determining the initial public offering price, see "Underwriting."
Application has been made to have the Shares approved for quotation on The
Nasdaq SmallCap Market.
-----------
THIS OFFERING INVOLVES SPECULATIVE SECURITIES WITH A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CAREFULLY CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNTS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share.................................. $ 5.00 $ 0.50 $ 4.50
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Total(3)................................... $5,250,000 $525,000 $4,725,000
</TABLE>
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- --------------------------------------------------------------------------------
(1) The Company has agreed to pay the Representative a non-accountable expense
allowance equal to 3% of the gross offering proceeds, and to issue to it,
the Representative's Warrants (as defined herein). The Company has also
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting estimated offering expenses payable by the Company of
$870,000, including the non-accountable expense allowance. The Bridge
Lenders are not responsible for any of these expenses.
(3) The Company has granted the Representative an option, exercisable within 45
days from the date of this Prospectus, to purchase up to an additional
157,500 Shares on the same terms as set forth above solely to cover
overallotment, if any. If the overallotment option is exercised in full,
the total Price to Public, Underwriting Discounts and Proceeds to Company
will be $6,037,500, $603,750 and $5,433,750 respectively. See
"Underwriting."
-----------
The Shares are being offered severally, and not jointly, by the Underwriters,
when, as and if delivered to and accepted by the Underwriters, and subject to
their right to reject orders in whole or in part and certain other conditions.
It is expected that delivery of the certificates representing the Shares will
be made on or about September , 1997.
COHIG & ASSOCIATES, INC.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
COYOTE SPORTS, INC. DESIGNS, ENGINEERS, MANUFACTURES, MARKETS AND DISTRIBUTES
BRAND NAME SPORTS EQUIPMENT AND RECREATIONAL PRODUCTS WORLDWIDE.
[PHOTO OF GOLF SHAFTS APPEARS HERE]
[REYNOLDS LOGO APPEARS HERE]
[PHOTO OF SKI POLES APPEARS HERE]
[APOLLO LOGO APPEARS HERE]
[PHOTO OF BICYCLE FRAMES APPEARS HERE]
[ICE.USA LOGO APPEARS HERE]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ SMALLCAP MARKET. SUCH STABILIZING,
IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
The Company intends to furnish its security holders with annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information.
On the effective date of the Registration Statement of which this Prospectus
forms a part, the Company will become a "reporting company" under the Exchange
Act. The Company intends to register the Common Stock under the Exchange Act
as of the effective date of the Registration Statement. The Company is a
"small business issuer" as defined under Regulation S-B adopted under the
Securities Act of 1933, as amended (the "Securities Act"), and will file
reports with the Commission pursuant to the Exchange Act on forms applicable
to small business issuers.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the notes thereto appearing elsewhere
in this Prospectus. Coyote conducts all of its operations through its
subsidiaries, Apollo Sports Technologies, Limited. ("Apollo"), Apollo Golf,
Inc. ("Apollo U.S."), Reynolds Cycle Technology, Limited. ("Reynolds"), ICE*USA
LLC ("ICE"), Cape Composites, Inc., a wholly-owned subsidiary of Sierra
Materials, LLC (which collectively shall be referred to herein as "Sierra
Materials") and Pentiumatics Sdn., Bhd. ("Pentiumatics"). As used in this
Prospectus, unless the context otherwise requires, the term Company includes
Coyote and all of its subsidiaries. Unless otherwise indicated, all share and
per share data and information contained in this Prospectus relating to the
number of shares of Common Stock outstanding (i) reflects a 3,450 to one
forward stock split effected June 11, 1997; (ii) reflects the return to the
Company for cancellation of 850,000 shares of Common Stock by the Company's two
existing shareholders on July 23, 1997 ("Share Return"); (iii) assumes the
issuance upon consummation of this offering of an aggregate of 75,000 shares of
Common Stock and warrants to purchase 125,000 shares of Common Stock to the
Bridge Lenders in connection with a private placement financing in April 1997
(see "Private Placement"); (iv) assumes no exercise of the overallotment option
(up to 157,500 Shares); (v) does not include up to 500,000 shares of Common
Stock reserved for issuance upon exercise of options available for grant under
the Company's 1997 Stock Option Plan (the "Option Plan") and (vi) does not
include up to 105,000 Shares reserved for issuance to the Representative
pursuant to this offering (the "Representative's Warrants"). See "Description
of Securities" and "Underwriting."
THE COMPANY
Coyote Sports, Inc. designs, engineers, manufactures, markets and distributes
brand name sports equipment and recreational products worldwide. The Company's
products include steel and graphite golf shafts, premium grade cycle tubing,
composite ski poles and javelins. The Company also produces graphite and other
advanced composite materials for use in the production of golf shafts, fishing
poles, ski poles, hockey sticks and other third party manufactured products.
The Company will be producing aluminum extruded alloys for such products as
cycle tubing, ski poles and tennis rackets. The Company manufactures its Apollo
golf shafts in its manufacturing facility in Oldbury, England, its Reynolds
cycle tubing in Tyseley, England, and graphite and other advanced composite
materials in California and will be manufacturing extruded aluminum alloys in
Southeast Asia for such products as cycle tubing, ski poles and tennis rackets.
During the year ended December 31, 1996, the greatest portion of the
Company's sales were derived from its Apollo steel golf shafts and Reynolds
cycle tubing. Apollo is the only manufacturer of seamless steel golf shafts in
the world. Management believes that the physical integrity of the seamless golf
shaft is superior to the welded golf shafts made by its competitors. Seamless
tubes can be manufactured using a greater variety of high carbon alloys which
the Company believes increase golf shaft consistency and permits greater design
versatility. Apollo has a strong OEM customer base, including in alphabetical
order, such brand names as Callaway Golf, Inc., Cobra Golf, Inc., Focus Golf,
Harris International, Karsten, Knight Golf, MacGregor Golf, Mizuno Golf
Company, Northwestern Golf, and Wilson Sporting Goods Company. Reynolds ranks
as one of the leading suppliers of premium brand cycle tubing serving such
customers as GT Bicycle, Inc., Kona Bicycles USA, Raleigh Bicycle Company, Ltd.
and Trek Bicycle Corp. Twenty-seven of the last 39 Tour de France races were
won with bicycles made from Reynolds tubing.
Coyote's business objective is to become a leading provider of sports
equipment and recreational products. Coyote management intends to build a
consolidated group of companies engaged in related and complementary businesses
that work together to compete effectively in the sports equipment and
recreational products industry. The Company intends to continue to purchase
undervalued companies within the sports equipment and recreational products
industry with experienced management, that have well-established brand names
and
3
<PAGE>
product lines, and strong engineering and design capabilities. Management
intends to strengthen and foster the growth of these companies through the
introduction of additional manufacturing capabilities and techniques, expanded
sales and marketing efforts and vertical integration of company-wide
manufacturing and distribution capabilities. Since September 1996, Coyote has
acquired sole ownership of three operating companies and has a controlling
interest in three other operating companies in furtherance of this strategy.
The Company's strategies to achieve its objective and facilitate its growth
are to: (i) continue to evaluate and acquire businesses compatible with the
Company's objective; (ii) expand further into the graphite golf shaft market;
(iii) increase the production of steel golf shafts to the optimal manufacturing
plant production output so as to realize cost efficiencies; (iv) shift the
manufacturing mix to products with higher value to increase per unit
profitability; (v) introduce aluminum alloy cycle tubing and other products
through a new manufacturing facility in Southeast Asia; (vi) increase the
capacity of the Company's graphite and other advanced composite materials
manufacturing facility; and (vii) expand product offerings into new and
existing markets.
The Company was incorporated in Nevada on October 24, 1994. The Company's
principal offices are located at 2291 Arapahoe Avenue, Boulder, Colorado 80302,
and its telephone number is (303) 417-0942.
THE OFFERING
Securities offered...... 1,050,000 Shares.
Common Stock
outstanding before
offering............... 2,600,000 Shares
Common Stock
outstanding after
offering............... 3,725,000 Shares(1)
Use of Proceeds......... Repayment of loan, capital equipment for Sierra
Materials, repayment of liabilities for Sierra
Materials, repayment of stockholder notes, and
working capital. See "Use of Proceeds."
Proposed NASDAQ
SmallCap symbol for
Common Stock........... "COYT"
- --------
(1) Includes 75,000 shares to be issued to Bridge Lenders on the effective date
of this offering. See "Private Placement."
RISK FACTORS
This offering involves a high degree of risk and immediate substantial
dilution. Prospective investors should carefully consider the matters set forth
under "Risk Factors" and "Dilution."
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
The following historical summary consolidated statement of operations data
for each of the years in the two-year period ended December 31, 1996 and the
historical summary balance sheet data as of December 31, 1996 are taken or
derived from the historical consolidated financial statements of the Company
included elsewhere herein, which were audited by KPMG Peat Marwick LLP as set
forth in their report thereon also included herein. The historical summary
consolidated statements of operations data for the six months ended June 30,
1996 and 1997 are taken or derived from the unaudited consolidated financial
statements of the Company included elsewhere herein. In the opinion of
management, such unaudited interim consolidated financial statements reflect
all adjustments (including only normal recurring accruals) which in the opinion
of management are necessary for a fair presentation of the results for these
periods. The operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. The following summary unaudited pro forma financial data are
taken or derived from the unaudited pro forma condensed combined financial
statements of the Company included elsewhere herein. The pro forma data are not
necessarily indicative of the results of the operations or financial position
that would have been obtained had the acquisitions occurred as of the beginning
of the periods covered thereby nor do they purport to be indicative of the
future results of operations or financial position of the Company. The summary
financial and operating data should be read in conjunction with the financial
statements, including notes thereto, included elsewhere in the Prospectus and
the discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ ---------------------------------------
PRO FORMA(1) PRO FORMA(2)
1995 1996 1996 1996 1997 1997
---------- ---------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales............. $ -- 5,453 23,522 20 12,750 13,683
Cost of goods sold.... -- (4,169) (17,881) (23) (9,784) (10,622)
---------- ---------- ---------- ---------- ---------- ----------
Gross profit (loss)... -- 1,284 5,641 (3) 2,966 3,061
Selling, general and
administrative
expenses............. (371) (2,308) (6,856) (238) (4,072) (4,233)
---------- ---------- ---------- ---------- ---------- ----------
Operating loss........ (371) (1,024) (1,215) (241) (1,106) (1,172)
Other income
(expense), net....... -- 92 (106) -- (788)(6) (760)
Income tax benefit
(expense)............ -- -- (248) -- 181 181
Minority interests.... -- (6) (6) -- 48 60
---------- ---------- ---------- ---------- ---------- ----------
Net loss.............. $ (371) (938) (241) (1,665)
========== ========== ========== ==========
Net loss per share.... $ (0.11) (0.27) (0.07) (0.48)
========== ========== ========== ==========
Pro forma net loss.... $ (1,575) (1,691)
========== ==========
Pro forma net loss per
share(3)............. $ (0.46) (0.49)
========== ==========
Shares used in
computing net loss
per share and pro
forma net loss per
share(3)(5).......... 3,450,000 3,450,000 3,450,000 3,450,000 3,450,000 3,450,000
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------
DECEMBER 31, AS ADJUSTED
1996 ACTUAL (4)
------------ ------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash....................................... $ 305 1,807 3,515
Working capital (deficit).................. 1,960 (672) 3,136
Total assets............................... 11,799 19,717 21,425
Total liabilities.......................... 6,563 13,447 11,300
Minority interests in net assets of
subsidiaries.............................. 210 756 756
Total stockholders' equity................. 5,027 5,514 9,369
</TABLE>
- --------
(1) Pro forma financial information is based upon the historical consolidated
financial statements of the Company for the year ended December 31, 1996,
the historical combined financial statements of Apollo, Apollo U.S.,
Reynolds and an acquired manufacturing facility for the nine months ended
September 30, 1996 (collectively, the "Apollo Entities"), and the
historical financial statements of Sierra Materials for the ten months
period ended December 31, 1996.
(2) Pro forma financial information is based upon the historical consolidated
financial statements of the Company and the historical financial statements
of Sierra Materials for the period January 1, 1997 to March 31, 1997.
(3) Calculated as described in Note 1 of Notes to Consolidated Financial
Statements.
(4) As adjusted amounts reflect the sale of 1,050,000 Shares (excluding any
Shares which may be sold as a result of the exercise of the overallotment
option) as contemplated by this Prospectus at an assumed price of $5.00 per
Share, net of $1,395,000 of estimated offering expenses including the non-
accountable expense allowance and underwriting discounts and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
(5) Subsequent to June 30, 1997, the Company retired 850,000 shares of Common
Stock contributed back by the Company's stockholders.
(6) Approximately $550,000 of this amount is attributable to debt financing
costs associated with the Private Placement (See "Private Placement").
6
<PAGE>
RISK FACTORS
The purchase of the Shares is speculative and involves a high degree of risk
and immediate and substantial dilution. Prospective investors should carefully
consider all of the information contained in this Prospectus and, in
particular, the following factors which could adversely affect the operations
and prospects of the Company, before making a decision to purchase any Shares.
RISK FACTORS RELATED TO THE BUSINESS OF THE COMPANY
Recent Operating Losses and Accumulated Deficit. Coyote has acquired an
interest in seven operating companies since inception, one of which was
recently dissolved. Of these, Apollo, Apollo U.S., Reynolds and ICE were the
only companies with business operations during the year ended December 31,
1996 which had been acquired as of that date. The Company, on a consolidated
historical basis, incurred a net loss of $937,954 for the year ended December
31, 1996. Subsequent to December 31, 1996, the Company acquired two additional
entities, Sierra Materials and Pentiumatics, in exchange for cash and the
assumption of indebtedness. Sierra Materials operated at a loss of $252,782
for the ten month period ended December 31, 1996. Pentiumatics was acquired by
the Company in April 1997 and had no prior business operations. From inception
through June 30, 1997, the Company has an accumulated deficit of $2,991,075.
In order to become profitable, the Company must increase sales while
effectively managing costs. There can be no assurance that the Company will be
able to achieve these goals or attain profitability. See "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
Risks Involved With Expansion Strategy and Unspecified Acquisitions. Since
inception, the Company has acquired an equity interest in seven operating
companies. In May 1997, the Company and its partner dissolved one of the
companies whose objective was to evaluate the business opportunities in
marketing and selling sporting apparel. An important part of the Company's
growth strategy is to increase sales through product innovation and pursuing
growth opportunities in domestic and international markets, including growth
through acquisitions. In most cases, the Company will not be required to
obtain stockholder approval in order to complete its acquisitions.
Acquisitions involve numerous risks, including potential difficulties in the
assimilation of acquired operations, diversion of management's attention away
from normal operating activities, negative financial impact based on the
amortization of any acquired intangible assets, potential loss of key
employees of the acquired operation and potential financial risks resulting
from pre-acquisition liabilities that may exceed any indemnities provided by
the seller of the acquired company.
No Assurance That Acquisitions Will Be Effectively Assimilated. The
successful integration of any such acquisition is critical to the future
financial performance of the Company. Complete integration of any acquisitions
could take several fiscal quarters to accomplish and would require, among
other considerations, assimilation of the acquired companies, their
management, personnel and procedures as part of the Company's existing
consolidated group and coordination of the respective companies' sales and
marketing and research and development efforts. There can be no assurance that
present and potential customers of the Company and any acquired entity would
continue purchasing from the Company. In addition, the process of combining
two organizations could cause the interruption of, or loss of momentum in, the
activities of either or both companies' businesses, which could have an
adverse impact on their combined operations. The Company believes that there
may be other acquisition opportunities which could complement its existing
businesses. While the Company regularly evaluates acquisition and business
combination opportunities, there are no commitments or agreements with respect
to any potential additional acquisition as of the date of this Prospectus.
There can be no assurance that the recent acquisitions or any other business
that the Company may acquire in the future will be effectively and profitably
integrated into the Company.
"Further Capital Requirements Associated With Expansion. The Company's
capital requirements have been and will continue to be significant. To date,
the Company has funded its capital requirements primarily with equity
investments from the Company's founders and the gross proceeds of $1,500,000
obtained by the Company pursuant to the Private Placement. The Company
anticipates that the proceeds to the Company from
7
<PAGE>
this offering, together with projected cash flows from operations, will be
sufficient to satisfy its contemplated cash requirements for at least 12
months following the consummation of this offering. However, the Company's
growth strategies include acquisitions which, in particular, could create cash
requirements beyond those presently contemplated. No portion of the net
proceeds from this offering have been specifically designated for any future
acquisitions of other companies or the assets of other companies. See "Use of
Proceeds." The Company's ability to consummate future acquisitions and execute
its growth strategy will depend to a significant degree on its ability to
obtain additional debt or equity financing. Other than the proceeds from this
offering, the Company has no commitments for additional borrowings or sales of
equity securities, and there can be no assurance that the Company will be
successful in consummating any such future financing arrangements on terms
favorable to the Company or that any such acquisition will not force the
Company to acquire additional debt. Certain factors among others could affect
the Company's access to the capital markets or the cost of such capital,
including the perception in the capital markets of the Company's present
businesses, results of operations, leverage, financial condition and business
prospects or concerns in the capital markets regarding the potential for
growth in the particular industries in which the Company's subsidiaries
conduct their businesses. Expansion or acquisition costs could adversely
affect the Company's liquidity and financial stability. See "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Potential Problems Associated With Growth. The Company has experienced
significant growth in the past two years and expects such growth to continue.
The Company's growth may place significant strains on the Company's future
management, staff, working capital, and operating and financial control
systems. There can be no assurance that the Company's management, staff,
working capital and systems will be adequate to support its future anticipated
growth. The failure to continue to upgrade operating and financial control
systems, to recruit qualified staff or to respond effectively to difficulties
encountered during expansion could have a material adverse effect on the
Company's business, results of operations and financial condition.
Dependence on Foreign Manufacturing Operations; Country Risks and Exchange
Rate Fluctuations. For the year ended December 31, 1996, and the six months
ended June 30, 1997, substantially all of the Company's revenues were from
products manufactured in foreign countries. The Company's business is highly
dependent upon steel golf shaft and cycle tubing products that are
manufactured in England utilizing raw materials furnished by a foreign
supplier. Apollo's steel golf shaft business and Reynolds cycle tubing
business accounted for approximately 91% of the Company's sales for the year
ended December 31, 1996. In the future, the Company expects that an expanded
number of its products will be manufactured in Southeast Asia. The Company's
business is subject to the risks generally associated with doing business
abroad, such as delays in shipment, foreign governmental regulation, adverse
fluctuations in foreign exchange rates, embargoes, tariffs, exchange controls,
trade disputes, expropriation, changes in economic conditions and governmental
instability in the countries in which the Company's manufacturing plants are
located. The Company's business is also subject to the risks associated with
the enactment of additional United States or foreign legislation and
regulations relating to exports or imports, including quotas, duties, taxes or
other charges or restrictions that could be imposed upon the import or export
of the Company's products in the future which, if imposed, could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dependence on Economic Conditions and Consumer Trends. The Company's
business is subject to economic cycles and changing consumer trends. Purchases
of discretionary sports equipment and recreational products tend to decline in
periods of economic uncertainty. The Company's products are generally used by
its customers in manufacturing finished goods for sale. Any significant
decline in general economic conditions or uncertainties regarding future
economic prospects that affect consumer spending could have a material adverse
effect on the Company's business, results of operations and financial
condition. In the past ten years, there has been increased consumer spending
on golf, cycle and skiing products. There can be no assurance that consumer
spending for golf, cycle and skiing products will continue. Any general
decline in the size of the market for golf shafts, cycle tubing or ski poles,
whether from general economic conditions, or otherwise or any adverse change
in the sale of products manufactured for the Company's customers would have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business."
8
<PAGE>
Seasonality and Dependence on Customers' Markets. Golf equipment, cycle
tubing and ski poles are seasonal products. The Company's results of
operations may be materially adversely affected by quarter-to-quarter changes
in unit sales to individual customers. Such changes may result from either
decisions by the customer to increase or decrease purchases or from the
traditional volatility in consumer demand for products. The Company believes
that this volatility is likely to continue in the future as customers seek to
gain competitive advantage through increased technology, innovation and
design. The mix of products may also contribute to quarterly or other periodic
fluctuations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Limited Supply of Carbon Fiber. The business of the Company's subsidiary,
Sierra Materials, is dependent on the availability of carbon fiber raw
materials. There are a limited number of carbon fiber suppliers worldwide. In
recent years, carbon fiber has, from time to time, been subject to limited
supply. Sierra Materials is, and expects to remain throughout 1997, on
allocation from its suppliers for carbon fiber materials used in its products.
Although it is anticipated in the future that the supply of carbon fiber will
increase, there can be no assurance that the carbon fiber supply currently
committed to Sierra Materials will be available when required or that Sierra
Materials' allocation will be sufficient to meet currently projected demand or
additional opportunities. Because Sierra Materials purchases large volumes of
carbon fiber, any decrease in the supply or increase in the cost of Sierra
Materials' carbon fiber could have a material adverse effect on the business,
results of operations and financial condition of Sierra Materials. See
"Business--Sierra Materials."
Continued Control by Management and Principal Stockholders. Following the
completion of this offering, the Company's executive officers and directors
and founding stockholders together will beneficially own 2,600,000 shares
(71.2% of the shares outstanding after this offering assuming the
overallotment option is not exercised). As a consequence, management will be
in control of the Company, including the ability to elect all of the persons
serving on the Company's Board of Directors, following completion of this
offering. This concentration of ownership may have the effect of delaying or
preventing a change in control of the Company. See "Principal Stockholders."
Substantial Purchase Obligation Could Negatively Impact Company Assets. ICE
was formed on September 18, 1996, by the transfer of certain assets from
Expedition Trading Company ("Expedition") which also retained a 20% ownership
interest in ICE. The Company owns an 80% ownership interest in ICE which
entitles the Company to receive 80% of the allocations of profits and losses
and 80% of all cash and in-kind distributions, if any, which may be made by
ICE to members in the future, including distributions of assets or the
proceeds from the sale of assets in a liquidation of ICE. Expedition is
entitled to receive 7% of gross sales from ICE from 1997 through 2002, with a
minimum payment of $100,000 per year and a maximum payment of $200,000 per
year. In 2003, ICE must pay Expedition $1.5 million less all amounts
previously paid to date under the agreement. Expedition retains a security
interest in all of the ICE assets. No assurance can be given that ICE can be
profitable in the future with the burden of the Expedition payment or that the
Company will be able to meet its substantial payment obligation to Expedition
in 2003. Failure to meet that obligation would cause a default under the
agreement and possible loss of the ICE assets, including its trade name,
customer lists, and proprietary information which the Company will have
developed over the period of time prior to 2003. (See "Business--ICE" and
"Business--Acquisition History.")
Substantial Portion of Proceeds Used for Debt Repayment Owed to Officer. A
substantial portion of the proceeds of this offering after deduction of
estimated offering expenses and underwriting discounts of $1,395,000
($2,350,155 or 63.7%) will be used for repayment of debt, including $200,155
to be paid to Mr. Stonebraker, the President of the Company. Interest rates
under Mr. Stonebraker's notes range from 12% to 25% per annum, which generally
reflect the interest costs incurred by Mr. Stonebraker to enable him to
advance the funds to the Company.
"Broad Discretion by Management in Application of Proceeds. Of the
approximate $3,855,000 net proceeds from this offering, $554,845 has been
allocated to working capital and other general corporate purposes. In
addition, approximately $468,000 of the offering expenses estimated to be
$870,000 have been prepaid by the
9
<PAGE>
Company as of September 10, 1997 and will be available for additional working
capital to the Company. Furthermore, while the Company has allocated
approximately $3,300,000 of the net proceeds of this offering to the repayment
of the Bridge Loans, the purchase of capital equipment, the repayment of
liabilities and the repayment of notes to a stockholder, the Board of
Directors has the right, in its discretion, to reallocate the net proceeds for
purposes furtherance of the Company's business strategy. Accordingly,
management will have broad discretion concerning the exact nature of the
application of the net proceeds of this offering."
Dependence on Key Personnel. The Company's success depends to a considerable
extent on the performance of its senior management team. The loss of the
services of a limited number of key management personnel, particularly Mel S.
Stonebraker, Chief Executive Officer, James M. Probst, Chief Operating
Officer, or certain key employees of the Company or its subsidiaries, could
have a material adverse effect on the Company. Although the Company has
employment agreements with Messrs. Stonebraker and Probst which extend through
the year 2000, and which contain a non-competition clause prohibiting such
employees from competing for nine months after termination, such agreements
are difficult to enforce against employees. The Company has key-person life
insurance policies in the amounts of $1,000,000 each on the lives of Messrs.
Stonebraker and Probst. See "Management--Employment Agreements."
Environmental Considerations. The Company's operations are subject to
governmental, environmental and health and safety laws and regulations,
including the laws of the United Kingdom and Southeast Asia, that impose
workplace standards and limitations on the discharge of pollutants into the
environment and establish standards for the handling, generation, emission,
release, discharge, treatment, storage and disposal of certain materials,
substances and wastes. The environmental laws in the United Kingdom are
presently being redrafted and, although no assurance can be given, the Company
believes that its facilities in the United Kingdom will be in compliance with
the new legislation as anticipated to be enacted. The nature of the Company's
heavy industrial manufacturing and assembly operations in Oldbury and Tyseley,
England, its manufacturing facility in California and its future operations in
Southeast Asia could expose the Company to the risk of claims with respect to
environmental matters. Although compliance with governmental requirements
relating to the protection of the environment has not had a material adverse
effect on the Company's business results of operations or financial condition
to date, there can be no assurance that material costs or liabilities will not
be incurred in connection with such environmental matters in the future. The
Company's Oldbury facility has a permit to discharge waste effluent into a
settling pond located on-site. The Company believes it is in compliance with
the discharge permit. In addition, expenditures for upgrades to Apollo's
effluent treatment system, if required, may be material. The Company holds an
indemnity from the seller of this property for certain remediation
attributable to the settling pond which is limited to five years and 500,000
Pounds Sterling. The existence of the settling pond on future events, such as
changes in existing laws and regulations or enforcement policies or the
discovery of contamination on sites owned or operated by the Company, may give
rise to additional compliance costs or operational interruptions which could
have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Governmental Regulation."
Highly Competitive Industry. The sports equipment and recreational products
industry is highly competitive. The Company faces competition, from companies,
many of which have greater financial and management resources, research and
development facilities and manufacturing and marketing capabilities, including
brand name recognition, than the Company. There can be no assurance that
technological and other developments by the Company's competitors or potential
competitors will not make the Company's products less competitive in the
market. The Company's ability to compete effectively will depend upon its
ability to attract and retain qualified personnel, innovate its manufacturing
techniques and processes, make adequate provision for its raw material
requirements and supplies through long-term supply agreements, maintain and
expand its technological capabilities, continue the process of vertically
integrating its manufacturing and distribution capabilities through further
acquisitions of companies whose businesses complement those of the Company,
market and sell existing products to new customers, develop new products for
existing and new customers, service its products and further develop its sales
force. Golf product sales are driven, in significant
10
<PAGE>
part, by technological improvements and innovations which will require that
the Company maintain its ability to compete in this area. No assurance can be
given that the Company will be able to compete effectively. See "Business."
Labor Unions; Risk of Work Stoppage. The Company's employees at its Oldbury
and Tyseley, England facilities are represented by several trade unions for
collective bargaining purposes. Approximately 223 of Apollo's employees and
approximately 19 additional Reynolds employees are covered by different trade
union agreements, representing individual trade unions, regarding such issues
as grievance procedures and safety. These union agreements may be renegotiated
at various times in the future, depending on a variety of circumstances.
Although the Company believes its relations with its employees are good, there
can be no assurance that the Company will not experience work stoppages or
slowdowns in the future. Any such work stoppage or slowdown could have a
material adverse effect on the business results of operations and financial
condition of the Company's Apollo and Reynolds subsidiaries. In addition,
there is no assurance that the Company's non-union facilities will not at
sometime in the future become subject to labor disputes and union
organizational efforts. See "Business--Employees."
Dependence on Proprietary Technology. The Company relies primarily on
trademark and trade secret laws and confidentiality procedures to protect its
trade secrets, goodwill, proprietary processes and product designs. Although
the Company intends to protect its intellectual property, there can be no
assurance that the steps that are taken by the Company in this regard will be
adequate to prevent misappropriation of its technology or that the Company's
competitors will not independently develop technologies that are substantially
equivalent or superior to the Company's technology. Furthermore, litigation
may be necessary to enforce the Company's intellectual property rights, to
protect the Company's trade secrets, to determine the validity and scope of
the proprietary rights of others or to defend against claims of infringement
could have a material adverse effect on the Company's business, results of
operations and financial condition. Such litigation could result in
substantial costs and diversion of resources and personnel. See "Business--
Intellectual Property."
Product Liability Risk; Limited Insurance Coverage and Uninsured Risks. Due
to the nature of the Company's golfing, cycling and skiing products, the
Company is subject to product liability claims involving personal injuries
allegedly related to Apollo's golf shafts, Reynolds' cycle tubing and ICE ski
poles. The Company's Apollo, Reynolds and ICE subsidiaries currently carry
occurrence-based product liability insurance policies. The Company believes
that its insurance has been and continues to be adequate to cover product
liability claims. Nevertheless, any future claims are subject to the
uncertainties related to litigation, and the ultimate outcome of such
proceedings or claims cannot be predicted. Due to the uncertainty with respect
to the nature and extent of manufacturers' and distributors' liability for
personal injuries, there is no assurance that the product liability insurance
of the Company's subsidiaries is or will be adequate to cover such claims.
Further, there can be no assurance that insurance will remain available or, if
available, that it will not be prohibitively expensive. Although the Company
believes it has adequate insurance coverage against hazards and risks which
are typical in the businesses conducted by its subsidiaries and that such
coverage is in reasonable amounts, there can be no assurance that due to
certain unforseen circumstances that such insurance will be adequate in every
instance. In addition, certain hazards and risks may be specifically excluded
from coverage under the policies maintained by the Company or otherwise may be
unavailable to the Company or other companies within the industry. The loss of
insurance coverage or claims exceeding that coverage or uninsured risks or
hazards could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Industrial Injury Claims. The Company is subject to the normal kind of
claims from employees in heavy industrial manufacturing operations. Several
employees at Apollo's heavy industrial manufacturing facility have filed
claims concerning a variety of work related ailments, including a condition
which results from prolonged exposure to machinery which vibrates. The Company
is intent on remedying this exposure by replacing certain
11
<PAGE>
equipment. Apollo's Employers Liability Insurance Policy and related insurance
company are involved with processing and settlement of these claims. No
assurance can be given that these claims can be settled at reasonable cost to
the Company or that repair or replacement of certain machinery will not cost
more than expected or be required in a manner other than as contemplated by
management. It is possible that the incidence of claims may have an effect on
the terms of which insurance becomes available in the future. See "Business--
Governmental Regulations."
RISK FACTORS RELATED TO THIS OFFERING
Offering Prices Not Necessarily Indicative of the Actual Value of the
Company. The offering price of the Shares was determined by negotiation
between the Company and the Representative and is not necessarily related to
the Company's assets, book value or financial condition, and may not be
indicative of the actual value of the Company. See "Underwriting."
Dilution to Investors. At June 30, 1997, after giving effect to the Share
Return, the Company had net tangible book value of $4,545,962 or $1.75 per
Share based upon 2,600,000 shares of Common Stock outstanding. Net tangible
book value per share is determined by dividing the number of outstanding
shares of Common Stock into the net tangible book value of the Company (total
assets less total liabilities and intangible assets). After giving effect to
the receipt of the net proceeds therefrom, the adjusted net tangible book
value at June 30, 1997, would have been $8,235,962 or $2.24 per Share. This
represents an immediate increase of $0.49 per Share to current stockholders
and an immediate dilution of $2.76 per Share or 55% to the investors in this
offering. See "Dilution."
Underwriters' Influence on the Market. A significant number of Shares may be
sold to customers of the Underwriters. Such customers may subsequently engage
in transactions for the sale or purchase of such Shares through or with the
Underwriters. Although they have no legal obligation to do so, the
Underwriters from time to time in the future may make a market in and
otherwise effect transactions in the Shares. To the extent the Underwriters do
so, they may be a dominating influence in any market that might develop and
the degree of participation by the Underwriters may significantly affect the
price and liquidity of the Shares. Such market making activities, if
commenced, may be discontinued at any time or from time to time by the
Underwriters without obligation or prior notice. Depending on the nature and
extent of the Underwriters' market making activities and retail support of the
Shares at such time, the Underwriters' discontinuance could adversely affect
the price and liquidity of the Shares.
Lack of Dividends. The Company has not paid any dividends since inception.
The Board of Directors does not intend to declare payment of any dividends in
the foreseeable future. See "Dividend Policy."
Possible Illiquidity of Trading Market and Application of Penny Stock
Rules. The Shares are expected to be eligible for initial quotation on the
NASDAQ SmallCap Market upon completion of this offering which may be a
significantly less liquid market than the NASDAQ National Market. Moreover, if
the Company should experience losses from operations, it may be unable to
maintain the standards for continued quotation on the NASDAQ SmallCap Market,
and the Shares could be subject to removal from the NASDAQ SmallCap Market.
Trading, if any, in the Common Stock would therefore be conducted in the over-
the-counter market on an electronic bulletin board established for securities
that do not meet the NASDAQ SmallCap Market Listing requirements, or in what
are commonly referred to as the "pink sheets." As a result, an investor would
find it more difficult to dispose of, or to obtain accurate quotations as to
the price of, the Company's Common Stock. In addition, if the Company's Common
Stock were removed from the NASDAQ SmallCap Market, it would be subject to so-
called "penny stock" rules that impose additional sales practice and market
making requirements on broker-dealers who sell and/or make a market in such
securities. As such, broker-dealers at any date after the offering, to the
extent that the Company's Common Stock were to become subject to the "penny
stock" rules, would be required in connection with transactions in the
Company's Common Stock, to provide customers with required risk disclosure
documents, disclose quotation and compensation information and provide monthly
price information and other required information. Consequently, removal from
the NASDAQ SmallCap Market, if it were to occur, could affect the ability or
willingness of broker-dealers to sell and/or make a market in the
12
<PAGE>
Company's Common Stock and the ability of purchasers of the Company's Common
Stock to sell their securities in the secondary market. In addition, if the
market price of the Company's Common Stock is less than $5.00 per share, the
Company may become subject to certain "penny stock" rules even if still quoted
on the NASDAQ SmallCap Market. While such "penny stock" rules should not
affect the quotation of the Company's Common Stock on the NASDAQ SmallCap
Market, such rules may further limit the market liquidity of the Common Stock
and the ability of purchasers in this offering to sell such securities in the
secondary market.
Currently Restricted Shares Will Be Eligible for Future Sale. Upon
consummation of this offering, the Company will have 3,650,000 Shares
outstanding (including 75,000 shares of Common Stock issuable to the Bridge
Lenders) of which the 1,050,000 Shares offered hereby will be freely tradeable
without restriction or further registration under the Securities Act. The
remaining 2,600,000 outstanding Shares, are "restricted securities" and under
certain circumstances may, in the future, be sold in compliance with Rule 144
adopted under the Securities Act. Holders of all said 2,600,000 shares of
restricted stock, including all officers and directors of the Company who hold
such restricted stock, have agreed that they will not, without the written
consent of the Representative, offer to sell, contract to sell, or otherwise
sell or dispose of their stock for one year following the date of this
Prospectus. In general, under Rule 144, subject to the satisfaction of certain
other conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted Shares for at least one year is entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of (i) 1% of the total number of outstanding shares of the same
class, or (ii) if the Common Stock is quoted on NASDAQ or a stock exchange,
the average weekly trading volume during the four calendar weeks immediately
preceding the sale. A person who presently is not and who has not been an
affiliate of the Company for at least three months immediately preceding the
sale and who has beneficially owned the Shares for at least two years is
entitled to sell such shares under Rule 144 without regard to any of the
volume limitations described above.
Upon the consummation of this offering, the Company will issue 75,000 shares
of Common Stock and warrants to purchase an additional 125,000 shares to the
Bridge Lenders. These shares, warrants and shares underlying the warrants are
being registered simultaneously with this offering for resale by the holders
thereof from time to time. The Bridge Lenders have agreed that they will not
offer to sell, contract to sell, or otherwise sell or dispose of the 75,000
shares, the 250,000 warrants to purchase 125,000 shares or the 125,000 shares
underlying the warrants for a period of six months following the effective
date of the offering and will not, without the written consent of the
Representative, offer to sell, contract to sell, or otherwise sell or dispose
of the 75,000 shares for one year following the offering, provided, however,
that they will be released from the second six month lockup if the Common
Stock trades at 150% or more of the public offering price for three
consecutive days.
The Company is authorized to issue additional options to purchase up to
500,000 shares of Common Stock under the Company's Option Plan. The Company
plans to register for sale under the Securities Act all shares issuable upon
exercise of options granted under the Option Plan. Following completion of the
offering, in addition to the warrants issuable to the Bridge Lenders, the
Company will have outstanding warrants exercisable to purchase 100,000 Shares
which will be issued to the Representative. The Company has undertaken to
register for sale under the Securities Act all shares issuable upon exercise
of those warrants. No prediction can be made to the effect, if any, that sales
of shares of Common Stock or the availability of such shares for sale will
have on the market prices prevailing from time to time. Nevertheless, the
possibility that substantial amounts of Common Stock may be sold in the public
market in the future may adversely affect prevailing market prices of the
Common Stock and could impair the Company's ability to raise capital in the
future through the sale of equity securities. Actual sales or the prospect of
future sales of Shares under Rule 144 may have a depressive effect upon the
price of the Common Stock.
Warrants May Create Dilution of Ownership. In connection with the offering,
the Company will sell to the Underwriter, for a nominal cost, warrants (the
"Representative's Warrants") to purchase up to 105,000 Shares. In addition,
the Bridge Lenders will receive 250,000 warrants to purchase 125,000 shares.
The Representative's Warrants will be exercisable commencing one year after
the date of this Prospectus and for
13
<PAGE>
four years thereafter, at an exercise price equal to the initial public
offering price of the Shares. The Bridge Lender warrants will be exercisable
commencing with the date of this Prospectus and for three years thereafter, at
an exercise price equal to 150% of the initial public offering price of the
Shares. Holders of these warrants are given the opportunity to profit from a
rise in the market price of the Shares with a resulting dilution of the
percentage ownership of the then stockholders. Furthermore, the Company will
grant certain registration rights with respect to the Representative's
Warrants and such registration could result in substantial expense to the
Company. See "Underwriting--Representative's Warrants" and "Additional
Registered Securities. " at an exercise price equal to the initial public
offering price of the Shares. The Bridge Lender warrants will be exercisable
commencing with the date of this Prospectus and for three years thereafter, at
an exercise price equal to 150% of the initial public offering price of the
Shares. Holders of these warrants are given the opportunity to profit from a
rise in the market price of the Shares with a resulting dilution of the
percentage ownership of the then stockholders. Furthermore, the Company will
grant certain registration rights with respect to the Representative's
Warrants and such registration could result in substantial expense to the
Company. See "Underwriting--Representative's Warrants" and "Additional
Registered Securities. "
Forward Looking Statements May Materially Differ from Actual Financial
Results. To the extent that the Prospectus contains forward-looking statements
regarding the financial condition, operating results, business prospects or
any other aspect of the Company, investors should be aware that the Company's
actual financial condition, operating results and business performance may
differ materially from that projected or estimated by the Company in forward-
looking statements. The Company has attempted to identify, in context, certain
of the factors that it currently believes may cause actual future experience
and results to differ from the Company's current expectations. The differences
may be caused by a variety of factors, including but not limited to adverse
economic conditions, general decreases in consumer spending for sports
equipment and recreational products, intense competition, including entry of
new competitors, increased or adverse governmental regulation, inadequate
capital, unexpected costs, lower sales and net income than forecasted or
greater losses than forecasted, loss of significant customers, price increases
for raw materials, inability to raise prices, the risk of litigation and
administrative proceedings involving the Company and its employees, higher
than anticipated labor costs, labor disputes, the possible fluctuation and
volatility of the Company's operating results and financial condition, adverse
publicity and news coverage, adverse currency exchange rates, inability to
carry out marketing and sales plans, loss of key executives, changes in
interest rates, inflationary factors, and other specific risks that may be
alluded to in this Prospectus.
No Prior Public Market; Determination of Offering Price May Bear No
Relationship to Market Price After Offering; Possible Volatility of Stock
Price. Prior to this offering, there has been no public market for the
Company's Shares and there can be no assurance that an active trading market
for the Shares will develop or be sustained after this offering. In the event
that the Company's Shares are thinly traded, stockholders may not be able to
sell a significant amount of Shares at the price quoted, or at all. The
initial public offering price for the Shares will be determined by negotiation
between the Company and the Representative based on several factors and may
bear no relationship to the market price of the Shares subsequent to this
offering. Following this offering, the market price for the Shares may be
highly volatile depending on various factors, including the general economy,
stock market conditions, announcements by the Company or its competitors and
fluctuations in the Company's operating results. In addition, the securities
market historically has experienced volatility which has affected the market
price of securities of many companies and which has sometimes been unrelated
to the operating performance of such companies. The trading price of the
Shares could also be subject to significant fluctuations in response to
variations in quarterly results of operations, announcements of new products
by the Company or its competitors, changes in earnings estimates by analysts,
governmental regulatory action, other developments or disputes with respect to
proprietary rights, general trends in the industry and overall market
conditions, and other factors. See "Underwriting."
Anti-takeover Considerations May Deter Change of Control. The Board of
Directors, without any action by the Company's stockholders, is authorized
under the terms of its Restated Articles of Incorporation, to designate shares
of preferred stock in such classes or series as it deems appropriate and to
establish the rights, preferences and privileges of such shares, including
dividend, liquidation and voting rights. This ability of the Board of
Directors would permit the Company to adopt a stockholders' rights plan which
would deter a hostile
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<PAGE>
takeover or issue shares which could entrench the Board of Directors and deter
an unsolicited tender offer. Either event may deprive current stockholders of
the ability to sell shares at a premium over the market price or adversely
affect the voting power and other rights of holders of Common Stock. These
provisions could have the effect of discouraging, delaying, deferring or
preventing a change in control of the Company. See "Description of
Securities."
USE OF PROCEEDS
The net proceeds to the Company from this offering, after deduction of
estimated offering expenses and underwriting discounts of $1,395,000 will be
approximately $3,855,000, at a per Share offering price of $5.00 ($4,642,500
if the over-allotment option on the Shares is exercised in full). Management
anticipates that the net proceeds will be applied with the following priority
during the next twelve month period:
<TABLE>
<CAPTION>
DESCRIPTION OF USE AMOUNT PERCENT
------------------ ---------- -------
<S> <C> <C>
Repayment of Loans(1) ....................................... $1,500,000 38.9
Capital Equipment--Sierra Materials(2)....................... 950,000 24.6
Repayment of Liabilities--Sierra Materials(3)................ 650,000 16.9
Repayment of notes to stockholder(4)......................... 200,155 5.2
Working Capital(5)........................................... 554,845 14.4
---------- ----
Total.................................................... $3,855,000 100
========== ====
</TABLE>
- --------
(1) In April 1997, as a result of the Private Placement, the Company obtained
two loans in the aggregate principal amount of $1,500,000 from
unaffiliated third parties. The loans are due on the earlier of
December 31, 1997, or five days subsequent to the Company's completion of
an initial public offering. The interest rate on each of the loans is 8%
per annum. The loans are secured by a Stock Pledge Agreement for the
Company's shares in Apollo and Apollo U.S. and by personal guarantees by
Mel Stonebraker and James Probst. The proceeds of these loans were used by
the Company as follows: Apollo and Reynolds working capital, $808,000;
Sierra Materials working capital, $360,000; and general corporate expenses
of $332,000.
(2) The Company intends to purchase certain capital equipment necessary for an
additional production line.
(3) The Company intends to use these funds to repay certain liabilities of
Sierra Materials which include $534,000 needed to eliminate the personal
guarantees of the prior shareholders of Sierra Materials and to eliminate
the obligation of the Company to make future royalty payments. See
"Consolidated Financial Statements" Note 2, Acquisitions.
(4) The Company had outstanding notes payable to Mel Stonebraker in the amount
of $112,496 at June 30, 1997. Subsequent to June 30, 1997 the Company
entered into an additional note payable to Mr. Stonebraker in the amount
of $87,659. The notes are unsecured and bear interest at rates ranging
from 12% to 25% per annum which approximates Mr. Stonebraker's cost of the
money lent to the Company. Interest is payable monthly on the notes and
any principal amounts outstanding are due between August 1998 and October
1999. The Company used the proceeds of Mr. Stonebraker's loans for working
capital. See "Certain Transactions."
(5) Part of the working capital may be used for Apollo marketing and sales,
for the Pentiumatics manufacturing facility, or for additional capital
equipment for Sierra Materials. Working capital will be increased by an
amount equal to the expenses of the offering that have been prepaid. The
Company had prepaid approximately $468,000 as of September 10, 1997.
The amounts set forth above represent the Company's present intentions for
the use of the proceeds from this offering. However, actual expenditures could
vary considerably depending upon many factors, including, without limitation,
unanticipated complications, delays or expenses, in developing Pentiumatic's
manufacturing facility. Any reallocation of the net proceeds of this offering
will be made at the discretion of the Board of Directors but will be in
furtherance of the Company's strategy to achieve growth and profitable
operations, including through the acquisition of products or businesses which
are complementary to the Company's current products and businesses. Although
the Company anticipates that the proceeds from this offering will be
sufficient for twelve months, the Company's working capital requirements are a
function of its future sales growth and expansion plans, neither of which can
be predicted with any reasonable degree of certainty, especially growth
resulting from business acquisitions. The Company may need to seek funds
through loans or other financing arrangements in the future, and there can be
no assurance that the Company will be able to make such arrangements in the
future should the need arise. See "Risk Factors."
Pending use of the net proceeds of the offering, the funds may be invested
temporarily in certificates of deposit, short-term government securities or
similar investments. Any income from these short-term investments will be used
for working capital.
15
<PAGE>
CAPITALIZATION
The following table sets forth, cash, short term debt and capitalization of
the Company as of June 30, 1997, and as adjusted to give effect to the sale of
the Shares offered hereby and the initial application of the estimated net
proceeds therefrom and giving effect to the Share Return. See "Use of
Proceeds." For additional information, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
consolidated financial statements and notes thereto included in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
AS
ACTUAL ADJUSTED(3)
---------- -----------
<S> <C> <C>
Cash.................................................... $1,806,705 3,514,985
Short term debt and current portion of long term
debt(1)(2)............................................. 5,508,824 3,408,913
========== ==========
Long term debt, excluding current portion(1)............ 1,892,123 1,845,314
Minority interests in net assets of subsidiaries........ 755,823 755,823
Stockholders' equity:
Preferred stock, $.001 par value, 4,000,000 shares
authorized, no shares issued or outstanding........... -- --
Common Stock, $.001 par value, 25,000,000 shares
authorized, 3,450,000 shares issued and outstanding;
3,650,000 shares issued and outstanding, as adjusted.. 3,450 3,650
Additional paid-in capital.............................. 8,347,333 12,202,133
Accumulated deficit..................................... (2,991,075) (2,991,075)
Foreign currency translation adjustment................. 154,000 154,000
---------- ----------
Total stockholders' equity.............................. 5,513,708 9,368,708
---------- ----------
Total capitalization.................................... $8,161,654 11,969,845
========== ==========
</TABLE>
- --------
(1) Certain obligations are in connection with the Company's acquisition of
intangible assets by ICE. See Consolidated Financial Statements included
herein.
(2) Notes payable to stockholder and partial repayment of Sierra Material's
indebtedness.
(3) As adjusted amounts reflect the sale of 1,050,000 Shares (excluding any
Shares which may be sold as a result of the exercise of the overallotment
option) as contemplated by this Prospectus at $5.00 per Share, net of
$1,395,000 of estimated offering expenses including the non-accountable
expense allowance and underwriting discounts and the application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
DIVIDEND POLICY
The Company has paid no dividends since inception. The payment of dividends
on the Shares rests with the discretion of the Board of Directors. There are
no restrictions on payment of dividends under any agreements to which the
Company is a party other than in the agreements relating to the Private
Placement, which restrictions will cease when the bridge loans are paid with
the proceeds of this offering. Payment of dividends is contingent upon, among
other things, future earnings, if any, and the financial condition of the
Company, capital requirements, general business conditions, and other factors
which cannot now be predicted. The Board of Directors does not intend to
declare payment of any dividends in the foreseeable future. There can be no
assurance that the future operations of the Company will be profitable or that
dividends will ever be paid by the Company.
16
<PAGE>
DILUTION
The following gives effect to the issuance of the Shares offered hereby at a
Price to Public of $5.00. The net tangible book value of the Company's Common
Stock at June 30, 1997 was $4,545,962 or $1.75 per share. "Net tangible book
value" represents the tangible assets less total liabilities of the Company,
and "net tangible book value per share" was determined by dividing the net
tangible book value of the Company by the number of shares of Common Stock
outstanding on June 30, 1997, as adjusted for the Share Return. See
"Capitalization." "Pro forma net tangible book value dilution per share"
represents the difference between the Price to Public per Share and the net
tangible book value per share after this offering. Without taking into account
any changes in the Company's net tangible book value per share after June 30,
1997 other than to give effect to the sale of the Shares offered hereby (net
of underwriting discounts and estimated offering expenses of $1,395,000), the
net tangible book value of the Company at June 30, 1997 would have been
$8,401,060 or $2.24 per share. This represents an immediate increase in net
tangible book value to the existing stockholders of $0.49 per share and an
immediate net tangible book value dilution to purchasers of the Shares of
$2.76 per Share, as illustrated by the following table:
<TABLE>
<S> <C> <C>
Assumed Price to Public per Share............................. $5.00
Net tangible book value per share of Common Stock before of-
fering....................................................... $1.75
Increase per share of Common Stock attributable to new invest-
ors.......................................................... 0.49
Adjusted net tangible book value per Share of Common Stock af-
ter offering................................................. 2.24
Dilution in net tangible book value per Share of Common Stock
to new investors............................................. $2.76
=====
Dilution per share of Common Stock as a percentage of offering
price........................................................ 55%
</TABLE>
The following table summarizes as of July 31, 1997, the difference between
existing stockholders and the new investors with respect to the number of
shares of Common Stock purchased from the Company, the total consideration
paid and the average price paid per share to the Company hereby (before
deducting underwriting discounts and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------------ PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 2,600,000 71% $ 8,500,000 62% $3.27
New stockholders(1)..... 1,050,000 29% 5,250,000 38% 5.00
--------- ---- ------------- ------
Total................. 3,650,000 100% 13,750,000 100%
========= ==== ============= ======
</TABLE>
- --------
(1) Assumes a Price to Public of $5.00 per Share with 1,050,000 Shares sold in
this offering. Excludes 75,000 shares and warrants to purchase 125,000
shares which will be issued after this offering in connection with the
Private Placement. See "Private Placement."
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
The following historical selected consolidated statement of operations data
for each of the years in the two-year period ended December 31, 1996 and the
historical selected balance sheet data as of December 31, 1996 are taken or
derived from the historical consolidated financial statements of the Company
included elsewhere herein, which were audited by KPMG Peat Marwick LLP as set
forth in their report thereon also included herein. The historical selected
consolidated statement of operations data for the six months ended June 30,
1996 and 1997 are taken or derived from the unaudited consolidated financial
statements of the Company included elsewhere herein. In the opinion of
management, such unaudited interim consolidated financial statements reflect
all adjustments (including only normal recurring accruals) which in the
opinion of management are necessary for a fair presentation of the results for
these periods. The operating results for the six months ended June 30, 1997
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1997. The following selected unaudited pro forma
financial data are taken or derived from the unaudited pro forma combined
financial statements of the Company included elsewhere herein. The pro forma
data are not necessarily indicative of the results of the operations or
financial position that would have been obtained had the acquisitions occurred
as of the beginning of the periods covered thereby nor do they purport to be
indicative of the future results of operations or financial position of the
Company. The selected financial and operating data should be read in
conjunction with the financial statements, including notes thereto, included
elsewhere in the Prospectus and the discussion under "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------- -------------------------------------
PRO FORMA(1) PRO FORMA(2)
1995 1996 1996 1996 1997 1997
--------- --------- ------------ --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales............... $ -- 5,453 23,522 20 12,750 13,683
Cost of goods sold...... -- (4,169) (17,881) (23) (9,784) (10,622)
--------- --------- --------- --------- --------- ---------
Gross profit (loss)..... -- 1,284 5,641 (3) 2,966 3,061
Selling, general and
administrative
expenses............... (371) (2,308) (6,856) (238) (4,072) (4,233)
--------- --------- --------- --------- --------- ---------
Operating loss.......... (371) (1,024) (1,215) (241) (1,106) (1,172)
Other income (expense),
net.................... -- 92 (106) -- (788)(6) (760)
Income tax benefit
(expense).............. -- -- (248) -- 181 181
Minority interests...... -- (6) (6) -- 48 60
--------- --------- --------- --------- --------- ---------
Net loss................ $ (371) (938) (241) (1,665) --
========= ========= ========= =========
Net loss per share...... $ (0.11) (0.27) (0.07) (0.48) --
========= ========= ========= =========
Pro forma net loss...... $ (1,575) (1,691)
========= =========
Pro forma net loss per
share(3)............... $ (0.46) (0.49)
========= =========
Shares used in computing
net loss per share and
pro forma net loss per
share(3)(5)............ 3,450,000 3,450,000 3,450,000 3,450,000 3,450,000 3,450,000
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997
-------------------
DECEMBER 31, AS ADJUSTED
1996 ACTUAL (4)
------------- ------ -----------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash........................................ $ 305 1,807 3,515
Working capital (deficit)................... 1,960 (516) 3,292
Total assets................................ 11,799 19,717 21,425
Total liabilities........................... 6,563 13,447 11,300
Minority interests in net assets of
subsidiaries............................... 210 756 756
Total stockholders' equity.................. 5,027 5,514 9,369
</TABLE>
- --------
(1) Pro forma financial information is based upon the historical consolidated
financial statements of the Company for the year ended December 31, 1996,
the historical combined financial statements of Apollo, Apollo U.S.,
Reynolds and an acquired manufacturing facility for the nine months ended
September 30, 1996 (collectively, the "Apollo entities"), and the
historical financial statements of Sierra Materials for ten month period
ended December 31, 1996.
(2) Pro forma financial information is based upon the historical consolidated
financial statements of the Company and the historical financial
statements of Sierra Materials for the period January 1, 1997 to March 31,
1997.
(3) Calculated as described in Note 1 to Consolidated Financial Statements.
(4) Pro forma as adjusted amounts reflect the sale of 1,050,000 Shares as
contemplated by this Prospectus at a price of $5.00 per Share, net of
$1,395,000 of estimated offering expenses including the non-accountable
expense allowance and underwriting discounts and the application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
(5) Subsequent to June 30, 1997, the Company retired 850,000 shares of Common
Stock contributed back by the Company's stockholders.
(6) Approximately $550,000 of this amount is attributable to debt financing
costs associated with the Private Placement (see "Private Placement").
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto and the Pro Forma
Consolidated Statements of Operations and Notes thereto, which appear
elsewhere in this Prospectus. Certain statements contained in this Prospectus
are "forward looking statements." Such statements are subject to risks,
uncertainties and other factors that could cause actual results to differ
materially from future results expressed or implied by such forward looking
statements. The Company has attempted to identify, in context, certain of the
factors that it currently believes may cause actual future experience and
results to differ from the Company's current expectations. The differences may
be caused by a variety of factors, including but not limited to adverse
economic conditions, general decreases in consumer spending for sports
equipment and recreational products, intense competition, including entry of
new competitors, increased or adverse governmental regulation, inadequate
capital, unexpected costs, lower revenues and net income than forecasted, loss
of significant customers, price increases for raw materials, inability to
raise prices, the risk of litigation and administrative proceedings involving
the Company and its employees, higher than anticipated labor costs, labor
disputes, the possible fluctuation and volatility of the Company's operating
results and financial condition, adverse publicity and news coverage, adverse
currency exchange rates, inability to carry out marketing and sales plans,
loss of key executives, changes in interest rates, inflationary factors, and
other specific risks that may be alluded to in this Prospectus.
OVERVIEW
Coyote designs, engineers, manufactures, markets and distributes brand name
sports equipment and recreational products. The Company's products include
steel and graphite golf shafts, premium grade cycle tubing, composite ski
poles and javelins. The Company also produces graphite and other advanced
composite materials for use in the production of golf shafts, fishing poles,
ski poles, hockey sticks and other third party manufactured products. The
Company manufactures its Apollo golf shafts in its manufacturing facility in
Oldbury, England, its Reynolds cycle tubing in Tyseley, England, its advanced
composite materials in San Diego, California and intends on manufacturing
extruded aluminum alloys in Southeast Asia for such products as cycle tubing,
ski poles and tennis rackets. The Company's ICE products are assembled in
Heber City, Utah.
Management anticipates that technology, price, quality and service will be
determining factors in the future success of the Company's current brand name
products which principally include golf shafts, ski poles and cycle tubing.
With this strategy in mind, the Company made two investments in 1997. The
Company acquired an 80% interest in Sierra Materials in March and acquired its
interest in Pentiumatics in April. See "Acquisition History."
Located in San Diego, California, Sierra Materials manufactures advanced
composite materials made primarily from carbon fiber, fiberglass and Kevlar.
Sierra Materials sells its products to manufacturers of sports and recreation
equipment. In the future, Sierra Materials intends on selling product to a
third party in Southeast Asia who will use the product, in part, to
manufacture graphite golf shafts to be distributed by Apollo under an
exclusive distribution agreement. See "Apollo Golf Shafts." The Company
intends on using a portion of the proceeds from the offering for capital
equipment purchases to expand Sierra Materials' manufacturing capacity. See
"Use of Proceeds."
Pentiumatics is in the process of constructing a thirty thousand square foot
aluminum extrusion factory in Southeast Asia. Pentiumatics will manufacture
aluminum cycle tubes and aluminum ski poles to be sold under the Reynolds and
ICE brand names, respectively. In addition, Pentiumatics intends to sell
extruded aluminum to unrelated third parties.
The addition of Pentiumatics is expected to enhance the Company's strategy
by adding extruded aluminum alloy to its manufacturing base. This would mean
that the Company could produce steel tubing, graphite and other advanced
composite pre-preg and extruded aluminum alloy. These are the main materials
used in most sporting goods products worldwide. If the Company is successful
in completing the construction of the factory
20
<PAGE>
to be located in Southeast Asia, the Company would be in a position to be
vertically integrated in all the main materials used in the manufacturing of
golf shafts, cycle tubing and ski poles, the main businesses of the Company.
Management believes that the completion of the factory will not require
significant additional Company resources. However, there can be no assurance
that the Company will finish the construction of the aluminum extrusion
factory or that the Company will produce extruded aluminum alloy.
Source of Sales
During the year ended December 31, 1996, the greatest portion of the
Company's sales were derived from its Apollo steel golf shafts and Reynolds'
cycle tubing. Apollo's steel golf shaft business and Reynold's cycle tubing
business accounted for approximately 91% of the Company's sales for the year
ended December 31, 1996. In March 1997, the Company acquired an 80% interest
in Sierra Materials which manufactures advanced composite materials. In April
1997, the Company purchased all of the outstanding stock of Pentiumatics, a
Southeast Asian company, which expects to manufacture extruded aluminum
alloys. The combination of these two acquisitions is anticipated to lessen the
Company's dependence on the sale of golf and cycle products as the principal
source of its sales. During the year ending December 31, 1997 and thereafter,
management believes that the golf and cycle businesses will represent a
progressively lower percentage of its total sales. The Company's future
acquisitions strategy is to focus on the sports equipment and recreation
industry with no single product line representing a majority of its total
sales.
Apollo Golf Shafts
The steel golf shaft market has three significant manufacturers: True Temper
(U.S.A.), Apollo (UK) and FM Precision (U.S.A.). Nippon Steel has
progressively withdrawn from the market and Apollo has purchased equipment
from Nippon Steel at favorable prices. There are large capital entry barriers
associated with the manufacturing of steel golf shafts and the Company does
not anticipate additional capacity coming on line from any new competitors.
Apollo is the only manufacturer of seamless steel golf shafts in the world.
Management believes that the physical integrity of the seamless golf shaft is
superior to a welded golf shaft made by its competitors. Seamless tubes can be
manufactured using a greater variety of high carbon alloys which the Company
believes increase golf shaft consistency and permits greater design
versatility. Currently, Apollo has a small market share of the graphite golf
shaft business. The Company's future plans are to increase sales in the
graphite golf shaft business utilizing Apollo's sales and distribution
channels. Initially, the Company plans to expand its presence in the graphite
golf shaft business by purchasing finished graphite golf shafts from an
independent graphite manufacturer for resale through equipment catalogs and
custom club makers ("retail after market"). Additionally, the Company will act
as sales agent for this same third party manufacturer for sales to original
equipment manufacturers ("OEMs"). The Company has signed an exclusive
distribution agreement with a Southeast Asian company whereby the Company will
distribute graphite golf shafts utilizing the Company's technology and
specifications and believes that with Apollo's established sales and
distribution channels that it will increase sales in this segment by providing
competitive pricing, quality and service.
Graphite golf shafts are manufactured by approximately 30 companies
worldwide and competition is intense. The industry is maturing and management
anticipates a consolidation will occur and as such, the number of competitors
will be reduced. Management anticipates that technology, price, quality and
service will be determining factors in effectively competing in this market.
The major competitors today are Aldila, HST, Unifiber, Fujikura, Grafalloy and
True Temper.
The Company's results of operations could be materially adversely affected
by the traditional volatility in consumer demand for specific golf club
brands. The Company also believes that while it will often be impossible to
predict such shifts in advance, the Company's broad range of customers should
reduce the extent of the impact on the Company's financial results.
Traditionally, the Company has focused its attention on the OEM market. The
Company plans to continue devoting a majority of its research and development
efforts on developing new innovations for the OEM market which today
represents a large portion of the Company's sales. The Company believes that
its strong presence in the OEM market has helped to position it as a leader in
the design,
21
<PAGE>
development and manufacture of golf shafts. The Company believes that its
strong historical position with respect to OEM manufacturers gives it
credibility in the retail after market as well. Expanding the Company's market
share in the retail after market is a significant component of its growth
strategy.
Apollo has a strong OEM customer base, including in alphabetical order, such
brand names as Callaway Golf, Inc., Cobra Golf, Inc., Focus Golf, Harris
International, Karsten, Knight Golf, MacGregor Golf Company, Mizuno Golf
Company, Northwestern Golf, and Wilson Sporting Goods Company. For the year
ended December 31, 1996, Apollo had approximately 700 customers in the U.S.A.
and 70 in Europe. No one customer accounted for more than 10% of the Company's
sales for the year ended December 31, 1996. Accordingly, the Company is not
economically dependent on any one key customer.
Reynolds Cycle Tubing
Reynolds ranks as one of the leading suppliers of premium brand cycle tubing
serving such customers as GT Bicycle, Inc., Kona Bicycles USA, Raleigh Bicycle
Company, Ltd. and Trek Bicycle Corp. Twenty-seven of the last 39 Tour de
France races were won with bikes made from Reynolds' tubing. The Reynolds
cycle tubing business is seasonal and had only a small impact on the financial
results of the Company for the period from acquisition (September 18, 1996)
through December 31, 1996. The Company plans to expand the Reynolds cycle
tubing business through its investment in Pentiumatics and the introduction of
an aluminum cycle tubing product line.
ICE Ski Poles
The ICE ski pole business represented approximately 7% of the Company's
total sales during the period from acquisition (September 18, 1996) through
December 31, 1996. In the future, the Company expects winter sports products
to become a larger portion of its business and as such, ICE expects that its
products will be in greater demand. By expanding its product line of winter
sports products, management expects greater cash flows for the Company
throughout the year.
Effects on Results of Operations
The acquisition of Apollo and Sierra Materials, both of which require
significant machinery and equipment to manufacture their respective products,
will result in depreciation charges to operations of approximately $600,000
per year.
ICE's intangible assets were recorded at approximately $815,000, net of the
minority interest in ICE. The Company is amortizing these assets, using the
straight-line method, over a 15-year period which will result in a non-cash
charge to operations of approximately $55,000 per year.
RESULTS OF OPERATIONS
The Company analyzes its results from operations in two categories: (1)
"United Kingdom (UK)" which consists of sales and corresponding cost of sales
of all product sold from the United Kingdom, with the exception of product
sold to Apollo U.S., and all selling, general, administrative, interest and
other expenses incurred by Apollo and Reynolds and (2) "U.S." which consists
of sales and corresponding cost of sales of all product sold from the United
States and all selling, general, administrative, interest and other expenses
incurred by Apollo U.S., Sierra Materials and ICE and general corporate
expenses incurred in the United States. Pentiumatics is not yet operational.
The Company accounts for its foreign operations in the local functional
currency, the Pound Sterling for United Kingdom operations and the Malaysian
Ringgit for Pentiumatics. These amounts are translated into the U.S. dollar
for financial reporting purposes. Balance Sheet amounts are translated using
the period end exchange rate. Statement of Operations amounts are translated
using the average exchange rate for the period. Translation
22
<PAGE>
gains/losses are reflected in Stockholders' equity (deficit) in the line item,
"Foreign currency translation adjustment." The risks inherent in maintaining
assets and liabilities and entering into transactions denominated in foreign
currencies increases volatility in reported results of operations and
stockholders' equity due to exchange rate differences between the U.S. dollar
and the other currencies. The Company enters into forward foreign exchange
contracts, from time to time, to "fix" the exchange rate for specific sales
from the U.K. to the U.S. The contracts are "marked" to market at each period
end. Gains and losses on the contracts are recognized currently in the
Statement of Operations. Due to significant volatility between the U.S. dollar
and the U.K. Pound Sterling, the Company's Statement of Operations could be
significantly impacted by exchange rate changes in these currencies.
Prior to 1996, the Company was a development stage enterprise as it was
devoting most of its activities to financial planning and identifying and
evaluating acquisitions. Management's Discussion and Analysis includes
primarily discussions of operations subsequent to the acquisition of Apollo,
Reynolds, Apollo U.S., ICE, Sierra Materials and Pentiumatics. See
"Acquisition History." Accordingly, as discussed in greater detail below,
these acquisitions have resulted in material increases in the Company's net
sales, cost of goods sold and selling, general and administrative costs and
resulting net operating loss for the six months ended June 30, 1997 in
comparison to the six months ended June 30, 1996 and for the year ended
December 31, 1996 compared to the year ended December 31, 1995. Apollo,
Reynolds, Apollo U.S. and ICE were acquired in September 1996. The operating
results of these acquired entities are reflected only in the six months ended
June 30, 1997 and not for the six months ended June 30,1996 and from October
1, 1996 to December 31, 1996 for the year ended December 31, 1996. In March
and April of 1997 the Company acquired its interest in Sierra Materials and
Pentiumatics, respectively. The effects of these acquisitions are included in
the interim consolidated balance sheet of the Company as of June 30, 1997 and
in the interim consolidated statement of operations for the six months ended
June 30, 1997.
SIX MONTHS ENDED JUNE 30, 1997 AND 1996.
The Company had net sales of $12,750,000 for the six months ended June 30,
1997 compared to $20,000 for the comparable period in 1996. Net sales for the
six months ended June 30, 1997 from UK operations were $4,339,000. The Company
did not have any UK sales, cost of sales or selling, general and
administrative costs for the six months ended June 30, 1996. Net sales from
U.S. operations were $8,411,000 for the six months ended June 30, 1997
compared to $20,000 for the comparable period in 1996.
The Company had a gross profit of $2,966,000 for the six months ended June
30, 1997 compared to $(3,000) for the comparable period in 1996. Gross profit
from UK operations was $1,158,000 for the six months ended June 30, 1997.
Gross profit from U.S. operations was $1,808,000 for the six months ended June
30, 1997 compared to $(3,000) for the comparable period in 1996.
The Company's selling, general and administrative expenses increased to
$4,072,000 for the six months ended June 30, 1997 compared to $238,000 for the
comparable period in 1996. Selling, general and administrative expenses from
UK operations were $2,623,000 for the six months ending June 30, 1997.
Selling, general and administrative expenses from U.S. operations were
$1,449,000 for the six months ended June 30, 1997 compared to $238,000 for the
comparable period in 1996.
The Company incurred an operating loss of $1,106,000 for the six months
ended June 30, 1997 compared to a $241,000 operating loss for the comparable
period in 1996. Operating loss from UK operations was $1,465,000 for the six
months ended June 30, 1997. The Company did not have UK operating income for
the six months ended June 30, 1996. Operating income from U.S. operations was
$359,000 for the six months ended June 30, 1997 compared to an operating loss
of $241,000 for the comparable period in 1996.
The disproportionate operating loss from UK operations compared to U.S.
operations is due to the organizational structure of Apollo and Apollo U.S.
(collectively the "Group"). All of the Group's manufacturing facilities, the
vast majority of the Group's employees and the majority of the Group's
selling, general and administrative expenses are in the UK, whereas most of
the Group's sales occur in the U.S.
23
<PAGE>
The Company had $200,000 in interest expense for the six months ended June
30, 1997; $77,000 from UK operations and $123,000 from U.S. operations. No
interest expense was incurred for the six months ending June 30, 1996. The
increase in interest expense is primarily the result of the Company's credit
facilities in the United States and the United Kingdom and interest on the
remaining purchase obligation for ICE.
The Company has entered into certain forward currency exchange contracts to
hedge its exposures to changes in currency exchange rates primarily between
the U.S. dollar and the UK pound sterling. These transactions resulted in
$39,000 in losses from UK operations for the six months ended June 30, 1997.
No such transactions took place for the six months ended June 30, 1996.
The Company entered into two secured promissory notes with Bridge Lenders in
1997 for $1,500,000. For the six months ended June 30, 1997, the Company
incurred $550,000 in debt financing costs from U.S. operations in
consideration of the notes payable. No such transactions took place for the
six months ended June 30, 1996.
The Company recorded an income tax benefit of $181,000 for the six months
ended June 30, 1997 primarily as a result of losses generated by Apollo in the
United Kingdom. Taxable income (loss) by country is determined under the tax
regulations of the respective taxing authorities, and varies significantly
from the measurement bases utilized for financial reporting purposes.The
losses will be utilized to offset future taxable income in the United Kingdom.
No such income tax benefits existed for the six months ended June 30, 1996.
The Company incurred a net loss of $1,665,000; $1,400,000 from UK operations
and $265,000 from U.S. operations, for the six months ended June 30, 1997
compared to a net loss of $241,000 for the comparable period in 1996.
Management attributes the increase in loss primarily to lower than expected
sales of Apollo and ICE, manufacturing material usage inefficiencies at Sierra
Materials, debt financing costs and other general corporate expenses.
In order to become profitable, the Company must increase sales while
effectively managing costs. Profitability depends to a large extent on
management's ability to increase sales, reduce selling, general, and
administrative costs, outsource the manufacturing of graphite shafts, more
efficiently utilize existing plant capacities at Apollo and Reynolds and
expand manufacturing capacity at Sierra Materials, commencing manufacturing at
Pentiumatics, and by acquiring companies whose businesses would be
complementary to, and compatible with, the existing business of the Company's
subsidiaries. Management does not expect the Company to attain profitability
in 1997. There can be no assurance that the Company will be able to achieve
these goals or attain profitability in the future.
YEARS ENDED DECEMBER 31, 1996 AND 1995
The Company had net sales of $5,453,000 for the year ended December 31,
1996, of which $2,499,000 were from UK operations and $2,954,000 were from
U.S. operations. The Company did not have any sales or cost of sales for the
year ended December 31, 1995.
The Company had a gross profit of $1,284,000 for the year ended December 31,
1996, of which $626,000 was from UK operations and $658,000 was from U.S.
operations.
The Company's selling, general and administrative expenses increased to
$2,308,000 for the year ended December 31, 1996 compared to $371,000 for the
comparable period in 1995. Selling, general and administrative expenses were
$1,348,000 from UK operations and $960,000 from U.S. operations for the year
ended December 31, 1996. All selling, general and administrative costs for the
year ended December 31, 1995 were from U.S. operations.
The Company incurred an operating loss of $1,024,000 for the year ended
December 31, 1996 compared to an operating loss of $371,000 for the comparable
period in 1995. Operating loss from UK operations was
24
<PAGE>
$722,000 for the year ended December 31, 1996. Operating loss from U.S.
operations was $302,000 for the year ended December 31, 1996 compared to an
operating loss of $371,000 for the comparable period in 1995. The operating
loss of $371,000 for the year ended December 31, 1995 was from U.S.
operations.
Interest expense for the year ended December 31, 1996 was $35,000; $16,000
from UK operations and $19,000 from U.S. operations. The Company did not have
interest expense for the year ended December 31, 1995.
The Company incurred a gain of $127,000 on forward currency exchange
contracts for the year ended December 31, 1996, all of which was from UK
operations. The Company did not have any forward currency exchanges gains or
losses for the year ended December 31, 1995.
The Company incurred a net loss of $938,000; $611,000 from UK operations and
$327,000 from U.S. operations for the year ended December 31, 1996, compared
to a net loss of $371,000 for the year ended December 31, 1995 entirely from
U.S. operations.
Inflation has not had a significant impact on the Company's operations
during the two year period ended December 31, 1996.
The following table sets forth, for the periods indicated, certain statement
of operations data as a percentage of net sales. The 1996 data is attributable
to Apollo, Reynolds, Apollo U.S., ICE and general corporate expenses and the
pro forma 1996 data reflects the pro forma combined results of those entities
as though the acquisitions were effective January 1, 1996. The June 30, 1997
data is attributable to Apollo, Reynolds, Apollo U.S., ICE, Sierra Materials,
Pentiumatics and general corporate expenses. The pro forma 1997 data reflects
the combined results of those entities and of Sierra Materials and
Pentiumatics as though these two acquisitions were effective January 1, 1997.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
-------------------- --------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Net sales........................... 100% 100 100 100
Cost of goods sold.................. (77) (76) (77) (78)
Gross profit...................... 23 24 23 22
Selling, general and administrative
expenses........................... (42) (29) (32) (31)
Operating loss...................... (19) (5) (9) (9)
Interest expense.................... (1) (1) (2) (1)
Gains on forward exchange contracts,
net................................ 3 -- -- --
Debt financing costs................ -- -- (4) (4)
Loss before income taxes and minor-
ity interest....................... (17) (6) (15) (14)
Income tax benefit (expense)........ -- (1) 2 2
Minority interests.................. -- -- -- --
Net loss.......................... (17)% (7) (13) (12)
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In February of 1997, the Financial Accounting Standards Board (the "FASB")
issued Statements of Financial Accounting Standards, No.128, Earnings per
Share, (Statement No. 128) and No. 129, Disclosure of Information about
Capital Structure, (Statement No. 129), effective for years ending after
December 15, 1997. Statement No. 128 specifies the computation, presentation,
and disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock or potential common stock. The Company will adopt
Statement No. 128 in the December 31, 1997 consolidated financial statements.
The effect of such adoption did not have a significant impact on the earnings
per share of the Company. Statement No. 129 specifies and aggregates various
disclosures which were previously required for certain entities. The Company
has adopted the disclosure requirements under this statement.
25
<PAGE>
SEASONALITY
As a result of the Company's present operations being primarily dependent
upon Apollo sales, management expects for the foreseeable future that the
Company's business will remain seasonal. Because the Company's customers have
historically built inventory in anticipation of purchases by golfers in the
spring and summer, the principal selling season for golf shafts, the Company's
primary product, the Company's operating results have been affected by
seasonal demand for golf clubs, which has generally resulted in higher sales
in the spring and summer months. The success of certain customers' products,
patterns of product introduction, and customer acceptance thereof, coupled
with a generally increasing overall demand for golf shafts, may mitigate the
impact of this seasonality. The Company acquisitions strategy will in part be
driven by its intention to moderate seasonality and balance cash flows.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had a working capital deficit of $516,000. As
of June 30, 1997 the Company had two outstanding notes payable. One note
payable provides for borrowings under a foreign line of credit up to 750,000
PS ($1,285,000 U.S.) plus cash on deposit with the bank with an interest rate
of 1.5% over the bank's prime rate (7% as of September 10, 1997). Amounts
outstanding on the note are secured by substantially all Apollo's assets. At
June 30, 1997 amounts outstanding under the note payable were $1,122,000, net
of $1,456,000 cash on deposit. The credit facility is due on demand and
subject to review in May 1998.
The second note payable provides for borrowings under a line of credit up to
a maximum of $500,000, with an interest rate equal to the bank's prime rate.
Amounts outstanding on the line of credit are secured by substantially all
assets of Apollo U.S. At June 30, 1997, $500,000 was outstanding. The line of
credit expires on May 31, 1998.
In August 1997 the Company borrowed $285,000 from an unrelated third party.
Principal is repayable on demand. Interest is agreed to as 8,000 shares of
common stock in the Company to be transferred equally from the Chief Executive
Officer and the Chief Operating Officer.
Management believes that the combination of remaining borrowings under the
foreign line of credit of $163,000, the Company's cash on hand of $351,000,
excluding the cash offset against the foreign line of credit, the $285,000
borrowing in August 1997, and the sale of Shares will provide sufficient cash
to meet the Company's financial obligations as they come due. However, there
can be no assurance that the Company will be able to meet its financial
obligations as they come due.
The Company incurred a loss of $938,000 in the year ended December 31, 1996
and $371,000 in the year ended December 31, 1995. At December 31, 1996,
amounts outstanding on the foreign line of credit were $738,000 and amounts
outstanding on the second note payable were $300,000.
Subsequent to December 31, 1996, the Company acquired a controlling interest
in two additional entities in exchange for the assumption of indebtedness and
entered into two new debt agreements which contractually terminate in 1997.
Management believes that the combination of extending the due dates of debt
agreements and the sale of the Shares will provide sufficient cash to meet its
obligations as they come due. However, there can be no assurance that the debt
agreements will be extended.
As of December 31, 1996, the Company had $305,000 in cash. Working capital
as of December 31, 1996, totaled $1,960,000.
Net cash used in operating activities was $345,000 and $1,117,000 in 1995
and 1996, respectively. The primary uses of cash were to fund the Company's
losses, to fund the build-up of inventory for the 1997 golf season, and to
reduce outstanding payables and accruals. Cash received from the collection of
receivables from sales prior to acquisition was also used to fund these uses
of cash.
Net cash used in investing activities of $5,046,000 was principally the
acquisition of businesses in 1996.
Net cash provided by financing activities was $351,000 and $6,226,000 in
1995 and 1996, respectively. The primary source of cash was capital
contributions by one of the Company's prior stockholders. The Company also
increased certain amounts payable to banks to finance its seasonal
fluctuations in working capital demand.
The Company continues to consider the acquisition of additional businesses
complementary to the Company's business. The Company would require additional
debt or equity financing, if it were to engage in a material acquisition in
the future.
26
<PAGE>
BUSINESS
OVERVIEW
Coyote was incorporated under the laws of the State of Nevada on October 24,
1994. For a further discussion concerning the capitalization and development
of the Company, see "Acquisition History."
Coyote designs, engineers, manufactures, markets and distributes brand name
sports equipment and recreational products. The Company's products include
steel and graphite golf shafts, premium grade cycle tubing, composite ski
poles and javelins. The Company also produces graphite and other advanced
composite materials for use in the production of golf shafts, fishing poles,
ski poles, hockey sticks and other manufactured third party products. The
Company intends to produce aluminum extruded alloys for such products as cycle
tubing, ski poles and tennis rackets. The Company manufactures its Apollo golf
shafts in its manufacturing facility in Oldbury, England, its Reynolds cycle
tubing in Tyseley, England, and graphite and other advanced composite
materials in California and intends to manufacture extruded aluminum alloys in
Southeast Asia.
During the year ended December 31, 1996, the greatest portion of the
Company's sales were derived from its Apollo steel golf shafts and Reynolds
cycle tubing. Apollo is the only manufacturer of seamless steel golf shafts in
the world. Management believes that the physical integrity of the seamless
golf shaft is superior to a welded golf shaft made by its competitors.
Seamless tubes can be manufactured using a greater variety of high carbon
alloys which the Company believes increase golf shaft consistency and permits
greater design versatility. Apollo has a strong OEM customer base, including
in alphabetical order, such brand names as Callaway Golf, Inc., Cobra Golf,
Inc., Focus Golf, Harris International, Karsten, Knight Golf, MacGregor Golf,
Mizuno Golf Company, Northwestern Golf, and Wilson Sporting Goods Company.
Reynolds ranks as one of the leading suppliers of premium brand cycle tubing
serving such customers as GT Bicycle, Inc., Kona Bicycles USA, Raleigh Bicycle
Company, Ltd. and Trek Bicycle Corp. Twenty-seven of the last 39 Tour de
France races were won with bikes made from Reynolds' tubing.
Coyote's business objective is to become a leading provider of sports
equipment and recreational products. Coyote management intends to build a
consolidated group of companies engaged in related and complementary
businesses that work together to compete effectively in the sports equipment
and recreational product industry. The Company intends to purchase companies
in the sports equipment and recreational products industry, which it believes
are undervalued, having experienced management that have well-established
brand names and product lines, and strong engineering and design capabilities.
Management intends to strengthen and foster the growth of these companies
through the introduction of additional manufacturing capabilities and
techniques, expanded sales and marketing efforts and vertical integration of
Company wide manufacturing and distribution capabilities. In furtherance of
this strategy, Coyote has acquired sole ownership of three companies (i.e.,
Apollo, Apollo U.S., and Reynolds) and a controlling interest in three other
companies (i.e., ICE, Sierra Materials and Pentiumatics) since September 1,
1996. The following table provides summary information about each of these
acquired companies.
27
<PAGE>
<TABLE>
<CAPTION>
% OF PRO FORMA(/1/)
REVENUE
% OWNED BY PRINCIPAL -----------------------
NAME LOCATION DATE ACQUIRED THE COMPANY PRODUCTS OR ACTIVITY 12/31/96 6/30/97
---- ----------------- ---------------- ----------- ---------------------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Apollo Golf, Inc. New Jersey 9/18/96 100% U.S. distributor 47% 49%
corporation for certain
located in Company
Chicago, IL products,
primarily golf
shafts
Apollo Sports UK (Oldbury, 9/18/96 100% Steel golf shafts; 28% 25%
Technologies, England) javelins
Limited
Sierra Materials, LLC(2) Colorado limited 3/27/97 (Date of 80% Graphite 14% 18%
liability company acquisition of composite
located in San shares of Cape materials;
Diego, CA Composites Inc.) advanced
composite
materials
Reynolds Cycle UK (Tyseley, 9/18/96 100% Steel cycle tubesets 9% 7%
Technology, Limited England)
ICE*USA LLC Colorado limited 9/18/96 80% Composite ski 2% 1%
liability company poles; aluminum
located in Utah ski poles; ski helmets
and San Diego,
CA
Pentiumatics Sdn., Bhd. Malaysia 4/1/97 77% Extruded aluminum -- --
</TABLE>
- --------
(1) Pro forma financial information for the year ended December 31, 1996 is
based upon the historical consolidated financial statements of the Company
for the year ended December 31, 1996, the historical combined financial
statements of Apollo, Apollo U.S., Reynolds and an acquired manufacturing
facility for the nine months ended September 30, 1996 (collectively, the
"Apollo entities"), and the historical financial statements of Sierra
Materials for the period March 1, 1996 to December 31, 1996. Pro forma
financial information for the six months ended June 30, 1997 is based upon
the historical consolidated financial statements of the Company for the
six months ended June 30, 1997 and the historical financial statements of
Sierra Materials for the three months ended March 31, 1997. See "Financial
Statements--Pro Forma Combined Financial Statements (unaudited)." For
geographic operating information, see Note 11 to Consolidated Financial
Statements.
(2) Owns 100% of Cape Composites Inc.
THE APOLLO GROUP--GOLF PRODUCTS
Acquisition Opportunities
Management perceives that the acquisition of Apollo presents the Company
with a number of opportunities: (i) to be a participant in the growing market
for golf equipment spawned by the recent popularity in this sport; (ii) to
capture a larger share of the golf shaft market by concentrating its marketing
efforts on the unique features and advantages of the seamless golf shaft in
comparison to its competitors' welded golf shafts, advantages that
historically have not been well communicated to its customers; (iii) to
increase manufacturing capability and profitability through more efficient
utilization of plant capacity; and (iv) to penetrate the growing graphite golf
shaft business by using its strong OEM customer base, its well recognized
brand name and established sales and distribution channels to increase sales
and profitability.
History and Market
In 1913, Accles and Pollock of England, the predecessor to Apollo, secured
the first patent for seamless tapered steel golf shafts. Unfortunately, the
Royal and Ancient, golf's governing body in the United Kingdom, banned the use
of steel golf shafts and Accles and Pollock had to sell overseas. As steel
golf shafts grew in popularity, the future King of England agreed to play a
round with them in 1929. Subsequently, the Royal and Ancient found the golf
shafts to be acceptable after all. Apollo remains the only steel golf shaft
manufacturer using a seamless tube, preferring its versatility and
consistency.
28
<PAGE>
Most golf clubs have golf shafts constructed from steel or graphite.
Although some other materials are used, they represent an insignificant
percent of the total world-wide market. Apollo sells its golf shafts to golf
club manufacturers, and in the retail after market through catalogs and custom
club makers. According to management estimates, steel golf shafts represent a
total worldwide wholesale market of approximately 29.5 million units,
representing $74 million in gross sales. The market for steel golf shafts has
decreased over the last ten years due to the introduction of graphite golf
shafts. In spite of this market decrease, Apollo's unit sales have remained
relatively constant, and as a result management believes that Apollo's market
share has significantly increased. Management believes that the decline in the
steel golf shaft market has stopped and that both the size and the overall
value of the steel golf shaft segment will grow over the next few years. This
is largely due to the introduction of new innovative steel golf shaft
products.
Graphite golf shafts were introduced in the early 1970's as the first major
change in golf shaft technology since steel replaced wood in the 1930's.
According to the Company's internally prepared market study, graphite golf
shafts accounted for approximately 46% of all golf shaft unit sales in
calendar 1996. Management believes that the exploitation of the graphite golf
shaft market segment is a major opportunity for Apollo. According to
management estimates, graphite golf shafts represent a total worldwide
wholesale market of approximately 26 million units, representing approximately
$164 million in gross revenues.
Apollo manufactures, in its 132,000 square foot Oldbury, England facility,
seven to eight million steel golf shafts a year, representing, in management's
estimate, approximately 24% of the world's supply of steel golf shafts by
units. Approximately 58% of Apollo's steel golf shaft products are sold in the
United States through Apollo U.S., which management believes represents
approximately 18% of the U.S. market. Approximately 42% are sold in Europe and
the rest of the world, which management believes represents approximately 47%
of the steel golf shaft market in Europe and approximately 25% of the steel
golf shaft market in the rest of the world.
Sales of golf equipment is highly seasonal with models traditionally
introduced in October and phased out by September of the following year.
Selling concentration is somewhat weighted towards the first half of the year,
when component purchase decisions are made for the following season. Larger
manufacturers place orders by schedule for future delivery, but as much as 40%
of Apollo U.S.'s sales can be generated by spot sales for immediate delivery
to small and medium sized assemblers.
Historically, Apollo focused almost exclusively on the steel golf shaft
market. Today, Apollo is positioning itself to penetrate the larger, in sales,
graphite golf shaft market. To leverage its sales and distribution channels,
Apollo has contracted with a third party manufacturer to supply graphite golf
shafts made and engineered to Apollo's specifications and under Apollo's
supervision and quality control.
According to the National Golf Foundation, U.S. golfers spend more than $15
billion a year on equipment, related merchandise and playing fees. World
demand for golf shafts is forecast to grow from 55.6 million golf shafts in
1996 to 59.0 million golf shafts in 1998 in line with the increase in golfer
population in the U.S.A. The European golfer population has grown 56% from 1.6
million in 1988 to 2.5 million in 1995 and is forecast to grow to 2.9 million
by 1998. According to the United States Golf Association, golf is played today
by people from all walks of life. Approximately 43% of all golfers come from
households headed by professionals or managers and another approximately 38%
come from homes headed by blue-collar and clerical workers. The remaining
approximately 19% consists of retirees and other persons. The U.S. golfer
population currently stands at approximately 25 million players, of which
approximately 11 million are core golfers, those that play 8 or more rounds
per year. Of these core golfers, approximately 5 million play 25 or more
rounds per year. Approximately 48% of all golfers are between the ages of 18
and 39. Senior golfers (over age 50) make up approximately 26% of the golf
population.
Apollo Products
Apollo is the only manufacturer of seamless steel golf shafts in the world.
Management believes that the physical integrity and consistency of the golf
shaft is superior using a seamless tube. For this reason, a seamless
29
<PAGE>
tube is usually specified for safety-critical applications, such as power
generation plants. Seamless tubes provide a more homogeneous shaft which
produces a more consistent product and reduces the potential for structural
defects. Seamless tubing also gives more opportunities to use a greater
variety of high carbon, high strength alloy steels as compared to welded
shafts. Apollo also uses high carbon alloys to maximize strength for golf
shafts which are not obtainable in a welded form.
Apollo manufactures a variety of unique steel golf shafts tailored to each
customer's needs and specifications. Its golf shafts are used by some of the
most well known golf club manufacturers. The Company's steel golf shafts are
generally designed and engineered by Apollo in partnership with its club
manufacturer customers. Although the majority of the Company's sales have been
concentrated among its top ten golf club manufacturer customers, no one
customer accounted for more than 10% of the Company's sales for the year ended
December 31, 1996.
Apollo also manufactures unique products to meet the needs of the retail
after market consisting of the catalog and custom club maker market. For this
market, Apollo manufactures eleven varieties of steel golf shafts and markets
five varieties of graphite golf shafts. Each variety is available in differing
flexes, kick points, torques and weights. Apollo provides a range of
innovative, high-quality products designed to maximize the performance of
golfers at every skill level. Additionally, Apollo supplies high performance
alloy steel tubing for use by Reynolds in the manufacture of cycle frame
tubesets and specialized tubing for other uses, such as wheelchairs and
javelins.
Apollo Engineering, Design and Manufacturing
The larger golf club manufacturers each require exclusively designed golf
shafts for their club systems which comprise golf shafts, heads and grips
engineered to work together. Apollo also designs specialty putter golf shafts
which involve a high level of manufacturing complexity. Apollo's activities in
the areas of product and process development are managed by its Technical
Director, Graeme Horwood, an industry recognized expert. Apollo has an
advanced test and inspection facility, which uses "in-house" designed test
equipment and a computer aided design package for golf shaft design. Apollo
U.S. has its own test and inspection laboratory. Considerable technical
support is provided to sales by product development engineers, involving
frequent customer visits and presentations. Development of manufacturing
processes is crucial to new product initiatives and is carried out by a senior
development engineer with the support of two development engineers and a
design engineer. The Company's manufacturing processes involves a number of
specialized processes requiring specific know-how.
Apollo manufactures its steel golf shafts in a 132,000 sq. ft. facility in
Oldbury, England. The Company owns the land, building and equipment used in
manufacturing its steel golf shafts. In the manufacturing process,
the tube is drawn down to produce the blank for forming the golf shaft through
a series of highly productive draw benches. Intermediate heat treatment,
lubrication and cleaning processes are crucial to achievement of final golf
shaft characteristics. High quality golf shafts are subjected to a final draw
pass on benches customized by Apollo's own engineers to guarantee close
control of weight and weight distribution. Premium golf shafts are
manufactured to within weight tolerance of +/- 2 grams. Tube lengths are
precision cut to produce blanks for step forming. Sophisticated heat treatment
is conducted in a furnace, which creates the resilience required for the
application, while keeping the component straight. Golf shaft straightness is
crucial and automatic straightening machines are an important feature of the
process. Final production operations include polishing, nickel/chromium
plating, inspection and packing.
All other manufacturers of steel golf shafts in the world produce steel golf
shafts using a weld mill. A weld mill starts with a flat sheet of steel which
is then rolled into the shape of a tube which is then welded, producing a tube
shaped product with a seam. Management believes that Apollo's seamless golf
shaft production methods provides a more uniform and consistent product.
30
<PAGE>
Apollo Sales and Marketing
Apollo ranks as one of the three leading steel golf shaft manufacturers in
the world and is the only one which has a manufacturing facility located in
Europe. Management believes that Apollo dominates the European market for
steel golf shafts. The market for golf clubs, and therefore golf shafts, is
driven not only by the growth in the golfing population, but also by the
frequency of club purchases, which is determined principally by product
innovation. In the United States and Europe, the Company sells and markets its
steel golf shafts through a salaried sales force directly to golf club
manufacturers and custom club makers. Apollo's sales force consists of four
full time employees in the United States and one full time employee in Europe.
Apollo U.S., responsible for U.S. sales, has expanded its sales force to
strengthen its sales and marketing efforts for steel golf shafts and to expand
into the marketing and sale of graphite golf shafts. Apollo's investment in
promotional activities has succeeded in strengthening its image with new
products. Current strategy focuses on the use of Apollo golf shafts by
European and U.S. Tour professionals. Apollo's Tour professional conversion
program includes one European consultant and two U.S. consultants who follow
the professional circuits in order to promote the use of Apollo golf shafts.
Competition
The steel golf shaft market has three significant competitors consisting of
True Temper (U.S.A.), FM Precision (U.S.A.) and Apollo (UK). Nippon Golf Shaft
has progressively withdrawn from the market and Apollo has purchased from it
equipment at economical prices. There are large capital entry barriers
associated with the manufacture of steel golf shafts and Apollo does not
anticipate additional capacity coming on line in the foreseeable future.
Graphite golf shafts are manufactured by approximately 30 companies
worldwide and competition is intense. The industry is maturing and management
anticipates a consolidation will occur over the next three years. In the end,
management believes that the number of competitors will be reduced
significantly as consolidation within the industry takes place. Technology,
price, quality and service will be determining factors. The major competitors
today are Aldila, HST, Unifiber, Fujikura, Grafalloy and True Temper.
REYNOLDS CYCLE TECHNOLOGY LIMITED--CYCLE PRODUCTS
Acquisition Opportunities
Management perceives that the acquisition of Reynolds presents the Company
with a number of opportunities. Reynolds is one of the oldest established
premium brands in cycling and its name recognition provides an opportunity to
introduce new products, principally aluminum cycle tubesets, bike parts,
handle bars and wheel frames into new and existing markets.
History and Market
Reynolds and its predecessor businesses have been manufacturing steel tubing
for high end bicycle frames for 99 years. Reynolds cycle tubing has been the
winning bike in 27 of the last 39 Tour De France races. Currently, Reynolds
has under contract the U.S.A. National Road Racing Team (which generally
comprises a significant portion of the U.S.A. Olympic Team), the Saturn Racing
Team and the Shaklee Racing Team. Using Reynolds cycle tubing, these teams
have consistently finished within the top five places in the U.S.A. and within
the top ten places worldwide. Through Reynolds strong brand name recognition
and reputation for innovation, Reynolds has established itself as a supplier
to many major OEM customers including, alphabetically, such brands as GT
Bicycle, Inc., Kona Bicycles USA, Raleigh Bicycle Company, Ltd., and Trek
Bicycle Corp.
According to the 1995 Interbike industry report, more than 100 million
Americans of all ages rode bicycles in 1993, which was up from approximately
72 million in 1983. The worldwide cycle industry produces approximately 108
million bicycles annually. Of those, 86% (93 million) are utility, low price
point bikes sold primarily in low income countries for transportation at under
$200 per cycle. Approximately 9% (10 million) of
31
<PAGE>
all bicycles sold are in the $200 to $400 range. While in general these bikes
use lower cost steel and are sold through mass merchants for recreational use,
there are some examples of branded components appearing on the higher end of
these models. Approximately 5% (5 million) of all bicycles sold are sold for
greater than $400, mainly through specialist dealer networks. The latter
models are Reynolds targeted market since these bikes are sold on a
combination of performance, tensile strength, endurance, brand and price to
sports and recreation enthusiasts with above average income and education
levels. Both bicycle brands and branded components tend to predominate in this
segment, as potential purchasers will research competing specifications. In
addition, the specialist dealer network also sells high margin aftermarket
accessories (for example, stems, seat posts, and wheels). These items often
provide over 40% of the cycle revenue to the specialist dealer and represent a
market into which Reynolds can extend its brand through introduction of new
products. Geographically, the major markets for the top 5% of bicycles sold
are Western Europe and the U.S., while the largest producers are physically in
Taiwan and Italy. Management believes that the tubeset market has annual
revenue of approximately $50 to $100 million worldwide. This includes steel,
aluminum, titanium and carbon fiber. Steel and aluminum tubesets account for
approximately 90% of such annual revenues.
Reynolds Products
Reynolds produces cycle tubing for a wide variety of cycle applications. The
tubing is used for road racing bicycles, road track bicycles and time trial
bicycles, competition touring bicycles, all-terrain bicycles and tandems.
Reynolds shares its research and development function with its main steel
tubing supplier, Apollo. Through this joint effort, the Reynolds
853(TM)/631(TM) "Air Hardened" products were developed. These products give an
exceptional weight to strength and stiffness ratio not normally seen with
conventional steel alloys that is achieved by a unique air hardening process
that concentrates the stiffness in the frame geometry and strength in the
joint, where it is most needed. Reynolds cycle tubes are all manufactured from
high quality alloy steels, which also contributes to the high strength and
stiffness to weight ratio. In addition to the 853(TM)/631(TM) products,
Reynolds also manufactures its 753(TM)/531(TM) manganese molybdenum series and
its 725(TM)/525(TM) and its 501(TM)/500(TM) chrome molybdenum series tubesets.
The higher the number the higher the tensile strength and stiffness to weight
ratio. As a consequence, the 853(TM) gives the greatest tensile strength and
stiffness to weight ratio and the greatest performance features of tubesets in
Reynolds product line.
Reynolds Engineering, Design and Manufacturing
Reynolds currently manufactures its tubesets in a 20,000 square foot leased
facility in Tyseley, England. The Company designs unique tubesets or various
pieces of a frame set to the specifications of its customers. Typically, the
tubesets are bid and specified twelve months before the actual production of
the cycle takes place. For example, in early 1997, the design and engineering
team at Reynolds was prototyping tubes sets for 1998 models. Once specified
into a specific bike model, manufacturing the tubeset is accomplished by a
series of cold forming, butting, heat treating and manipulations. The
engineers at Reynolds work closely with the design teams of its customers to
ensure compliance with tight tolerances and quality specifications.
In the future the Company plans to expand its manufacturing into Southeast
Asia for both aluminum and steel. This will provide a competitive advantage to
increase market share, primarily with the U.S. OEM customers.
Reynolds Sales and Marketing
In the U.S. and Europe, sales and marketing is accomplished using a salaried
sales force located in Elk Grove Village, Illinois for its U.S. sales and in
its Tyseley, England factory for its European sales. The design engineers work
closely with the Reynolds sales staff and the OEM customers. Reynolds markets
its product line through advertising in several cycling trade journals.
Reynolds plans to introduce a line of aluminum cycle tubes in 1998, through
the Pentiumatics facility in Southeast Asia, targeting its marketing at the
premium branded aluminum cycle tube market. Sales and marketing for Southeast
Asia will be done from the Pentiumatics facility.
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<PAGE>
Reynolds Competition
The majority of branded cycle tubing is supplied by six manufacturers
worldwide. Easton is a U.S. based manufacturer, specializing in aluminum;
Columbus is an Italian-based manufacturer, primarily using steel; Dedacciai is
an Italian-based manufacturer, primarily using steel; True Temper, is a U.S.
based manufacturer, primarily using steel; Tange, is a Japanese based
manufacturer, primarily using steel; and Reynolds, a U.K. based manufacturer
primarily using steel and is planning to introduce an aluminum cycle tubing
product line.
SIERRA MATERIALS--ADVANCED COMPOSITE MATERIALS
Acquisition Opportunities
Management perceives that the acquisition of Sierra Materials presents the
Company with a number of opportunities. Sierra Materials is a manufacturer of
graphite and other advanced composite materials, and a supplier of products
that are essential to ever expanding uses by manufacturers. The market for
Sierra Materials products is expanding because the products are being used in
a greater variety of applications. A significant portion of the production
capacity of Sierra Materials has been sold and management believes that the
additional manufacturing capacity planned to be acquired, in significant part
through the proceeds of this offering, will result in increased sales and
profitability.
Overview and Markets
Sierra Materials is a supplier of graphite and other advanced composite
materials primarily for use in the sports and recreational markets. A
composite material is a structural system comprised of different types or
forms of materials. In common usage today, the term "composite" refers to a
matrix of one type of material, such as an epoxy resin, reinforced with a
fibrous form of another material, such as carbon fiber, fiberglass, or
Kevlar(TM). Nature has successfully used this structural concept in its own
composite structural material--wood. Wood is comprised of a fibrous material
(cellulose) which reinforces a matrix of lignin (sap). The most common type of
composite used commercially today is glass fiber reinforced plastic ("GFRP").
Commonly referred to as fiberglass, GFRP has been used for decades in boats,
pickup truck caps and sporting goods, among other items.
Advanced composites is a term given to high performance fibers combined with
polymers (resins). Fibers which fall into this category include carbon fiber,
boron, Kevlar(TM) and Spectra(TM), along with high strength glass fibers and
some ceramics. Sierra Materials is a manufacturer of unidirectional pre-
impregnated material ("prepreg") made primarily from carbon fiber and
fiberglass; and coated fabrics, primarily woven fiberglass and Kevlar(TM). The
Company's finished composite materials are principally sold in rolls and are
subsequently incorporated by Sierra Materials' customers into manufactured
products.
Advanced composites have been used for years in military and aerospace
applications. Now that these advanced materials have been proven in the
demanding environments of military and aerospace applications, an increasing
number of manufacturers are implementing composite materials in their
products. Commercial
aircraft, including the new Boeing 777, are using composite materials in
primary structural elements such as the tail wings and floor beams.
Because carbon fiber is as strong and durable as metal but lighter and more
versatile, it is used in many sporting goods applications where weight and
performance are critical factors. Sierra Materials' composite materials are
capable of being incorporated in a wide range of sports equipment and
recreational product applications. Uses of advanced composites currently
include the manufacture of golf shafts, fishing rods, hockey sticks, skis, ski
poles, snow boards, water skis, surfboards, sailboats, and tennis racquets.
Commercial applications other than sporting equipment include automotive
components such as drive shafts and body panels; medical devices, such as
prosthetics; industrial uses, such as tanks and containers; electronic
components, such as circuit boards and antennae; infrastructure projects such
as reinforcements; and security systems, such as body armor and armored
vehicles.
Over the last two decades, there has been significant growth in the use of
graphite and other advanced composite materials as a result of improvements in
applications engineering, advances in composites technology and declining
costs to the customer in manufacturing final products.
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Sierra Materials Engineering, Design and Manufacturing
The most common method of advanced composites fabrication involves the use
of prepreg. This is a term given to preimpregnated materials, either
unidirectional fiber material or woven fabrics impregnated with resins. The
raw graphite comes into the factory in the form of a spool of yarn, where each
strand of yarn has between 1,000 to 50,000 filaments, depending on the
specifications ordered. The unidirectional prepreg is manufactured by
spreading these thousands of filaments (carbon or fiberglass) onto a resin
coated paper and, by using pressure and heat, impregnating the filaments with
the resin. Both types of materials are sold in roll form to meet specific
customer requirements for size and weight. The woven fabric prepreg is
manufactured primarily of fiberglass, carbon fiber or Kevlar(TM).
In 1997, the limiting factor affecting Sierra Materials' sales and earnings
growth is expected to be the availability of carbon fiber yarn. In 1995,
sports equipment and recreational products companies were fully embracing
carbon fiber as the material of choice. Usage of carbon fiber in the aerospace
industry was up significantly, and signs of an impending shortage of fiber
began to appear. However, the fiber manufacturers which had been burdened by
overcapacity in the past were hesitant to invest once again in new plant and
equipment. No plans for additional capacity were announced until late 1996. At
present, most of the new capacity will not be available to meet anticipated
customer demand for carbon fiber until early in 1998.
In 1997, management estimates that, on an industry basis, up to 30% of total
carbon fiber demand will go unfilled. Aerospace programs which command higher
margins are being supplied first, with any remaining capacity going to
commercial and recreational suppliers.
Sierra Materials is presently operating at near manufacturing capacity and
its sales are, accordingly, limited. A portion of the proceeds of this offerng
will be used to expand its manufacturing capacity.
Sierra Materials Sales and Marketing
According to the Suppliers of Advanced Composites Materials Association,
worldwide shipments of carbon fiber materials for the first half of 1995 was
over 12,000,000 pounds valued at over $280,000,000 with annual growth
estimates averaging 15% over the next 5 years. This growth is being fueled by
two primary industries; the aerospace industry which accounts for
approximately 78% of total sales, and sporting goods manufacturers which
account for approximately 18% of total sales. The remaining sales were divided
between a variety of developmental projects, including automotive, medical,
and infrastructure applications.
The composite materials market can be broken down into three segments: raw
materials suppliers, such as suppliers of carbon fiber and resins; converters
(prepreggers), such as Sierra Materials, which convert the raw
materials into a useable state; and end users, such as golf club shaft
manufacturers, which form the prepreg into a finished product. While some
companies, such as the golf shaft manufacturer Aldila, have integrated into
producing its own prepreg materials, very few companies have fully integrated
from basic materials to end product.
Sierra Materials' sales to date have been realized with a limited formal
marketing program. Its sales have been primarily accomplished by industry
reputation. As of June 30, 1997, backlog of unfulfilled orders exceeded
$4,000,000.
Sierra Materials Competition
There are approximately 24 suppliers of carbon fiber prepreg worldwide.
Large suppliers include ICI Fiberite, Inc., Toray Composites America, Hexcel
Corp., Cytec Engineered Materials, Inc. and Newport Adhesive and Composites,
Inc. Currently, Toray Composites America, Hexcel Corp. and Newport Adhesives
and Composites, Inc. all have parent companies which own fiber manufacturing
facilities.
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<PAGE>
ICE--SKI PRODUCTS
Acquisition Opportunities
Management perceives that the acquisition of ICE presents the Company with a
number of opportunities. ICE is a recognized brand name in that portion of the
composite ski pole market that is serviced through a large number of specialty
shops selling premium high end sports equipment. The ICE brand name can be
expanded to other premium products for distribution through this unique
channel.
ICE is a manufacturer and marketer of premium composite and aluminum ski
poles. ICE markets its ski poles in the United States directly to
approximately 450 speciality shops nationwide and in Canada and Japan through
independent distributors. During the 1996-1997 ski season, ICE had
approximately 3% of the unit market share and approximately 6% of the dollar
market share for specialty shops in the United States according to the March
1997 U.S. Ski and Snowboard Industry Report. ICE has a limited presence in
chain stores.
Most ski poles are manufactured from extruded aluminum alloys. In recent
years, graphite ski poles have been introduced and have grown in unit sales
each year. As in most sporting goods categories, the use of carbon fiber
composites is growing due primarily to lighter weight, superior strength and
greater versatility.
In 1996-1997, ICE introduced a line of ski helmets to the market. The
Company plans to introduce a new aluminum ski pole line which it intends to
manufacture at Pentiumatics. See "Business--Pentiumatics--Extruded Aluminum
Alloys."
The key strategy for ICE is to expand its existing product line. Over the
past few years, the use of helmets in the ski industry has increased
dramatically. Management believes that this trend will continue and that in
the next few years helmets will be the single fastest growing segment in ski
equipment. During the 1996-1997 season and in response to this increased
demand, ICE introduced a new line of Department of Transportation approved
helmets which it purchases for resale. Aluminum poles have historically been
the largest single segment of the ski pole business. Previously, ICE has not
manufactured a ski pole for this market. During the 1997-1998 season, ICE will
introduce a line of high end aluminum poles to augment its traditional
composite product.
ICE Industry
According to the February 1996 issue of American Demographics Magazine, more
than 10 million Americans aged seven and older participated in downhill skiing
in 1994, making it the nation's most popular winter sport. The period between
1988 and 1994 was not a good one for the ski industry with both the number of
skiers and the percent who ski at least once a year, declining. However the
introduction of the new "shaped" ski's in 1995-1996 has had a very positive
impact on the industry as a whole. As a consequence, the sale of
Alpine skis rose 36.6% during the 1996-1997 season compared against 1995-1996.
Total retail spending on snow sports rose 17.4% to approximately $2 billion
(source Sporting Goods Intelligence--May 12, 1997).
The Company employs independent sales representatives to sell and promote
its products to approximately 450 specialty shops nationwide. The ICE brand of
ski poles has one of the highest average retail prices in the industry. The
ICE ski pole is a premium product and is marketed as such.
The Company is moving aggressively toward vertical integration and, by the
end of 1998, the Company plans to be manufacturing aluminum ski poles and have
contractual control over the third party manufacture of composite poles
through the Pentiumatics Southeast Asian facility (see "Business--Apollo" and
"Business--Pentiumatics Extruded Aluminum Alloys"). This manufacturing
capability will give ICE greater control over quality, cost and innovation
which management believes will create opportunities in the OEM market as well.
The Company believes this kind of vertical integration will allow it to have a
competitive cost structure and better control over the quality of the finished
product.
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<PAGE>
ICE Competition
Major competitors, in alphabetical order, are Goode Ski Technologies, Kerma
Ski Poles, Leki USA, Scott USA and Smith Sport Optics, Inc. Of these, the
Company views Leki and Kerma as its major competitors in the high technology,
high priced composite ski pole market.
PENTIUMATICS--PROPOSED EXTRUDED ALUMINUM ALLOYS FACILITY
In April of 1997, the Company purchased all of the outstanding shares of
Pentiumatics for approximately $200,000 cash. At that time, Pentiumatics was
an existing Malaysian company that owned no significant assets other than
certain contract rights to purchase land and equipment. Subsequent to the
Company's initial purchase, the Company contributed approximately $2,200,000
to Pentiumatics for stock in order to assist Pentiumatics in acquiring land
and constructing a building at a cost of approximately $3,200,000 and
equipment at a cost of approximately $670,000. The land and equipment
purchases and building construction contract were entered into with
unaffiliated third parties on an arms-length basis. The Company intends to use
these assets to build and operate an aluminum extrusion factory. In June of
1997, Insular Mart Sdn Bhd, a Malaysian company ("Insular"), contributed
approximately $600,000 into Pentiumatics to finalize the above transactions,
resulting in an ownership of 23% by Insular and 77% ownership by the Company.
It is the Company's expectation that the 30,000 square foot factory will be
completed in 1997. The Company anticipates that a significant percentage of
this new plant's output will eventually be used by Reynolds and ICE. In
addition, the Company plans to produce other extruded aluminum parts for
regional manufacturers of sports equipment.
The addition of Pentiumatics is expected to enhance the Company's strategy
by adding extruded aluminum alloy to its manufacturing base. This would mean
that the Company could produce steel tubing, graphite and other advanced
composite pre-preg and extruded aluminum alloy. These are the main materials
used in most sporting goods products worldwide. If the Company is successful
in completing the construction of the factory, the Company would be in a
position to be vertically integrated in all the main materials used in the
manufacturing of golf shafts, cycle tubing and ski poles, the main businesses
of the Company. There can be no assurance that the Company will finish the
construction of the aluminum extrusion factory or that the Company will
produce extruded aluminum alloy.
GOVERNMENTAL REGULATIONS
UNITED KINGDOM
Apollo and Reynolds are established in England and are, accordingly, subject
to the laws of the European Community and those of England and Wales with
regard to their activities generally. These laws relate to
employment, including, for example, employee rights against unfair dismissal
and discrimination on the basis of race, sex or disability, taxation, company
administration, consumer protection and planning matters. Specific regulations
which apply to Apollo and Reynolds as manufacturing companies include:
Environment. The activities of Apollo and Reynolds are regulated by the
Environmental Protection Act of 1990. This Act requires Apollo to obtain
licenses to carry out its nickel coating process for golf shafts and to
produce, store and dispose of industrial waste of various descriptions. In
addition, consent is required from the local rivers authority under the Water
Resources Act of 1991 and The Water Industry Act of 1991 regarding discharge
of overflow water from its property into the public sewers. The Company
believes that it is currently in compliance with all licenses and consents.
When the Environment Act of 1995 is fully implemented, the relevant authority
will have significantly increased powers to order persons and companies to
clean contaminated land. However, these increased powers may only be exercised
if the contamination poses a serious risk to health or property. No cleanup
proceedings have been threatened against Apollo and Reynolds, nor are such
proceedings anticipated.
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<PAGE>
Health and Safety. The principal United Kingdom statute is the Health and
Safety At Work Act of 1974 ("Health and Safety Act"), which imposes a duty on
employers to maintain a "a safe system of work." This obligation is
supplemented by various regulations requiring employers to establish
procedures for assessing hazards to safety and for reducing or eliminating
risk. Apollo and Reynolds have regular contact with the Factory Inspectorate,
the statutory body which administers the Health and Safety Act. No proceedings
are in existence or threatened against the United Kingdom companies by the
Factory Inspectorate.
Although management believes it is currently in compliance with the above
regulations, the Company's future operations could expose it to the risk of
claims with respect to environmental or health and safety matters. Although
compliance with governmental requirements relating to the protection of the
environment or health and safety has not had a material adverse effect on the
Company's financial condition or results of operations to date, there can be
no assurance that material costs or liabilities will not be incurred in
connection with such environmental or health and safety matters in the future.
UNITED STATES
Environmental Regulations. The Company's operations which are located in the
United States, including ICE, Sierra Materials and Apollo U.S., are subject to
governmental, environmental and health and safety laws and regulations that
impose workplace standards and limitations on the discharge of pollutants into
the environment and establish standards for the handling, generation,
emission, release, discharge, treatment, storage and disposal of certain
materials, substances and wastes. These laws include, for example, the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended ("CERCLA"), the Clean Air Act, as amended, and the Resource
Conservation and Recovery Act of 1976, as amended. Management believes the
Company is in compliance with United States environmental laws and
regulations. Although compliance with governmental requirements relating to
the protection of the environment has not had a material adverse effect on the
Company's financial condition or results of operations to date, there can be
no assurance that material costs or liabilities will not be incurred in
connection with such environmental matters in the future.
EMPLOYEES AND CONSULTANTS
The Company has 317 full time employees and one part time employee. The
Company will hire additional employees as may be required to support expansion
of the Company's operations.
There are three different unions that have collective bargaining agreements
with Apollo and Reynolds. All hourly paid Apollo employees and 18 hourly paid
Reynolds employees are members of a union. Several union agreements apply to
all hourly employees of both companies.
Except for the hourly paid agreement, which is negotiated annually, there
are no termination dates to the above agreements. The above agreements
continue to apply until otherwise renegotiated between the parties. Management
believes that the relationship with its employees is good.
INTELLECTUAL PROPERTY
The Company's success depends and will continue to depend in part on the
goodwill associated with its various trademarks including "APOLLO",
"ACCULITE", "MATCHFLEX", "MASTERFLEX", "SHADOW", and others. The Company has
sought and obtained trademark registrations, or has applications currently
pending, for these and other marks in the United States through the United
States Patent and Trademark Office and for a portion of these marks in many
foreign countries as well.
The Company owns no issued patents which relate to its technology or
products. As to the golf shafts produced and sold by the Company, there is one
currently pending application for a patent in Great Britain which relates to
producing frequency-matched shafts from a universal blank.
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<PAGE>
The Company has certain confidential and proprietary information including
confidential information relating to the operation of the Company's business,
sales and customer information, supplier information, and certain portions of
the manufacturing process which may be proprietary. While the Company has
taken reasonable steps to safeguard such information, there can be no
assurance that the steps that have been and are taken by the Company in this
regard will be adequate to prevent misappropriation of its technology or that
the Company's competitors will not independently develop technologies that are
substantially equivalent or superior to the Company's technology.
RESEARCH AND DEVELOPMENT
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products
amounted to approximately $220,000 for the time period from September 18,
1996, the date that Apollo and Reynolds were acquired by Coyote to December
31, 1996. During the nine months prior to the Company's acquisition of Apollo,
approximately $400,000 was spent on development of new products and processes.
FACILITIES
The Company's executive offices are located in Boulder, Colorado pursuant to
a lease terminating in July, 1998. Apollo operates its golf shaft
manufacturing in a facility in Oldbury, England, which is a heavy industrial
area. The Company owns the land, building and equipment used in manufacturing
its steel golf shafts. Reynolds' currently manufactures its tubesets in a
20,000 square foot leased facility in Tyseley, England. Apollo U.S. operates a
8,153 square foot facility in Elk Grove, Illinois, pursuant to a lease which
expires January 31, 2000. Sierra conducts its manufacturing operations in a
10,284 sq. ft. facility in San Diego, California, pursuant to a sublease which
expires in February 1999. ICE operates two 1,000 square foot facilities in
Heber, Utah, pursuant to two leases, both of which expire on November 14,
1997.
LITIGATION
The Company is not currently subject to any material litigation nor, to the
Company's knowledge, is any material litigation threatened against the
Company. The Company is subject to the normal kind of claims from employees in
heavy industrial manufacturing operations. See "Risk Factors--Industrial
Injuries".
ACQUISITION HISTORY
Coyote was incorporated under the laws of the State of Nevada on October 24,
1994. From its inception through December 31, 1994, the founders of Coyote
contributed a total of $51,000 to the capital of Coyote, which capital
contributions were used to pay various organizational and startup expenses
incurred by Coyote. During the fiscal year ended December 31, 1995, Coyote's
majority shareholder ("former majority shareholder") at that time contributed
an additional $304,923 to the capital of Coyote to fund additional
organizational and startup expenses. During the partial year ended December
31, 1994 and the year ended December 31, 1995, Coyote's sole activity was the
organization of its business and development of its business strategy to
purchase companies in the sports equipment and recreational products industry.
During such period, Coyote did not own any subsidiaries or business assets and
was not conducting any business activities.
The organizational and startup stage of the Company continued until
September 18, 1996, when the Company acquired Apollo, Reynolds, Apollo Golf
and ICE. During 1996, Coyote's former majority shareholder at that time
contributed an additional $5,783,815 to the capital of Coyote to fund the
acquisition of the four operating subsidiaries and otherwise provide funds for
Coyote's working capital requirements. During the six month period, ended June
30, 1997, Coyote's former majority shareholder at that time contributed an
additional $2,211,045 to Coyote's capital to finance Coyote's acquisition of
Sierra Materials and Pentiumatics and fund Coyote's working capital
requirements. In addition, on April 4, 1997, Coyote borrowed a total of
$1,500,000 from two Bridge Lenders to provide working capital for Apollo,
Reynolds and Sierra Materials and fund its working capital requirements. See
"Private Placement."
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On September 18, 1996, the Company through a wholly-owned subsidiary,
acquired three affiliated entities, Apollo, a company registered in England
and Wales, Reynolds, a company registered in England and Wales, and Apollo
Golf, a New Jersey corporation (collectively, the "Apollo Entities"), and
purchased certain associated properties for a total purchase price of U.S.
$5,135,305. In addition, on September 18, 1996, the Company formed ICE to
acquire certain intangible assets, consisting primarily of registered
trademarks and certain other intangible assets, owned by Expedition Trading
Company, L.L.C., a Utah limited liability company ("Expedition"). This
purchase was consummated on September 18, 1996 and resulted in ICE acquiring
the intangible assets from Expedition in exchange for ICE's promissory note in
the amount of $1,500,000 payable to Expedition over a six year period and the
issuance to Expedition of a 20% interest in ICE. The Company has retained an
80% interest in ICE. See "Risk Factors--Substantial Purchase Obligation".
On March 27, 1997, the Company formed Sierra Materials, a Colorado limited
liability company which acquired all of the outstanding common stock of Cape
Composites, Inc. ("Cape"). Sierra Materials assumed all the assets and
liabilities of Cape and granted a 20% ownership interest to the former owners
of Cape, the Company retaining a 80% interest in Sierra Materials.
In April 1997, the Company first acquired an ownership interest in an
existing Malaysian company, Pentiumatics. The Company and another unaffiliated
party subsequently financed the purchase by Pentiumatics of land, building and
equipment which will be incorporated into a proposed aluminum extrusion
facility which the Company believes should be completed in the fourth quarter
of 1997. See "Pentiumatics--Proposed Extruded Aluminum Alloys Facility".
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions of the officers, directors and certain key
employees of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Mel S. Stonebraker(1)... 45 Chief Executive Officer, President and Chairman
of the Board
James M. Probst(2)...... 39 Chief Operating Officer, Chief Financial Officer,
Secretary/Treasurer and Director
John Paul McNeill....... 26 Controller
James A. Pfeil.......... 42 Vice President
Jeffrey T. Kates(1)(2).. 36 Director
Don A. Forte(1)(2)...... 49 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Mel S. Stonebraker, co-founder of the Company, has been an officer and
director of the Company since its incorporation in 1994 and is currently
President, Chief Executive Officer and Chairman of the Board. From 1983 to
1994, Mr. Stonebraker was International Business Development Manager for
Schuller International Corporation, a wholly owned subsidiary of Manville
Corporation. In that position, he was responsible for corporate activities
throughout the Pacific Rim countries. He was a resident in Singapore from 1984
to 1989. Mr. Stonebraker received a B.A. degree from the University of
Colorado in 1977 and a Masters of International Administration from the
American Graduate School for International Management (Thunderbird) in 1983.
James M. Probst, co-founder of the Company, has been an officer of the
Company since February 1995 and is currently Chief Operating Officer, Chief
Financial Officer, Secretary/Treasurer and a Director. From 1986 to 1995, Mr.
Probst was employed by Schuller International Corporation, a wholly owned
subsidiary of Manville Corporation. During that time, Mr. Probst held several
positions ranging from research and development Engineer to Business Manager
of a unit with approximately $30 million in revenues. Mr. Probst received a
B.S. degree in Mechanical Engineering from the University of Colorado, Denver
in 1986 and an M.B.A. from the University of Denver in 1990.
James A. Pfeil joined the Company in May 1997 as Vice President, primarily
responsible for overseeing ICE, Sierra Materials and Pentiumatics. From May
1995 to May 1997, Mr. Pfeil was Vice President of Operations of Cobra Golf,
Inc., a wholly-owned subsidiary of American Brands. From May 1992 to May 1995,
he was Vice President, General Manager of West Coast Composites, a wholly
owned subsidiary of Cobra Golf, Inc. West Coast Composites manufactures all of
the graphite golf shafts used by Cobra Golf, Inc. From May 1990 to May 1992 he
was Materials Manager for Cobra Golf, Inc. From 1985 to 1990 he worked as a
consultant with over 100 clients dealing with manufacturing issues and
assisting in materials requirement planning ("MRP") system implementations.
Mr. Pfeil received a B.S. in Business from San Diego State University in 1980.
John Paul McNeill, C.P.A. joined the Company in July 1997 as Controller.
Previously, Mr. McNeill was Assistant Controller of Cobra Golf, Inc., a
wholly-owned subsidiary of American Brands. Prior to his position at Cobra
Golf, Inc., he spent four years with the accounting firm of Ernst & Young LLP,
one year in the United Kingdom and three years in San Diego, California. Mr.
McNeill is knowledgeable in both U.S. and U.K. generally accepted accounting
principles. Mr. McNeill graduated high honors with a B.B.A. from the
University of Notre Dame in 1992.
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Jeffrey T. Kates became a director of the Company in May 1997. From August
1996 to the present, Mr. Kates has been the Chief Operating Officer of
Plastics Research Corp. a firm with annual revenues of $35 million. From
October 1994 to August 1996, Mr. Kates was President and a director of Harloc
Incorporated, a subsidiary of the Tesa Group in Irun, Spain, which attained
annual revenues of $150 million. Mr. Kates received a B.S. degree in
Agricultural Engineering from the University of Illinois in 1984 and an M.B.A.
from the University of Denver in 1988.
Don A. Forte became a director of the Company in June 1997. For the past 25
years, Mr. Forte has been employed by Johns Manville (JM) a leading
manufacturer of building products. Mr. Forte has held numerous positions in
his career with JM. His present position is Vice President of Manufacturing
and Engineering for the Insulation Group. Mr. Forte is currently responsible
for 16 manufacturing plants located in North America which manufacture fiber
glass insulation products for residential and commercial applications. Prior
to this assignment, Mr. Forte was the Vice President and General Manager of
JM's Filtration Division. The Filtration Division manufactures products in
four U.S. plant locations and distributes to customers worldwide. Mr. Forte
received his B.S. degree from Northern Illinois University in 1970 and an
M.B.A. degree from Xavier University in 1982.
Executive officers of the Company are appointed by, and serve at the
discretion of, the Board of Directors and are elected annually. There is no
family relationship between any director of the Company and any other director
or officer of the Company.
The Company has agreed, for a period of two years from the date of this
Prospectus, if so requested by the Representative, to nominate and use its
best efforts to elect a designee of the Representative as a director of the
Company or, at the Representative's option, to appoint such designee as a non-
voting adviser to the Company's Board of Directors. The Representative has not
identified any potential designee. The Company's officers, directors and
controlling stockholders have agreed to vote their shares of Common Stock in
favor of such designee. The Representative does not intend to exercise its
right to designate such a person until shortly before the call of the
Company's first annual meeting of shareholders following the completion of
this offering.
The following persons are key employees of the Company's subsidiaries:
Paul Andy Taylor, 49, has been the Managing Director of Apollo and Reynolds
since September 1990 and is responsible for all strategic and operational
activities of those companies. Mr. Taylor joined Apollo as Sales and Marketing
Director in August 1986 as part of a new management team which dramatically
expanded the company's activities through the late 1980s. Prior to joining
Apollo, he was engaged in international sales and marketing for the TI Group,
a United Kingdom owned global conglomerate. Key areas of activity included
Europe, Comecon, China/Far East and North America. Mr. Taylor received a B.A.
degree with honors in Russian Studies from Nottingham University, England in
1968 and holds a management diploma from London Business School.
David Nelson, 43, has been the Financial Director of Apollo and Reynolds
since 1993 and is responsible for the financial control of Apollo and
Reynolds, managing relationships with external providers of finance and
ensuring statutory compliance. Mr. Nelson's previous positions were as
divisional Financial Director within United Kingdom quoted companies. He
previously worked for Ernst & Young in Kuwait, and Peat Marwick in Zambia. He
received a B.S. Degree with honors in Civil Engineering from Loughborough
University in 1975, and is a chartered accountant (FCA).
Graeme Horwood, 52, has been the Technology Director of Apollo and Reynolds
since July 1986 and is responsible for Product and Process development in the
Company's golf shaft, cycle and athletic divisions. He is the focus of
Apollo's relationship on new product development with key customers. Prior to
joining the Company, Mr. Horwood was Engineering Design Manager at the Raleigh
Bicycle Co. Nottingham, England, Group leader in a research and development
team at TI Groups' Research facility at Cambridge, England. He served a
Technical Apprenticeship with GEC, England and received a B.S. Degree in
Mechanical Engineering from Rugby College of Engineering, Rugby, England in
1968.
41
<PAGE>
Keith Noronha, 41, has been the Director and General Manager of Reynolds
since September 1996 and is responsible for the strategic and operational
growth of Reynolds. Mr. Noronha joined Apollo in November 1988 as Financial
Director until 1993 when he transferred to the U.S. to be Vice President and
General Manager of Apollo U.S., which he successfully repositioned and grew
through 1996. Mr. Noronha returned to the United Kingdom in August 1996 to
develop and implement an aggressive global strategy. Prior to joining Apollo
in 1988 he worked as Financial Director at several United Kingdom companies
notably BKB Electricals, BSR and was an engineering graduate with the Rover
Group, after obtaining an B.S. Degree with honors in Mechanical Engineering at
Queen Mary College, London University in 1978. He holds the FCMA Professional
Management Accounting qualifications.
Stewart Tibbatts, 49, has been the Manufacturing Director of Apollo and
Reynolds since January 1996 and is responsible for the effective operation of
the Company's manufacturing activities in golf shafts, cycle tubing and
athletic products. Mr. Tibbatts joined Apollo in 1995 having previously been
Director and General Manager of Reynolds at Tyseley for six years. Mr.
Tibbatts began his career as an apprentice at Reynolds in 1965 and
successfully worked his way up through the company. He also received an HNC in
Mechanical Engineering from North Birmingham Poly in 1969, and Diploma in
Management Studies from the University of Central England in 1983.
David B. Abrams, 32, has been the President, Chief Financial Officer,
Treasurer and a director of Sierra Materials since March 1996. His current
responsibilities include overseeing all of the subsidiary's activities and
operations, with specific responsibility for corporate finances, including
profit and loss management, materials procurement, sales and marketing and
long term strategic planning. From December 1992 to March 1996, Mr. Abrams was
the Senior Associate for acquisitions at Zimmerman Holdings, Inc., a private
investment firm. Previously, he was Manager of Business Development at Westech
Gear Corporation, a Zimmerman subsidiary. Mr. Abrams received his B.A. degree
from the University of Rochester in 1987 and his M.B.A. from the University of
Southern California in 1996. Mr. Abrams owns 10% of Sierra Materials.
Mark H. Snyder, 30, has been the Executive Vice President, Secretary and a
director of Sierra Materials since March 1996. His current responsibilities
include overseeing all of the subsidiary's manufacturing operations, research
and development and legal and regulatory affairs. From May 1992 to March 1996,
he was a Senior Associate with Sheridan Ross and McIntosh, a Denver
intellectual property law firm. Mr. Snyder received his B.S. in Chemical
Engineering from the University of Rochester in 1988 and his J.D. and M.B.A.
degrees from Boston College in 1992. Mr. Snyder owns 10% of Sierra Materials.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has an Audit Committee and a Compensation Committee. The Board
of Directors does not have a Nominating Committee and the functions of such a
committee are performed by the Board of Directors.
Audit Committee. The functions of the Audit Committee include
recommendations to the Board of Directors with respect to the engagement of
the Company's independent certified public accountants and the review of the
scope and effect of the audit engagement. Messrs. Kates, Forte and Probst are
the current members of the Company's Audit Committee.
Compensation Committee. The function of the Compensation Committee is to
make recommendations to the Board with respect to compensation of management
employees. The Compensation Committee also administers plans and programs
relating to stock options, pension and other retirement plans, employees
benefits, incentives and compensation and determines the persons to whom
options should be granted under the Company's Option Plan and the number of
options to be granted to each person. Messrs. Kates, Forte and Stonebraker are
the current members of the Company's Compensation Committee.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Articles of Incorporation authorizes the Company to indemnify
its directors for certain breach of fiduciary duty to the Company and its
stockholders, and other liabilities, subject to certain limitations.
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<PAGE>
Such indemnification does not apply to acts or omissions which involve
intentional misconduct, fraud or a knowing violation of law or the payment of
unlawful distributions to stockholders.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
SUMMARY COMPENSATION
The following table sets forth certain information regarding compensation
earned or awarded to the Chief Executive Officer and certain key employees of
the Company who received in excess of $100,000 of salary and bonus from the
Company during the year ended December 31, 1996 (the "Named Executive
Officers"):
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------------------------- ---------------------
OTHER ANNUAL SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS($) COMPENSATION($) OPTIONS/# OF SHARES
- --------------------------- ---- ---------- -------- --------------- ---------------------
<S> <C> <C> <C> <C> <C>
Mel S. Stonebraker...... 1996 $115,000 -0- $ 6,529(1) -0-
Chief Executive Officer 1995 $115,000 -0- $ 6,805(1) -0-
1994 -0- -0- $ 572(1) -0-
Paul Andrew Taylor...... 1996 $ 91,470 $34,100 $14,474(2) -0-
Managing Director 1995 $ 86,818 $43,093 $13,791(2) -0-
Apollo & Reynolds 1994 $ 82,919 $30,821 $12,252(2) -0-
</TABLE>
- --------
(1) Includes the annual cost of a company car.
(2) Includes the annual cost of a company car and pension plan benefits and
private health insurance and an educational grant earned by Mr. Taylor.
COMPENSATION OF DIRECTORS
Directors are not currently paid fees for attending meetings, although they
may be paid annual retainer fees in cash or options in the future. Directors
are reimbursed for their out-of-pocket expenses for attending Board meetings.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Messrs. Stonebraker
and Probst expiring on May 31, 2000, pursuant to which they are employed as
officers of the Company. The agreements automatically renew for additional two
year periods unless either party notifies the other party that it does not
intend to renew the agreement. The employment agreements provide for
employment of Messrs. Stonebraker and Probst on a full-time basis at annual
salaries of $150,000 and $125,000, respectively, beginning September 1, 1997.
The officers are entitled to receive a bonus based on certain objectives to be
established by the Board of Directors and incentive stock options to purchase
45,000 shares each over a five year term to be granted on the effective date
of this offering at $5.50. The options will vest over a three year period if
the Company achieves 90% of its targeted earnings before deduction of
interest, taxes, depreciation and amortization as established by the Board of
Directors. The officers have the right to purchase their pro-rata share of any
new offerings of the Company's equity securities after December 31, 1997.
Messrs. Stonebraker and Probst may be terminated by the Company for cause,
which is defined as excessive unauthorized absenteeism, actual fraud or
material acts of dishonesty, destruction of material Company property; willful
disclosure of Company proprietary information, or a material violation of
internal controls or procedures. If the officers voluntarily terminate prior
to the end of the original contract term, they are required to reimburse the
Company up to $62,500 each, on a pro-rata basis depending on the date of
termination. If the Company terminates Messrs. Stonebraker or Probst without
cause, they are each entitled to 18 months' salary as a severance payment. If
termination without cause occurs after the end of the
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<PAGE>
original contract term, they are each entitled to 12 months' salary. The
employment agreements provide that the officers may not compete with the
Company for a period of the greater of (i) nine months subsequent to their
termination date, or (ii) the severance pay period. The officers also have a
change of control agreement with the Company pursuant to which the officers
are entitled to a continuation of salary and benefits if their employment is
terminated by the Company without cause or by them for good reason (such as a
reduction in their compensation) within two years after a change of control.
Apollo has an employment agreement with Paul Andrew Taylor pursuant to which
he serves as Managing Director of Apollo. The agreement provides for a salary
of 65,000 pound sterling per year ($111,200 based upon the conversion rate on
December 31, 1996). Mr. Taylor also participates in an executive bonus program
at Apollo for 1997 with maximum bonus potential of 150% of annual salary. The
executive bonus program at Apollo is based on earnings for the steel golf
shaft business. During the year ended December 31, 1996, Mr. Taylor earned a
$34,100 bonus based upon this program. Mr. Taylor's employment agreement is
subject to termination by the Company upon twelve months notice or by Mr.
Taylor upon six months notice. Mr. Taylor may be terminated by the Company for
gross default or misconduct and other breaches of conduct. His agreement
provides that he will not compete with Apollo within the United Kingdom or the
United States for a period of six months after termination of employment. Mr.
Taylor is provided life insurance equal to four times annual base salary and
has the use of a company car.
1997 STOCK OPTION PLAN
The Company's 1997 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors and stockholders on June 10, 1997. The Plan provides for
the grant of options to purchase up to 500,000 shares of the Company's Common
Stock that are intended to qualify as either incentive stock options within
the meaning of Section 422 of the Internal Revenue Code or as options that are
not intended to meet the requirements of such section ("Nonstatutory Stock
Options"). Nonstatutory Stock Options may not be granted at an exercise price
of less than 85% of fair market value of the Company's underlying shares of
Common Stock on the date of grant. Options to purchase shares may be granted
under the Plan to persons who, in the case of Incentive Stock Options, are
employees (including officers of the Company or its subsidiaries), or, in the
case of Nonstatutory Stock Options, are employees (including officers of the
Company or its subsidiaries), non-employee directors or consultants of the
Company.
The Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee has full discretionary authority,
subject to certain restrictions, to determine the number of shares for which
Incentive Stock Options and Nonstatutory Stock Options may be granted and the
individuals to whom, and the times at which, and the exercise prices for which
options will be granted. It is anticipated that upon commencement of the
offering, the Board of Directors will grant options of approximately 300,000
shares to certain employees, directors and consultants, including Messrs.
Stonebraker and Probst, who will receive options to purchase 45,000
shares each under the employment agreements entered into with the Company.
PENSION PLAN BENEFITS
The employees of Apollo and Reynolds participate in a multi-employer defined
benefit pension plan. The plan provides defined benefits to substantially all
salaried and hourly employees of Apollo and Reynolds. The Company contributed
approximately $208,000 for the three month period ended December 31, 1996, to
this plan. The Company is required to implement its own defined benefit plan
during 1997.
CERTAIN TRANSACTIONS
Mr. Stonebraker has loaned approximately $200,155 to the Company at various
times during the years ended December 31, 1996 and 1995 and after June 30,
1997. The loans are evidenced by notes that are unsecured and bear interest
rates ranging from 12% to 25% per annum. Interest is payable monthly on the
notes and any
44
<PAGE>
principal amounts outstanding are due between August 1998 and October 1999.
The Company intends to repay these notes from the proceeds of this offering.
These loans were made by Mr. Stonebraker at his actual cost of money.
Mel S. Stonebraker and another person who is no longer a stockholder of the
Company were the founders of the Company. Mr. Stonebraker and such other
stockholder subscribed to 1,035,000 and 2,415,000 shares (i.e. as determined
after the 3,450 to one forward stock split), respectively, of Common Stock on
average for $2.42 per share. Subsequently, such other stockholder transferred
his shares to a third party ("former majority shareholder"). During the period
from November 1994 through June 30, 1997, the former majority stockholder, who
may be considered a founder of the Company, contributed a total of
approximately $8,349,783 to the Company's capital to pay organizational and
start up expenses, provide funds for the Company's working capital needs and
to finance the purchases of the Company's six (6) operating subsidiaries. The
former majority stockholder did not receive any additional shares of Common
Stock for his capital contributions to the Company.
In August 1996, Mr. Stonebraker and the former majority stockholder
transferred 172,500 shares and 345,000 shares (i.e., as determined after the
forward stock split), respectively, of the Common Stock owned by them to James
M. Probst. As a result of such transfer, the number of shares of Common Stock
owned by the former majority stockholder and Messrs. Stonebraker and Probst
was 2,070,000, 862,500 and 517,500 shares of Common Stock respectively.
On March 27, 1997, the Company established a new entity, Sierra Materials,
LLC ("Sierra"). Sierra is 80% owned by the Company and 20% owned by two
individuals who are officers. Sierra was established to acquire Cape
Composites, Inc. (d/b/a "Sierra Materials"). The shares of Sierra Materials
are pledged as collateral for certain outstanding debt of approximately
$650,000 of Sierra Materials which must be paid or the personal guarantees of
the prior stockholders of Sierra Materials must be removed prior to September
23, 1997 or the shares of Sierra Materials will revert to the previous owners
of Sierra Materials.
On April 4, 1997, the Company entered into two secured promissory notes with
lenders. The amounts of the notes are $1,355,000 and $145,000 and are due on
June 16, 1997, or they may be extended to the earlier of December 31, 1997 or
five days subsequent to the Company completing an initial public offering. The
interest rates on the notes are 8% and may be increased if the Company
defaults on the terms of the notes. As additional consideration for the
lenders making the notes, the Company will also issue 75,000 shares of the
Company's common stock at the initial public offering price for no additional
consideration and warrants to purchase 125,000 shares of the Company's common
stock subsequent to the Company's initial public offering. Accordingly, the
Company recorded debt financing costs of approximately $550,000 in other
income (expense) for the period ending June 30, 1997. The notes are secured by
a Stock Pledge Agreement whereby the assets of the Company in Apollo Golf,
Inc. and in Apollo Sports Holdings are pledged as collateral. In addition, the
notes are secured by the personal guaranty of two of the stockholders of the
Company.
On July 9, 1997, the former majority stockholder of the Company, who is no
longer affiliated with the Company, sold all of his 2,070,000 shares of Common
Stock to Messrs. Stonebraker and Probst, each of whom purchased 1,035,000
shares. Each purchaser paid $4,250,000 for shares purchased by him, payable in
the form of a promissory note bearing interest at 6 1/2% per annum due July 9,
2004. No payments of principal or interest are payable until January 1, 2001
at which time all accrued interest is due and payable. Thereafter, interest
shall be paid annually in arrears until July 9, 2004 when all accrued interest
and the full principal is due and payable. The holder of the notes agrees
that, upon any default in the notes, he will not seek to execute against or
make any claims of ownership to any capital shares of the Company or any of
its subsidiaries.
Pursuant to the Share Return, on July 23, 1997, Messrs. Stonebraker and
Probst returned to the Company for cancellation 467,500 and 382,500 shares of
Common Stock, respectively, which were previously owned by them.
45
<PAGE>
All ongoing and future transactions by the Company with officers, directors,
5% stockholders and their affiliates will be entered into only if the Company
believes that such transactions are reasonably expected to benefit the Company
and the terms of such transactions are no less favorable to the Company than
could be obtained from unaffiliated third parties as determined by independent
directors of the Company. Furthermore, any ongoing and future loans or other
transactions, including forgiveness of loans, will be required to be approved
by a majority of the Company's independent disinterested directors.
PRIVATE PLACEMENT
On April 4, 1997, the Company entered into two secured promissory notes with
the Bridge Lenders in the aggregate amount of $1,500,000. The notes are due on
the earlier of December 31, 1997, or five days subsequent to the Company
completing an initial public offering. The interest rate on the notes is 8%
per annum. Such notes are referred to as the "8% Notes." As additional
consideration for the lenders making the 8% Notes, the Company will also issue
75,000 shares of its Common Stock and 250,000 warrants to purchase 125,000
shares at the time the Company first offers shares of its capital stock
pursuant to a public offering. Such shares of Common Stock and warrants and
the shares underlying the warrants are subject to a lock up arrangement. See
"Additional Registered Shares" and "Description of Securities - Bridge
Warrants." The notes are secured by a Stock Pledge Agreement whereby the
entire interest of the Company in Apollo and Apollo U.S. are pledged as
collateral. In addition, the notes are secured by the personal guaranties of
Messers. Stonebraker and Probst, the Company's two existing stockholders.
46
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth as of the date of this Prospectus, and as
adjusted to reflect the sale of the Shares of Common Stock offered hereby,
certain information regarding beneficial ownership of the Company's Common
Stock by (i) each person known by the Company to be the beneficial owner of
more than 5% of the outstanding Common Stock, (ii) each director of the
Company, (iii) each Named Executive Officer, and (iv) all executive officers
and directors of the Company as a group. The following information assumes
that the named individuals will not be purchasing any Shares of Common Stock
in this offering.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
OWNERSHIP PERCENT OF CLASS
----------------- -----------------------
NAME AND ADDRESS BEFORE AFTER
OF BENEFICIAL OWNER SHARES(1) OFFERING(1) OFFERING(1)
- ------------------- ----------------- ----------- -----------
<S> <C> <C> <C>
Mel S. Stonebraker.................. 1,430,000(1) 55.0% 39.2%
2291 Arapahoe Avenue
Boulder, CO 80302
James M. Probst..................... 1,170,000(1) 45.0% 32.0%
2291 Arapahoe Avenue
Boulder, CO 80302
Jeffrey T. Kates.................... 0(2) -- --
3200 Robert T. Longway Blvd.
Flint, MI 48506
Don A. Forte........................ 0(2) -- --
717 Seventeenth Street
Denver, CO 80202
All executive officers and directors
as a group (4 Persons)............. 2,600,000(1) 100.0% 71.2%
</TABLE>
- --------
(1) Excludes five year options to purchase up to 45,000 shares each to be
granted to Messrs. Stonebraker and Probst on the effective date of this
offering at $5.50 per share. The options vest in three equal annual
increments commencing one year from the date of grant if the Company
achieves 90% of its targeted earnings before deduction of interest, taxes,
depreciation and amortization as established by the Board of Directors.
(2) Excludes seven year options to purchase up to 15,000 shares to be granted
to Messrs. Kates and Forte on the effective date of this offering at the
public offering price. The options vest in three equal annual increments
commencing one year from the date of the grant.
ADDITIONAL REGISTERED SHARES
The shares of Common Stock issuable to the Bridge Lenders who are Deere Park
Capital Management, Inc. and Steven Kerr, which are not being offered hereby,
aggregating 75,000 shares, the warrants to purchase 125,000 shares as well as
the 125,000 shares underlying those warrants are all being registered
simultaneously with this offering for resale by the Bridge Lenders from time
to time, provided that each of such persons has agreed with the Company not to
make any such sales in no event during the six month period after the
effective date and from that date until twelve months from the consummation of
this offering without the prior written consent of the Representative in its
sole discretion in each case unless the Common Stock trades at 150% or more of
the public offering price for three consecutive days.
There are no material relationships between either of the Bridge Lenders and
the Company, nor have any such material relationships existed within the past
three years. The Company has been informed by the Representative that there
are no agreements between any of the Underwriters and any Bridge Lender
regarding the distribution of their Common Stock or warrants.
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<PAGE>
The sale of the Common Stock or warrants by the Bridge Lenders may be
effected from time to time in transactions (which may include block
transactions by or for the account of the Bridge Lenders) in the over-the-
counter market or in negotiated transactions, a combination of such methods of
sale or otherwise. Sales may be made at fixed prices which may be changed, at
market prices prevailing at the time of sale, or at negotiated prices.
The Bridge Lenders may effect such transactions by selling their securities
directly to purchasers through broker-dealers acting as agents for the Bridge
Lenders or to broker-dealers who may purchase shares as principals and
thereafter sell the securities from time to time in the over-the-counter
market, in negotiated transactions or otherwise. Such broker-dealers, if any,
may receive compensation in the form of discounts, concessions or commissions
from the Bridge Lenders and/or the purchasers from whom such broker-dealers
may act as agents or to whom they may sell as principals or otherwise (which
compensation as to a particular broker-dealer may exceed customary
commissions).
The Bridge Lenders and broker-dealers, if any, acting in connection with
such sales might be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act and any commissions received by them and any
profit on the resale of the securities may be deemed underwriting discounts
and commissions under the Securities Act.
DESCRIPTION OF SECURITIES
The following description of the Company's securities is qualified in its
entirety by reference to the Company's Articles of Incorporation and Bylaws,
copies of which have been filed as exhibits to the Registration Statement of
which this Prospectus is a part. As of the date of this Prospectus, the Common
Stock was held of record by two stockholders. See "Additional Information."
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 29,000,000 shares of capital stock, $.001 par value,
of which 25,000,000 shares are designated as Common Stock and of which
4,000,000 shares are designated as Preferred Stock.
COMMON STOCK
As of the date of this Prospectus, the Company had 2,600,000 shares of
Common Stock issued and outstanding. The holders of the Common Stock (i) have
equal ratable rights to dividends from funds legally available therefor, when,
as and if declared by the Board of Directors of the Company; (ii) are entitled
to share ratably in all the assets of the Company available for distribution
to holders of the Common Stock upon liquidation, dissolution or winding up of
the affairs of the Company; (iii) do not have preemptive rights; and (iv) are
entitled to one vote per share on all matters which stockholders may vote on
at all meetings of stockholders.
Holders of Common Stock do not have cumulative voting rights, which means
that the holders of a majority of such outstanding shares voting for the
election of directors can elect all of the directors of the Company to be
elected, if they so choose. In such event, the holders of the remaining shares
will not be able to elect any of the Company's directors.
PREFERRED STOCK
As of the date of this Prospectus, no shares of Preferred Stock were
outstanding. Under governing Nevada law and the Company's Articles of
Incorporation, no action by the Company's stockholders is necessary, and only
action of the Board of Directors is required, to authorize the issuance of any
of the Preferred Stock. The Board of Directors is empowered to establish and
to designate the name of, each class or series of the shares and to set the
terms of such shares (including terms with respect to redemption, sinking
fund, dividend, liquidation, preemptive, conversion and voting rights and
preferences). Accordingly, the Board of Directors, without
48
<PAGE>
stockholder approval, may issue preferred stock with terms (including terms
with respect to redemption, sinking fund, dividend, liquidation, preemptive,
conversion and voting rights and preferences) that could adversely affect the
voting power and other rights of holders of the Common Stock.
The existence of Preferred Stock may have the effect of discouraging an
attempt, through acquisition of a substantial number of shares of Common
Stock, to acquire control of the Company with a view to effecting a merger,
sale or exchange of assets or a similar transaction. The anti-takeover effects
of the Preferred Stock may deny stockholders the receipt of a premium on their
Common Stock and may also have a depressive effect on the market price of the
Common Stock.
In August, 1997, the Company under an amendment to its Articles of
Incorporation elected not to be governed by the anti-takeover provisions under
Nevada law, the Company's state of incorporation. As such, the Nevada anti-
takeover statutory provisions would only apply to the Company's capital stock
if the Company's Articles of Incorporation were subsequently amended.
8% NOTES
In April 1997, the Company issued $1,500,000 aggregate principal amount of
the 8% Notes. Interest on the 8% Notes, and the aggregate outstanding
principal amount of the 8% Notes, are payable on the maturity date, which is
the earlier of December 31, 1997, or five days after the Company's initial
public offering.
BRIDGE WARRANTS
An aggregate of 250,000 warrants which will be exercisable for an aggregate
of 125,000 shares of Common Stock will be issued to the Bridge Lenders shortly
after the consummation of this public offering. These warrants will have a
three year term and an exercise price equal to 150% of the public offering
price. The warrants will be subject to redemption by the Company for $0.10 per
warrant if the closing high bid price of the Common Stock exceeds the warrant
exercise price by at least 50% during a period of at least 20 out of 30
trading days and if certain other conditions are satisfied. The Bridge Lenders
have agreed that they will not offer to sell, contract to sell, or otherwise
sell or dispose of the 250,000 warrants or the 125,000 shares underlying the
warrants for a period of six months following the Effective Date of the
offering.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 3,650,000 Shares of
Common Stock outstanding (3,807,500 shares if the Representative's over-
allotment option with respect to the Shares is exercised in full). In
addition, 75,000 shares will be issued to the Bridge Lenders shortly after
this offering. The Bridge Lenders under a lock up arrangement may not offer to
sell, contract to sell, or otherwise sell or dispose of the 75,000 shares for
a period of six months following the completion of the offering and will not,
without the written consent of the Representative, offer to sell, contract to
sell, or otherwise sell or dispose of the 75,000 shares for one year following
the offering, provided, however, that they will be released from the second
lock up if the Common Stock trades at 150% or more of the public offering
price for three consecutive days. The 1,050,000 Shares sold in this offering
will be freely transferable and tradeable without restriction or further
registration under the Securities Act except for any shares purchased or held
by any "affiliate" of the Company, which will be subject to the resale
limitation of Rule 144 promulgated under the Securities Act.
Of the Company's 2,600,000 shares of Common Stock outstanding immediately
prior to the date of this Prospectus, all are "restricted securities" as that
term is defined under Rule 144 of the Securities Act. Holders of all said
2,600,000 shares have agreed that they will not, without the consent of the
Representative, offer to sell, contract to sell, or otherwise sell or dispose
of their stock for one year following this offering. Restricted securities may
be sold in open market transactions in compliance with Rule 144 if the
conditions of such rule are satisfied. Under Rule 144, as amended effective
April 29, 1997, any person (or persons whose shares are aggregated) who has
beneficially owned restricted shares for at least one year is entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of the
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<PAGE>
Company's Common Stock (36,500 shares immediately after this offering), or (ii)
the average weekly trading volume during the four calendar weeks immediately
preceding the date on which notice of the sale is filed with the Commission.
Sales pursuant to Rule 144 are also subject to certain requirements relating to
the manner of sale, notice and availability of current public information about
the Company. A person who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and whose
restricted shares have been fully paid for two years since the later of the
date they were acquired from the Company or the date they were acquired from an
affiliate of the Company may sell such restricted shares under Rule 144(k)
without regard to the limitations described above.
Upon the consummation of this offering, the Company will issue 75,000 shares
and warrants to purchase an additional 125,000 shares to the Bridge Lenders.
These shares, warrants and shares underlying the warrants are being registered
simultaneously with this offering for resale by the holders thereof from time
to time. The holders have agreed that they will not during the six month period
after the Effective Date sell, either publicly or privately, any shares,
warrants or shares underlying warrants, and during the second six month period
ending one year after the Effective Date, without the written consent of the
Representative, offer to sell, contract to sell, or otherwise sell or dispose
of the 75,000 shares, provided, however, that they will be released from this
lock-up if the Common Stock trades at 150% or more of the public offering price
for three consecutive days.
The Company is authorized to issue additional options to purchase up to
500,000 shares of Common Stock under the Company's Option Plan. The Company
plans to register for sale under the Securities Act all shares issuable upon
exercise of options granted under the Option Plan. Following completion of the
offering, in addition to the warrants issuable to the Bridge Lenders, the
Company will have outstanding warrants exercisable to purchase 105,000 shares
of Common Stock which will be issued to the Representative. The Company has
undertaken to register for sale under the Securities Act all shares issuable
upon exercise of those warrants. No prediction can be made to the effect, if
any, that sales of shares of Common Stock or the availability of such shares
for sale will have on the market prices prevailing from time to time.
Nevertheless, the possibility that substantial amounts of Common Stock may be
sold in the public market in the future may adversely affect prevailing market
prices of the Common Stock and could impair the Company's ability to raise
capital in the future through the sale of equity securities. Actual sales or
the prospect of future sales of shares of Common Stock under Rule 144 may have
a depressive effect upon the price of the Common Stock and the market for such
securities.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar with respect to the Company's Common Stock
is American Securities Transfer & Trust, Inc., 938 Quail Street, Suite 101,
Lakewood, Colorado 80215.
50
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part, the Underwriters named below (the "Underwriters"), have
severally agreed through Cohig & Associates, Inc., the Representative, to
purchase and the Company has agreed to sell the Underwriters the aggregate
number of Shares as set forth opposite their respective names below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Cohig & Associates, Inc.......................................
---------
TOTAL....................................................... 1,050,000
=========
</TABLE>
The Shares are being offered by the several Underwriters, subject to prior
sale, when, as, and if delivered to and accepted by the Underwriters and
subject to their rights to reject orders in whole or in part and subject to
approval of certain legal matters by counsel and to various other conditions.
The nature of the Underwriters' obligation is such that they must purchase all
of the Shares offered hereby if any are purchased.
The offering price of the Shares was negotiated between the Company and the
Representative. Among the factors considered in determining the offering price
were the equity investment of the founding stockholders of the Company, the
Share Return, the market for the Company's products, the general economic
environment, prospects of the Company, the background and ability of the
management of the Company and other factors. However, there is no public
trading market for the Shares and the offering price of the Shares does not
necessarily bear any relationship to the Company's assets, book value, or
financial condition, and may not be indicative of the actual value of the
Company. See "Risk Factors."
The Company has granted the Representative an option, exercisable within 45
days from the effective date of the Registration Statement, to purchase up to
an additional number of Shares as will be equal to not more than 15% of the
total number of Shares initially offered at the initial public offering price
less the underwriting discount of $0.50 per Share. The Representative may
exercise such option only for the purpose of covering any over-allotment in
the sale of the Shares offered hereby.
The Underwriters have advised the Company that the Underwriters propose to
offer the Shares directly to the public at the initial public offering price
set forth on the cover page of this Prospectus, and to selected dealers at the
price, less a concession of not more than $ per Share. After the initial
public offering, the price to the public and the concession may be changed by
the Underwriters.
The Underwriters have informed the Company that they do not expect to sell
any Shares offered hereby to accounts over which they exercise discretionary
authority as to such sale.
The Company will pay the Representative a non-accountable expense allowance
of 3% of the offering proceeds, which will include proceeds from the
overallotment option to the extent exercised. The Company has paid to the
Representative $40,000 against the non-accountable expense allowance. The
Representative's expenses in excess of the non-accountable expense allowance
will be borne by the Representative. To the extent that the expenses of the
Representative are less than the non-accountable expense allowance, the excess
shall be deemed to be compensation to the Representative.
51
<PAGE>
The Company and the Underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the 1933 Act, and, if such
indemnifications are unavailable or insufficient, the Company and the
Underwriters have agreed to damage contribution agreements between them based
upon relative benefits received from this offering and relative fault
resulting in such damages. The Company has also agreed with the Underwriters
that the Company will use its best efforts to cause a registration statement
pursuant to Section 12(g) of the Exchange Act to become effective no later
than the date of this Prospectus.
The Company will enter into a two-year consulting agreement with the
Representative pursuant to which the Representative will be paid $3,000 per
month. The entire consulting fee is payable upon the closing of this offering.
Although there is no contractual agreement or other obligation to do so,
officers, directors and affiliates of the Company may be sold a portion of the
Shares, but only on the same terms and conditions as will be offered to the
public. Such persons will be required to represent that purchases by such
persons, if any, will be for investment purposes only with no present intent
to sell.
The foregoing does not purport to be a complete statement of the terms and
conditions of the Underwriting Agreement, copies of which are on file at the
offices of the Representative, the Company and the Commission. See "Additional
Information."
REPRESENTATIVE'S WARRANTS
At the closing of the offering, the Company will sell and deliver to the
Representative for an aggregate purchase price of $105, warrants (the
"Representative's Warrants"), consisting of 105,000 warrants to purchase
105,000 shares of Common Stock at a price that is equal to 125% of the initial
public offering price for the Common Stock.
The Representative's Warrants shall be issued to the Representative and
thereafter may be transferred to officers and employees of the Representative
who are also shareholders of the Representative or by will, pursuant to the
laws of descent and distribution, or by the operation of law. Such
Representative's Warrants will be non-transferable for a period of one year
following the date of this Prospectus except to the Underwriters, selling
group members participating in the offering, and their respective bona fide
officers or partners. Each certificate representing the Representative's
Warrants subsequently issued shall bear a restrictive legend providing that
such securities shall remain non-transferable for the remainder of the one
year period following the date of this Prospectus. The Representative's
Warrants will also contain anti-dilution provisions for stock splits,
recombinations and reorganizations, a one-time demand registration provision
(at the Company's expense), piggyback registration rights (both of which
expire five years from the date of the Prospectus), a cashless exercise
provision, and will otherwise be in form and substance satisfactory to the
Representative. The Representative's Warrants will be exercisable during the
four-year period commencing one year after the date of this Prospectus.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Chrisman, Bynum & Johnson, P.C., Boulder, Colorado 80302. Certain
legal matters will be passed upon by counsel for the Underwriters, Clanahan,
Tanner, Downing & Knowlton, P.C., 1600 Broadway, Suite 2400, Denver, Colorado
80202.
The consolidated financial statements Coyote Sports, Inc. as of and for the
years ended December 31, 1995 and 1996 have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
Prior to this offering, the Company has not been subject to the reporting
requirements of the Securities Exchange Act of 1934. The Company has filed
with the Commission a Registration Statement under the Securities Act of 1933,
as amended, with respect to the sale of the Shares. This Prospectus, which is
part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement and the
52
<PAGE>
exhibits thereto, certain portions of which have been omitted as permitted by
the rules and regulations of the Commission. For further information with
respect to the Company and the Shares, reference is hereby made to such
Registration Statement, including the exhibits thereto. Statements contained
in this Prospectus as to the contents of any contract or other document
referred to are not necessarily complete, and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement. The Registration Statement and exhibits thereto may be
inspected by anyone without charge at the public reference facilities
maintained by the Commission at Judiciary Plaza, Room 1024, 450 Fifth Street,
N.W, Washington, D.C. 20549, or at one of the Commission's regional offices:
Northwestern Atrium Center, 500 West Madison, Suite 1400, Chicago, Illinois
60661-2511, and 7 World Trade Center, 13th Floor, New York, New York 10048, or
on the SEC website: http://www.sec.gov. Copies of all or any part of such
material may be obtained, upon payment of the prescribed fees, from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C.
53
<PAGE>
INDEX TO FINANCIAL STATEMENTS
COYOTE SPORTS, INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
PRO FORMA COMBINED FINANCIAL STATEMENTS (UNAUDITED)
Pro Forma Condensed Combined Balance Sheet as of June 30, 1997.......... F-3
Pro Forma Condensed Combined Statements of Operations for the year ended
December 31, 1996...................................................... F-4
Pro Forma Condensed Combined Statements of Operations for six months
ended June 30, 1997.................................................... F-5
Notes to Pro Forma Condensed Combined Financial Statements.............. F-6
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report............................................ F-7
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June
30, 1997 (unaudited)................................................... F-8
Consolidated Statements of Operations for the years ended December 31,
1995 and 1996 and six months ended June 30, 1996 and 1997 (unaudited).. F-9
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1995 and 1996 and six months ended June 30, 1997
(unaudited)............................................................ F-10
Consolidated Statements of Cash Flows for the years ended December 31,
1995 and 1996 and six months ended June 30, 1996 and 1997 (unaudited).. F-11
Notes to Consolidated Financial Statements.............................. F-12
TI APOLLO LIMITED, APOLLO GOLF, INC. AND TI REYNOLDS 531 LIMITED
HISTORICAL COMBINED FINANCIAL STATEMENTS
Independent Auditors' Report............................................ F-21
Combined Balance Sheets as of December 31, 1995 and September 30, 1996.. F-22
Combined Statements of Operations for the year ended December 31, 1995
and the nine months ended September 30, 1996........................... F-23
Combined Statements of Stockholders' Equity for the year ended December
31, 1995 and the nine months ended September 30, 1996.................. F-24
Combined Statements of Cash Flows for the year ended December 31, 1995
and the nine months ended September 30, 1996........................... F-25
Notes to Combined Financial Statements.................................. F-26
</TABLE>
F-1
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma condensed consolidated financial
statements have been prepared to give effect to the completion of the offering
and the acquisitions of the entities described below.
On September 18, 1996, Coyote Sports, Inc. (the "Company" or "Coyote")
acquired three affiliated entities, TI Apollo Limited, TI Reynolds 531 Limited
and Apollo Golf, Inc., (collectively, the "Apollo Entities") and a
manufacturing facility. The transaction has been accounted for as a purchase
and the results of operations of the Apollo Entities are included in the
operations of the Company beginning October 1, 1996. The pro forma condensed
combined statements of operations for the year ended December 31, 1996 assume
the offering and the acquisition were consummated on January 1, 1996.
On March 27, 1997, the Company established a new entity, Sierra Materials,
LLC ("Sierra"). Sierra is 80% owned by the Company and 20% owned by two
individuals not previously related to the Company. Sierra was established to
acquire Cape Composites, Inc. (d/b/a Sierra Materials). Sierra Materials is a
supplier of graphite and other advanced composite materials for use in the
sports and recreational markets. The acquisition of Sierra Materials coincided
with the formation of Sierra on March 27, 1997. The shares of Sierra Materials
are pledged as collateral for certain outstanding debt of Sierra Materials
which must be paid by or personal guarantees of the previous owners of
indebtedness existing on March 27, 1997 removed by the Company prior to
September 23, 1997 or the shares of Sierra Materials will revert back to the
previous owners of Sierra Materials. The unaudited pro forma condensed
consolidated statements of operations for the year ended December 31, 1996 and
the six months ended June 30, 1997 of the Company assume the offering and
acquisition occurred on January 1, 1996 and January 1, 1997, respectively.
The accompanying pro forma condensed consolidated balance sheet assumes the
offering and related debt repayments was completed on June 30, 1997.
In management's opinion, all material adjustments necessary to reflect the
transactions are presented in the pro forma adjustments for the year ended
December 31, 1996 and the six months ended June 30, 1997 which are based upon
available information. The pro forma statements do not purport to present the
Company's results of operations or financial position that would have resulted
had the transactions to which pro forma effect is given been consummated as of
the dates or for the periods indicated and do not purport to project the
Company's financial position or results of operations at any future date or
for any future period, and should be read in conjunction with the Company's
consolidated financial statements and the combined financial statements of the
Apollo Entities.
F-2
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED BALANCE SHEET
JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COYOTE ADJUSTMENTS COMBINED
----------- ----------- ----------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash.................................... $ 1,806,705 1,708,280 (a) 3,514,985
Receivables, net........................ 4,271,039 4,271,039
Inventories............................. 3,773,656 3,773,656
Prepaid expenses and other current
assets................................. 587,550 587,550
----------- ----------
Total current assets.................. 10,438,950 12,147,230
----------- ----------
Property, plant and equipment, net........ 8,310,059 8,310,059
Intangible assets, net.................... 967,746 967,746
----------- ---------- ----------
$19,716,755 1,708,280 21,425,035
=========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable........................... $ 4,726,940 (1,967,468)(a) 2,759,472
Current portion of long term debt....... 582,388 (19,947)(a) 562,441
Current portion of obligation payable
under purchase agreement............... 87,000 87,000
Current portion of related party notes
payable................................ 112,496 (112,496)(a) --
Payables to related parties............. 21,164 21,164
Accounts payable........................ 2,917,850 2,917,850
Taxes payable........................... 287,000 287,000
Accrued expenses........................ 2,376,263 2,376,263
----------- ----------
Total current liabilities............. 11,111,101 9,011,190
----------- ----------
Long term debt, net of current portion.. 348,521 (46,809)(a) 301,712
Obligation payable under purchase
agreement, net of current portion...... 728,000 728,000
Related party notes payable, net of
current portion ....................... 815,602 815,602
Deferred tax liability.................. 444,000 444,000
----------- ----------
Total liabilities..................... 13,447,224 11,300,504
Minority interests in net assets of
subsidiaries............................. 755,823 755,823
Stockholders' equity:
Common stock............................ 3,450 200 (a) 3,650
Additional paid-in capital.............. 8,347,333 3,854,800 (a) 12,202,133
Accumulated deficit..................... (2,991,075) (2,991,075)
Foreign currency translation
adjustment............................. 154,000 154,000
----------- ----------
Total stockholders' equity............ 5,513,708 9,368,708
----------- ---------- ----------
$19,716,755 1,708,280 21,425,035
=========== ========== ==========
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
F-3
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL
APOLLO SIERRA
ENTITIES MATERIALS
PERIOD FROM PERIOD FROM
HISTORICAL JANUARY 1, MARCH 1, 1996
COYOTE 1996 TO TO
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, PRO FORMA PRO FORMA
1996 1996 1996 ADJUSTMENTS COMBINED
---------------------- ------------- ------------- ----------- ------------
(AS RESTATED, NOTE 14)
<S> <C> <C> <C> <C> <C>
Net sales............... $ 5,453,117 14,787,052 3,281,936 23,522,105
Cost of goods sold...... (4,168,665) (10,789,428) (2,923,260) (17,881,353)
----------- ----------- ---------- ------------
Gross profit.......... 1,284,452 3,997,624 358,676 5,640,752
Selling, general, and
administrative
expenses............... (2,308,141) (3,997,959) (562,677) 13,000(b) (6,855,777)
----------- ----------- ---------- ------------
Operating loss........ (1,023,689) (335) (204,001) (1,215,025)
----------- ----------- ---------- ------------
Other income (expense):
Interest expense...... (34,897) (238,677) (48,781) 36,000(c) (286,355)
Gains on forward
exchange contracts,
net.................. 126,570 54,000 -- 180,570
----------- ----------- ---------- ------------
91,673 (184,677) (48,781) (105,785)
----------- ----------- ---------- ------------
Loss before income
taxes and minority
interest............. (932,016) (185,012) (252,782) (1,320,810)
Income tax expense...... -- (248,000) -- (248,000)
Minority interest in
subsidiaries (income)
loss................... (5,938) -- -- (5,938)
----------- ----------- ---------- ------ ------------
Net loss.............. $ (937,954) (433,012) (252,782) 49,000 (1,574,748)
=========== =========== ========== ====== ============
Net loss per share...... $ (0.27) (0.43)
=========== ============
Weighted average shares
outstanding............ 3,450,000 3,650,000
=========== ============
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
F-4
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SIERRA
MATERIALS
THREE MONTHS
ENDED PRO FORMA PRO FORMA
COYOTE MARCH 31, 1997 ADJUSTMENTS COMBINED
----------- -------------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............... $12,750,168 932,948 13,683,116
Cost of goods sold...... (9,784,535) (819,532) (18,000)(b) (10,622,067)
----------- -------- -----------
Gross profit.......... 2,965,633 113,416 3,061,049
Selling, general, and
administrative
expenses............... (4,071,540) (161,525) (4,233,065)
----------- -------- -----------
Operating loss........ (1,105,907) (48,109) (1,172,016)
----------- -------- -----------
Other income (expense):
Interest expense...... (199,617) (14,028) 42,000(c) (171,645)
Loss on forward
exchange contracts,
net.................. (39,000) -- (39,000)
Debt financing costs.. (550,000) -- (550,000)
----------- -------- -----------
(788,617) (14,028) (760,645)
----------- -------- -----------
Loss before taxes and
minority interest.... (1,894,524) (62,137) (1,932,661)
Income tax benefit...... 181,000 -- 181,000
Minority interests in
losses of
subsidiaries........... 48,042 -- 12,427(d) 60,469
----------- -------- ------- -----------
Net loss.............. $(1,665,482) (62,137) 36,427 (1,691,192)
=========== ======== ======= ===========
Net loss per share.... $ (0.48) (0.46)
=========== ===========
Weighted average
shares outstanding... 3,450,000 3,650,000
=========== ===========
</TABLE>
See accompanying notes to pro forma condensed combined financial statements.
F-5
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
On September 18, 1996, Coyote acquired all of the outstanding common stock
of TI Apollo Limited, Apollo Golf, Inc. and TI Reynolds 531 Limited. In
addition, the Company acquired a manufacturing facility located in Oldbury,
U.K. (the "Oldbury property"). These entities and manufacturing facility are
collectively referred to as the Apollo Entities. Consideration paid for the
Apollo Entities was $5,135,305 in cash.
On March 27, 1997, the Company and two previously unrelated individuals
established Sierra Materials which acquired all of the outstanding common
stock of Cape Composites, Inc. (d/b/a "Sierra Materials"). The Company is
obligated to repay or remove the personal guarantees of the prior stockholders
of Sierra Materials in the amount of approximately $534,000 at June 30, 1997.
The personal guarantees must be removed prior to September 23, 1997 or the
shares of Sierra Materials will revert to the previous owners of Sierra
Materials.
(2) PRO FORMA ADJUSTMENTS
The following pro forma adjustments give effect to the offering and
acquisition of the Apollo Entities, and Sierra Materials as of the beginning
of each period presented for the statement of operations and the effect of the
offering as of June 30, 1997 for the balance sheet.
(a) Reflects the estimated net proceeds of the offering of $3,855,000,
repayment of notes payable to stockholder of $112,496 and long term debt
and notes payable of $2,034,224. Subsequent to June 30, 1997, the Company
retired 850,000 shares of Common Stock.
(b) Reflects the net decrease in depreciation expense for the Apollo
Entities, based on the lower carrying values of property, plant and
equipment for the year ended December 31, 1996. The lower carrying values
resulted from the allocation of purchase price to monetary assets and
liabilities based on their fair values with the amount remaining to
allocate to long lived assets being less than historical carrying values.
Reflects the increase in depreciation expense for the increase in Sierra
Material's fixed assets due to purchase accounting for the six months ended
June 30, 1997.
(c) Reflects the decrease in interest expense due to pay down of the
Sierra indebtedness and repayment of the stockholder notes payable.
(d) Reflects the adjustment for minority interests in Sierra Materials
for the three months ended March 31, 1997.
(3) PENTIUMATICS SDN., BHD.
Coyote purchased Pentiumatics Sdn., Bhd. on April 1, 1997. This transaction
is reflected in the historical information for the six months ended June 30,
1997.
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Coyote Sports, Inc.:
We have audited the accompanying consolidated balance sheets of Coyote
Sports, Inc. and subsidiaries (the "Company") as of December 31, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material, respects the financial position of Coyote
Sports, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boulder, Colorado
May 19, 1997, except
for Note 8 and Note 14 which are
as of June 11, 1997 and August 1, 1997, respectively
F-7
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1996 AND JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
--------- ---------- -------------
<S> <C> <C> <C>
ASSETS (UNAUDITED)
Current assets:
Cash................................... $ 29,497 305,006 1,806,705
Trade receivables, less allowance for
doubtful accounts of $340,000 in 1996
and $224,000 in 1997.................. -- 2,681,626 4,171,134
Receivables from related parties....... -- 91,418 99,905
Inventories (as restated, note 14)..... -- 3,931,718 3,773,656
Prepaid expenses and other assets...... -- 245,623 587,550
--------- ---------- -------------
Total current assets................. 29,497 7,255,391 10,438,950
--------- ---------- -------------
Property, plant and equipment:
Land................................... -- 816,000 794,000
Building............................... -- 110,000 3,434,940
Machinery and equipment................ 7,195 2,628,302 4,320,430
Furniture and fixtures................. 2,122 19,122 46,790
--------- ---------- -------------
9,317 3,573,424 8,596,160
Less accumulated depreciation.......... (2,477) (31,677) (286,101)
--------- ---------- -------------
Net property, plant and equipment.... 6,840 3,541,747 8,310,059
--------- ---------- -------------
Intangible assets, net of accumulated
amortization of $16,979 in 1996 and
$51,004 in 1997......................... -- 1,001,771 967,746
--------- ---------- -------------
$ 36,337 11,798,909 19,716,755
========= ========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Notes payable.......................... $ -- 1,038,000 4,726,940
Current portion of long term debt...... -- -- 582,388
Current portion of obligation payable
under purchase agreement.............. -- 87,000 87,000
Current portion of related party notes
payable............................... -- -- 112,496
Payables to related parties............ 17,817 22,291 21,164
Accounts payable....................... -- 2,687,427 2,917,850
Taxes payable.......................... -- 638,000 287,000
Accrued expenses....................... 4,604 823,077 2,376,263
--------- ---------- -------------
Total current liabilities............ 22,421 5,295,795 11,111,101
--------- ---------- -------------
Long term debt, net of current portion... -- -- 348,521
Obligation payable under purchase
agreement, net of current portion....... -- 728,000 728,000
Related party notes payable, net of
current portion......................... 45,632 112,861 815,602
Deferred tax liability................... -- 426,000 444,000
--------- ---------- -------------
Total liabilities.................... 68,053 6,562,656 13,447,224
Minority interests in net assets of
subsidiaries............................ -- 209,688 755,823
Stockholders' equity (deficit):
Preferred stock, $.001 par value.
Authorized 4,000,000 shares, none
issued or outstanding................. -- -- --
Common stock, $.001 par value.
Authorized 25,000,000 shares,
3,450,000 shares issued and
outstanding........................... 3,450 3,450 3,450
Additional paid-in capital............. 352,473 6,136,288 8,347,333
Accumulated deficit (as restated, note
14)................................... (387,639) (1,325,593) (2,991,075)
Foreign currency translation
adjustment............................ -- 212,420 154,000
--------- ---------- -------------
Total stockholders' equity
(deficit)........................... (31,716) 5,026,565 5,513,708
--------- ---------- -------------
Commitments and contingencies (notes 1,
2, 5, 6, 9, 12 and 13).................. $ 36,337 11,798,909 19,716,755
========= ========== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ --------------------
1995 1996 1996 1997
----------- ----------- -------- ----------
AS RESTATED (UNAUDITED)
(NOTE 14)
<S> <C> <C> <C> <C>
Net sales.................. $ -- 5,453,117 19,601 12,750,168
Cost of goods sold......... -- (4,168,665) (22,780) (9,784,535)
----------- ------------ ---------- ----------
Gross profit............. -- 1,284,452 (3,179) 2,965,633
Selling, general and admin-
istrative expenses........ (370,873) (2,308,141) (238,288) (4,071,540)
----------- ------------ ---------- ----------
Operating loss........... (370,873) (1,023,689) (241,467) (1,105,907)
----------- ------------ ---------- ----------
Other income (expense):
Interest expense......... -- (34,897) -- (199,617)
Gain (loss) on forward
exchange contracts,
net..................... -- 126,570 -- (39,000)
Debt financing costs..... -- -- -- (550,000)
----------- ------------ ---------- ----------
91,673 -- (788,617)
----------- ------------ ---------- ----------
Loss before income taxes
and minority interest... (370,873) (932,016) (241,467) (1,894,524)
Income tax benefit......... -- -- -- 181,000
Minority interests in sub-
sidiaries (income) loss... -- (5,938) -- 48,042
----------- ------------ ---------- ----------
Net loss................. $ (370,873) (937,954) (241,467) (1,665,482)
=========== ============ ========== ==========
Net loss per share......... $ (0.11) (0.27) (0.07) (0.48)
=========== ============ ========== ==========
Weighted average shares
outstanding............... 3,450,000 3,450,000 3,450,000 3,450,000
=========== ============ ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
FOREIGN TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL CURRENCY STOCKHOLDERS'
------------------ ---------------- PAID-IN ACCUMULATED TRANSLATION EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT (DEFICIT)
------- -------- --------- ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT JANUARY 1,
1995................... -- $ -- 3,450,000 $3,450 47,550 (16,766) -- 34,234
Contributed capital..... -- -- -- -- 304,923 -- -- 304,923
Net loss................ -- -- -- -- -- (370,873) -- (370,873)
------- -------- --------- ------ --------- ---------- ------- ----------
BALANCES AT DECEMBER 31,
1995................... -- -- 3,450,000 3,450 352,473 (387,639) -- (31,716)
Contributed capital..... -- -- -- -- 5,783,815 -- -- 5,783,815
Net loss................ -- -- -- -- -- (937,954) -- (937,954)
Foreign currency
translation
adjustment............. -- -- -- -- -- -- 212,420 212,420
------- -------- --------- ------ --------- ---------- ------- ----------
BALANCES AT DECEMBER 31,
1996 (as restated, note
14).................... -- -- 3,450,000 3,450 6,136,288 (1,325,593) 212,420 5,026,565
------- -------- --------- ------ --------- ---------- ------- ----------
Contributed capital..... -- -- -- -- 2,211,045 -- -- 2,211,045
Net loss................ -- -- -- -- -- (1,665,482) -- (1,665,482)
Foreign currency
translation
adjustment............. -- -- -- -- -- -- (58,420) (58,420)
------- -------- --------- ------ --------- ---------- ------- ----------
BALANCES AT JUNE 30,
1997 (Unaudited)....... -- $ -- 3,450,000 $3,450 8,347,333 (2,991,075) 154,000 5,513,708
======= ======== ========= ====== ========= ========== ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
SIX MONTHS ENDED JUNE 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------- ---------------------
1995 1996 1996 1997
--------- ----------- -------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating
activities:
Net loss..................... $(370,873) (937,954) (241,467) (1,665,482)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization.............. 2,477 46,179 30 227,412
Deferred taxes............. -- -- -- 18,000
Minority interest in net
earnings of subsidiary.... -- 5,940 -- (48,042)
Contribution from minority
shareholder............... -- -- -- 594,177
Changes in operating assets
and liabilities (net of
acquisitions):
Trade receivables and
receivables from related
parties................. -- 1,640,799 (374,962) (1,196,449)
Inventories.............. -- (822,656) -- 587,025
Prepaid expenses and
other assets............ 900 (215,860) -- (288,300)
Payables to related
parties................. 17,817 4,474 60,464 --
Accounts payable......... 4,725 (137,696) 471,721 (466,810)
Taxes payable............ -- 63,000 -- (351,000)
Accrued expenses......... -- (763,530) 3,594 1,525,883
--------- ----------- -------- -----------
Net cash used in
operating activities.. (344,954) (1,117,304) (80,620) (1,063,586)
--------- ----------- -------- -----------
Cash flows from investing
activities:
Purchase of property, plant
and equipment............... (3,140) (25,105) (150) (3,832,660)
Acquisitions of businesses,
net of cash acquired of
$114,759.................... -- (5,020,546) -- (198,059)
--------- ----------- -------- -----------
Net cash used in
investing activities.. (3,140) (5,045,651) (150) (4,030,719)
--------- ----------- -------- -----------
Cash flows from financing
activities:
Proceeds from notes payable.. -- 375,000 -- 3,633,067
Leases....................... -- -- -- (4,925)
Borrowings (repayments) on
related party notes payable,
net......................... 45,632 67,229 -- 815,237
Capital contributions........ 304,923 5,783,815 40,766 2,211,045
--------- ----------- -------- -----------
Net cash provided by
financing activities.. 350,555 6,226,044 40,766 6,654,424
--------- ----------- -------- -----------
Effect of exchange rate changes
on cash....................... -- 212,420 -- (58,420)
--------- ----------- -------- -----------
Increase (decrease) in
cash.................. 2,461 275,509 (40,004) 1,501,699
Cash at beginning of period.... 27,036 29,497 29,497 305,006
--------- ----------- -------- -----------
Cash at end of period.......... $ 29,497 305,006 (10,507) 1,806,705
========= =========== ======== ===========
Supplemental disclosures of
cash flow information
Cash paid during the period
for:
Interest................. $ -- 23,000 217,427 126,247
========= =========== ======== ===========
Income taxes............. $ -- -- -- --
========= =========== ======== ===========
Noncash transactions--
acquisition of a subsidiary in
exchange for 20% of the stock
in that subsidiary and future
cash payments (note 2)
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
NATURE OF BUSINESS
Coyote Sports, Inc. and subsidiaries (the Company), is engaged in the
manufacture and sale of sporting good products. These sporting good products
include steel golf shafts (under the name Apollo), bicycle frame tubes (under
the name Reynolds), and high-end ski poles (under the name ICE). The Company
sells its golf shafts and bicycle frame tubes in wholesale markets and to
assemblers of finished products, and its ski poles to retail shops throughout
the United States. The Company's golf shaft and cycle tubing businesses
accounted for approximately 91% of the Company's revenue for the year ended
December 31, 1996. If the demand for golf products were to experience a
significant change it could have a significant impact on the Company's
financial performance.
The Company, in addition to the businesses described above, plans to expand
its existing product lines into other sporting good product lines in the
future. The Company plans to develop some of these products internally, as
well as, acquiring companies with existing products lines that complement the
Company's product lines.
Prior to 1996, the Company was a development stage enterprise as it was
devoting most of its activities to financial planning and identifying
acquisitions.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements as of June 30, 1997
and for the six months ended June 30, 1996 and 1997, are unaudited but, in the
opinion of management, include all adjustments, consisting of normal recurring
adjustments, which are necessary for a fair presentation of financial
condition, results of operations, and cash flows. The operating results for
the six months ended June 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1997.
LIQUIDITY
The Company incurred a loss of $937,954 in 1996. Notes payable to banks as
of December 31, 1996 contractually terminate April 30, 1998 and May 31, 1998.
Subsequent to December 31, 1996 the Company acquired two additional entities
in exchange for the assumption of indebtedness and entered into two new debt
agreements which contractually terminate on the earlier of December 31, 1997
or 5 days after the Company's initial public offering.
Management believes that the combination of positive cash flows from
operations, extending the due dates of debt agreements, entering into new debt
agreements and the sale of equity will provide sufficient cash to meet its
obligations as they come due. However, there can be no assurance that
operations will generate positive cash flows, that the debt agreements will be
extended, and that new debt or equity will be sold. If the Company is unable
to secure additional financing or refinance existing debt, cash flows from
operations might not be sufficient to cover the Company's financial
obligations during 1997.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all
subsidiaries in which a controlling interest is held, including Apollo Sports
Holdings Ltd. and its subsidiaries, Apollo Golf, Inc. and ICE*USA LLC for the
year ended December 31, 1996. The Company purchased a controlling interest in
two other entities; Sierra Materials, LLC on March 27, 1997 and Pentiumatics
Sdn., Bhd on April 1, 1997. The accounts of these subsidiaries are included in
the consolidated financial statements for the six months ending June 30, 1997.
All significant intercompany balances and transactions have been eliminated in
consolidation.
F-12
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
TRADE RECEIVABLES
Prior to the year ended December 31, 1996, the Company had not recorded a
provision for doubtful accounts. During the year ended December 31, 1996, the
Company recorded a provision of approximately $33,000 and the remaining
$307,000 represents provisions for doubtful accounts carried over from the
Apollo acquisition.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Valuation allowances are provided for finished goods in excess of what
is expected to be sold and raw materials which are no longer used in
manufacturing.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the straight-
line method based on estimated useful lives of the assets, which range from 3
to 20 years.
INTANGIBLE ASSETS
Intangible assets represent trade names for approximately $765,000 and
customer lists for approximately $254,000 and are amortized on a straight-line
basis over the expected period to be benefitted of 15 years. The Company
reviews the impairment of intangible assets as well as other long-lived assets
whenever changes in circumstances indicate that the carrying amount of such
assets may have been impaired which is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the impairment to
be recognized is measured by the amount by which the carrying amount of the
assets exceed the fair value of the assets.
REVENUE RECOGNITION
The Company recognizes sales upon shipment to customers.
RESEARCH AND DEVELOPMENT EXPENSES
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred. The amount charged against operations in 1996 was
approximately $220,000, which is included in selling, general and
administrative expenses.
TAXES PAYABLE
Taxes payable consist of employee withheld payroll taxes, of approximately
$359,000, for employees based in the United Kingdom. Additionally, as a part
of the purchase agreement of the Apollo entities (note 2) the Company is
obligated to pay income taxes of approximately $279,000 for the entities
domiciled in the United Kingdom for earnings prior to the acquisition.
Therefore, taxes payable were included as an increase in the cost of the
Apollo entities.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method
whereby deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in 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.
F-13
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ADVERTISING
The Company expenses advertising costs when incurred. Advertising expenses
recognized in the year ended December 31, 1996 approximated $335,000 and are
included in selling, general and administrative expenses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FOREIGN EXCHANGE RISK AND FINANCIAL INSTRUMENTS
The accounts of the Company's foreign subsidiaries are measured using the
local currency as the functional currency. For those operations, assets and
liabilities are translated at period end exchange rates. Revenue and expense
accounts are translated at average monthly exchange rates. Net gains or losses
resulting from translation are excluded from results of operations and
accumulated as a separate component of stockholders' equity. Gains and losses
from foreign currency transactions are included in operations as incurred.
The Company enters into forward foreign exchange contracts on certain
foreign forward delivery commitments. Generally, open forward delivery
commitments are marked to market at the end of each accounting period and
corresponding gains and losses are recognized in other income (expense).
NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of shares
outstanding during the year as adjusted for subsequent stock splits.
RECLASSIFICATIONS
Certain reclassifications have been made to conform to the June 30, 1997
presentation.
(2) ACQUISITIONS
On September 18, 1996, the Company acquired three affiliated entities, TI
Apollo Limited, a United Kingdom company, TI Reynolds 531 Limited, a United
Kingdom company, and Apollo Golf, Inc., a United States company, (the "Apollo
Entities") and a manufacturing facility for total consideration of 3,284,702
Pound Sterling (PS) ($5,135,305 U.S.) in cash. The transaction was accounted
for by the purchase method. The purchase price was allocated to monetary
current assets and liabilities based on the fair values and the remainder to
property, plant and equipment, which resulted in property, plant and equipment
being recorded at less than the appraised value. Accordingly, no goodwill was
recorded from this acquisition. According to the purchase agreement, the
seller has indemnified the Company for five years for environmental
obligations and related costs up to 500,000 PS. As a result of an independent
environmental evaluation, no charges are expected to be incurred in
conjunction with remediation of property. Therefore the indemnification is not
considered to be an asset and was not included in the purchase price
allocation by the Company.
Certain assets and liabilities of the acquired entities have been stated at
management's best estimate of fair value which may be adjusted once better
information becomes available. Once determined, the purchase price and related
allocations may be adjusted. Management believes any adjustments made to the
purchase price will not materially impact the Company's operations and
financial position.
On March 27, 1997, the Company established a new entity, Sierra Materials,
LLC ("Sierra"). Sierra is 80% owned by the Company and 20% owned by two
individuals. Sierra was established to acquire Cape Composites, Inc. (d/b/a
Sierra Materials). Sierra Materials is a supplier of graphite and other
advanced composite materials for use in the sports and recreational markets.
This acquisition of Sierra Materials coincided with the formation of Sierra on
March 27, 1997. The transaction was accounted for by the purchase method and
the shares of Sierra Materials are pledged as collateral for certain
outstanding debt, amounting to approximately $650,000 and $534,000 at March
27, 1997 and June 30, 1997, respectively, of Sierra Materials which must be
paid or
F-14
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
refinanced by the Company prior to September 23, 1997. The personal guarantees
of the prior stockholders of Sierra Materials must be removed by the Company
prior to September 23, 1997 or the Shares of Sierra Materials will revert back
to the previous owners of Sierra Materials. No cash was paid and no goodwill
was recorded as a result of this acquisition.
On April 1, 1997, the Company acquired all of the outstanding stock of
Pentiumatics Sdn. Bhd. ("Pentiumatics"), a Southeast Asian entity whose
principal operations have not commenced. The principal operations of
Pentiumatics will be the extrusion of various metals which will be sold to
third parties, primarily for the manufacture of sporting goods. The
acquisition has been accounted for by the purchase method. Consideration for
Pentiumatics was approximately $200,000 cash and no goodwill was recorded.
The following unaudited pro forma financial information for the years ended
December 31, 1995 and 1996 present the combined results of operations of the
Company and the Apollo Entities as if the acquisition had occurred as of the
beginning of 1995 and 1996, after giving effect to certain adjustments,
including amortization of intangible assets, reduced depreciation expense, and
related income tax effects. The following unaudited pro forma financial
information for the six months ended June 30, 1996 and 1997 presents the
combined results of operations of the Company and Sierra Materials as if the
acquisition had occurred as of the beginning of 1996 and 1997. The pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company, the Apollo Entities and Sierra
Materials constituted a single entity during such periods.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------------
1995 1996 1996 1997
------------ ----------- --------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net sales..................... $ 22,280,546 23,522,105 9,672,897 13,683,116
============ =========== ========= ==========
Net loss...................... $ (699,869) (1,574,748) (355,702) (1,691,192)
============ =========== ========= ==========
Net loss per share............ $ (0.20) (0.46) (0.10) (0.49)
============ =========== ========= ==========
</TABLE>
Also, on September 18, 1996, the Company entered into an agreement to
acquire certain assets of Expedition Trading Company, LLC, a Utah Limited
Liability Company (Expedition). The Company established ICE*USA LLC, a
Colorado Limited Liability Company (ICE), in order to purchase certain
intangible assets from Expedition in exchange for consideration of $1.5
million, in the form of a note, and a 20% interest in ICE. The negotiated
terms of the transaction provided that the Company would own an 80% interest
in ICE and Expedition would own a 20% interest.
The $1.5 million unsecured obligation is payable to Expedition over six
years, and has been discounted at 15%. The present value is $1,018,750 as of
December 31, 1996. Expedition is entitled to receive a minimum payment of
$100,000 per year and a maximum of $200,000 per year through 2002. Annual
payment amounts are based on ICE sales. In 2003, the Company must pay
Expedition $1.5 million, less all amounts previously paid under the agreement.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Raw materials and supplies................ $ 804,113
Work-in-process........................... 1,082,239
Finished goods............................ 2,661,366
----------
4,547,718
Valuation allowance....................... (616,000)
----------
$3,931,718
==========
</TABLE>
F-15
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) NOTES PAYABLE TO STOCKHOLDER
The Company has outstanding notes payable to one of its stockholders in the
amount of $112,861 at December 31, 1996. The notes are unsecured and bear
interest rates ranging from 12% to 25% per annum. Interest is payable monthly
on the notes and any principal amounts outstanding are due in August 1998.
(5) NOTES PAYABLE TO BANKS
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Note payable under line of credit, variable interest rate of 1.5%
over the bank's prime rate
(7.5% at December 31, 1996), interest payable quarterly.......... $ 738,000
Note payable under line of credit, variable interest rate equal to
the bank's prime rate (8.25% at December 31, 1996), interest
payable monthly.................................................. 300,000
----------
$1,038,000
==========
</TABLE>
In September 1996, the Company entered into a Credit Facility Agreement
("credit facility") which provides for borrowings under a foreign line of
credit up to 750,000 PS ($1,285,000 U.S.) with an interest rate of 1.5% over
the bank's prime rate. The credit facility also provides for borrowings of up
to 400,000 PS ($685,000 U.S.) for spot and forward foreign exchange
transactions and borrowings of up to 120,000 PS ($205,000 U.S.) for customs
bonds. Amounts outstanding on the credit facility are secured by substantially
all Apollo Sports Holdings Ltd.'s assets. As of December 31, 1996, $431,000 PS
($738,000 U.S.) was outstanding under the credit facility. The credit facility
is due on demand and is subject to review in May 1998.
In December 1996, the Company entered into a Loan and Security Agreement
("line of credit") which provides for borrowings under a line of credit up to
a maximum of $500,000, with an interest rate equal to the bank's prime rate.
Amounts outstanding on the line of credit are secured by substantially all
assets of Apollo Golf, Inc. As of December 31, 1996, $300,000 was outstanding
under this line of credit. The line of credit expires on May 31, 1998.
(6) LEASES
The Company has noncancelable operating leases for offices and equipment
that expire in various years through 2001. Lease expense on these operating
leases amounted to approximately $61,000 and $14,669 for the years ended
December 31, 1996 and 1995, respectively.
At December 31, 1996, future minimum lease payments for operating leases are
as follows:
<TABLE>
<S> <C>
1997................................ $250,000
1998................................ 190,000
1999................................ 90,000
2000................................ 6,000
--------
$536,000
========
</TABLE>
F-16
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years
ended:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1996
----- --------
<S> <C> <C>
Current:
U.S. Federal............................................ $ -- --
United Kingdom.......................................... -- (16,000)
State................................................... -- --
----- --------
-- (16,000)
----- --------
Deferred:
U.S. Federal............................................ -- --
United Kingdom.......................................... -- 16,000
State................................................... -- --
----- --------
-- 16,000
----- --------
$ -- --
===== ========
</TABLE>
Actual income tax expense (benefit) differs from the amounts computed using
the U.S. statutory tax rate of 34% as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
--------- --------
<S> <C> <C>
Computed tax at the expected
statutory rate................................................ $(126,000) (317,000)
Increase (decrease) in in-
come taxes resulting from:
State tax, net of federal
benefit and state tax
credits..................................................... (12,000) (27,000)
Increase in valuation al-
lowance..................................................... 137,000 414,000
Other, net................................................... 1,000 (70,000)
--------- --------
Income tax expense......................................... $ -- --
========= ========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 142,000 480,000
Bad debts and inventory allowances..................... -- 111,000
--------- ---------
Total deferred tax assets............................ 142,000 591,000
Valuation allowance.................................... (142,000) (557,000)
--------- ---------
Net deferred tax assets.............................. -- 34,000
--------- ---------
Deferred tax liability--difference in book and tax bases
of property, plant and equipment from acquisition....... -- (460,000)
--------- ---------
Net deferred tax liability........................... $ -- (426,000)
========= =========
</TABLE>
F-17
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996, the Company has net operating loss carryforwards for
U.S. federal income tax purposes of $480,000 which are available to offset
future federal taxable income and expire in the following years. For the year
ended December 31, 1996, the Company generated negligible taxable income in
the U.K. All of the operating loss carryforwards were generated by U.S.
operations.
<TABLE>
<S> <C>
2009................................ $ 5,000
2010................................ 137,000
2011................................ 338,000
--------
$480,000
</TABLE>
At December 31, 1996, management does not believe it is more likely than not
that the Company will realize the benefits of a substantial portion of its
deferred tax assets and recognized a valuation allowance.
(8) COMMON STOCK AND PREFERRED STOCK
On June 11, 1997, the stockholders approved an increase in the authorized
number of shares of common stock from 1,000,000 shares to 25,000,000 shares.
Also on that date, the Board of Directors of the Company declared 3,450 to 1
stock split of the Company's common stock. In the accompanying financial
statements, all numbers of common shares and per share amounts have been
adjusted to reflect the common stock split retroactively. The stockholders
also authorized preferred stock. The total amount of preferred stock
authorized is 4,000,000 shares with none issued or outstanding.
(9) EMPLOYEE BENEFIT PLAN
Two of the Company's acquired subsidiaries participate in a multi-employer
defined benefit pension plan. The plan provides defined benefits to
substantially all salaried and hourly employees in these two subsidiaries.
Amounts charged to pension expense and contributed to the plan in 1996 were
$208,000. The Company is required to implement its own defined benefit plan
during 1997. In accordance with the purchase agreement on the transfer date of
the newly formed defined benefit plan, the amount of assets transferred from
the multi-employer plan will be equal to the benefit obligation of the
Company's employees based upon an actuarial report to be performed as of the
transfer date.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instrument equals the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The carrying amounts of certain of the Company's financial
instruments, including cash, trade accounts receivable and accounts payable
approximate fair value because of their short maturity. The fair value of
notes payable approximate the carrying value because of the short maturity of
these notes and because the notes bear interest at variable interest rates
which approximate market rates.
FOREIGN CURRENCY INSTRUMENTS
The fair value of the Company's foreign exchange contracts is estimated
based on quoted market prices of comparable contracts.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------
CARRYING FAIR
AMOUNT VALUE
------------------
<S> <C> <C>
Foreign exchange contracts............................ $ 191,306 191,306
========= ========
</TABLE>
F-18
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(11) OPERATING INFORMATION BY GEOGRAPHIC REGION
The Company's operations are summarized by geographic region as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Net sales:
United Kingdom............................................ $ 2,499,142
United States............................................. 2,953,975
-----------
$ 5,453,117
===========
Operating income (loss):
United Kingdom............................................ $ (722,000)
United States............................................. 212,713
-----------
(509,287)
General corporate expenses................................ (514,402)
-----------
$(1,023,689)
===========
Identifiable assets:
United Kingdom............................................ $ 7,950,943
United States, excluding corporate........................ 3,698,341
Corporate................................................. 149,625
-----------
$11,798,909
===========
</TABLE>
Operating income (loss) represents net sales less operating expenses. In
computing operating loss none of the following items have been added or
deducted: interest expense, gain (losses) on forward exchange contracts,
income taxes and minority interest.
(12) COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
UNION AGREEMENTS
Substantially all of the employees of the Apollo Entities are unionized
under various contracts which are periodically renegotiated.
(13) SUBSEQUENT EVENTS
On March 27, 1997, the Company established a new entity, Sierra Materials,
LLC ("Sierra"). Sierra is 80% owned by the Company and 20% owned by two
individuals. Sierra was established to acquire Cape Composites, Inc. (d/b/a
"Sierra Materials"). The shares of Sierra Materials are pledged as collateral
for certain outstanding debt of approximately $650,000 of Sierra Materials
which must be paid or the personal guarantees of the prior stockholders of
Sierra Materials must be removed prior to September 27, 1997 or the shares of
Sierra Materials will revert to the previous owners of Sierra Materials.
F-19
<PAGE>
COYOTE SPORTS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 1, 1997, the Company acquired all of the outstanding stock of
Pentiumatics Sdn. Bhd. ("Pentiumatics"), a Southeast Asian entity whose
principal operations have not commenced. The principal operations of
Pentiumatics will be the extrusion of various metals which will be sold to
third parties, primarily for the manufacture of sporting goods. The
consideration for Pentiumatics was equal to approximately $200,000 cash.
Pentiumatics is included in the Company's consolidated financial statements
beginning April 1, 1997. Subsequent to the acquisition the majority
stockholders contributed additional capital to the Company of approximately
$2,200,000. In June of 1997, Insular Mart Sdn Bhd, a Malaysian company,
contributed approximately $600,000 into Pentiumatics resulting in an ownership
interest of 23%.
On April 4, 1997, the Company entered into two secured promissory notes with
lenders. The amounts of the notes are $1,355,000 and $145,000 and are due on
June 16, 1997, or they may be extended to the earlier of December 31, 1997 or
five days subsequent to the Company completing an initial public offering. The
interest rates on the notes are 8% and may be increased if the Company
defaults on the terms of the notes. As additional consideration for the
lenders making the notes, the Company will also issue 75,000 shares of the
Company's common stock at the initial public offering price for no additional
consideration and warrants to purchase 125,000 shares of the Company's common
stock subsequent to the Company's initial public offering. Accordingly, the
Company recorded debt financing costs of approximately $550,000 in other
income (expense) for the period ending June 30, 1997. The notes are secured by
a Stock Pledge Agreement whereby the assets of the Company in Apollo Golf,
Inc. and in Apollo Sports Holdings are pledged as collateral. In addition, the
notes are secured by the personal guaranty of two of the stockholders of the
Company.
The minority stockholders of Pentiumatics loaned the Company $815,602 in
June 1997. The note bears interest at 5 percent. Principal is due July 25,
2002.
The Company's 1997 Stock Option Plan (the "Option Plan") was adopted by the
Board of Directors and stockholders on June 10, 1997. The Option Plan provides
for the grant of options to purchase up to 500,000 shares of the Company's
common stock. Stock options granted under the Option Plan may be either
incentive stock options granted to employees, or nonstatutory stock options,
granted to employees, non-employee directors or consultants of the Company.
The Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee has full discretionary authority,
subject to certain restrictions, to determine the number of shares for which
incentive stock options and nonstatutory stock options may be granted and the
individuals to whom, and the times at which, the exercise prices and vesting
requirements for which options will be granted. No options have been granted
under the Option Plan.
Subsequent to June 30, 1997, the Company retired 850,000 shares of common
stock.
On August 4, 1997, the Company entered into a note payable with one of its
stockholders in the amount of $87,659. The note is unsecured and bears
interest at 12% per annum. Interest is payable monthly on the note and any
principal amounts outstanding are due in October 1999.
In August 1997 the Company borrowed $285,000 from an unrelated third party.
Principal is repayable on demand. Interest is agreed to as 8,000 shares of
common stock in the Company to be transferred equally from the Chief Executive
Officer and the Chief Operating Officer.
(14) RESTATEMENT
The Company has restated inventory, cost of goods sold and accumulated
deficit by $308,909 as the elimination of intercompany profits in inventory
was incorrectly stated as of December 31, 1996.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Coyote Sports, Inc.
We have audited the accompanying combined balance sheets of TI Apollo
Limited, Apollo Golf, Inc. and TI Reynolds 531 Limited (collectively the
Apollo Entities) as of December 31, 1995 and September 30, 1996, and the
related combined statements of operations, stockholders' equity and cash flows
for the year ended December 31, 1995 and for the nine months ended September
30, 1996. These combined financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of TI Apollo
Limited, Apollo Golf, Inc. and TI Reynolds 531 Limited (collectively the
Apollo Entities) as of December 31, 1995 and September 30, 1996, and the
results of their operations and their cash flows for the year ended December
31, 1995 and for the nine months ended September 30, 1996, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Boulder, Colorado
June 5, 1997, except
for Note 10 which
is as of August 1, 1997
F-21
<PAGE>
TI APOLLO LIMITED, APOLLO GOLF, INC.
AND TI REYNOLDS 531 LIMITED
COMBINED BALANCE SHEETS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash............................................. $ 1,214,407 114,757
Trade accounts receivable, less allowance for
doubtful accounts of $265,000 in 1995 and
$125,000 in 1996................................ 2,736,164 3,086,843
Inventories (as restated, note 10)............... 3,710,391 3,243,873
Prepaid expenses and other assets................ 282,939 204,761
----------- ----------
Total current assets........................... 7,943,901 6,650,234
----------- ----------
Property, plant and equipment:
Machinery and equipment.......................... 10,269,054 10,438,190
Furniture and fixtures........................... 578,000 582,000
----------- ----------
10,847,054 11,020,190
Less accumulated depreciation.................... (7,843,819) (8,320,485)
----------- ----------
Net property, plant and equipment.................. 3,003,235 2,699,705
----------- ----------
$10,947,136 9,349,939
=========== ==========
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Notes payable to Former Parent................... $ 688,000 1,138,000
Accounts payable................................. 2,505,197 1,623,546
Taxes payable.................................... 947,000 575,000
Accrued expenses................................. 942,111 1,398,577
Dividends payable................................ 832,000 --
----------- ----------
Total current liabilities...................... 5,914,308 4,735,123
----------- ----------
Deferred tax liability............................. 540,000 525,000
----------- ----------
Total liabilities.............................. 6,454,308 5,260,123
Stockholders' equity
Common stock..................................... 1,600,057 2,292,057
Additional paid-in capital....................... 4,480,943 3,800,943
Accumulated deficit (as restated, note 10)....... (1,575,172) (2,008,184)
Foreign currency translation adjustment.......... (13,000) 5,000
----------- ----------
Total stockholders equity...................... 4,492,828 4,089,816
----------- ----------
Commitments and contingencies (notes 3, 4, 6 and
9)................................................ $10,947,136 9,349,939
=========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-22
<PAGE>
TI APOLLO LIMITED, APOLLO GOLF, INC.
AND TI REYNOLDS 531 LIMITED
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -----------------
<S> <C> <C>
Net sales...................................... $ 22,280,546 14,787,052
Cost of goods sold............................. (16,342,961) (10,789,428)
------------ -----------
Gross profit................................. 5,937,585 3,997,624
Selling, general and administrative expenses... (5,493,276) (3,997,959)
------------ -----------
Operating income (loss)...................... 444,309 (335)
------------ -----------
Other income (expense):
Interest expense, net........................ (224,305) (238,677)
Gains (losses) on forward exchange contracts,
net......................................... (126,000) 54,000
------------ -----------
(350,305) (184,677)
------------ -----------
Income (loss) before income taxes............ 94,004 (185,012)
Income tax expense............................. (507,000) (248,000)
------------ -----------
Net loss..................................... $ (412,996) (433,012)
============ ===========
</TABLE>
See accompanying notes to combined financial statements.
F-23
<PAGE>
TI APOLLO LIMITED, APOLLO GOLF, INC.
AND TI REYNOLDS 531 LIMITED
COMBINED STATEMENTS OF STOCKHOLDERS EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
FOREIGN
ADDITIONAL CURRENCY TOTAL
COMMON COMMON COMMON PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS
STOCK(1) STOCK(2) STOCK(3) CAPITAL DEFICIT ADJUSTMENT EQUITY
-------- --------- -------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES JANUARY 1, 1995
(as restated, note
10).................... $1,000 1,521,427 77,630 4,518,838 (1,162,176) (5,000) 4,951,719
Contributed Capital..... -- -- -- 808,105 -- -- 808,105
Dividends declared...... -- -- -- (846,000) -- -- (846,000)
Net loss................ -- -- -- -- (412,996) -- (412,996)
Foreign currency
translation
adjustment............. -- -- -- -- -- (8,000) (8,000)
------ --------- ------ --------- ---------- ------- ---------
BALANCES DECEMBER 31,
1995 $1,000 1,521,427 77,630 4,480,943 (1,575,172) (13,000) 4,492,828
====== ========= ====== ========= ========== ======= =========
Contributed capital..... -- 692,000 -- 12,000 -- -- 704,000
Dividends declared...... -- -- -- (692,000) -- -- (692,000)
Net loss................ -- -- -- -- (433,012) -- (433,012)
Foreign currency
translation
adjustment............. -- -- -- -- -- 18,000 18,000
------ --------- ------ --------- ---------- ------- ---------
BALANCES SEPTEMBER 30,
1996 $1,000 2,213,427 77,630 3,800,943 (2,008,184) 5,000 4,089,816
====== ========= ====== ========= ========== ======= =========
</TABLE>
- --------
(1) Common stock, no par value. Authorized 1,000 shares, 100 issued and
outstanding.
(2) Common stock, .25 Pound Sterling (PS) ($.39 at December 31, 1995 and
September 30, 1996) par value. Authorized 5,800,000 shares, 5,719,688 (par
value partially paid to .025 PS) and 5,719,688 (fully paid par value)
shares issued and outstanding at December 31, 1995 and September 30, 1996,
respectively.
(3) Common stock, .02 PS ($.03 at December 31, 1995 and September 30, 1996) par
value. Authorized 14,040,040 shares, 10,000,000 (par value partially paid
to .005 PS) shares issued and outstanding.
See accompanying notes to combined financial statements.
F-24
<PAGE>
TI APOLLO LIMITED, APOLLO GOLF, INC.
AND TI REYNOLDS 531 LIMITED
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $ (412,996) (433,012)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation.................................. 395,600 476,666
Deferred income taxes......................... (4,000) (15,000)
Changes in operating assets and liabilities:
Trade accounts receivable, net.............. 540,928 (350,679)
Inventories................................. (124,189) 466,518
Prepaid expenses and other assets........... (174,032) 78,178
Accounts payable............................ (305,427) (881,651)
Taxes payable............................... (179,000) (372,000)
Accrued expenses............................ (692,636) 456,466
----------- ----------
Net cash used in operating activities..... (955,752) (574,514)
----------- ----------
Cash flows used in investing activities--purchase
of property, plant and equipment................. (192,144) (173,136)
Cash flows from financing activities:
Proceeds from notes payable to Former Parent.... 688,000 450,000
Dividends paid.................................. (1,962,000) (832,000)
Capital contributions........................... 808,105 12,000
----------- ----------
Net cash used in financing activities..... (465,895) (370,000)
----------- ----------
Effect of exchange rate changes on cash........... (8,000) 18,000
----------- ----------
Net decrease in cash...................... (1,621,791) (1,099,650)
----------- ----------
Cash at beginning of period....................... 2,836,198 1,214,407
----------- ----------
Cash at end of period............................. $ 1,214,407 114,757
=========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest........................................ $ 11,050 53,788
=========== ==========
Income taxes.................................... $ 1,191,768 --
=========== ==========
</TABLE>
See accompanying notes to combined financial statements.
F-25
<PAGE>
TI APOLLO LIMITED, APOLLO GOLF, INC. AND TI REYNOLDS 531 LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND SEPTEMBER 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES AND BASIS OF
PRESENTATION
NATURE OF BUSINESS AND BASIS OF PRESENTATION
TI Apollo Limited ("TAL"), Apollo Golf, Inc. ("AGI") and TI Reynolds 531
Limited ("TRL") (collectively, the "Apollo Entities", or "Company") formerly
wholly owned subsidiaries of TI Group plc ("Former Parent") are engaged in the
manufacture and sales of sporting goods products. These sporting good products
include steel golf shafts (under the name Apollo) and bicycle frame tubes
(under the name Reynolds). The Company sells its golf shafts and bicycle frame
tubes in wholesale markets and to assemblers of finished products primarily in
Europe and the United States. The Company's golf shaft business accounted for
approximately 88% of the Company's revenue for the nine months ended September
30, 1996. If the demand for golf products were to experience a significant
change it could have a significant impact on the financial performance of the
Apollo Entities.
The Apollo Entities have been combined as a result of the acquisition of
these entities by Coyote Sports, Inc. as described in note 11. These combined
financial statements are presented on a historical cost basis and do not
include the effects of purchase accounting. The purchase price paid by Coyote
Sports, Inc., for the Apollo Entities was less than the net book value
recorded in the combined financial statements.
All significant intercompany balances and transactions have eliminated in
combination.
ACCOUNTS RECEIVABLE
The provision for doubtful accounts was $269,167 and $101,003 and
uncollectible accounts charged to the allowance were $262,189 and $240,787 for
the year ended December 31, 1995 and the nine months ended September 30, 1996,
respectively. The allowance for doubtful accounts was $258,661 as of December
31, 1994.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Valuation allowances are provided for finished goods in excess of what
is expected to be sold and raw materials which are no longer used in
manufacturing.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Maintenance and repairs are
charged to expense as incurred. Depreciation is computed using the straight-
line method based on estimated useful lives of the assets, which range from 3
to 20 years.
DIVIDENDS
Dividends declared and paid are based on the operating results of TAL and TRL.
There is no restriction from paying dividends in loss years.
REVENUE RECOGNITION
The Company recognizes sales upon shipment to customers.
RESEARCH AND DEVELOPMENT EXPENSES
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred. The amount charged against operations during the year
ended December 31, 1995 and the nine months ended September 30, 1996 was
approximately $665,000 and $407,000, respectively, which is included in
selling, general and administrative expenses.
F-26
<PAGE>
TI APOLLO LIMITED, APOLLO GOLF, INC. AND TI REYNOLDS 531 LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INCOME TAXES
The Apollo Entities account for income taxes under the asset and liability
method whereby deferred tax assets and liabilities are recognized for future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in 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.
In accordance with FAS 109, current and deferred income taxes were allocated
to the combined entities as if the combined entity was a separate taxpayer
independent of other TI Group plc entities.
ADVERTISING
The Apollo Entities expense advertising costs when incurred. Advertising
expense recognized in the year ended December 31, 1995 and the nine months
ended September 30, 1996 approximated $1,029,000 and $581,000, respectively,
and is included in selling, general and administrative expenses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FOREIGN EXCHANGE RISK AND FINANCIAL INSTRUMENTS
The accounts of TAL and TRL are measured using the local currency (Pound
Sterling) as the functional currency. For those operations, assets and
liabilities are translated at period end exchange rates. Revenue and expense
accounts are translated at average monthly exchange rates. Net gains or losses
resulting from translation are excluded from results of operations and
accumulated as a separate component of stockholder's equity. Gains and losses
from foreign currency transactions are included in operations as incurred.
The Company enters into forward foreign exchange contracts on certain
foreign forward delivery commitments. Generally, open forward delivery
commitments are marked to market at the end of each accounting period and
corresponding gains and losses are recognized in other income (expense).
RECLASSIFICATIONS
Certain reclassifications have been made to conform to the September 30,
1996 presentation.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Raw materials and supplies..................... $1,051,452 514,094
Work-in-progress............................... 766,022 866,239
Finished goods................................. 2,323,847 2,384,470
---------- ---------
4,141,321 3,764,803
Valuation allowance............................ (430,930) (520,930)
---------- ---------
$3,710,391 3,243,873
========== =========
</TABLE>
F-27
<PAGE>
TI APOLLO LIMITED, APOLLO GOLF, INC. AND TI REYNOLDS 531 LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(3) NOTES PAYABLE TO FORMER PARENT
The Former Parent had a senior bank facility which was used to fund the
working capital needs of the Apollo Entities, similar to a line of credit.
Amounts outstanding on the facility were the obligation of the Former Parent.
Amounts payable by the Apollo Entities were payable to the Former Parent.
These amounts were paid prior to the completion of the acquisition in note 11.
(4) LEASES
The Company has noncancelable operating leases for offices and equipment
that expire in various years through 2000. Lease expense on these operating
leases amounted to approximately $193,000 and $134,000 for the year ended
December 31, 1995 and the nine months ended September 30, 1996, respectively.
At September 30, 1996, future minimum lease payments for operating leases
are as follows:
<TABLE>
<S> <C>
1997................................ $198,701
1998................................ 176,469
1999................................ 94,183
2000................................ 9,178
--------
$478,531
========
</TABLE>
(5) INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years
ended:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Current:
U.S. Federal................................. $ -- --
United Kingdom............................... 543,000 263,000
State........................................ -- --
-------- -------
543,000 263,000
-------- -------
Deferred:
U.S. Federal................................. -- --
United Kingdom............................... (36,000) (15,000)
State........................................ -- --
-------- -------
(36,000) (15,000)
-------- -------
$507,000 248,000
======== =======
</TABLE>
F-28
<PAGE>
TI APOLLO LIMITED, APOLLO GOLF, INC. AND TI REYNOLDS 531 LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Actual income tax expense (benefit) differs from the amounts computed using
the U.S. statutory tax rate of 34% as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Computed tax at the expected statutory rate.. $ 32,000 (63,000)
Increase (decrease) in income taxes from:
State tax, net of federal benefit and tax
credits................................... (16,000) (20,000)
Meals and entertainment expenses........... 22,000 19,000
Correction of a previously filed tax
return.................................... -- 80,000
Increase in valuation allowance............ 448,000 264,000
Other, net................................. 21,000 (32,000)
-------- -------
Income tax expense....................... $507,000 248,000
======== =======
</TABLE>
Income tax expense is a result of income generated in the United Kingdom
without the benefit of the utilization of net operating losses generated in
the United States.
The tax effects of temporary differences which give rise to significant
portions of deferred tax assets and deferred tax liabilities are presented
below:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30
1995 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............. $ 294,000 524,000
Bad debts and inventory allowances........... 201,000 227,000
--------- --------
Total deferred tax assets.................. 495,000 751,000
Valuation allowance............................ (448,000) (712,000)
--------- --------
Net deferred tax assets.................... 47,000 39,000
--------- --------
Deferred tax liability--difference in book and
tax basis of property, plant and equipment
from acquisition.............................. (587,000) (564,000)
--------- --------
Net deferred tax liability................. $(540,000) (525,000)
========= ========
</TABLE>
At September 30, 1996, management does not believe it is more likely than
not that the Apollo Entities will realize the benefits of a substantial
portion of its deferred tax assets and recognized a valuation allowance.
(6) EMPLOYEE BENEFIT PLAN
The Apollo Entities participate in a multi-employer defined benefit pension
plan. The plan provides defined benefits to substantially all salaried and
hourly employees in these two subsidiaries. Amounts charged to pension expense
and contributed to the plan during the year ended December 31, 1995 and the
nine months ended September 30, 1996 were $30,996 and $20,250, respectively.
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument equals the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The carrying amounts of certain of the Apollo Entities' financial
instruments, including cash, trade accounts receivable and accounts payable
approximate fair value because of their short maturity.
F-29
<PAGE>
TI APOLLO LIMITED, APOLLO GOLF, INC. AND TI REYNOLDS 531 LIMITED
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOREIGN CURRENCY INSTRUMENTS
The fair value of the Apollo Entities' foreign exchange contracts is
estimated based on quoted market prices of comparable contracts.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------
CARRYING FAIR
AMOUNT VALUE
---------- --------
<S> <C> <C>
Foreign exchange contracts............................ $ 80,252 80,252
========= ========
</TABLE>
(8) OPERATING INFORMATION BY GEOGRAPHIC REGION
The Apollo Entities' operations are summarized by geographic region as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1996
-------------
<S> <C>
Net Sales:
United Kingdom............................................ $ 6,788,333
United States............................................. 7,998,719
-----------
14,787,052
===========
Operating income (loss):
United Kingdom............................................ (1,349,667)
United States............................................. 1,349,332
-----------
(335)
===========
Identifiable assets:
United Kingdom............................................ 6,321,000
United States............................................. 3,260,067
-----------
$ 9,581,067
===========
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
LITIGATION
The Apollo Entities are involved in various claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Apollo Entities' combined financial position, results of operations or
liquidity.
UNION AGREEMENTS
Substantially all of the employees of TAL and TRL are unionized under
various contracts which are periodically renegotiated.
(10) RESTATEMENT
The Company has restated the January 1, 1995 inventory balance and the
accumulated deficit by $231,128 as of January 1, 1995 as the elimination of
intercompany profits in inventory was incorrectly stated as of January 1,
1995.
(11) ACQUISITION BY COYOTE SPORTS, INC.
On September 18, 1996, all of the outstanding shares of the Apollo Entities
were sold to Coyote Sports, Inc. In addition to these shares of the Apollo
Entities, Coyote Sports, Inc. acquired a manufacturing facility which is used
by TI Apollo Limited to manufacture golf shafts.
F-30
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE IN-
FORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CON-
NECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH IN-
FORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OF-
FER TO SELL, OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE AFFAIRS OF THE COMPANY SINCE THAT DATE HEREOF OR 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
Use of Proceeds.......................................................... 15
Capitalization........................................................... 16
Dividend Policy.......................................................... 16
Dilution................................................................. 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition & Results of
Operations.............................................................. 19
Business................................................................. 26
Management............................................................... 38
Certain Transactions..................................................... 42
Private Placement........................................................ 43
Principal Stockholders................................................... 44
Additional Registered Securities......................................... 44
Description of Securities................................................ 45
Shares Eligible for Future Sale.......................................... 46
Underwriting............................................................. 48
Legal Matters............................................................ 49
Experts.................................................................. 49
Available Information.................................................... 49
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,050,000
SHARES OF COMMON STOCK
COYOTE SPORTS, INC.
[LOGOS OF REYNOLDS, APOLLO, ICE.USA APPEAR HERE]
---------------
PROSPECTUS
---------------
COHIG & ASSOCIATES, INC.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Incorporation and Bylaws of the Company provide that the
Company shall indemnify to the fullest extent permitted by Nevada law any
person who was or is a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, by reason of the
fact that he or she is or was a director or officer of the Company or is or
was serving at the request of the Company in any capacity and in any other
corporation, partnership, joint venture, trust or other enterprise. The Nevada
Business Corporation Act (the "Nevada Act") permits the Company to indemnify
an officer or director who was or is a party or is threatened to be made a
party to any proceeding because of his or her position, if the officer or
director acted in good faith and in a manner he or she reasonably believed to
be in the best interests of the Company or, if such officer or director was
not acting in an official capacity for the Company, he or she reasonably
believed the conduct was not opposed to the best interests of the Company.
Indemnification is mandatory if the officer or director was wholly successful,
on the merits or otherwise, in defending such proceeding. Such indemnification
(other than as ordered by a court) shall be made by the Company only upon a
determination that indemnification is proper in the circumstances because the
individual met the applicable standard of conduct. Advances for such
indemnification may be made pending such determination. Such determination
shall be made by a majority vote of a quorum consisting of disinterested
directors or of a committee of at least two disinterested directors, or by
independent legal counsel or by the shareholders.
In addition, the Articles of Incorporation provide for the elimination, to
the extent permitted by Nevada law, of personal liability of directors to the
Company and its shareholders for monetary damages for breach of fiduciary duty
as directors. The Nevada Act provides for the elimination of personal
liability of directors for damages occasioned by breach of fiduciary duty,
except for liability based on the director's duty of loyalty to the Company,
liability for acts or omissions not made in good faith, liability for acts or
omissions involving intentional misconduct, liability based on payments of
improper dividends, liability based on violations of state securities laws,
and liability for acts occurring prior to the date such provision was added.
See the second and third paragraphs of Item 28 below for information
regarding the position of the Securities and Exchange Commission with respect
to the effect of any indemnification for liabilities arising under the
Securities Act.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses to be borne
by the Company in connection with the offering described in the Registration
Statement, other than the underwriting discount.
<TABLE>
<S> <C>
Registration Fee................................................... $ 2,546
National Association of Securities Dealers, Inc. Fee............... 2,262
Non-Accountable Expense Allowance.................................. 181,125
Legal Fees and Expenses............................................ 260,000
Accounting Fees and Expenses....................................... 300,000
Printing and Engraving Expenses.................................... 70,000
Blue Sky Fees and Expenses......................................... 8,000
Underwriters' Legal Fees for Blue Sky.............................. 30,000
Transfer Agent's and Registrar's Fees.............................. 1,000
Nasdaq Listing Fees................................................ 10,000
Miscellaneous Expenses............................................. 5,067
--------
Total............................................................ $870,000
========
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant sold the following unregistered securities during the past
three fiscal years.
The Registrant sold 700 shares of its common stock to an individual who is
no longer a shareholder of the Company and 300 shares of its common stock to
Mel S. Stonebraker, who together constituted the two founders of the Company
in February 1995 and April 1995, respectively. Subsequently, the individual
who is no longer a shareholder of the Company transferred his 700 shares of
Common Stock to a third party ("former majority shareholder"). In August 1996,
the former majority shareholder and Mel S. Stonebraker transferred 50 and 100
shares, respectively, of the Company's Common Stock to James M. Probst. On
June 11, 1997, the Registrant effected a 3,450 to 1 forward stock split of its
Common Stock, resulting in a total of 3,450,000 shares issued and outstanding
as of that date. As a result of such forward stock split, the former majority
shareholder owned 2,070,000 shares, Mel S. Stonebraker owned 862,500 shares
and James M. Probst owned 517,500 shares of the Registrant's Common Stock.
On July 9, 1997, the former majority shareholder sold all of his shares of
Common Stock to Mel S. Stonebraker and James M. Probst (1,035,000 shares to
each) for separate promissory notes of $4,250,000 from each of Messrs.
Stonebraker and Probst. As a result of this transaction, Messrs. Stonebraker
and Probst currently own as of the date of this Registration Statement all of
the outstanding shares of the Registrant's Common Stock.
On July 23, 1997, Messrs. Stonebraker and Probst returned 467,500 and
382,500 shares of Common Stock, respectively, to the Registrant pursuant to a
Share Return Agreement. Following such share return, Mr. Stonebraker owned
1,430,000 shares and Mr. Probst owned 1,170,000 shares of the Registrant's
Common Stock.
The Registrant believes that the transactions were private in nature and
were exempt from the registration requirements of Section 5 of the Securities
Act of 1933 (the "Securities Act") by virtue of the exemptions contained in
Section 4(2) of the Securities Act and the so-called 4 (1-1/2) exemption from
the registration requirements under the Securities Act.
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
1.2 Representative's Warrant Agreement.
3.1 Restated Articles of Incorporation of the Company, as amended.**
3.2 Certificate of Amendment to Articles of Incorporation**
3.3 Bylaws of the Company, as amended.**
4.1 Form of certificate for shares of Common Stock.**
5.1 Opinion of Chrisman, Bynum & Johnson, P.C.
10.1 TI Group plc and Apollo Sports Holding Ltd. and Coyote Sports Inc.
Agreement for the sale and purchase of the whole of the issued share
capitals of TI Apollo Limited, Apollo Golf Inc. and TI Reynolds 531
Limited, dated September 18, 1996.**
10.2 ICE*USA LLC Agreement between Coyote Sports, Inc. and Expedition
Trading Company dated September 18, 1996.**
10.3 Agreement between David B. Abrams, Coyote Sports, Inc. and Mark H.
Snyder (regarding Sierra Materials, Inc), dated March 27, 1997.**
10.4 Mel S. Stonebraker Employment Agreement.**
10.5 Mel S. Stonebraker Change in Control Agreement.**
10.6 James M. Probst Employment Agreement.**
10.7 James M. Probst Change in Control Agreement.**
10.8 Agreement dated March 1, 1997 between Sportma Corporation Berhad and
Apollo Golf, Inc.**
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
10.9 Paul Andrew Taylor Employment Agreement.**
10.10 1997 Stock Option Plan.**
10.11 Transfer of Oldbury Property located in UK from TI Reynolds Limited to
Apollo Sports Holdings Limited dated September 18, 1996.**
10.12 Agreement for Sale and Purchase of Freehold Property at Oldbury, West
Midlands, dated September 17, 1996, between TI Reynolds Limited and TI
Group plc.**
10.13 Amended and Restated Secured Promissory Note between Deere Park
Capital Management, Inc. and Coyote Sports, Inc. dated May 4, 1997.**
10.14 Amended and Restated Secured Promissory Note between Steve Kerr and
Coyote Sports, Inc. dated May 4, 1997.**
10.15 Unlimited Continuing Guaranty between Deere Park Capital Management,
Inc. and Apollo Sports Holdings Limited dated May 4, 1997.**
10.16 Unlimited Continuing Guaranty between Deere Park Capital Management,
Inc. and Mel Stonebraker dated April 4, 1997.**
10.17 Unlimited Continuing Guaranty between Steve Kerr and Apollo Sports
Holdings Limited dated May 4, 1997.**
10.18 Stock Pledge Agreement between Deere Park Capital Management, Inc.,
Steve Kerr and Mel Stonebraker dated April 4, 1997.**
10.19 Stock Pledge Agreement between Deere Park Capital Management, Inc.,
Steve Kerr and Coyote Sports, Inc. dated April 4, 1997.**
10.20 Lease between Hamann-Chambers-Rumsey-Burns and Apollo Golf, Inc.
located in El Cajon, California.**
10.21 Lease between American National Bank and Trust Company of Chicago and
TI Steel Tube (USA) Inc. located in Cook County, Illinois.**
10.22 Lease between Coyote Sports, Inc. and Accent Properties located in
Boulder, Colorado.**
10.23 Lease between Hamann-Chambers-Rumsey-Burns and Apollo Golf, Inc.
located in San Diego, California.**
10.24 Purchase Agreement, dated July 23, 1997 between Pentiumatics SDN. BHD,
and Sportma Corporation Berhad.**
10.25 Share Return Agreement dated July 23, 1997 among Mel Stonebraker,
James Probst and Coyote Sports, Inc.**
10.26 Lease between Airport Business Commons and ICE*USA LLC dated October
22, 1996.**
10.27 Lease between Airport Business and ICE*USA LLC dated July 18, 1997.**
10.28 Agreement dated April 4, 1997, between Syarikat Larut Jaya Sdn. Bhd.
and Pentiumatics Sdn. Bhd.
10.29 Construction Agreement dated April 4, 1997, between Pentiumatics Sdn.
Bhd. and Syarikat Pembina Maju.
21.1 List of Subsidiaries of Company.**
ICE*USA LLC, a Colorado limited liability company
Sierra Materials, LLC (formerly known as Cape Composites, LLC), a
Colorado limited liability company
Pentiumatics SDN, BHD, a Malaysian company
Apollo Golf, Inc., a New Jersey corporation
Apollo Sports Holdings Ltd., a United Kingdom company
Reynolds Cycle Technology, Ltd., a United Kingdom company
Apollo Sports Technologies, Limited, a United Kingdom company.
23.1 Consent of KPMG Peat Marwick LLP.
23.2 Consent of KPMG Peat Marwick LLP.
23.3 Consent of Chrisman, Bynum & Johnson, P.C. (included in its opinion
filed as Exhibit 5.1).
24.1 Power of Attorney (included in signature page of original filing).**
</TABLE>
- --------
**Previously filed.
II-3
<PAGE>
ITEM 28. UNDERTAKINGS.
The undersigned small business issuer will 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
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in
the opinion of the Securities and Exchange 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 small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such indemnification
by it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
The undersigned small business issuer will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the small business issuer pursuant to Rule
424(b)(1), or (4) or 497(h) under the Securities Act as part of this
registration statement as of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) of this
section do not apply if the registration statement is on Form S-3, Form S-8
or Form F-3, and the information required to be included in a post-
effective amendment by those paragraphs is contained in periodic reports
filed with or furnished to the Commission by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements of filing on Form SB-2 and has caused this Amendment
to Registration Statement No. 333-29077 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Denver, State of
Colorado, on the 12th day of September 1997.
COYOTE SPORTS INC.
By: ___________________________
Mel S. Stonebraker,
President
<PAGE>
EXHIBIT 1.1
-----------
COYOTE SPORTS, INC.
UNDERWRITING AGREEMENT
_____________, 1997
Cohig & Associates, Inc.
6300 South Syracuse Way, Suite 430
Englewood, Colorado 80111
Gentlemen:
COYOTE SPORTS, INC. ("Company"), a Colorado corporation, hereby
confirms its agreement with you, as Representative, and with the other members
of the Underwriting Group as follows:
SECTION 1
DESCRIPTION OF OFFERING AND SHARES
----------------------------------
The Underwriting Group proposes to purchase from the Company in an
initial public offering ("Public Offering") a total of 1,050,000 shares of the
Company's $.001 par value common stock ("Shares"). The Company's $.001 par
value common stock when not referring specifically to the "Shares" shall be
referred to herein as the "Company's Common Stock." The Representative, either
on its own behalf or on behalf of the members of the Underwriting Group, will
have an overallotment option ("Overallotment Option") to purchase up to an
additional 157,500 Shares ("Overallotment Shares") exercisable for a period of
forty-five (45) days after the Effective Date (hereinafter defined) to cover
overallotments, which may occur during the Offering. The Company agrees to sell
to the Underwriting Group all of the Shares and the Company agrees to sell to
the Representative all or such portion of the Overallotment Shares under the
Overallotment Option to the extent exercised by the Representative from time to
time during the forty-five (45) day period following the Effective Date. The
Shares will initially be offered and sold to the public at a price of $5.00 for
each Share. Such price is referred to herein as the "Public Offering Price."
The Company's authorized and outstanding capitalization when the Public Offering
of the Shares is permitted to commence and at the Closing Date (hereinafter
defined) and at the Option Closing Date (hereinafter defined) will be as set
forth in the Registration Statement (hereinafter defined) and the Prospectus
(hereinafter defined) included therein.
<PAGE>
On the Effective Date, the Shares will be listed for quotation on the
NASDAQ Small Cap Market. The foregoing agreement by the Company is subject to
the Company's ability to meet the NASDAQ Small Cap Market maintenance
requirements on the Effective Date. In connection with the application for such
listing, the Company will furnish the Representative or legal counsel for the
Representative five (5) complete copies of the Registration Statement
(hereinafter defined) and all amendments thereto for filing with the NASD.
SECTION 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
---------------------------------------------
In order to induce the members of the Underwriting Group to enter into
this Agreement, the Company hereby represents and warrants to and agrees with
the members of the Underwriting Group as follows:
2.1 REGISTRATION STATEMENT AND PROSPECTUS. A registration statement
-------------------------------------
on Form SB-2 (File No. 333-29077) ("Registration Statement") with respect to the
Shares and the Representative's Warrants (hereinafter defined), including the
related Prospectus, copies of which have heretofore been delivered by the
Company to the Representative, has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended ("Act"), and the
rules and regulations ("Rules and Regulations") of the Commission thereunder,
and said Registration Statement has been filed with the Commission under the
Act; one or more amendments to said Registration Statement, copies of which have
heretofore been delivered to the Representative, has or have heretofore been
filed with the Commission; and the Company may file with the Commission on or
prior to the Effective Date additional amendments to said Registration
Statement, including the final Prospectus. As used in this Agreement, the term
"Registration Statement" refers to and means said Registration Statement and all
amendments thereto, including the Prospectus, all exhibits and all financial
statements, as it becomes effective; the term "Prospectus" refers to and means
the Prospectus included in the Registration Statement when it becomes effective;
and the term "Preliminary Prospectus" refers to and means any Prospectus
included in said Registration Statement before it becomes effective. The terms
"Effective Date" and "effective" refer to the date the Commission declares the
Registration Statement effective, pursuant to Section 8 of the Act.
2.2 ACCURACY OF REGISTRATION STATEMENT AND PROSPECTUS. The
-------------------------------------------------
Commission has not issued any order preventing or suspending the use of any
Preliminary Prospectus with respect to the Shares and each Preliminary
Prospectus has conformed in all material respects with the requirements of the
Act and the applicable Rules and Regulations of the Commission thereunder and to
the best of the Company's knowledge has not included at the time of filing any
untrue statement of a material fact or omitted to state a material fact
necessary to make the statements therein not misleading. When the Registration
Statement becomes effective and on the Closing Date and on the Option Closing
Date, (i) the Registration Statement and Prospectus and any further amendments
or supplements thereto will contain all statements which are required to be
stated therein in accordance with the Act and the Rules and Regulations
thereunder for the purposes of the proposed Public Offering of the Shares, (ii)
all
2
<PAGE>
statements of material fact contained in the Registration Statement and
Prospectus will be true and correct, and (iii) neither the Registration
Statement nor the Prospectus will include any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, the
Company does not make any representations or warranties as to information
contained in or omitted from the Registration Statement or the Prospectus in
reliance upon written information furnished on behalf of the members of the
Underwriting Group specifically for use therein.
2.3 FINANCIAL STATEMENTS AND DEFINITION OF SUBSIDIARIES. The
---------------------------------------------------
consolidated financial statements of the Company and its Subsidiaries together
with related schedules and notes as set forth in the Registration Statement and
Prospectus present fairly the financial position of the Company and its
Subsidiaries and the results of its operations and the changes in its financial
position at the respective dates and for the respective periods for which they
apply. The term "Subsidiaries" as used throughout this Agreement refers to (i)
Apollo Sports Holding Limited ("ASHL") whose issued and outstanding capital
stock is 100% owned by the Company; (ii) Apollo Sports Technologies Limited
("Apollo") whose issued and outstanding capital stock is 100% owned by ASHL;
(iii) Reynolds Cycle Technology Limited ("Reynolds"), whose issued and
outstanding capital stock is 100% owned by ASHL; (iv) Apollo Golf, Inc. ("Apollo
Golf") whose issued and outstanding capital stock is 100% owned by the Company;
(v) ICE*USA, LLC ("ICE") in which the Company owns of record and holds an 80%
interest; Sierra Materials, LLC ("Sierra Materials") in which the Company owns
an 80% interest and its Subsidiary and its 100% owned Subsidiary Cape
Composites, Inc.; (vii) Pentiumatics Sdn. Bhd., in which the Company owns
approximately 77% of the issued and outstanding capital stock and, (viii) any
other entity in which the Company shall have a controlling interest requiring
such entity to be reported as part of the Company's financial statements on a
consolidated or unconsolidated basis. Such financial statements have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods concerned except as otherwise stated
therein.
2.4 INDEPENDENT PUBLIC ACCOUNTANTS. The accountants which have
------------------------------
audited the consolidated financial statements of the Company and its
Subsidiaries filed or to be filed with the Commission as part of the
Registration Statement and Prospectus which are designated as audited financial
statements, are independent certified public accountants with respect to the
Company within the meaning of the Act and the Rules and Regulations thereunder.
2.5 NO CONTINGENT LIABILITIES AND NO MATERIAL ADVERSE CHANGE. Except
--------------------------------------------------------
as disclosed in the Registration Statement and Prospectus, neither the Company
nor any of its Subsidiaries have any contingent liabilities, obligations or
claims nor have they received threats of claims or regulatory action. Except as
may be reflected in or contemplated by the Registration Statement or the
Prospectus, subsequent to the dates as of which information is given in the
Registration Statement and Prospectus and prior to the Closing Date and the
Option Closing Date, (i) there shall not have been any material adverse change
in the condition, financial or otherwise, of the Company or its Subsidiaries or
in the business of the Company or its Subsidiaries; (ii) there shall not have
been any material adverse transaction
3
<PAGE>
entered into by the Company or any of its Subsidiaries; (iii) neither the
Company nor any of its Subsidiaries shall have incurred any material
obligations, contingent or otherwise, which are not disclosed in the Prospectus;
(iv) there shall not have been any change in the outstanding securities or long
term debt (except current payments) of the Company or any of its Subsidiaries;
(v) the Company has not and will not have paid or declared any dividends or
other distributions on its Common Stock or other securities; and (vi) there
shall not have been any change in the officers or directors of the Company.
2.6 NO DEFAULTS. Neither the Company nor any of its Subsidiaries is
-----------
in default under any of the contracts, leases, subleases, licenses, sublicenses
or any other agreements to which they are a party. Except as disclosed in the
Prospectus, neither the Company nor any of its Subsidiaries is in default, which
has not been waived, in the performance of any obligation, agreement or
condition contained in any debenture, note or other evidence of indebtedness or
any indenture or loan agreement. The execution and delivery of this Agreement,
the consummation of the transactions herein contemplated and the compliance with
the terms of this Agreement will not conflict with or result in a breach of any
of the terms, conditions or provisions of, or constitute a default under, the
charter, articles of association, articles of incorporation, as amended,
articles of organization, operating agreement or bylaws as amended, of the
Company or any of its Subsidiaries any note, indenture, mortgage, deed of trust
or other agreement or instrument to which the Company or any of its Subsidiaries
is a party or by which it, its Subsidiaries or any of their property is bound,
or any existing law, order, rule, regulation, writ, injunction or decree of any
government, governmental instrumentality, agency or body, arbitration tribunal
or court, domestic or foreign, having jurisdiction over the Company, its
Subsidiaries or their properties. The consent, approval, authorization or order
of any court or governmental instrumentality, agency or body is not required for
the consummation of the transactions herein contemplated except such as may be
required under the Act or under the blue sky or securities laws of any state or
jurisdiction.
2.7 INCORPORATION AND STANDING. The Company is and at the Closing
--------------------------
Date and at the Option Closing Date will be duly incorporated and validly
existing in good standing as a corporation under the state law of the Company's
state of incorporation with authorized and outstanding capital stock as set
forth in the Registration Statement and the Prospectus and with full power and
authority (corporate and other) to own its properties and conduct its business,
present and proposed, as described in the Registration Statement and Prospectus;
the Company has full power and authority to enter into this Agreement; and the
Company is duly qualified and in good standing as a foreign corporation in each
jurisdiction in which it owns or leases real property or transacts business
requiring such qualification. All of the Company's Subsidiaries are identified
and described in the Registration Statement. Each of the Company's Subsidiaries
is and at the Closing Date and at the Option Closing Date will be, duly
incorporated and validly existing in good standing as a corporation or limited
liability company under the state law of their respective state of
incorporation, formation or organization or, is validly existing as a
corporation under the foreign law in which such Subsidiary was chartered, or
otherwise formed or created, incorporated with authorized and outstanding
capital stock as set forth in the Registration Statement and the Prospectus and
with full power and authority
4
<PAGE>
(corporate and other) to own its property and conduct its business, present and
proposed, as described in the Registration Statement and Prospectus, and is duly
qualified and in good standing as a foreign corporation or limited liability
company in each jurisdiction in which it owns or leases real property or
transacts business requiring such qualification, except where the failure to so
qualify would not be materially adverse to the Company's business taken as a
whole.
2.8 LEGALITY OF OUTSTANDING SHARES. The outstanding shares of
------------------------------
Common Stock of the Company and the outstanding shares of capital stock or
limited liability company interests of each of its Subsidiaries have been duly
and validly authorized and issued, are fully paid and nonassessable and conform
to all statements with regard thereto contained in the Registration Statement
and Prospectus. No sales of securities have been made by the Company or any of
its Subsidiaries in violation of the registration provisions of the Act or in
violation of any other federal ar state laws.
2.9 LEGALITY OF SHARES. The Shares and the Representative's Warrants
------------------
(described in Section 3.4 hereof) have been duly and validly authorized and,
when issued and delivered against payment as provided in this Agreement, will be
validly issued, fully paid and nonassessable. The Shares and the
Representative's Warrants, upon issuance, will not be subject to the preemptive
rights of any shareholders of the Company. The Shares and the Representative's
Warrants, when sold and delivered, will constitute valid and binding obligations
of the Company enforceable in accordance with their terms. A sufficient number
of shares of Common Stock have been reserved for issuance upon exercise of the
warrants in existence and outstanding as of the Effective Date of the
Registration Statement and upon exercise of the Representative's Warrants. The
Shares and the Representative's Warrants will conform to all statements in the
Registration Statement and Prospectus made with respect thereto. Upon delivery
of and payment for the Shares and the Representative's Warrants to be sold by
the Company as set forth in this Agreement, the persons paying therefor will
receive good and marketable title thereto, free and clear of all liens,
encumbrances, charges and claims. The Company will have on the Effective Date
of the Registration Statement and at the time of delivery of the Shares and the
Representative's Warrants full legal right and power and all authorizations and
approvals required by law to sell and deliver the Shares and Representative's
Warrants in the manner provided hereunder.
2.10 OUTSTANDING SHARES AND LONG TERM DEBT ON EFFECTIVE DATE.
-------------------------------------------------------
Immediately prior to the Effective Date, the only shares of capital stock,
warrants, options, or other convertible securities which have been issued by the
Company and which will be outstanding on the Effective Date will be as described
in the Prospectus, and the Company will not be obligated on any long term debt,
whether or not recorded on the books, records, or accounts of the Company and
will not be obligated to issue any capital stock, warrants, options, or other
convertible securities, except as described in the Prospectus. Unless the
Representative has approved in writing a different maximum number of fully
diluted shares, immediately prior to the Effective Date of the Registration
Statement the number of shares of Common Stock of the Company outstanding on a
fully diluted basis will not exceed 2,600,000 Shares plus the number
5
<PAGE>
of shares underlying the warrants granted to Deere Park Capital Management, Inc.
and Steve Kerr pursuant to the terms of the Amended and Restated Secured
Promissory Notes dated May 4, 1997 between the Company and Deere Park Capital
Management, Inc. and Steve Kerr, respectively and the shares underlying the
options which will be granted after the Effective Date under the Company's 1997
Stock Option Plan ("Plan") in the amount and to the employees disclosed in the
Prospectus. For purposes of this Underwriting Agreement, the term "fully diluted
basis" shall mean the number of shares of Common Stock actually issued and
outstanding plus the number of shares of Common Stock underlying all issued and
outstanding convertible or excisable securities.
2.11 CUSIP NUMBER. The Company has obtained a CUSIP number for its
------------
Common Stock and the warrants to be registered for Deere Park Capital
Management, Inc. and Steve Kerr.
2.12 OPTIONS AND TREASURY SHARES. There are no outstanding options,
---------------------------
warrants or other rights to purchase securities of the Company, however
characterized, except as described in the Registration Statement. Except as
described in the Registration Statement, there are no securities of the Company,
however characterized, held in its treasury. Except as described in the
Registration Statement, the Company has not offered or agreed to purchase or
issue any shares of Common Stock or any convertible securities in the future.
2.13 SUBSIDIARIES. The Company's Subsidiaries as listed and
------------
described in the Prospectus constitute all of the Company's Subsidiaries as of
the Effective Date. Except as described herein and in the Registration
Statement, the Company has no Subsidiaries other than those described herein and
in the Registration Statement, is not carrying on any discussion or negotiation
with third parties regarding the merger or acquisition of any other entity and
does not currently intend to acquire any Subsidiaries or engage in mergers with
or the acquisition of any entity except as otherwise indicated in the
Registration Statement.
2.14 JOINT VENTURES. Except as described in the Prospectus, the
--------------
Company has not entered into any joint venture, partnership, limited liability
company, strategic alliance or similar arrangement in which the Company has a
participating interest in the profits, losses, assets and liabilities as a joint
venturer, partner, member or shareholder of any such entity or under any such
arrangement.
2.15 PRIOR SALES. No securities of the Company, or of a predecessor
-----------
of the Company, have been sold except as described in the Registration Statement
or as disclosed in writing to the Representative.
2.16 LITIGATION. Except as set forth in the Registration Statement
----------
or except for nonmaterial actions, suits, or proceedings disclosed in writing to
the Representative, there is, and at the Closing Date and at the Option Closing
Date there will be, no action, suit or proceeding before any court or
governmental agency, authority or body pending or to the knowledge of the
Company threatened against the Company or any of its Subsidiaries or any
6
<PAGE>
joint venture, limited liability company, partnership or similar entity or
arrangement in which the Company has an interest.
2.17 ACQUISITION OF SUBSIDIARIES. In connection with the acquisition
---------------------------
of all of the issued and outstanding capital stock of Apollo Sports
Technologies, Ltd., formerly TI Apollo, Ltd. ("Apollo"), a UK Company, Reynolds
531, Ltd., formerly TI Reynolds, Ltd., ("Reynolds"), a UK Company, and Apollo
Golf, Inc., a New Jersey corporation ("Apollo US") and certain real property
from TI Group plc, a UK Company, and in connection with the acquisition of Cape
Composites, Incorporated ("Cape") through Sierra Materials, LLC ("Sierra
Materials") in which the Company owns an 80% interest, the formation of ICE*USA,
LLC and the acquisition of assets from Expedition Trading Company, LLC and the
acquisition of 5,000,000 shares of the issued and outstanding capital stock of
Pentiumatics, Sdn Bhd, a Malaysian company, the Company, through its officers,
directors, employees, legal counsel, accountants and other agents, have
conducted a thorough and complete independent investigation of the books,
records (including, without limiting the generality thereof, the tax records),
financial data, liabilities, obligations, assets, properties, agreements and all
other instruments and documents in the possession of each such Subsidiary or the
sellers ("Sellers") of each such corporation and pertaining to each such
Subsidiary and as a result of such investigation on or prior to the closing date
when the acquisition of each such corporation was consummated, and based on the
current operations and conditions of each such Subsidiary under the Company's
control and supervision, the Company does not know of any fact, condition or
circumstance existing as of the date hereof and will not know or be aware of any
fact, condition or circumstance as of the closing date, or the Option Closing
Date, which could result in a breach of any of the representations, warranties
or covenants contained in the agreements governing the purchase of the capital
stock or assets and properties of such Subsidiaries made by the Sellers of such
Subsidiaries to the Company which shall have survived the Closing Date or which
would result in a claim for indemnification against such Sellers under the terms
of any such agreements or which would materially adversely affect the Company,
its assets or financial condition which are not otherwise disclosed in the
Registration Statement.
2.18 FINDER. Except as set forth in the Registration Statement, the
------
Company knows of no outstanding claims against it for compensation for services
in the nature of a finder's fee, origination fee, financial consulting fee,
commission or any other form of compensation which would accrue to, be earned by
or be required to be paid to any person with respect to the offer and sale of
the Shares hereunder.
2.19 EXHIBITS. There are no contracts or other documents which are
--------
required to be filed as exhibits to the Registration Statement by the Act or by
the Rules and Regulations thereunder, which have not been so filed
and each contract to which the Company or any of its Subsidiaries is a party and
to which reference is made in the Prospectus has been duly and validly executed,
is in full force and effect in all material respects in accordance with its
terms, and none of such contracts has been assigned and the Company knows of no
present situation or condition or fact which would prevent compliance with the
terms of such contracts. Except for amendments or modifications of such
contracts in the ordinary course of business, the
7
<PAGE>
Company has not been advised that any party to any such contract intends to
exercise any right which it may have to cancel any of its obligations under any
of such contracts and has no knowledge that any other party to any such
contracts has any intention not to render full performance under such contracts.
2.20 TAX RETURNS. The Company has (and to the extent required under
-----------
applicable law each of the Subsidiaries have) filed all foreign, state and local
tax returns which are required to be filed by it (them) and has (have) paid all
taxes shown on such returns and on all assessments, including interest and
penalties, received by it (them) to the extent such taxes have become due. All
such tax returns so filed were correct and complete in all material respects.
All foreign, state and local taxes with respect to which the Company (and its
Subsidiaries to the extent required under applicable law) is obligated have been
paid or adequate accruals have been set up to cover any such unpaid taxes,
including any interest and penalties accrued with respect to any such unpaid
taxes. Except as set forth in the Registration Statement, there is no material
dispute or claim concerning the liability of the Company or any of its
Subsidiaries for any tax.
2.21 NO PREEMPTIVE RIGHTS. The Company's securities, however
--------------------
characterized, are not subject to preemptive rights.
2.22 USE OF FORM SB-2. The Company is eligible to use Form SB-2 for
----------------
the offering of the Shares and the Representative's Warrants.
2.23 NO SHARES BEING OFFERED. Except as described in the
-----------------------
Registration Statement, neither the Company nor any of its Subsidiaries is
currently offering any securities of which it is the issuer.
2.24 CERTIFICATES, PERMITS, LICENSES, APPROVALS, PATENTS AND
-------------------------------------------------------
TRADEMARKS. The Company and each of its Subsidiaries possess adequate
- ----------
certificates, permits, licenses, sublicenses, authorizations, consents or
approvals, issued by the appropriate federal, state and local regulatory
authorities necessary to conduct its business and to retain possession of its
assets and properties. The Company and its Subsidiaries have not received any
notice of any proceeding relating to the revocation or modification of any of
these certificates, permits, licenses, sublicenses, authorizations, consents or
approvals. The Company and each of its Subsidiaries has had issued to it or
them, owns or has applied for, U.S. domestic, United Kingdom, real properties,
plants, equipment, machinery used in the manufacture of products by the
Company's Subsidiaries, furniture, fixtures, vehicles and any other property
whether real, personal, tangible or intangible, including without limitation,
other foreign (as shall be necessary or appropriate) trademark, patent, patent
right, service mark, logo, trade dress, mask work, copyright and trade secret
protection necessary to the conduct of its and their respective businesses as
now being conducted or otherwise has sufficient licenses or sublicenses granting
the Company and/or one or more of its Subsidiaries the exclusive use of the
trademarks, patents, patent rights, service mark, logo, trade dress, mask work,
or copyrights in connection with the conduct of its or their business
activities; and except as described in the Prospectus,
8
<PAGE>
the Company has no knowledge of any use by it or any of its Subsidiaries of the
trade secrets of others, of any interference, misappropriation, infringement or
violation by it or them of trademarks, patents, patent rights, service mark,
logo, trade dress, mask work, or copyrights of others, or of any claim being
made against the Company or any of its Subsidiaries regarding trademark, patent,
service mark, logo, trade dress, mask work, or copyright infringement or use or
misappropriation of trade secrets of others. Neither the Company nor any of its
Subsidiaries has received any charge, complaint, claim, demand or notice
alleging any interference, infringement, misappropriation or violation of any
trademark, patent, patent rights, service mark, logo, trade dress, mask work,
copyright or use of trade secrets of others.
2.25 TITLE TO PROPERTIES. The Company and each of its Subsidiaries
-------------------
has marketable title to all real properties, plants, equipment, machinery used
in the manufacture of products by the Company's Subsidiaries, furniture,
fixtures, vehicles and any other property whether real, personal, tangible or
intangible, including without limitation, patents, patent applications, patent
rights, trademarks, trademark applications, service marks, service mark
applications, logos, trade dress, mask works, copyrights, equipment, know-how,
technology, and trade secrets, described in the Registration Statement as owned
by it or them. All such properties are free and clear of all liens, charges,
encumbrances or restrictions, however characterized, except as described in the
Registration Statement. All of the contracts, leases, subleases, patents,
patent applications, patent rights, trademarks, trademark applications, service
marks, service mark applications, logos, trade dress, mask works, copyrights,
licenses and agreements, however characterized, under which the Company and each
of its Subsidiaries holds its properties, as described in the Registration
Statement, are in full force and effect.
2.26 NO DIRECTED SALES. The Company has not made any representation,
-----------------
whether oral or in writing, to any person, whether an existing shareholder or
not, that any of the Shares will be reserved or directed to such person during
the proposed Public Offering of the Company's securities.
2.27 RESTRICTED SHARES. The Company has caused each of its current
-----------------
shareholders who holds "restricted securities" as such term is defined in Rule
144 under the Act to acknowledge that they hold "restricted securities" as
defined in Rule 144.
2.28 NEGOTIATIONS. During the period from the Effective Date to the
------------
Closing Date or the Option Closing Date, the Company will notify the
Representative in writing from time to time of the status of any negotiations
involving the Company or any of its Subsidiaries relating to any transaction
which would, if consummated, have a material effect upon the Company or any of
its Subsidiaries. Also, the Company will consult with its legal counsel
concerning the need to disclose any such negotiations.
2.29 AUTHORITY. The execution and delivery by the Company of this
---------
Agreement has been duly authorized by all necessary corporate action and this
Agreement is the valid, binding and legally enforceable obligation of the
Company.
9
<PAGE>
2.30 1940 ACT. The Company has been advised of the Investment
--------
Company Act of 1940, as amended (the " 1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" within the meaning of the 1940 Act and such rules and regulations.
2.31 CAMPAIGN CONTRIBUTIONS AND CORRUPT PRACTICES ACT. The Company
------------------------------------------------
has not at any time since the date of its incorporation, nor have any of the
Subsidiaries at any time during the period that such Subsidiaries have been
owned by the Company, made any unlawful contribution to any candidate for U.S.
domestic or foreign office, or failed to disclose fully any contribution in
violation of law, or made any payment to any federal, state or foreign
government, governmental officer or official, employee or agent, or other person
charged with similar public or quasipublic duties, other than payments required
or permitted by the laws of the United States, the United Kingdom or Malaysia or
any other foreign nation or country or any jurisdiction thereof. Further,
neither the Company, its Subsidiaries, nor its officers, directors, employees,
shareholders, agents, representatives, or any other person acting for or on
behalf of the Company disbursed or received Company funds, entered into any
transaction intended to transfer, directly or indirectly, assets or made
improper entries or inaccurate recordings of payments or receipts on the
Company's books to cover up any transaction in violation of the Foreign Corrupt
Practices Act or any other laws of the United States, the United Kingdom,
Malaysia or any other foreign country or nation or jurisdiction thereof.
2.32 SHARES ACTIVITIES. The Company has not taken and will not take,
-----------------
directly or indirectly, any action designed to, or that might be reasonably
expected to, cause or result in the stabilization or manipulation of the price
of any security to facilitate the sale or resale of the Shares.
2.33 ENVIRONMENTAL. Except as specifically described in the
-------------
Prospectus, the Company and each of its Subsidiaries is in compliance with all
foreign, federal, state, and local laws, statutes, treaties, ordinances, rules,
regulations, and policies relating to the use, treatment, storage,
transportation, discharge, emission, or disposal of, or exposure of others to,
toxic substances and protection of health, safety or the environment
("Environmental Laws") which are applicable to its or their business; there is
no pending or asserted claim, liability, or investigation by any third party or
governmental authority against the Company or any of its Subsidiaries under
Environmental Laws; no substances which are prohibited or regulated by any
Environmental Law or designated to be radioactive, toxic, hazardous or otherwise
a danger to health or the environment by any foreign, federal, state or local
governmental agency ("Hazardous Material") are present or likely to become
present on any property which is owned, leased, or occupied by the Company and
no such property has been designated as a SuperFund site, pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended, or
otherwise designated as a contaminated site under applicable foreign, federal,
state or local law; and the Company has received all permits, licenses,
authorizations, consents, waivers or approvals required of it under
Environmental Laws to conduct its business
10
<PAGE>
as presently conducted and is in compliance with all terms and conditions of
such permits, licenses, authorizations, consents, waivers or approvals.
2.34 CONDITION OF ASSETS. The buildings, machinery, equipment and
-------------------
other tangible assets of the Company and its Subsidiaries are to the best of the
Company's knowledge, free of any defects, have been maintained in accordance
with industry practice, and are in good operating condition and repair, subject
to normal wear and tear.
2.35 UNDISCLOSED LIABILITIES. Except as disclosed in the
-----------------------
Registration Statement, neither the Company nor its Subsidiaries have any
material liability (whether known or unknown, whether asserted or unasserted,
whether absolute or contingent, whether accrued or unaccrued, whether liquidated
or unliquidated, and whether due or to become due, including, without limiting
the generality thereof, any liability for taxes).
2.36 PRODUCT WARRANT. All of the products manufactured, sold, leased
---------------
and delivered by the Company and its Subsidiaries have conformed in all material
respects with all applicable contractual commitments and all express and implied
warranties, and neither the Company nor any of its Subsidiaries has any material
liability (whether known or unknown, whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due) for replacement or repair
thereof or other damages in connection therewith which would materially,
adversely affect the financial condition and business operations of the Company
and its Subsidiaries.
2.37 PRODUCT LIABILITY. Neither the Company nor its Subsidiaries has
-----------------
any material liability (whether known or unknown, whether asserted or
unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due) arising
out of any injury to individuals or property as a result of the ownership,
possession, or use of any product manufactured, sold, leased or delivered by the
Company or any of its Subsidiaries.
2.38 INSURANCE. The Company and its Subsidiaries have in effect, and
---------
as of the Closing Date and the Option Closing Date will have in effect, adequate
insurance policies, including policies providing property, casualty, liability
(whether providing for general, product liability, fire and extended coverage or
other liability coverage) and workers' compensation coverage and bond and surety
arrangements, to provide adequate coverage and protection against the risks
covered thereunder. Each such insurance policy is (i) legal, valid, binding,
enforceable and in full force and effect in all material respects; (ii) neither
the Company nor any of its Subsidiaries is in material breach or default
(including with respect to paying of premiums or the giving of notices) and no
event has occurred which, with notice or lapse of time, would constitute such a
material breach or default, or permit termination, modification, or
acceleration, under the policy; and (iii) no party to the policy has repudiated
any material provision thereof.
11
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2.39 EMPLOYEES. To the best knowledge of the Company, no executive,
---------
key employee, or significant group of employees employed by the Company or any
of its Subsidiaries have given notice to the Company or any of its Subsidiaries
or intends to terminate his or her employment with the Company or any of its
Subsidiaries within the next twelve (12) months. Except as described in the
Registration Statement, neither the Company nor any of its Subsidiaries is a
party to or bound by any collective bargaining agreement, nor has the Company or
any of its Subsidiaries experienced any strike or material grievance, claim of
unfair labor practice or other collective bargaining dispute within the past
three (3) years. Neither the Company nor any of its Subsidiaries has committed
any material unfair labor practice. The Company, to the best of its knowledge,
is not aware of any organizational effort presently being made or threatened by
or on behalf of any labor union with respect to the employees of the Company or
any of its Subsidiaries.
2.40 CERTAIN BUSINESS RELATIONSHIPS. Except as disclosed in the
------------------------------
Registration Statement, no principal shareholder of the Company nor any of their
affiliates have been involved in any material business arrangement or
relationship with the Company and its Subsidiaries within the past twenty-four
(24) months, and no such shareholder or affiliate owns any material asset,
tangible or intangible, which is used in the business of the Company or any of
its Subsidiaries.
All of the above representations and warranties set forth in Sections
2.1 through 2.40 hereof shall survive the performance or termination of this
Agreement.
SECTION 3
PURCHASE AND SALE OF THE SHARES
-------------------------------
3.1 PURCHASE OF SHARES. The Company hereby agrees to sell to the
------------------
members of the Underwriting Group named in Schedule I hereto (for all of whom
the Representative is acting), severally and not jointly, and each member of the
Underwriting Group, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees to purchase
from the Company, severally and not jointly, the number of Shares set forth
opposite the name of each member of the Underwriting Group as set forth in
Schedule I hereto at a purchase price of $5.00 for each Share which such member
has so agreed to purchase. The Company hereby grants to the Representative and
the members of the Underwriting Group an option for a period of forty-five (45)
days after the Effective Date ("Overallotment Exercise Period") to purchase up
to 157,500 Overallotment Shares in order to cover overallotments. The purchase
price of each Overallotment Share shall be $5.00. The Overallotment Option
granted hereunder shall be exercisable by the Representative, in whole or in
part, from time to time during the Overallotment Exercise Period. Any
Overallotment Shares purchased upon exercise of the Overallotment Option shall
be purchased for the account of the Representative and/or for the accounts of
the members of the Underwriting Group as determined by the Representative.
12
<PAGE>
3.1.1 DEFAULT BY MEMBER OF UNDERWRITING GROUP. If for any reason one
---------------------------------------
or more of the Underwriters shall fail or refuse (otherwise than for a
reason sufficient to justify the termination of this Agreement under the
provisions of Section 9 hereof) to purchase and pay for the number of
Shares agreed to be purchased by such Underwriter, the Company shall
immediately give notice thereof to the Representative, and the
nondefaulting Underwriters shall have the right within twenty-four (24)
hours after the receipt by the Representative of such notice, to purchase
or request one or more other Underwriters to purchase, in such proportions
as may be agreed upon among the Representative and such purchasing
Underwriter or Underwriters and upon the terms herein set forth, the Shares
which such defaulting Underwriter or Underwriters agreed to purchase. If
the nondefaulting Underwriters fail so to make such arrangements with
respect to all such Shares, the number of Shares which each nondefaulting
Underwriter is otherwise obligated to purchase under this Agreement shall
be automatically increased pro rata to absorb the remaining Shares which
the defaulting Underwriter or Underwriters agreed to purchase; provided,
however, that the nondefaulting Underwriters shall not be obligated to
purchase any of the Shares if the aggregate Public Offering Price of the
Shares which the defaulting Underwriter or Underwriters agreed to purchase
exceeds ten percent (10%) of the Public Offering Price of the total
Shares which all Underwriters agreed to purchase hereunder. If the total
number of Shares which the defaulting Underwriter or Underwriters agreed to
purchase shall not be purchased or absorbed in accordance with this
subsection 3.1.1, then the Company shall have the right, within twenty-four
(24) hours next succeeding the twenty-four (24) hour period above referred
to, to make arrangements with other underwriters or purchasers satisfactory
to the Representative for the purchase of all of the Shares which the
defaulting Underwriter or Underwriters agreed to purchase hereunder on the
terms herein set forth. In any such case, either the Representative or the
Company shall have the right to postpone the Closing Date determined as
provided in subsection 3.2.2. hereof for not more than seven (7) business
days after the date originally fixed as the Closing Date pursuant to said
subsection 3.2.2. in order that any necessary changes in the Registration
Statement, the Prospectus or any other documents or arrangements may be
made. If neither the nondefaulting Underwriters nor the Company shall make
arrangements within the twenty-four (24) hour periods stated above for the
purchase of all the Shares which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without
further act or deed and without any liability on the part of the Company to
any nondefaulting Underwriter and without any liability on the part of any
nondefaulting Underwriter to the Company.
3.1.2 LIABILITY OF DEFAULTING MEMBERS OF THE UNDERWRITING GROUP.
---------------------------------------------------------
Nothing contained in this Section 3.1 shall relieve any defaulting member
of the Underwriting Group of its liability, if any, to the Company or to
the remaining members of the Underwriting Group for damages occasioned by
its default hereunder.
3.2 PUBLIC OFFERING PRICE. After the Commission notifies the Company that
---------------------
the Registration Statement has become effective and after this Agreement becomes
effective, the
13
<PAGE>
members of the Underwriting Group propose to offer initially the Shares to the
public at the Public Offering Price. The members of the Underwriting Group may
allow such concessions and discounts upon sales to selected dealers as may be
determined from time to time by the Representative.
3.2.1 PAYMENT FOR SHARES. Payment for the Shares shall be made to
------------------
the Company by regular check or checks at the offices of the Representative
set forth above in Englewood, Colorado, upon delivery to the Representative
of certificates for the Shares in definitive form in such numbers and
registered in such names as the Representative requests in writing at least
two (2) full business days prior to such delivery. The Company agrees not
to seek to obtain (i) certification of the Representative's closing check
or checks from the Representative's bank or banks or (ii) a cashier's check
or checks from the Representative's bank or banks in substitution for the
Representative's closing check or checks. The Company agrees to deposit
the Representative's closing check or checks into the Company's bank
account and to allow such check or checks to clear through the banking
system on a "regular way" basis. Nothing contained in this Section 3.2.1
shall be construed to relieve the Representative from its obligations
created as a result of the issuance of the Representative's regular check
or checks at the Closing.
3.2.2 CLOSING. The time and date of delivery and payment hereunder
-------
for the Shares is herein called the "Closing Date" and shall take place at
the office of the Representative at the address set forth above in
Englewood, Colorado, at 10:00 A.M. on the third (3rd) business day
following the Effective Date of this Agreement; provided, however, the
Company and the Representative may agree, on the date that this Agreement
becomes legally effective, to an alternative Closing Date and such
alternative Closing Date shall become the "Closing Date" under this
Agreement. Should the Representative elect to exercise any part of the
Overallotment Option pursuant to Section 3.1 hereof, the time, date of
delivery and payment for the Overallotment Shares being purchased shall be
as mutually agreed between the Company and the Representative, but not
later than the forty-fifth (45th) calendar day after the Effective Date.
Said date is hereinafter referred to as the "Option Closing Date."
3.2.3 INSPECTION OF CERTIFICATES. For the purpose of expediting the
--------------------------
checking and packaging of the certificates for the Shares, the Company
agrees to make the certificates available for inspection by the
Representative at the place designated by the Representative at least one
full business day prior to the proposed delivery date.
3.3 REPRESENTATIVE'S NONACCOUNTABLE EXPENSE ALLOWANCE. It is understood
-------------------------------------------------
that the Company shall reimburse the Representative for its expenses on a
nonaccountable basis in the amount of three percent (3%) of the of the Shares
and Overallotment Shares purchased at the Public Offering Price by the
Underwriters. The Representative acknowledges that it has received $40,000 of
the nonaccountable expense allowance, which amount will be credited
14
<PAGE>
against the unpaid balance of such nonaccountable expense allowance. On the
Closing Date and the Option Closing Date, the Company shall pay to the
Representative the unpaid balance of such nonaccountable expense allowance then
due.
3.4 REPRESENTATIVE'S WARRANTS. On the Closing Date, the Company will sell
-------------------------
warrants to the Representative and its designees ("Representative's Warrants")
entitling the Representative to purchase a total of 105,000 shares of Common
Stock. The Representative's Warrants will be in the form of the
Representative's Warrants to Purchase Shares filed as an exhibit to the
Registration Statement. The Representative's Warrants shall be exercisable
during the four (4) year period commencing one (1) year after the Effective
Date. The total amount that the Representative shall pay the Company for the
Representative's Warrants is One Hundred and Five Dollars ($105). The Company
and the Representative agree that the Representative's Warrants may not be sold,
transferred, assigned, pledged, or hypothecated for a period of one year after
the Effective Date of the Registration Statement except to officers of the
Representative, to members of the Underwriting Group, and to officers or
partners of selected dealers and except by will or operation of law. After such
one (1) year period, the Representative's Warrants may be sold, transferred,
assigned, pledged, or hypothecated provided that any such transaction is in
accordance with the registration or exemption from registration provisions of
the Act and any applicable state securities laws. If the Representative's
Warrants are exercised during the first year after the Effective Date of the
Registration Statement, then any shares of Common Stock of the Company acquired
as a result of any such exercise may not be sold, transferred, assigned,
pledged, or hypothecated until after expiration of such one (1) year period.
3.5 REPRESENTATIONS OF THE PARTIES. The parties hereto respectively
------------------------------
represent that as of the Closing Date and as of the Option Closing Date the
representations herein contained and the statements contained in all the
certificates theretofore or simultaneously delivered by any party to another,
pursuant to this Agreement, shall in all material respects be true and correct.
3.6 POSTCLOSING INFORMATION. The Representative covenants that reasonably
-----------------------
promptly after the Closing Date and after the Option Closing Date, the
Representative will supply the Company with all information that the Company may
reasonably request which must be supplied to the Commission or securities
authorities of states in which the Shares have been qualified for sale
3.7 REOFFERS BY SELECTED DEALERS. On each sale by the members of the
----------------------------
Underwriting Group of any of the Shares to selected dealers, the members of the
Underwriting Group shall require the selected dealers purchasing any such Shares
to agree to reoffer such Shares on the terms and conditions of the offering set
forth in the Registration Statement and Prospectus.
15
<PAGE>
SECTION 4
REGISTRATION STATEMENT AND PROSPECTUS
-------------------------------------
4.1 DELIVERY OF REGISTRATION STATEMENT. The Company has delivered to the
----------------------------------
Representative without charge two (2) signed printed copies of the Registration
Statement, including all financial statements and exhibits filed therewith and
any amendments or supplements thereto, and shall deliver without charge to the
Representative such number of conformed printed copies of the Registration
Statement as the Representative shall request,
including all financial statements and exhibits filed therewith and any
amendments or supplements thereto. The signed copies of the Registration
Statement furnished to the Representative include signed copies of any and all
opinions and consents of the independent public accountants certifying to the
financial statements included in the Registration Statement and Prospectus and
signed copies of any and all opinions, consents and certificates of any other
persons whose profession gives authority to statements made by them and who are
named in the Registration Statement or Prospectus as having prepared, certified
or reviewed any part thereof.
4.2 DELIVERY OF PRELIMINARY PROSPECTUS AND AGREEMENTS. The Company will
-------------------------------------------------
have caused to be delivered, at its expense, to the members of the Underwriting
Group and to other broker dealers specified by the Representative prior to the
Effective Date of the Registration Statement as many printed copies of (i) each
Preliminary Prospectus filed with the Commission bearing in red ink the
statements required by Item 501 of Regulation S-B, and (ii) each Agreement Among
Underwriters, Underwriting Agreement, and Selected Dealer Agreement, all as may
have been requested by the Representative. The Company consents to the use of
such documents by the members of the Underwriting Group and by prospective
selected dealers prior to the Effective Date of the Registration Statement, so
long as such use is in accordance with the applicable provisions of the Act, the
applicable Rules and Regulations thereunder and the applicable state blue sky or
securities laws.
4.3 DELIVERY OF PROSPECTUS. The Company will deliver, at its expense, to
----------------------
the members of the Underwriting Group and to other broker dealers specified by
the Representative, as many printed copies of the Prospectus as the
Representative may request and will deliver said printed copies of the
Prospectus to the members of the Underwriting Group and such other persons on
the Effective Date and for such period of time thereafter as the Prospectus is
required by law to be delivered in connection with offers and sales of the
Shares.
4.4 FURTHER AMENDMENTS AND SUPPLEMENTS. If during the period of time that
----------------------------------
the Company's Prospectus is required to be delivered under the Act, any event
occurs or any event known to the Company relating to or affecting the Company
shall occur, as a result of which the Prospectus as then amended or supplemented
would include an untrue statement of a material fact, or omit to state any
material fact necessary to make the statements made therein, in light of the
circumstances under which they were made, not misleading or if it is necessary
at any time after the Effective Date to amend or supplement the Prospectus to
comply with the Act, the Company agrees to notify immediately the Representative
thereof and prepare and file
16
<PAGE>
with the Commission such further amendment to the Registration Statement or
supplemental or amended Prospectus as may be required and furnish and deliver to
the Representative and to others designated by the Representative, all at the
Company's expense, a reasonable number of copies of the amended or supplemented
Prospectus which as so amended or supplemented will not contain any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements made therein, in the light of the circumstances under which
they were made, not misleading when it is delivered to a purchaser or
prospective purchaser, and which will comply in all respects with the Act; and
in the event the Representative is required to deliver a Prospectus after the
date specified in Rule 174 of the Rules and Regulations, the Company upon
request will prepare promptly such Prospectus or Prospectuses as may be
necessary to permit compliance with the requirements of Section 10 of the Act.
4.5 USE OF PROSPECTUS. The Company authorizes the members of the
-----------------
Underwriting Group in connection with the distribution of the Shares and all
dealers who may distribute any of the Shares to use the Prospectus, as from time
to time amended or supplemented, in connection with the offering and sale of the
Shares so long as such use is in accordance with the applicable provisions of
the Act, the applicable Rules and Regulations thereunder and applicable state
blue sky or securities laws.
SECTION 5
COVENANTS OF THE COMPANY
------------------------
The Company covenants and agrees with the members of the Underwriting Group
that:
5.1 OBJECTION OF REPRESENTATIVE TO AMENDMENTS OR SUPPLEMENTS. After the
--------------------------------------------------------
date hereof, the Company will not at any time, whether before or after the
Effective Date of the Registration Statement, file any amendment or supplement
to the Registration Statement or Prospectus (i) unless and until a copy of such
amendment or supplement has been previously furnished to the Representative
within a reasonable time period (but in no event less than three (3) business
days before the Company proposes to file such amendments and to the extent of
any changes are made to such amendment not less than two (2) business days)
prior to the filing thereof or (ii) to which the Representative or legal counsel
to the Representative has reasonably objected, in writing, on the ground that
such amendment or supplement is not in compliance with the Act or the Rules and
Regulations.
5.2 COMPANY'S BEST EFFORTS TO CAUSE REGISTRATION STATEMENT TO BECOME
----------------------------------------------------------------
EFFECTIVE. The Company agrees to use its best efforts to cause the Registration
- ---------
Statement and any amendment thereto to become effective as promptly as
reasonably practicable and will promptly advise the Representative and will
confirm such advice in writing (i) when the Registration Statement shall have
become effective and when any amendment thereto shall have become effective and
when any amendment of or supplement to the Prospectus shall be filed with the
Commission, (ii) when the Commission shall make, either orally or in writing, a
request or suggestion for any amendment to the Registration Statement or the
Prospectus or
17
<PAGE>
for any additional information and the nature and substance thereof, (iii) of
the issuance by the Commission of an order suspending the effectiveness of the
Registration Statement pursuant to Section 8 of the Act or of the initiation of
any proceedings for that purpose, (iv) of the happening of any event which in
the judgment of the Company makes any material statement in the Registration
Statement or Prospectus untrue or which requires the making of any changes in
the Registration Statement or Prospectus in order to make the statements therein
not misleading, and (v) of the refusal to qualify or the suspension of the
qualification of the Shares for offering or sale in any jurisdiction or of the
institution of any proceedings for any of such purposes. The Company will use
every reasonable effort to prevent the issuance of any such order or of any
order preventing or suspending such use, to prevent any such refusal to qualify
or any such suspension, and to obtain as soon as possible a lifting of any such
order, the reversal of any such refusal and the termination of any such
suspension.
5.3 PREPARATION AND FILING OF AMENDMENTS AND SUPPLEMENTS. The Company
----------------------------------------------------
agrees to prepare and file promptly with the Commission, upon request of the
Representative, such amendments or supplements to the Registration Statement or
Prospectus, in form satisfactory to legal counsel for the Representative, as in
the opinion of the Representative and of legal counsel to the Company, may be
necessary in connection with the offering or distribution of the Shares and will
use its best efforts to cause the same to become effective as promptly as
possible.
5.4 BLUE SKY QUALIFICATIONS. The Company agrees to use its best efforts
-----------------------
to register or qualify the Shares or such part thereof as the Representative may
determine for sale under the blue sky laws of such states as are requested by
the Representative. The Company will be assisted by legal counsel for the
Representative in registering or qualifying the Shares for sale under such blue
sky laws. The Company will pay all of the filing fees and legal fees, costs and
expenses incurred by such legal counsel in so registering or qualifying such
Shares. The Representative's legal counsel will forward to legal counsel for the
Company copies of all correspondence, comments, orders or other documents
("correspondence and documents") sent to or received from such states in
connection with such registrations and qualifications at the time such
correspondence and documents are sent or received by legal counsel for the
Representative. Immediately prior to the distribution of the preliminary
Prospectus to potential investors and prior to the Effective Date of the
Registration Statement, legal counsel for the Representative will issue to the
Company and the Underwriting Group a written blue sky memorandum of all states
in which the preliminary Prospectus may be distributed and in which the proposed
initial Public Offering (the "Public Offering") of the Shares has been
registered or qualified for sale, canceled, withdrawn, denied or exempt, the
date of such event(s) and the number of Shares registered or qualified for sale
in each such state. The Company understands that one of the factors considered
by the Representative and the Underwriting Group in deciding to execute this
Underwriting Agreement was the states in which the Shares have been registered
or qualified for resale.
18
<PAGE>
5.5 FINANCIAL STATEMENTS. The Company, at its own expense, agrees to
--------------------
prepare and give and will continue to give such financial statements and other
information and reports to and as may be required by the Commission or the
proper public bodies of the states in which the Shares may be registered or
qualified.
5.6 REPORTS AND FINANCIAL STATEMENTS TO THE REPRESENTATIVE. From and
------------------------------------------------------
after June 30, 1997, the date of the most recent quarterly financial statement
filed with the Commission and continuing through the Closing Date, the Company
shall furnish to the Representative and to legal counsel for the Representative,
the Company's unaudited monthly financial statements. For a period of five (5)
years from the Closing Date, the Company agrees to deliver to the Representative
copies of each annual report of the Company and copies of all reports it is
required to file or make available pursuant to the Shares Exchange Act of 1934,
as amended ("Exchange Act"), and will deliver to the Representative: (i) within
ninety (90) days (plus any extensions of time that the Commission grants to the
Company to file its annual report on the appropriate Form) after the close of
each fiscal year of the Company, a financial report of the Company and its
Subsidiaries on a consolidated basis, and a similar financial report of all of
the Company's unconsolidated Subsidiaries, all such reports to include a balance
sheet as of the end of the preceding fiscal year, a statement of operations, a
statement of stockholders' equity and statement of cash flows covering such
fiscal year, and all to be in reasonable detail and certified by independent
public accountants for the Company; (ii) within forty-five (45) days (plus any
extensions of time that the Commission grants to the Company to file its
quarterly report on the appropriate Form) after the end of each quarterly fiscal
period of the Company other than the last quarterly fiscal period in any fiscal
year, copies of the consolidated statements of operations, stockholders' equity
and cash flows for the quarterly fiscal period and the fiscal year to the end of
such quarterly fiscal period, and the balance sheet as of the end of that period
of the Company and its Subsidiaries and the equivalent financial statements of
all of the Company's unconsolidated Subsidiaries, for that period, all subject
to year end adjustment, certified by the principal financial or accounting
officer of the Company; (iii) copies of all other statements, documents or other
information which the Company mails or otherwise makes available to any class of
its security holders or files with the Commission; (vi) copies of all news,
press or public information releases when made; (v) copies of all letters to the
Company from its independent certified public accountants concerning actual or
potential deficiencies in the Company's accounting procedures or internal
control of funds; and (vi) upon request in writing from the Representative, such
other information as may reasonably be requested and which may be properly
disclosed to the Representative with reference to the property, business and
affairs of the Company and its Subsidiaries. If the Company fails to furnish
the Representative with financial statements as herein provided, within the
times specified herein, the Representative shall have the right to have such
financial statements prepared by independent public accountants of such
Representative's own choosing and the Company agrees to furnish such independent
public accountants such data and assistance and access to such records as they
may reasonably require to enable them to prepare such statements and to pay
their reasonable fees and expenses in preparing the same; provided, however, the
Company shall have the right to furnish the financial statements to the
Representative at any time after the Representative retains independent public
accountants to
19
<PAGE>
prepare the financial statements in which event the amount of fees that the
Company shall be obligated to pay to the independent public accountants selected
by the Representative will be limited to those fees (including any retainer
paid) actually incurred to the point in time that the Company furnishes the
required financial statements.
5.7 EXPENSES PAID BY THE COMPANY. The Company agrees to pay, whether or
----------------------------
not the transactions contemplated hereunder are consummated or this Agreement is
prevented from becoming effective or is terminated, all costs and expenses
incident to the performance of its obligations under this Agreement, including
all expenses incident to the authorization, issuance, and delivery of the Shares
and Representative's Warrants, any original issue taxes in connection therewith,
all transfer taxes, if any, incident to the initial sale of the Shares to the
public, the fees and expenses of the Company's personnel in connection with the
proposed Public Offering, the costs, fees, and expenses incident to the
preparation, printing and filing under the Act and with the NASD of the
Registration Statement, or supplements thereto, the cost of printing,
reproducing and filing all exhibits to the Registration Statement, the Agreement
Among Underwriters, this Agreement, the Selected Dealer Agreement and any other
underwriting documents, the cost of printing and delivering to the
Representative, the members of the Underwriting Group, and selected dealers
copies of the Registration Statement and copies of the Agreement Among
Underwriters, this Agreement and the Selected Dealer Agreement, and any other
underwriting documents, as many Preliminary Prospectuses and the final
Prospectuses as the Representative may deem reasonably necessary as herein
provided, the costs and legal counsel fees of qualifying the Shares under the
state securities or blue sky laws as provided in Section 5.4 hereof, the fees
and disbursements of legal counsel and accountants for the Company, the cost of
providing the Representative with two (2) bound volumes of the Registration
Statement, as amended, all exhibits thereto, all state filings and all
correspondence relating to the Registration Statement and all state filings, all
expenses incurred in connection with the holding of "due diligence" meetings
(which shall include all presentations specified by the Representative) held by
the Representative, and the cost of one (1) suitable tombstone notice in the
Wall Street Journal relating to the proposed Public Offering, and any other
expenses customarily paid by an issuer. Except as specified above, the Company
shall not be required to pay any fees or charges for attending or any travel or
lodging expenses incurred in attending due diligence meetings by members of the
Underwriting Group or dealers. Except as otherwise specified above, the
Representative agrees to pay all fees and expenses of any legal counsel which it
may employ to represent it separately in connection with or on account of the
proposed Public Offering and agrees to pay any advertising not paid by the
Company, mailing, telephone, travel and clerical costs and all other office
costs incurred or to be incurred by the Representative or by its representatives
in connection with the proposed Public Offering.
5.8 REPORTS TO SHAREHOLDERS. For so long as the Company's Common Stock is
-----------------------
registered under the Exchange Act, the Company agrees to hold an annual meeting
of shareholders for the election of directors within one hundred eighty (180)
days after the end of each of the Company's fiscal years and, within one hundred
eighty (180) days after the end of each of the Company's fiscal years, to send
to each of the Company's shareholders the
20
<PAGE>
audited financial statements of the Company as of the end of the fiscal year
just completed prior thereto. Such financial statements shall be those required
by Rule 14c-3 under the Exchange Act and shall be included in an annual report
meeting the requirements of such Rule. Further, the Company agrees, so long as
such Common Stock is so registered:
(i) to provide the Company's shareholders with quarterly summary
operating financial statements;
(ii) to send, within thirty (30) days after the Closing Date, a letter
to shareholders of the Company which welcomes them as shareholders and
discusses the business conducted by the Company since the Effective Date.
(iii) to send, as least every ninety (90) days for a period of three
(3) years after the Effective Date, a letter or report to shareholders of
the Company and to broker dealers which are then market markers of Shares
of the Company on NASDAQ ("market makers"), which contains a narrative
discussion of the Company's financial status and results of operations and
a narrative discussion of the business conducted by the Company since the
last report or letter to shareholders and market markers.
(iv) during the period after three (3) years from the Effective Date,
to send to each of the Company's shareholders and market markers in printed
form within ninety (90) days after the end of each fiscal quarter just
ended a narrative discussion of such financial statements and the business
conducted by the Company during such quarter.
If the Company breaches any of its agreements set forth in this Section
5.8, the parties agree that any such breach will result in irreparable harm to
the Representative for which an adequate remedy for damages will not exist and
therefore the Representative shall be entitled to seek and obtain a court
injunction in equity which orders the Company to comply with its agreements set
forth in this Section 5.8 and which requires the Company
to reimburse the Representative for its costs, including reasonable attorney
fees, incurred in obtaining such injunctive order.
5.9 SECTION 11(a) FINANCIAL. The Company agrees to send to each of its
-----------------------
security holders and agrees to deliver to the Representative, as soon as
practicable, but in no event later than the first day of the sixteenth (16th)
full calendar month following the Effective Date, an earnings statement (as to
which no opinion need be rendered but which will satisfy the provisions of
Section 11 (a) of the Act) covering a period of at least twelve (12) months
beginning after the Effective Date.
5.10 POSTEFFECTIVE AVAILABILITY OF PROSPECTUS. Within the time during
----------------------------------------
which the Prospectus is required to be delivered under the Act, the Company
agrees to comply, at its own expense, with all requirements imposed upon it by
the Act, as now or hereafter amended, by the Rules and Regulations, as from time
to time may be in force, and by any order of the Commission, so far as necessary
to permit the continuance of sales of the Shares.
21
<PAGE>
5.11 APPLICATION OF PROCEEDS. The Company intends to apply the net
-----------------------
proceeds from the sale of the Shares substantially in the manner set forth in
the Registration Statement. Except for cumulative changes of less than ten
percent (10%) in each specific item set forth in the "Use of Proceeds" section
of the definitive Prospectus, the Company will not deviate from such use without
giving written notice of such proposed deviation to the Representative at least
ten (10) business days prior to any such deviation. Pending utilization of the
net proceeds by the Company for business purposes, all of the unused net
proceeds from the sale of the Shares will be invested in short term United
States government securities purchased through a bank or in a nondiscretionary
account of the Company with the Representative.
5.12 DELIVERY OF DOCUMENTS. Prior to the Closing Date, the Company agrees
---------------------
to deliver to the Representative true and correct copies of the charter,
articles of association, articles of incorporation and certificate of
incorporation of the Company and its Subsidiaries, and all amendments thereto,
all such copies to be certified by the secretary of state of the state of
incorporation of the Company and by the proper governmental authority of any
foreign country in which one or more Subsidiaries are incorporated to the extent
that such document or an equivalent thereof is made available by such
governmental authority; true and correct copies of the bylaws of the Company and
of the minutes of all meetings of the directors and shareholders of the Company
held prior to the Closing Date; and true and correct copies of all material
contracts to which the Company or any of its Subsidiaries, if any, is a party.
5.13 COOPERATION WITH REPRESENTATIVE'S DUE DILIGENCE. At all times prior
-----------------------------------------------
to the Closing Date, the Company agrees to cooperate with the Representative,
legal counsel for the Representative, and the Representative's consultants in
such investigation as the Representative may make or cause to be made of the
Company, its Subsidiaries and their affiliates and the Company agrees to make
available to the Representative in connection therewith such information and
documents relating to the Company, its Subsidiaries and their affiliates as the
Representative may reasonably request and such persons as the Representative or
legal counsel for the Representative shall deem reasonably necessary or
appropriate in order to verify or substantiate any document or other information
regarding the Company and the preparation and filing of the Registration
Statement.
5.14 ANNUAL MEETINGS. The Company will, at its expense, so long as its
---------------
Common Stock is registered under the Exchange Act, hold an annual meeting of
shareholders for the election of directors within one hundred eighty (180) days
after the end of each of the Company's fiscal years.
5.15 LIMITATIONS ON COMPANY. Except with the Representative's prior
----------------------
written consent, the Company agrees that the Company will not do the following
until (a) the termination of this Agreement or (b) the number of days after the
Effective Date for which the Prospectus is required to be used pursuant to Rule
174 of the Rules and Regulations, whichever occurs first:
(i) Undertake or authorize any change in its capital structure;
22
<PAGE>
(ii) Borrow any funds other than in the ordinary course of business
and as contemplated by the Prospectus;
(iii) Consolidate or merge with or into any other corporation;
(iv) Purchase all or substantially all of the assets of another
corporation or any other entity or person or sell all or substantially all
of the Company's assets to another corporation, entity or person;
(v) Purchase fifty percent (50%) or more of the securities of another
corporation or other entity or sell or enter into an exchange transaction
pursuant to which the Company or the Company's shareholders sell or
exchange or otherwise dispose of fifty percent (50%) of the issued and
outstanding shares of the Company's Common Stock in a taxable or tax free
transaction; or
(vi) Create any mortgage or any lien upon any of its properties or
assets other than in the ordinary course of business and as contemplated by
the Prospectus.
5.16 APPOINTMENT OF TRANSFER AGENT. Prior to the Effective Date, the
-----------------------------
Company will have appointed American Securities Transfer & Trust, Inc., 938
Quail Street, Suite 101, Lakewood, Colorado 80215, as transfer agent for the
Company's Shares and Common Stock. The Company shall not change its transfer
agent for a period of two (2) years after the Effective Date without the
Representative's prior written consent.
5.17 DAILY TRANSFER SHEETS. For the three (3) year period following the
---------------------
Effective Date, the Company, at its expense, shall provide the Representative,
if so requested in writing, with copies of the Company's daily Common Stock
transfer sheets and the Depository Trust Company ("DTC") special security
position listing reports.
5.18 CERTIFICATES. The Company agrees to make arrangements to have
------------
available at the office of the transfer agent sufficient quantities of the
Company's certificates as may be needed for the quick and efficient transfer of
the Shares and Common Stock.
5.19 COMPLIANCE WITH CONDITIONS PRECEDENT. The Company agrees to use all
------------------------------------
reasonable efforts to comply or cause to be complied with the conditions
precedent to the obligations of the members of the Underwriting Group in Section
8 hereof.
5.20 FILINGS OF FORMS. The Company agrees to file with the Commission all
----------------
required reports on Form SR in accordance with the provisions of Rule 463 of the
Rules and Regulations and will file with the appropriate state securities
authorities any sales and other reports required by the rules and regulations of
such agencies and will provide copies of such reports to the Representative and
to the legal counsel for the members of the Underwriting Group.
23
<PAGE>
5.21 REGISTRATION UNDER THE EXCHANGE ACT. Prior to the Effective Date of
-----------------------------------
the Registration Statement, the Company will have made a filing under Section
12(g) of the Exchange Act with respect to the Company's Common Stock. The
Company agrees to deliver a copy of such filing to the Representative and to
legal counsel for the Representative when filed. On the Effective Date of the
Registration Statement, the Company will cause the Company's filing under
Section 12(g) of the Exchange Act to become effective with the Commission.
5.22 LISTING IN MANUALS. The Company will use its best efforts to qualify
------------------
(if not already qualified) the Company's Shares and Common Stock for trading in
all states as soon as legally possible. Therefore, as soon as possible prior to
the Effective Date, the Company will use its best efforts to have the Company
listed in Moody's Over-the-Counter Manual and Standard & Poor's Standard
Corporation Records and such other Manuals as are reasonably requested by the
Representative.
5.23 NASDAQ/NMS. The Company agrees to have the Shares listed and
----------
available for quotation on the NASDAQ Small Cap Market on the Effective Date of
the Registration Statement. Subject to the Company's ability to meet the
maintenance requirements of the NASDAQ Small Cap Market, the Company agrees to
maintain the listing of its Common Stock such that such Shares will continue to
be available for quotation on the NASDAQ Small Cap Market. The trading symbols
shall be mutually agreeable to the Company and the Representative. As soon as
the Company meets the qualifications required with respect thereto, the Company
will designate its securities for inclusion on the NASDAQ National Market System
or, in the alternative, such national stock exchange as is agreed to between the
Company and the Representative .
5.24 SECONDARY TRADING QUALIFICATIONS. The Company agrees to qualify its
--------------------------------
securities for secondary trading, as soon as legally possible, in California and
such other states as are reasonably requested by the Representative from time to
time.
5.25 LEGENDS ON STOCK CERTIFICATES. The Company agrees to cause the stock
-----------------------------
certificates of its current shareholders that represent "restricted securities,"
and the stock and warrant certificates held by officers, directors, or
controlling persons of the Company to be clearly legended as being restricted
against transfer without compliance with the Act and to cause the Company's
transfer agent and warrant agent to put stop transfer instructions against such
certificates.
5.26 STOCKHOLDERS AND WARRANTHOLDERS LISTS AND TRANSFER SUMMARIES. Within
------------------------------------------------------------
ten (10) business days after the Closing Date and within ten (10) business days
after the Option Closing Date, the Company will deliver to the Representative
complete lists of all holders of the Shares and Common Stock of the Company as
of the Closing Date and as of the Option Closing Date, respectively. Each such
list shall include the name and address of each such holder and the number of
Shares and shares of Common Stock owned by each such person as of such date.
Within ten (10) business days after the end of each of the first twenty-four
(24)
24
<PAGE>
calendar months after the Closing Date, the Company will provide the
Representative with a new list containing the information described above with
respect to the Shares and Common Stock as of the end of each such month and a
list which shows each transaction involving a transfer of a Share or Common
Stock certificate during such month. This transfer list shall include the name
and address of the transferor and the transferee and the number of Shares and
shares of Common Stock transferred.
5.27 DIRECTORS, OFFICERS AND COMMITTEES. Immediately after the Closing
----------------------------------
Date, the Representative shall have the right, subject to the approval of the
Board of Directors, to select one member of the Company's Board of Directors.
The director to be selected by the Representative shall serve until the next
annual meeting of the Company's Shareholders. Thereafter, the Company will have
such member renominated for an additional two (2) terms of office. The
Company's officers and directors agree that they will vote their shares of
Common Stock (or any other securities entitled to vote for the election of
directors) to re-elect such member. In addition, the Company will solicit its
shareholders to vote in favor of the Representative's nominee. Following the
date of the final Prospectus, the Company agrees that the persons comprising the
Board of Directors and officers of the Company on the Effective Date must be
acceptable to the Representative. Such acceptance will only be withheld by the
Representative if material adverse information is discovered by the
Representative. By no later than the Closing Date, the Company will, if it has
not already done so, have two (2) outside independent directors serving on the
Board of Directors. The Company shall continue to maintain at least two (2)
independent outside directors for at least the next two (2) fiscal years beyond
the Effective Date. The Company agrees that for a period of three (3) years
after the Closing Date, the Company will permit a representative, designated by
the Representative and acceptable to the Company, to receive notice of and to
attend all meetings of the Board of Directors of the Company. The Representative
shall be provided with the same notice of each meeting of the Board of Directors
as is provided to the Board of Directors. No compensation shall be paid to such
observer. However, the Company will reimburse out of pocket expenses incurred by
such observer to attend meetings. Such observer shall have no vote at such
meetings; and, such observer shall be required, prior to attending any such
meeting, to represent in writing to the Company that such observer is familiar
with and will comply with all requirements of the federal securities laws
applicable to a person who comes into possession of material nonpublic
information concerning the Company. The Board of Directors of the Company will
establish an audit and a management compensation committee and will maintain
such committees so long as the Common Stock of the Company is registered under
the Exchange Act. For a period of not less than two (2) years after the
Effective Date, at least two (2) outside independent director's will serve on
the Company's audit and compensation committees and as such shall comprise a
majority of the members of such committees. The Board of Directors will manage
and oversee the application of the proceeds received by the Company from the
Public Offering. Any material modification in the application of such proceeds
which varies from the specific use described in the final Prospectus shall
require the prior review and approval of all of the members of the Board of
Directors.
25
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5.28 RIGHT OF INSPECTION. The Company agrees that for a period of three
-------------------
(3) years following the date of the final Prospectus, the Representative, at the
Representative's expense, will have the right to have a person or persons
selected by the Representative review the books, records and operations of the
Company, upon seven (7) days written notice. Any person designated by the
Representative to conduct such review shall be required to execute a
confidentiality agreement which will, in part, prohibit disclosure of
information to any person other than the Representative. Unless the Company
specifically agrees otherwise, any such information shall be held in confidence.
5.29 PUBLIC RELATIONS FIRM. At least ninety (90) days prior to the
---------------------
Effective Date, the Company will engage the services of a public relations
advisory firm which is acceptable to the Representative. The Company shall
retain the services of such public relations advisory firm for at least one (1)
year following the Effective Date. The Company shall have sole authority to
determine the compensation and the utilization of such public relations firm.
In any event, the Company shall provide reasonable and frequent notices to the
public concerning material developments in the Company's business operations,
activities and acquisitions. Such public relations firm shall not be a member
of the Underwriting Group or a "related person" of any such member of the
Underwriting Group. The term "related person" is described in Section 5.32 of
this Agreement.
5.30 DISSEMINATION OF INFORMATION. To avoid any appearance of the early
----------------------------
commencement of the Public Offering, the Company shall consult with its counsel
and the Representative prior to distribution to third parties of any financial
information, news releases and/or other publicity regarding the Company, its
business or any terms of the proposed Public Offering, unless such dissemination
is required by law or by prior Company practices. Prior to the distribution
thereof, the Company shall furnish to the Representative copies of all
documents, including, without limitation, financial information, news releases
and other documents regarding the Company, its business, its properties or any
of the terms of the proposed Public Offering, which the Company or its public
relations advisors intend to distribute prior to the Closing Date.
5.31 MANAGEMENT REFERRALS. Persons whom management of the Company believe
--------------------
may be interested in purchasing Shares in the Public Offering will be referred
only to the Representative and management of the Company will purchase Shares in
the Public Offering only through the Representative. The Representative will
have complete control of the distribution of the Shares in the Public Offering.
5.32 NO NASD MEMBER PAYMENTS OR AFFILIATION. For purposes of this Section
--------------------------------------
5.29 and Section 5.32 hereof, a "related person" of an NASD member is a person
who has any of the following relationships with any NASD member: legal counsel,
financial consultant or advisor, finder, associated person, or member of the
immediate family of any such person. The Company represents to the
Representative that the Company has not paid and will not pay, except as
described in the Registration Statement or the next sentence, or agreed to pay
or deliver any item of value, including securities, to any member of the NASD or
to any person
26
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associated with a member of the NASD or to any related person of an NASD member
during the period beginning on the three hundred sixty-sixth (366th) day prior
to the filing of the Registration Statement with the Commission and ending on
the forty-fifth (45th) day after the Effective Date of the Registration
Statement. The representation contained in the foregoing sentence shall not
include cash discounts or commissions paid by the Company in connection with a
distribution of the Company's securities which occurs prior to the filing of the
Registration Statement with the Commission. The Company shall supply to legal
counsel for the Representative no later than one (1) week before the expected
filing date of the Registration Statement, the written representation of the
Company's president or chief executive officer as to (i) the existence or non-
existence of any NASD affiliation or association of any officer, director, or
five percent (5%) or greater shareholder of the Company, and, if a shareholder
of the Company is a corporation, the existence or non-existence of such NASD
affiliation or association of any officer, director or five percent (5%) or
greater shareholder of such corporation, (ii) whether or not any unregistered
securities of the Company have been acquired by any NASD member or related
persons during the thirteen (13) month period prior to the anticipated filing
date of the Registration Statement, and (iii) whether or not key-man life
insurance has been or will be provided for any officer or director of the
Company by any NASD member or related person.
5.33 FUTURE SALES.
------------
5.33.1 COMPANY SALES TO OTHERS. During the period of six (6) months
-----------------------
after the Effective Date of the Registration Statement, the Company will
not sell any securities (other than debt securities issued to financial
institutions) not covered by the Registration Statement without the
Representative's prior written consent. Excepted from this provision shall
be sales of Excluded Shares. The term "Excluded Shares" shall mean options
and warrants which are issued and outstanding on the Effective Date of the
Registration Statement or which are issued pursuant to a plan ("Plan")
which has been approved in writing by the Board of Directors of the Company
and the Representative prior to the Effective Date of the Registration
Statement.
5.33.2 COVERED PERSONS. Prior to the Effective Date of the
---------------
Registration Statement, the Company will cause each of its officers,
directors, five percent (5%) or more shareholders, and their affiliates and
any other persons as shall be required by NASDAQ ("Covered Persons) to
agree with the Representative in a written agreement in form and substance
satisfactory to the Representative and legal counsel for the Representative
that, without the prior written consent of the Representative, each such
Covered Person will not sell or otherwise dispose of any of the Company's
shares of Common Stock. Such agreement will also provide that if a Covered
Person who is an officer or director of the Company on the Effective Date
of the Registration Statement ceases to be an officer or director of the
Company at any time during the period of twelve (12) months after the
Closing Date, then such Covered Person and the affiliates of such Covered
Person will agree not to sell any of the Company's shares of Common Stock
which are owned by such Covered Person and such Covered Person's affiliates
27
<PAGE>
on the Effective Date of such Registration Statement until the expiration
of twelve (12) months after the Effective Date. For purposes of this
Agreement, the term "affiliate" shall have the meaning ascribed to it in
Rule 405 of the Act. Such agreements between the Representative and the
Covered Persons will also provide that any sales of shares of Common Stock
of the Company by such persons during the two (2) year period after the
Closing Date, under Rule 144 promulgated by the SEC under the Act ("Rule
144 Sales"), will be executed only through the Representative acting as a
broker or dealer. In such agreement the Representative will agree to
execute such Rule 144 Sales on a competitive basis. If any person required
to execute an agreement under this subsection 5.33.2. has pledged, or
during the applicable period pledges, any of the Company's shares of Common
Stock which are covered by such agreement, such person shall cause his
pledgee to also agree in writing to comply with the pledgor's agreement
with the Representative. A copy of any such written agreement from the
pledgee shall be promptly delivered by the pledgor to the Representative
after execution thereof by the pledgee.
5.34 EXCLUSIVE DEALING. The Company at no time prior to the Closing Date,
-----------------
as contemplated under this Agreement, shall enter into discussions, negotiate or
otherwise make any arrangements with any other underwriter or other person which
relate in any manner to the undertaking of a possible Public Offering of the
Company's securities by any such person other than the Representative, so long
as the Representative is discharging and performing its duties and
responsibilities under this Agreement and has not indicated in writing its
decision not to consummate the proposed Public Offering as contemplated under
this Agreement.
5.35 FINANCIAL PRINTER. The Representative has approved the Company's
-----------------
selection and engagement of R R Donnelley Financial as the financial printing
company selected by the Company to print the Preliminary and Final Prospectus
and for the transmitting of all electronic filings to the Commission prior to
the engagement by the Company of the services of such financial printing
company. In addition, the Representative shall approve the form, size, style
and quality of the Preliminary and Final Prospectus.
5.36 LIMITATION ON CERTAIN OFFERINGS. At no time for a period commencing
-------------------------------
on March 17, 1997 and continuing until thirty-six (36) months after the
Effective Date shall the Company, without the prior written consent of the
Representative, conduct an offering of its securities under the exemption from
the registration requirements afforded under Regulation S (i.e., Rules 901
through 904) as promulgated under the Act or any offering of its Shares under an
S-8 Registration Statement (or successor from of registration statement) in
connection with the issuance of the Company's securities to consultants or
advisors for services.
SECTION 6
INDEMNIFICATION
---------------
6.1 INDEMNIFICATION BY COMPANY. The Company agrees to indemnify and hold
--------------------------
harmless the Representative and the other members of the Underwriting Group and
each
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officer, director, employee, representative, agent, surety, guarantor, and
each person who controls the Representative or any other member of the
Underwriting Group within the meaning of Section 15 of the Act against any and
all losses, claims, damages or liabilities, joint or several, or litigation,
arbitration or mediation proceedings (collectively referred to as "litigation"),
including any and all awards or judgments rendered in connection therewith, to
which they or any of them may become subject under the Act or any other statute
or at common law and to reimburse the persons indemnified for any legal or other
expenses (including the cost of any investigation and preparation) incurred by
them in connection with any litigation, whether or not resulting in any
liability, but only insofar as such losses, claims, damages, liabilities and
litigation (including awards and/or judgments in connection therewith) arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereto
and the Prospectus and related exhibits included in the Registration Statement
or any application or other document filed in order to qualify the Shares under
the blue sky or securities laws of the states where filings were made, or the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, all
as of the date when the Registration Statement or such amendment, as the case
may be, becomes effective, or any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or supplemented if
the Company shall have filed with the Commission any amendments thereof or
supplements thereto), or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however
that the indemnity agreement contained in this subsection 6.1 shall not apply to
the Representative or any of the other members of the Underwriting Group or any
person controlling the Representative or any other member of the Underwriting
Group in respect of any such losses, claims, damages, liabilities or litigation
arising out of or based upon any such untrue statement or alleged untrue
statement, or any such omission or alleged omission, if such statement or
omission was made in reliance upon information peculiarly within the knowledge
of the Representative or another member of the Underwriting Group and furnished
in writing to the Company by a member of the Underwriting Group specifically for
use in connection with the preparation of the Registration Statement and
Prospectus or any such amendment or supplement thereto and such person in making
any such statement, or any such omission or alleged omission, knowingly and
willfully violated applicable law or was guilty of gross negligence in
connection therewith. This indemnity agreement is in addition to any other
liability which the Company may otherwise have to the Representative and other
members of the Underwriting Group or to any person controlling the
Representative or a member of the Underwriting Group. Each member of the
Underwriting Group agrees within ten (10) days after the receipt by it of
written notice of the commencement of any action against it or against any
person controlling it as aforesaid, in respect of which indemnity may be sought
from the Company on account of the indemnity agreement contained in this
subsection 6.1 to notify the Company in writing of the commencement thereof.
The failure of such a member of the Underwriting Group so to notify the Company
of any such action shall relieve the person to whom such notice was not given
from any liability which it may have to that member of the Underwriting Group or
any person controlling it as aforesaid on account of the indemnity
29
<PAGE>
agreement contained in this subsection 6.1, but shall not relieve the Company
from any other liability which it may have to that member of the Underwriting
Group or such controlling person. In case any such action shall be brought
against the Representative of any other member of the Underwriting Group or any
such controlling person and the Representative or other member of the
Underwriting Group shall notify the Company of the commencement thereof, the
Company shall be entitled to participate in (and, to the extent that it shall
wish, to direct) the defense thereof at its own expense, but such defense shall
be conducted by legal counsel of recognized standing and reasonably satisfactory
to such member of the Underwriting Group or such controlling person or persons,
which is a defendant or which are defendants in such litigation. No settlement,
compromise or other disposition of any such litigation shall be made by the
Company without the prior written consent of the Representative and the other
persons indemnified hereunder. Conversely, any settlement, compromise or other
disposition shall require the Company's written consent and to the extent the
Company does not consent to any such settlement, compromise or other disposition
of any such litigation, the Company shall not be liable for amounts paid in
connection therewith. If the Company elects to direct such defense, the Company
agrees to furnish to each indemnified member of the Underwriting Group at its
request, copies of all pleadings therein and to apprise each indemnified member
of the Underwriting Group of all developments therein, all at the Company's
expense, and to permit the Representative and each indemnified member of the
Underwriting Group to be an observer therein.
6.2 INDEMNIFICATION BY THE MEMBERS OF THE UNDERWRITING GROUP. The members
--------------------------------------------------------
of the Underwriting Group agree, in the same manner as set forth in subsection
6.1. above, to indemnify and hold harmless the Company, the directors and
officers of the Company and each person, if any, who controls the Company within
the meaning of Section 15 of the Act, with respect to any statement in or
omission from the Registration Statement or any amendment thereto, or the
Prospectus (as amended or as supplemented, if amended or supplemented as
aforesaid) or any application or other document filed in any state or
jurisdiction in order to qualify the Shares under the blue sky or securities
laws thereof, or any information furnished pursuant to subsection 3.6 hereof, if
such statement or omission was made in reliance upon information peculiarly
within the knowledge of a member of the Underwriting Group and furnished in
writing to the Company by a member of the Underwriting Group or on its behalf
specifically for use in connection with the preparation thereof or supplement
thereto and such person in making any such statement, or any such omission or
alleged omission, knowingly or willfully, violated applicable law or was guilty
of gross negligence in connection therewith. No member of the Underwriting
Group shall be liable for amounts paid in settlement of any such litigation if
such settlement was effected without the written consent of the member of the
Underwriting Group. In case of commencement of any action in respect of which
indemnity may be sought from a member of the Underwriting Group on account of
the indemnity agreement contained in this subsection 6.2., each person to be
indemnified by the indemnifying member of the Underwriting Group shall have the
same obligation to notify the member of the Underwriting Group as the members of
the Underwriting Group have toward the Company in subsection 6.1. hereof,
subject to the same loss of indemnity in the event such notice is not given, and
the indemnifying member of the Underwriting Group shall have the
30
<PAGE>
same right to participate in (and, to the extent that the indemnifying member of
the Underwriting Group shall wish, to direct) the defense of such action at the
expense of the indemnifying member of the Underwriting Group, but such defense
shall be conducted by legal counsel of recognized standing and reasonably
satisfactory to the Company. If the indemnifying member of the Underwriting
Group elects to direct such defense, the indemnifying member of the Underwriting
Group agrees to furnish to the Company at its request copies of all pleadings
therein and apprise it of all the developments therein, all at the expense of
the indemnifying member of the Underwriting Group, and permit the Company to be
an observer therein.
6.3 CONTRIBUTION. If the indemnification provided for in this Section 6
------------
is unavailable to or insufficient to hold harmless an indemnified party under
subsections 6.1 and 6.2 hereof, in respect of any losses, claims, damages or
liabilities (or actions or litigation including awards and/or judgments in
respect thereof) referred to therein, then each indemnifying party shall in lieu
of indemnifying such indemnified party contribute to the amount paid or payable
by such indemnified party as a result of such losses, claims, damages, or
liabilities (or actions or litigation including awards and/or judgments in
respect thereof) in such proportion as is appropriate to reflect not only (i)
the relative benefits received by the Company on the one hand and the member of
the Underwriting Group on the other from the Public Offering of the Shares, but
also (ii) the relative fault of the Company and the member of the Underwriting
Group in connection with the statements or omissions which resulted in such
losses, claims, damages, or liabilities (or actions or litigation including
awards and/or judgments in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and the member of the Underwriting Group on the other shall be deemed
to be in the same proportion as the total net proceeds from the Public Offering
of the Shares (before deducting expenses) received by the Company bears to the
total underwriting discount received by the members of the Underwriting Group,
in each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the member of the Underwriting Group and the person's relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the members of the Underwriting
Group agree that it would not be just and equitable if contribution pursuant to
this subsection 6.3. were determined by pro rata allocation or by any other
method of allocation which does not take account of the equitable considerations
referred to above in this subsection. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions or litigation including awards and/or judgments in respect thereof)
referred to above in this subsection 6.3 shall be deemed to include any legal or
other expenses to which such indemnified party would be entitled if subsections
6.1 and 6.2 hereof were applied. Notwithstanding the provisions of this
subsection 6.3, no member of the Underwriting Group shall be required to
contribute any amount in excess of the amount equal to the total price of the
Shares underwritten and distributed by it to the public. No person guilty of
fraudulent
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<PAGE>
misrepresentation (within the meaning of Section 11 of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
6.4 THREAT OF REGULATORS' ACTION. The Company and the Representative
----------------------------
agree to advise each other immediately and confirm in writing the receipt of any
threat of or the initiation of any steps or procedures by the Commission or any
other regulatory authority which would impair or prevent the right to offer or
sell any of the Shares or the issuance of any "suspension orders" or other
prohibitions preventing or impairing the proposed Public Offering of the Shares.
In the case of the happening of any such event, neither the Company nor the
members of the Underwriting Group will acquiesce in such steps, procedures or
suspension orders, and each party agrees to actively defend any such actions or
orders unless all parties agree, in writing, to acquiesce in such actions or
orders.
SECTION 7
EFFECTIVENESS OF AGREEMENT
--------------------------
After this Agreement has been executed by the Company and the
Representative, this Agreement shall become effective (i) at 10:00 A.M., Denver,
Colorado Time, on the first full business day after the Effective Date of the
Registration Statement or (ii) upon release by the Representative of the Shares
for offering after the Effective Date, whichever shall first occur. The time of
the release by the Representative of the Shares for offering, for the purposes
of this Section 7, shall mean the time of release by the Representative for
publication of the first newspaper advertisement which is subsequently published
relating to the Shares or the time of the first mailing of copies of the
Prospectus relating to the Shares in connection with a confirmation of a sale of
Shares by an Underwriter or Dealer, whichever shall first occur.
SECTION 8
CONDITIONS OF THE OBLIGATIONS OF THE
------------------------------------
MEMBERS OF THE UNDERWRITING GROUP
---------------------------------
After execution of this Agreement by the Company and the Representative,
the obligations of the members of the Underwriting Group to purchase the Shares
and to make payment therefor on the Closing Date and on the Option Closing Date
shall be subject to the accuracy, as of the Closing Date and as of the Option
Closing Date, of the representations and warranties on the part of the Company
herein contained, to the performance by the Company of all of its agreements and
obligations herein contained, to the fulfillment of or compliance by the Company
with all covenants and conditions hereof, and to the following additional
conditions, any of which may be waived or modified by the Representative:
8.1 EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration Statement
---------------------------------------
shall have become effective and no order suspending the effectiveness of the
Registration Statement shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission or be pending; any
request for additional information on the part of the Commission (to be included
in the Registration Statement or Prospectus or otherwise) shall
32
<PAGE>
have been complied with to the satisfaction of the Commission; and neither the
Registration Statement nor the Prospectus nor any amendment thereto shall have
been filed to which legal counsel for the Representative shall have reasonably
objected in writing or shall have withheld giving its consent.
8.2 ACCURACY OF REGISTRATION STATEMENT. The Representative shall not have
----------------------------------
disclosed in writing to the Company that the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto contains an untrue
statement of a fact which, in the opinion of legal counsel for the
Representative is material, or omits to state a fact which, in the opinion of
such legal counsel, is material and is required to be stated therein, or is
necessary to make the statements therein not misleading.
8.3 NO MATERIAL ADVERSE CHANGES. No material adverse changes shall have
---------------------------
occurred in or with respect to the officers or directors of the Company. No
material adverse changes shall have occurred in or with respect to the business,
properties, financial condition or credit of the Company or in or with respect
to any conditions affecting the prospects of its business.
8.4 CASUALTY AND OTHER CALAMITY. The Company or any of its Subsidiaries
---------------------------
shall not have sustained any loss on account of fire, explosion, flood,
accident, calamity or any other cause, of such character as materially adversely
affects the business or properties of the Company of any of its Subsidiaries
considered as an entire entity, whether or not such loss is covered by
insurance, and no officer or director of the Company shall have suffered any
injury, sickness or disability of a nature which would materially adversely
affect his or her ability to properly function as an officer or director of the
Company.
8.5 LITIGATION AND OTHER PROCEEDINGS. Except as disclosed in the
--------------------------------
Prospectus, there shall be no litigation instituted or threatened against the
Company and there shall be no proceeding instituted or threatened against the
Company before or by any federal or state commission, regulatory body or
administrative agency or other governmental body, domestic or foreign.
8.6 LACK OF MATERIAL CHANGE. Except as contemplated herein or as set
-----------------------
forth in the Registration Statement and Prospectus, during the period subsequent
to the date of the last audited balance sheet included in the Registration
Statement, the Company (i) shall have conducted its business in the usual and
ordinary manner as the same was being conducted on the date of the last audited
balance sheet included in the Registration Statement, and (ii) except in the
ordinary course of its business, the Company shall not have incurred any
liabilities or obligations (direct or contingent) or disposed of any of its
assets, or entered into any material transaction or suffered or experienced any
materially adverse change in its condition, financial or otherwise. The capital
stock and surplus accounts of the Company shall be substantially the same as at
the date of the last balance sheet included in the Registration Statement,
without considering the proceeds from the sale of the Shares, other than as may
be set forth in the Prospectus.
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8.7 LEGAL COUNSEL FOR THE REPRESENTATIVE. The authorization of the
------------------------------------
Shares, the Representative's Warrants, the Registration Statement, Prospectus
and all corporate proceedings and other legal matters incident thereto and to
this Agreement shall be reasonably satisfactory in all respects to legal counsel
for the Representative.
8.8 OPINIONS OF LEGAL COUNSEL.
-------------------------
8.8.1. CHRISMAN BYNUM & JOHNSON, P.C., LEGAL OPINION. The Company
---------------------------------------------
shall have furnished to the members of the Underwriting Group an opinion,
dated the Closing Date, addressed to the members of the Underwriting Group,
from Chrisman Bynum & Johnson, P.C.,legal counsel to the Company, to the
effect that based upon a review by them of the Registration Statement,
Prospectus, the Company's certificate of incorporation,bylaws and relevant
corporate proceedings and contracts, an examination of such statutes as
they deem necessary and based upon such other investigation by such legal
counsel as they deem necessary to express such opinion:
(i) The Company and each of its Subsidiaries have been duly
incorporated or formed and are validly existing corporations or
limited liability companies in good standing under the laws of the
state or foreign country, nation or jurisdiction in which the Company
and each such Subsidiary was incorporated or formed, and that the
Company and each such Subsidiary has full power and authority to own
and operate its properties and to carry on its business as set forth
in the Registration Statement and Prospectus.
(ii) The Company has authorized and outstanding securities as set
forth in the Registration Statement and Prospectus; the outstanding
securities of the Company and each of its Subsidiaries and the Shares
conform to the statements concerning them in the Registration
Statement and Prospectus; the outstanding securities of the Company
and each of its Subsidiaries have been duly and validly issued and
are fully paid and nonassessable, except as otherwise disclosed by
such legal counsel with respect to the Reynolds' ordinary shares, and
contain no preemptive rights; the Shares being sold by the Company to
the Underwriting Group and the Representative's Warrants have been
duly and validly authorized and, upon issuance thereof and payment
therefor in accordance with the terms of this Agreement and the
Representative's Warrants, will be duly and validly issued, fully paid
and nonassessable and will not be subject to the preemptive rights of
any shareholder of the Company.
(iii) To legal counsel's knowledge, no consents, approvals,
authorizations or orders of agencies, officers or other regulatory
authorities are known to such legal counsel which are necessary for
the valid authorization, issue or sale of the Shares being sold by the
Company to the Underwriting Group hereunder, except as required under
the Act or the securities laws of the states in which the Shares are
qualified or except as required by the NASD.
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(iv) To legal counsel's knowledge, the issuance and sale of the
Shares being sold by the Company to the Underwriting Group and the
consummation of the transactions herein contemplated and compliance
with the terms of this Agreement will not conflict with or result in a
breach of any of the terms, conditions, or provisions of or constitute
a default under the certificate of incorporation or bylaws of the
Company, or any note, indenture, mortgage, deed of trust, or other
agreement or instrument known to such counsel to which the Company or
any of its Subsidiaries is a party or by which the Company or any of
its Subsidiaries or any of the properties of any such Subsidiaries are
bound or any existing law (provided this Section 8.8 (iv) shall not
relate to federal or state securities laws), order, rule, regulation,
writ, injunction, or decree of any government, governmental
instrumentality, agency, body, arbitration tribunal, or court,
domestic or foreign, having jurisdiction over the Company or its
property or any of the Company's Subsidiaries or the property of any
such Subsidiary which is known to such counsel.
(v) No preemptive rights exist with respect to the Company's
securities.
(vi) The Company has authorized capitalization as described in
the Registration Statement.
(vii) Based upon written or oral communications from the
Commission, the Registration Statement has become effective under the
Act and, to the knowledge of such legal counsel, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceeding for that purpose has been instituted or is
pending or contemplated; legal counsel has participated in the
preparation of the Registration Statement and Prospectus and each
amendment and supplement thereto, and no facts have come to the
attention of legal counsel to lead counsel to believe that either the
Registration Statement or the Prospectus or any amendment or
supplement thereto contains any untrue statement of a material fact or
omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of
the circumstances under which made (except for the financial
statements and other financial data included therein, as to which
legal counsel expresses no opinion); and such counsel is familiar with
all contracts referred to in the Registration Statement or Prospectus
and such contracts are sufficiently summarized or disclosed therein or
filed as exhibits thereto as required, and such legal counsel does not
know of any other contracts that are required to be summarized or
disclosed or filed, and such legal counsel does not know of any legal
or governmental proceedings pending or threatened to which the Company
or any of its Subsidiaries are subject of such a character required to
be disclosed in the Registration Statement or the Prospectus which are
not disclosed and properly described therein.
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(viii)This Agreement has been duly authorized by the Company and
is a valid and binding agreement of the Company enforceable in
accordance with its terms subject to equitable principles and to
applicable bankruptcy, insolvency and other laws concerning the
enforceability of creditors' rights generally; provided that such
counsel need not express any opinion as to the enforceability of any
indemnification or contribution provisions contained in this
Agreement. A sufficient number of shares of the Company's Common Stock
have been duly reserved for issuance upon exercise of the
Representative's Warrants.
(ix) Except as disclosed in the Registration Statement and
Prospectus, to the knowledge of legal counsel, neither the Company nor
any of its Subsidiaries is in default under any of the contracts,
licenses, leases or agreements to which any of them is a party and
which are described in the Registration Statement or attached thereto
as exhibits and the Public Offering of the Shares being sold by the
Company to the Underwriting Group will not cause the Company to become
in default of any of such contracts, licenses, leases or agreements.
(x) Except as disclosed in the Registration Statement and
Prospectus and subject to equitable principles, to the knowledge of
legal counsel, the properties owned by the Company and its
Subsidiaries described in the Registration Statement are free and
clear of all liens, charges, encumbrances or restrictions; to the
knowledge of legal counsel, all of the leases, subleases and other
agreements known to such counsel under which the Company and each of
its Subsidiaries holds its properties and conducts its business are in
full force and effect; to the knowledge of legal counsel, neither the
Company nor any of its Subsidiaries is in default under any of the
material terms or provisions of any of such leases, subleases or other
agreements known to such counsel; and to the knowledge of legal
counsel, there are no claims against the Company or any of its
Subsidiaries concerning the rights of the Company of any of its
Subsidiaries under such leases, subleases and other agreements and
concerning the right of the Company or any of its Subsidiaries to
continued possession of its properties.
(xi) Legal counsel is unaware of any affiliate, parent or
Subsidiaries of the Company except as are described in the
Registration Statement and Prospectus.
(xii) Except as disclosed in the Registration Statement, the
Company and/or each of its Subsidiaries, as the case may be,
exclusively own, possess, or lawfully use, pursuant to licenses,
sublicenses or other agreements, all U.S. or United Kingdom or other
foreign patents, patent applications, trademarks, trademark
applications, service marks, trade names, logos, trade dress, mark
works, and copyrights (collectively, "Patents, Trademarks and
Copyrights") necessary to the manufacture, distribution and marketing
of the products currently manufactured by the Company's Subsidiaries;
such Patents,
36
<PAGE>
Trademarks and copyrights are legal, valid and enforceable; and to the
best of legal counsel's knowledge, the Company and each of its
Subsidiaries has taken all necessary and appropriate action to
maintain and protect the Patents, Trademarks and Copyrights.
(xiii) Such counsel has not received and is not aware of the
Company or any of its Subsidiaries having received any notice of any
claim from any third party which notice would cause such counsel to
conclude that the Company or its Subsidiaries do not own or possess
adequate rights with respect to the Patents, Trademarks and
Copyrights.
(xiv) The licenses, sublicenses and other agreements
("Licenses") covering the use of any of the Patents, Trademarks and
Copyrights by the Company of any of its Subsidiaries is legal,
binding, enforceable and in full force and effect and to the best of
legal counsel's knowledge, neither the Company nor any of its
Subsidiaries is in breach or default of any such Licenses and no event
has occurred which with notice or lapse of time would result in a
breach or default or permit termination, modification or acceleration
under any such License.
(xv) To such counsel's knowledge, except as set forth in the
Registration Statement and Prospectus, no holders of Common Stock or
other securities of the Company have registration rights with respect
to securities of the Company and, except as set forth in the
Registration Statement and Prospectus, all holders of securities of
the Company having rights to registration of such Common Stock, or
other securities, because of the filing of the Registration Statement
by the Company have, with respect to the Public Offering contemplated
thereby, waived such rights or such rights have expired by reason of
lapse of time following notification of the Company's intent to file
the Registration Statement, or have included securities in the
Registration Statement pursuant to the exercise of such rights.
In rendering such opinions, such legal counsel shall be entitled to rely
upon Public Authority Documents and upon information provided by client
officials in written Certificates provided that copies of such Public Authority
Documents and Certificates are attached as exhibits to the written opinion of
legal counsel. The term "Public Authority Documents" shall have the meaning
ascribed to it in the Legal Opinion Accord of the ABA Section of Business Law
(1991). Such opinions may be subject to such qualifications, exceptions,
definitions, limitations as are normally included in similar opinions.
8.9 ACCOUNTANT'S LETTER. The Representative shall have received a letter
-------------------
addressed to the Representative and dated the Closing Date from KMPG Peat
Marwick LLP, independent public accountants for the Company, stating that with
respect to the Company they are independent public accountants within the
meaning of the Act and the applicable published
37
<PAGE>
Rules and Regulations thereunder; in their opinion, the Company's financial
statements audited by them at all dates and for all periods referred to in their
opinion and included in the Registration Statement and Prospectus, comply in all
material respects with the applicable accounting requirements of the Act and the
published Rules and Regulations thereunder with respect to registration
statements on Form SB-2; on the basis of certain indicated procedures (but not
an audit in accordance with generally accepted accounting principles), including
reading of the instruments of the Company set forth in the Prospectus, a reading
of the latest available interim unaudited financial statements of the Company,
whether or not appearing in the Prospectus, inquiries of the officers of the
Company or other persons responsible for its financial and accounting matters
regarding the specific items for which representations are requested below and a
reading of the minute book of the Company, nothing has come to their attention,
except as disclosed in their letter, which would cause them to believe that
during the period from the last audited balance sheet included in the
Registration Statement to a specified date not more than two (2) days prior to
the date of such letter:
(i) there has been any material change in the financial
position of the Company other than as contemplated by disclosures
contained in the Prospectus;
(ii) there has been any material change in the capital stock or
surplus accounts of the Company or any payment or declaration of any
dividend or other distribution in respect thereof or exchange therefor
or in the debt of the Company from that shown in the Company's last
audited balance sheet included in the Prospectus, other than as
contemplated by disclosures contained in the Prospectus;
(iii) there have been any material decreases in working capital
or net worth as compared with amounts shown in the Company's last
audited balance sheet included in the Prospectus other than as
contemplated by disclosures contained in the Prospectus;
(iv) there have been any material decreases, as compared with
amounts shown in the Company's last audited balance sheet included in
the Prospectus, in the cash balances other than as contemplated by
disclosures contained in the Prospectus;
(v) the financial statements and schedules set forth in the
Registration Statement and Prospectus do not present fairly the
financial position and results of operations of the Company for the
periods indicated in conformity with generally accepted accounting
principles applied on a consistent basis, and are not in all material
respects a fair presentation of the information purported to be shown;
38
<PAGE>
(vi) there is any material obligation or liability on the part
of the Company or any of its Subsidiaries to fund the Apollo and
Reynolds Pension Scheme not otherwise reflected in Company's audited
consolidated financial statements for the fiscal year ended December
31, 1997; and
(vii) the dollar amounts, percentages and other financial
information set forth in the Registration Statement and Prospectus
under the captions "Summary," "The Offering, "Summary Consolidated
Financial Data," "Risk Factors," "Use of Proceeds," "Capitalization,"
"Dilution," "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business," "Summary Compensation," and "Certain Transactions" are not
in agreement with the Company's general ledger, financial records or
computations made by the Company therefrom.
Such letter ("Accountant's Letter") shall also cover such other matters
incident to the transactions contemplated by this Agreement in form satisfactory
to the Representative as the Representative reasonably requests.
8.10 CONFORMED COPIES OF ACCOUNTANT'S LETTER. The Representative shall be
---------------------------------------
furnished without charge, in addition to the original signed copies, such number
of signed or photostatic or conformed copies of the Accountant's Letter as the
Representative shall reasonably request.
8.11 OFFICER'S CERTIFICATES. The Company shall have furnished to the
----------------------
Representative two (2) certificates each signed by the president and by the
chief financial officer of the Company, one dated the date of this Agreement and
one dated as of the Closing Date, to the effect that:
(i) The representations and warranties of the Company in this
Agreement are true and correct at and as of the date of the
certificate and the Company has complied with all the agreements and
has satisfied all the conditions on its part to be performed or
satisfied at or prior to the date of the certificate;
(ii) The Registration Statement has become effective and no
order suspending the effectiveness of the Registration Statement has
been issued and to the best of the knowledge of the respective
signers, after such respective signers have made inquiry, no
proceeding for that purpose has been initiated or is threatened by the
Commission;
(iii) The respective signers have each carefully examined the
Registration Statement and Prospectus and any amendments and
supplements thereto, and the Registration Statement and the Prospectus
and any amendments and supplements thereto contain all statements
required to be stated therein, and all statements contained therein
are true and correct, and neither the Registration Statement nor
39
<PAGE>
Prospectus nor any amendment or supplement thereto includes any untrue
statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading and, since the Effective Date of the
Registration Statement, there has occurred no event required to be set
forth in an amended or a supplemented Prospectus which has not been so
set forth;
(iv) This Agreement has been, and, as of the Closing Date, the
Representative's Warrants will have been, duly authorized and executed
by the Company;
(v) The respective signers have each reviewed the
questionnaires provided to the Representative by each officer,
director, and five percent (5%) or more shareholder of the Company
and, to the best of their knowledge, the statements made in such
questionnaires are true and correct ;
(vi) Except as set forth in the Registration Statement and
Prospectus, since the respective dates as of which information is
given in the Registration Statement and Prospectus and prior to the
date of such certificate, (i) there has not been any change in the
officers or directors of the Company or any substantially adverse
change, financial or otherwise, in the affairs or condition of the
Company, and (ii) the Company has not incurred any liabilities, direct
or contingent, or entered into any transactions, otherwise than in the
ordinary course of business; and
(vii) As of or subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, no
dividends or distributions whatever have been declared and/or paid on
or with respect to the securities of the Company.
8.12 TENDER FOR DELIVERY. All of the Shares being offered by the Company
-------------------
which are sold in the Public Offering shall be tendered for delivery in
accordance with the terms and provisions of this Agreement.
8.13 BLUE SKY QUALIFICATION. The Shares shall be qualified in such states
----------------------
as are reasonably designated by the Representative as set forth in Section 5.4
hereof and each such qualification shall be in effect and not subject to any
stop order or other proceeding on the Closing Date or Option Closing Date. On
both the Effective Date of the Registration Statement and on the Closing Date,
the Company and the Representative shall receive from Clanahan, Tanner, Downing
and Knowlton, P.C., a written opinion which contains the following:
(i) The names of the states in which applications to register
or qualify the Shares have been filed;
40
<PAGE>
(ii) The status of such registrations or qualifications in such
states as of the date thereof;
(iii) A list containing the name of each such state in which the
Shares may be legally offered and sold by a dealer licensed in such
state and the number of each which may be legally offered and sold in
each such state as of the date thereof:
(iv) With respect to the written opinion dated on the Effective
Date, a representation that such legal counsel will continuously
update such written information if any changes occur in the
information provided therein between the Effective Date and the
Closing Date and Option Closing Date; and
(v) A statement that the Company, the members of the
Underwriting Group and selected dealers in the Public Offering may
rely upon the opinions contained therein.
8.14 APPROVAL OF LEGAL COUNSEL TO THE REPRESENTATIVE. All opinions,
-----------------------------------------------
letters, certificates and evidence mentioned above or elsewhere in this
Agreement shall be deemed to be in compliance with the provisions hereof only if
they are in form and substance satisfactory to legal counsel for the
Representative. The suggested form of such documents shall be provided to the
legal counsel for the Representative at least three (3) business days before the
Closing Date.
8.15 OFFICER'S CERTIFICATE AS A COMPANY REPRESENTATIVE. Any certificate
-------------------------------------------------
signed by an officer of the Company and delivered to the Representative or to
legal counsel for the Representative will be deemed a representation and
warranty by the Company to the members of the Underwriting Group as to the
statements made therein.
SECTION 9
TERMINATION
-----------
9.1 TERMINATION BECAUSE OF NONCOMPLIANCE. This Agreement may be
------------------------------------
terminated by the members of the Underwriting Group by notice to the Company in
the event that the Company shall have failed or been unable to comply with any
of the terms, conditions or provisions of this Agreement on the part of the
Company to be performed, complied with or fulfilled within the respective times
herein provided for, unless compliance therewith or performance or satisfaction
thereof shall have been expressly waived by the Representative in writing. This
Agreement may be terminated by the Company by notice to the Representative in
the event the members of the Underwriting Group shall have failed or been unable
to comply with any of the terms, conditions or provisions of this Agreement on
the part of the members of the Underwriting Group to be performed, complied with
or fulfilled within the respective times herein provided for, unless compliance
therewith or performance or satisfaction thereof shall have been expressly
waived by the Company in writing.
41
<PAGE>
9.2 TERMINATION BECAUSE OF CHANGES. This Agreement may be terminated by
------------------------------
the members of the Underwriting Group by notice to the Company if the
Representative believes in its sole judgment that any changes have occurred in
or with respect to the management of the Company or any of its Subsidiaries,
that material adverse changes have occurred in or with respect to the business,
financial condition, results of operations, prospects or obligations of the
Company or any of its Subsidiaries, or if the Company or any of its Subsidiaries
shall have sustained a loss or anticipated loss as a result of a strike,
governmental action, fire, flood, accident, contract termination, or other
calamity of such a character as, in the sole judgment of the Representative, may
interfere materially with the conduct of the business and operations of the
Company and its Subsidiaries on a consolidated basis, regardless of whether or
not such loss or anticipated loss shall have been insured.
9.3 MARKET OUT TERMINATION. This Agreement may be terminated by the
----------------------
members of the Underwriting Group by notice to the Company at any time if, in
the judgment of the Representative, payment for and delivery of the Shares is
rendered impracticable or inadvisable because (i) additional material
governmental restrictions not in force and effect on the date hereof shall have
been imposed upon the trading in securities generally, or minimum or maximum
prices shall have been generally established on the New York or American Stock
Exchange, or trading in securities generally on either such Exchange shall have
been suspended, or a general moratorium shall have been established by federal
or state authorities, or (ii) a war or other national calamity or emergency
shall have occurred, or (iii) of any suspension of trading of the Common Stock
of the Company in the over-the-counter market, or (iv) substantial and material
adverse changes in the condition of the securities markets beyond normal
fluctuations have occurred.
9.4 EFFECT OF TERMINATION HEREUNDER. If the members of the Underwriting
-------------------------------
Group decide to terminate this Agreement pursuant to this Section 9 or the
Company decides to terminate this Agreement pursuant to Section 9.1 or 10.3
hereof, such party shall provide notice of such termination to the other party.
In such event, the Company shall reimburse the Representative on an accountable
basis for all reasonable and customary expenses incurred by the Representative
in connection with the proposed Public Offering as herein provided up to and
including the date of termination subject to a maximum limit of $50,000. The
Representative shall provide the Company with a statement of the Underwriting
Group's actual accountable out of pocket expenses, which shall include but are
not limited to, fees of legal counsel for the Representative and the fees of
independent consultants and investigators who are not directly or indirectly
affiliated or associated with a member of the NASD and who are retained by the
Underwriting Group to provide a service in connection with the due diligence
investigation of the proposed Public Offering, confirmation and other document
preparation costs, entertainment expenses, travel expenses, postage expenses,
advertising costs, duplication expenses, long distance telephone expenses, and
any other actual out of pocket accountable expense incurred by the Underwriting
Group in connection with the proposed Public Offering. The Representative shall
not be required to include in such accountable expenses any of the expenses to
be paid by the Company under Section 5.7 hereof, and, if the Underwriting Group
has paid any of such expenses on behalf of the Company, the Company shall
separately
42
<PAGE>
reimburse the Underwriting Group for such advances immediately upon
receipt of a statement therefor from the Representative. If such actual
accountable out of pocket expenses are less than the amount of the
nonaccountable expense payments the Company has made to the Representative as
provided in Section 3.3 hereof, the Underwriting Group will refund the balance
of such payments net of the Representative's actual accountable out-of-pocket
expenses, to the Company within ten (10) days after the delivery of such
statement by the Representative to the Company. If the amount of the actual
accountable out-of-pocket expenses are more than the amount of the
nonaccountable expense payments made by the Company to the Representative, the
balance shall be promptly paid by the Company to the Representative. The
members of the Underwriting Group shall not have any liabilities to each other
if the Company or the members of the Underwriting Group decide not to proceed
with the proposed offering for any reason set forth in this Section 9 or in
Section 10 hereof, except that the Company shall remain obligated to pay the
costs and expenses required to be paid by it as specified in Section 5.7 hereof
and this Section 9.4, and the Company, and the members of the Underwriting Group
shall be obligated to pay, respectively, all losses, claims, damages or
liabilities,joint or several, under Section 6 hereof.
SECTION 10
REPRESENTATIONS AND WARRANTIES OF
---------------------------------
THE MEMBERS OF THE UNDERWRITING GROUP
-------------------------------------
The members of the Underwriting Group represent and warrant to and agree
with the Company that:
10.1 REGISTRATION AS BROKER DEALER AND MEMBER OF NASD. The members of the
------------------------------------------------
Underwriting Group are registered as broker dealers with the Commission and are
members in good standing of the NASD and are licensed as dealers in all states
in which they will sell the Shares.
10.2 NO PENDING PROCEEDINGS. There is not now pending against the
----------------------
Representative any action or proceeding of which it has been advised, either in
any court of competent jurisdiction, before the Commission or any state
securities commission, concerning its activities as a broker or dealer that, in
the opinion of the Representative, would prevent it from acting as such under
federal securities laws or under the laws of the states in which it intends to
offer the Shares.
10.3 COMPANY'S RIGHT TO TERMINATE. In the event any action or proceeding
----------------------------
of the type referred to in Section 10.2 hereof shall be instituted against the
Representative at any time prior to the Closing Date hereunder, or in the event
there shall be filed by or against the Representative in any court pursuant to
any federal, state, local or municipal statute, a petition in bankruptcy or
insolvency or for reorganization or for the appointment of a receiver or trustee
of assets of the Representative or if the Representative makes an assignment for
the benefit of creditors, the Company shall have the right on written notice to
the Representative to terminate
43
<PAGE>
this Agreement without any liability to the members of the Underwriting Group of
any kind except for the payment of expenses as provided in Section 5.7 hereof.
10.4 FINDER. The members of the Underwriting Group know of no outstanding
------
claims against them for compensation for services in the nature of a finder's
fee, origination fee, financial consulting fee or any other form of compensation
as a finder with respect to the offer and sale of the Shares hereunder.
10.5 COMPLIANCE. The members of the Underwriting Group, severally and not
----------
jointly, agree to offer and sell the Shares being purchased hereunder in
accordance with the requirements of federal and state securities laws and the
rules of the NASD.
SECTION 11
FEE PAYABLE ON OCCURRENCE OF CERTAIN EVENTS
-------------------------------------------
11.1 FINANCIAL CONSULTING AGREEMENT. On the Closing Date, the Company
------------------------------
shall enter into an agreement ("Financial Consulting Agreement") with the
Representative pursuant to which the Representative shall receive a consulting
fee of Three Thousand Dollars ($3,000) per month for the twenty-four (24) month
period following the Closing Date in consideration for the consulting services
to be provided by the Representative during such period which shall include
advising the Company in connection with business and financial planning,
corporate organization and structure, financial matters in connection with the
operation of the business of the Company, private and public equity and debt
financing, acquisitions, mergers and other similar business combinations, the
Company's relations with the holders of its securities, preparation and
distribution of periodic reports as well as providing the Company with analysis
of the Company's financial statements. Under the terms of the Financial
Consulting Agreement, the Representative shall not be required to spend in
excess of twenty (20) hours per month in providing such consulting services to
the Company. The entire amount of the consulting fee equal to a total of Seventy
Two Thousand Dollars ($72,000) shall be paid by the Company to the
Representative on the Closing Date.
11.2 MERGERS AND ACQUISITIONS. Subject to the purchase of the Shares by
------------------------
the members of the Underwriting Group, for a period of three (3) years after the
Effective Date, the Representative will provide consulting services which are
customary in the industry in connection with, and the Representative will be
paid a consulting fee in connection with any transaction initiated by the
Representative involving, a merger, consolidation, stock exchange, or the
acquisition or sale of all or a material part of the assets or business of any
entity (collectively referred to herein as "Mergers and Acquisitions"), if such
transaction involves the Company, its parent company, or its Subsidiaries. A
transaction will be deemed initiated by the Representative if it is suggested by
the Representative to either party to the transaction. The consulting fee
payable to the Representative in connection with any such Merger or Acquisition
will be computed as follows:
44
<PAGE>
AMOUNT OF TRANSACTION FEE
--------------------- ---
$1.00 - $1,000,000 5% plus
$1,000,001 - $2,000,000 4% plus
$2,000,001 - $3,000,000 3% plus
$3,000,001 - $4,000,000 2% plus
$4,000,001 and over 1%
Amount of the transaction includes:
(i) the total proceeds and other consideration being received by the
Company, its parent company, or its Subsidiaries and/or any of their
securities holders upon the consummation of the transaction (including
payments made in installments) inclusive of cash, securities, notes,
liabilities assumed, consulting agreements and agreements not to compete;
(ii) if a portion of such consideration includes contingent payments
(whether or not related to future earnings or operations), fifty percent
(50%) of the maximum amount of such payments; and
(iii) in the event that the aggregate consideration for a transaction
consists in whole or in part of securities, for the purposes of calculating
the amount of the consideration, the value of such securities will be, in
the case of the existence of a public trading market thereof, the average
of the closing sale prices for the five (5) days preceding the consummation
of the transaction or, in the absence of a public trading market thereof,
the fair market value thereof as agreed to by the parties on the day
preceding the consummation of the transaction.
The Company has not previously granted similar rights to any other person.
If the Company, at any time during the three (3) year period following the
Effective Date, contemplates (i) the purchase and sale of its assets or the
assets of any of its Subsidiaries which is not in the ordinary course of
business, (ii) a Merger or Acquisition, (iii) the creation of a joint venture
with one (1) or more third parties, or (iv) a material investment (whether debt
or equity financing) is made by a third party in the Company and the
Representative did not arrange for the transaction, the Company shall engage the
Representative to review, comment and make recommendations with respect to any
such transaction and shall compensate the Representative for such services in a
reasonable amount the Representative and the Company shall mutually agree.
In addition, the Company shall reimburse the Representative for any
reasonable expenses it incurs in arranging and closing such funding or
transactions as contemplated under this subsection 12.2, including legal fees of
its counsel after receiving written approval from the Company.
45
<PAGE>
11.3 ADDITIONAL EQUITY AND DEBT FINANCING. If the Representative, upon
------------------------------------
request by the Company, arranges for equity financing on behalf of the Company
involving the offer and sale of the Company's securities, including, without
limitation, options, warrants or rights into which the Company's shares of
Common Stock or other securities may be acquired upon exercise thereof, other
than the Public Offering contemplated under this Agreement, which financing is
accepted and closed by the Company at any time during the three (3) year period
following the Effective Date, the Company will pay to the Representative a
commission equal to ten percent (10%) of the total amount of the equity
financing arranged by the Representative. For purposes of this subsection
12.3, the term "arranges" shall mean the efforts of the Representative in
locating the financing, introducing the Company to the source of the financing,
and assisting the Company, in all reasonable way as the Company may request, to
negotiate and complete such financing. If the Representative arranges for debt
financing accepted by and closed with the Company during such three (3) year
period, the Company will pay the Representative a commission equal to five
percent (5%) of the total amount of such debt financing. If the Representative
arranges for an increase in the Company's line of credit, which is accepted and
closed with the Company, the Company will pay the Representative a fee equal to
one percent (1%) of the total amount of such increase.
SECTION 12
NOTICE
------
Except as otherwise expressly provided in this Agreement:
12.1 NOTICE TO THE COMPANY. Whenever notice is required by the provisions
---------------------
of this Agreement to be given to the Company, such notice shall be in writing
addressed as follows:
Coyote Sports, Inc.
2291 Arapahoe Avenue
Boulder, Colorado 80302
Attn: Mel S. Stonebraker,
President
12.2 NOTICES. Whenever notice is required by the provisions of this
-------
Agreement to be given to the members of the Underwriting Group, such notice
shall be given in writing addressed to the Representative at the address set
forth in the beginning of this Agreement.
SECTION 13
MISCELLANEOUS
-------------
13.1 BENEFIT. This Agreement is made solely for the benefit of the members
-------
of the Underwriting Group, the Company, their respective officers and directors
and any controlling person referred to in Section 15 of the Act, and their
respective successors and assigns, and no other person shall acquire or have any
right under or by virtue of this Agreement. The term "successor" or the term
"successors and assigns" as used in this Agreement shall not include
46
<PAGE>
any purchasers, as such, of any of the Shares. In addition, the indemnity,
defense and contribution obligations of the Company included in Section 6 of
this Agreement also inure to the benefit of the selected dealers and any person
who controls the selected dealers within the meaning of Section 15 of the Act.
13.2 SURVIVAL. The respective indemnities, agreements, representations,
--------
warranties, covenants and other statements as set forth in or made pursuant to
this Agreement and the indemnity and contribution agreements contained in
Section 6 hereof shall survive and remain in full force and effect, regardless
of (i) any investigation made by or on behalf of the Company, or the
Representative or any of the other members of the Underwriting Group or any such
officer or director thereof or any controlling person of the Company or of the
Representative or any other member of the Underwriting Group, (ii) delivery of
or payment for the Shares, and (iii) the occurrence of Closing Date and the
Option Closing Date. Any successor of the Company, any member of the
Underwriting Group or any controlling person, officer or director thereof, shall
be entitled to the benefits hereof.
13.3 GOVERNING LAW AND FORUM. The validity, interpretation and
-----------------------
construction of this Agreement and of each part hereof will be governed by the
laws of the State of Colorado. The parties to the Agreement hereby agree to
submit to the jurisdiction of the courts of the State of Colorado located in
Denver, Colorado which shall be the sole tribunal in which any such parties may
institute and maintain a legal proceeding against the other party arising from
any dispute under this Agreement. If any party initiates a legal proceeding in
a jurisdiction other than in the courts of the State of Colorado, the other
party may assert as a complete defense and as a basis for dismissal of such
legal proceeding failure of the party initiating such proceeding to have
initiated and maintained such proceeding in the courts of the State of Colorado
in accordance with this Section 14.3.
13.4 THE INFORMATION OF THE MEMBERS OF THE UNDERWRITING GROUP.
--------------------------------------------------------
Notwithstanding any participation by the legal counsel for the Representative in
the reorganization and/or revision of the Prospectus, the statements with
respect to the Public Offering of the Shares on the cover page of the Prospectus
and the Notes thereto and under the caption "Underwriting" in the Prospectus
constitute the only written information furnished by or on behalf of the members
of the Underwriting Group referred to in Sections 2.2, 6.1 and 6.2 hereof.
13.5 SEVERABILITY. If any provision or portion of any provision of this
------------
Agreement is determined to be invalid for any reason, such invalid provision or
portion of such invalid provision shall be deemed to be deleted and the validity
of the remaining provisions or portions thereof shall not be affected thereby
and shall remain in full force and effect.
13.6 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which may be deemed an original and all of which together
will constitute one and the same instrument.
47
<PAGE>
Please confirm that the foregoing correctly sets forth the Agreement
between the members of the Underwriting Group and the Company.
Very truly yours,
COYOTE SPORTS, INC.
By:_______________________________________
Mel S. Stonebraker, President
48
<PAGE>
THE REPRESENTATIVE, ON BEHALF OF THE UNDERWRITING GROUP, HEREBY CONFIRMS AS OF
THE DATE HEREOF THAT THE ABOVE LETTER SETS FORTH THE AGREEMENT BETWEEN THE
COMPANY AND THE UNDERWRITING GROUP.
COHIG & ASSOCIATES, INC.
By:_______________________________________________
Harold M. Golz, Director of Corporate
Finance of Cohig & Associates, Inc.,
as Attorney in Fact for the several
Underwriters named in Schedule I to
the Underwriting Agreement
49
<PAGE>
SCHEDULE I
TO
UNDERWRITING AGREEMENT
UNDERWRITER ADDRESS NUMBER OF SHARES
- ----------- ------- ----------------
COHIG & ASSOCIATES, INC. 6300 SOUTH SYRACUSE WAY
SUITE 430
ENGLEWOOD, CO 80111
50
<PAGE>
COYOTE SPORTS, INC.
COHIG & ASSOCIATES, INC.
REPRESENTATIVE'S WARRANT AGREEMENT
Dated as of September __, 1997
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Section Title Page Number
<C> <S> <C>
1 Definitions 1
2 Warrants and Issuance of Warrant Certificates 3
3 Form of Warrant Certificate 3
4 Term of Warrants; Exercise of Warrants 3
5 Reservation of Warrant Securities 5
6 Payment of Taxes 5
7 Warrant Securities to be Fully Paid 6
8 Limitation on Transfer 6
9 Adjustment of Exercise Price and Number of Shares 6
10 Merger or Consolidation of Company 10
11 Modification of Agreement 10
12 Notice to Holders 10
13 Registration Rights 11
14 Restrictions on Transfer 14
15 No Rights as Stockholder 15
16 Notices 15
17 Arbitration 16
18 Miscellaneous Provisions 16
</TABLE>
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT
THIS REPRESENTATIVE'S WARRANT AGREEMENT (the "Agreement"), dated as of
September __, 1997 is made and entered into by and between COYOTE SPORTS, INC.
(the "Company"), a Nevada corporation (the "Company"), and COHIG & ASSOCIATES,
INC. ("Cohig").
The Company agrees to issue and sell, and Cohig agrees to purchase, for the
price of $105, Warrants to purchase up to an aggregate 105,000 shares ("Shares")
of the Company's Common Stock, subject to the terms and conditions set forth
below.
In consideration of the foregoing and for the purpose of defining the terms
and provisions of the Warrants and the respective rights and obligations
thereunder, the Company and Cohig, for value received, hereby agree as follows:
SECTION 1. DEFINITIONS
The following terms used in this agreement shall have the following
meanings (unless otherwise expressly provided herein):
The "Act." The Securities Act of 1933, as amended.
The "Commission." The Securities and Exchange Commission.
The "Company." Coyote Sports, Inc., a Nevada corporation.
"Common Stock." The Common Stock, $.001 par value per share, of the
Company, whether now or hereafter authorized, holders of which have the right to
participate in the distribution of earnings and assets of the Company without
limit as to the amount or percentage.
"Current Market Price." The Current Market Price shall be determined as
follows:
(a) if the security at issue is listed on a national securities
exchange or admitted to unlisted trading privileges on such an exchange or
quoted on either the Nasdaq National Market or the Nasdaq Small Cap Market,
the Current Market Price shall be the last reported sale price of that
security on such exchange or system on the day for which the Current Market
Price is to be calculated; or, if no such sale is made on such day, the
average of the highest closing bid and lowest asked price for such day on
such exchange or system; or
(b) if the security at issue is not so listed or quoted or admitted
to unlisted trading privileges, the Current Market Price shall be the last
reported sale price of that security on the OTC Bulletin Board on the day
for which the Current Market Price is to be calculated; or if no such sale
is made on such day, the average of the last reported highest bid and
lowest asked prices quoted on the OTC Bulletin Board on the last business
day on such day; or
(c) if the security at issue is not so listed or quoted or admitted
to unlisted trading privileges and bid and asked prices are not reported,
the Current Market Price shall be determined in such reasonable manner as
may be prescribed from time to time by the Board of Directors of the
Company, subject to the objection and arbitration procedure as described in
Section 9.9 below.
"Effective Date." September __, 1997.
"Exercise Date." 9:00 a.m. Denver, Colorado, local time, on September __,
1998.
"Exercise Period." The period commencing on the Exercise Date and extending
to and through the Expiration Date.
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"Exercise Price." $6.25 per Share, as modified in accordance with Section
4, below.
"Expiration Date." 5:00 p.m. Denver, Colorado, local time on September __,
2002; provided, however, if such date shall be a holiday or a day on which banks
are authorized to close in the State of Colorado, the Expiration Date shall mean
5:00 p.m. Denver, Colorado, local time on the next following day which in the
State of Colorado is not a holiday or a day on which banks are authorized to
close.
"Holder "or "Warrant Holder." The person to whom a Warrant Certificate
is issued, and any valid transferee thereof pursuant to Section 8 below.
"Majority Holder." Any Holder, any holder of Warrant Securities, or any
combination of Holders and such holders of Warrant Securities; and any Holder of
Warrant Warrants, any holder of Warrant Warrant Securities, or any combination
of such Holders and such holders of Warrant Warrant Securities, if they hold, in
the aggregate, unexercised Warrants plus issued and outstanding Warrant
Securities equal to more than 50% of the total of (i) all Warrant Securities
issued and outstanding as a result of the exercise of the Warrant, and (ii) all
Warrant Securities that may at that time be purchased by exercising the
unexercised portion of the Warrant. For purposes hereof, a Holder of a Warrant
which entitles the Holder to purchase more than one share or Warrant shall be
deemed to hold Warrants equal to the number of shares or Warrants which may be
acquired pursuant to any such Warrant.
"NASD." The National Association of Securities Dealers, Inc.
"NASDAQ." The Nasdaq Stock Market, Inc.
"Warrants." The Warrants issued in accordance with the terms of this
Agreement and any Warrants issued in substitution for or replacement of such
Warrants, or any Warrants into which such Warrants may be divided or exchanged.
"Warrant Securities." The Common Stock receivable upon exercise or
conversion of a Warrant, and the Common Stock underlying the unexercised portion
of a Warrant.
"OTC Bulletin Board." An electronic quotation medium operated by NASDAQ.
"Public Offering." The public offering by the Company of shares of Common
Stock pursuant to an underwriting agreement dated as of September __,
1997, between the Company and Cohig as Representative of the several
Underwriters named in the underwriting agreement.
"Underwriter." A broker-dealer identified as an Underwriter in the Final
Prospectus for the Public Offering.
SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES
2.1 Description of Warrants. Each Warrant shall initially entitle the
Warrant Holder to purchase one share of Common Stock on exercise thereof,
subject to modification and adjustment as hereinafter provided in Section 10.
Warrant Certificates representing up to 105,000 Warrants and evidencing the
right to purchase an aggregate of up to 105,000 shares of Common Stock of the
Company shall be executed by the proper officers of the Company. The Company
shall deliver Warrant Certificates in required whole number denominations to the
person entitled thereto in connection with the original issuance of Warrant
Certificates or any transfer or exchange permitted under this Agreement.
2.2 Warrant Securities. Certificates representing the Warrant Securities
shall be issued only on or after the Exercise Date upon exercise or conversion
of the Warrants or upon transfer or exchange of the Warrant Securities following
exercise of the Warrants.
SECTION 3. FORM OF WARRANT CERTIFICATE
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3.1 Form of Certificates. The Warrant Certificates shall be substantially
in the form attached hereto as Exhibit A and may have such letters, numbers or
other marks of identification and such legends, summaries or endorsements
printed, lithographed or engraved thereon as the Company may deem appropriate
and as are not inconsistent with the provisions of this Agreement. The Warrant
Certificates shall be dated as of the date of issuance, whether on initial
issuance, transfer, exchange or in lieu of mutilated, lost, stolen or destroyed
Warrant Certificates.
3.2 Execution of Certificates. The Warrant Certificates shall be executed
on behalf of the Company by its President and Secretary, by manual signatures
thereon, and shall have imprinted thereon a facsimile of the Company's seal. Any
Warrant Certificate may be signed by any person who at the actual date of the
preparation of such Warrant Certificate shall be a proper officer of the
Company to sign such Warrant Certificate even though such person was not such an
officer upon the date of this Agreement.
3.3 Mutilated, Lost, Stolen, or Destroyed Certificate. In case the
certificate or certificates evidencing the Warrants shall be mutilated, lost,
stolen or destroyed, the Company shall, at the request of the Warrant Holder,
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated certificate or certificates, or in lieu of and substitution for the
certificate or certificates lost, stolen or destroyed, a new Warrant Certificate
or Certificates of like tenor and representing an equivalent right or interest,
but only upon receipt of evidence satisfactory to the Company of such loss,
theft or destruction of such Warrant and a bond of indemnity, if requested, also
satisfactory in form and amount, at the applicant's cost. Applicants for such
substitute Warrant Certificate shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
3.4 Exchange of Certificate. Any Warrant Certificate may be exchanged for
another certificate or certificates entitling the Warrant Holder to purchase a
like aggregate number of Shares as the certificate or certificates surrendered
then entitled such Warrant Holder to purchase. Any Warrant Holder desiring to
exchange a Warrant Certificate shall make such request in writing delivered to
the Company, and shall surrender, properly endorsed, with signatures guaranteed,
the certificate evidencing the Warrant to be so exchanged. Thereupon, the
Company shall execute and deliver to the person entitled thereto a new Warrant
Certificate as so requested.
SECTION 4. TERM OF WARRANTS; EXERCISE OF WARRANT
4.1 Exercise of Warrant. Subject to the terms of this Agreement, the
Warrant Holder shall have the right, at any time during the four-year period
commencing at 9:00 a.m., Denver Time, on the Exercise Date and ending at 5:00
p.m., Denver Time, on the Expiration Date to purchase from the Company up to the
number of fully paid and nonassessable Shares to which the Warrant Holder may at
the time be entitled to purchase pursuant to this Agreement, upon surrender to
the Company, at its principal office, of the certificate evidencing the Warrants
to be exercised, together with the purchase form on the reverse thereof, duly
filled in and signed, and upon payment to the Company of the Exercise Price for
the number of Shares in respect of which such Warrants are then exercised, but
in no event for less than 100 Shares (unless fewer than an aggregate of 100
shares are then purchasable under all outstanding Warrants held by a Warrant
Holder).
4.2 Payment of Exercise Price. Payment of the aggregate Exercise Price
shall be made in cash or by check, or any combination thereof.
4.3. Issuance of Shares. Subject to the provisions of Section 9, upon
receipt of a Warrant Certificate with the exercise form thereon duly executed,
together with payment in full of the Exercise Price for the Warrant Securities
being purchased by such exercise, or upon exercise of the Conversion Right
described in Section 4.6, the Company shall requisition from the Company's
transfer agent certificates for Warrant Securities and upon receipt shall make
delivery of certificates evidencing the total number of whole Warrant Securities
for which Warrants are then being exercised or converted, together with cash as
provided in Section 4.8 hereof in respect of any fractional Warrant Securities
otherwise issuable upon such surrender. The certificates shall be in such names
and denominations as are required for delivery to, or in accordance with the
instructions of the Warrant Holder; provided that if fewer than all Warrant
Securities issuable
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on exercise of a Warrant Certificate are purchased, the Company (if so
requested) shall issue such balance Warrant Certificate for the balance of the
Warrant Securities. Such certificates for the Warrant Securities shall be deemed
to be issued, and the person to whom such Warrant Securities are issued of
record shall be deemed to have become a holder of record of such Warrant
Securities, as of the date of the surrender of such Warrant Certificate and
payment of the Exercise Price, whichever shall last occur; provided further that
if the books of the Company with respect to the Warrant Securities shall be
closed as of such date, the certificates for such Warrant Securities shall be
deemed to be issued, and the person to whom such Warrant Securities are issued
of record shall be deemed to have become a record holder of such Warrant
Securities, as of the date on which such books shall next be open (whether
before, on or after the applicable Expiration date) but at the Exercise Price
and upon the other conditions in effect upon the date of surrender of the
Warrant Certificate and payment of the Exercise Price, whichever shall have last
occurred, to the Company.
4.4 Cancellation of Certificates. All Certificates surrendered upon
exercise or conversion of Warrants shall be canceled.
4.5 Status as Shareholder. Upon receipt of the Warrant Certificate by the
Company as described in Sections 4.1 or 4.3 above, the Holder shall be deemed to
be the holder of record of the Warrant Securities issuable upon such exercise,
notwithstanding that the transfer books of the Company may then be closed or
that certificates representing such Warrant Securities may not have been
prepared or actually delivered to the Holder.
4.6 Conversion Right. In addition to and without limiting the rights of the
Holder under the terms of the Warrant Agreement, the Holder shall have the right
(the "Conversion Right") during the Exercise Period to convert the Warrant
evidenced by a certificate or any portion thereof into shares of Common Stock as
provided in this Section 4.6 at any time or from time to time prior to its
expiration.
a. Upon exercise of the Conversion Right with respect to a particular
number of shares of Common Stock (the "Converted Shares"), the Company
shall deliver to the Holder, without payment by the Holder of any Exercise
Price or any cash or other consideration, that number of Converted Shares
equal to the quotient obtained by dividing the Net Value (as hereinafter
defined in this paragraph 4.6(a)) of the Converted Shares by the Current
Market Price of a single Share, determined in each case as of the close of
business on the Conversion Date (as hereinafter defined). The "Net Value"
of the Converted Shares shall be determined by subtracting the aggregate
Exercise Price of the Converted Shares from the aggregate Current Market
Price of the Converted Shares on the Conversion Date. No factional
securities shall be issuable upon exercise of the Conversion Right, and if
the number of securities to be issued in accordance with the foregoing
formula is other than a whole number, the Company shall pay to the Holder
an amount in cash equal to the Current Market Price of the resulting
fractional share.
b. The Conversion Right may be exercised by the Holder by the
surrender of the Warrant Certificate at the principal office of the Company
or at the office of the Company's stock transfer agent, if any, together
with a written statement specifying that the Holder thereby intends to
exercise the Conversion Right and indicating the number of Shares subject
to the Warrants which are being surrendered (referred to in subparagraph
4.(a) above as the Converted Shares), on the reverse side of the Warrant
Certificate, in exercise of the Conversion Right. Such conversion shall be
effective upon receipt by the Company of the Warrant Certificate, or on
such later date as is specified therein (the "Conversion Date"), but not
later than the Expiration Date. Certificates for the Converted Shares
issuable upon exercise of the Conversion Right, together with a check in
payment of any fractional Converted Share and, in the case of a partial
exercise a new Warrant evidencing the Warrant Securities remaining subject
to the Warrant, shall be issued as of the Conversion Date and shall be
delivered to the Holder within seven (7) days following the Conversion
Date.
4.7 Fractional Shares. On exercise of the Warrants by the Warrant Holders,
the Company shall not be required to deliver fractions of shares of Common
Stock; provided, however, that the Company shall purchase such fraction for an
amount in cash equal to the Current Market Price of such fraction, computed on
the trading day immediately preceding the day upon which such Warrant
Certificate was surrendered for exercise. By accepting a
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<PAGE>
Warrant Certificate, the holder thereof expressly waives any right to receive a
Warrant Certificate evidencing any fraction of a Share or to receive any
fractional share of securities upon exercise of a Warrant, except as expressly
provided in this Section 4.7.
SECTION 5. RESERVATION OF WARRANT SECURITIES
There has been reserved, and the Company shall at all times keep reserved
so long as the Warrants remain outstanding, out of its authorized and unissued
Common Stock, such number of shares of Common Stock as shall be subject to
purchase under the Warrants. Every transfer agent for the Common Stock and other
securities of the Company issuable upon the exercise of the Warrants will be
irrevocably authorized and directed at all times to reserve such number of
authorized shares and other securities as shall be requisite for such purpose.
The Company will keep a copy of this Agreement on file with every transfer agent
for the Common Stock and other securities of the Company issuable upon the
exercise of the Warrants. The Company will supply every such transfer agent with
duly executed stock and other certificates, as appropriate, for such purpose and
will provide or otherwise make available any cash which may be payable as
provided in Section 4.7 hereof.
SECTION 6. PAYMENT OF TAXES
The Company will pay all documentary stamp taxes, if any, attributable to
the initial issuance of the Warrants or the Warrant Securities and any tax
(except federal or state income tax) which may be payable in respect of any
transfer of the Warrants or the Warrant Securities.
SECTION 7. WARRANT SECURITIES TO BE FULLY PAID
The Company covenants that all Warrant Securities that may be issued and
delivered to a Holder of this Warrant upon the exercise of a Warrant and payment
of the Exercise Price, and all Converted Shares that may be issued and delivered
to a Holder upon a conversion of a Warrant, will be, upon such delivery, validly
and duly issued, fully paid and nonassessable.
SECTION 8. LIMITATION ON TRANSFER
This Warrant may not be sold, transferred, assigned, pledged or
hypothecated until the Exercise Date, except for (a) the sale, transfer, or
assignment, in whole or in part, to or among the officers of Cohig and employees
who are also shareholders of Cohig or (b) the transfer by will, pursuant to the
laws of descent and distribution or operation of law as a result of the death of
any transferee to whom all or a portion of this Warrant may be transferred. All
sales, transfers, assignments or hypothecations of this Warrant must be in
compliance with this Section 8. Any assignment or transfer of this Warrant shall
be made by the presentation and surrender of this Warrant to the Company at its
principal office or the office of its transfer agent, if any, accompanied by a
duly executed Assignment Form, in the form attached to and by this reference
incorporated in this Warrant as Exhibit B. Upon the presentation and surrender
of these items to the Company, the Company, at its sole expense, shall execute
and deliver to the new Holder or Holders a new Warrant or Warrants, containing
the same terms and conditions as this Warrant, in the name of the new Holder or
Holders as named in the Assignment Form, and this Warrant shall at that time be
canceled.
SECTION 9. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES
9.1. Adjustments. The number and kind of securities purchasable upon the
exercise of the Warrants and the Exercise Price shall be subject to adjustment
from time to time upon the happening of certain events, as follows:
(a) In case the Company shall (i) pay a dividend in Common Stock or
make a distribution to its stockholders in Common Stock, (ii) subdivide its
outstanding Common Stock, (iii) combine its outstanding Common Stock into a
smaller number of shares of Common Stock or (iv) issue by classification of
its Common Stock other securities of the Company, the number of Shares
purchasable upon exercise of the Warrants
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<PAGE>
immediately prior thereto shall be adjusted so that the Warrant Holder
shall be entitled to receive the kind and number of Shares or other
securities of the Company which it would have owned or would have been
entitled to receive immediately after the happening of any of the events
described above, had the Warrants been exercised immediately prior to the
happening of such event or any record date with respect thereto. Any
adjustment made pursuant to this subsection 9.1(a) shall become effective
immediately after the effective date of such event retroactive to the
record date, if any, for such event.
(b) If, prior to the expiration of the Warrants by exercise, by their
terms, or by redemption, the Company shall be recapitalized by
reclassifying its outstanding shares of Common Stock into shares with a
different par value, or by changing its outstanding shares of Common Stock
into shares without par value or in the event of any other material change
of the capital structure of the Company or of any successor corporation by
reason of any reclassification, recapitalization or conveyance, prompt,
proportionate, equitable, lawful and adequate provision shall be made
whereby any Warrant Holder shall thereafter have the right to purchase, on
the basis and the terms and conditions specified in this Agreement, in lieu
of the Warrant Securities theretofore purchasable on the exercise of any
Warrant, such securities or assets as may be issued or payable with respect
to or in exchange for the number of Warrant Securities theretofore
purchasable on exercise of the Warrant had such reclassification,
recapitalization or conveyance not taken place; and in any such event, the
rights of any Warrant Holder to any adjustment in the number of Warrant
Securities purchasable on exercise of such Warrant, as set forth above,
shall continue to be preserved in respect of any stock, securities or
assets which the Warrant Holder becomes entitled to purchase.
(c) In case the Company shall issue rights, options, warrants, or
convertible securities to all or substantially all holders of its Common
Stock, without any charge to such holders, entitling them to subscribe for
or purchase Common Stock at a price per share which is lower at the record
date mentioned below than the then Current Market Price, the number of
Shares thereafter purchasable upon the exercise of each Warrant shall be
determined by multiplying the number of Shares theretofore purchasable upon
exercise of the Warrants by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding immediately prior to the
issuance of such rights, options, warrants or convertible securities plus
the number of additional shares of Common Stock offered for subscription or
purchase, and of which the denominator shall be the number of shares of
Common Stock outstanding immediately prior to the issuance of such rights,
options, warrants, or convertible securities plus the number of shares
which the aggregate offering price of the total number of shares offered
would purchase at such Current Market Price. Such adjustment shall be made
whenever such rights, options, warrants, or convertible securities are
issued, and shall become effective immediately and retroactively to the
record date for the determination of stockholders entitled to receive such
rights, options, warrants, or convertible securities.
(d) In case the Company shall distribute to all or substantially all
holders of its Common Stock evidences of its indebtedness or assets
(excluding cash dividends or distributions out of earnings) or rights,
options, warrants, or convertible securities containing the right to
subscribe for or purchase Common Stock (excluding those referred to in
subsection 9.1(b) above), then in each case the number of Shares thereafter
purchasable upon the exercise of the Warrants shall be determined by
multiplying the number of Shares theretofor purchasable upon exercise of
the Warrants by a fraction, of which the numerator shall be the then
Current Market Price on the date of such distribution, and of which the
denominator shall be such Current Market Price on such date minus the then
fair value (determined as provided in subsection 9.1(g) below) of the
portion of the assets or evidences of indebtedness so distributed or of
such subscription rights, options, warrants, or convertible securities
applicable to one share. Such adjustment shall be made whenever any such
distribution is made and shall become effective on the date of distribution
retroactive to the record date for the determination of stockholders
entitled to receive such distribution.
(e) No adjustment in the number of Shares purchasable pursuant to the
Warrants shall be required unless such adjustment would require an increase
or decrease of at least one percent in the number of Shares then
purchasable upon the exercise of the Warrants or, if the Warrants are not
then exercisable, the
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number of Shares purchasable upon the exercise of the Warrants on the first
date thereafter that the Warrants become exercisable; provided, however,
that any adjustments which by reason of this subsection 9.1(d) are not
required to be made immediately shall be carried forward and taken into
account in any subsequent adjustment.
(f) Whenever the number of Shares purchasable upon the exercise of
the Warrant is adjusted, as herein provided, the Exercise Price payable
upon exercise of the Warrant shall be adjusted by multiplying such Exercise
Price immediately prior to such adjustment by a fraction, of which the
numerator shall be the number of Warrant Shares purchasable upon the
exercise of the Warrant immediately prior to such adjustment, and of which
the denominator shall be the number of Warrant Shares so purchasable
immediately thereafter.
(g) Whenever the number of Shares purchasable upon exercise of the
Warrants is adjusted as herein provided, the Company shall cause to be
promptly mailed to the Warrant Holder by first class mail, postage prepaid,
notice of such adjustment and a certificate of the chief financial officer
of the Company setting forth the number of Shares purchasable upon the
exercise of the Warrants after such adjustment, a brief statement of the
facts requiring such adjustment and the computation by which such
adjustment was made.
(h) For the purpose of this subsection 9.1, the term "Common Stock"
shall mean (i) the class of stock designated as the Common Stock of the
Company at the date of this Agreement, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value. In the event that at any time, as
a result of an adjustment made pursuant to this Section 9, the Warrant
Holder shall become entitled to purchase any securities of the Company
other than Common Stock, (y) if the Warrant Holder's right to purchase is
on any other basis than that available to all holders of the Company's
Common Stock, the Company shall obtain an opinion of an independent
investment banking firm valuing such other securities; and (z) thereafter
the number of such other securities so purchasable upon exercise of the
Warrants shall be subject to adjustment from time to time in a manner and
on terms as nearly equivalent as practicable to the provisions with respect
to the Shares contained in this Section 9.
(i) Upon the expiration of any rights, options, warrants, or
conversion privileges, if such shall have not been exercised, the number of
Shares purchasable upon exercise of the Warrants, to the extent the
Warrants have not then been exercised, shall, upon such expiration, be
readjusted and shall thereafter be such as they would have been had they
been originally adjusted (or had the original adjustment not been required,
as the case may be) on the basis of (i) the fact that the only shares of
Common Stock so issued were the shares of Common Stock, if any, actually
issued or sold upon the exercise of such rights, options, warrants, or
conversion privileges, and (ii) the fact that such shares of Common Stock,
if any, were issued or sold for the consideration actually received by the
Company upon such exercise plus the consideration, if any, actually
received by the Company for the issuance, sale or grant of all such rights,
options, warrants, or conversion privileges whether or not exercised;
provided, however, that no such readjustment shall have the effect of
decreasing the number of Shares purchasable upon exercise of the Warrants
by an amount in excess of the amount of the adjustment initially made in
respect of the issuance, sale, or grant of such rights, options, warrants,
or conversion rights.
9.2. No Adjustment for Dividends. Except as provided in subsection 9.1, no
adjustment in respect of any dividends or distributions out of earnings shall be
made during the term of the Warrants or upon the exercise or conversion of the
Warrants.
9.3. No Adjustment in Certain Cases. No adjustments shall be made pursuant
to Section 9 hereof in connection with the issuance of the Common Stock sold as
part of the public sale pursuant to the Underwriting Agreement or the issuance
of Shares upon exercise of the Warrants. No adjustments shall be made pursuant
to Section 9 hereof in connection with the grant or exercise of presently
authorized or outstanding options to purchase, or the issuance of shares of
Common Stock under the Company's director or employee benefit plans disclosed in
the Registration Statement relating to the Public Offering.
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9.4. Preservation of Purchase Rights upon Reclassification, Consolidation,
etc. In case of any consolidation of the Company with or merger of the Company
into another corporation, or in case of any sale or conveyance to another
corporation of the property, assets, or business of the Company as an entirety
or substantially as an entirety, the Company or such successor or purchasing
corporation, as the case may be, shall execute with the Warrant Holder an
agreement that the Warrant Holder shall have the right thereafter upon payment
of the Exercise Price in effect immediately prior to such action to purchase,
upon exercise of the Warrants, the kind and amount of shares and other
securities and property which it would have owned or have been entitled to
receive after the happening of such consolidation, merger, sale, or conveyance
had the Warrants been exercised immediately prior to such action. In the event
of a merger described in Section 368(a)(2)(E) of the Internal Revenue Code of
1986, in which the Company is the surviving corporation, the right to purchase
Shares under the Warrants shall terminate on the date of such merger and
thereupon the Warrants shall become null and void, but only if the controlling
corporation shall agree to substitute for the Warrants, its Warrants which
entitle the holder thereof to purchase upon their exercise the kind and amount
of shares and other securities and property which it would have owned or been
entitled to receive had the Warrants been exercised immediately prior to such
merger. Any such agreements referred to in this subsection 9.4 shall provide for
adjustments, which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Section 9 hereof. The provisions of this subsection
9.4 shall similarly apply to successive consolidations, mergers, sales, or
conveyances.
9.5. Par Value of Shares of Common Stock. Before taking any action which
would cause an adjustment effectively reducing the portion of the Exercise Price
allocable to each Share below the par value per share of the Common Stock
issuable upon exercise of the Warrants, the Company will take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and nonassessable Common Stock
upon exercise of the Warrants.
9.6. Independent Public Accountants. The Company may retain a firm of
independent public accountants of recognized national standing (which may be any
such firm regularly employed by the Company) to make any computation required
under this Section 9, and a certificate signed by such firm shall be conclusive
evidence of the correctness of any computation made under this Section 9.
9.7. Statement on Warrant Certificates. Irrespective of any adjustments in
the number of securities issuable upon exercise of the Warrants, Warrant
certificates theretofore or thereafter issued may continue to express the same
number of securities as are stated in the similar Warrant certificates initially
issuable pursuant to this Agreement. However, the Company may, at any time in
its sole discretion (which shall be conclusive), make any change in the form of
Warrant certificate that it may deem appropriate and that does not affect the
substance thereof; and any Warrant certificate thereafter issued, whether upon
registration of transfer of, or in exchange or substitution for, an outstanding
Warrant certificate, may be in the form so changed.
9.8. Treasury Stock. For purposes of this Section 9, shares of Common Stock
owned or held at any relevant time by, or for the account of, the Company, in
its treasury or otherwise, shall not be deemed to be outstanding for purposes of
the calculations and adjustments described.
9.9. Officers' Certificate. Whenever the Exercise Price or the aggregate
number of Warrant Securities purchasable pursuant to this Warrant shall be
adjusted as required by the provisions of this Section 9, the Company shall
promptly file with its Secretary or an Assistant Secretary at its principal
office, and with its transfer agent, if any, an officers' certificate executed
by the Company's President and Secretary or Assistant Secretary, describing the
adjustment and setting forth, in reasonable detail, the facts requiring such
adjustment and the basis for and calculation of such adjustment in accordance
with the provisions of this Warrant. Each such officers'' certificate shall be
made available to the Holder or Holders of this Warrant for inspection at all
reasonable times, and the Company, after each such adjustment, shall promptly
deliver a copy of the officers' certificate relating to that adjustment to the
Holder or Holders of this Warrant. If the officers' certificate is not
accompanied by the certificate described in Section 8.6, the officers'
certificate described in this Section 6 shall be deemed to be conclusive as to
the correctness of the adjustment reflected
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therein if, and only if, no Holder of this Warrant delivers written notice to
the Company of an objection to the adjustment within 30 days after the officers'
certificate is delivered to the Holder or Holders of this Warrant. The Company
will make its books and records available for inspection and copying during
normal business hours by the Holder so as to permit a determination as to the
correctness of the adjustment. If written notice of an objection is delivered by
a Holder to the Company and the parties cannot reconcile the dispute, the Holder
and the Company shall submit the dispute to arbitration pursuant to the
provisions of Section 17 below. Failure to prepare or provide the officers'
certificate shall not modify the parties" rights hereunder.
SECTION 10. MERGER OR CONSOLIDATION OF THE COMPANY
The Company will not merge or consolidate with or into any other
corporation or sell all or substantially all of its property to another
corporation, unless the provisions of Section 9.3 are complied with.
SECTION 11. MODIFICATION OF AGREEMENT.
The Company may by supplemental agreement make any changes or corrections
in this Agreement it shall deem appropriate to cure any ambiguity or to correct
any defective or inconsistent provision or mistake or error herein contained.
Additionally, the Company may make any changes or corrections deemed necessary
which shall not adversely affect the interests of the Holders, including
lowering the exercise price or extending the Exercise Period of the Warrants;
provided, however, this Agreement shall not otherwise be modified, supplemented
or altered in any respect except with the consent in writing of the Holders who
hold not less than a majority of the Warrants then outstanding and provided
further that no such amendment shall accelerate the Warrant Expiration Date or
increase the Exercise Price without the approval of all the holders of all
outstanding Warrants.
SECTION 12. NOTICE TO HOLDERS
If, prior to the expiration of this Warrant either by its terms or by its
exercise in full, any of the following shall occur:
(i) the Company shall declare a dividend or authorize any other
distribution on its Common Stock; or
(ii) the Company shall authorize the granting to the shareholders
of its Common Stock of rights to subscribe for or purchase
any securities or any other similar rights; or
(iii) any reclassification, reorganization or similar change of
the Common Stock, or any consolidation or merger to which
the Company is a party, or the sale, lease, or exchange of
any significant portion of the assets of the Company; or
(iv) the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(v) any purchase, retirement or redemption by the Company of its
Common Stock;
then, and in any such case, the Company shall deliver to the Holder or Holders
written notice thereof at least 30 days prior to the earliest applicable date
specified below with respect to which notice is to be given, which notice shall
state the following:
(a) the purpose for which a record of stockholders is to be
taken;
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<PAGE>
(b) the number, amount, price and nature of the shares of Common
Stock or other stock, securities, or assets which will be
deliverable on Warrant Securities following exercise of the
Warrants if such exercise occurs prior to the record date
for such action;
(c) the date on which a record is to be taken for the purpose of
such dividend, distribution or rights, or, if a record is
not to be taken, the date as of which the shareholders of
Common Stock of record to be entitled to such dividend,
distribution or rights are to be determined;
(d) the date on which such reclassification, reorganization,
consolidation, merger, sale, transfer, dissolution,
liquidation, winding up or purchase, retirement or
redemption is expected to become effective, and the date, if
any, as of which the Company's shareholders of Common Stock
of record shall be entitled to exchange their Common Stock
for securities or other property deliverable upon such
reclassification, reorganization, consolidation, merger,
sale, transfer, dissolution, liquidation, winding up,
purchase, retirement or redemption; and
(e) if any matters referred to in the foregoing clauses are to
be voted upon by shareholders of Common Stock, the date as
of which those shareholders to be entitled to vote are to be
determined.
SECTION 13. Registration Rights
13.1. Demand Registration Right. Upon the written request of a Majority
Holder, made at any time after the Exercise Date, but before the Expiration
Date, the Company shall file within 90 days of such written request, no more
than once, a registration statement or Regulation A offering statement pursuant
to the Act, and all necessary amendments thereto, to register or qualify the
Warrant, Warrant Securities and the Warrant Securities underlying the
unexercised portion of this Warrant. The Company may use the Regulation A
exemption if available, but the Company must file a registration statement if
the securities that are to be covered cannot be sold pursuant to Regulation A
because of the limitations applicable to the use of the Regulation A exemption.
The Company agrees to use its best efforts to cause this registration or
qualification to become effective as promptly as practicable and to keep such
registration effective for a period of the lesser of 180 days or the date of
completion of the distribution described in the Registration Statement; and its
officers, directors, consultants, auditors and counsel shall cooperate in all
matters necessary or advisable to pursue this objective. All of the expenses of
this registration or qualification shall be borne by the Company, including, but
not limited to, legal, accounting, consulting, printing, filing and NASD fees,
out-of-pocket expenses incurred by counsel, accountants, and consultants
retained by the Company and miscellaneous expenses directly related to the
registration statement or offering statement and the offering, and the
underwriter's accountable and nonaccountable expense allowances and fees; but
the Company shall not pay any expense allowance, brokerage fees, commissions or
underwriting discounts except to the extent they are attributable to other
securities that the Company has registered or qualified in conjunction with the
registration and qualification of the Warrant, Warrant Securities or the Warrant
Securities underlying the unexercised portion of this Warrant. Notwithstanding
the foregoing, if, as a qualification of any offering in any state or
jurisdiction in which the Company (by vote of its Board of Directors) or any
underwriter determines in good faith that it wishes to offer securities
registered in the offering, it is required that offering expenses be allocated
in a manner different from that provided above, then the offering expenses shall
be allocated in whatever manner is most nearly in compliance with the provisions
set out above. The Majority Holder shall be entitled to exercise the rights
described in this subsection 13.1 one time only.
Within 10 days after the delivery by the Majority Holder to the Company of
the notice described above, the Company shall deliver written notice to all
other Holders of this Warrant and holders of the Warrant Securities, if any,
advising them that the Company is proceeding with a registration statement or
offering statement and offering them the right to include the Warrant and
Warrant Securities of those Holders or holders therein. If any Holder of a
Warrant and Warrant Securities delivers written acceptance of that offer to the
Company within 30 days after the delivery of the
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Company's notice, the Company shall be obligated to include that holder's
Warrant and that holder's Warrant Securities in the contemplated registration
statement or offering statement.
13.2. Piggy-Back Registration Right. If at any time prior to the Expiration
Date the Company files a registration statement with the Commission pursuant to
the Act, or pursuant to any other act passed after the date of this Agreement,
which filing provides for the sale of securities by the Company to the public,
or files a Regulation A offering statement under the Act, the Company shall
offer to the Holder or Holders of this Warrant and the holders of any Warrant
Securities the opportunity to register or qualify the Warrant Securities and any
Warrant Securities underlying the unexercised portion of this Warrant, if any,
at the Company's sole expense, regardless of whether the Holder or Holders of
this Warrant or the holders of Warrant Securities or both may have previously
availed themselves of any of the registration rights described in this Section
13; provided, however, that in the case of a Regulation A offering, the
opportunity to qualify shall be limited to the amount of the available exemption
after taking into account the securities that the Company wishes to qualify.
Notwithstanding anything to the contrary, this subsection 13.2 shall not be
applicable to a registration statement registering securities issued pursuant to
an employee benefit plan or as to a transaction subject to Rule 145 promulgated
under the Act or which a form S-4 registration statement could be used.
The Company shall deliver written notice to the Holder or Holders of this
Warrant and to any holders of the Warrant Securities of its intention to file a
registration statement or Regulation A offering statement under the Act at least
60 days prior to the filing of such registration statement or offering
statement, and the Holder or Holders and holders of Warrant Securities shall
have 30 days thereafter to request in writing that the Company register or
qualify the Warrant Securities or the Warrant Securities underlying the
unexercised portion of this Warrant in accordance with this subsection 13.2.
Upon the delivery of such a written request within the specified time, the
Company shall be obligated to include in its contemplated registration statement
or offering statement all information necessary or advisable to register or
qualify the Warrant Securities or Warrant Securities underlying the unexercised
portion of this Warrant for a public offering, if the Company does file the
contemplated registration statement or offering statement; provided, however,
that neither the delivery of the notice by the Company nor the delivery of a
request by a Holder or by a holder of Warrant Securities shall in any way
obligate the Company to file a registration statement or offering statement.
Furthermore, notwithstanding the filing of a registration statement or offering
statement, the Company may, at any time prior to the effective date thereof,
determine not to offer the securities to which the registration statement or
offering statement relates, other than the Warrant, Warrant Securities and
Warrant Securities underlying the unexercised portion of this Warrant.
Notwithstanding the foregoing, if, as a qualification of any offering in any
state or jurisdiction in which the Company (by vote of its Board of Directors)
or any underwriter determines in good faith that it wishes to offer securities
registered in the offering, it is required that offering expenses be allocated
in a manner different from that provided above, then the offering expenses shall
be allocated in whatever manner is most nearly in compliance with the provisions
set out above.
The Company shall comply with the requirements of this subsection 13.2 and
the related requirements of subsection 13.7 at its own expense. That expense
shall include, but not be limited to, legal, accounting, consulting, printing,
federal and state filing fees, NASD fees, out-of-pocket expenses incurred by
counsel, accountants and consultants retained by the Company, and miscellaneous
expenses directly related to the registration statement or offering statement
and the offering. However, this expense shall not include the portion of any
underwriting commissions, transfer taxes and the underwriter's accountable and
nonaccountable expense allowances attributable to the offer and sale of the
Warrant, Warrant Securities and the Warrant Securities underlying the
unexercised portion of this Warrant, all of which expenses shall be borne by the
Holder or Holders of this Warrant and the holders of the Warrant Securities
registered or qualified.
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<PAGE>
13.3. Inclusion of Information. In the event that the Company registers or
qualifies the Warrant, Warrant Securities or the Warrant Securities underlying
the unexercised portion of this Warrant pursuant to subsections 13.1 or 13.2
above, the Company shall include in the registration statement or qualification,
and the prospectus included therein, all information and materials necessary or
advisable to comply with the applicable statutes and regulations so as to permit
the public sale of the Warrant Securities or the Warrant Securities underlying
the unexercised portion of this Warrant. As used in subsections 13.1 and 13.2,
reference to the Company's securities shall include, but not be limited to, any
class or type of the Company's securities or the securities of any of the
Company's subsidiaries or affiliates.
13.4. Registration Statement Filed by Holder. In addition to the
registration rights described in subsections 13.1 and 13.2 above, upon the
written request of any Majority Holder, the Company, as promptly as possible
after delivery of such request, shall cooperate with the requesting Majority
Holder or holder in preparing and signing any registration statement or offering
statement that the Holder or holder may desire to file in order to sell or
transfer the Warrant and Warrant Securities. Within 10 days after the delivery
of the written request described above, the Company shall deliver written notice
to all other Holders of this Warrant and holders of Warrant Securities, if any,
advising them that the Company is proceeding with a registration statement or
offering statement and that their Warrant and Warrant Securities will be
included therein if they so desire and agree to pay their pro rata share of the
cost of registration or qualification and provided that the Holder or holder
delivers written notice to the Company of their desire to be included and their
agreement to pay their pro rata share of the cost within 30 days after the
delivery of the Company's notice to them. The Company will supply all
information necessary or advisable for any such registration statements or
offering statements; provided, however, that all the costs and expenses of such
registration statements or offering statements shall be borne, in a manner
proportionate to the number of securities for which they indicate a desire to
register, by the Holders of this Warrant and the holders of Warrant Securities
who seek the registration or qualification of their Warrant, Warrant Securities
or Warrant Securities underlying the unexercised portion of their Warrant. In
determining the amount of costs and expenses to be borne by those Holders or
holders, the only costs and expenses of the Company to be included are the
additional costs and expenses that would not have otherwise been incurred by the
Company if those Holders or holders had not desired to file a registration
statement or offering statement. As an example, and without limitation, audit
fees would not be charged to those Holders or holders if or to the extent that
the Company would have incurred the same audit fees for its year-end or other
use in the absence of the registration statement or offering statement. The
Holders or holders responsible for the costs and expenses shall reimburse the
Company for those reimbursable costs and expenses reasonably incurred by the
Company within 30 days after the initial effective date of the registration
statement or qualification at issue.
13.5. Payment of Exercise Price from Proceeds. In the event that any such
Registration Statement is utilized for a public offering of any of the Shares to
be received upon exercise of the Warrants pursuant to this Section 13, the
Warrant Holder may elect to pay the exercise price of the Warrants to the
Company out of the proceeds of the sale of the Shares pursuant to the
Registration Statement concurrently with the closing of such sale of the Shares;
provided that if such sale is not closed within 90 days of the effective date of
such Registration Statement, then the Warrant Holder shall be obligated to pay
the exercise price of the Warrants to the Company on such 90th day.
13.6. Condition of Company's Obligations. As to each registration statement
or offering statement, the Company's obligations contained in this Section 13
shall be conditioned upon a timely receipt by the Company in writing of the
following:
(a) Information as to the terms of the contemplated public
offering furnished by and on behalf of each Holder or holder intending to
make a public distribution of the Warrant Securities or Warrant Securities
underlying the unexercised portion of the Warrant; and
(b) Such other information as the Company may reasonably require
from such Holders or holders, or any underwriter for any of them, for
inclusion in the registration statement or offering statement.
12
<PAGE>
13.7. Additional Requirements. In each instance in which the Company
shall take any action to register or qualify the Warrant Securities or the
Warrant Securities underlying the unexercised portion of this Warrant, if any,
pursuant to this Section 13, the Company shall do the following:
(a) supply to Cohig, as the representative of the Holders of the
Warrant and the holders of Warrant Securities whose Warrant Securities are
being registered or qualified, two (2) manually signed copies of each
registration statement or offering statement, and all amendments thereto,
and a reasonable number of copies of the preliminary, final or other
prospectus or offering circular, all prepared in conformity with the
requirements of the Act and the rules and regulations promulgated
thereunder, and such other documents as Cohig shall reasonably request;
(b) cooperate with respect to (i) all necessary or advisable
actions relating to the preparation and the filing of any registration
statements or offering statements, and all amendments thereto, arising from
the provisions of this Section 13, (ii) all reasonable efforts to establish
an exemption from the provisions of the Act or any other federal or state
securities statutes, (iii) all necessary or advisable actions to register
or qualify the public offering at issue pursuant to federal securities
statutes and the state "blue sky" securities statutes of each jurisdiction
that the Holders of the Warrant or holders of Warrant Securities shall
reasonably request, and (iv) all other necessary or advisable actions to
enable the Holders of the Warrant Securities to complete the contemplated
disposition of their securities in each reasonably requested jurisdiction;
and
(c) keep all registration statements or offering statements to
which this Section 13 applies, and all amendments thereto, effective under
the Act for a period of at least 180 days after their initial effective
date and cooperate with respect to all necessary or advisable actions to
permit the completion of the public sale or other disposition of the
securities subject to a registration statement or offering statement.
13.8. Reciprocal Indemnification. In each instance in which pursuant to
this Section 13 the Company shall take any action to register or qualify the
Securities or the Warrant Securities underlying the unexercised portion of this
Warrant, prior to the effective date of any registration statement or offering
statement, the Company and each Holder or holder of Warrants or Warrant
Securities being registered or qualified shall enter into reciprocal
indemnification and contribution agreements, in the form customarily used by
reputable investment bankers with respect to public offerings of securities.
13.9. Cohig as Representative. For purposes of subsection 13.6 (a)
above, by the receipt of this Warrant or any Warrant Securities, all Holders and
all holders of Warrant Securities acknowledge and agree that Cohig is and shall
be their representative.
13.10. Survival. The Company's obligations described in this Section 13
shall continue in full force and effect regardless of the exercise, surrender,
cancellation or expiration of this Warrant.
SECTION 14. RESTRICTIONS ON TRANSFER
14.1. Restrictions on Transfer. This Warrant, the Warrant Securities, and
all other securities issued or issuable upon exercise of this Warrant, may not
be offered, sold or transferred, in whole or in part, except in compliance with
the Act, and except in compliance with all applicable state securities laws. The
Warrant Holder agrees that prior to making any disposition of the Warrants to
the persons as provided in Section 8, the Warrant Holder shall give written
notice to the Company describing briefly the manner in which any such proposed
disposition is to be made; and no such disposition shall be made if the Company
has notified the Warrant Holder that in the opinion of counsel reasonably
satisfactory to the Warrant Holder a registration statement or other
notification or post-effective amendment thereto (hereinafter collectively a
"Registration Statement") under the Act is required with respect to such
disposition and no such Registration Statement has been filed by the Company
with, and declared effective, if necessary, by, the Commission.
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<PAGE>
14.2. Restrictive Legend. The Company may cause substantially the following
legends, or their equivalents, to be set forth on each certificate representing
the Warrants, the Warrant Securities, or any other security issued or issuable
upon exercise or conversion of a Warrant, not theretofore distributed to the
public or sold to underwriters, as defined by the Act:
(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES
LAWS AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR TRANSFERRED IN ANY
MANNER EXCEPT IN COMPLIANCE WITH THE AGREEMENT PURSUANT TO WHICH THEY WERE
ISSUED."
(b) Any legend required by applicable state securities laws.
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legends (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement under
the Act, or the securities represented thereby) shall also bear the above
legends unless, in the opinion of the Company's counsel, the securities
represented thereby need no longer be subject to such restrictions.
SECTION 15. NO RIGHTS AS STOCKHOLDER
Nothing contained in this Agreement or in the Warrants shall be construed
as conferring upon the Warrant Holder or its transferees any rights as a
stockholder of the Company, including the right to vote, receive dividends,
consent or receive notices as a stockholder in respect to any meeting of
stockholders for the election of directors of the Company or any other matter.
The Company covenants, however, that for so long as this Warrant is at least
partially unexercised, it will furnish any Holder of this Warrant with copies of
all reports and communications furnished to the shareholders of the Company.
SECTION 16. NOTICES
16.1. The Company. All notices, demands, claims, elections, opinions,
requests or other communications hereunder (however characterized or described)
shall be in writing and shall be deemed duly given or made if (and then two
business days after) sent by registered or certified mail, return receipt
requested, postage prepaid and addressed to, in the case of the Company as
follows:
Coyote Sports, Inc.
2291 Arapahoe Avenue
Boulder, Colorado 80302
Attention: Mel S. Stonebraker
16.2. The Warrant Holders. Any distribution, notice or demand required or
authorized by this Agreement to be given or made by the Company to or on the
Warrant Holders shall be sufficiently given or made if sent by mail, first
class, certified or registered, postage prepaid, addressed to the Warrant
Holders at their last known addresses as they shall appear on the registration
books for the Warrant Certificates maintained by the Company.
16.3. Effectiveness of Notice. The Company may send any notice, demand,
claim, election, opinion, request or communication hereunder to the intended
recipient at the address set forth above using any other means (including
personal delivery, expedited courier, messenger service, telecopy, telex,
ordinary mail or electronic mail), but no such notice, demand, claim, election,
opinion, request or other communication shall be deemed to have been duly given
or made unless and until it actually is received by the intended recipient. The
Company may change the address to which
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<PAGE>
notices, demands, claims, elections, opinions, requests and other communications
hereunder are to be delivered by giving the Warrant Holders notice in the manner
herein set forth.
SECTION 17. ARBITRATION
The Company and the Holder, and by receipt of a Certificate or any Warrant
Securities, all subsequent Holders or holders of Warrant Securities, agree to
submit all controversies, claims, disputes and matters of difference with
respect to this Agreement and the Certificates, including, without limitation,
the application of this Section 17, to arbitration in Denver, Colorado,
according to the rules and practices of the American Arbitration Association
from time to time in force; provided, however, that if such rules and practices
conflict with the applicable procedures of Colorado courts of general
jurisdiction or any other provisions of Colorado law then in force, those
Colorado rules and provisions shall govern. This agreement to arbitrate shall be
specifically enforceable. Arbitration may proceed in the absence of any party if
notice of the proceeding has been given to that party. The parties agree to
abide by all awards rendered in any such proceeding. These awards shall be final
and binding on all parties to the extent and in the manner provided by the rules
of civil procedure enacted in Colorado. All awards may be filed, as a basis of
judgment and of the issuance of execution for its collection, with the clerk of
one or more courts, state or federal, having jurisdiction over either the party
against whom that award is rendered or its property. No party shall be
considered in default hereunder during the pendency of arbitration proceedings
relating to that default.
SECTION 18. MISCELLANEOUS PROVISIONS
18.1. Persons Benefiting. This Agreement shall be binding upon and inure to
the benefit of the Company; the Holders, and their respective successors and
assigns. By his acceptance of a Warrant Certificate, the Holder accepts and
agrees to comply with all of the terms and provisions hereof. Nothing in this
Agreement is intended or shall be construed to confer on any other person any
right, remedy or claim or to impose on any other person any duty, liability or
obligation.
18.2. Severability. If any term contained herein shall be held, declared or
pronounced void, voidable, invalid, unenforceable or inoperative for any reason
by any court of competent jurisdiction, government authority or otherwise, such
holding, declaration or pronouncement shall not affect adversely any other term,
which shall otherwise remain in full force and effect, and the effect of such
holding, declaration or pronouncement shall be limited to the territory or
jurisdiction in which made.
18.3. Termination. This Agreement shall terminate as of the close of
business on the Expiration Date, or such earlier date upon which all Warrants
shall have been exercised or redeemed; except that the exercise of a Warrant in
full or the Expiration Date shall not terminate the provisions of this Agreement
as it relates to holders of Warrant Securities.
18.4. Governing Law. These terms and each Certificate issued hereunder
shall be deemed to be a contract under the laws of the State of Nevada and for
all purposes shall be construed in accordance with the laws of said state
without giving effect to conflicts of laws provisions of such state.
18.5. Agreement Available to Holders. A copy of these terms shall be
available at all reasonable times at the office of the Company for inspection by
any Holder. As a condition of such inspection, the Company may require any
Holder to submit a Certificate held of record for inspection.
18.6. Counterparts. This Agreement may be executed in any number of
counterparts, 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.
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18.7. Failure to Perform. If the Company fails to perform any of its
obligations hereunder, it shall be liable to the Holder for all damages, costs
and expenses resulting from the failure, including, but not limited to, all
reasonable attorney's fees and disbursements.
18.8. Paragraph Headings. Paragraph headings used in this Warrant Agreement
are for convenience only and shall not be taken or construed to define or limit
any of the terms or provisions of this Agreement. Unless otherwise provided, or
unless the context shall otherwise require, the use of the singular shall
include the plural and the use of any gender shall include all genders.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
COYOTE SPORTS, INC.
By:
-----------------------------
Mel S. Stonebraker, President
COHIG & ASSOCIATES, INC.
By:
-----------------------------
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EXHIBIT A
---------
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED,
HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH THE
AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED.
Warrant Certificate No. ____
REPRESENTATIVE'S OPTIONS TO PURCHASE
____ SHARES OF COMMON STOCK
COYOTE SPORTS, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF NEVADA
This Warrant Certificate certifies that ____ or registered assigns (the
"Holder") is the registered owner of the above-indicated number of Warrants
("Warrants") expiring at 5:00 p.m. Denver, Colorado local time, on September __,
2002 (the "Expiration Date"). Each Warrant entitles the Holder to purchase from
Coyote Sports, Inc. (the "Company") a Nevada corporation, at any time during the
period commencing at 9:00 a.m., Denver, Colorado local time, on September __,
1998, and expiring on the Expiration Date, one fully paid and non-assessable
share of Common Stock of the Company at a purchase price per Share of $6.25 (the
"Exercise Price"), upon surrender of this Certificate, with the exercise form
hereon duly completed and executed, with payment of the Exercise Price, at the
principal office of the Company, but only subject to the conditions set forth
herein and in the Representative's Warrant Agreement between the Company and
Cohig & Associates, Inc., dated September __, 1997 (the "Warrant Agreement"). In
addition, the Holder has the right to convert Warrants evidenced by this
Certificate into shares of Common Stock as provided in Section 4.6 of the
Warrant Agreement. The Exercise Price, the Expiration Date, and the number of
shares of Common Stock of the Company purchasable upon exercise of the Warrants
evidenced hereby shall be subject to adjustment from time to time as set forth
in the Warrant Agreement. Reference is hereby made to the other provisions of
the Warrant Agreement, all of which are hereby incorporated by reference herein
and made a part of this Certificate and which shall for all purposes have the
same effect as though fully set forth at this place.
Upon due presentment for registration of transfer of this Certificate at
the office of the Company a new Certificate or Certificates of like tenor and
evidencing in the aggregate a like number of Warrants, subject to any
adjustments made in accordance with the Warrant Agreement, shall be issued to
the transferee in exchange for this Certificate, subject to the limitations
provided in the Warrant Agreement.
The Holder of the Warrants evidenced by this Certificate may exercise or
convert all or any whole number of such Warrants in the manner stated hereon and
in the Warrant Agreement. The Exercise Price shall be payable in lawful money of
the United States of America in cash or by certified or cashier's check or bank
draft payable to the order of the Company. Upon any partial exercise or
conversion of the Warrants evidenced hereby, there shall be signed and issued to
the Warrant Holder a new Warrant Certificate in respect of the Shares as to
which the Warrants evidenced hereby shall not have been exercised or converted.
These Warrants may be exchanged at the office of the Company by surrender of
this Warrant Certificate properly endorsed for one or more new Warrants of the
same aggregate number of Shares as here evidenced by the Warrant or Warrants
exchanged. No fractional shares of Common Stock will be issued upon the exercise
of rights to purchase hereunder, but the Company shall pay the cash value of any
fraction upon the exercise of one or more Warrants. These Warrants are
transferable at the office of the Company in the manner and subject to the
limitations set forth in the Warrant Agreement.
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This Warrant Certificate does not entitle any Warrant Holder to any of the
rights of a stockholder of the Company.
COYOTE SPORTS, INC.
By:
-----------------------------
Dated:
[Seal]
Attest:
___________________________________
Secretary
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NOTICE OF EXERCISE
------------------
(To be executed by a Holder desiring to exercise the right to purchase Shares
pursuant to a Warrant.)
The undersigned Holder of a Warrant hereby
(a) irrevocably elects to exercise the Warrant to the extent of purchasing
__________ Shares;
(b) makes payment in full of the aggregate Exercise Price for those Shares
in the amount of $ ___________ by the delivery of certified funds or a bank
cashier's check in the amount of $ ____________;
(c) requests that certificates evidencing the securities underlying such
Shares be issued in the name of the undersigned, or, if the name and address of
some other person is specified below, in the name of such other person:
_______________________________________________________
_______________________________________________________
_______________________________________________________
(Name and address of person other than the
-----
undersigned in whose name Shares are to be registered)
(d) requests, if the number of Shares purchased are not all the Shares
purchasable pursuant to the unexercised portion of the Warrant, that a new
Warrant of like tenor for the remaining Shares purchasable pursuant to the
Warrant be issued and delivered to the undersigned at the address stated below.
Dated: _______________ ____________________________________________
Signature Signature
(This signature must conform in all respects
to the name of the Holder as specified on
the face of the Warrant.)
______________________ ____________________________________________
Social Security Number Printed Name
or Employer ID Number
Address: ________________________________________
____________________________________________
3
<PAGE>
ASSIGNMENT FORM
---------------
FOR VALUE RECEIVED, the undersigned, ______________________ , hereby sells,
assigns and transfers unto:
Name: ___________________________________________________
(Please type or print in block letters)
Address: ________________________________________________
_____________________________________________
the right to purchase _____________ Shares of Coyote Sports, Inc. (the
"Company") pursuant to the terms and conditions of the Warrant held by the
undersigned. The undersigned hereby authorizes and directs the Company (i) to
issue and deliver to the above-named assignee at the above address a new Warrant
pursuant to which the rights to purchase being assigned may be exercised, and
(ii) if there are rights to purchase Shares remaining pursuant to the
undersigned's Warrant after the assignment contemplated herein, to issue and
deliver to the undersigned at the address stated below a new Warrant evidencing
the right to purchase the number of Shares remaining after issuance and delivery
of the Warrant to the above-named assignee. Except for the number of Shares
purchasable, the new Warrants to be issued and delivered by the Company are to
contain the same terms and conditions as the undersigned's Warrant. To complete
the assignment contemplated by this Assignment Form, the undersigned hereby
irrevocably constitutes and appoints ___________________________ as the
undersigned's attorney-in-fact to transfer the Warrants and the rights
thereunder on the books of the Company with full power of substitution for these
purposes.
Dated: ___________________ __________________________________________________
Signature
(This signature must conform in all respects to
the name of the Holder as specified on the face of
the Warrant.)
__________________________________________________
Printed Name
Address: _______________________________________________
________________________________________________
4
<PAGE>
OPTION CONVERSION EXERCISE FORM
TO: Coyote Sports, Inc.
Pursuant to Section 4.7 of the Warrant Agreement, the Holder hereby
irrevocably elects to convert Warrants into _______________ Shares of the
Company. A conversion calculation is attached hereto as Exhibit B-1.
The undersigned requests that certificates for such Shares be issued as
follows:
Name: ___________________________________________________
Address: _________________________________________________
Deliver to: ______________________________________________
and that a new Certificate for the balance remaining of the Warrants, if any, be
registered in the name of, and delivered to, the undersigned at the address
stated above.
Signature ____________________ Dated _______________________
5
<PAGE>
Exhibit B-1
CALCULATION OF OPTION CONVERSION
--------------------------------
Converted Securities = Net Value
---------
FMV
FMV = $ _______________
Net Value = Aggregate FMV - Aggregate Exercise Price
= $ _______________ - _______________
= $ _______________
Converted Shares = _______________
Fractional Converted Shares = _______________(1)
_______________
(1) _______________ to pay for fractional Shares in cash @ $ ______ per Share.
6
<PAGE>
September 12, 1997
Coyote Sports, Inc.
2291 Arapahoe Avenue
Boulder, CO 80302
Gentlemen:
We have acted as counsel to Coyote Sports, Inc. (the "Company") in connection
with the preparation and filing of Registration Statement No. 333-29077 on Form
SB-2 (the "Registration Statement") covering registration under the Securities
Act of 1933 of 1,207,500 shares of the Company's Common Stock, $.001 par value
on behalf of the Company, and 75,000 shares, 250,000 Warrants and 125,000 shares
underlying the Warrants on behalf of certain Selling Stockholders (collectively,
the "Securities"). As such, we have examined the Registration Statement, the
Company's Amended and Restated Articles of Incorporation, its Bylaws, and
minutes of meetings of its Board of Directors.
Based upon the foregoing, and assuming that the Securities will be sold
according to the Registration Statement at a time when effective, we are of the
opinion that, upon issuance of the Securities according to the Registration
Statement and receipt of the consideration to be paid for the Securities, the
Securities will be validly issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the references to our firm in the Prospectus which is made a
part of the Registration Statement.
Very truly yours,
CHRISMAN, BYNUM & JOHNSON, P.C.
Laurie P. Glasscock, Esq.
<PAGE>
Dated this 4th day of April, 1997
Between
SYARIKAT LARUT JAYA SDN. BHD.
And
******************************************************************
AGREEMENT
*******************************************************************
M/S W.K. YAP, LOO & CO.
No. 47, 1st Floor
Jalan Pasar,
34000 Taiping,
Perak.
File Ref: YWK/MISC 61/97
<PAGE>
AN AGREEMENT made the 4th day of April, 1997
Between
SYARIKAT LARUT JAYA SDN. BHD. (Company No. 40590-V), a company incorporated in
Malaysia under the Companies Act, 1965 and having its principal place of
business at No. 3, Jalan Medan Taiping 5, Medan Taiping, 34000 Taiping, Perak
(hereinafter referred to as "the First Party) of, the one part
And
PENTIUMATICS SDN. BHD. (Company No. 388059-W), a company incorporated
[illegible] and having its [illegible] Abbas, Tanjung Bungah, 11200 Penang
(hereinafter referred to as "the Second Party") of the other part.
RECITALS
(a) KAMI OIL INDUSTRIES SDN. BHD. (In Receivership And In Liquidation) is a
company incorporated in Malaysia under the Companies Act, 1965 (hereinafter
referred to as "the Proprietor"), acting by its Receiver and Manager LIM TIAN
HUAT (NRIC No. 4713589) of care of Messrs. Arthur Andersen & Co., having its
correspondence address at Level 1, Block C (South), Pusat Bandar Damansara,
Damansara Heights, 50490 Kuala Lumpur (hereinafter referred to as "the Receiver
and Manager").
(b) The Proprietor is the registered owner of all that piece and parcel of
leasehold industrial land held under Pajakan Negeri 4501 Lot No. 8206, Mukim
Asam Kumbang, Daerah Larut & Matang, Negeri Perak with an area of approximately
234,524 square feet (hereinafter referred to as "the said Land") together with
the factory building(s) erected thereon and all that plant and machinery, office
furniture and fittings more particularly described in the Appendix (hereinafter
collectively referred to as "the Plant and Machinery") annexed herewith (the
said Land together with the factory building(s) erected thereon and the Plant
and Machinery are hereinafter collectively referred to as "the said Property").
(c) Vide a Debenture dated the 20th day of July, 1990 created by the Proprietor
(hereinafter referred to as "the Debenture") in favour of Bank Bumiputra
Malaysia Berhad (hereinafter referred to as "the Bank"), the Proprietor charged
the said Property to the Bank as security for the repayment of all monies due
under the loan granted by the Bank to the Proprietor.
(d) The said Land is further subject to Three (3) charges in favour of the Bank
vide:
(1) Charge Presentation No. 27532/90 Jilid 3696 Folio 42 registered on the
17th day of August, 1990;
(2) Charge Presentation No. 17119/91 Jilid 3967 Folio 23 registered on the
27th day of May, 1991; and
<PAGE>
(3) Charge Presentation No. 19785/93 Jilid 5078 Folio 20 registered on the
22nd day of June, 1993
(hereinafter collectively referred to as "the Charges").
(e) The transfer of the said Land is subject to the consent of the Menteri
Besar of Perak.
(f) Vide a Sale and Purchase Agreement dated the 20th day of January, 1997 made
between the Receiver and Manager on behalf of the Proprietor of the [illegible]
the other party [illegible] the First Party has purchased, [illegible] the said
Property from the Proprietor with the consent of the Bank and having the right
to appoint a nominee to accept the transfer of the said Land from the
Proprietor.
(g) Subject to the proper completion of the Sale Agreement between the
Proprietor and the First Party, the First Party has at the request of the Second
Party agreed to sell the factory building(s) thereon the said Land together with
the Plant and Machinery on "as is where is" basis free from all or any lien,
charges and encumbrances whatsoever and to nominate and appoint the Second Party
as its nominee to accept the transfer of the said Land free from all
encumbrances whatsoever with vacant possession thereof but subject to the
conditions expressed or implied on the document of title from the Proprietor
pursuant to the provisions of the Sale Agreement at an agreed consideration and
upon the terms and conditions hereinafter contained.
(h) In this transaction, Messrs. W.K. Yap, Loo & Co. of No. 47, First Floor,
Jalan Pasar, 34000 Taiping, Perak (hereinafter called "the First Party's
Solicitors) shall be the Solicitors acting for the First Party and
Messrs. of (hereinafter called "the Second Party's
Solicitors") shall be the Solicitors acting for the Second Party.
NOW IT IS HEREBY AGREED as follows:
CONSIDERATION
- -------------
1. In consideration of the above premises and the sum of Ringgit Malaysia
Seven Hundred Ten Thousand (RM710,000.00) only (hereinafter called "the
Deposit") now paid by the Second Party to the First Party by way of deposit and
part payment of the consideration amount herein, the First Party hereby agree to
sell the factory building(s) thereon the said Land together with the Plant and
Machinery on "as is where is" basis free from all or any lien, charges and
encumbrances whatsoever and to nominate and appoint the Purchaser as its nominee
to accept the transfer of the said Land free from all encumbrances whatsoever
with vacant possession thereof but subject to the conditions expressed or
implied on the document of title from the Proprietor pursuant to the provisions
of the Sale Agreement and the Second Party hereby agree to purchase the factory
building(s) thereon the said Land together with the Plant and Machinery and to
accept the transfer of the said Land from the Proprietor at the agreed
consideration sum of Ringgit Malaysia Seven Million One Hundred Thousand
(RM7,100,000.00) only (hereinafter called "the Consideration Sum") which made up
as follows:
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Purchase Price for the said Land RM6,800,000.00
and the factory building(s)
(b) the Plant and Machinery RM 300,000.00
--------------
Total: RM7,100,000.00
</TABLE>
and subject to the terms and conditions hereinafter contained.
PAYMENT OF BALANCE CONSIDERATION SUM
- ------------------------------------
2.1 The balance of the Consideration Sum of Ringgit Malaysia Six Million Three
Hundred Ninety Thousand (RM6,390,000.00) only (hereinafter called "the Balance
Consideration Sum") shall be paid by the Second Party to the Bank through the
First Party's Solicitors toward redemption of the said Property and completion
of the Sale Agreement within One (1) month from the date hereof (hereinafter
referred to as "the Completion Date") and such payment to the Bank by the Second
Party shall be treated as payment to the First Party.
2.2 In the event the Second Party shall be unable to settle the Balance
Consideration Sum on the Completion Date, the First Party shall extend the time
period for the payment of same for a further period of one (1) month from the
Completion Date (hereinafter called "the Extended Completion Date") and the
Second Party shall pay late payment interest at the rate of Twelve per centum
(12%) per annum on the Balance Consideration Sum for such extended period of
payment thereof.
2.3 In the event the Second Party shall fail to pay the Balance Consideration
Sum together with late payment interest thereon the Extended Completion Date
then the Vendor shall have the right to terminate this Agreement and all part
payment(s) thenceforth paid by the Second Party under this Agreement shall be
forfeited by the First Party absolutely as agreed liquidated damages and neither
party shall thereafter have any further claim against the other save for
antecedent breach.
PROCEDURE FOR COMPLETION
- ------------------------
3.1 Upon the execution of this Agreement the First Party shall notify the
Proprietor of the nomination and appointment of the Second Party as its nominee
to accept the transfer of the said Land from the Proprietor.
3.2 Upon the compliance of Clause 2.1 or 2.2 above by the Second Party, the
First Party and/or the First Party's Solicitors shall procure a valid and
registrable Memorandum of Transfer affecting the said Land in favour of the
Second Party duly executed by the Receiver and Manager acting on behalf of the
Proprietor together with the issued document of title for the said Land, the
Discharge of Charge duly executed by the Bank and all other relevant documents
pertaining thereto (hereinafter collectively referred to as "the Transfer
Documents") and forward the same to the Second Party's Solicitors who may take
all necessary steps and do all such acts or things as may be required to effect
<PAGE>
the registration of the transfer of the said land from the Proprietor in favour
of the Second Party at the cost and expense [illegible].
PRIVATE CAVEAT
- --------------
Upon execution of this Agreement, the Second Party may at its own cost and
expense to lodge private caveat against the said Land PROVIDED THAT the Second
Party shall at the same time execute in escrow the Notice of the Withdrawal of
Private Caveat in the form prescribed by the National Land Code which Notice
shall be deposited with the First Party's Solicitors for safe keeping. In the
event the Second Party fails to pay the Balance Consideration Sum in accordance
with Clause 2.1 or 2.2 above then the First Party's Solicitors are hereby
authorized to forthwith present such Notice at the relevant Land Office/Registry
to effect the withdrawal of the private caveat at the expense of the Second
Party.
NON COMPLETION BY SECOND PARTY
- ------------------------------
5. If the Second Party shall fail to pay the Balance Consideration Sum or
other payment(s) payable by it pursuant to the provisions herein then it is
hereby expressly agreed between the parties hereto that all the payment(s) which
have already been paid by the Second Party to the First Party, the Bank and/or
the First Party's Solicitors as at the date of such default shall be forfeited
absolutely to the First Party as agreed liquidated damages and this Agreement
shall become null and void and of no further effect and neither party hereto
shall thereafter have any claim against the other save for antecedent breach.
DISCLOSURE AND INDEMNITY
- ------------------------
6. The First Party hereby warrant to the Second Party that unless expressly
disclosed in this Agreement, there are no other adverse claims against the said
Property and the First Party hereby expressly covenant that during the
continuance of this Agreement, the First Party shall not grant option to
purchase, assign, sell, lease, demise, charge or otherwise encumber the said
Property. In the event that third parties may claim any interest on the said
Property, the First Party undertake to indemnify the Second Party against all
such claims and to bear all legal fees, disbursements, cost and other expenses
which may be incurred by the Second Party in connection with or arising from
this Agreement.
NON APPROVAL OF MENTERI BESAR'S CONSENT TO TRANSFER
- ---------------------------------------------------
7.1 The parties hereto hereby expressly agree and confirm that this Agreement
is conditional upon the granting of the consent of the Menteri Besar of Perak
for transfer of the said Land in favour of the Second Party.
7.2 The First Party shall within Fourteen (14) days from the date hereof apply
for [illegible]
7.3 If the First Party and/or the Proprietor shall fail to obtain the Menteri
Besar's consent for the transfer of said Land in favour of the Second Party on
or before the Completion Date and the
<PAGE>
Proprietor shall refuse to a further extension of time thereof, then in such
even this Agreement shall be terminated and the First Party shall within Seven
(7) days from the date of termination thereof refund the Deposit and all part
payment(s) thenceforth paid by the Second Party to the First Party free of
interest and thereafter this Agreement shall become null and void and be of no
further force or effect and neither party hereto shall have any further claim
whatsoever against the other save for antecedent breach.
TIME
- ----
8. Time whenever mentioned herein shall be the essence of this Agreement.
COST
- ----
9.1 The cost of and incidental to the preparation and execution of this
Agreement and the transfer of the said Land including all stamp duty and
registration fees thereon shall be borne by the Second Party. The Second Party
further agrees to pay as and when required any additional or excess stamp duly
and/or penalty that may be imposed by the Collector of Stamp Duty or such other
competent authority in respect of this Agreement and/or the transfer of the said
Property.
9.2 Each party shall bear their respective solicitor's fees.
NO WAIVER
- ---------
10. Knowledge or acquiescence by either party hereto of any breach of any of
the conditions or covenants herein contained shall not operate as or be deemed
to be waiver of such conditions or covenants or any of them and notwithstanding
such knowledge acquiescence each party hereto shall be entitled to exercise
their respective rights under this Agreement and to require strict performance
by the other of the terms and conditions herein.
SPECIFIC PERFORMANCE
- --------------------
11. Both parties hereto shall be entitled to specific performance of this
contract.
NOTICES
- -------
12. Any [illegible] to be served by either party hereto to the other under the
provisions of this Agreement shall be in writing and shall be deemed to be
sufficiently served:
(a) if it is given by the party or its Solicitors by post in a registered
letter addressed to the party to be served at its address herein mentioned and
in such case it shall be deemed (whether it is actually delivered or not) to
have been received at the time when such registered letter would in the ordinary
course be delivered;
(b) if it is given by the party or its Solicitors and despatched by hand to
the party to be served on its Solicitors.
<PAGE>
SUCCESSORS BOUND
- ----------------
13. This Agreement shall be binding upon the successors in title and assigns of
the parties hereto.
DEFINITIONS & INTERPRETATION
- ----------------------------
14.1 In this Agreement where the context so admits:
(a) words importing the masculine gender shall be deemed to include the
feminine gender and the neuter genders and vice versa;
(a) words importing the singular number shall include the plural and vice
versa.
14.2 The headings are inserted for convenience of reference only and shall not
affect the construction or interpretation of the provisions of this Agreement.
<PAGE>
IN WITNESS WHEREOF the parties hereto have hereunto set their hands and
seals the day and year first abovewritten.
SYARIKAT LARUT JAYA SDN. BHD. )
is affixed hereto in the )
presence of: )
........................ .......................
Director Director
The Common Seal of )
PENTIUMATICS SDN. BHD. )
is affixed hereto in the )
presence of: )
........................ .......................
Director Director
A:SP200B/S&P4
<PAGE>
Dated this 4th day of April, 1997
Between
PENTIUMATICS SDN. BHD.
And
SYARIKAT PEMBINA MAJU
*********************************************************************
CONSTRUCTION AGREEMENT
*********************************************************************
M/S W.K. YAP, LOO & CO.
No. 47, 1st Floor,
Jalap Pasar,
34000 Taiping,
Perak.
File Ref: YWK/MISC 61/97
<PAGE>
CONSTRUCTION AGREEMENT
An Agreement made on the 4th day of April, 1997
Between
PENTIUMATICS SDN. BHD. (Company No. 388059-W), a company incorporated in
Malaysia under the Companying Agr. 1965 and having its registered [illegible]
Taijung Bunhah, 11200 Penan [illegible] the one part
And
SYARIKAT PEMBINA MAJU (Business Registration No. IP0001072-U), a firm registered
under the Business Registration Act, 1956 and having its principal place of
business at No. 3, Jalan Medan Taiping 5, Medan Taiping, 34000 Taiping, Perak
(hereinafter referred to as "the Contractor") of the other part.
WHEREAS:
(a) The Owner has purchased all that piece and parcel of leasehold industrial
land held under Pajakan Negeri 4501 Lot No. 8206, Mukim Asam Kumbang, Daerah
Larut & Matang, Negeri Perak with an area of approximately 224,524 square feet
together with the factory building(s) erected thereon (hereinafter referred to
as "the said Factory").
(b) The Owner is desirous of engaging the Contractor to carry out repair and
renovation works on the said Factory more particularly described in the Schedule
annexed herewith (hereinafter referred to as "the Construction Works") and the
Contractor has agreed to undertake the Construction works thereof subject to the
terms and conditions hereinafter appearing.
NOW IT IS HEREBY AGREED AS FOLLOWS:
1. CONSIDERATION
-------------
In consideration of the above premises and the sum of Ringgit Malaysia One
Million and Two Hundred Thousand (RM1,200,000.00) only (hereinafter referred to
as "the Construction Cost") to be paid by the Owner to the Contractor
progressively in accordance with the Schedule annexed herewith, the Owner hereby
appoint the Contractor to carry out the Construction Works and the Contractor
hereby agree to undertake the Construction Works thereof upon the terms and
conditions hereinafter appearing.
2. TIME OF COMPLETION
------------------
The Construction Works to be performed under this Contract shall be
commenced within Fourteen (14) days from the date hereof and substantially
completed within Three (3) months from the date of commencement thereof. In the
event that the Owner is applying for a loan from any
<PAGE>
licensed financial institution to facilitate the whole or part of the
Construction Cost thereof, then the date of commencement of work shall be within
Fourteen (14) days form the receipt of the loan approval.
3. COMPENSATION [illegible]
-------------
The Contractor hereby agrees to compensate the Owner by way of agreed
liquidated damages to be calculated from day to day [illegible] of Ten per
centum (10%) per annum on the Construction Cost for the period occupied beyond
the specified time for the completion of the said Factory.
4. EXECUTION OF CONSTRUCTION WORKS
-------------------------------
4.1 Subject to and in accordance with the terms and provisions of this
Agreement the Contractor shall diligently promptly and in accordance with the
specifications as agreed between the parties hereto construct and complete the
repair and renovation of the said Factory within the stipulated time or any
extension thereof as may be granted by the Owner and in connection therewith the
Contractor shall provide and furnish all materials, apparatus, appliances,
equipment, fixtures, tools, implements and all other facilities as required in
connection therewith the Construction Works on the said Factory.
4.2 The Contractor covenants that all the work shall be done in a good and
workmanlike manner.
5. PAYMENT
-------
The Contractor shall be entitled to claim progressive payments form the
Owner from time to time by instalments upon the completion of the stages of
works in accordance with the Schedule.
6. FORCE MAJEURE
-------------
The Contractor shall not be liable for any delay or for any consequence of
any delay in the carrying out the Construction Works on the said Factory if such
delay shall be due to fire strike flood accident or any act of God or as
consequence of war or of hostilities (whether war be declared or not) or to any
other cause whatsoever beyond the Contractor's reasonable control. If such
delay occurs then (unless the cause thereof shall frustrate or render impossible
the performance of this contract or shall otherwise discharge the same) the
Contractor's period for performing its obligation under Clause 2 above shall be
extended by such period as the Contractor may reasonably require to complete the
performance.
7. INTEREST ON LATE PAYMENT
------------------------
Without prejudice to the Contractor's right to cease work upon default of
payment by the Owner in accordance with Clause 5 above read together with the
Schedule herein, if any of the instalments set out in the Schedule hereto shall
remain unpaid by the Owner at the expiration of Fourteen (14) days from the date
of the Contractor's notification of claim on progressive payment, interest on
such unpaid instalment(s) shall commence immediately thereafter and be payable
by the
<PAGE>
Owner, such interest to be calculated at the rate of ten per centum (10%) per
annum from the due date until the date of full payment thereof.
8. TIME
----
Time wherever stipulated herein shall be the essence of this Agreement.
9. SUCCESSORS BOUND
----------------
This Agreement shall be binding upon the heirs, personal representatives,
executors, successors in title and assigns of the parties hereto.
10. NOTICES
-------
Any notice required to be sent hereinafter shall be in writing and may be
sent by prepaid Registered Post addressed to the party to be served and the same
shall be deemed to have been properly served Seven (7) days after due posting
thereof.
11. COST
----
11.1 The cost for and incidental to the preparation of this Agreement including
the stamp duty thereof shall be borne by the Owner absolutely.
11.2 Each party shall bear their respective solicitors fees.
12. DEFINITIONS & INTERPRETATION
----------------------------
12.1 Words importing the masculine gender shall be deemed to include the
feminine and neuter genders and vice versa.
12.2 Words importing the singular number shall include the plural and vice
versa.
12.3 The headings are inserted for convenience of reference only and shall not
affect the construction or interpretation of the provisions of this Agreement.
<PAGE>
IN WITNESS WHEREOF the parties have hereunder set their hands and seal the
day and year first above written.
The Common Seal of )
PENTIUMATICS SDN. BHD. )
is affixed hereto in )
presents of: )
............................... ............................
Director Director
SIGNED and DELIVERED by the )
above named Contractor in the )
presence of: )
SYARIKAT PEMBINA MAJU
Manager
YAP WAI KHEONG
Advocate & Solicitor
Taiping
a:Const10A/jv3
<PAGE>
Exhibit 23.1
------------
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
THE BOARD OF DIRECTORS
COYOTE SPORTS, INC.:
We consent to the inclusion of our report dated May 19, 1997, except for Note 8
and Note 14 which are as of June 11, 1997 and August 1, 1997, respectively, with
respect to the consolidated balance sheets of Coyote Sports, Inc. as of December
31, 1995 and 1996, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the years then ended, which
report appears in Amendment 2 on Form SB-2 of Coyote Sports, Inc. dated
September 12, 1997 and to the reference to our firm under the heading "Experts"
in the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG PEAT MARWICK LLP
Boulder, Colorado
September 12, 1997
<PAGE>
Exhibit 23.2
------------
Consent of Independent Auditors
-------------------------------
The Board of Directors
Coyote Sports, Inc.:
We consent to the inclusion of our report dated June 5, 1997, except for Note 10
which is as of August 1, 1997, with respect to the combined balance sheets of TI
Apollo Limited, Apollo Golf, Inc. and TI Reynolds 531 Limited as of December 31,
1995 and September 30, 1996, and the related combined statements of operations,
stockholder's equity, and cash flows for the year ended December 31, 1995 and
for the nine months ended September 30, 1996, which report appears in Amendment
2 on Form SB-2 of Coyote Sports, Inc. dated September 12, 1997.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boulder, Colorado
September 12, 1997
