<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 9, 1998
REGISTRATION STATEMENT NO. 333-37507
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CONNECTICUT VALLEY SPORTS, INC.
(Name of Small Business Issuer)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 3484 13-3890380
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
------------------------
4004 HIGHWAY 93 NORTH
STEVENSVILLE, MONTANA 59870
(406) 777-5534
(Address and Telephone Number of Principal Executive Offices and Place Of
Business)
------------------------------
JOHN TILLELI
CHIEF EXECUTIVE OFFICER
CONNECTICUT VALLEY SPORTS, INC.
4004 HIGHWAY 93 NORTH
STEVENSVILLE, MONTANA 59870
(406) 777-5534
(Name, Address and Telephone Number of Agent for Service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
GERSTEN, SAVAGE, KAPLOWITZ & FREDERICKS LLP ZIMET, HAINES, FRIEDMAN & KAPLAN
JAY M. KAPLOWITZ, ESQ. JAMES MARTIN KAPLAN, ESQ.
101 EAST 52ND STREET 460 PARK AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022
TELEPHONE: (212) 752-9700 TELEPHONE: (212) 486-1700
TELECOPIER: (212) 752-9713 TELECOPIER: (212) 223-1151
</TABLE>
------------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: /X/
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
AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL
THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES
ACT OF 1933, AS AMENDED OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A) MAY DETERMINE. THE EXHIBIT INDEX REQUIRED BY ITEM
601 OF REGULATION S-B IS LOCATED AT PAGE OF THE SEQUENTIAL NUMBERING SYSTEM
APPEARING IN THE MANUALLY SIGNED COPY OF THIS REGISTRATION STATEMENT, TOTALING
PAGES, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED SECURITY (1) PRICE FEE
<S> <C> <C> <C> <C>
Units............................... 1,725,000(2) $5.10 $8,797,500 $2,665.91
Common Stock $.001 par value
("Common Stock").................. 1,725,000(3) -0- -0- -0-
Redeemable Common Stock Purchase
Warrant ("Warrant")............... 1,725,000(4) -0- -0- -0-
Common Stock........................ 1,725,000(5) $6.00 $10,350,000 $3,136.56
Underwriter Warrant................. 1(6) $.0001 $10.00 $--
Units............................... 150,000(7) $5.61 $841,500 $255.00
Common Stock........................ 150,000(8) -0- -0- -0-
Warrants............................ 150,000(9) -0- -0- -0-
Common Stock........................ 150,000(10) $6.00 $900,000 $272.73
Total Registration Fee.............. $6,330.20
Previously Paid..................... $5,830.46
Amount Due Herewith................. $499.74
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 promulgated under the Securities Act of 1933, as
amended.
(2) Includes 225,000 Units subject to an over-allotment option granted to the
Underwriter ("Over-Allotment Option").
(3) Consists of Common Stock included as part of the Units, including Units
which the Underwriter has the option purchase from the Registrant to cover
the over-allotments, if any.
(4) Consists of Warrants included as part of the Units, including Units which
the Underwriter has an option to purchase from the Registrant to cover
over-allotments, if any.
(5) Represents shares of Common Stock issuable upon exercise of the Warrants
contained in the Units. Pursuant to Rule 416, this Registration Statement
also covers an indeterminable number of additional shares of Common Stock
issuable as a result of any future anti-dilution adjustments in accordance
with the terms of the Warrants contained in the Units.
(6) Issuable to the Underwriter. Exercisable to purchase up to 150,000 Units.
(7) Represents the Units issuable upon exercise of the Underwriter's Warrant.
Pursuant to Rule 416, this Registration Statement also covers an
indeterminable number of additional Units issuable as a result of a future
anti-dilution adjustments in accordance with the terms of the Underwriter's
Warrants.
(8) Consists of Common Stock included as part of the Units underlying the
Underwriter's Warrants. Pursuant to Rule 416, this Registration Statement
also covers an indeterminable number of additional of shares of Common Stock
issuable as a result of a future anti-dilution adjustments in accordance
with the terms of the Underwriter's Warrants.
(9) Consists of Warrants included as part of the Units underlying the
Underwriter's Warrants. Pursuant to Rule 416, this Registration Statement
also covers an indeterminable number of additional of Warrants issuable as a
result of a future anti-dilution adjustments in accordance with the terms of
the Underwriter's Warrants.
(10) Represents the Common Stock issuable upon exercise of the Warrants
contained in the Underwriter's Warrant. Pursuant to Rule 416, this
Registration Statement also covers an indeterminable number of additional of
shares of Common Stock issuable as a result of a future anti-dilution
adjustments in accordance with the terms of the Underwriter's Warrants and
the Warrants contained in the Units.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED , 1998
PROSPECTUS
CONNECTICUT VALLEY SPORTS, INC.
1,500,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND
ONE REDEEMABLE COMMON STOCK
PURCHASE WARRANT
Connecticut Valley Sports, a Delaware corporation (the "Company"), is
offering hereby (the "Offering") 1,500,000 Units ("Units"), each Unit consisting
of one share of the Company's common stock, $.0001 par value ("Common Stock"),
and one Redeemable Common Stock Purchase Warrant ("Warrant"), through Briarwood
Investment Counsel (the "Underwriter"). The Units, Common Stock and the Warrants
are sometimes collectively referred to as the "Securities." The Common Stock and
Warrants are immediately separable and separately tradable. Each Warrant
entitles the holder thereof to purchase one share of the Company's Common Stock
("Share") at an exercise price of $6.00 per Share, subject to adjustment in
certain circumstances, commencing 2000 [two years from the effective date
of the registration statement of which this Prospectus is a part ("Effective
Date")] and ending on 2003 [five years from the Effective Date]. The
Warrants are subject to redemption by the Company upon not less than 30 days
written notice at $.10 per Warrant at any time commencing 1999 [one year
from the Effective Date] with the prior approval of the Underwriter, provided
the closing bid quotation in the market where the Common Stock trades at the
time of the call for redemption has equaled or exceeded $7.50 for 20 consecutive
trading days ending on the third business day prior to the date of the
redemption notice. Prior to this Offering there has been no market for the
Securities and there can be no assurance that a market will develop or if
developed will be sustained. See "Description of Securities" and "Risk Factors."
Application has been made to have the Units, Common Stock and Warrants
included for quotation on The Nadsaq SmallCap Market under the symbols "CVSPU",
"CVSP" and "CVSPW" respectively and for listing on the Boston Stock Exchange
under the symbols "CVSC", "CVS" and "CVSW", respectively. The offering price of
the Units and the exercise price and other terms of the Warrants have been
determined by negotiation between the Company and the Underwriter and do not
necessarily bear any relation to the Company's earnings, assets, book value, net
worth or any other recognized criteria of value. For a discussion of the factors
considered in determining the offering price and exercise price, see
"Underwriting."
These are Speculative Securities.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD NOT BE PURCHASED BY INVESTORS WHO
CANNOT AFFORD THE LOSS OF THEIR ENTIRE INVESTEMENT SEE
"RISK FACTORS" BEGINNING ON PAGE 8 AND
"DILUTION" ON PAGE 18
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 ACCURANCY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
DISCOUNT AND PROCEEDS TO THE
PRICE TO PUBLIC COMMISSION (1) COMPANY(2)
<S> <C> <C> <C>
Per Unit............................ $5.10 $.51 $4.59
Total (3)........................... $7,650,000 $765,000 $6,885,000
</TABLE>
(1) In addition, the Company has agreed to pay the Underwriter a non-accountable
expense allowance equal to 3% of the gross proceeds of this Offering, to sell to
the Underwriter a warrant to purchase 150,000 shares of Common Stock at a
purchase price of $5.50 per share and 150,000 Warrants at a purchase price of
$.11 per Warrant ("Underwriter's Warrant") and to retain the Underwriter as a
financial consultant. The Company has also agreed to pay the Underwriter a
warrant solicitation fee of 5% under certain circumstances and to indemnify the
Underwriter against certain liabilities arising under the Securities Act of
1933, as amended ("Securities Act"). See "Underwriting."
(2) Does not include expenses of the Offering, (estimated to be $655,000)
including the Underwriter's non-accountable expense allowance in the amount of
$229,500 ($263,925 if the Underwriters' Over-allotment Option is exercised in
full).
(3) The Company has granted the Underwriter an option exercisable within 45 days
from the Effective Date to purchase up to 225,000 additional Units
("Over-Allotment Option"), on the same terms as set forth above for the purpose
of covering over-allotments, if any. If the Over-Allotment Option is exercised
in full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to the Company will be $8,797,500, $879,750 and $7,917,750,
respectively. See "Underwriting."
The Securities are offered by the Underwriter, as agent for the Company
when, as and if delivered to and accepted by the Underwriter and subject to its
right to reject orders in whole part, the approval of certain legal matters by
counsel and certain other conditions. It is expected that delivery of the
certificates representing the Common Stock and Warrants comprising the Units
will be made against payment therefor at the offices of Briarwood Investment
Counsel, 1851 East First Street, Suite 950 Santa Ana, California 92705 on or
about 1998.
BRIARWOOD INVESTMENT COUNSEL
THE DATE OF THIS PROSPECTUS IS 1998
<PAGE>
CERTAIN PERSON'S PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING PURCHASES OF THE UNITS, SHARES AND WARRANTS TO STABILIZE THEIR
MARKET PRICE, PURCHASES OF THE UNITS, SHARES AND WARRANTS TO COVER SOME OR ALL
OF A SHORT POSITION IN THE UNITS, SHARES AND WARRANTS MAINTAINED BY THE
UNDERWRITER AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. THE
DISCUSSIONS IN THIS PROSPECTUS CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THE RESULTS DISCUSSED IN THE FORWARD LOOKING STATEMENTS. FACTORS THAT MAY CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS" BEGINNING ON PAGE 8. EACH PROSPECTIVE INVESTOR IS URGED TO READ THIS
PROSPECTUS IN ITS ENTIRETY.
IN SEPTEMBER 1997, CONNECTICUT VALLEY SPORTS, INC. (THE "COMPANY"), THROUGH
AN EXCHANGE OFFER ACQUIRED APPROXIMATELY 97% OF THE OUTSTANDING CAPITAL STOCK OF
CONNECTICUT VALLEY CLASSICS, INC. ("CVC"). CVC OWNS ALL OF THE OUTSTANDING
CAPITAL STOCK OF THE STOCK SHOP, INC. ("STOCK SHOP") WHICH IN TURN, OWNS
APPROXIMATELY 99% OF THE OUTSTANDING CAPITAL STOCK OF COOPER FIREARMS, INC.
("COOPER ARMS"). ALL REFERENCES IN THIS PROSPECTUS TO THE COMPANY INCLUDE CVC,
STOCK SHOP AND COOPER ARMS AND THE OPERATIONS OF CVC EXCLUSIVE OF ITS
SUBSIDIARIES ARE REFERRED TO HEREIN AS "CVC CLASSICS." SEE "BUSINESS --
HISTORY."
THE COMPANY
The Company through CVC and CVC's subsidiaries, Stock Shop and Cooper Arms,
designs, engineers, manufactures, assembles, markets and sells custom quality,
mass produced rifles and shotguns used for both hunting and competition (target)
shooting. The Company's firearms are produced to the quality level associated
with rifles produced largely by hand to a customers specifications (custom
quality), but multiple units of the Company's firearms are manufactured in a
production line process to the Company's standard specifications (mass
produced.)
CVC Classics designs, engineers, manufactures, assembles and markets a
premium line of ten shotguns for clay target shooting and hunting. This line is
an improved version of the famed Winchester Model 101 and features lengthened
forcing cones, overboring, mechanical triggers, diamond honed barrels, and
select American walnut with hand checkering. The most popular model, the CVC
Classic Sporter, is intended for sporting clays competition shooting. CVC
Classics' shotguns generally retail from $3,000 without options to in excess of
$10,000 with options and are sold to licensed firearms dealers who are approved
by the Company (the "Approved Dealers"). See "Business - Products -- CVC
Classics."
The Stock Shop manufactures rifle and shotgun stocks used by the Company in
the manufacture of its other firearms and custom manufactures stocks for others.
The Stock Shop also purchases barreled actions manufactured by the
world-renowned firm of J.G. Anschutz GmbH ("Anschutz") under an agreement
between them. These barreled actions are then assembled by the Company, with
stocks and hardware manufactured by it into rifles, designed by the Company
which are sold under the trade name "Anschutz USA Sporting Rifles." The Anschutz
USA Sporting Rifles are sold to the Approved Dealers. The rifles retail for
approximately $1,550 to $1,895 without options, and can generally retail for in
excess of $10,000 with options. See "Business - Products -- The Stock Shop."
Cooper Arms designs, engineers, manufactures, markets and sells a line of
custom quality, mass produced bolt action rifles for hunting and competition.
The Cooper Arms product line consists of five basic models of rifles ranging in
caliber from .17 up to .45-70. The Cooper Arms rifles are produced in AAA select
walnut in a classic design. The rifles are sold to the Approved Dealers and
generally retail from $1,695 to in excess of $6,000 with options.
The Company has designed prototypes of, and intends to market ultra accurate
high performance ammunition for use primarily by military and law enforcement
units. This line of highly accurate ammunition previewed at the Brussels
Military Procurement Exposition in November of 1997. See "Business - Products --
Cooper Arms." The Company intends to commence marketing of specialty labeled
sports apparel and shooting accessories. Products are expected to include caps,
shooting vests, gun cases
3
<PAGE>
and cleaning supplies. The products will be targeted at the high grade, high
margin upscale market. See "Business - Products -- Apparel and Accessories."
The Company's goal is to become a leading manufacturer of custom quality,
mass produced firearms and high grade accessories by focusing on the high growth
areas of the firearms market which the Company believes includes various types
of target shooting, such as clay, trap and skeet shooting. The Company's primary
strategies for achieving its goal are to broaden its product line and increase
the scope and efficiency of its manufacturing operations. In order to broaden
its product lines, the Company intends to seek to acquire companies which sell
products which are competitive or complimentary to its current products or to
acquire such product lines. Alternatively, as the Company is doing with
ammunition and apparel and accessories, the Company may develop such product
lines itself. The purchase of additional production equipment at its existing,
or proposed facilities, is expected by management to reduce reliance on third
party suppliers, as well as to increase capacity and manufacturing efficiency.
The Company's address is 4004 Highway 93 North, Stevensville, Montana 59870
and its telephone number is (406) 777-5534.
The Company was incorporated in Delaware in May 1996. CVC was incorporated
in Connecticut in March 1991 and reincorporated in Delaware in May 1995.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Units Offered................... 1,500,000 Units, each Unit consisting of one share of
Common Stock and one Warrant.
Offering-Price.................. $5.10 per Unit
Common Stock Outstanding
Prior to the Offering (1)..... 2,797,476
After the Offering (1)........ 4,297,476
Warrants Outstanding:
Prior to the Offering......... 50,000
After the Offering(2)......... 1,550,000
Terms of Warrants:
Exercise Price................ The exercise price is $6.00 per share of Common Stock,
subject to adjustment in certain circumstances.
Exercise Period............... The Warrants are exercisable for a period of three years
commencing, unless adjusted pursuant to the redemption
provisions, on , 2000 (two years after the Effective
Date) and expiring on , 2003 (five years after the
Effective Date).
Redemption.................... The Warrants are redeemable by the Company, commencing
1999, one year from the Effective Date with the
prior approval of the Underwriter, at a redemption price
of $0.10 per Warrant on not less than 30 days written
notice, provided that the closing bid price per share of
Common Stock, for 20 consecutive trading days ending on
the third business day prior to the date of the redemption
notice, is at least $7.50, subject to adjustment for
certain events. Upon giving notice of redemption, the
Warrants will become exercisable if they were not
otherwise exercisable. See "Description of Securities --
Redeemable Common Stock Purchase Warrants."
Risk Factors.................. The securities offered hereby involve a high degree of
risk and immediate substantial dilution to public
investors. See "Risk Factors" and "Dilution."
Use of Proceeds............... The net proceeds of the Offering will be used primarily
for acquisitions, construction of a new manufacturing
facility, for research and development, for sales and
marketing, to purchase raw materials, repayment of
indebtedness and for working capital and general corporate
purposes. See "Use of Proceeds."
Proposed NASDAQ Symbols(3).... Units: CVSPU
Common Stock: CVSP
Warrants: CVSPW
Proposed Boston Stock Exchange
Symbols(3).................. Units: CYSU
Common Stock: CVS
Warrants: CVSW
</TABLE>
- ------------------------
(1) Assumes no exercise of (i) options to acquire 600,000 shares of Common Stock
pursuant to the Company's 1997 Stock Option Plan, of which options to
acquire 275,000 shares have been granted, (ii)
5
<PAGE>
other currently outstanding options and warrants to acquire 250,000 shares
of Common Stock, (iii) the Warrants, (iv) the Underwriter's Warrants, or (v)
the Over-allotment Option. See "Principal Stockholders," "Management" and
"Description of Securities."
(2) Assumes no exercise of (i) the Underwriter's Warrants or (ii) the
Over-allotment Option. See "Description of Securities."
(3) The proposed trading symbols do not imply that a liquid and active market
will be developed or sustained for the Units, Shares and or Warrants upon
completion of the Offering.
6
<PAGE>
SUMMARY OF CONSOLIDATED FINANCIAL INFORMATION
The summary consolidated financial information set forth below is derived
from and should be read in conjunction with the financial statements of the
Company, including the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ --------------------------
1994 1995 1996 1996 1997
----------- ---------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales.................................... $ 247,950 $ 74,744 $ 244,725 $ 193,796 $ 365,378
Gross profit (loss).......................... (157,491) (264,502) (331,428) (161,331) (272,933)
Operating loss............................... (402,468) (746,708) (1,090,615) (817,062) (729,953)
Net loss..................................... (449,480) (782,463) (1,102,664) (846,762) (753,523)
Earnings per share........................... (0.84) (0.75) (0.44) (0.35) (0.27)
Weighted average number of shares
outstanding(1)............................. 535,728 1,040,893 2,488,466 2,410,972 2,803,558
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30,
------------------------------------ --------------------------
1994 1995 1996 1997 AS ADJUSTED(2)
----------- ---------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit).................... $ (598,480) $ (49,286) $ 200,083 $ (76,943) $ 6,238,880
Total assets................................. 500,286 736,095 1,126,112 1,107,900 7,114,400
Long-term debt............................... -- 262,500 300,000 384,203 470,026
Total liabilities............................ 901,291 759,059 999,357 1,143,342 1,059,842
Stockholders' equity (deficit)............... (401,005) (22,964) 126,755 (35,442) 6,054,558
</TABLE>
- ------------------------
(1) Adjusted for merger with Stock-Shop and recapitalization in 1995. See Notes
1 and 2 to the financial statements.
(2) Gives effect to the sale of securities offered hereby and application of
estimated net proceeds of $6,230,000 and the reclassification in December
1997 of $123,323 in short term debt owed to a company which the Company's
Chairman is a principal to long term debt. See "Use of Proceeds."
7
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, IN CONNECTION
WITH INVESTMENTS IN THE SECURITIES OFFERED HEREBY. THIS PROSPECTUS CONTAINS
CERTAIN FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET
FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. AN INVESTMENT IN THE SECURITIES
OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
HISTORY OF LOSSES; GOING CONCERN UNCERTAINTY INCLUDED AS PART OF AUDITOR'S
REPORT; NO ASSURANCE OF PROFITABILITY
For the years ended December 31, 1995, December 31, 1996 and the nine months
ended September 30, 1997, the Company had net losses of $782,463, $1,102,664,
and $753,523 respectively. At September 30, 1997, the Company had an accumulated
deficit of $3,412,069. There can be no assurance that the Company will be able
to integrate successfully the operations of CVC, the Stock Shop and Cooper Arms,
that the Company will be able to successfully implement its business strategy,
that the Company's products wll gain market acceptance, or that the Company will
operate profitably in the future. Due to the Company's continued operating
losses, the independent accountants' opinion on the Company's 1996 and 1995
financial statements indicates that there is a substantial doubt about the
Company's ability to continue as a going concern. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
POSSIBLE NEED FOR ADDITIONAL FINANCING
Although the Company anticipates, based on currently proposed plans, that
the net proceeds of the Offering will be sufficient to satisfy the Company's
anticipated cash requirements for at least 12 months following the date that the
Securities and Exchange Commission declares the Registration Statement of which
this Prospectus is a part effective (the "Effective Date"), there can be no
assurance that the Company will not require additional financing at an earlier
date. If the Company is required to obtain financing in the future, there can be
no assurance that such financing will be available on terms acceptable to the
Company, or at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
LIMITED OPERATIONS OF OPERATING SUBSIDIARIES, NEW PRODUCT LINES
On a limited basis in 1993 and 1994, CVC Classics produced various
prototypes and limited production for two shotguns within the CVC Classic
Sporter family--the CVC Classic Sporter and the Waterfowler. In September 1994,
the Company curtailed such limited production due to a lack of adequate capital
and in order to develop its business plan for long-term, full-scale production
of its products. Subsequent to financing activities that occurred in mid-1995,
CVC Classics recommenced operations in October 1995. In-house manufacturing and
assembly of CVC Classic's premium line of shotguns recommenced after the
acquisition by CVC Classics of the capital stock of the Stock Shop and its
subsidiary Cooper Arms in November 1996. There can be no assurance that the
Company's operations relating to CVC Classic's line of shotguns will produce
significant, or any, revenues or that such operations will be profitable. See
the Financial Statements and Notes thereto included herein and "Business."
The Company has not sold, produced or purchased any Cooper Arms ammunition
or any of the Company's apparel and accessory products or any significant
quantity of firearms stocks. The Company has never engaged in the business of
selling, designing or producing products other than firearms. An evaluation of
ammunition, apparel and accessory, and firearms stocks business lines must be
considered in light of the risks, expenses and difficulties frequently
encountered in connection with establishing new businesses in a competitive
industry. There can be no assurance that these products will gain market
8
<PAGE>
acceptance or that the Company will be able to establish recognizable brand
names. Furthermore, there can be no assurance that these business lines will
produce significant or any revenue, or that such operations will be profitable.
See "Business."
INSUFFICIENT FACILITIES
While the Company believes that its current property and equipment are
adequate for its business as currently conducted, the current facilities are not
automated, operate in a comparatively inefficient manner and have insufficient
production capacity to achieve significant growth in production volume.
Therefore the Company believes it is necessary to purchase new manufacturing
equipment and ideally, consolidate and expand its current manufacturing
premises. Failure to do so could cause the Company to have inventory shortages
or force the Company to rely on high cost third party suppliers. Additionally,
the Company manufactures its products at two separate facilities, leading to
inefficiencies. The Company has allocated a portion of the proceeds of this
Offering to improve its manufacturing facilities and intends to raise additional
capital for improvements by issuing industrial development bonds. However, there
can be no assurance that the industrial development bond offering will be
completed, that improvements can be made to the Company's manufacturing
facilities, or that such improvements will enable the Company to operate
profitably. Furthermore, construction of the new facility will take at least 12
months, and could take significatly longer. Although the Company intends to
upgrade its existing facilities during this time period, delays in opening the
new facility could have a material adverse effect on the Company. See "Use of
Proceeds" and "Business -- Property" and "Business -- Manufacturing."
BROAD DISCRETION IN APPLICATION OF PROCEEDS; UNSPECIFIED ACQUISITIONS
A substantial portion of the proceeds of this Offering have been allocated
to acquisitions. As of the date of this Prospectus, the Company has not
identified any particular acquisition targets and no discussions or negotiations
regarding any acquisitions are pending. Stockholders of the Company, therefore,
may have no opportunity to approve specific acquisitions or to review the
financial condition of any potential target. Additionally, there can be no
assurance that the Company will be able to successfully integrate such
acquisitions into the Company, or that such acquisitions will enable the Company
to operate profitably. In addition, a portion of the proceeds are to be used for
working capital and general corporate purposes. Accordingly, management of the
Company will have broad discretion in the application of the proceeds of this
Offering. See "Use of Proceeds."
ABSENCE OF PATENT PROTECTION; POTENTIAL INFRINGEMENT CLAIMS; PROPRIETARY RIGHTS
The Company does not currently have patent protection on its products or
production processes. Its ability to compete effectively with other companies
will depend, in part, on its ability to maintain the proprietary nature of its
products and production processes. The Company may apply for patent protection.
However, there can be no assurance that it will be successful in obtaining such
patents or if obtained, that such patents will afford the Company sufficient
protection. The Company intends to rely substantially on unpatented products and
production processes, and there can be no assurance that others will not copy
any of its designs or processes. See "Business -- Products."
It is not certain that the Company's products or production processes will
not infringe patents or other rights owned by others. Specifically, with respect
to CVC Classics, the basic design and engineering of the CVC Classic Sporter is
largely based on that of the Classic Doubles, previously manufactured by Sports
Japan, Inc. ("Sports Japan"), which Classic Doubles was itself based upon the
shotgun known as the Winchester Model 101 produced by the Winchester Division of
the Olin Corporation ("Winchester"). The Company has no license or other
relationship with Winchester, Olin, or any other party who has patent or
trademark rights in the Winchester Model 101. Management does not believe that
either Sports Japan or Winchester has any viable claims against the Company
based upon unfair competition or protected proprietary rights to such designs
and engineering. Management believes that neither the Winchester
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Model 101 nor any of its parts are protected by patents and the shotgun itself
is no longer manufactured. Management also believes that Winchester sold the
manufacturing rights to Sports Japan, whose Classic Doubles was an improved
version of the Winchester Model 101 and which company itself ceased operations
and forfeited its firearms manufacturing license in Japan in 1988. Further,
management believes that the CVC Classic Sporter is differentiated from the
Winchester Model 101 and the Classic Doubles by virtue of the different
manufacturing process and the Company's design enhancement. The Company has not
obtained any opinion from patent counsel and there can be no assurance that any
such claims will not be brought against the Company by Winchester, Sports Japan
or persons connected or previously connected with such entities. In the event
that such claims are brought against the Company, even if the Company was
ultimately found not to be liable, the cost to the Company of defending any such
lawsuit could have a materially adverse effect on the Company's operations.
Moreover, if the Company's products infringe patents or proprietary rights of
others, the Company, under certain circumstances could become liable for damages
or be forced to alter its products or production processes, either of which
could have a material adverse effect on the Company.
Cooper Arms holds a registered trademark, No. 74-511,590, granted March 28,
1995 for the mark "17CCM" which is used in connection with a cartridge developed
by Cooper Arms. The Company has applied for the registration of additional
marks, however, there can be no assurance that it will be successful in
obtaining such registrations. The Company's application of the mark "Classic
Sporter" was rejected as being "merely descriptive" and thus not eligible for
trademark protection. The Company is currently appealing the rejection. If the
Company fails to obtain the mark "Classic Sporter," the Company would not be
able to prevent other companies from marketing firearms under the name Classic
Sporter, which could have a material adverse effect on the Company.
Additionally, the Company's trademark counsel has indicated that the name
"Connecticut Valley" may be deemed "confusingly similar" to another company's
name and the Company may be required to change its name or seek another name
under which to market certain products. If the Company were required to cease
using "Connecticut Valley", it could have a material adverse effect on the
Company. Although registration affords the Company the protection of federal
trademark laws against the unauthorized use of the protected mark or a use
deemed "confusingly similar" under federal trademark law, there can be no
assurance that third parties will not infringe on the Company's current or
future trademark registrations or that the Company will have sufficient
resources to defend against any such infringement successfully or at all. See
"Business -- Proprietary Rights."
POSSIBLE INSUFFICIENCY OF INSURANCE
The Company maintains, and intends to continue to maintain, pending product
liability insurance in the amount of $1,000,000 per claim and $1,000,000 in the
aggregate, which management believes will be sufficient to cover liabilities to
the Company arising from injury to people or their property from use of the
Company's products. There can be no assurance that the Company's current
insurance will be adequate to cover unanticipated liabilities. See "Business --
Legal Proceedings."
DEPENDENCE UPON SUPPLIERS
Although the Company assembles its own firearms products, it purchases
certain materials and component parts from third-party suppliers and intends to
use third party suppliers to manufacture all of the products in the Company's
ammunition and apparel and accessories lines. No assurance can be given that the
Company's third-party suppliers will be able to provide the Company with a
timely, uninterrupted and adequate supply of materials. In the event that any of
the Company's third-party suppliers are unable to provide the Company with a
timely, uninterrupted and adequate supply of materials, the Company's ability to
meet its production schedule may be adversely affected. In addition, the Company
does not presently have any long-term contracts with these suppliers and, as a
consequence, any of these relationships may be terminated by the Company or the
supplier at any time. Although the Company believes that
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other suppliers are available, there can be no assurance that such materials
would be available to the Company on an immediate basis, if needed, or at prices
similar to those now paid by the Company. See "Business -- Suppliers."
DEPENDENCE ON CERTAIN CUSTOMERS
The Company's three largest customers accounted for 42% of net sales for the
nine months ended September 30, 1997. During the nine months ended September 30,
1997, Sporting Clays Market, The Outdoorsman and PJ Vollmer & Co., Inc accounted
for 12%, 17% and 13% of sales, respectively. The Company believes that it has
good relationships with its customers and that they will continue to do business
with the Company. However, the Company has no long term contracts with any of
its customers, all of whom purchase products from the Company pursuant to
purchase orders. Therefore, there can be no assurance that any of its customers,
including its largest customers, will continue to purchase products from the
Company. The loss of customers, particularly the Company's largest customers,
could have a materially adverse effect on the Company's business and results of
operations. See "Business -- Major Customers."
RISK OF NON-PAYMENT BY CUSTOMERS
In recent years, the Company's uncollectible accounts receivable has been
high in relation to total sales. The Company believes that this was partially
due to the changes in management at certain subsidiaries. The Company now
employs procedures to limit the sales on credit terms to customers who pose a
high risk of non-payment. However, there can be no assurance that customers,
particularly those who own one retail store, who are a majority of the Company's
customers, will not fail to pay for the Company's products. See "Managements
Discussion and Analysis of Financial Condition and Results of Operations."
CONCENTRATION OF CREDIT RISK
From time to time the Company maintains cash balances with a Montana
commercial bank in amounts in excess of federal insurance limits. There can be
no assurance that the Company will not suffer losses due to its concentration of
credit risk. See the Financial Statements and Notes thereto included herein.
COMPETITION
The Company competes in a highly specialized competitive environment
directly with many other national and international sporting firearms
manufacturers. Many of these companies are larger, better known and have
significantly greater financial, manufacturing and marketing resources than the
Company. In addition, unlike the Company, many firearms manufacturers are
subsidiaries of larger, more diverse companies on whom they can rely for capital
and other resources. No assurance can be given that the Company will be capable
of competing successfully in the future, or that the Company will be successful
in maintaining or expanding its share of the market for its products. See
"Business -- Competition."
OUTSTANDING FEDERAL EXCISE TAX LIABILITY
As of September 30, 1997 the Company owed approximately $46,000 for federal
excise taxes that were not paid when due during 1997, together with penalties
that have accrued. Although no collection or enforcement actions or proceedings
have been commenced or been threatened against the Company to date, no assurance
can be given that an action or proceeding will not be commenced against the
Company. If commenced, such an action or proceeding could result in fines or a
suspension of the Company's firearms manufacturing license which could
materially and adversely affect the Company's business or operations. The
Company intends to pay the balance of its federal excise tax liability from the
net proceeds of the Offering. See "Use of Proceeds" and "Business -- Licensing
and Government Regulations."
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LICENSING AND GOVERNMENT REGULATION
The firearms manufacturing industry is subject to extensive regulation by
various federal and State regulatory agencies, including the Bureau of Alcohol,
Tobacco and Firearms ("BATF"). The Company maintains a license issued by BATF
permitting the manufacturing and distribution of firearms and ammunition to a
network of BATF licensed dealers throughout the United States. The license is
renewable every three years and requires the Company to maintain certain records
relating to firearms shipments. In October 1997 the Company's BATF license was
renewed until October 2000. The loss or suspension of any of the Company's
license could have a material adverse effect on the Company.
The Company may export products. Each shipment of firearms shipped outside
the United States must be licensed by the State Department. The State Department
regulates the type of firearms that may be exported to various countries. The
Company must comply with these regulations to be able to export products.
The manufacturing, sale and purchase of firearms is extensively regulated by
federal, state and local governments. While many of the current laws and
regulations do not affect the Company, from time to time, legislation and
regulations that could potentially affect the Company, either beneficially or
adversely, have been proposed by federal and state legislators and regulators.
Management is not aware of any currently pending or proposed legislation or
regulations which, if adopted, would have a materially adverse impact on the
Company's operations. There can be no assurance that BATF or various federal and
state regulators will not adopt regulations or take other actions that would
materially adversely affect the business of the Company. See "Business --
Licensing and Government Regulation."
CONTINUED CONTROL BY MANAGEMENT AND/OR EXISTING STOCKHOLDERS
Following completion of the Offering, the Company's officers, directors and
principal stockholders will own or control an aggregate of approximately 49% of
the Company's issued and outstanding Common Stock. There are no cumulative
voting rights under the Company's certificate of incorporation and therefore,
such stockholders will effectively possess the ability to elect all of the
directors of the Company, to increase its authorized capital, to dissolve or
merge the Company, or to sell its assets, and generally to exert substantial
control over the business and operations of the Company. See "Principal
Stockholders" and "Certain Transactions."
ENVIRONMENTAL REGULATION
The Company's facilities in Montana use and store various hazardous
materials and generate small amounts of hazardous waste. Under various federal,
state and locals laws, ordinances and regulations, an owner or operator of real
property is generally liable for the costs of removal or remediation of
hazardous wastes that are released on its property, regardless of whether the
owner or operator know of, or was responsible for, the release of such hazardous
materials. The Company has not been advised of any non-compliance or violation
of any environmental laws, ordinances and regulations and the Company believes
that it is in substantial compliance with all such laws, ordinances or
regulations applicable to its Montana facilities. The Company, however, has not
performed any environmental studies on its Montana facilities, and as a result,
there may be potential liabilities or conditions which could arise with respect
to the Montana facilities and have a material adverse effect on the Company.
DEPENDENCE ON KEY PERSONNEL
The Company's business is dependent upon the efforts and abilities of its
management and engineering/assembly production personnel, who are familiar with
the specific manufacturing details of the Company's products and the production
processes therefor. The success of the Company is largely dependent upon the
experience and expertise of Daniel Cooper, its President and only full time
executive officer. The Company, through its Stock Shop subsidiary, has entered
into an employment agreement with
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<PAGE>
Mr. Cooper. The employment agreement is for a three-year term expiring in March
1999, and provides that Mr. Cooper will receive an annual salary of $48,000, in
addition to stock options and bonuses in certain circumstances and reimbursement
of certain expenses. The Company also intends to enter into employment
agreements with each of Messrs. Tilleli, McCabe, Landis and Wang, each of whom
are currently officers and directors of the Company. Although the specific terms
of these employment agreements have not been negotiated, it is expected that the
annual salary for each individual will not exceed $100,000. The loss of the
services of any of the Company's management or key personnel would likely have a
material adverse effect on the business of the Company. The Company intends to
purchase key man life insurance on Mr. Cooper's life in the amount of
$1,000,000. See "Business -- Personnel," "Management" and "Certain
Transactions."
OFFERING TO BENEFIT INSIDERS, PROCEEDS TO REPAY INDEBTEDNESS
The Company will use a portion of net proceeds to make an aggregate
installment payment of $37,500 on four notes aggregating $300,000 principal
amount that CVC issued to four former officers and directors of CVC, including
an $10,961 payment to Gary Landis who is a director and officer of the Company,
and a $15,120 payment to O. Milton Gosset who is a principal shareholder of the
Company and a former director of CVC. The balance of this aggregate first
installment will be made to two former officers and directors of CVC. The
Company intends to make the remaining installments from operating cash flows,
but if such cash flows are insufficient, a portion of the net proceeds of the
Offering that were allocated to working capital may be used to make the
remaining installment payments. Additionally, the Company owes $123,323 to a
Company controlled by its Chairman, Victor Wang, evidenced by a promissory note
due, with interest accruing at 6% per annum, on the earlier of (i) thirteen
months following the closing of the Offering, or (ii) November 30, 2000. The
Company intends to repay the note from operating cash flows, but if such cash
flows are insufficient, a portion of the net proceeds of the Offering that were
allocated to working capital may be used to repay the note. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Certain Transactions."
SUBSTANTIAL DILUTION; CONSIDERATION PAID BY EXISTING STOCKHOLDERS
Purchasers of Units in the Offering will suffer immediate dilution of $3.61
per share of Common Stock (or 72%) in the net tangible book value of their
investment, assuming $.10 of the offering price per Unit is attributable to the
Warrants. See "Dilution."
Officers, directors and other existing stockholders acquired their shares of
Common Stock at an average per Share price of $1.23 per share, substantially
less than the initial public offering price of $5.00 per share. Accordingly,
investors in the Offering will bear a disproportionate share of the risk of an
investment in the Company. See "Dilution."
LIMITATION ON DIRECTOR LIABILITY, INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's certificate of incorporation provides that a director of the
Company shall not be personally liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director, with certain
exceptions under Delaware law. This may discourage stockholders from bringing
suit against a director for breach of fiduciary duty and may reduce the
likelihood of derivative litigation brought by stockholders on behalf of the
Company against a director. In addition, the Company's by-laws provide for
mandatory indemnification of directors and officers. See "Management --
Indemnification of Officers and Directors and Limitation on Directors'
Liability."
ABSENCE OF DIVIDENDS ON COMMON STOCK
Since inception, the Company has not paid any cash dividends on its Common
Stock and it does not anticipate paying such dividends in the foreseeable
future. The payment of dividends by the Company is
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within the discretion of its Board of Directors and depends upon the Company's
earnings, capital requirements, financial condition and other factors deemed
relevant by the Board. The Company intends to retain earnings, if any, to
finance its operations. In addition, the payment of cash dividends may be
limited or prohibited by the terms of any future loan agreements or any
preferred stock that may be issued by the Company. See "Dividend Policy."
AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED STOCK
The Company's certificate of incorporation, authorizes the issuance of
1,000,000 shares of "blank check" preferred stock with such designations, rights
and preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Board of Directors is empowered, without stockholder
approval, to issue preferred stock with dividend, liquidation, conversion,
voting or other rights which could decrease the amount of earnings and assets
available for distribution to holders of Common Stock and adversely affect the
relative voting power or other rights of the holders of the Company's Common
Stock. In the event of issuance, the preferred stock could be used, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. The Company has no present intention to issue
any shares of its preferred stock. However, there can be no assurance that the
Company will not issue shares of preferred stock in the future. The Company has
agreed with the Underwriter that, except for issuance's disclosed in or
contemplated by this Prospectus, it will not issue any securities, including but
not limited to any shares of preferred stock, prior to , 2001 without the
prior written consent of the Underwriter. See "Description of Securities --
Preferred Stock."
NO ASSURANCE OF PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE; POSSIBLE
VOLATILITY OF MARKET PRICE FOR THE UNITS, COMMON STOCK AND WARRANTS
Prior to this Offering, there has been no public trading market for the
Units, Common Stock and the Warrants (collectively, the "Securities"). The
initial public offering price of the Units and the exercise price and other
terms of the Warrants were determined through negotiations between the Company
and the Underwriter and bear no relationship whatsoever to the Company's
earnings, assets, book value per share, net worth, results of operations or
other generally accepted criteria of value. The offering price of the Units, as
well as the exercise price of the Warrants, should not be construed as
indicative of their value. There can be no assurance that an active trading
market for the Units will develop after the Offering or that, if developed, it
will be sustained. As a result, investors will be exposed to a risk of a decline
in the market prices of the Securities after the Offering. The market prices of
the Securities following the Offering may be highly volatile as has been the
case with the securities of many emerging companies. The Company's operating
results and various factors affecting the industry in which the Company competes
may impact the market price of the Company's Securities to a significant degree.
In addition, in recent years the stock market has experienced a high level of
price and volume volatility, and market prices for the securities of many
companies have experienced wide price fluctuations not necessarily related to
the operating performance of such companies. There can be no assurance that the
market price of the Securities will not experience significant fluctuations or
decline below the initial public offering price.
LIMITED UNDERWRITING EXPERIENCE OF UNDERWRITER
Although certain officers of the Underwriter have had experience working on
public offerings, and other corporate finance matters, the Underwriter has not
previously served as the sole or managing underwriter of a firm commitment
public offering. Since the Underwriter's experience in underwriting firm
commitment public offerings is limited, there can be no assurance that the lack
of experience will not adversely affect the public offering of the Company's
Units and the subsequent development, if any, of a trading market for the Units.
See "Risk Factors -- Underwriter's Influence on the Market; Possible Limitations
on Market Making Activities."
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UNDERWRITER'S INFLUENCE ON THE MARKET; POSSIBLE LIMITATIONS ON MARKET MAKING
ACTIVITIES
A significant number of Units may be sold to customers of the Underwriter.
Such customers subsequently may engage in transactions for the sale or purchase
of Securities through or with the Underwriter. The Underwriter has indicated
that it intends to act as market-maker and otherwise effect transactions in the
Securities. To the extent the Underwriter acts as market-maker in the
Securities, it may exert a dominating influence in the markets for those
Securities. The price and liquidity of the Securities may be significantly
affected to the extent, if any, that the Underwriter participates in such
markets. Furthermore, the Underwriter may discontinue such activities at any
time and from time to time. The Underwriter also has the right to act as the
Company's exclusive agent in connection with any future solicitation of holders
of Warrants to exercise their Warrants. Applicable rules of the Securities and
Exchange Commission prohibit the Underwriter and any other soliciting
broker-dealers from engaging in any market making activities or solicited
brokerage activities with regard to the Units, Common Stock and Warrants for a
period of up to five business days prior to the solicitation of the exercise of
any Warrants until the later of the termination of such solicitation activity or
the termination of any right the Underwriter may have to receive a fee for the
solicitation of the Warrants. As a result, the Underwriter and such soliciting
broker-dealers may be unable to continue to make a market for the Units, Common
Stock and the Warrants during certain periods while the Warrants are
exercisable. Such a limitation, while in effect, could impair the liquidity and
market price of the Common Stock and the Warrants. See "Underwriting."
RISK OF LOW-PRICED SECURITIES; PENNY STOCK REGULATION
The regulations of the Securities and Exchange Commission promulgated under
the Securities Exchange Act of 1934 as amended ("Exchange Act") require
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. Commission regulations generally
define a penny stock to be an equity security that has a market price of less
than $5.00 per share, subject to certain exceptions. Unless an exception is
available, those regulations require the delivery, prior to any transaction
involving a penny stock, of a disclosure schedule explaining the penny stock
market and the risks associated therewith and impose various sales practice
requirements on broker-dealers who sell penny stocks to persons other than
established customers and accredited investors (generally institutions). In
addition, the broker-dealer must provide the customer with current bid and offer
quotations for the penny stock, the compensation of the broker-dealer and its
salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer's account. Moreover,
broker-dealers who recommend such securities to persons other than established
customers and accredited investors must make a special written suitability
determination for the purchaser and receive the purchaser's written agreement to
a transaction prior to sale. If the Company's securities become subject to the
regulations applicable to penny stocks, the market liquidity for the Company's
securities could be severely affected. In such an event, the regulations on
penny stocks could limit the ability of broker-dealers to sell the Company's
securities and thus the ability of purchasers of the Company's securities to
sell their securities in the secondary market.
NASDAQ ELIGIBILITY AND MAINTENANCE REQUIREMENTS; POSSIBLE DELISTING OF COMMON
STOCK FROM NASDAQ SMALLCAP MARKET OR THE BOSTON STOCK EXCHANGE
Prior to this Offering, there has been no established public trading market
for the Company's Units, Common Stock or Warrants and there is no assurance that
a public trading market for the Company's Securities will develop after the
completion of this Offering. If a trading market does in fact develop for the
Securities offered hereby, there can be no assurance that it will be sustained.
The Company has applied for listing of the Units, Common Stock and Warrants
on Nasdaq SmallCap Market and the Boston Stock Exchange ("BSE"). If the listings
are approved, the continued trading of the Common Stock and the Warrants on
Nasdaq SmallCap and the BSE is conditioned upon the Company
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meeting certain criteria. If the Company fails to meet any of these criteria,
the Units, Common Stock and/ or the Warrants could be delisted from trading on
Nasdaq SmallCap Market or the BSE, which delisting could materially adversely
affect the trading market for the Units, Common Stock and/or the Warrants. There
can be no assurance that the Securities will not be delisted.
SHARES ELIGIBLE FOR FUTURE SALE
No assurance can be given as to the effect, if any, that future sales of
Common Stock, or the availability of shares of Common Stock for future sales,
will have on the market price of the Common Stock from time to time. Sales of
substantial amounts of Common Stock (including shares issued upon the exercise
of Warrants or stock options), or the possibility of such sales, could adversely
affect the market price of the Units, Common Stock and Warrants and also impair
the Company's ability to raise capital through an offering of its equity
securities in the future. Upon completion of the Offering, the Company will have
4,297,476 shares of Common Stock outstanding, of which only the 1,500,000 shares
of Common Stock included in the Units offered hereby will be transferable
without restriction under the Securities Act. The remaining 2,797,476 shares,
issued in private transactions, will be "Restricted Securities" (as defined in
Rule 144 promulgated under the Securities Act) which may be publicly sold only
if registered under the Securities Act or if sold in accordance with an
applicable exemption from registration, such as Rule 144. In general, under Rule
144, as currently in effect, subject to the satisfaction of certain other
conditions, a person, including an affiliate of the Company, who has
beneficially owned restricted securities for at least one year, is entitled to
sell (together with any person with whom such individual is required to
aggregate sales), within any three-month period, a number of shares that does
not exceed the greater of 1% of the total number of outstanding shares of the
same class or, if the Common Stock is quoted on The Nasdaq Stock Market or a
national securities exchange, the average weekly trading volume during the four
calendar weeks preceding the sale. A person who has not been an affiliate of the
Company for at least three months and who has beneficially owned restricted
securities for at least two years is entitled to sell such restricted shares
under Rule 144 without regard to any of the limitations described above. Holders
of 2,757,475 shares of Common Stock have certain registration rights. Officers,
directors and other security holders of the Company including those with
registration rights, owning and/or having rights to acquire in the aggregate
2,797,476 shares of Common Stock, have entered into agreements not to sell or
otherwise dispose of any securities of the Company, including Common Stock,
prior to , 2000 (two years from the Effective Date) (the "Lock-Up
Agreements") without the prior written consent of the Underwriter, which may be
granted or withheld in the sole and absolute discretion of the Underwriter.
Following expiration of the term of the Lock-Up Agreements, or the earlier
release of the restrictions contained therein, shares will become eligible for
resale pursuant to Rule 144, subject to the volume limitations and compliance
with the other provisions of Rule 144. Furthermore, the holder(s) of the
Underwriter's Warrants (including the securities issuable upon exercise thereof)
have demand and piggyback registration rights with respect to the units issuable
upon exercise of the Underwriter's Warrants. See "Description of Securities,"
"Description of Securities -- Shares Eligible for Future Sale," and
"Underwriting."
ADVERSE EFFECT OF REDEMPTION OF WARRANTS
Under certain conditions, the Warrants may be redeemed by the Company after
, 1999 with the prior written consent of the Underwriter, at a redemption
price of $.10 per Warrant upon not less than 30 days prior written notice to the
holders of such Warrants, provided the closing bid price of the Common Stock has
been at least $7.50 for 20 consecutive trading days ending on the third day
prior to the date the notice of redemption is given.
The Warrants will be exercisable until the close of business on the day
immediately preceding the date fixed for redemption. The redemption of the
Warrants could force the holders (i) to exercise the Warrants and pay the
exercise price at a time when it may be disadvantageous for the holders to do
so, (ii) to sell the Warrants at the then current market price when they might
otherwise wish to hold the Warrants or (iii) to
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accept the redemption price, which is likely to be substantially less than the
market value of the Warrants at the time of redemption. See "Description of
Securities -- Redeemable Common Stock Purchase Warrants."
NEED FOR FUTURE REGISTRATION OF WARRANTS; STATE BLUE SKY REGISTRATION; EXERCISE
OF WARRANTS
The Warrants and Common Stock will trade separately upon the completion of
the Offering. Purchasers may buy Warrants in the after-market or may move to
jurisdictions in which the Warrants and the shares of Common Stock underlying
the Warrants are not so registered or qualified. In this event, the Company
would be unable to issue shares of Common Stock to those persons desiring to
exercise their Warrants unless and until the Warrants and the underlying shares
of Common Stock are qualified for sale in jurisdictions in which such purchasers
reside, or an exemption from such qualification exists in such jurisdictions.
There can be no assurance that the Company will be able to effect any required
qualification. The Warrants will not be exercisable unless the Company maintains
a current registration statement on file with the Commission through
post-effective amendments to the registration statement containing the
Prospectus. Although the Company has agreed to file appropriate post-effective
amendments to the registration statement containing the Prospectus and to
maintain a current Prospectus with respect to the Warrants, there can be no
assurance that the Company will file post-effective amendments necessary to
maintain a current Prospectus or that the Warrants will continue to be so
registered. See "Description of Securities -- Redeemable Common Stock Purchase
Warrants."
RELATIONSHIP OF UNDERWRITER TO TRADING
The Underwriter may act as a broker or dealer with respect to the purchase
or sale of the Common Stock and the Warrants in the over-the-counter market
where each is expected to trade. The Underwriter also has the right to act as
the Company's exclusive agent in connection with any future solicitation of
Warrantholders to exercise their Warrants. Regulation M, which was recently
adopted to replace Rule 10b-6, under the Exchange Act may prohibit the
Underwriter from engaging in any market-making activities with regard to the
Company's securities for a period of up to five business days (or such other
applicable period as Regulation M may provide) prior to any solicitation by the
Underwriter of the exercise of Warrants until the later of the termination of
such solicitation activity or the termination (by waiver or otherwise) of any
right that the Underwriter may have to receive a fee for the exercise of
Warrants following such solicitation. As a result, the Underwriter and any
solicitating broker/dealer may be unable to provide a market for the Company's
securities during certain periods while the Warrants are exercisable. Any
temporary cessation of such market-making activities could have an adverse
effect on the market price of the Company's securities.
UNDERWRITER'S WARRANTS AND REGISTRATION RIGHTS
In connection with this Offering, the Company has agreed to sell to the
Underwriter, for nominal consideration, the Underwriter's Warrants which entitle
the Underwriter to purchase up to 150,000 shares of Common Stock at a purchase
price of $5.50 per share and 150,000 Warrants at a purchase price of $.11 per
Warrant. The securities issuable upon exercise of the Underwriter's Warrants are
identical to those offered pursuant to this Prospectus. The Underwriter's
Warrants are exercisable for a period of four years commencing one year from the
date of this Prospectus. The exercise of the Underwriter's Warrants and the
Warrants contained in the Underwriter's Warrants may (i) dilute the value of the
shares of Common Stock to be acquired by holders of the Warrants, (ii) adversely
affect the Company's ability to obtain equity capital and (iii) adversely affect
the market price of the Common Stock if the Common Stock issuable upon the
exercise of the Underwriter's Warrants and the Warrants contained in the
Underwriter's Warrants are sold in the public market. The Underwriter has been
granted certain "piggyback" and demand registration rights for a period of seven
years from the Effective Date with respect to the registration under the
Securities Act of the securities directly or indirectly issuable upon exercise
of the Underwriter's Warrants. The exercise of such rights could result in
substantial expense to the Company. See "Underwriting."
17
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units offered hereby,
after underwriting discounts and commissions and other expenses of the Offering
are estimated to be $6,230,000 ($7,228,325 if the Over-allotment Option is
exercised in full). The Company intends to use the net proceeds as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
------------ -----------
<S> <C> <C>
ACQUISITIONS(1)............................................................................ $ 1,500,000 24%
CONSTRUCTION OF NEW MANUFACTURING FACILITY (2)............................................. 1,250,000 20%
RESEARCH AND DEVELOPMENT (3)............................................................... 975,000 16%
SALES AND MARKETING (4).................................................................... 750,000 12%
RAW MATERIALS (5).......................................................................... 300,000 5%
REPAYMENT OF INDEBTEDNESS (6).............................................................. 83,500 1%
WORKING CAPITAL AND GENERAL CORPORATE PURPOSES............................................. 1,371,500 22%
------------ ---
TOTAL...................................................................................... $ 6,230,000 100%
------------ ---
------------ ---
</TABLE>
(1) The Company, as the opportunity arises, intends to acquire other companies,
products or product lines complementary to its existing businesses and may
use a portion of the proceeds of this Offering to pay all, or a portion of,
the purchase price for such acquisitions. Additionally, the portion of the
proceeds of this Offering allocated to acquisitions may be used to purchase
equipment, or as working capital, for such acquisitions. Any decision to
make such an acquisition will be based on a variety of factors, including
the purchase price, and other financial terms of the transaction, and the
business prospects and competitive position of, and technology or products
provided by, the acquisition candidate. As of the Effective Date, the
Company has no agreements, understandings or arrangements with respect to
any such acquisition nor is the Company engaged in any discussions or
negotiations regarding any such acquisition. There can be no assurance that
the Company will successfully consummate any acquisition or successfully
integrate any acquired company or products into its operations. Investors in
this Offering may not have an opportunity to evaluate the specific merits
and risks of any acquisition. Net proceeds which are allocated for
acquisitions but not used for that purpose may be used for working capital.
(2) The Company intends to construct and equip a new manufacturing facility on
property being purchased in Missoula County, Montana that is expected to be
financed in part through the issuance of industrial revenue bonds. The
facility is expected to consist of a 20,000 square foot manufacturing and
warehousing building on approximately 6.3 acres of land. The existing
manufacturing plants and equipment will be relocated in the new consolidated
facility when it is completed. The Company's proposed equipment purchases
include 2 CNC machining centers, a CNC tooling center and other equipment
designed to expand manufacturing capacity and improve efficiency. This
equipment can be used at either the new or existing facilities. There can be
no assurance that the industrial revenue bond financing will be completed.
If the financing is delayed or terminated, the Company intends to utilize
proceeds from the offering designated for construction to make additional
equipment purchases and make other improvements to operations at its
existing facilities.
(3) Research and development costs include the development of certain new
products, as well as attempts to determine more efficient ways to
manufacture existing products.
(4) Sales and marketing expenses include the production of a catalogue of the
Company's products and the costs of print advertising trade shows, sales
literature and sales samples.
(5) The Company intends to purchase metal, wood, supplies and component
assemblies such as barrels and frames.
(6) Repayment of indebtedness consists of approximately $46,000 due for
outstanding federal excise taxes and a payment of $37,500 due on a series of
promissory notes in the aggregate principal amount of $300,000. Of the
$300,000, $87,690 principal amount is due to Gary Landis, an officer and
director of the Company, $120,960 principal amount is due to O. Milton
Gossett, a principal shareholder of the
18
<PAGE>
Company and a former officer and director of CVC, and the remainder is due
to two former officers and directors of CVC. The notes bear interest at 9%
per annum and are payable in eight (8) quarterly installments commencing on
the earlier of (i) the closing of the Offering or (ii) November 1, 1998. The
Company intends to make the remaining payments from operating cash flows,
but if such cash flows are insufficient, proceeds of the Offering that were
allocated to working capital may be used to make the remaining installment
payments. See "Certain Transactions." Repayment of indebtedness does not
include trade accounts payable which may be repaid from funds allocated to
working capital.
The foregoing represents the Company's current estimate of the allocation of
the net proceeds of the Offering based upon certain assumptions relating to the
costs associated with the implementation of the Company's present business
plans. Future events, including problems, delays and complications encountered
in implementation of its present plans, as well as changes in economic
conditions, regulatory or competitive conditions and the success of the
Company's marketing activities may make shifts in the allocation of funds
necessary or desirable. Any material reallocation will be made by the Board of
Directors. There can be no assurance that the Company's estimates will prove
accurate or that unforeseen expenses will not be incurred with a resulting
reallocation of the use of the proceeds of this Offering.
The Company believes, based on currently proposed plans, that the net
proceeds of this Offering will satisfy the Company's cash requirements for at
least 12 months followings the Effective Date. Pending the utilization, the net
proceeds will be invested primarily in high grade short term interest bearing
investments. Additional proceeds received as a result of the exercise of the
Over-allotment Option will be added to working capital.
19
<PAGE>
DILUTION
At September 30, 1997, the net tangible book value of the Company was
($187,481) or $(0.07) per share of common stock based on 2,747,476 shares of
common stock outstanding. The net tangible book value per share represents the
amount of the Company's total tangible assets less total liabilities and
minority interests, divided by the number of shares of common stock outstanding.
After giving effect to the receipt of the net proceeds (estimated to be
approximately $6,230,000) from the sale of the shares of Common Stock offered
hereby at an assumed initial public offering price of $5.10 per share, the
proforma net tangible book value of the Company attributable to common stock at
September 30, 1997 would be $5,892,519 or $1.39 per share of common stock. This
would result in dilution to the public investors (i.e. the difference between
the estimated initial public offering price per share of common stock and the
tangible book value thereof after giving effect to this Offering) of
approximately $3.61 per share or (72%). The following table illustrates the per
share dilution assuming $10 of the Offering price per Unit is attributable to
the Warrant included therein.
<TABLE>
<S> <C> <C>
Assumed initial public offering price......................... $ 5.00
Net tangible book value at September 30, 1997................. (0.07)
Increase in proforma net tangible book value attributable to
new investors............................................... 1.46
---------
Proforma net tangible book value after this Offering.......... 1.39
---------
Proforma dilution of net tangible book value to the new
investors................................................... $ 3.61
---------
---------
</TABLE>
The following tables set forth as of September 30, 1997, with respect to the
Company's existing stockholders and investors in this Offering, the number of
shares of Common Stock acquired from the Company, the percentage of ownership of
such shares of Common Stock, the total consideration paid, the percentage of
total consideration paid, and the average price per share paid by the existing
stockholders and by the investors in the Offering:
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
--------------------- ------------------------ PER
NUMBER PERCENT NUMBER PERCENT SHARE
---------- --------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... 2,747,476 64.68% $ 3,376,627 31.04% $ 1.23
New investors............................ 1,500,000 35.32 7,500,000 68.96 $ 5.00
---------- --------- ------------- --------- -----
Total.................................... 4,247,476 100.00% $ 10,876,627 100.00% $ 2.56
---------- --------- ------------- --------- -----
---------- --------- ------------- --------- -----
</TABLE>
The above table assumes no exercise of the Overallotment Option. The above
table also assumes no exercise of currently outstanding options to purchase
475,000 shares of Common Stock and currently outstanding Warrants to purchase
50,000 shares of Common Stock. The options have exercise prices below the
Offering price, and thus, to the extent they are exercised, will cause further
dilution to new investors. See "Options/SAR Grants in Last Fiscal Year" and
"Certain Transactions."
20
<PAGE>
CAPITALIZATION
The following table sets forth the actual capitalization of the company at
September 30, 1997, and as adjusted to give effect to the sale of 1,500,000
units offered hereby and to the application of the net proceeds therefrom, at
the assumed public offering price of $5.10 per unit and the reclassification in
December 1997 of $123,323 in short term debt owed to a company in which the
Company's Chairman is a principal to long term debt.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
----------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED
------------- -------------
Long-term debt..................................................................... $ 384,203 $ 470,026
------------- -------------
------------- -------------
Stockholders' Equity
Common Stock, $.0001 par value, 30,000,000 shares authorized on an actual and
adjusted basis, 2,747,476 issued and outstanding on an actual basis and 4,247,476
shares issued and outstanding on an adjusted basis (1) 275 425
Additional paid-in capital......................................................... 3,376,352 9,466,202
Retained earnings (accumulated deficit)............................................ (3,412,069) (3,412,069)
------------- -------------
Stockholders equity (deficit)...................................................... $ (35,442) $ 6,054,558
------------- -------------
Total capitalization............................................................... $ 2,058 $ 6,524,584
------------- -------------
------------- -------------
</TABLE>
- ------------------------
(1) Does not give effect to the issuance of 50,000 shares of Common Stock and
50,000 warrants after September 30, 1997.
DIVIDEND POLICY
The Company does not anticipate paying any dividends on its Common Stock in
the foreseeable future. Any earnings, which the Company may realize in the
foreseeable future, will be retained to finance the growth of the Company.
Future dividend policy will depend upon the Company's earnings, capital
requirements, financial condition and other factors considered relevant by the
Company's Board of directors. In addition, the payment of cash dividends may be
limited or prohibited by the terms of any future loan agreements or any
preferred stock that may be issued by the Company. See "Description of
Securities -- Common Stock."
21
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------------------- ----------------------------
1994 1995 1996 1996 1997
------------ ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales................................. $ 247,950 $ 74,744 $ 244,725 $ 193,796 $ 365,378
Cost of good sold......................... 405,441 339,246 576,153 355,127 638,311
Gross profit (loss)....................... (157,491) (264,502) (331,428) (161,331) (272,933)
Operating expenses........................ 244,977 482,206 759,187 655,731 457,020
Operating loss............................ (402,468) (746,708) (1,090,615) (817,062) (729,953)
Other income (expense).................... (47,012) (35,755) (12,049) (29,700) (23,570)
Net loss.................................. (449,480) (782,463) (1,102,664) (846,762) (753,523)
Earnings per share........................ (0.84) (0.75) (0.44) (0.35) (0.27)
Weighted average number of shares
outstanding (1)......................... 535,728 1,040,893 2,488,466 2,410,972 2,803,558
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER
------------------------------------------- 30,
1994 1995 1996 1997
------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit)................. (598,480) $ (49,286) $ 200,083 $ (76,943)
Total assets.............................. 500,286 736,095 1,126,112 1,107,900
Long-term debt............................ -- 262,500 300,000 384,203
Total liabilities......................... 901,291 759,059 999,357 1,143,342
Stockholder's equity (deficit)............ (401,005) (22,964) 126,755 (35,442)
</TABLE>
- ------------------------
(1) Adjusted for merger with Stock Shop and recapitalization in 1995. See notes
1 and 2 to the financial statements.
COOPER FIREARMS, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
JANUARY 1,
YEAR ENDED DECEMBER 31, 1996 SIX MONTHS ENDED
---------------------------- TO AUGUST 13, JUNE 30,
1994 1995 1996 1996
------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Net sales..................................................... $ 959,206 $ 954,002 $ 589,070 $ 534,420
Cost of goods sold............................................ 1,046,630 1,027,871 516,687 461,005
Gross profit (loss)........................................... (87,424) (73,869) 72,383 73,415
Operating expenses............................................ 182,410 396,278 237,190 209,621
Operating loss................................................ (269,834) (470,147) (164,807) (136,206)
Other income (expense)........................................ (17,230) (38,809) (20,267) (15,241)
Net loss...................................................... (287,064) (508,956) (185,074) (151,447)
Earnings per common share..................................... (3.17) (4.19) (1.36) (1.13)
Weighted average number of common shares outstanding.......... 90,565 121,436 135,677 133,465
<CAPTION>
AT DECEMBER 31,
----------------------------
1994 1995
------------- -------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit)..................................... $ (2,401) $ (117,865)
Total assets.................................................. 781,774 675,636
Long-term debt................................................ 118,621 175,643
Total liabilities............................................. 603,957 669,775
Stockholders' equity.......................................... 177,817 5,861
</TABLE>
22
<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
financial statements and the notes thereto appearing elsewhere in this
Prospectus. This discussion contains forward looking statements that involve
risks and uncertainties. The Company's actual results in the future may differ
materially from the results discussed in such forward looking statements.
Factors that might cause such a difference include, but are not limited to those
discussed in "Risk Factors."
CERTAIN FACTORS AFFECTING COMPARABILITY
On August 13, 1996, the Company acquired all of the preferred stock and 92%
of the common stock of Cooper Arms (in subsequent stock purchases, the Company
increased its ownership in Cooper Arms to approximately 99%) in a transaction
accounted for under the purchase method. This acquisition distorts comparability
between periods. Therefore, pro forma results of operations assuming Cooper Arms
was acquired on January 1, 1995 have been used in this analysis to provide more
meaningful information in the evaluation of the ongoing performance of the
business.
The following pro forma condensed statements of operations do not purport to
be indicative of the consolidated results of operations of the Company that
might have occurred had the acquisition actually taken place on January 1, 1995,
nor are they indicative of future results. Furthermore, these pro forma
condensed consolidated statements of operations do not reflect changes which may
occur as a result of post-merger activities or other matters.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------- -------------------
1995 1996 1996
------------- ------------- -------------------
<S> <C> <C> <C>
Net sales..................................................... $ 1,028,746 $ 833,795 $ 782,866
Cost of goods sold............................................ 1,367,117 1,092,840 871,814
------------- ------------- -------------------
Gross profit (loss)........................................... (338,371) (259,045) (88,948)
Operating expenses............................................ 878,484 996,377 892,921
------------- ------------- -------------------
Operating loss................................................ (1,216,855) (1,255,422) (981,869)
Other expenses................................................ 74,564 38,960 52,404
------------- ------------- -------------------
Loss before minority interests................................ (1,291,419) (1,294,382) (1,034,273)
Minority interests in net loss of subsidiary.................. 6,644 -- --
------------- ------------- -------------------
Net loss...................................................... $ (1,284,775) $ (1,294,382) $ (1,034,273)
------------- ------------- -------------------
------------- ------------- -------------------
</TABLE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO PRO FORMA AMOUNTS FOR NINE
MONTHS ENDED SEPTEMBER 30, 1996.
Net sales revenue declined $417,488 or 53% from $782,866 in 1996 to $365,378
in 1997, primarily due to lower sales volume. The Company has concentrated its
efforts in 1997 on expanding production capacity, improving efficiency and
securing capital required for both. The Company has temporarily reduced its
current production and marketing efforts to accomplish these objectives.
Furthermore, financial constraints and limitations on production capacity have
forced the Company to temporarily suspend rifle production for portions of 1997.
Consequently, sales volume has suffered. Management believes that it is
necessary for the Company to expand production capacity for it to be able to
produce significant improvement in sales.
23
<PAGE>
Gross profit (loss) declined from (11.4%) of net sales in 1996 to (74.7%) in
1997, in part due to inefficiencies in the integration of CVC Classics, Cooper
Arms and Stock Shop production operations. A major inefficiency was the failure
to consolidate production at a single location. In addition, the Company
temporarily suspended rifle production for portions of 1997 as described above.
The lower production volume resulted in a significant increase in fixed overhead
costs allocated to each unit produced.
Operating expenses declined $435,728 or 49% from $892,921 in 1996 to
$457,020 in 1997, primarily due to elimination of duplicated costs after the
merger of CVC and Cooper Arms. Executive compensation was reduced by $127,290
from $175,290 in 1995 to $48,000 in 1996. In addition, management has
significantly reduced bad debt expense from $85,574 in 1996 to $193 in 1997.
This is due to tighter credit policies and improved collection procedures. As a
percentage of net sales, operating expenses increased from 114.1% to 125.1%
primarily due to the decline in net sales.
Loss from operations decreased by $251,916 or 26% from $(981,869) in 1996 to
$(729,953) in 1997, primarily due to the elimination of duplicated costs after
the merger of CVC and Cooper Arms which was partially offset by the decrease in
net sales and inefficiencies in the integration of production operations of CVC
Classics and Cooper Arms.
Interest expense decreased by $36,406 or 58% from $62,570 in 1996 to $26,164
in 1997 reflecting repayment of debt and new low or non-interest-bearing
borrowings from related parties.
There was no income tax expense in either period as a result of the Company
incurring a loss.
As a result, the Company's net loss decreased by $280,750 or 27% from
$(1,034,273) in 1996 to $(753,523) in 1997. As a percentage of net sales, net
loss was (132.1%) in 1996 and (206.2%) in 1997.
PRO FORMA AMOUNTS FOR YEAR ENDED DECEMBER 31, 1996 COMPARED TO PRO FORMA
AMOUNTS FOR YEAR ENDED DECEMBER 31, 1995.
Net sales declined $194,951 or 19% from $1,028,746 in 1995 to $833,795 in
1996, primarily due to lower sales volumes. Due to financial difficulties,
Cooper Arms temporarily suspended operations for approximately three months in
1996. Cooper Arms resumed its production after it was acquired by CVC funded
primarily by the proceeds of $402,383 from CVC's sale of Common Stock in a
private offering and a capital contribution of $1,000,000 from an entity
controlled by the Company's Chairman. See "Certain Transactions."
Gross profit (loss) improved from (32.8%) of net sales in 1995 to (31.1%) in
1996.
Operating expenses increased $117,893 or 13% from $878,484 in 1995 to
$996,377 in 1996, primarily due to an increase of approximately $119,000 in bad
debt expense. This increase was partially attributable to the write off of past
due receivables that existed at the time the Company acquired Cooper Arms and
during the reorganization of CVC, which resulted in the operations being
relocated to Montana. As a percentage of net sales, operating expenses increased
from 85.4% in 1995 to 119.5% in 1996, primarily due to the decline in net sales
and the increase in bad debt expense.
Loss from operations increased by $38,567 or 3% from $(1,216,855) in 1995 to
$(1,255,422) in 1996, primarily due to the decrease in net sales and increase in
bad debt expense which were partially offset by the improvement in gross profit
(loss) percentage. As a percentage of net sales, loss from operations was
(118.2%) in 1995 and (150.6%) in 1996, reflecting the decline in sales volume.
Interest expense decreased by $24,374 or 33% from $74,564 in 1995 to $50,190
in 1996, reflecting repayments of debt and new low or non-interest-bearing
borrowings from related parties.
There was no income tax expense in either period as a result of the Company
incurring a loss.
As a result, the Company's net loss increased by $9,607 or 1% from
$(1,284,775) in 1995 to $(1,294,382) in 1996. As a percentage of net sales, the
net loss was (124.9%) in 1995 and (155.2%) in 1996.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its operating cash flow deficit through
loans from stockholders, capital contributions and sales of common stock.
In 1996, the Company had negative cash flows of $(1,123,583) from
operations. The principal uses of cash were the net loss of $1,102,664, an
increase in inventory of $87,873, a decrease in accounts payable and accrued
expenses of $69,053 and a decrease in federal excise tax payable. The principal
source of cash from operations was a decrease in accounts receivable of $47,915.
A temporary suspension of production for parts of 1996 resulted in an increase
in raw materials inventory, since these items did not enter the production cycle
when expected. In addition, the Company purchased raw materials at favorable
prices, taking advantage of discounts in anticipation of the planned increase in
production capacity. Accounts payable and accrued expenses and federal excise
taxes payable decreased as such balances were paid out of the proceeds of the
sale of the Company's Common Stock in a private placement. Cash flows from
investments activities was reduced by $105,728. The principal uses of cash from
investments were the purchase of Cooper Arms for $30,000 and purchase of
equipment for $126,205. The principal source for cash from investments was the
$37,477 in cash obtained in connection with the Cooper Arms acquisition. The
Company raised $402,383 from the sale of Common Stock; and a Company controlled
by its principal shareholder made a capital contribution of $1,000,000. When
reflecting all transactions, the Company had a net increase in cash of $167,330
from $64,204 in 1995 to $231,534 in 1996 and a net increase in working capital
(deficit) of $249,369 from $(49,286) in 1995 to $200,083 in 1996.
The Company had lease commitments at December 31, 1996 for its facilities
totaling $114,325 of which $55,075 and $43,250 is committed for 1997 and 1998,
respectively. The lease commitments end on September 1, 1999.
The Company was also obligated under an employment agreement with its
President at December 31, 1996 at a total of $108,000 in salary, of which
$48,000 is to be paid in 1997. The employment agreement expires on March 31,
1999.
In the first nine months of 1997, the Company used $(599,599) in operating
activities. The principal uses of cash were the net loss of $(753,523) and a
decrease in federal excise taxes payable of $14,249. Cash was provided
principally by increases in accounts payable and accrued expenses (including
accrued interest) of $46,713 and customer deposits of $14,774. Cash flows from
investing activities were decreased by $297,611 as a result of the purchase of
property and equipment and costs incurred related to this Offering. Cash flows
from financing activities increased by $690,466 primarily as a result of
$591,326 from the sale of Common Stock, $98,900 of bank borrowings and a $15,091
advance from an affiliate. When reflecting all these transactions, the Company
had a net decrease in cash of $206,744 from $231,534 in 1996 to $24,790 in 1997
and a net decrease in working capital (deficit) of $277,026 and $200,083 in 1996
to $(76,943) in 1997.
After payment of applicable underwriting discounts and commissions and
certain other expenses of the Offering, the Company expects to receive net
proceeds of approximately $6,230,000 (or approximately 81% of the estimated
gross proceeds of $7,650,000). The Company believes, based on currently proposed
plans, that the proceeds of the Offering will fulfill the Company's working
capital needs for at least 12 months following the Offering. If the Company
continues to grow, bank borrowings, other debt placements and equity offerings
may be considered, in part or in combination as the situation warrants. There
can be no assurance that financing will be available from these sources on terms
acceptable to the Company, if at all.
The Company has incurred substantial recurring operating losses. This raises
substantial doubt about the Company's ability to continue as a going concern.
The auditors have expressed such doubt in their opinion on the Company's
financial statements. If the Company is not able to complete the Offering,
generate additional revenues or reduce its expenses, it is possible that
operations will be discontinued.
25
<PAGE>
BUSINESS
HISTORY
CVC was formed to re-engineer, produce and market a high-quality,
American-manufactured version of a sporting shotgun produced first in Japan by
the Olin Corporation as the "Winchester Model 101" and, until 1988, by its
successor company as the "Classic Doubles" Sporter. In 1993 and 1994, CVC
commenced limited production of its American-made model, the "CVC Classic
Sporter" and by 1995 completed the design and engineering of a line of ten
shotguns within the CVC Classic Sporter family. In 1995 and early 1996, CVC
sought to increase production of the CVC Classic Sporter by reaching an
understanding with a manufacturer pursuant to which the manufacturer would
supply and assemble the metal components of the CVC Classic Sporter and CVC
would finish and market the completed product. In mid-1996, management
determined that this arrangement was not performing as expected and it was
discontinued.
The Company was formed in May 1996 for the purpose of acquiring the
outstanding securities of CVC. In September 1997, the Company completed an
exchange offer as a result of which CVC became a majority owned (approximately
97%) subsidiary of the Company.
In November 1996, CVC acquired all of the issued and outstanding capital
stock of the Stock Shop, and indirectly, the Stock Shop's majority-owned
(approximately 99%) subsidiary Cooper Arms. The Company's senior management and
Board of Directors believes this acquisition was necessary in order to expand
the Company's business activities to include in-house manufacturing of CVC
shotguns and create economies of scale in the marketing of the Company's
products. At this time CVC Classics' operations were relocated to a facility in
Montana. Although the Company still experiences inefficiencies related to
operating two separate facilities, it has been able to eliminate some expenses
by conducting all of its operation in Montana.
In August and September 1996, Stock Shop acquired 92% of the outstanding
capital stock of Cooper Arms and all of the assets of the Stock Shop of Montana
LLC, a company under common control, respectively. In August 1997, the Company
acquired an additional 7% of Cooper Arms' outstanding capital stock.
INDUSTRY BACKGROUND
The 1995 Annual Firearms Manufacturing, and Exportation Report ("Report")
compiled by the Bureau of Alcohol, Tobacco and Firearms ("BATF") revealed that
in 1995, 1,331,780 rifles and 1,173,645 shotguns were manufactured in the United
States. According to the Report, of these firearms, 88,899 rifles and 100,877
shotguns were exported.
The National Shooting Sports Foundation's Profile of Participation in the
Hunting and Shooting Sports (1995) ("Profile") reveals that hunting is a stable,
if not growing, recreational activity. Annual hunting license sales have
remained around the 16 million mark since 1983. The Profile indicates that
hunters/shooters between the ages of 35-54 report owning the most shotguns,
while those over 55 own the most centerfire rifles. With respect to target
shooters, the Profile reports that the target shooting segment of the shooting
sports market is growing and cites a survey by American Sports Analysis which
reveals that trap and skeet shooting, with over 4.5 million participants, is on
the rise. Additionally, sporting clay shooting is among the fastest growing
sports, which over the course of a few years attracted approximately 3.1 million
participants.
GROWTH STRATEGY
The Company's goal is to become a leading manufacturer of custom quality,
mass produced firearms and high grade accessories by focusing on the high growth
areas of the firearms market which the Company believes includes various types
of target shooting, such as clay, trap and skeet shooting. The Company's primary
strategies for achieving its goal are to broaden its product line and increase
the scope
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and efficiency of its manufacturing operations. In order to broaden its product
lines, the Company intends to seek to acquire companies which sell products
which are competitive or complimentary to its current products or to acquire
such product lines. Alternatively, as the Company is doing with ammunition and
clothing and accessories, the Company may develop such product lines itself. The
purchase of additional production equipment at its existing, or proposed
facilities, is expected by management to reduce reliance on third party
suppliers, as well as increase capacity and manufacturing efficiency.
PRODUCTS
The Company manufactures manually operated rifles and shotguns primarily
designed for hunting, target shooting and other shooting sports. The primary
components of each of these firearms are a barrel action and stock. The barrel
is the metallic cylindrical tube through which the projectile passes before it
leaves the firearm. The moving parts that allow one to load, fire and unload a
firearm make up the action. When the barrel is attached to the action, these
metal parts (which contain all the parts necessary for the firearm to function)
may be called a barreled action. The stock is the wood handle of the firearm to
which the barrel and the action are attached. The stock provides proper grip and
balance. Firearms may be decorated by engravings or inlays on the metal parts or
engravings, inlays or checkering on the stock.
A rifle is a long gun with spiral grooves cut into the interior of the
barrel to give the projectile a stabilizing spin after it leaves the barrel. A
rifle fires a single projectile each time the cartridge is ignited by the
pulling of the trigger. Most of the Company's rifles are bolt action rifles.
Bolt action rifles require manual turning, retraction and closing of a bolt
device in order to load ammunition. Lugs are used to lock the bolt into the
action when the rifle is to be fired. Bolt action rifles may be repeating
rifles, which allow more than one (usually three to five) cartridges to be
stored in a magazine and manually fed into the action with the bolt.
A shotgun is also a long gun. In contrast to a rifle, a shotgun fires a
cartridge with a number of projectiles at one time which spread over an area
after being discharged from the barrel. This makes a shotgun the firearm of
choice for shooting moving targets. The concentration of the projectiles from a
given distance is known as the shot pattern. Many shotguns have two barrels,
which are arranged vertically (over-and-under) or horizontally (side by side).
Many shotguns use a rib (a long flat metal piece running the length of the
barrel) to provide a proper sighting plane.
Most shooting sportsmen prefer a high level of accuracy in their firearms.
The accuracy and distance of a rifle or shotgun depends upon the length and
width of the barrel, the precision with which it is manufactured, as well as
other variations. Other features of importance to shotgun users are internal
refinements to the barrel such as diamond honing, to ensure internal smoothness,
a minimal recoil (recoil is the force with which the gun moves backwards against
the shoulder when fired) and overboring for a consistent shot pattern. Rifle
users prefer rifles that are manufactured with high grade barrels (known as
match-grade) and are designed so that glass bedding is used to create a precise
fit between the action and stock and also to prevent the wood in the stock from
touching the barrel which could adversely affect the rifle's accuracy (this
design is known as free floating). A shooting sportsmen may own a wide variety
of rifles or shotguns, creating a market for repeat buyers of the Company's
products.
The Company does not intend to manufacture or market handguns or assault
weapons.
CVC CLASSICS
CVC Classics designs, engineers, manufactures and markets a premium line of
ten shotguns for clay target shooting and hunting which retail from $3,000 to
$4,200 without options and can retail for in excess $10,000 with options. The
CVC Classics shotguns are a 12 gauge, over and under third generation rendition
of the renowned Winchester Model 101. The best selling model in the line is the
CVC Classic Sporter offered in three barrel lengths. The CVC Classic Sporter are
ready for sporting clays competition
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(which Management believes is the largest and fastest growing segment of the
shotgun industry) as delivered.
Third generation improvements to the CVC Classic Sporter include lengthened
forcing cones, mechanical triggers, and overboring. Improvements to
manufacturing techniques include a one piece frame machined from ordinance 416
stainless steel a machined 4140 steel monobloc, and diamond honed barrels. All
of these improvements provide superior balance, lighter weight, reduced recoil
and better shot patterning. Additionally the shotguns feature select American
walnut with hand checkering. CVC is currently perfecting its rib to barrel laser
beam welding process known as "CVC Fusion(TM)" which fuses the barrels and ribs
into an inseparable structure for improved strength and durability. Management
believes that this technology will provide the strongest barrel assembly
available because the ribs and barrel metal are fused into an inseparable
structure for the life of the shotgun. Moreover, in addition to achieving
greater barrel strength, lighter weight and a unique gun balance, CVC Fusion(TM)
is expected to lower production costs per unit due to the accelerated pace at
which assembly can occur (as compared to soldering) and reduced labor needed in
the assembly process. The Company does not hold a patent on its laser-beam
welding technology and may seek to secure a patent in order to license the
technology to the industry. There can be no assurance, however that even if the
Company applies for patent protection, a patent will be issued.
THE STOCK SHOP
The Stock Shop designs and manufactures high quality firearms stocks.
Currently, the Company only produces stocks for use on the Company's other
products and on a custom basis for retail customers. If the Company is able to
increase capacity in its manufacturing facilities, it may attempt to solicit
contract orders from other firearms manufacturers for large quantities of
firearms stocks on an OEM basis. There can be no assurance that the Company will
be able to increase capacity to a sufficient level for this or that there exists
a market for production of the Company's stocks on an OEM basis.
The Stock Shop also designs, engineers, assembles and markets the "Anschutz
USA Sporting Rifle," based on the Anschutz Model 1700 series barreled action.
The Stock Shop has an agreement with the world renowned firm of J.G. Anschutz
GmbH and its distributor, AcuSport Corporation, whereby AcuSport has agreed to
sell the Stock Shop the Anschutz Model 1700 series barreled action, the Stock
Shop manufactures stocks for and assembles the rifle using the barreled action.
The Stock Shop also acquired the American rights to the use of the name
"Anschutz USA Sporting Rifle." The Company's arrangement with Anschutz is
terminable by either party without notice.
The Stock Shop's Anschutz rifle is available in four calibers and with two
stock designs. The rifles retail from $1,550 to $1,895 without options, and can
retail for in excess of $10,000 with options.
COOPER ARMS
Cooper Arms designs, engineers, manufactures and markets a line of high
quality bolt action rifles for sport hunting and competition. The line consists
of five basic models of rifles, each in various styles, featuring classic
American design, two of which are repeating rifles and three of which are single
shot bolt action varmint rifles. The standard features of the repeating rifles
include three mid-locking lug bolts, box magazine, twin extractors, glass
bedding, single stage fully adjustable match trigger, 24 inch length chrome moly
match barrel (free floated) with .960-.650 straight taper, competition step
crown and 13 inch length of pull. All metal component parts of the repeating
rifles are machined from solid bar stock steel. The standard features of the
single shot varmint rifles include three front-locking lug bolts, Sako-style
extraction system, glass bedding, matte finish, single stage fully adjustable
match trigger, 24 inch stainless steel match grade barrel (free floated) and 13
inch length of pull. Cooper Arms rifles retail from $1,695 without options and
can retail for in excess of $6,000 with options.
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The Cooper Arms rifles are sold with certain guarantees as to the accuracy
of the rifles and a one year warranty requiring the Company to remedy defects in
the rifle's metal parts. The warranty does not cover damage caused by misuse or
inadequate care. The Cooper Model 36 is the holder of the 1994, 1995, 1996 and
1997 National Rifle Association sanctioned Hunter Class Silhouette US National
Championships.
Cooper Arms also designs and intends to market Cooper Arms ammunition. The
Company has designed prototypes of the ammunition including ammunition which is
especially designed for use with Cooper Arms rifles. The ammunition and the
manufacturing process by which it will be produced were designed to provide
superior accuracy. This design includes using precise processes for placing the
bullet in the brass cartridge and measuring the amount of gun powder used. This
ammunition is primarily intended for use by military and law enforcement units
in the United States and abroad. Manufacturing of the ammunition is being
contracted out to a manufacturer specializing in the production of high grade
ammunition. The Company intends to ensure that the manufacturers maintain high
quality control levels so that the ammunition is produced with the precision
called for in the Company's design. Cooper Arms plans to utilize third party
manufacturers for the production of the ammunition as customer purchase orders
are received and thus avoid keeping ammunition in inventory. This ammunition
previewed at the Brussels Military Procurement Exposition in November of 1997
and the Company expects sales to commence in the second quarter of 1998.
APPAREL AND ACCESSORIES
In the second quarter of 1998, the Company intends to commence marketing of
specialty labeled sports apparel and shooting accessories. The Company is hoping
to capitalize on the consumer's perception and familiarity with its firearms in
order to establish an identifiable brand name. These products are expected to
include caps, shooting vests, hunting coats, shirts, shotgun and rifle cases and
cleaning supplies. The products will be targeted at the high grade, high margin
upscale market. Design and selection of the products will be performed by the
Company and the manufacturing of the products will be contracted out to third
parties. The products will be sold primarily to the approved dealers. The
Company intends to establish a brand name which will be recognized and
associated with high quality firearms and accessories.
MANUFACTURING
In manufacturing shotguns, the Company mills (that is, cuts and forms raw
metal into the required shape and size) approximately 60% of the internal metal
components of the shotguns and produces the stocks. The barrel, as well as other
parts not manufactured by the Company, are purchased from suppliers. As
required, the metal parts purchased from suppliers are heat-treated by the
Company, which also fits or trims and adjusts the parts and finishes the metal.
Finishing is the process by which a metal part is either polished or blued,
which is a chemical process which protects the part against rusting and creates
a dark blue or black finish. The Company then assembles the various components
into finished shotguns which undergo quality control review before being readied
for shipment.
All of the metal components of the Company's rifles are purchased from
suppliers, but the Company produces the stocks itself. The metal parts are fit
and finished by the Company which also assembles them into finished rifles. The
Company produces the stocks for its firearms from raw wood. The process of
profiling (also called milling) the wood, that is, shaping the raw wood block
into the required shape is done by hand with the use of semi-automatic
machinery. The remainder of the production process, which consists of fitting
the profiled wood to the metal parts of the firearm, final shaping, sanding,
placing the design on the wood (known as checkering) and finishing, are
currently done by hand.
The Company's proposed new manufacturing facility is expected to allow the
Company to produce substantially all of the metal parts for the firearms itself:
barrels will continue to be purchased from suppliers at least initially.
Additionally, the equipment which the Company expects to purchase is intended to
automate substantial portions of the manufacturing process which are now
performed by hand. For
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example, currently producing the stocks is done almost entirely by hand. The new
equipment is intended to automate virtually the entire production process for
the stocks except for certain finishing processes that will be done by hand. See
"Business--Property."
In the event the financing for the new manufacturing facility cannot be
obtained, the Company will install the new equipment in its existing facilities.
This equipment will allow for substantially all of the changes in the Company's
manufacturing operations which the new facility would allow, except rather than
producing all of the component metal parts for rifle production only a majority
of such parts would be produced by the Company. The remainder of the parts would
continue to be purchased from suppliers. However, the new facility would result
in greater manufacturing efficiencies and capacity than would updating the
existing facilities and would also provide for on-site warehousing of finished
goods which is not possible at the existing facilities. Management believes that
the equipment purchased for existing facilities will be transferable to the new
facility. This will enable the Company to make equipment purchases while waiting
to obtain financing and complete construction of the new facility.
SALES AND MARKETING
The Company sells its products primarily to retail stores which specialize
in the sale of firearms and related products. The Company's Approved Dealer list
currently consists of approximately 500 retail stores of which approximately 125
have purchased products during 1997. Before approving a dealer, the Company
reviews each prospect to determine that it holds an appropriate BATF license and
is a "storefront" firearms dealer. The Company may sell to distributors in the
future although it has no current plans to do so.
Sales to the Approved Dealers are solicited by independent sales
representatives retained by the Company who have exclusive territories.
Presently, the Company retains independent sales representatives covering
approximately 35 states and intends to engage representatives to cover the
remaining states. The sales representatives also sell firearms manufactured by
others and are not prohibited from selling directly competitive firearms. The
Company promotes its products at trade shows and shooting competitions or
outings. The Company advertises in shooting and hunting periodicals and provides
dealers with sales literature about its products.
The Company intends to use a portion of the proceeds of the Offering to
produce a direct mail catalogue. The catalogue will include all of the Company's
products and solicit sales of products other than firearms which cannot be sold
by direct mail. The catalogue will enable the Company to market directly to the
higher margin consumer market. Additionally, the Company believes its catalogue
will increase consumer awareness of its products, which could serve to promote
sales in dealer outlets.
COMPETITION
The Company competes in a highly specialized, competitive environment
directly with many other national and international sporting firearms
manufacturers. Many of these companies are larger, better known and have
significantly greater financial, manufacturing and marketing resources than the
Company. In addition, unlike the Company, many firearms manufacturers are
subsidiaries of larger, more diverse companies on whom they can rely for capital
and other resources. No assurance can be given that the Company will be capable
of competing successfully in the future, or that the Company will be successful
in maintaining or expanding its share of the market for its products. The
Company's competition includes the Dakota Arms, Beretta Perazzi, Krieghoff
Ultralight, Kimber and Browning lines of firearms.
MAJOR CUSTOMERS
The Company's three largest customers accounted for 42% of net sales for the
nine months ended September 30, 1997, respectively. During the nine months ended
September 30, 1997, Sporting Clays Market, The Outdoorsman and PJ Vollmer & Co.,
Inc. accounted for 12%, 17% and 13% of sales,
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respectively. The Company believes that it has good relationships with its
customers and that they will continue to do business with the Company. However,
the Company has no long term contracts with any of its customers, all of whom
purchase products from the Company pursuant to individually placed purchase
orders. Therefore, there can be no assurance that any of its customers,
including its largest customers, will continue to purchase products from the
Company.
SUPPLIERS
Although the Company manufactures certain components of its firearms and
assembles them, it purchases certain materials and other component parts from
third party suppliers. The Company has no long-term contracts with suppliers,
and any of these relationships can be terminated by either party at any time.
Failure to obtain necessary materials from suppliers could interrupt the
Company's production schedule and adversely affect the Company. The Company
intends to use a portion of the proceeds of the offering to increase in-house
manufacturing in order to reduce dependence on metal component part suppliers.
However, the Company will remain dependent on suppliers for raw material and
certain component parts.
The Company intends to use one or more independent manufacturers for the
manufacture of the Cooper Arms ammunition and the apparel and accessories. The
Company will remain dependent on these suppliers for the production of the
ammunition and the apparel and accessories, although the Company believes that
there are a number of manufacturers who are capable of producing the ammunition
and the apparel and accessories.
LICENSING AND GOVERNMENT REGULATION
The firearms manufacturing industry is subject to extensive regulation by
various Federal and State regulatory agencies, including BATF. The Company
maintains licenses issued by the BATF permitting the distribution of firearms
and ammunition to a network of BATF licensed dealers throughout the United
States. The licenses are renewable every three years and require the Company to
maintain certain records relating to Firearms shipments. The Company's BATF
license was originally issued to Cooper Arms in February 1991 and has been
renewed until October 2000. The loss or suspension of any of the Company's
licenses could have a material adverse effect on the Company. The Company's
licenses could be suspended if it fails to pay the 11% federal excise tax due on
all sales of firearms. Currently, the Company owes approximately $46,000 in such
taxes together with interest or penalties. The Company is not aware of any
pending action against the Company with respect to such taxes and intends to pay
all amounts due from the proceeds of this Offering.
The manufacture, sale and purchase of firearms is subject to extensive
governmental regulation, including The Gun Control Act of 1968, The National
Firearms Act, The Arms Export Control Act and The Federal Firearms Act. Since
the Company is not presently selling revolvers, pistols or assault weapons, many
of the provisions of presently effective laws and regulations are not applicable
to the Company's present business.
The Company may export products. Each shipment of firearms shipped outside
the United States must be licensed by the State Department. The State Department
regulates the type of firearms that may be exported to various countries. The
Company must comply with these regulations to be able to export products. There
can be no assurance that as the Company expands its product line or as new laws
or regulations are adopted, or current laws and regulations expanded, that
existing or future laws and regulations would not have a materially adverse
effect on the business of the Company.
Moreover, from time to time, legislation and regulations that could
potentially affect the Company, either beneficially or adversely, have been
proposed by federal and state legislators and regulators. Management is not
aware of any currently pending or proposed legislation or regulations which, if
adopted, would have a materially adverse impact on the Company's operations.
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PROPRIETARY RIGHTS
The Company does not currently have patent protection on its products or
production processes. Its ability to compete effectively with other companies
will depend, in part, on its ability to maintain the proprietary nature of its
products and production processes. The Company may apply for patent protection.
However, there can be no assurance that it will be successful in obtaining such
patents or if obtained that such patents will afford the Company sufficient
protection. The Company intends to rely substantially on unpatented products and
production processes, and there can be no assurance that others will not copy
any of its designs or processes.
The basic design and engineering of the CVC Classic Sporter is largely based
on that of the Classic Doubles, previously manufactured by Sports Japan, Inc.
("Sports Japan"), which, in turn, was based upon the shotgun known as the
Winchester Model 101 produced by the Winchester Division of the Olin Corporation
("Winchester"). The Company has no license or other relationship with
Winchester, Olin Corporation or any other party who owns a patent or trademark
on the Winchester Model 101. Management does not believe that either Sports
Japan or Winchester has any viable claims against the Company based upon unfair
competition or protected proprietary rights to such designs and engineering.
Management believes that neither the Winchester Model 101 nor any of its parts
are protected by patents, and the shotgun itself is no longer manufactured.
Management also believes that Winchester sold the manufacturing rights to Sports
Japan, whose Classic Doubles was an improved version of the Winchester Model 101
and which company itself ceased operations and forfeited its firearms
manufacturing license in Japan in 1988. Further, management believes that the
CVC Classic Sporter is differentiated from the Winchester Model 101 and the
Classic Doubles by virtue of the different manufacturing process and the
Company's design enhancement. The Company has not obtained any opinion from
patent counsel and there can be no assurance that any such claims will not be
brought against the Company by Winchester, Sports Japan or persons connected or
previously connected with such entities. In the event that such claims are
brought against the Company, even if the Company was ultimately found not to be
liable, the cost to the Company of defending any such lawsuit could have a
materially adverse effect on the Company's operations. Moreover, if the
Company's products infringe patents or proprietary rights of others, the
Company, under certain circumstances, could become liable for damages or be
forced to alter its products, or production processes, either of which could
have a material adverse effect on the Company.
Cooper Arms holds a registered trademark, No. 75-511,590, granted March 28,
1995 for the mark "17CCM" which is used in connection with a cartridge developed
by Cooper Arms. The Company has applied for the registration of additional
markets, however, there can be no assurance that it will be successful in
obtaining such registrations. The Company's application of the mark "Classic
Sporter" was rejected as being "merely descriptive" and thus not eligible for
trademark protection. The Company is currently appealing the rejection. If the
Company fails to obtain the mark "Classic Sporter", the Company would not be
able to prevent other companies from marketing firearms under the name Classic
Sporter, which could have a material adverse effect on the Company.
Additionally, the Company's trademark counsel has indicated that the name
"Connecticut Valley" may be deemed "confusingly similar" to another company's
name and the Company may be required to change its name or seek another name
under which to market certain products. If the Company were required to cease
using "Connecticut Valley", it could have a material adverse effect on the
Company. Although registration affords the Company the protection of federal
trademark laws against the unauthorized use of the protected mark or a use
deemed "confusingly similar" under federal trademark law, there can be no
assurance that third parties will not infringe on the Company's current or
future trademark registrations or that the Company will have sufficient
resources to defend against any such infringement successfully or at all.
PERSONNEL
The Company has approximately 18 full time employees, including 15 in
manufacturing and 3 in corporate and general administration, some of whom also
have production responsibilities. Of the 15
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employees in manufacturing, 12 are located at the Stevensville, Montana
facility, three are at the Victor Montana facility. None of the Company's
employees are represented by labor organizations and the Company is not aware of
any activities seeking such organization. The Company considers its
relationships with its employees to be satisfactory. See "Management."
PROPERTY
The Company operates two manufacturing facilities. The primary manufacturing
operations are conducted at a 5,200 square foot facility in Stevensville,
Montana, and the manufacturing activities relating to machining and metal work
are conducted at Victor, Montana. The Company's executive offices are located at
the Stevensville facility. The Stevensville facility is leased by the Company
for $2,475 per month for the first 12 months and for $2,750 per month for the
remaining 12 months. The lease is due to expire in July 1998, but is renewable
by the Company for a period of 12 months upon 30 days written notice at a rate
of $3,000 per month. The Company also leases the Victor facility for
approximately $2,000 per month, which lease expires in September 1999.
The Company believes that its current property and equipment are adequate
for its business as currently conducted, however, the current facilities are not
automated, operate in a comparatively inefficient manner and have insufficient
production capacity to achieve significant growth in production volume. The
Company believes that consolidation of its two facilities is desirable and the
acquisition of automated production equipment, such as computer aided design and
manufacturing equipment is necessary for it to increase capacity and operate
more efficiently.
The estimated cost of the acquisition of the necessary property is
$2,200,000 and the estimated cost of the capital equipment and machinery is
$2,300,000. Approximately 75% of the cost of the new facility is to be financed
by the issuance of industrial revenue bonds by Missoula County, Montana. The
Company is presently finalizing the agreements to acquire the real property and
to finance the project.
There can be no assurance that the Company will be successful in obtaining
industrial revenue bond financing for the new manufacturing facility. If it is
unsuccessful in obtaining such financing it would consider conventional
financing for the new manufacturing facility, or a smaller new facility, or if
financing is not available for these alternatives, the Company will purchase new
equipment for its existing facilities.
LEGAL PROCEEDINGS
The Company has a dispute with a former officer and director of CVC which
may give rise to a claim by the Company against such individual for damages. The
Company is currently investigating the matter. Management does not believe that
the matter will have a material affect on the Company.
The Company has been contacted by an individual who injured himself while
firing a firearm manufactured by the Company. This matter was referred to the
Company's insurance carrier. Independent tests have indicated that the injury
was not caused by any defect in the Company's product and the individual has not
pursued any claim against the Company. Management believes that any exposure
relating to this matter in excess of its $25,000 deductible would be covered by
the insurance currently maintained, however, there can be no assurance that
existing insurance coverage is adequate for this or any other claim.
In December 1997, McLemore Sporting Arms, Inc., an operator of a retail
store which was a customer of Cooper Arms commenced a lawsuit in the Fifth
District Court, Franklin Parish, Louisiana against it and CVC seeking
approximately $35,000 representing plaintiff's loss from the purchase of
allegedly defective rifles plus unspecified additional monetary damages for
other costs incurred by the customer and damage to the customer's commercial
reputation. The Company believes it has meritorious defenses to the action and
intends to vigorously defend this lawsuit.
The Company is not currently a party to any litigation, or aware of any
potential litigation that it believes could have a material adverse effect on
the Company or its business. See "Risk Factors--Possible Insufficiency of
Insurance."
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MANAGEMENT
The directors and executive officers of the Company, together with their
ages and a brief Description of their employment histories, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICE
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Daniel Cooper....................... 43 President and Director
Victor Wang......................... 32 Chairman of the Board and Director of Marketing
John Tilleli........................ 26 Chief Executive Officer and Director
Gary D. Landis...................... 55 Vice President-Marketing, Secretary and Director
Edward McCabe....................... 40 Treasurer (Chief Financial Officer) and Director
</TABLE>
None of the Company's executive officers intends to devote his full business
time to the affairs of the Company except for Mr Cooper.
The Company's by-laws contain a provision dividing the Board of Directors
into three classes. Initially, Class I, Class II and Class III directors shall
serve terms of one, two and three years, respectively. As the initial term of
each class concludes, directors of that class shall be elected to serve a term
of three years or until their respective successors have been duly elected.
Directors of the Company are not compensated for acting in such capacities.
John Tilleli has been elected to Class I, Edward McCabe and Gary D. Landis
have been elected to Class II, Victor Wang and Dan Cooper have been elected to
Class III. At the Effective Date, the Company intends to add at least two
independent directors, who shall be added to the classes so that the number of
directors in each class is as evenly distributed as possible.
Daniel Cooper has served as a Director and officer, since September 1996,
and has been President of the Company and its subsidiaries since August 1997. He
founded The Stock Shop of Montana, LLC, the predecessor of the Stock Shop, and
has served as its President since its inception. Mr. Cooper founded Cooper Arms
and served as its President and a Director from October 1990 to February 1995
and from August 1996 to date. Mr. Cooper organized the North American Divide
Expedition in 1980 and led the Expedition on a 6 year hike of the North American
Continental Divide from Mexico to the Bering Strait of Alaska. This
accomplishment was recognized by the Guinness Book of World Records. Mr. Cooper
holds a BS in Environmental Studies and International Affairs from Lewis and
Clark College (1979).
Victor Wang has served as Chairman of the Board and Director of Marketing of
the Company since its inception. Mr. Wang is a principal shareholder of Duke &
Co., Inc., a registered broker/dealer, and has served as an officer and director
of Duke & Co., Inc. since 1993. From 1991 to 1993, Mr. Wang served as Chairman
of the Board and Chief Executive Officer of Questron Technologies Incorporated,
a publicly traded alternate dispute resolution company. Mr. Wang has a BS from
Johns Hopkins University (1989) and is licensed as a General Securities
Principal and Corporate Securities Limited Representative.
John Tilleli has served as a Director and Chief Executive Officer of the
Company since its inception. He has served as Secretary of The Stock Shop of
Montana, LLC, the predecessor of Stock Shop, Inc., since March 1996. Mr. Tilleli
is presently employed as Vice President of Corporate Finance of Duke & Co.,
Inc., a registered broker/dealer, where he works on mergers, acquisitions, and
other corporate finance matters. He has held that position since February, 1994.
From 1993 to 1994, Mr. Tilleli was employed as a registered representative for
Russo Securities, Inc. Mr. Tilleli has a BBA in Finance from the University of
Miami (1993) and is licensed as a General Securities Representative, General
Securities Options Principal and Uniform Securities Agent.
Gary D. Landis is one of CVC's founders and has served as a Director of the
Company and CVC since CVC's inception. He also served as CVC's Chief Executive
Officer from 1991 until September 1996, when he was appointed Vice President of
Marketing. Mr. Landis operates a consulting business, Gary Landis Consulting.
Mr. Landis was the managing director of all healthcare businesses at Compton
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Partners, a division of Saatchi & Saatchi Advertising. Mr. Landis has been in
the advertising business for 33 years, having spent 29 years with Saatchi &
Saatchi both in the United States and abroad. During that period, Mr. Landis
managed subsidiary companies for 19 years. Mr. Landis has a BA from the
University of Illinois.
Edward McCabe has served as a Director, Treasurer and Chief Financial
Officer of the Company since its inception. Mr. McCabe has been employed as
Chief Financial Officer of Duke & Co., Inc., a registered broker/dealer, since
December 1995. From January 1993 to November 1995, Mr. McCabe served as the
Controller for Concord Holding Corporation, a publicly traded company engaged in
the financial services business. Prior thereto, he served as the Controller for
Adler Coleman & Co. from December 1984 to July 1992. Mr. McCabe holds a BS from
St. Peter's College (1982).
EMPLOYMENT AGREEMENTS
None of the Company's executive officers are subject to employment
agreements with the Company, except for Mr. Cooper whose employment agreement
with The Stock Shop of Montana, LLC, Stock Shop's predecessor, was assigned to
Stock Shop in connection with the September 1996 acquisition of The Stock Shop
of Montana, LLC. See "Certain Transactions." Mr. Cooper receives an annual
salary of $48,000 and may receive a performance related bonus or stock options.
Mr. Cooper's three year employment contract expires on March 31, 1999 and
continues on the same terms and conditions until that time. The Company intends
to enter into employment agreements with each of Messrs. Wang, Tilleli, McCabe
and Landis. Although no terms have yet been agreed upon, the Company expects
that none of these employment agreements will provide for an annual salary in
excess of $100,000.
EXECUTIVE COMPENSATION
The following table sets forth cash compensation paid by the Company to, as
well as any other compensation paid to or earned by, the Chief Executive Officer
of the Company and those executive officers, if any, compensated at greater than
$100,000 for services rendered to the Company in all capacities during the
fiscal year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-----------------
ANNUAL COMPENSATION AWARDS
----------------------------------------------- -----------------
OTHER ANNUAL RESTRICTED
COMPENSATION STOCK
NAME AND YEAR SALARY BONUS AWARD(S)
PRINCIPAL POSITION ($) ($) ($) ($) (#)
(A) (B) (C) (D) (E) (F)
- ---------------------------------------------- --------- --------- ------ --------------------- -----------------
<S> <C> <C> <C> <C> <C>
John Tilleli, CEO............................. 1996 0 0
Joe Bishoff(2)................................ 82,131
1996 1995 48,577
<CAPTION>
SECURITIES
UNDERLYING
NAME AND OPTIONS/SARS
PRINCIPAL POSITION
(A) (G)
- ---------------------------------------------- -------------
<S> <C>
John Tilleli, CEO............................. 50,000(1)
Joe Bishoff(2)................................
</TABLE>
- ------------------------
(1) Represents shares of Common Stock underlying currently exercisable options.
(2) Mr. Bishof served as the Chief Executive Officer of Cooper Arms until
shortly prior to the Company's acquisition of Cooper Arms in 1996.
35
<PAGE>
EMPLOYEE STOCK OPTION PLAN
In September 1997, the Board of Directors adopted and approved the Company's
1997 Stock Option Plan (the "Plan" or the "1997 Stock Option Plan"). The Plan is
to be administered by the Board of Directors or by the committee appointed by
the Board (the "Plan Administrator"). Pursuant to the Plan, options to acquire
an aggregate of 600,000 shares of Common Stock may be granted, 275,000 of which
have been granted.
Each of the Company's subsidiaries had adopted a stock option plan. In
December 1997, the Company cancelled each subsidiary's plan so that no shares or
options will be issued pursuant to those plans.
The following table set forth options issued by the Stock Shop in 1996.
These options were exchanged for options to purchase the Company's Common Stock
on identical terms pursuant to the Company's September 1997 private offering in
which it acquired 97% of CVC.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
(INDIVIDUAL GRANTS)
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO
OPTIONS/SARS EMPLOYEES IN EXERCISE OR BASE
NAME GRANTED (#) FISCAL YEAR PRICE ($/SH) EXPIRATION DATE
(A) (B) (C) (D) (E)
- ----------------------------------------------- ------------- ----------------- ---------------- ---------------
John Tilleli, CEO.............................. 50,000 18% $ .0001 9/1/2001
Daniel Cooper, President....................... 25,000 9% $ 3.45 9/1/2001
Victor Wang, Chairman.......................... 150,000 55% $ .0001 9/1/2001
Edward McCabe, CFO............................. 50,000 18% $ .0001 9/1/2001
</TABLE>
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's certificate of incorporation and by-laws provide that the
Company shall indemnify all officers and directors of the Company to the full
extent permitted by the Delaware General Corporation Law. Under such provision,
any director or officer who is in his capacity as such is made or threatened to
be made a party to any suit or proceeding, may be indemnified if the Board of
Directors determines such director or officer acted in good faith and in manner
he or she reasonably believed to be in or not opposed to the best interest of
the Company. The certificate of incorporation, by-laws and Delaware law further
provide that such indemnification is not exclusive of any other rights to which
such individual may be entitled under the certificate of incorporation, the
by-laws, any agreement, vote of shareholders or disinterested directors or
otherwise.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted or directors of officers pursuant to the foregoing provision
otherwise, the Company has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy and
therefore is unenforceable.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information concerning stock
ownership of all persons known by the Company to own beneficially five percent
or more of the outstanding Common Stock, each Director and certain executive
officers and all officers and directors as a group, and as adjusted to reflect
the sale of the Units offered hereby.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE OF OUTSTANDING
NAME AND ADDRESS OF OF BENEFICIAL COMMON STOCK OWNED
BENEFICIAL OWNER OR OWNERSHIP ----------------------------------
IDENTITY OF GROUP NUMBER OF SHARES BEFORE OFFERING AFTER OFFERING
- -------------------------------------------------------------- ------------------ ----------------- ---------------
<S> <C> <C> <C>
Victor Wang(2)................................................ 1,730,000 55.0% 37.2%
The C.I.T. Trust(2)........................................... 1,380,000 49.3% 32.1%
O. Milton Gossett............................................. 171,884 6.1% 4.0%
156 Ridgefield Ave.
South Salem, NY 10590
John Tilleli (4).............................................. 50,000 1.8% 1.2%
Gary D. Landis................................................ 132,446 4.7% 3.1%
12 Taylor Lane
Westport, CT 06880
Edward McCabe (4)............................................. 50,000 1.8% 1.2%
Daniel Cooper (5)............................................. 370,595 13.2% 8.6%
All officers and directors as a group (5 persons)............. 2,333,041 71.7% 49.0%
</TABLE>
- ------------------------
(1) Except as set forth herein the business address of each individual is c/o
Connecticut Valley Classics, 4004 Highway 93 North, Stevensville, MT 59870.
(2) Includes 350,000 shares underlying currently exercisable options and
1,380,000 shares owned by the C.I.T. Trust, of which Mr. Wang disclaims
beneficial ownership.
(3) The beneficiaries of the C.I.T. Trust are the children of the Company's
Chairman, Victor Wang.
(4) Includes 50,000 shares underlying currently exercisable options.
(5) Includes 6,250 shares underlying currently exercisable options. Does not
include 18,750 shares issuable upon exercise of options which are not
currently exercisable and will not become exercisable within sixty days from
the date of this Prospectus.
CERTAIN TRANSACTIONS
CVC is currently indebted to Messrs. Landis, Gossett, Dean Jendsen and
George Carey, all of whom are or were officers, directors or stockholders of
CVC, in the aggregate amount of $300,000, plus interest, accruing at the rate of
9% per annum, of approximately $37,500 since June 1995. The loans are to be
repaid in eight quarterly installments. The first installment will be due on the
earlier of November 1, 1998 or the closing of this Offering.
In December 1995, Victor Wang, a principal stockholder and director received
200,000 options to purchase shares of CVC's Common Stock as additional
consideration for a $75,000 loan made by Mr. Wang to the Company. The options
are exercisable at $2.76 per share for a three year period terminating in
December 1998. The Company repaid the $75,000 loan in March 1996. These 200,000
options were exchanged for 200,000 options to purchase shares of the Company's
Common Stock pursuant to the Company's September 1997 Private Offering.
Between May 1992 and December 1, 1997, a company in which Victor Wang is a
principal advanced CVC approximately $123,323, none of which has been repaid. On
December 1, 1997, the Company executed a promissory note to evidence these
advances. Pursuant to the note, the Company is to repay the
37
<PAGE>
principal, together with interest accruing at 6% per annum from December 1,
1997, on the earlier of (i) thirteen months following the closing of the
Offering, or (ii) November 30, 2000. Additionally, Mr. Wang loaned $50,000 to
CVC in 1996 pursuant to a promissory note bearing interest at a rate of 9% per
annum. This loan was repaid in September 1996.
Between September 1995 and May 1997, the Company sold a total of 553,954
shares of stock in three separate private placements at purchase prices ranging
from $3.45 to $3.85 per share. Duke & Co., Inc., a company in which the
Company's Chairman is a principal, acted as placement agent in these offerings
and received a commission of 10% of the gross proceeds and a non-accountable
expense allowance of 3% of the gross proceeds.
In March 1996, Mr. Wang acquired a 70% membership interest in The Stock Shop
of Montana, LLC for $86,500. In connection with such transaction, Mr. Wang
agreed to use his best efforts to assist The Stock Shop of Montana, LLC to (i)
obtain a $200,000 line of credit, and (ii) restructure its secured debt. In
order to aid the Company in obtaining this line of credit, Mr. Wang hypothecated
a $30,000 certificate of deposit as collateral for this line of credit with
Rocky Mountain Bank, Rocky Mountain Bank continues to hold this certificate of
deposit in Mr. Wang's name as collateral for the Company's loan in the amount of
$15,000.
In September 1996, the Stock Shop acquired The Stock Shop of Montana, LLC
and Messrs. Wang, Tilleli and McCabe were appointed as officers and/or directors
of the Stock Shop.
In November 1996, CVC acquired all of the issued and outstanding common
stock of the Stock Shop from its stockholders, which included Mr. Wang and Mr.
Daniel Cooper, officers, directors and stockholders of CVC, by an exchange of
1,300,000 shares of the CVC's Common Stock for 1,300,000 shares of the Stock
Shop's common stock. In addition, CVC replaced options previously issued to
employees of the Stock Shop with options to purchase the same number of shares
of CVC's Common stock on the same terms, which included options to purchase
150,000 shares of the Stock Shop's common stock to Mr. Wang, options to purchase
50,000 shares to each of Messrs. Tilleli and McCabe and options to purchase
25,000 shares to Mr. Cooper. Each of these options to acquire CVC Common Stock
were exchanged in September 1997 for options to acquire the Company's Common
Stock. See "Management" and "Principal Stockholders."
In September 1996, a company in which Victor Wang is a principal paid
$1,000,000 to CVC. No additional stock was issued to Mr. Wang or his company as
part of this transaction. For financial reporting purposes, the Company has
accounted for this as a contribution to additional paid in capital and no
portion of this $1,000,000 will be repaid.
In September 1997, the Company completed an exchange offer as a result of
which CVC became a majority owned (approximately 97%) subsidiary of the Company.
Pursuant to the exchange, the Company issued an aggregate of 2,747,476 shares of
its Common Stock and granted options to acquire up to 475,000 shares of its
Common Stock. There exists the potential that an additional 230,000 options to
acquire stock of CVC will be granted to certain of CVC's current and former
principals, thereby decreasing the percentage of ownership the Company has in
CVC. However, even if all 230,000 CVC options are granted and exercised, CVC
will continue to be a majority owned subsidiary of the Company.
In the future, the Company will present all proposed transactions between
the Company and its officers, directors or 5% stockholders, and their affiliates
to the Board of Directors for its consideration and approval. Any such
transaction will require approval by a majority of the disinterested directors
and such transactions will be on terms no less favorable than those available to
disinterested third parties.
38
<PAGE>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, $.0001 par value per share, and 1,000,000 shares of "blank check"
preferred stock, $.0001 par value per share. As of the date of the Prospectus,
2,797,476 shares of Common Stock and no shares of Preferred Stock are issued and
outstanding.
The following are brief descriptions of the securities offered hereby and
other securities of the Company. The rights of the holders of shares of the
Company's capital stock are established by the Company's certificate of
incorporation, the Company's by-laws and Delaware law. The following statements
do not purport to be complete or give full effect to statutory or common law,
and are subject in all respects to the applicable provisions of the certificate
of incorporation, by-laws and state law.
UNITS
Each Unit consists of one share of Common Stock and one Warrant to purchase
one share of Common Stock. The securities comprising the Units will be
separately tradable or transferable immediately upon issuance.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share, and subject
to the rights of holders of the of preferred stock, if any, to receive dividends
when, as and if declared by the Board of Directors and to share ratably in the
assets of the Company legally available for distribution to holders of Common
Stock in the event of the liquidation, dissolution or winding up of the Company.
Holders of the Common Stock do not have subscription, redemption, conversion or
preemptive rights.
Each share of Common Stock is entitled to one vote on any matter submitted
to the holders, including the election of directors. Holders of Common Stock do
not have cumulative voting rights. Therefore, holders of a majority of the
outstanding shares of Common Stock entitled to vote for the election of
directors may elect all of the directors to be elected, if they so choose, and
in such event, the holders of the remaining shares will not be able to elect any
of the Company's directors. Except as otherwise required by the Delaware General
Corporation Law, all stockholder action (other than the election of directors,
who are elected by plurality vote), is subject to approval by a majority of the
shares of Common Stock present at a stockholders' meeting at which a quorum (a
majority of the issued and outstanding shares of Common Stock) is present in
person or by proxy, or by written consent pursuant to Delaware law.
All shares of Common Stock outstanding are fully paid and non-assessable,
and the shares of Common Stock offered hereby and the shares of Common Stock
issuable upon exercise of the Warrants, when issued upon payment of the purchase
price set forth on the cover page of the Prospectus or payment of the exercise
price specified in the Warrants, as the case may be, will be fully paid and
non-assessable.
The Board of Directors is authorized to issue additional shares of Common
Stock within the limits authorized by the Company's Certificate of Incorporation
without further stockholder action. The Company has agreed with the Underwriter
that it will not issue any securities, including but not limited to shares of
Common Stock, prior to , [three years from the Effective Date]
except as disclosed in or contemplated by this Prospectus, without the prior
written consent of the Underwriter.
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
The Warrants offered hereby will be issued in registered form under a
Warrant Agreement (the "Warrant Agreement") between the Company and Continental
Stock Transfer & Trust Company, as Warrant Agent (the "Warrant Agent").
39
<PAGE>
Each Warrant will be separately transferable and will entitle the registered
holder thereof to purchase one share of Common Stock at $6.00 per share (subject
to adjustment as described below) commencing 2000 (two years from the
Effective Date) and ending, , 2003 (five years from the
Effective Date) (the "Exercise Period"). The exercise price and the number of
shares of Common Stock issuable upon the exercise of each Warrant are subject to
adjustment in the event of a stock split, stock dividend, recapitalization,
merger, consolidation or certain other events. A holder of Warrants may exercise
such Warrants by surrendering the certificate evidencing such Warrants to the
Warrant Agent, together with the form of election to purchase on the reverse
side of such certificate attached thereto properly completed and executed and
the payment of the exercise price and any transfer tax. If less than all of the
Warrants evidenced by a Warrant certificate are exercised, a new certificate
will be issued for the remaining number of Warrants.
The Company has authorized and reserved for issuance a number of shares of
Common Stock sufficient to provide for the exercise of the Warrants. When
issued, upon payment of the exercise price specified in the Warrants, each share
of Common Stock will be fully paid and nonassessable. Holders of Warrants will
not have any voting or other rights as stockholders of the Company unless and
until Warrants are exercised and shares issued pursuant thereto.
Under certain conditions, the Warrants may be redeemed by the Company after
, 1999 with the prior written consent of the Underwriter at a
redemption price of $.10 per Warrant upon not less than 30 days prior written
notice to the holders of such Warrants, provided the closing bid price of the
Common Stock has been at least $7.50 for 20 consecutive trading days ending on
the third day prior to the date the notice of redemption is given. The Warrants
will be exercisable until the close of business on the day immediately preceding
the date fixed for the redemption of the Warrants in the notice of redemption.
The Company will pay the Underwriter a fee of 5% of the exercise price of
each Warrant exercised, provided (i) the market price of the Common Stock on the
date the Warrant was exercised was equal to or greater than the Warrant exercise
price on that date, (ii) the funds constituting the exercise price of the
Warrant was solicited by the Underwriter, (iii) the Warrant was not held in a
discretionary account, (iv) the disclosure of compensation arrangements was made
in documents provided to the holders of the Warrants, (v) the solicitation of
the exercise of the Warrant was not a violation of Rule 101 of Regulation M
under the Exchange Act and (vi) the Underwriter is designated in writing as the
soliciting NASD member. The Underwriter and any other soliciting broker/dealers
will be prohibited from engaging in any market making activities or solicited
brokerage activities with regard to the Company's securities during the periods
prescribed by Rule 101 of Regulation M before the solicitation of any Warrant
until the later of the termination of such solicitation activity or the
termination of any right the Underwriter and any other soliciting broker/dealer
may have to receive a fee for the solicitation of the exercise of the Warrants.
For a holder of a Warrant to exercise the Warrant, there must be a current
registration statement on file with the Securities and Exchange Commission and
various state securities commissions. The Company will be required to file
post-effective amendments to the registration statement when events require such
amendments and to take appropriate action under the state securities laws. While
it is the Company's intention to file post-effective amendments when necessary
and to take appropriate action under state securities laws, there can be no
assurance that the Company will file all post-effective amendments required to
maintain the effectiveness of the registration statement or that the Company
will take all appropriate action under state securities laws. If the
registration statement is not kept current for any reason, the Warrants will not
be exercisable, and holders thereof may be deprived of value.
PREFERRED STOCK
The Company is authorized to issue up to 1,000,000 shares of "blank check"
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without further stockholder approval, to issue
40
<PAGE>
preferred stock with dividend, liquidation, conversion, voting or other rights
that could decrease the amount of earnings and assets available for distribution
to holders of Common Stock or adversely affect the voting power or other rights
of the holders of the Company's Common Stock. In the event of issuance, the
preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company. As of
the date of the Prospectus, no shares of preferred stock are outstanding. The
Company has no present intention to issue any shares of preferred stock. The
Company has agreed with the Underwriter that, except for issuances disclosed in
or contemplated by this Prospectus, it will not issue any securities, including
but not limited to any shares of preferred stock, prior to ,
2001 without the prior written consent of the Underwriter.
STATUTORY PROVISIONS AFFECTING STOCKHOLDERS
Following the consummation of the Offering, the Company will be subject to
Section 203 of the Delaware General Corporation Law, the State of Delaware's
"business combination" statute. In general, such statute prohibits a publicly
held Delaware corporation from engaging in various business combination"
transactions with any "interested stockholder" for a period of three years after
the date of the transaction in which the person became an "interested
stockholder," unless (i) the transaction is approved by the Board of Directors
prior to the date the interested stockholder obtained such status; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
"interested stockholder," the "interested stockholder" owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned by (a) persons who are directors and officers and
(b) employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) on or subsequent to such date
the "business combination" is approved by the Board of Directors and authorized
at an annual or special meeting of stockholders by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
"interested stockholder." A "business combination" includes mergers, asset sales
and other transactions. An "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years, did own) 15% or
more of a corporation's voting stock. The statute could prohibit or delay
mergers or other takeover or change in control attempts with respect to the
Company and, accordingly, may discourage attempts to acquire the Company.
REPORTS TO STOCKHOLDERS
The Company intends to furnish its stockholders with annual reports
containing financial statements audited and reported upon by its independent
certified public accountants after the end of each fiscal year, and will make
available such other periodic reports as the Company may deem to be appropriate
or as may be required by law. The Company's fiscal year end December 31. The
Company has filed a Registration Statement on Form 8-A with the Commission to
register under, and be subject to the reporting requirements of, the Exchange
Act.
TRANSFER AGENT AND WARRANT AGENT
The Company has engaged Continental Stock Transfer & Trust Co. to act as
Transfer Agent for the Company's Units and Common Stock and Warrant Agent for
the Warrants.
41
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
All of the 2,797,476 shares of Common Stock of the Company outstanding as of
the date of this Prospectus, are "restricted securities." Of this amount
2,048,675 are owned by "affiliates" of the Company, as those terms are defined
in Rule 144 promulgated under the Securities Act. Absent registration under the
Securities Act, the sale of such shares is subject to Rule 144, as promulgated
under the Securities Act. 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 of Common Stock for at
least one year is entitled to sell in brokerage transactions, within any
three-month period, a number of shares that does not exceed the greater of 1% of
the total number of outstanding shares of the same class, or if the Common Stock
is quoted on NASDAQ or a stock exchange, the average weekly trading volume
during the four calendar weeks preceding the sale. Rule 144 also permits a
person who presently is not and who has not been an affiliate of the Company for
at least three months immediately preceding the sale and who has beneficially
owned the shares of Common Stock for at least two years to sell such shares
without regard to any of the volume limitations as described above. Holders of
2,757,475 shares of Common Stock have certain registration rights. All of the
Company's existing securityholders, including those with registration rights,
have agreed not to sell or otherwise dispose of any of their shares of Common
stock now owned or issuable upon the exercise of currently exercisable warrants
for a period of two years from the date of this Prospectus, without the prior
written consent of the Underwriter. No prediction can be made as 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 of the Company's securities prevailing
form time to time. The possibility that substantial amounts of Common Stock may
be sold under Rule 144 into the public market may adversely affect prevailing
market prices for the Common Stock and could impair the Company's ability to
raise capital in the future through the sale of equity securities.
42
<PAGE>
UNDERWRITING
Briarwood Investment Counsel Inc. (the "Underwriter") has agreed, subject to
the terms and conditions contained in the Underwriting Agreement, to purchase
from the Company 1,500,000 Units, each consisting of one share of Common Stock
and one Warrant. The Underwriter is committed to purchase and pay for all of the
Units offered hereby if any of such securities are purchased. The Units are
being offered by the Underwriter subject to prior sale, when, as and if
delivered to and accepted by the Underwriter and subject to approval of certain
legal matters by counsel and to certain other conditions.
The Underwriter has advised the Company that it proposes to offer the Units
to the public at the public offering price set forth on the cover page of this
Prospectus. The Underwriter may allow to certain dealers who are members of the
National Association of Securities Dealers, Inc. the ("NASD") concessions, not
in excess of $ per Unit.
The Company has granted to the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 225,000 additional
Units at the public offering price set forth on the cover page of this
Prospectus, less the underwriting discounts and commissions. The Underwriter may
exercise this option from time to time, in whole or in part, solely for the
purpose of covering overallotments, if any, made in connection with the sale of
the Units offered hereby.
The Company has agreed to pay to the Underwriter a nonaccountable expense
allowance of 3% of the gross proceeds of this offering ($229,500). The Company
has also agreed to pay all expenses in connection with qualifying the shares of
Common Stock and Warrants included in the Units offered hereby for sale under
the laws of such states as the Underwriter may designate, including expenses of
counsel retained for such purpose by the Underwriter.
The Company has agreed to sell to the Underwriter and its designees, for an
aggregate of $10.00 warrants (the "Underwriter's Warrants") to purchase up to
150,000 shares of Common Stock at an exercise price of $5.50 per share and
150,000 Warrants at an exercise price of $.11 per Warrant (110% of the public
offering price per Security). The Underwriter's Warrants may not be sold,
transferred, assigned or hypothecated for one year from the date of this
Prospectus, except to the officers and partners of the Underwriter or members of
the selling group, and are exercisable during the four-year period commencing
one year from the date of this Prospectus (the "Warrant Exercise Term"). During
the Warrant Exercise Term, the holders of the Underwriter's Warrants are given,
at nominal cost, the opportunity to profit form a rise in the market price of
the Common Stock. To the extent that the Underwriter's Warrants are exercised,
dilution to the interests of the Company's shareholders will occur. Further, the
terms upon which the Company will be able to obtain additional equity capital
may be adversely affected since the holders of the Underwriter's Warrants can be
expected to exercise them at a time when the Company would, in all likelihood,
be able to obtain any needed capital on terms more favorable to the Company than
those provided in the Underwriter's Warrants. Any profit realized by the
Underwriter on the Sale of the Underwriter's Warrants, the underlying shares of
Common Stock or the underlying Warrants, or the shares of Common Stock issuable
upon any exercise of such underlying Warrants, may be deemed additional
underwriting compensation. Subject to certain limitations and exclusions, the
Company has agreed, at the request of the holders of a majority of the
Underwriter's Warrants, at the Company's expense, to register the Underwriter's
Warrants, the shares of Common Stock and Warrants underlying the Underwriter's
Warrants, and the shares of Common Stock issuable upon exercise of the
underlying Warrants, under the Securities Act on one occasion during the
three-year period commencing one year from the date of this Prospectus and to
include such Underwriter's Warrants and such underlying securities in any
appropriate registration statement which is filed by the Company during the
Warrant Exercise Term. The Units issuable upon exercise of the Underwriter's
Warrant and the Securities of which the Units are comprised of are being
registered by this Prospectus. Additionally, the Company has granted the
Underwriter piggyback registration rights with respect to these Securities for a
period of seven years.
43
<PAGE>
The Company has agreed, in connection with the exercise of the Warrants
pursuant to solicitation (commencing one year from the date of this Prospectus),
to pay to the Underwriter a fee of 5% of the exercise price for each Warrant
exercised, provided, however, that the Underwriter will not be entitled to
receive such compensation in Warrant exercise transactions in which (i) the
market price of Common Stock at the time of exercise is lower than the exercise
price of the Warrants; (ii) the Warrants are held in any discretionary account;
(iii) disclosure of compensation arrangements is not made, in addition to the
disclosure provided in this Prospectus, in documents provided to holders of the
Warrants at the time of exercise; (iv) the exercise of Warrants is unsolicited
by the Underwriter; or (v) the solicitation of exercise of the Warrants was in
violation of Regulation M promulgated under the Exchange Act.
The Company has agreed, for a period of three years from the date of this
Prospectus, to engage a designee of the Underwriter as a non-voting advisor to
the Company's Board of Directors or, at the Underwriter's request, to nominate
and use its best efforts to elect a designee of the Underwriter as a director of
the Company. The Underwriter has not yet, and has no current intention to
exercise its right to designate such person.
In addition, the Company has agreed to enter into a consulting agreement to
retain the Underwriter as a financial consultant for a period of two years
following the consummation of this offering at a monthly fee of $2,083.34 (or an
aggregate of $50,000), $25,000 of which aggregate fee is payable upon the
closing of this Offering and the balance on the first anniversary thereof. The
consulting agreement will not require the consultant to devote a specific amount
of time to the performance of its duties thereunder. It is anticipated that
these consulting services will be provided by principals of the Underwriter
and/or members of the Underwriter's corporate finance department who, however,
have not been designated as of the date hereof. In the event that the
Underwriter originates a financing or a merger, acquisition, joint venture or
other transaction to which the Company is a party, the Underwriter will be
entitled to receive a finder's fee in consideration for origination of such
transaction.
The Company has agreed to indemnify the Underwriter against certain civil
liabilities, including liabilities under the Securities Act.
The Company's officers, directors and shareholders have agreed not to sell
or otherwise dispose of any of their shares of Common Stock for a period of two
years from the date of this Prospectus, without the prior written consent of the
Underwriter other than in connection with private transfers pursuant to which
the transferees agree to be bound by the same provisions.
Prior to this offering, there has been no public trading market for the
Units or the Common Stock or Warrants. Consequently, the initial public offering
price of the Units and the exercise price of the Warrants have been determined
by negotiations between the Company and the Underwriter. Among the factors
consider in determining the initial public offering price and the exercise price
were the Company's financial condition and prospects, management, market prices
of similar securities of comparable publicly-traded companies, certain financial
and operating information of companies engaged in activities similar to those of
the Company and the general condition of the securities markets.
Although it has no obligation to do so, the Underwriter intends to engage in
market-making actives or solicited brokerage activities with respect to the
purchase or sale of Common Stock or Warrants in the over-the-counter market
where such securities will trade. However, no assurance can be given that the
Underwriter will continue to participate as a market maker in the securities of
the Company or that another broker/dealer will make a marker in such securities.
The Underwriter has the right to act as the Company's exclusive agent in
connection with any future solicitation of holders of the Warrants to exercise
their Warrants. Unless granted an exemption by the Securities and Exchange
Commission from Regulation M under the Exchange Act, the Underwriter will be
prohibited from engaging in any market-making activities or solicited brokerage
activities with regard to the Company's securities during the period prescribed
by Regulation M before the solicitation of the exercise of any Warrant based
upon a prior solicitation until the later of the termination of such
solicitation activity or the termination by waiver or
44
<PAGE>
otherwise of any right the Underwriter many have to receive a fee for the
exercise of the Warrants following such solicitation. As a result, the
Underwriter and soliciting broker/dealers may be unable to continue to make a
market for the Company's securities during certain periods while the Warrants
are exercisable. Such a limitation, while in effect, could impair the liquidity
and market price of the Company's securities.
While certain officers of the Underwriter have significant experience in
corporate financing and the underwriting of securities, the Underwriter has not
previously underwritten any public offering. Accordingly, there can be no
assurance that the Underwriter's limited public offering experience will not
affect the Company's offering of the Units and subsequent development of a
trading market, if any.
LEGAL MATTERS
Certain legal matters in connection with the securities being offered hereby
will be passed upon the Company by Gersten, Savage, Kaplowitz & Fredericks, LLP
("GSKF"), New York, New York. GSKF owns 110,000 shares of Common Stock and
50,000 Warrants which are identical to the Warrants offered hereby. Certain
legal matters will be passed upon for the Underwriter by Zimet, Haines, Friedman
& Kaplan, New York, New York.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by BDO Seidman, LLP, independent certified public accountants, to
the extent and for the periods (which contain an explanatory paragraph regarding
uncertainties relating to the Company being a going concern) set forth in their
report appearing elsewhere herein, and is included in reliance upon such report
given upon the authority of said firm as experts in auditing and accounting.
The financial statements of Cooper Firearms, Inc. included in this
Prospectus have been audited by David Tarlow & Co., P.C., independent certified
public accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein, and is included in reliance upon such report given
upon the authority of said firm as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2 under the Securities Act with respect to the
Securities offered hereby (the "Registration Statement"). This Prospectus does
not contain all the information set forth in the Registration Statement and the
exhibits thereto as permitted by the Rules and Regulation of the Commission. For
further information with respect to the Company and such securities, reference
is made to the Registration Statement and to the exhibits filed therewith.
Statements contained in this Prospectus as to the contents of any contracts or
other document referred to herein are not necessarily complete and where such
contract or other document is an exhibit to the Registration Statement, each
such statement is qualified in all aspects by the provision of such exhibit to
which reference is made for a full statement of the provisions thereof. The
Registration Statement including exhibits filed therewith, may be inspected,
without charge, at the principal office of the Commission located at 450 Fifth
Street N.W., Room 1024, Washington, D.C. 20549. Copies of all or any part of the
Registration Statement (including the exhibits thereto) also may be obtained
from the Public Reference Section of the Commission at its principal office in
Washington, D.C., at the Commission's prescribed rates. Electronic registration
statements filed through the Electronic Data Gathering Analysis and Retrieval
system are publicly available through the Commission's web site at
http: //www.sec.gov.
On the date of the Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports, proxy and
information statements and other information with the Securities and Exchange
45
<PAGE>
Commission. Such reports, proxy and information statements and other information
can be inspected and copies at the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and
copies of such material also may be obtained from the Public Reference Section
of the Commission at prescribed rates. The Commission maintains a web site at
http: //www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically. The Company
intends to furnish its stockholders with annual reports containing audited
financial statements and such other reports containing audited financial
statements and such other reports as the Company deems appropriate or as may be
required by law.
46
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
-----------
<S> <C>
CONNECTICUT VALLEY SPORTS, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants...................................................... F-1
Financial Statements:
Consolidated Balance Sheets........................................................................... F-2
Consolidated Statements of Operations................................................................. F-3
Consolidated Statements of Stockholders' Equity....................................................... F-4
Consolidated Statements of Cash Flows................................................................. F-5
Notes to Consolidated Financial Statements............................................................ F-7
COOPER FIREARMS, INC.
Report of Independent Certified Public Accountants...................................................... F-20
Financial Statements:
Statements of Operations.............................................................................. F-21
Statements of Stockholders' Equity.................................................................... F-22
Statements of Cash Flows.............................................................................. F-23
Notes to Financial Statements......................................................................... F-24
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Officers and Directors
Connecticut Valley Sports, Inc.
Stevensville, Montana
We have audited the accompanying consolidated balance sheet of Connecticut
Valley Sports, Inc. (formerly Connecticut Valley Classics, Inc.) and
Subsidiaries as of December 31, 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years ended December 31,
1996 and 1995. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 Connecticut
Valley Sports, Inc. and Subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for the years ended December 31, 1996 and
1995, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As discussed in Note 3 to the
financial statements, the company has suffered recurring losses from operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
<TABLE>
<S> <C> <C>
/s/ BDO SEIDMAN, LLP
---------------------------------------
BDO Seidman, LLP
</TABLE>
New York, New York
February 15, 1997, except for Note 1
which is September 17, 1997
F-1
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
UNAUDITED
ASSETS
CURRENT ASSETS
Cash................................................................................ $ 231,534 $ 24,790
Accounts receivable, net of allowance for doubtful accounts of $47,860 in 1996
and $20,643 in 1997............................................................... 46,653 48,034
Inventories......................................................................... 475,827 477,329
Other current assets................................................................ 18,862 7,872
------------ -------------
Total current assets................................................................ 772,876 558,025
------------ -------------
PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated depreciation of $182,884 in 1996
and $265,486 in 1997.............................................................. 278,454 353,566
------------ -------------
DEFERRED COSTS
Deferred costs, less accumulated amortization of $101,590 in 1996 and $119,064 in
1997.............................................................................. 29,513 152,039
------------ -------------
OTHER ASSETS
Due from stockholders............................................................... 30,000 30,000
Due from affiliated companies....................................................... 14,269 14,270
Other assets........................................................................ 1,000 --
------------ -------------
Total other assets.............................................................. 45,269 44,270
------------ -------------
Total assets.................................................................... $1,126,112 $ 1,107,900
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses............................................... $ 280,022 $ 306,485
Customer deposits................................................................... 16,425 31,199
Federal excise tax payable.......................................................... 60,454 46,205
Notes payable....................................................................... 41,740 42,906
Notes payable to stockholders....................................................... 23,770 22,450
Accrued interest.................................................................... 42,150 62,400
Due to affiliated companies......................................................... 108,232 123,323
------------ -------------
Total current liabilities....................................................... 572,793 634,968
Notes payable--less current maturities.............................................. -- 84,203
Notes payable to stockholders....................................................... 300,000 300,000
Deferred credit on acquisition...................................................... 126,564 124,171
------------ -------------
Total liabilities............................................................... 999,357 1,143,342
------------ -------------
Commitments and Contingencies
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock $.0001 par value, 1,000,000 shares authorized and -0- shares issued
and outstanding in 1997........................................................... -- --
Common stock $.01 par value, 3,000,000 shares authorized and 2,655,471 shares issued
and outstanding in 1996 and $.0001 par value, 30,000,000 shares authorized and
2,747,476 shares issued and outstanding in 1997................................... 26,555 275
Additional paid-in-capital.......................................................... 2,872,769 3,376,352
Accumulated deficit................................................................. (2,772,569) (3,412,069)
------------ -------------
Total stockholders' equity (deficit)............................................ 126,755 (35,442)
------------ -------------
Total liabilities and stockholders' equity...................................... $1,126,112 $ 1,107,900
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------- --------------------------
1995 1996 1996 1997
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
UNAUDITED
Net sales................................................ $ 74,744 $ 244,725 $ 193,796 $ 365,378
Cost of goods sold....................................... 339,246 576,153 355,127 638,311
------------ ------------- ------------ ------------
Gross profit (loss)...................................... (264,502) (331,428) (161,331) (272,933)
------------ ------------- ------------ ------------
OPERATING EXPENSES
Selling, general and administrative expenses........... 332,206 685,800 570,157 456,827
Writedown of inventory to lower of cost or market........ 150,000 -- -- --
Bad debts................................................ -- 73,387 85,574 193
------------ ------------- ------------ ------------
Total operating expenses............................... 482,206 759,187 655,731 457,020
------------ ------------- ------------ ------------
Operating loss......................................... (746,708) (1,090,615) (817,062) (729,953)
------------ ------------- ------------ ------------
OTHER INCOME (EXPENSE)
Other income............................................. -- 11,230 10,166 2,594
Interest expense......................................... (35,755) (29,923) (42,303) (26,164)
------------ ------------- ------------ ------------
Total other income (expense)........................... (35,755) (18,693) (32,137) (23,570)
------------ ------------- ------------ ------------
Loss before minority interests........................... (782,463) (1,109,308) (849,199) (753,523)
Minority interests in net loss of subsidiary............. -- 6,644 2,437 --
------------ ------------- ------------ ------------
Net loss............................................... $ (782,463) $ (1,102,664) $ (846,762) $ (753,523)
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Loss per share........................................... $ (0.75) $ (0.44) $ (0.35) $ (0.27)
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
Weighted average number of shares outstanding............ 1,040,893 2,488,466 2,410,972 2,803,558
------------ ------------- ------------ ------------
------------ ------------- ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
----------------------- PAID-IN ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- ----------- ------------ ------------- --------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Balance--January 1, 1995.................. 470,000 $ 210,000 $ 238,442 $ (887,442) $ (439,000)
Issuance of stock......................... 860,000 8,600 39,123 47,723
Reorganization............................ -- (205,300) 205,300 --
Proceeds from private placement........... 237,269 2,373 816,204 818,577
Expenses related to private placement..... (182,981) (182,981)
Stockholder loans contributed to
capital................................. 365,180 365,180
Net loss--year ended December 31, 1995.... (782,463) (782,463)
---------- ----------- ------------ ------------- --------------
Balance--December 31, 1995................ 1,567,269 $ 15,673 $ 1,481,268 $ (1,669,905) $ (172,964)
---------- ----------- ------------ ------------- --------------
---------- ----------- ------------ ------------- --------------
YEAR ENDED DECEMBER 31, 1996
Balance--January 1, 1996.................. 1,567,269 $ 15,673 $ 1,481,268 $ (1,669,905) $ (172,964)
Issuance of stock......................... 910,000 9,100 58,699 67,799
Contribution of capital................... 1,000,000 1,000,000
Proceeds from private placement........... 178,202 1,782 406,606 408,388
Expenses related to private placement..... (73,804) (73,804)
Net loss--year ended December 31, 1996.... (1,102,664) (1,102,664)
---------- ----------- ------------ ------------- --------------
Balance--December 31, 1996................ 2,655,471 $ 26,555 $ 2,872,769 $ (2,772,569) $ 126,755
---------- ----------- ------------ ------------- --------------
---------- ----------- ------------ ------------- --------------
NINE MONTHS ENDED
SEPTEMBER 30, 1997 UNAUDITED
Balance--January 1, 1997.................. 2,655,471 $ 26,555 $ 2,872,769 $ (2,772,569) $ 126,755
Proceeds from private placement........... 183,993 1,840 706,533 708,373
Expenses related to private placement..... (117,047) (117,047)
Acquisition of minority interest in Cooper
Firearms, Inc........................... 790 8 (8) -- --
Acquisition of and reorganization as
Connecticut Valley Sports, Inc.......... (92,778) (28,128) (85,895) 114,023 --
Net loss--nine months ended September 30,
1997.................................... (753,523) (753,523)
---------- ----------- ------------ ------------- --------------
Balance--September 30, 1997............... 2,747,476 $ 275 $ 3,376,352 $ (3,412,069) $ (35,442)
---------- ----------- ------------ ------------- --------------
---------- ----------- ------------ ------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------------
<S> <C> <C> <C> <C>
1995 1996 1996 1997
----------- ------------- ------------ -----------
<CAPTION>
UNAUDITED
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................ $ (782,463) $ (1,102,664) $ (846,762) $ (753,523)
Adjustments to reconcile net loss to net cash used by operating
activities:
Minority interest in net loss of subsidiary................. -- (6,644) (2,437) --
Depreciation and amortization............................... 73,874 104,996 68,465 97,579
Changes in operating assets, net of effect of acquisition of
Cooper Firearms, Inc.:
(Increase) decrease:
Accounts receivable................................... (22,188) 47,915 (10,312) (1,381)
Inventories........................................... 34,846 (87,873) 76,734 (1,502)
Other current assets.................................. (14,544) 4,773 13,035 10,990
Other assets.......................................... (1,000) -- -- 1,000
Increase (decrease) in:
Accounts payable and accrued expenses................. 125,339 (69,053) (129,086) 26,463
Customer deposits..................................... (12,756) 9,891 34,377 14,774
Federal excise tax payable............................ -- (51,924) (8,222) (14,249)
Accrued interest payable.............................. 15,150 27,000 38,203 20,250
----------- ------------- ------------ -----------
Net cash used by operating activities........................... (583,742) (1,123,583) (766,005) (599,599)
----------- ------------- ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Repayment of loan receivable.................................... -- 13,000 13,000 --
Acquisition of subsidiary....................................... -- (30,000) (30,000) --
Cash of acquired subsidiary..................................... -- 37,477 37,477 --
Purchases of property and equipment............................. (171,401) (126,205) (77,412) (157,611)
Advance of loan receivable...................................... (13,000) -- -- --
Deferred costs.................................................. (4,232) -- -- --
----------- ------------- ------------ -----------
Net cash used by investing activities........................... (188,633) (105,728) (56,935) (157,611)
----------- ------------- ------------ -----------
</TABLE>
F-5
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------- -------------------------
1995 1996 1996 1997
----------- ------------- ------------ -----------
UNAUDITED
<S> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of loans payable....................................... 47,115 1,225 1,225 98,900
Advances from stockholders...................................... 507,151 92,170 92,170 --
Advances to stockholders........................................ -- (94,269) (80,000) --
Repayment of loan receivable from stockholder................... -- 50,000 -- --
Repayments to stockholders...................................... -- (163,100) (52,122) (1,320)
Advances from affiliates........................................ -- 108,232 16,330 15,091
Proceeds from private placement................................. 818,577 408,388 408,388 708,373
Expenses related to private placement........................... (182,981) (73,804) (73,804) (117,047)
Capital contributed............................................. -- 1,000,000 1,000,000 --
Issuance of stock............................................... 47,723 67,799 67,799 --
Deferred costs.................................................. -- -- -- (140,000)
Repayment of notes payable...................................... (405,000) -- -- (13,531)
----------- ------------- ------------ -----------
Net cash provided by financing activities....................... 832,585 1,396,641 1,379,986 550,466
----------- ------------- ------------ -----------
Net increase (decrease) in cash............................... 60,210 167,330 557,046 (206,744)
Cash at beginning of period..................................... 3,994 64,204 64,204 231,534
----------- ------------- ------------ -----------
Cash at end of period........................................... $ 64,204 $ 231,534 $ 621,250 $ 24,790
----------- ------------- ------------ -----------
----------- ------------- ------------ -----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Notes payable to stockholders transferred to additional paid-in
capital....................................................... $ 365,180 $ -- $ --
The company purchased all of the preferred stock and 91.65% of
the common stock of Cooper Firearms, Inc. for $30,000. In
conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired............................... $ -- $ 310,479 $ 310,479 $ --
Cash paid for the capital stock............................. -- (30,000) (30,000) --
----------- ------------- ------------ -----------
Liabilities assumed....................................... $ -- $ 280,479 $ 280,479 $ --
----------- ------------- ------------ -----------
----------- ------------- ------------ -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest.......................................... $ 20,605 $ 23,190 $ 4,100 $ 10,094
Cash paid for income taxes...................................... $ 317 $ 1,291 $ 1,243 $ 1,464
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 1--ORGANIZATION AND NATURE OF BUSINESS
Connecticut Valley Sports, Inc. ("CVS") was incorporated on March 28, 1996
under the laws of the State of Delaware.
On September 17, 1997, CVS, an inactive shell corporation acquired 2,747,476
shares of common stock representing 96.73% of the outstanding stock of
Connecticut Valley Classics, Inc. ("CVC"). The surviving entity changed its name
from CVC to Connecticut Valley Sports, Inc. Pursuant to the terms of the
acquisition, CVC shareholders exchanged their stock for shares in CVS on a one
for one basis.
CVC is the continuing entity for financial reporting purposes, and the
financial statements prior to September 17, 1997 represent its financial
position and results of operations. The assets, liabilities and results of
operations of CVS (which were minimal) are included as of September 17, 1997.
CVS and its subsidiaries manufacture and sell custom quality production bolt
action rifles and high quality shot guns used for both sport hunting and
competition. The company also manufactures and sells firearm stocks used in the
production of rifles. Customers are located throughout the United States and
parts of Canada.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Connecticut
Valley Sports, Inc. and its majority-owned subsidiaries Connecticut Valley
Classics, Inc., The Stock Shop, Inc., and Cooper Firearms, Inc. All material
intercompany transactions and balances have been eliminated. The consolidated
statement of operations reflects amounts for Cooper Firearms, Inc. as of August
13, 1996, the date it was acquired.
B) 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
C) INVENTORIES
Inventories are valued at the lower of cost or market on a first-in,
first-out basis.
D) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided using
accelerated methods over estimated useful lives of five to seven years for
furniture and fixtures, molds and tools, and machinery and equipment and over
the remaining term of the lease to which leasehold improvements relate.
F-7
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E) ORGANIZATION AND START-UP COSTS
Organization and start-up costs are stated at cost. Amortization is provided
using the straight line method over a period of 36-60 months.
F) REVENUE RECOGNITION
Revenue from the sale of firearms is recognized when the product is shipped.
G) INCOME TAXES
The company accounts for income taxes in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("Statement 109"). Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the 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, if any, 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. Under Statement 109, 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.
H) STOCK-BASED COMPENSATION
The company accounts for stock-based compensation in accordance with the
provisions of Accounting Principles Board Opinion No. 25 (APB 25). Stock-based
compensation includes all transactions under which employees receive shares of
stock or other equity instruments (such as options) in the company or events
where the company incurs liabilities to employees in amounts that are based on
the price of its stock. Under APB 25, the company recognizes compensation
expense for employee options in the amount of the excess of the fair value of
stock underlying options over the exercise price of such options. The expense is
recorded on the date the company issues stock or grants options as compensation.
I) LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
which requires that certain long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. This standard is effective for fiscal years that begin
after December 15, 1995. The company's adoption of this pronouncement on January
1, 1996 did not have a material impact on the company's consolidated financial
statements.
J) DEFERRED CREDIT
Deferred credit on acquisition (negative goodwill arising from the
acquisition of Cooper Firearms, Inc. described in Note 13) is amortized on a
straight-line basis over its estimated useful life of 40 years.
F-8
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K) INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of September 30, 1997, and for
the nine months ended September 30, 1996 and 1997 reflect all adjustments
(consisting of recurring accruals) management considers necessary for a fair
presentation of financial position, results of operations and cash flows.
Results of operations for the nine months ended September 30, 1997 are not
indicative of results to be expected for the year.
L) LOSS PER SHARE DATA
Net loss per common and common equivalent share using the weighted average
number of common and common equivalent shares outstanding was computed by
applying Securities and Exchange Commission Staff Accounting Bulletin No. 83
(SAB 83). Pursuant to SAB 83, common and common equivalent shares issued by the
company during the twelve months immediately preceding its initial public
offering at a price below the initial public offering price together with common
share equivalents which result from the grant of common stock options and
warrants having exercise prices below the initial public offering price during
the same period have been included in the calculation of the shares used in
computing net loss per share as if they were outstanding for all periods prior
to the initial public offering. Net loss per share for these periods has been
computed using the treasury stock method, under which the number of shares
outstanding reflects an assumed use of the proceeds from the issuance of such
shares and from the assumed exercise of such options and warrants to repurchase
shares of the company's common stock at the initial public offering price.
M) RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("Statement 128"). Statement 128 is
effective for financial statements issued for periods ending after December 15,
1997. Statement 128 simplifies the computation of earnings per share by
replacing the presentation of primary earnings per share with a presentation of
basic earnings per share, as defined. The statement requires dual presentation
of basic and diluted earnings per share by entities with complex capital
structures. Basic earnings per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number
of shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity
similar to fully diluted earnings per share. Statement 128 is not expected to
have a significant impact on the company's financial statements.
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("Statement 130") and Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information" ("Statement 131") were issued. Statement 130 addresses
standards for reporting and display of comprehensive income and its components,
and Statement 131 requires disclosure of reportable operating segments. Both
statements are effective for the Company's 1998 fiscal year. These
pronouncements are not expected to materially affect the company's financial
statements.
F-9
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 3--GOING CONCERN
As shown in the accompanying financial statements, the company has incurred
substantial recurring operating losses. This raises substantial doubt about the
company's ability to continue as a going concern.
Management believes the company will generate new business and improve
operating efficiency in future years. In addition, the company intends to raise
funds through a public offering of its common stock. Management believes that
the proceeds from the offering will be sufficient to provide working capital
until the company is able to increase revenues and improve operating efficiency.
If the company is not able to complete the public offering, generate significant
new business or reduce its expenses, it is possible operations will be
discontinued. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
NOTE 4--INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Finished goods.................................................. $ 101,791 $ 47,763
Work in process................................................. 42,235 62,493
Raw materials................................................... 331,801 367,073
------------ -------------
$ 475,827 $ 477,329
------------ -------------
------------ -------------
</TABLE>
NOTE 5--PROPERTY AND EQUIPMENT
Major classifications of property and equipment and their respective
depreciable lives are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Furniture and fixtures.......................................... $ 11,159 $ 10,898
Molds and tools................................................. 304,625 323,982
Machinery and equipment......................................... 132,840 264,568
Leasehold improvements.......................................... 12,714 19,604
------------ -------------
461,338 619,052
Accumulated depreciation........................................ (182,884) (265,486)
------------ -------------
Property and equipment, net................................... $ 278,454 $ 353,566
------------ -------------
------------ -------------
</TABLE>
Depreciation expense amounted to $46,019 and $77,879 for the years ended
December 31, 1995 and 1996, and $46,934 and $82,501 for the nine months ended
September 30, 1996 and 1997, respectively.
F-10
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 6--DEFERRED COSTS
Major classifications of deferred costs and their respective amortization
periods are as follows:
<TABLE>
<CAPTION>
AMORTIZATION DECEMBER 31, SEPTEMBER 30,
PERIOD 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Display models.................................... 36 months $ 15,425 $ 15,425
Organization costs................................ 60 months 36,406 36,406
Start-up costs.................................... 60 months 79,272 79,272
Stock issuance costs.............................. -- 140,000
------------ -------------
131,103 271,103
Accumulated amortization.......................... (101,590) (119,064)
------------ -------------
Deferred costs, net............................... $ 29,513 $ 152,039
------------ -------------
------------ -------------
</TABLE>
The stock issuance costs are related to a proposed public offering of the
company's common stock. If the offering does not take place, these costs will be
expensed.
NOTE 7--NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
First Security Bank, due July, 1996, interest at 8.75% per
annum, secured by all of the former assets of SSLLC with a
book value of approximately $87,000. This note was refinanced
with Rocky Mountain Bank (see below) in 1997.................. $ 41,740 $ --
Rocky Mountain Bank, due January, 2000, interest at 9.25% per
annum, collateral-ized by a $20,000 Certificate of Deposit
(included in cash), monthly payments inclusive of interest of
$1,339.86..................................................... -- 35,060
Equipment lease, due January, 2002, interest at 8.85% per annum,
monthly payments inclusive of interest of $1,735.30,
collateralized by equipment with a book value of $98,705 at
June 30, 1997................................................. -- 77,049
Rocky Mountain Bank, due September, 1998, interest at 8.1% per
annum......................................................... -- 15,000
------------ -------------
41,740 127,109
Less: Current portion........................................... 41,740 42,906
------------ -------------
Long-term debt.................................................. $ -- $ 84,203
------------ -------------
------------ -------------
</TABLE>
F-11
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 7--NOTES PAYABLE (CONTINUED)
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
- --------------------------------------------------------------
<S> <C>
1998.......................................................... $ 42,906
1999.......................................................... 30,537
2000.......................................................... 24,539
2001.......................................................... 19,004
2002.......................................................... 10,123
----------
$ 127,109
----------
----------
</TABLE>
NOTE 8--NOTES PAYABLE TO STOCKHOLDERS
The company has notes payable to its stockholders as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Notes payable to four (4) stockholders payable in eight (8)
equal quarterly installments commencing November 1, 1998
inclusive of interest at 9%................................... $ 300,000 $ 300,000
Demand notes, non-interest bearing.............................. 23,770 22,450
------------ -------------
323,770 322,450
Less: Current portion........................................... (23,770) (22,450)
------------ -------------
Long-term debt.................................................. $ 300,000 $ 300,000
------------ -------------
------------ -------------
</TABLE>
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
- --------------------------------------------------------------
<S> <C>
1997.......................................................... $ 23,770
1998.......................................................... 37,500
1999.......................................................... 150,000
2000.......................................................... 112,500
----------
$ 323,770
----------
----------
</TABLE>
F-12
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 9--RELATED PARTY TRANSACTIONS
The company and other entities controlled by its chairman have advanced
funds to each other for operating purposes. Other than as described in Note 8,
related party loans are non-interest bearing and have no scheduled repayment
dates. In accordance with the intentions of the parties involved, the balances
payable to affiliates have all been classified as current, and the balances due
from shareholders and affiliates have been classified as non-current.
The company has also issued options to certain executives. See Note 17.
NOTE 10--INCOME TAXES
The company had available net operating loss carryforwards for tax purposes
at December 31, 1996. Due to a change in ownership, the availability of these
losses to offset future taxable income is severely restricted. The company must
continue to operate as a firearms manufacturer until 1998, and an annual limit
on the use of prior losses based on the value of the company at the time of the
ownership change multiplied by the long-term tax exempt rate will apply. This
results in a limitation on utilization of the losses of approximately $2,000 per
year and affects approximately $2,000,000 of the total available carryforward.
The amounts and expiration dates of these losses are as follows:
<TABLE>
<CAPTION>
EXPIRATION DATE
DECEMBER 31, AMOUNT
- ------------------------------------------------------------ ------------
<S> <C>
2006........................................................ $ 559,199
2007........................................................ 94,026
2008........................................................ 375,989
2009........................................................ 275,605
2010........................................................ 795,863
2011........................................................ 454,277
------------
$ 2,554,959
------------
------------
</TABLE>
As of December 31, 1996, the company has a net operating loss carryforward
(after applying change of ownership limitations described above) of
approximately $580,000 which results in a deferred tax asset of approximately
$232,000 which has been offset by a valuation allowance.
The consolidated statements of operations include losses of $129,766 and
$40,939 for the years ended December 31, 1996 and 1995, respectively, incurred
by The Stock Shop of Montana, LLC prior to its merger with The Stock Shop, Inc.
Since SSLLC was taxed as a partnership under the provisions of Subchapter K of
the Internal Revenue Code, this loss may only be deducted by SSLLC's members.
NOTE 11--COMMITMENTS
a) The company conducts its primary operations from a facility that is
leased under an agreement which expires July 29, 1998. There is an option to
renew the lease for an additional 12 months at $3,000 per month. The company has
an option to purchase the property at fair market value which expires on July
10,
F-13
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 11--COMMITMENTS (CONTINUED)
1998. The company is responsible for all costs of utilities, repairs,
maintenance, upkeep, insurance, and real estate taxes in addition to the basic
rent.
The company leases a second facility under an agreement which expires on
September 1, 1999.
Future minimum rental payments under these leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDING YEARS ENDING
DECEMBER 31, AMOUNT SEPTEMBER 30, AMOUNT
- ------------------------------ ---------- ------------------------------ ---------
<S> <C> <C> <C>
1997.......................... $ 55,075 1998.......................... $ 51,500
1998.......................... 43,250 1999.......................... 22,000
1999.......................... 16,000
---------- ---------
$ 114,325 $ 73,500
---------- ---------
---------- ---------
</TABLE>
Rent expenses for the years ended December 31, 1995 and 1996 and the nine
months ended September 30, 1996 and 1997 were $15,188, $29,465, $14,022 and
$44,387, respectively.
b) The company has employment agreements with its President of Manufacturing
and its Production Manager that expire on March 31, 1999. Future minimum
payments under the contracts are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
- -------------------------------------------------------------- ----------
<S> <C>
1997.......................................................... $ 78,000
1998.......................................................... 78,000
1999.......................................................... 19,500
----------
$ 175,500
----------
----------
</TABLE>
NOTE 12--SIGNIFICANT CONCENTRATIONS OF CREDIT RISK
The company has concentrated its credit risk for cash by maintaining
accounts at Rocky Mountain Bank in excess of federal insurance limits. The
maximum loss that would have resulted from that risk totalled $127,419 at
December 31, 1996, for the excess of deposits over amounts that would have been
covered by federal insurance.
NOTE 13--MERGERS AND ACQUISITIONS
In September 1996, The Stock Shop, Inc. ("SSI") acquired all of the assets
of The Stock Shop of Montana, LLC ("SSLLC"), a company under common control, in
exchange for the assumption of all of SSLLC's liabilities. The transaction has
been accounted for in a manner similar to that in pooling-of-interests
accounting and the operations of SSLLC have been recorded by SSI as of the
beginning of the
F-14
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 13--MERGERS AND ACQUISITIONS (CONTINUED)
year. SSI did not issue any new shares of stock as part of the transaction. The
book value of SSLLC's net assets (liabilities) at the date of combination
consisted of the following:
<TABLE>
<S> <C>
Accounts receivable.............................................. $ 2,625
Prepaid expenses................................................. 452
Property and equipment, net of accumulated depreciation of
$5,595......................................................... 8,383
Start-up costs, net of accumulated amortization of $1,058........ 3,174
Due from member.................................................. 80,000
Accounts payable and accrued expenses............................ (42,000)
Notes payable (current).......................................... (47,215)
Due to affiliated companies...................................... (140,602)
---------
$(135,183)
---------
---------
</TABLE>
On November 15, 1996, CVC acquired all of the outstanding stock of SSI in
exchange for 1,300,000 shares of its own common stock. The transaction has been
accounted for as a pooling-of-interests, and the operations of SSI are reflected
for all periods presented.
SSI's consolidated balance sheet (including the assets, liabilities and
equity of SSLLC acquired in the pooling described above) as of December 31, 1995
was as follows:
<TABLE>
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 5,565
Accounts receivable....................................... 17,366
Inventory................................................. 7,319
Other current assets...................................... 900
---------
Total current assets.................................. $ 31,150
PROPERTY AND EQUIPMENT
Property and equipment, at cost, less accumulated
depreciation of $2,516.................................. 11,462
START-UP COSTS
Start-up costs, net of accumulated amortization of $423... 3,809
---------
Total assets.......................................... $ 46,421
---------
---------
</TABLE>
F-15
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 13--MERGERS AND ACQUISITIONS (CONTINUED)
<TABLE>
<S> <C> <C>
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued expenses..................... $ 29,422
Notes payable to LLC members.............................. 13,100
Notes payable--bank....................................... 47,115
---------
Total liabilities..................................... $ 89,637
Members' equity (deficit)................................. (43,216)
---------
Total liabilities and members' equity (deficit)........... $ 46,421
---------
---------
</TABLE>
The company's consolidated statement of operations included the following
amounts attributable to SSI:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1995 1996
------------ -------------
<S> <C> <C>
Revenues.................................... $ 87,038 $ 51,600
Net income (loss)........................... (40,939) (129,766)
</TABLE>
The consolidated net loss for the year ended December 31, 1995 is comprised
of the following:
<TABLE>
<S> <C>
Net loss of CVC before effect of merger with
SSI............................................ $(741,524)
Net loss of SSLLC................................ (40,939)
---------
Consolidated net loss............................ $(782,463)
---------
---------
</TABLE>
Consolidated revenue for the year ended December 31, 1995 is the same amount
as originally reported by CVC prior to the merger with SSI.
On August 13, 1996, the company acquired all of the preferred stock and
91.65% of the common stock of Cooper Firearms, Inc. for $30,000. The transaction
has been accounted for under the purchase method for financial reporting
purposes. The deferred credit which arose from the purchase of this stock at a
discount is being amortized over a period of 40 years.
Pro forma information assuming the acquisition had occurred on January 1,
1995 is as follows:
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED
---------------------------- SEPTEMBER 30,
1995 1996 1996
------------- ------------- -------------
<S> <C> <C> <C>
Revenues..................... $ 1,028,746 $ 833,795 $ 782,866
Net loss..................... $ (1,284,775) $ (1,294,382) $(1,034,273)
</TABLE>
F-16
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 13--MERGERS AND ACQUISITIONS (CONTINUED)
On August 15, 1997, the company issued 790 shares of its common stock in
exchange for an additional 5.79% interest in Cooper Firearms, Inc. The company
issued one share of CVC stock for every ten shares of Cooper Firearms, Inc.
stock exchanged.
NOTE 14--REGULATION OF FIREARMS BY U.S. GOVERNMENT
As a manufacturer of firearms, the company must comply with the regulations
of the Bureau of Alcohol, Tobacco and Firearms. Requirements include an
accountability of each serial numbered gun and the payment of an 11% federal
excise tax as the guns are shipped and invoiced. Failure to comply with these
regulations can lead to fines and suspension of manufacturing and sales
operations.
NOTE 15--CONTINGENCIES
The company has been notified that an individual injured himself while
firing a weapon produced by the company. This individual has retained counsel.
Management intends to vigorously defend this matter and has referred it to its
insurance company. The insurer has not yet determined whether this is a covered
claim under the policy. The amount or range of potential loss cannot be
reasonably estimated at this time, but management does not expect it to be
material. No accrual has been made for this loss contingency in the financial
statements.
NOTE 16--FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash, accounts
receivable and accounts payable and accrued expenses approximated fair value as
of December 31, 1996 because of the relatively short-term maturity of these
instruments. The carrying values of long-term receivables and long-term debt,
including the current portion, approximated fair value as of December 31, 1996,
based upon quoted market prices.
NOTE 17--STOCK OPTIONS
CVC adopted a stock option plan on August 29, 1995 authorizing it to issue
four members of management options to purchase 230,000 shares of CVC common
stock. These options may not be issued unless CVC attains certain levels of
profitability. CVC will issue 125,000 of these options if it achieves one year
of after-tax profitability. Another 60,000 options will be issued if CVC's after
tax profitability is $250,000. If CVC's net income reaches $500,000, it will
issue an additional 45,000 options. The exercise prices of these options will be
determined by CVC's Board of Directors when they are issued. To date, CVC has
not yet met such criteria. Upon issuance, these options will vest immediately
and have no expiration date. These options are not exercisable with respect to
CVS stock. To date, no options have been issued pursuant to this plan.
CVC adopted a second stock option plan on August 29, 1995 authorizing it to
issue its employees options to purchase an aggregate of up to 125,000 shares of
CVC common stock. These options are issuable at the discretion of CVC's board of
directors based upon employee performance with terms as the
F-17
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 17--STOCK OPTIONS (CONTINUED)
board deems appropriate. These options will not be exercisable with respect to
CVS stock. To date, no options have been issued pursuant to this plan.
In December 1995, the company issued its chairman an option to purchase
200,000 shares of the company's common stock at an exercise price of $2.76 per
share. The options were issued as additional consideration for the company to
obtain a $75,000 loan from the chairman. The right to exercise this option
vested immediately and expires in December 1998. The exercise price of this
option exceeds management's estimate of the market value of the stock on the
grant date, and, accordingly, the option has an immaterial value. The chairman
has not yet exercised any portion of this option.
In September 1996, SSI awarded one of its directors (now a director of CVS)
an option to purchase 25,000 shares of SSI's common stock at an exercise price
of $3.45 per share. Pursuant to the mergers of SSI and CVC and CVC and CVS, this
option is now available to the individual with respect to CVS common stock. The
right to exercise this option vests in increments of 6,250 shares per year for
four years beginning September 1, 1997. The option expires on September 1, 2001.
The exercise price of this option exceeds management's estimate of the market
value of SSI's common stock on the grant date, and are considered to have an
immaterial value. The director has not yet exercised any portion of this option.
In September 1996, SSI awarded three of its directors (now directors of CVS)
options to purchase 250,000 shares of SSI's common stock at an exercise price of
$0.0001 per share. Pursuant to the mergers of SSI and CVC and CVC and CVS, these
options are now available to the individuals with respect to CVS common stock.
The right to exercise these options vested immediately and expires on September
1, 2001. Management's estimate of the market value of SSI's common stock on the
grant date exceeds the exercise price of these options by an amount which
results in an immaterial expense. Accordingly, the options had an immaterial
value at the time of their issuance, and no expense has been recorded in
connection therewith. The directors have not yet exercised any portion of these
options.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based Compensation" ("Statement 123"), requires the company to provide pro forma
information regarding net loss and loss per share as if compensation cost for
the company's stock option plans had been determined in accordance with the fair
value-based method prescribed in Statement 123. The company estimates the fair
value of each stock option at the grant date by using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1995 and 1996, respectively: no dividends paid for all years; expected
volatility of 40.7% and 38.9%; risk free interest rates of 5.51% and 6.60%; and
expected lives of 5.0 and 4.0 years.
Under the accounting provisions of Statement 123, there would be no material
difference between the company's net loss and loss per share from that reported
in the financial statements in accordance with Accounting Principles Board
Opinion No. 25.
NOTE 18--CAPITAL CONTRIBUTION
In September 1996, a company in which the Chairman is a principal paid the
company $1,000,000. No additional stock was issued to the Chairman or his
company as a result of this transaction. The company has accounted for this as a
contribution to additional paid-in capital.
F-18
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997)
NOTE 19--REORGANIZATION
In 1995, the company reincorporated in Delaware. As part of this
transaction, the company changed the par value of its stock from $1 per share to
$0.01 per share.
In 1997, the company was reorganized as Connecticut Valley Sports, Inc. as
described in Note 1. As part of this transaction, the company changed the par
value of its stock from $0.01 per share to $0.0001 per share.
NOTE 20--PREFERRED STOCK
The company has authorized the issuance of 1,000,000 shares of "blank check"
preferred stock. This stock may be issued with any rights, preferences or
designations as determined by the Board of Directors at the time of its issuance
without stockholder approval. Management has no present intention to issue any
shares of this preferred stock.
NOTE 21--MAJOR CUSTOMERS
During the nine months ended September 30, 1997, the company generated
approximately 42% of its sales from three customers.
NOTE 22--SUBSEQUENT EVENTS
The company has filed a registration statement with the Securities Exchange
Commission for an initial public offering of 1,500,000 units. Each unit will
consist of one share of the company's common stock and one warrant entitling the
holder thereof to purchase one additional share of the company's common stock at
an exercise price of $6. The offering price is expected to be $5.10 per unit.
F-19
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Officers and Directors
Cooper Firearms, Inc.
Stevensville, Montana
We have audited the accompanying statements of operations, stockholders'
equity and cash flows of Cooper Firearms, Inc. for the year ended December 31,
1995 and for the period from January 1, 1996 to August 13, 1996. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described in Note 3, on August 13, 1996, The Stock Shop, Inc. acquired
all of the company's preferred stock and 91.65% of its common stock.
In our opinion, the statements of operations, stockholders' equity and cash
flows referred to above present fairly, in all material respects, the results of
operations and cash flows of Cooper Firearms, Inc. for the year ended December
31, 1995 and for the period from January 1, 1996 to August 13, 1996, in
conformity with generally accepted accounting principles.
<TABLE>
<S> <C> <C>
/s/ DAVID TARLOW & CO., P.C.
---------------------------------------
David Tarlow & Co., P.C.
</TABLE>
New York, New York
May 8, 1997
F-20
<PAGE>
COOPER FIREARMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
JANUARY 1, ENDED JUNE 30,
1996 1996
YEAR ENDED TO --------------
DECEMBER 31, AUGUST 13,
1995 1996 UNAUDITED
------------ --------------
<S> <C> <C> <C>
Net sales......................................................... $ 954,002 $ 589,070 $ 534,420
Cost of goods sold................................................ 1,027,871 516,687 461,005
------------ -------------- --------------
Gross profit (loss)............................................... (73,869) 72,383 73,415
------------ -------------- --------------
OPERATING EXPENSES
Selling, general and administrative expenses...................... 316,278 209,828 191,621
Writedown of inventory to lower of cost or market................. 80,000 -- --
Bad debts......................................................... -- 27,362 18,000
------------ -------------- --------------
Total operating expenses...................................... 396,278 237,190 209,621
------------ -------------- --------------
Operating loss................................................ (470,147) (164,807) (136,206)
Interest expense.................................................. 38,809 20,267 15,241
------------ -------------- --------------
Net loss...................................................... $ (508,956) $ (185,074) $ (151,447)
------------ -------------- --------------
------------ -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
COOPER FIREARMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TREASURY STOCK--
PREFERRED PREFERRED STOCK
STOCK CLASS B CLASS C COMMON STOCK COMMON
---------------------- ---------------------- --------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- --------- ----------- --------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Balance--January 1, 1995..... 28,661 $ 716,525 10,000 $ 125,000 117,085 $ 690,221 2,324 $ (23,240)
Shares issued................ 23,000 287,500 6,300
Shares issued in lieu of
interest................... 1,100 11,000
Warrants exercised........... 6,500 44,000
Common stock repurchased..... 550 (5,500)
Net loss--year ended December
31, 1995...................
----------- --------- ----------- --------- --------- ---------- ----- ---------
Balance--December 31, 1995... 28,661 $ 716,525 33,000 $ 412,500 130,985 $ 745,221 2,874 $ (28,740)
----------- --------- ----------- --------- --------- ---------- ----- ---------
----------- --------- ----------- --------- --------- ---------- ----- ---------
JANUARY 1, 1996 TO AUGUST 13,
1996
Balance--January 1, 1996..... 28,661 $ 716,525 33,000 $ 412,500 130,985 $ 745,221 2,874 $ (28,740)
Warrants exercised........... 5,000 30,000
Shares issued in lieu of
interest................... 1,120 14,000
Debt converted to common
stock...................... 2,424 300,000
Net loss--period from January
1, 1996 to August 13,
1996.......................
----------- --------- ----------- --------- --------- ---------- ----- ---------
Balance--August 13, 1996..... 28,661 $ 716,525 33,000 $ 412,500 139,529 $1,089,221 2,874 $ (28,740)
----------- --------- ----------- --------- --------- ---------- ----- ---------
----------- --------- ----------- --------- --------- ---------- ----- ---------
<CAPTION>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------- -------------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Balance--January 1, 1995..... $(1,330,689) $ 177,817
Shares issued................ 287,500
Shares issued in lieu of
interest................... 11,000
Warrants exercised........... 44,000
Common stock repurchased..... (5,500)
Net loss--year ended December
31, 1995................... (508,956) (508,956)
------------- -------------
Balance--December 31, 1995... $(1,839,645) $ 5,861
------------- -------------
------------- -------------
JANUARY 1, 1996 TO AUGUST 13,
1996
Balance--January 1, 1996..... $(1,839,645) $ 5,861
Warrants exercised........... 30,000
Shares issued in lieu of
interest................... 14,000
Debt converted to common
stock...................... 300,000
Net loss--period from January
1, 1996 to August 13,
1996....................... (185,074) (185,074)
------------- -------------
Balance--August 13, 1996..... $(2,024,719) $ 164,787
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
COOPER FIREARMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
JANUARY 1,
1996
YEAR ENDED TO SIX MONTHS
DECEMBER 31, AUGUST 13, ENDED JUNE 30,
1995 1996 1996
------------ -------------- --------------
<S> <C> <C> <C>
UNAUDITED
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.......................................................... $ (508,956) $ (185,074) $ (151,447)
Adjustments to reconcile net loss to net cash used by operating
activities:
Depreciation and amortization................................. 25,141 12,738 13,252
Loss on sale of property and equipment........................ -- 3,702 3,702
(Increase) decrease in:
Accounts receivable......................................... 107,610 29,809 (38,400)
Inventory................................................... 39,902 (3,555) (39,469)
Other current assets........................................ 9,306 13,328 7,590
Other assets................................................ 1,957 16,605 16,605
Increase (decrease) in:
Accounts payable and accrued expenses....................... (55,934) (14,218) 64,853
Customer deposits........................................... 12,930 (7,987) (6,191)
Federal excise tax payable.................................. 50,290 (16,959) 27,206
------------ -------------- --------------
Net cash used by operating activities............................. (317,754) (151,611) (102,299)
------------ -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............................... (24,303) (10,307) (10,307)
Proceeds from sales of property and equipment..................... -- 170,035 170,035
------------ -------------- --------------
Net cash provided (used) by financing activities................ (24,303) 159,728 159,728
------------ -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of loans payable......................................... 95,000 -- --
Repayments of loans payable....................................... (21,026) (188,934) (188,934)
Net advances of bank line-of-credit............................... 24,475 23,700 23,700
Capital stock issued.............................................. 342,500 44,000 44,000
Purchase of treasury stock........................................ (5,500) -- --
Advance from stockholder.......................................... -- 100,000 100,000
Financing costs incurred.......................................... (3,325) -- --
------------ -------------- --------------
Net cash provided (used) by financing activities................ 432,124 (21,234) (21,234)
------------ -------------- --------------
Net increase (decrease) in cash................................. 90,067 (13,117) 36,195
Cash at beginning of period....................................... (39,473) 50,594 50,594
------------ -------------- --------------
Cash at end of period............................................. $ 50,594 $ 37,477 $ 86,789
------------ -------------- --------------
------------ -------------- --------------
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING AND INVESTING
ACTIVITIES
Notes payable assumed by purchaser of property and equipment...... $ -- $ 106,082 $ 106,082
Notes payable to stockholder converted to stock................... $ -- $ 300,000 $ --
Supplemental Disclosure of Cash Flow Information
Cash paid for interest............................................ $ 24,744 $ 20,909 $ 15,241
Cash paid for income taxes........................................ $ 51 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
COOPER FIREARMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO THE SIX MONTHS
ENDED JUNE 30, 1996)
NOTE 1--ORGANIZATION AND NATURE OF BUSINESS
Cooper Firearms, Inc., was incorporated in 1990 under the laws of the State
of Montana. The company manufactures and sells custom quality production bolt
action rifles used for both sport hunting and competition. Customers are located
throughout the United States and parts of Canada.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A) 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
B) INVENTORIES
Inventories are valued at the lower of cost or market on a first-in,
first-out basis.
C) DEPRECIATION
Depreciation is provided using accelerated methods over the estimated useful
lives of the assets.
D) AMORTIZATION
Amortization of loan fees and start-up costs is provided using the straight
line method over a period of 36-60 months.
E) INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements for the six months ended June 30,
1996 reflect all adjustments (consisting of recurring accruals) management
considers necessary for a fair presentation of results of operations and cash
flows.
F) LONG-LIVED ASSETS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of", which requires
that certain long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. This standard is effective for fiscal years that begin after
December 15, 1995. The company's adoption of this pronouncement on January 1,
1996 did not have a material impact on the company's financial statements.
NOTE 3--SUBSEQUENT EVENTS
On August 13, 1996, The Stock Shop, Inc. acquired all of the preferred stock
and 91.65% of the common stock of the company.
F-24
<PAGE>
COOPER FIREARMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED WITH RESPECT TO THE SIX MONTHS
ENDED JUNE 30, 1996)
NOTE 4--DEPRECIATION
The company recorded depreciation expense of $23,440 for the year ended
December 31, 1995 and $9,967 for both the six months ended June 30, 1996 and the
period from January 1, 1996 to August 13, 1996.
NOTE 5--REGULATION OF FIREARMS BY U.S. GOVERNMENT
As a manufacturer of firearms, the company must comply with the regulations
of the Bureau of Alcohol, Tobacco and Firearms. Requirements include an
accountability of each serial numbered gun and the payment of an 11% federal
excise tax as the guns are shipped and invoiced. Failure to comply with these
regulations can lead to fines and suspension of manufacturing and sales
operations.
NOTE 6--CONTINGENCIES
The company has been notified that an individual injured himself while
firing a weapon produced by the company. This individual has retained counsel.
Management intends to vigorously defend this matter and has referred it to its
insurance company. The insurer has not yet determined whether this is a covered
claim under the policy. The amount or range of potential loss cannot be
reasonably estimated at this time, but management does not expect it to be
material. No accrual has been made for the loss contingency in the financial
statements.
F-25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO UNDERWRITER, DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE AND REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED ON AS HAVING BEEN AUTHORIZED FOR THE COMPANY OR THE UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO ANY PERSON IN
ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
DELIVERY OF THIS PROSPECTUS NOR ANY SALE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 8
Use of Proceeds................................ 18
Dilution....................................... 20
Capitalization................................. 21
Dividend Policy................................ 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 23
Business....................................... 26
Management..................................... 34
Principal Stockholders......................... 37
Certain Transactions........................... 37
Description of Securities...................... 39
Shares Eligible for Future Sale................ 42
Underwriting................................... 43
Legal Matters.................................. 45
Experts........................................ 45
Financial Statements........................... 47
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTION.
CONNECTICUT VALLEY
SPORTS, INC.
1,500,000 Units
Each Unit Consisting of One
Shares of Common Stock and One
Redeemable Common
Stock Purchase Warrants
BRIARWOOD INVESTMENT
COUNSEL, INC.
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, among other things, and
subject to certain conditions, authorizes the Company to indemnify its officers
and directors against certain liabilities and expenses incurred by such persons
in connection with claims made by reason of their being such an officer or
director. The restated Certificate of Incorporation and By-laws of the Company
provide for indemnification of its officers and directors to the full extent
authorized by law.
Reference is made to the Underwriting Agreement, the proposed form of which
is filed as Exhibit 1.1, pursuant to which the Underwriter agrees to indemnify
the directors and certain officers of the Registrant and certain other persons
against certain civil liabilities.
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is a statement of the estimated expenses to be paid by the
Company in connection with the issuance and distribution of the securities being
registered:
<TABLE>
<S> <C> <C>
SEC Registration Fee.......................................................... $ 6,330.20
NASD Filing Fee............................................................... $ 2,414.75
NASDAQ Filing Fee............................................................. * $25,000.00
Printing Engraving Expenses................................................... * $75,000.00
Legal Fees and Expenses....................................................... * $125,000.00
Accounting Fees and Expenses.................................................. * $120,000.00
Blue Sky Fees and Expenses.................................................... * $40,000.00
Transfer Agent and Registrar Fees and Expenses................................ * $ 3,500.00
Underwriter's Non-accountable Expense Allowance............................... $229,500.00
Miscellaneous................................................................. * $28,236.41
----------
Total..................................................................... $655,000.00
</TABLE>
- ------------------------
* Estimate
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has sold securities to the
individuals listed below. The issuances of these securities were considered to
be exempt from registration under Rule 505 and 506 of Regulation D of the Act,
as amended, and the regulations promulgated thereunder or Section 4(2) of the
Act. Each purchaser of the securities in such transaction represented his
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the certificates for the securities issued in such transaction.
Each purchaser of the securities in such transaction had adequate access to
information about the Registrant. Except as set forth below, there were no
underwriters or placement agents involved in the transactions and there were no
underwriting discounts or commissions paid in connection therewith.
In September 1997, the Company issued an aggregate of 2,747,476 shares of
its Common Stock to 56 investors in exchange for 2,747,476 shares of Common
Stock of Connecticut Valley Classics, Inc. ("CVC"). As a result of the exchange,
CVC became a 97% owned subsidiary of the Company.
In October 1997, the Company issued 50,000 shares of common stock to
Gersten, Savage, Kaplowitz & Fredricks, LLP in exchange for legal services
rendered. This transaction was exempt from registration pursuant to Section 4(2)
of the Act.
II-1
<PAGE>
CVC, the Company's predecessor and majority owned subsidiary has sold
securities to the individuals listed below in the past three years:
In May 1995, Victor Wang acquired 470,000 shares of CVC common stock for
$50,000 and undertaking obligations to provide additional financing for CVC in
the future. This transaction was exempt from registration pursuant to Section
4(2) of the Act.
In September 1995, CVC closed a private placement in which it issued 237,269
shares of common stock at an offering price of $3.45 per share. Sales were made
to 26 accredited investors. Duke & Co., Inc. acted as placement agent and
received a placement agent fee of 10% of the gross proceeds as well as a 3%
non-accountable expense allowance. In March 1996, an additional 132,692 shares
of common stock were sold to 11 other accredited investors on the same terms and
conditions in another private placement. These transactions were exempt from
registration pursuant to Rule 506 of Regulation D.
In connection with these private placements, 60,000 shares of common stock
were issued to Gersten, Savage, Kaplowitz & Fredericks, LLP as compensation for
legal services rendered. This transaction was exempt pursuant to Section 4(2) of
the Act.
In November 1996, the CVC issued 910,000, 364,000 and 26,000 shares to
Victor Wang, Daniel Cooper and Jason Stacey, respectively, in connection with
the acquisition of the Stock Shop, Inc. Mssrs. Wang, Cooper and Stacey had
acquired their shares in the Stock Shop, Inc. in connection with the acquisition
by the Stock Shop, Inc. of all of the assets of the Stock Shop LLC. These
transactions were exempt from registration pursuant to Section 4(2) of the Act.
From March through May 1997, CVC has a series of closings on a private
placement in which it issued 183,993 shares of common stock at an offering price
of $3.85 per share. Sales were made to 13 accredited investors. Duke & Co., Inc.
acted as placement agent and received a placement agent fee of 10% of the gross
proceeds as well as a 3% non-accountable expense allowance. This transaction was
exempt from registration pursuant to Rule 506 of Regulation D.
In August 1997, CVC issued 790 shares of stock to eight individuals in
exchange for their shares in the Company's majority owned Cooper Arms
subsidiary. This transaction was exempt from registration pursuant to Section
4(2).
ITEM 16. EXHIBITS
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement between the Company and Briarwood Investment Counsel
1.2 Form of Underwriter's Warrant
1.3 Form of Investment Banking Agreement between the Company and Briarwood Investment
Counsel, Inc.
3.1* Certificate of Incorporation of the Company and Amendments thereto
3.2* By-laws of the Company
4.1** Specimen Common Stock Certificate
4.2** Specimen Warrant Certificate
4.3 Form of Warrant Agreement
4.4** Form of public warrant agreement
5.1** Form of opinion of Gersten, Savage, Kaplowitz & Fredericks, LLP
10.1 Form of employment agreement with Dan Cooper, President of the Company
10.2 The Company's 1997 Stock Option Plan
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.3 Lease Agreement between the Company and Curtis L. Merriman
10.4 Lease Agreement between the Company and Bitteroot Investments, L.L.C.
10.5 Agreement between the Company and J.G. Anschutz GmbH
10.6 Agreement between the Company and AcuSport Corporation
21.1* List of Subsidiaries
23.1 Consent of BDO Seidman, LLP
23.2 Consent of David A. Tarlow & Co., P.C.
23.3 Consent of Gersten, Savage, Kaplowitz & Fredericks, LLP, counsel for the Company
(included in Exhibit 5.1 to this Registration Statement)
24.1* Power of Attorney
27** Financial Data Schedule
</TABLE>
- ------------------------
* Filed with the initial filing on October 9, 1997
** To be filed by Amendment
ITEM 17 UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to any charter provision, by-law contract arrangements statute,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the 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 whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned small business issuer 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 Act;
(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 suit information in the registration statement.
(2) That, for the purpose of determining any liability under the Act, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the Offering of such
securities at that time shall be deemed to be the initial bona fide Offering
thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the Offering.
(4) For determining any liability under the 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 under Rule 424(b)(1), or (4) or 497(h), under the Act
as part of this registration statement as of the time the Commission
declared it effective.
II-3
<PAGE>
(5) For determining any liability under the Act, treat each post-effective
amendment that contains a form of Prospectus as a new registration statement
at that time as the initial bona fide Offering of those securities.
(6) To provide to the Underwriter at the closing specified in the underwriting
agreements, certificates in such denominations and registered in such names
as required by the Underwriter to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Act, the Registrant certifies that it
has reasonable grounds to believe that it meets all of the requirements for
filing on Form SB-2 and has duly caused this amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York and State of New York on January 8, 1998.
CONNECTICUT VALLEY SPORTS, INC.
By: /s/ JOHN TILLELI
-----------------------------------------
John Tilleli
Pursuant to the requirements of the Act, this amendment to the Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ JOHN TILLELI Chief Executive Officer
- ------------------------------ January 8, 1998
John Tilleli
* President and Director
- ------------------------------ January 8, 1998
Dan Cooper
* Chairman and Director
- ------------------------------ January 8, 1998
Victor Wang
* Treasurer (Principal
- ------------------------------ Accounting Officer) and January 8, 1998
Edward McCabe Director
* Vice President-Marketing,
- ------------------------------ Secretary and Director January 8, 1998
Gary Landis
/s/ JOHN TILLELI
- ------------------------------
*by John Tilleli as attorney
in fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM 16. EXHIBITS
- --------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement between the Company and Briarwood Investment Counsel, Inc.
1.2 Form of Underwriter's Warrant
1.3 Form of Investment Banking Agreement between the Company and Briarwood Investment Counsel, Inc.
3.1* Certificate of Incorporation of the Company and Amendments thereto
3.2* By-laws of the Company
4.1** Specimen Common Stock Certificate
4.2** Specimen Warrant Certificate
4.3 Form of Warrant Agreement
4.4** Form of public warrant agreement
5.1** Form of opinion of Gersten, Savage, Kaplowitz & Fredericks, LLP
10.1 Form of employment agreement with Dan Cooper, President of the Company
10.2 The Company's 1997 Stock Option Plan
10.3 Lease Agreement between the Company and Curtis L. Merriman
10.4 Lease Agreement between the Company and Bitteroot Investments, L.L.C.
10.5 Agreement between the Company and S.G. Anschutz GmbH
10.6 Agreement between the Company and AcuSport Corporation
21.1* List of Subsidiaries
23.1 Consent of BDO Seidman, LLP
23.2 Consent of David A. Tarlow & Co., P.C.
23.3 Consent of Gersten, Savage, Kaplowitz & Fredericks, LLP, counsel for the Company (included in Exhibit
5.1 to this Registration Statement)
24.1 Power of Attorney (included on the signature page of this Registration Statement)
27** Financial Data Schedule
</TABLE>
- ------------------------
* Filed with the initial filing on October 9, 1997
** to be filed by Amendment
<PAGE>
Exhibit 1.1
Draft 12/31/97
CONNECTICUT VALLEY SPORTS, INC.
UNDERWRITING AGREEMENT
New York, New York
___________, 1998
Briarwood Investment Counsel
1851 East First Street
Suite 950
Santa Ana, California 92705
Dear Sirs:
The undersigned, Connecticut Valley Sports, Inc., a Delaware corporation
(the "Company"), hereby confirms its agreement with Briarwood Investment
Counsel (the "Underwriter" or "You"), as follows:
1. Introduction. The Company proposes to issue and sell to the
Underwriter an aggregate of 1,500,000 units (the "Offered Units") at a price
of $5.10 per Offered Unit, consisting of an aggregate of 1,500,000 shares of
Common Stock, $.0001 par value (the "Common Stock"), of the Company and
1,500,000 redeemable Common Stock purchase warrants (the "Redeemable
Warrants"), each Redeemable Warrant exercisable to purchase one share of
Common Stock. Each Redeemable Warrant shall be exercisable for a period of
three (3) years, commencing two years after the Effective Date, and shall
entitle the holder to purchase one share of Common Stock at a price equal to
$6.00 per share, which price is subject to adjustment in certain
circumstances to prevent dilution; provided, however, that in the event the
Company calls the Redeemable Warrants for redemption prior to the second
anniversary of the Effective Date, the Redeemable Warrants shall be
exercisable from the date on which the Redeemable Warrants are called for
redemption until the redemption date. The Company shall have the right, upon
the written consent of the Underwriter, to call each of the Redeemable
Warrants for redemption upon not less than thirty (30) days' prior written
notice at any time commencing one year from the Effective Date at a
redemption price of $.10 per Redeemable Warrant, subject to adjustment,
provided that the closing bid quotation of the Common Stock as reported on
The Nasdaq Stock Market or the last sales price if quoted on a national
securities exchange for a period of 20 consecutive trading days, which period
ends on the third trading day prior to the date on which the
<PAGE>
Company gives notice of redemption, equals or exceeds $7.50 per share,
subject to adjustment in certain circumstances to prevent dilution. The
Redeemable Warrants will be issued pursuant to a warrant agreement dated the
date hereof between the Company and Continental Stock Transfer and Trust
Company (the "Public Warrant Agreement"), a form of which has been filed as
Exhibit 4.4 to the Registration Statement. It is contemplated that the
shares of Common Stock and the Redeemable Warrants comprising the Offered
Units will become detachable and trade separately and be purchasable
separately immediately upon issuance.
The 1,500,000 Offered Units, and the 1,500,000 shares of Common Stock
and 1,500,000 Redeemable Warrants included therein, are hereinafter referred
to as the "Firm Securities." Upon your request, as provided in Section 3 of
this Agreement, the Company shall also issue and sell to you up to an
additional 225,000 Units, for the purpose of covering over-allotments in the
sale of the Firm Securities. Such additional securities are hereinafter
referred as the "Option Securities." The Firm Securities and the Option
Securities are hereinafter sometimes referred to as the "Offered Securities."
The 1,725,000 shares of Common Stock included as part of the Offered
Securities are hereinafter referred to as the "Shares"; the 1,725,000 shares
of Common Stock issuable upon exercise of the Redeemable Warrants included as
part of the Offered Securities are hereinafter referred to as the "Public
Warrant Shares"; and the Offered Securities and Public Warrant Shares are
sometimes hereinafter referred to collectively as the "Public Securities."
The Company also proposes to issue and sell to you, pursuant to the
terms of a warrant agreement, dated as of the First Closing Date (as
hereinafter defined), between you and the Company (the "Underwriter's Warrant
Agreement"), warrants (the "Underwriter's Warrants) to purchase up to 150,000
shares of Common Stock and 150,000 Redeemable Warrants. The Underwriter's
Warrants shall be exercisable during the four-year period commencing 12
months from the Effective Date, at $5.50 per share of Common Stock and $.11
per Redeemable Warrant, subject to adjustment in certain events to protect
against dilution. The 150,000 shares of Common Stock issuable upon exercise
of the Underwriter's Warrants are hereinafter referred to as the
"Underwriter's Shares"; the 150,000 Redeemable Warrants issuable upon
exercise of the Underwriter's Warrants are hereinafter referred to as the
"Underwriter's Redeemable Warrants"; the 150,000 shares of Common Stock
issuable upon exercise of the Underwriter's Redeemable Warrants are
hereinafter referred to as the "Underwriter's Warrant Shares"; and the
Underwriter's Warrants, the Underwriter's Shares, the Underwriter's
Redeemable Warrants and the Underwriter's
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<PAGE>
Warrant Shares are sometimes hereinafter referred to collectively as the
"Underwriter's Securities." The Public Securities and the Underwriter's
Securities are sometimes hereinafter referred to collectively as the
"Registered Securities."
The Registered Securities are more fully described in the Registration
Statement and the Prospectus referred to below.
2. Representations and Warranties. The Company represents and
warrants to, and agrees with, the Underwriter:
(a) A registration statement on Form SB-2 (File No. 333-37507)
including a preliminary form of prospectus, relating to the registration of
the Registered Securities has been prepared by the Company in conformity with
the requirements of the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") promulgated pursuant to the Act, and
said registration statement has been filed with the Commission under the Act.
One or more amendments to said registration statement has or have, as the
case may be, been similarly prepared and filed with the Commission and the
Company may file on or prior to the Effective Date of said registration
statement an additional amendment thereto which will include the final
prospectus. The Company will not, so long as any Redeemable Warrants or
Underwriter's Warrants remain outstanding and exercisable, file any amendment
thereto or any amendment or supplement to the Preliminary Prospectus or the
Prospectus (as those terms are defined below) unless the Company has given
reasonable and prior notice thereof to the Underwriter and counsel for the
Underwriter and neither shall have reasonably objected within a reasonable
period of time prior to the filing thereof. As used in this Agreement and
unless the context indicates otherwise, the term "Registration Statement"
refers to and means said registration statement, including any exhibit,
financial statement and prospectus included therein, as finally amended and
revised on or prior to the effective date (the "Effective Date") of said
registration statement. The term "Preliminary Prospectus" refers to and
means any prospectus filed with the Commission and included in said
registration statement before it becomes effective, and the term "Prospectus"
refers to and means the prospectus included in the Registration Statement,
except that if the prospectus first filed by the Company pursuant to Rule
424(b) of the Rules and Regulations shall differ from the Prospectus, the
term "Prospectus" shall refer to the prospectus filed pursuant to Rule
424(b). If the Registration Statement or the Prospectus is amended or
supplemented after the Effective Date and prior to or on the Closing Dates
(as hereinafter defined), then the terms
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<PAGE>
"Registration Statement" and "Prospectus" shall refer to such documents as so
amended or supplemented. The terms used herein shall have the same meaning
as in the Prospectus unless the context hereof otherwise requires.
(b) Neither the Commission nor any state regulatory authority has
issued an order preventing or suspending the use of the Preliminary
Prospectus nor has the Commission or any such authority instituted or, to the
best knowledge of the Company, threatened to institute any proceedings with
respect to such an order; the Preliminary Prospectus, at the time of filing
with the Commission, conformed in all material respects to the requirements
of the Act and the Rules and Regulations, contained all statements which were
required to be stated therein by the Act and the Rules and Regulations and
did not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; and the Registration Statement at the time when it
becomes effective, and the Prospectus (and any amendments or supplements
thereto) at all subsequent times up to the date set forth in the Prospectus
as required by Item 502(e) of Regulation S-B of the Rules and Regulations,
will contain all statements which are required to be stated therein in
accordance with the Act and the Rules and Regulations and will conform in all
material respects to the requirements of the Act and the Rules and
Regulations, and at such times neither the Registration Statement nor the
Prospectus, nor any amendment or supplement thereto, will contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not misleading,
except that the representations and warranties in this Section 2(b) do not
apply to statements or omissions made in the Registration Statement or
Prospectus by or on behalf of the Underwriter made in reliance upon and in
conformity with information furnished in writing to the Company in connection
with the Registration Statement or Prospectus or any amendment or supplement
thereto by the Underwriter, expressly for use therein.
(c) Each of the Company and the Subsidiaries (as defined in
paragraph (d) of this Section 1 below) has been duly organized and is now,
and at the Closing Dates will be, validly existing and in good standing as a
corporation or partnership, as the case may be, under the laws of the
jurisdiction of its organization, and has (i) with respect to the Company, an
authorized and outstanding capitalization and indebtedness as set forth in
the Registration Statement at the respective dates referred to therein and
(ii) full power and authority to own its
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<PAGE>
properties and conduct its business as presently conducted and as described in,
or contemplated by, the Registration Statement. Each of the Company and the
Subsidiaries is duly qualified and in good standing as a foreign corporation in
all jurisdictions in which the nature of the business transacted by it or the
character or location of its properties makes such qualification necessary.
Except where the failure to be so qualities would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole. Each of the
Company and the Subsidiaries holds all material authorizations, approvals,
licenses, certificates, franchises and permits from state, federal or other
regulatory authorities necessary for the conduct of its business as presently
conducted and as described in or contemplated by the Registration Statement and
is in material compliance with all laws and regulations and all orders and
decrees applicable to it or to such business or assets, and there are no
proceedings pending or, to the best knowledge of the Company, threatened,
seeking to cancel, terminate or limit such authorizations, approvals, licenses,
certificates, franchises or permits.
(d) The Company does not own, directly or indirectly, any capital
stock or other equity interest in or of any corporation, partnership or other
legal entity whatsoever, except that the Company owns approximately 97% of
the outstanding securities of Connecticut Valley Classics, Inc., a ________
corporation ("CVC"). CVC owns all of the outstanding securities of Stock
Shop, Inc., a ________ corporation ("Stock Shop"), and Cooper Firearms, Inc.,
a ________ corporation ("Cooper Firearms" and collectively with CVC, the
"Subsidiaries"). All of the securities owned by the Company, directly or
indirectly, in the Subsidiaries are free and clear of all liens, charges,
encumbrances and restrictions. There are no options or warrants for the
purchase of, or other rights to purchase, or outstanding securities
convertible into or exchangeable for, any capital stock or other securities
of the Subsidiaries. [Add other representations/covenants re: Subsidiaries.]
(e) The financial statements of the Company, including the related
notes included as part of the Registration Statement, present fairly the
financial condition of the Company and Subsidiaries as of the dates thereof
and the results of operations for the respective periods to which they apply.
Such financial statements have been prepared in accordance with generally
accepted accounting principles consistently applied throughout the periods
involved, except as otherwise stated therein, and all adjustments necessary
for a fair presentation of results for such periods have been made.
-5-
<PAGE>
(f) BDO Seidman, LLP, who have audited the financial statements
included as part of the Registration Statement, are independent public
accountants as required by the Act and the Rules and Regulations. [Add language
re: David Tarlow & Co., P.C. re: Cooper Firearms' financial statements]
(g) Subsequent to the dates as of which information is given in the
Registration Statement and Prospectus, except as disclosed in or contemplated by
the Registration Statement and Prospectus, (i) the Company has not incurred any
liabilities or obligations, direct or contingent, or entered into any material
transactions other than in the ordinary course of business; (ii) there has not
been any change in the capital stock, funded debt (other than regular repayments
of principal and interest on existing indebtedness) or other securities of the
Company; (iii) there has not been any adverse change in the condition (financial
or otherwise), business, operations, income, net worth or properties, including
any loss or damage to the properties, of the Company (whether or not such loss
is insured against); and (iv) the Company has not paid or declared any dividend
or other distribution on its Common Stock or its other securities or redeemed or
repurchased any of its Common Stock or other securities.
(h) This Agreement, the Public Warrant Agreement, the Underwriter's
Warrant Agreement and the Consulting Agreement (as defined in Section 5(u)
hereof), have been duly and validly authorized by the Company, and this
Agreement constitutes, and the Public Warrant Agreement, the Underwriter's
Warrant Agreement and the Consulting Agreement, when executed and delivered
pursuant to this Agreement (assuming due execution by the Underwriter and/or the
appropriate parties to such agreements), will each constitute, a valid and
binding agreement of the Company, enforceable against the Company in accordance
with its respective terms, except (i) as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
similar laws affecting creditors' rights generally, (ii) as enforceability of
any indemnification, contribution or exculpation provision may be limited under
applicable Federal and state securities laws, and (iii) that the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought ((i), (ii) and (iii) are hereinafter
referred to as the "Enforceability Exceptions").
(i) The Units and the Shares have been duly authorized and, when
issued and delivered pursuant to this Agreement, the Shares will be duly
authorized, validly issued,
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<PAGE>
fully paid and non-assessable. The Redeemable Warrants have been duly
authorized and, when issued and delivered pursuant to this Agreement, will
constitute valid and legally binding obligations of the Company enforceable in
accordance with their terms, subject to the Enforceability Exceptions, and will
be entitled to the benefits provided by the Public Warrant Agreement. The
Public Warrant Shares have been reserved for issuance upon exercise of the
Redeemable Warrants and, when issued in accordance with the terms of the
Redeemable Warrants and Public Warrant Agreement, will be duly authorized,
validly issued, fully paid and non-assessable. The Underwriter's Warrants have
been duly authorized and, when issued and delivered pursuant to this Agreement
and the Underwriter's Warrant Agreement, will constitute valid and legally
binding obligations of the Company enforceable in accordance with their terms,
subject to the Enforceability Exceptions, and will be entitled to the benefits
provided by the Underwriter's Warrant Agreement. The Underwriter's Shares have
been reserved for issuance upon exercise of the Underwriter's Warrants and, when
issued in accordance with the terms of the Underwriter's Warrants and
Underwriter's Warrant Agreement, will be duly authorized, validly issued, fully
paid and non-assessable. The Underwriter's Redeemable Warrants, when issued in
accordance with the terms of the Underwriter's Warrants and Underwriter's
Warrant Agreement, will be duly authorized and will constitute valid and legally
binding obligations of the Company enforceable in accordance with their terms,
subject to the Enforceability Exceptions, and will be entitled to the benefits
provided by the Public Warrant Agreement. The Underwriter's Warrant Shares have
been reserved for issuance upon exercise of the Underwriter's Redeemable
Warrants and, when issued in accordance with the terms of the Underwriter's
Redeemable Warrants and the Public Warrant Agreement, will be duly authorized,
validly issued, fully paid and non-assessable. Neither the issuance of any of
the Public Securities nor any of the Underwriter's Securities will violate or
otherwise be subject to the preemptive rights of any holders of any security of
the Company or similar contractual rights granted by the Company, and none of
the holders of any of the Public Securities or any of the Underwriter's
Securities will be subject to personal liability by reason of being such
holders.
(j) All issued and outstanding capital stock of the Company has been
duly authorized and validly issued and is fully paid and non-assessable; the
issuances and sales of all such capital stock complied in all respects with
applicable Federal and state securities laws; the holders thereof have no rights
of rescission with respect thereto, and are not subject to personal liability by
reason of being such holders; and none of such securities were issued in
violation of the preemptive rights of any
-7-
<PAGE>
holders of any security of the Company or similar contractual rights granted by
the Company.
(k) No default exists in the due performance and observance of any
term, covenant or condition of any license, contract, indenture, mortgage, deed
of trust, note, loan or credit agreement, or any other agreement or instrument
to which the Company or any Subsidiary is a party or by which the Company or any
Subsidiary may be bound or to which any of the property or assets of the Company
or any Subsidiary are subject.
(l) The Company and the Subsidiaries are not in violation of any term
or provision of their respective Certificate of Incorporation or By-Laws.
Neither the execution and delivery of this Agreement, nor the issuance and/or
sale of any of the Public Securities or the Underwriter's Securities, nor the
consummation of any of the transactions contemplated herein, nor the compliance
by the Company with the terms and provisions hereof, has conflicted with or will
conflict with, or has resulted in or will result in a breach of, any of the
terms and provisions, or has constituted or will constitute a default under, or
has resulted in or will result in the creation or imposition of any lien, charge
or encumbrance upon the property or assets of the Company or any Subsidiary
pursuant to the terms of, any indenture, mortgage, deed of trust, note, loan or
credit agreement or any other agreement or instrument evidencing an obligation
for borrowed money, or any other agreement or instrument to which the Company or
any Subsidiary is a party, or by which the Company or any Subsidiary is or may
be bound, or to which any of the property or assets of the Company or any
Subsidiary is subject; nor will such actions result in any violation of the
provisions of the Certificate of Incorporation or the By-Laws of the Company or
any Subsidiary or of any contract or agreement, or of any statute or any order,
rule or regulation applicable to the Company or any of the Subsidiaries or of
any other regulatory authority or other governmental body having jurisdiction
over the Company or any of the Subsidiaries.
(m) Except as set forth in the Registration statement, there is
neither pending nor, to the best knowledge of the Company, threatened, any
action, suit, or proceeding at law or in equity or any arbitration (or
circumstances that may give rise to the same) to which the Company or any
Subsidiary or any of the respective officers, directors or securityholders
thereof is a party before or by any court, arbitration tribunal or governmental
instrumentality, agency, or body, which might result in any materially adverse
change in the condition (financial or otherwise), business, operations, income,
net worth or properties of the Company or any Subsidiary, or which might
materially
-8-
<PAGE>
adversely affect the properties or assets thereof, or prevent consummation of
the transactions contemplated hereby; nor except as set forth in the
Registration Statement, are there any such actions, suits or proceedings against
the Company related to environmental matters or matters related to
discrimination on the basis of age, sex, religion or race; and no labor
disturbance by the employees of the Company or any Subsidiary exists or to the
best knowledge of the Company is imminent which might be expected to materially
adversely affect the conduct of the business, property, operations, financial
condition or earnings of the Company or any Subsidiary.
(n) There is no contract or other document which is required by the
Act or by the Rules and Regulations to be filed as an exhibit to the
Registration Statement which has not been so filed, and each contract which is
filed as an exhibit to the Registration Statement is and shall be in full force
and effect at each of the Closing Dates or shall have been terminated in
accordance with its terms or as set forth in the Registration Statement and
Prospectus, and no party to any such contract has given notice to the Company of
the cancellation of or, to the knowledge of the Company, shall have threatened
to cancel, any such contract, and, except as set forth in the Prospectus, the
Company and the Subsidiaries are not or shall not be in default thereunder.
(o) Except as set forth in the Registration Statement, neither the
Company nor any Subsidiary owns any real property. Except as set forth in the
Registration Statement, each of the Company and the Subsidiaries has good and
marketable title to all of its property and assets, including any licenses,
trademarks and copyrights, described in the Registration Statement as owned by
it, free and clear of all liens, charges, encumbrances and restrictions other
than such as do not materially affect the value or transferability of such
property and assets and do not interfere with the use of such property or assets
made or proposed to be made by the Company or any Subsidiary, and other than as
described in the Registration Statement (including the financial statements and
notes included therein), all of the leases, subleases and licenses under which
it holds or uses any real or personal property, including those described or
referred to in the Prospectus, are in full force and effect, and the Company and
the Subsidiaries are not in default in respect of any of the terms or provisions
of any such leases, subleases and licenses, and, to the best of the Company's
knowledge, no claim of any sort has been asserted by anyone adverse to the
rights of the Company or any Subsidiary under any such leases, subleases or
licenses affecting or questioning the rights of the Company or such Subsidiary
to the continued use or enjoyment of the rights and property covered
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<PAGE>
thereby. Each of the Company and the Subsidiaries owns or leases all such
properties as are necessary to its operations as now conducted and as proposed
to be conducted as set forth in the Prospectus.
(p) Each of the Company and the Subsidiaries has timely (giving
effect to permitted extensions) and properly prepared and filed all necessary
Federal, state, local and foreign income and franchise tax returns and has paid
all taxes shown on such returns and all assessments received by it to the extent
the same have become due, other than those due without interest or penalty, and
except to the extent the Company is in good faith contesting any such tax or
assessment in appropriate proceedings and has established reserves in accordance
with normal accounting practices. Except as set forth in the Registration
Statement, the Company has no knowledge of any tax deficiency which might be
asserted against the Company or any Subsidiary which could adversely affect the
business or properties thereof, and has established adequate reserves for such
taxes which are not yet due and payable.
(q) Each of the Company and the Subsidiaries maintains insurance,
which is in full force and effect, of the types and in the amounts currently
adequate for its business, including but not limited to personal injury and
product liability insurance, insurance covering all personal property owned or
leased by the Company or any Subsidiary against theft, damage, destruction, acts
of vandalism and all other risks customarily insured against. The Company and
the Subsidiaries have not (i) failed to give notice or present any insurance
claim with respect to any matter, including but not limited to the Company's
business, property or employees, under the insurance policy or surety bond in a
due and timely manner, (ii) had any disputes or claims against any underwriter
of such insurance policies or surety bonds or has failed to pay any premiums due
and payable thereunder, or (iii) failed to comply with all conditions contained
in such insurance policies and surety bonds. To the best knowledge of the
Company, there are no facts or circumstances under any such insurance policy or
surety bond which would relieve any insurer of its obligation to satisfy in full
any valid claim of the Company or any Subsidiary.
(r) Except as set forth in the Registration Statement, the Company
and the Subsidiaries own or possess adequate rights to use all patents,
patent rights, inventions, trademarks, service marks, trade names and
copyrights necessary for the conduct of their business as described in the
Prospectus and the Company and the Subsidiaries have not received any notice
of infringement of or conflict with, and the Company and the Subsidiaries, to
the
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<PAGE>
best of the Company's knowledge, are not infringing or in conflict with
asserted rights of others with respect to, any patents, patent rights,
inventions, trademarks, service marks, trade names or copyrights.
(s) Except as set forth in the Prospectus, neither the Company nor
any Subsidiary is obligated or under any liability whatsoever to make any
payment by way of royalties, fees or otherwise to any owner or licensee of,
or other claimant to, any patent, trademark, service mark, trade name,
copyright, know-how, technology or other intangible asset, with respect to
the use thereof or in connection with the conduct of its business or
otherwise. In addition, the Company and the Subsidiaries own and have the
unrestricted right to use all trade secrets, know-how (including all other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), inventions, designs, processes, works of authorship,
computer programs and technical data and information (collectively herein
"intellectual property") that are material to the development, manufacture,
operation and sale of all products and services sold or proposed to be sold
by the Company and any Subsidiary, free and clear of and without violating
any right, lien, or claim of others, including without limitation, former
employers of its employees. The Company is not aware of any development by
any other person or entity of trade secrets or items of technical information
similar to those of the Company. The Company has taken reasonable security
measures to protect the secrecy, confidentiality and value of all of its
intellectual property in all material aspects.
(t) Except as set forth in the Registration Statement, the Company
is not obligated to pay and has not paid within the past twelve months, and
has not obligated, and will not obligate, the Underwriter to pay, any
finder's fee in connection with the underwriting contemplated hereby or any
other fee (cash, securities or otherwise) in consideration of financial,
consulting or investment banking services.
(u) No officer or director of the Company or any affiliate (as
such term is defined in Rule 405 promulgated under the Rules and Regulations)
of any such officer or director has taken, and each officer or director has
agreed that he will not take, directly or indirectly, any action designed to
or which might reasonably be expected to cause or result in the stabilization
or manipulation of the price of any security issued by the Company.
(v) No officer, director or greater than 5% stockholder of the
Company or any Subsidiary, or any "affiliate" or "associate" (as these terms
are defined in Rule 405 promulgated
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<PAGE>
under the Rules and Regulations) of any of the foregoing persons or entities
has or has had, either directly or indirectly, (i) an interest (other than
ownership of an immaterial number of shares of capital stock of an entity
whose securities are publicly traded) in any person or entity which (A)
furnishes or sells products or services which are furnished or sold or are
proposed to be furnished or sold by the Company or any Subsidiary, or (B)
purchases from or sells or furnishes to the Company or any Subsidiary any
goods or services, or (ii) a beneficial interest in any contract or agreement
to which the Company or any Subsidiary is a party or by which it may be bound
or affected. Except as set forth in the Prospectus under "Certain
Transactions," there are no existing agreements, arrangements, or
transactions, between or among the Company or any of its Subsidiaries and any
officer or director of the Company or any Subsidiary, or any partner,
affiliate or associate of any of the foregoing persons or entities.
(w) The minute books of each of the Company and the Subsidiaries
have been made available to the Underwriter and contain a complete summary of
all meetings and actions of the directors and stockholders or partners, as
the case may be, of each of the Company and the Subsidiaries since the time
of their respective dates of organization, and reflect all transactions
referred to in such minutes accurately in all respects.
(x) The Company is not aware of any bankruptcy, labor disturbance
or other event affecting any of its principal suppliers or customers which is
reasonably likely to result in a material adverse change in the condition,
financial or otherwise, prospects, business or results of operation of the
Company and the Subsidiaries, taken as a whole.
(y) The Registered Securities and all the other securities of the
Company conform to all statements in relation thereto in the Registration
Statement.
(z) On the Effective Date, (i) the authorized capital stock of the
Company will be as set forth in the Registration Statement, and (ii) not more
than an aggregate of 2,797,476 shares of Common Stock shall be issued and
outstanding, not including: (A) an aggregate of 600,000 shares of Common
Stock reserved for issuance under the Company's 1997 Stock Option Plan (the
"Stock Option Plan") and (B) up to an aggregate of 475,000 shares of Common
Stock upon exercise of options and warrants which are anticipated to be
outstanding on the First Closing Date (collectively the "Non-Plan Options").
Other than the shares of Common Stock already issued (or reserved for
issuance as described in the immediately preceding sentence), the 1,725,000
Public
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Warrant Shares reserved for issuance upon the Redeemable Warrants, the
150,000 Underwriter's Shares reserved for issuance upon exercise of the
Underwriter's Warrants, the 150,000 Underwriter's Warrant Shares reserved for
issuance upon exercise of the Underwriter's Redeemable Warrants, and the
Public Securities and Underwriter's Securities to be offered in or in
connection with the proposed public offering ("Public Offering"), no other
shares of capital stock or securities convertible into capital stock shall be
outstanding or reserved for issuance at the completion of the Public
Offering, without the consent of the Underwriter.
(aa) Except for the registration rights granted (i) under the
Underwriter's Warrant Agreement, (as described in the Registration
Statement), no holder of any securities of the Company has the right to
require that the Company include such securities in the Registration
Statement or any registration statement to be filed by the Company.
(bb) The Units, Common Stock and the Redeemable Warrants are
eligible for quotation on The Nasdaq SmallCap Market ("NASDAQ") and have been
approved for listing on the Boston Stock Exchange, subject to official notice
of issuance. The Company has filed a registration statement with the
Commission pursuant to Sections 12(g) and 12(b) of the 1934 Act, and has used
its best efforts to have same declared effective by the Commission on an
accelerated basis on the Effective Date.
(cc) Neither the Company or any Subsidiary nor any officer,
director or other agent thereof has, acting on behalf of the Company or any
Subsidiary, at any time (i) made any contributions to any candidate for
political office in violation of law, or failed to disclose fully any such
contributions in violation of law, (ii) made any payment to any state,
Federal or foreign governmental officer or official, or any other person
charged with similar public or quasi-public duties, other than payments
required or not prohibited by law or (iii) made any payment of funds of the
Company or any Subsidiary or received or retained any funds in violation of
any law, rule or regulation and under circumstances requiring the disclosure
of such payment, receipt or retention of funds in the Prospectus.
(dd) Since December 31, 1996, neither the Company nor any
Subsidiary has sustained any material casualty loss or interference with its
business from fire, storm, explosion, flood or other like or unlike casualty,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree which is not disclosed or reflected in
the Prospectus.
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<PAGE>
(ee) The Company is not an "investment company" or a company
"controlled" by an "investment company," within the meaning of the Investment
Company Act of 1940, as amended.
(ff) No unregistered securities of the Company have been sold by
the Company within the three years prior to the date hereof, except as
disclosed in Part II of the Registration Statement.
(gg) The employment agreements between the Company and its
respective officers, as disclosed in the Registration Statement, are or will
be on or before the First Closing Date binding and enforceable obligations
upon the respective parties thereto in accordance with their respective
terms, subject to the Enforceability Exceptions.
(hh) Except as set forth in the Prospectus, the Company has no
employee benefit plans (including, without limitation, profit sharing and
welfare benefit plans) or deferred compensation arrangements that are subject
to the provisions of the Employee Retirement Income Security Act of 1974.
(ii) There are no voting or other shareholder agreements between
the Company and any shareholders of the Company or between or by and among
any shareholders of the Company.
(jj) Each of the Company and the Subsidiaries has generally enjoyed
a satisfactory employer-employee relationship with its employees and is in
material compliance with all federal, state, local, and foreign laws and
regulations respecting employment and employment practices, terms and
conditions of employment and wages and hours. There are no pending
investigations involving the Company or any of the Subsidiaries by the U.S.
Department of Labor or any other governmental agency responsible for the
enforcement of such federal, state, local, or foreign laws and regulations.
There is no unfair labor practice charge or complaint against the Company or
any of the Subsidiaries pending before the National Labor Relations Board or
any strike, picketing, boycott, dispute, slowdown or stoppage pending or, to
the Company's best knowledge, threatened against or involving the Company or
the Subsidiaries or any predecessor entity, and none has ever occurred. No
representation question exists respecting the employees of the Company or any
of the Subsidiaries, and no collective bargaining agreement or modification
thereof is currently being negotiated by the Company or any of the
Subsidiaries. No grievance or arbitration proceeding is pending under any
expired or existing collective bargaining agreements to which the Company or
any of the Subsidiaries is or was a party. No
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labor dispute with the employees of the Company or any of the Subsidiaries
exists, or is imminent.
(kk) The statements in the Prospectus under "RISK FACTORS,"
"BUSINESS," "CERTAIN TRANSACTIONS," "MANAGEMENT" and "DESCRIPTION OF
SECURITIES," insofar as they refer to statements of law, descriptions of
statutes, licenses, regulations or legal conclusions are correct in all
material respects.
(ll) The Company warrants that consummation of the transactions
contemplated herein will not, as of the Effective Date or the First Closing
Date, result in a material breach of any of the terms, provisions or
conditions of any agreement to which it or any Subsidiary is a party.
(mm) [The Company has delivered to the Underwriter a business plan
covering a three year period setting forth its best estimates of sales,
earnings, cash flow and other significant items.]
Any certificate signed by an officer of the Company in his capacity as such
and delivered to the Underwriter or counsel for the Underwriter shall be
deemed a representation and warranty by the Company to the Underwriter as to
the matters covered thereby.
3. Purchase, Delivery and Sale of the Offered Securities and the
Underwriter's Warrants.
(a) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth, the
Company agrees to sell to the Underwriter the Firm Securities, consisting of
1,500,000 Units, and the Underwriter agrees to purchase such Firm Securities
from the Company, on a firm commitment basis, at a purchase price of $4.59
per Unit, of which $4.50 shall be ascribed to each Share and $.09 shall be
ascribed to each Redeemable Warrant therein, to be sold by the Underwriter at
an initial public offering price of $5.10 per Unit, of which $5.00 shall be
ascribed to each Share and $.10 shall be ascribed to each Redeemable Warrant
therein.
(b) In addition, the Company hereby grants the Underwriter the
option (the "Over-allotment Option) to purchase from the Company, at any time
or from time to time during a period of forty-five (45) days from the date of
the Prospectus, all or any part of the Option Securities at a purchase price
of $4.50 per share of Common Stock and/or $.09 per Redeemable Warrant, to be
sold by the Underwriter at an initial public offering price of $5.00 per
share and $.10 per Redeemable Warrant. Notice of
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exercise of the Over-allotment Option, in whole or in part, shall be
delivered by the Underwriter to the Company at least two (2) days in advance
of the date on which the Option Securities are to be delivered to the
Underwriter, provided that delivery of the Option Securities shall be made
concurrently with tender of payment therefor. Option Securities may be
purchased by the Underwriter only for the purpose of covering over-allotments
in the sale of the Firm Securities, and the Underwriter shall have no
obligation to make any over-allotments. No Option Securities shall be
delivered and paid for unless the Firm Securities shall be simultaneously
delivered or shall theretofore have been delivered and paid for as herein
provided.
(c) On the First Closing Date, the Company shall issue and sell to
the Underwriter the Underwriter's Warrants. The total purchase price of the
Underwriter's Warrants shall be $10. The Underwriter's Warrants shall be
exercisable for a period of four years commencing 12 months from the
Effective Date, at prices of $5.50 per Underwriter's Share and $.11 per
Underwriter's Redeemable Warrant, respectively. The Underwriter's Warrant
Agreement, including the forms of Underwriter's Warrant Certificates, shall
be substantially in the form filed as Exhibit 4.3 to the Registration
Statement. Payment for the Underwriter's Warrants shall be made on the First
Closing Date.
(d) Payment for the Firm Securities and the Option Securities
shall be made on each of the First Closing Date and Option Closing Date (as
hereinafter defined), respectively, by certified or bank cashier's check in
New York Clearing House funds, payable to the order of the Company, or by
Federal Funds wire transfer, at the offices of counsel to the Underwriter, or
at such other place as agreed upon by the Underwriter and the Company, upon
delivery of certificates (in form and substance reasonably satisfactory to
the Underwriter) representing the Firm Securities and Option Securities to be
sold at such closing or by confirmation of electronic transfer of the Firm
Securities or Option Securities, as the case may be, to the Underwriter for
the accounts of the Underwriter. Delivery and payment for the Firm
Securities shall be made at 10:00 A.M. New York time, on or before the [third]
business day following the Public Offering or at such earlier time as the
Underwriter shall determine or as required by law, or at such other time as
shall be agreed upon by the Underwriter and the Company. The hour and date
of delivery and payment for the Firm Securities are called the "First Closing
Date." The Firm Securities shall be registered in such name or names and in
such authorized denominations as the Underwriter may request in writing at
least two (2) full business days prior to Closing Date. The Company will
permit the Underwriter to examine and package any certificates
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representing the Firm Securities for delivery, at least one (1) full business
day prior to the First Closing Date. Delivery for each of the Option
Securities as provided above shall be made within two (2) business days after
notice of exercise to the Company, and against payment therefor, as provided
above. The hour and date of such delivery and payment made subsequent to the
First Closing Date for Option Securities is referred to as the "Option
Closing Date." The Option Securities shall be registered in such name or
names and in such denominations as the Underwriter may request in writing at
the time of exercise of the Over-allotment Option. The First Closing Date
and Option Closing Date are collectively referred to herein as the "Closing
Dates."
(e) The Company shall not be obligated to sell or deliver any Firm
Securities except upon tender of payment by the Underwriter for all the Firm
Securities.
4. Public Offering by the Underwriter. The Underwriter agrees to
cause the Firm Securities to be offered to the public initially at the prices
and under the terms set forth in the Prospectus as soon, on or after the
effective date of this Agreement, as the Underwriter deems advisable, but no
more than five (5) full business days after such effective date. The
Underwriter may allow such concessions and discounts upon sales to other
dealers as set forth in the Prospectus. The Underwriter agrees to notify the
Company in writing when the Public Offering is first made and when it is
completed. After the completion of the initial public offering, the public
offering prices, the concessions and the reallowance may be changed by the
Underwriter.
5. Agreements of the Company. The Company covenants and agrees with
the Underwriter that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective as promptly as possible, and will
not at any time, whether before or after the Effective Date, file any
amendment or supplement to the Registration Statement, (i) which shall not
have been previously submitted to, and approved by, the Underwriter or
counsel for the Underwriter a reasonable time prior to the filing thereof,
(ii) to which the Underwriter or counsel for the Underwriter shall have
reasonably objected in writing as not being in compliance with the Act or the
Rules and Regulations or (iii) which is not in compliance with the Act or the
Rules and Regulations.
(b) The Company will notify the Underwriter, promptly after it
shall have received notice of the effectiveness of the Registration Statement
or any amendment or supplement
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<PAGE>
thereto, of the receipt of any comments of the Commission with respect
thereto, of the time when the Registration Statement or any post-effective
amendment thereto has become effective or any supplement to the Prospectus
has been filed.
(c) The Company will advise the Underwriter promptly of any
request of the Commission for an amendment or supplement to the Registration
Statement or the Prospectus, or for any additional information, or of the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement, or of any judgment, order, injunction or decree
preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, or of the institution of any proceedings for any of such
purposes, of which it has knowledge, and will use its best efforts to prevent
the issuance of any stop order, and, if issued, to obtain as promptly as
possible the lifting thereof.
(d) If at any time when a prospectus relating to the Public
Securities and/or the Underwriter Securities is required to be delivered
under the Act, any event shall have occurred as a result of which, in the
opinion of counsel for the Company or counsel for the Underwriter, the
Prospectus, as then amended or supplemented, includes an untrue statement of
a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act, the
Company will notify the Underwriter promptly and prepare and file with the
Commission an appropriate amendment or supplement in accordance with Section
10 of the Act, each such amendment or supplement to be satisfactory to
counsel for the Underwriter, and the Company will furnish to the Underwriter
copies of such amendment or supplement as soon as available and in such
quantities as the Underwriter may request.
(e) Within the time during which the Prospectus is required to be
delivered under the Act, or pursuant to the undertakings of the Company in
the Registration Statement, the Company will comply, at its own expense, with
all requirements imposed upon it by the Act, the Rules and Regulations, the
1934 Act or the rules and regulations of the Commission promulgated under the
1934 Act, each as now or hereafter amended or supplemented, and by any order
of the Commission so far as necessary to permit the continuance of sales of,
or dealings in, the Registered Securities.
(f) The Company will furnish to the Underwriter, without charge,
two (2) signed copies of the Registration Statement and of any amendment of
supplement thereto which has been filed
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prior to the date of this Agreement, together with two (2) copies of each
exhibit filed therewith, and of five (5) conformed copies of such
Registration Statement and amendments thereto (unsigned and exclusive of
exhibits). The signed copies of the Registration Statement so furnished to
the Underwriter will include signed copies of any and all consents and
reports of the independent public auditors as to the financial statements
included in the Registration Statement and Prospectus, and signed copies of
any and all consents and certificates of any other person 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 parts thereof.
(g) The Company will deliver to the Underwriter, without charge,
(i) prior to the Effective Date, copies of each Preliminary Prospectus
distributed to the public and filed with the Commission bearing in red ink
the statement required by Item 501 of Regulation S-B of the Rules and
Regulations; (ii) on and from time to time after the Effective Date, copies
of the Prospectus; and (iii) as soon as they are available, and from time to
time thereafter, copies of each amended or supplemented Prospectus, and the
number of copies to be delivered in each such case will be such as the
Underwriter may reasonably request. The Company has consented and hereby
consents to the use of each Preliminary Prospectus for the purposes permitted
by the Act and the Rules and Regulations. The Company authorizes the
Underwriter and dealers to use the Prospectus in connection with the sale of
the Offered Securities and the Public Warrant Shares, for such period as, in
the opinion of counsel for the Underwriter, delivery of the Prospectus is
required to comply with the applicable provisions of the Act and the Rules
and Regulations.
(h) For so long as any Redeemable Warrant is outstanding, the
Company shall, at its own expense, use its reasonable best efforts to cause
post-effective amendments to the Registration Statement, or a new
registration statement relating to the Public Warrant Shares, to become
effective in compliance with the Act and without any lapse of time between
the effectiveness of the Registration Statement and of any such
post-effective amendment or new registration statement. The Company also
agrees to take such action as may be necessary to qualify the Registered
Securities for offer and sale under the Blue Sky or securities laws of such
states or other jurisdictions as is required and as the Underwriter or
counsel for the Underwriter may designate (provided that such states or
jurisdictions do not require the Company to qualify as a foreign corporation
or to file a general consent to service of process) and to continue such
qualifications in effect so long as may be required for the purposes of the
distribution of
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<PAGE>
the Registered Securities. In each state or jurisdiction where the Company
shall qualify the Registered Securities as above provided, the Company will
prepare and file such statements or reports as may be required by the laws of
such state or jurisdiction, and the Underwriter shall, upon the written
request of the Company, supply the Company with all information known to the
Underwriter and required to be included in such statements or reports.
(i) Except as otherwise provided in (iii) below, during the period
of three years from the First Closing Date, the Company, at its expense,
shall furnish the Underwriter with (i) copies of each annual report of the
Company; (ii) as soon as practicable and in any event upon filing such report
with the Commission, a financial report of the Company, which will include a
balance sheet as of the end of the preceding fiscal year, a statement of
operations, a statement of stockholders' equity (deficit) and a statement of
cash flows covering such fiscal year, such report being in reasonable detail
and audited by independent public auditors; (iii) during the period of two
years from the First Closing Date, for each fiscal quarter of the Company
other than the last fiscal quarter in any fiscal year, as soon as practicable
and in any event upon filing such report with the Commission, a financial
report of the Company, which will include a balance sheet as of the end of
the fiscal quarter, a statement of operations, a statement of stockholders'
equity (deficit) and a statement of cash flows covering such fiscal quarter,
together with notes thereto, for such fiscal quarter and, with respect to the
statement of operations, for the fiscal year to date, setting forth in each
case in comparative form the corresponding figures for the preceding year,
such report being in reasonable detail and certified by the Chief Financial
Officer of the Company to be correct and complete, to fairly present the
financial condition of the Company at the date thereof and the results of
operations for the period then ending and to have been prepared in accordance
with generally accepted accounting principles consistently applied, except
for normal year end adjustments; and (iv) a copy of any Schedule 13D, 13G,
14D-1, 13E-3 or 13E-4 received or filed by the Company from time to time; (v)
a copy of any report filed by the Company pursuant to the 1934 Act; (vi)
copies of all statements, documents or other information which the Company
shall mail or otherwise make available to any class of its security holders,
or shall file with the Commission or with any exchange upon which the
securities issued by the Company shall then be listed or registered; and
(vii) such other publicly available information as the Underwriter may from
time to time request. If, and so long as, the Company has an active
subsidiary or subsidiaries, the Company's financial statements will be on a
consolidated basis to the extent the accounts of the Company and its
subsidiary or subsidiaries are
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consolidated in reports furnished to its stockholders generally. Separate
financial statements shall be furnished for all subsidiaries whose accounts
are not consolidated but which at the time are significant subsidiaries as
defined by the Rules and Regulations. With respect to each consolidated and
unconsolidated significant subsidiary and affiliate, if any, the financial
reports shall be in sufficient detail to show the basis of any consolidated
reports required hereunder. Notwithstanding the foregoing, the Company's
financial statements shall be deemed to comply with the requirements of this
paragraph if they comply with the Rules and Regulations.
(j) For a period of five years from the First Closing Date, the
Company shall not change its independent public accountants without the
Underwriter's prior consent. For a period of five years from the First
Closing Date, the Company shall promptly submit to the Underwriter copies of
all accountants' management reports and similar correspondence between the
Company and its independent public accountants.
(k) The Company on the First Closing Date will sell to the
Underwriter the Underwriter's Warrants according to the terms specified in
Section 3 hereof. The Company has reserved and shall continue to reserve a
sufficient number of shares of Common Stock for issuance upon exercise of
the Underwriter's Warrants and the Underwriter's Redeemable Warrants.
(l) For the five year period following the First Closing Date, the
Company agrees that the Underwriter shall have the right to nominate, and the
Company shall use its best efforts to cause the election of, one member of
the Company's Board of Directors, who shall be reasonably acceptable to the
Company. The Underwriter may also appoint a designee to be engaged as an
advisor at all meetings of the Company's Board of Directors, which advisor
would be entitled to the same cash compensation and the same reimbursement of
expenses as the Company affords its directors who are not also officers or
employees of the Company (and would, in any event, be reimbursed for all
reasonable costs incurred in attending Board meetings, including but not
limited to, food, lodging and transportation) and to receive all copies of
all notices and other documents distributed to the members of the Company's
Board of Directors (including, but not limited to, any unanimous consents
prepared and advance notices of all proposed Board actions or consents), as
if such advisor were a member of the Company's Board of Directors; provided,
however, that during any period a person designated by the Underwriter is
engaged by the Board as an advisor, the Underwriter shall not be entitled to
designate a director. To the extent permitted by law, the Company
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<PAGE>
agrees to indemnify and hold the designee (as a director or advisor) and the
Underwriter harmless against any and all claims, actions, awards and judgments
arising out of his service. The Company shall immediately after the First
Closing Date use its best efforts to obtain directors' and officers' liability
insurance in amounts reasonable and customary for similarly situated companies,
at a premium that the Company can reasonably afford. In the event the Company
maintains a liability insurance policy affording coverage for the acts of its
officers and directors, it will, if possible, include the Underwriter and its
designee (as a director or advisor) as insureds under such policy. The rights
and benefits of such indemnification and the benefits of such insurance shall,
to the extent possible, extend to the Underwriter insofar as it may be, or be
alleged to be, responsible for such advisor. The Company will deliver, on or
before the date hereof, the agreements of each of its officers, directors and
holders of 5% or more of its Common Stock, to vote, during the five (5) year
period commencing on the First Closing Date, for the election of the
Underwriter's designee for director, if any.
(m) The Company will maintain insurance in full force and effect of
the types and in the amounts adequate for its business and in line with
insurance maintained by similar companies and businesses, including but not
limited to, personal injury and product liability insurance and insurance
covering all personal property owned or leased by the Company against theft,
damage, destruction, acts of vandalism and all other risks customarily insured
against.
(n) During the course of the distribution of the Offered Securities,
the Company will not take, directly or indirectly, any action designed to or
which might, in the future, reasonably be expected to cause or result in
stabilization or manipulation of the prices of the Common Stock and/or
Redeemable Warrants. During the so-called "quiet period" in which delivery of a
prospectus is required, if applicable, the Company will not issue press releases
or engage in any other publicity regarding the Company, its business or any
terms of the Public Offering, without the Underwriter's prior written consent
which shall not be unreasonably withheld or unduly delayed. During such period,
copies of all documents which the Company or its public relations advisors
intend to distribute will be provided to the Underwriter for review prior to
such distribution.
(o) The Company will use its best efforts at its cost and expense, to
take all necessary and appropriate action to maintain the listing of the Common
Stock and the Redeemable Warrants on NASDAQ and the Boston Stock Exchange for a
period of
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five years from the First Closing Date and will, as promptly as practicable
following determination by the Company that the Common Stock and Redeemable
Warrants will qualify therefor, use its best efforts to list such securities on
The Nasdaq National Market and maintain such listing for as long as such
securities remain qualified.
(p) On or prior to the Effective Date, the Company shall register
with (i) the Corporation Records Service (including annual report information)
published by Standard & Poor's Corporation or (ii) Moody's Industrial Manual
(Moody's OTC Industrial Manual not being sufficient for these purposes).
(q) The Company has filed a registration statement with the
Commission pursuant to Sections 12(b) and 12(g) of the 1934 Act with respect to
the Common Stock and Redeemable Warrants and will use its best efforts to have
same declared effective by the Commission on or before the Effective Date. The
Company will use its best efforts to maintain such registration in effect for a
period of not less than 5 years from the First Closing Date.
(r) The Company will at all times from the First Closing Date until
at least five (5) years from such date, maintain in full force, or cause to be
maintained in full force, from an insurer rated "A" or better (General
Policyholders Rating) in the most recent edition of "Best Life Reports", term
life insurance in the amount of at least $1,000,000 on the life of Dan Cooper.
Such policy shall be owned by the Company and all benefits thereunder shall be
payable to the Company.
(s) On the Closing Dates, all transfer or other taxes (other than
income taxes) which are required to be paid in connection with the sale and
transfer of the Offered Securities and the Underwriter's Warrants will have been
fully paid by the Company and all laws imposing such taxes will have been fully
complied with.
(t) On the First Closing Date, the Company and the Underwriter shall
enter into a consulting agreement, substantially in the form filed as Exhibit
1.3 to the Registration Statement, pursuant to which the Underwriter will offer
to provide financial consulting services to the Company for a two-year period
(the "Consulting Agreement").
(u) Except for (i) the Public Securities, (ii) the Underwriter's
Securities, (iii) the issuance of Common Stock pursuant to the exercise of any
Non-Plan Options and (iv) the issuance, subject to the terms hereof, to
employees, officers and
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directors of stock options to purchase a number of shares of Common Stock not to
exceed 600,000 shares pursuant to the Stock Option Plan, the Company will not,
from and after the date hereof until thirty-six (36) months after the First
Closing Date, sell or issue any shares of Common Stock, preferred stock or other
equity securities of the Company or sell or grant options, warrants or rights to
purchase any shares of equity securities of the Company, without the
Underwriter's prior written consent. Notwithstanding the foregoing, during the
36-month period following the First Closing Date, the Company may issue
securities in connection with an acquisition, merger or similar transaction
without the Underwriter's prior consent, provided that such securities are not
publicly registered and the acquirer of the securities is not granted
registration rights with respect thereto which may be exercised prior to
thirty-six (36) months after the First Closing Date.
(v) The Company will not file any registration statement relating to
the offer or sale of any of the Company's securities, including any registration
statement on Form S-8, during the thirty-six (36) months following the First
Closing Date without the Underwriter's prior written consent. Furthermore, for
a period of five years after the First Closing Date, the Company shall notify
the Underwriter in writing at least fifteen (15) days before the proposed filing
of any registration statement for any public offering of any equity or debt
securities of the Company or its Subsidiaries (other than securities issued
pursuant to an employee benefit plan or a transaction subject to Rule 145
promulgated under the Act), or at least fifteen (15) days before the private
offering of any debt or equity securities by the Company or its Subsidiaries
through a private financing, in order that the Underwriter or, at its option, a
group of associated investment bankers of which the Underwriter shall be a
co-manager, shall have a right of first refusal to effect such offering on terms
at least as favorable as otherwise offered in writing to the Company. A private
offering of securities shall not include shares given as compensation to
employees of the Company.
The Underwriter agrees to notify the Company if the Underwriter intends to
exercise its right of first refusal within 15 days of receipt by the Underwriter
of such notice from the Company. A refusal by the Underwriter in respect of any
offering made by the Company shall not prejudice any further rights of first
refusal during the five year period, including without limitation the right of
first refusal of the Underwriter with respect to any revised terms otherwise
offered to the Company.
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<PAGE>
(w) The Company shall retain Continental Stock transfer & Trust
Company ("Continental Stock") as transfer agent for the Common Stock and as
warrant agent for the Redeemable Warrants. For the five (5) year period
following the First Closing Date, the Company will not change its transfer agent
or warrant agent without the prior written consent of the Underwriter.
(x) Subsequent to the dates as of which information is given in the
Registration Statement and Prospectus and prior to the Closing Dates, except as
disclosed in or contemplated by the Registration Statement and Prospectus, (i)
the Company will not have incurred any liabilities or obligations, direct or
contingent, or entered into any material transactions other than in the ordinary
course of business; (ii) there shall not have been any change in the capital
stock, funded debt (other than regular repayments of principal and interest on
existing indebtedness) or other securities of the Company, any adverse change in
the condition (financial or otherwise), business, operations, income, net worth
or properties, including any loss or damage to the properties of the Company
(whether or not such loss is insured against), which could adversely affect the
condition (financial or otherwise), business, operations, income, net worth or
properties of the Company; and (iii) the Company shall not have paid or declared
any dividend or other distribution on its Common Stock or its other securities
or redeemed or repurchased any of its Common Stock or other securities. The
Company shall furnish to the Underwriter as early as practicable prior to each
of the date hereof, the First Closing Date and each Option Closing Date, if any,
but no later than two (2) full business days prior thereto, a copy of the latest
available unaudited interim financial statements of the Company (which in no
event shall be as of a date more than sixty (60) days prior to the date of the
Registration Statement) which have been read by the Company's independent public
accountants, as stated in their letters to be furnished pursuant to Section 9(d)
hereof.
(z) [Address employment agreements] The Company will not, for a
period of three (3) years from the First Closing Date increase or authorize an
increase in the compensation of its five (5) most highly paid employees in any
year without the prior written consent of the Underwriter or unless permitted by
the terms of employment contracts satisfactory to the Underwriter.
(aa) The Company maintains and will continue to maintain a system of
internal accounting controls sufficient to provide reasonable assurances that:
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary in order to
permit
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preparation of financial statements in accordance with generally accepted
accounting principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(bb) For a period of three years from the Effective Date, the Company
will retain a financial public relations firm reasonably acceptable to
Underwriter.
(cc) The Company agrees that for so long as the Common Stock is
registered under the 1934 Act, the Company will hold an annual meeting of
shareholders for the election of directors within 180 days after the end of each
of the Company's fiscal years and, within 150 days after the end of each of the
Company's fiscal years, will provide the Company's shareholders with the 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
applicable rules under the 1934 Act and shall be included in an annual report
pursuant to the requirements thereof.
(dd) For a period equal to the lesser of (i) seven (7) years from the
date hereof and (ii) the sale to the public of the Underwriter's Securities, the
Company will not take any action or actions which may prevent or disqualify the
Company's use of Form S-1 or Form SB-2 (or other appropriate form) for the
registration under the Act of the Underwriter's Redeemable Warrants, the
Underwriter's Shares or the Underwriter's Warrant Shares.
(ee) Subject to the provisions of applicable law, the Underwriter
shall be entitled to receive a warrant solicitation fee of five percent (5%) of
the aggregate exercise price of the Redeemable Warrants for each Redeemable
Warrant exercised during the period commencing one year after the Effective
Date; provided, however, that the Underwriter will not be entitled to receive
such compensation in Redeemable Warrant exercise transactions in which (i) the
market price of the Common Stock at the time of exercise is lower than the
exercise price of the Redeemable Warrants; (ii) the Redeemable Warrants are held
in any discretionary account; (iii) disclosure of compensation arrangements is
not made in the Registration Statement and in documents provided to holders of
Redeemable Warrants at the time of exercise; (iv) the holder thereof has not
confirmed in writing that the Underwriter solicited the exercise of the
Redeemable Warrants; or (v) the solicitation
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or exercise of the Redeemable Warrants was in violation of Regulation M
promulgated under the 1934 Act.
(ff) Promptly following the First Closing Date the Board of Directors
shall designate an Audit Committee, at least one of whose members shall be the
director, if any, who is designated by the Underwriter. A majority of the
members of the Audit Committee shall be independent directors.
(gg) The Company shall cause each director, officer and shareholder of
the Company, to enter into an agreement with the Underwriter pursuant to which
he, she or it will agree not to sell or otherwise transfer any shares of Common
Stock and or options or warrants to acquire Common Stock of the Company for a
period of 24 months following the First Closing Date without the prior consent
of the Underwriter.
(hh) The Company shall engage the Underwriter's counsel, at such
counsel's regular hourly rates, to provide the Underwriter, on the First Closing
Date and annually thereafter, until the earlier of (i) such time as the Common
Stock is listed on the New York Stock Exchange or American Stock Exchange or
quoted on NASDAQ/NMS or (ii) the second anniversary of the First Closing Date,
with an opinion, setting forth those states in which the Common Stock and
Redeemable Warrants may be traded in non-issuer transactions under the Blue Sky
laws of the 50 states. The cost of the same shall not exceed $10,000.
(ii) There shall be no agreements between the Company and any
securityholder except those which are disclosed in the Registration Statement.
(jj) The Company will arrange to have its securityholders agree to be
bound by such "lock-up" or similar transfer restrictions as may be required by
the NASD or any exchange or similar entity.
(kk) For a period of three (3) years from the Effective Date, the
Company will not offer or sell any of its securities pursuant to Regulation S
promulgated under the Act without the prior written consent of the Underwriter.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless the Underwriter
and each person, if any, who controls the Underwriter within the meaning of
Section 15 of the Act against any losses, claims, damages, expenses or
liabilities, joint or several
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(which shall, for all purposes of this Agreement, include, but not be limited
to, all costs of defense and investigation and all reasonable attorney's fees),
to which the Underwriter or any such controlling person may become subject,
under the Act or otherwise, but only as such losses, claims, damages or
liabilities (or action in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; provided,
however, that the Company will not be liable in any such case to the extent that
any such loss, claim, damages or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, any Preliminary Prospectus or the Prospectus
or any amendment or supplement thereto, in reliance upon, and in conformity
with, written information furnished to the Company by the Underwriter
specifically for use in the preparation thereof. The information set forth on
the cover page concerning the Underwriter and under the caption "Underwriting"
or otherwise specifically relating to the Underwriter in the Registration
Statement shall be deemed to have been furnished to the Company by the
Underwriter for purposes hereof. This indemnity will be in addition to any
liability which the Company may otherwise have.
(b) The Underwriter agrees that it will indemnify and hold harmless
the Company, each of its directors, each nominee (if any) for director named in
the Prospectus, each of its officers who has signed the Registration Statement,
and each person, if any, who controls the Company within the meaning of Section
15 of the Act, against any losses, claims, damages, expenses or liabilities
(which shall, for all purposes of this Agreement, include, but not be limited
to, all costs of defense and investigation and all attorney's fees), joint or
several, to which the Company or any such director, nominee, officer or
controlling person may become subject under the Act or otherwise, but only as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, any Preliminary
Prospectus or the Prospectus or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in the Registration
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Statement, any Preliminary Prospectus or the Prospectus or such amendment or
supplement thereto in reliance upon and in conformity with written information
furnished to the Company by the Underwriter specifically for use in the
preparation thereof, provided, however, that the obligation of each Underwriter
to indemnify the Company (including any controlling person, director or officer
thereof) shall (i) only relate to any untrue statement or alleged untrue
statement or any omission or alleged omission which applies to such Underwriter
and (ii) be limited in amount to the net proceeds received by the Company from
the Underwriter.
This indemnity will be in addition to any liability which the
Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
6 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 6, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve the indemnifying
party from any liability which it may have to any indemnified party otherwise
than solely pursuant to this Section 6. In case any such action is brought
against any indemnified party, which notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may choose, jointly with any other indemnifying party
similarly notified, reasonably assume the defense thereof. Subject to the
provisions herein stated and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section 6 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation, unless the indemnifying party shall have a default
judgment entered against it or shall settle such action without the consent of
the indemnified party. The indemnified party shall have the right to employ
separate counsel in any such action and to participate in the defense thereof,
but the fees and expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the indemnified party; provided
that the fees and expenses of such counsel shall be at the expense of the
indemnifying party if (i) the employment of such counsel has been specifically
authorized in writing by the indemnifying party, (ii) the named parties to such
action (including any impleaded parties) include both the indemnified and the
indemnifying party and the indemnified party shall have been advised by such
counsel that there may be one or more legal defenses available to the
indemnifying party different
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from or in conflict with any legal defenses which may be available to the
indemnified party (in which case the indemnifying party shall not have the right
to assume the defense of such action on behalf of the indemnified party, it
being understood, however, that the indemnifying party shall, in connection with
any one such action or separate but substantially similar or related actions in
the same jurisdiction arising out of the same general allegations or
circumstances, be liable only for the reasonable fees and expenses of one
separate firm of attorneys for the indemnified party, which firm shall be
designated in writing by the indemnified party), or (iii) the professional
competence of the counsel to be employed by the indemnifying party is not
reasonably acceptable to the indemnified party. No settlement of any action
against an indemnified party shall be made without the prior written consent of
the indemnified party, which consent shall not be unreasonably withheld. The
indemnifying party shall not be liable to indemnify the indemnified party for
any settlement of any action effected without the indemnifying party's prior
written consent to any such settlement, which consent shall not be unreasonably
withheld.
7. Contribution. In order to provide for just and equitable contribution
under the Act in any case in which (i) the Underwriter makes a claim for
indemnification pursuant to Section 6 hereof but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that the express provisions of Section 6 provide for indemnification in such
case, or (ii) contribution under the Act may be required on the part of the
Underwriter, then the Company and the Underwriter shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(which shall, for all purposes of this Agreement, include, but not be limited
to, all costs of defense and investigation and all attorneys' fees), in either
such case (after contribution from others) in such proportions such that the
Underwriter shall be responsible in the aggregate for that portion of such
losses, claims, damages or liabilities determined by multiplying the total
amount of such losses, claims, damages or liabilities by the difference between
the aggregate public offering price of the Units (or underlying Shares and
Redeemable Warrants) and the aggregate purchase price of the Units (or
underlying Shares and Redeemable Warrants) to such Underwriter and dividing the
product by the aggregate public offering price of the Units (or underlying
Shares and Redeemable Warrants), and the Company shall be responsible for that
portion of such losses, claims, damages or liabilities determined by multiplying
the total amount of such losses, claims, damages or liabilities by the aggregate
purchase price of the Units
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(or underlying Shares and Redeemable Warrants) to the Underwriter and dividing
the product thereof by the aggregate public offering price of the Units (or
underlying Shares and Redeemable Warrants). No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. The foregoing contribution agreement shall in no way affect
the contribution liabilities of any persons having liability under Section 11 of
the Act other than the Company and the Underwriter. As used in this Section 7,
the term "Underwriter" includes any person who controls the Underwriter within
the meaning of Section 15 of the Act. If the full amount of the contribution
specified in this Section 7 is not permitted by law, then the Underwriter shall
be entitled to contribution from the Company, its officers, directors and
controlling persons to the fullest extent permitted by law. Any party entitled
to contribution will, promptly after receipt of notice of commencement of any
action, suit or proceeding against such party in respect to which a claim for
contribution may be made against another party or parties under this Section 7,
notify such party or parties from whom contribution may be sought, but the
omission so to notify such party or parties shall not relieve the party or
parties from whom contribution may be sought from any obligation it or they may
have hereunder or otherwise than under this Section 7, or to the extent that
such party or parties were not adversely affected by such omission. The
contribution agreement set forth above shall be in addition to any liabilities
which any indemnifying party may have at common law or otherwise.
8. Survival of Agreements, etc. All statements contained in any
schedule, exhibit or other instrument delivered by or on behalf of the parties
hereto, or in connection with the transactions contemplated by this Agreement,
shall be deemed to be representations and warranties hereunder. Notwithstanding
any investigations made by or on behalf of the parties to this Agreement, all
representations, warranties, indemnities, and agreements made by the parties to
this Agreement or pursuant hereto shall remain in full force and effect and will
survive delivery of and the payment for the Offered Securities, for a period of
five years from the date hereof, except that, if a party hereto has actual
knowledge at the time of the Closing Dates of facts which would constitute a
breach of the representations and warranties contained herein, such breaches
shall be waived by such party if such party consummates the transactions
contemplated by this Agreement.
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9. Conditions of Underwriter's Obligations. The obligations of the
Underwriter hereunder will be subject to the accuracy of and compliance with (as
of the date of this Agreement and as of the Closing Dates) the representations,
warranties and agreements contained in Sections 2 and 5 hereof and to the
following additional conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 p.m., New York City time, on the date of this Agreement, or such later
date as shall be consented to in writing by the Underwriter; and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued and no proceeding for that purpose shall have been initiated or be
pending or, to the best knowledge of the Company or the Underwriter,
contemplated or threatened by the Commission; any request by the Commission for
additional information to be included in the Registration Statement or the
Prospectus or otherwise shall have been complied with to the satisfaction of
counsel for the Underwriter; qualification under the securities laws of such
states as the Underwriter may designate of the issue and sale of the Offered
Securities upon the terms and conditions herein set forth or contemplated and
containing no provision unacceptable to the Underwriter shall have been secured;
and no stop order shall be in effect denying or suspending effectiveness of such
qualifications, nor shall any stop order proceedings with respect thereto be
instituted or pending or, to the best knowledge of the Company and the
Underwriter, threatened under such laws. If the Company has elected to rely
upon Rule 430A of the Rules and Regulations, the price of the Units (or
underlying Shares and Redeemable Warrants) and any price-related information
previously omitted from the effective Registration Statement pursuant to such
Rule 430A shall have been transmitted to the Commission for filing pursuant to
Rule 424(b) of the Rules and Regulations within the prescribed time period, and
prior to the First Closing Date the Company shall have provided evidence
satisfactory to the Underwriter of such timely filing, or a post-effective
amendment providing such information shall have been promptly filed and declared
effective in accordance with the requirements of Rule 430A of the Rules and
Regulations.
(b) No amendments to the Registration Statement, any Preliminary
Prospectus or the Prospectus to which the Underwriter or counsel for the
Underwriter shall have objected, after having received reasonable notice of a
proposal to file the same, shall have been filed.
(c) The Underwriter shall not have discovered and disclosed to the
Company prior to the respective Closing Dates that the Registration Statement or
the Prospectus, or any amendment or
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supplement thereto, contains an untrue statement of fact which, in the
reasonable opinion of counsel for the Underwriter, is material, or omits to
state a fact which, in the opinion of such counsel, is material and is required
to be stated therein or is necessary to make the statements therein not
misleading.
(d) The Underwriter shall have received from BDO Seidman, LLP, two
certificates or letters, one dated and delivered on the Effective Date and one
dated and delivered on the First Closing Date, in form and substance
satisfactory to the Underwriter, stating that:
(i) they are independent certified public accountants with
respect to the Company within the meaning of the Act and the Rules and
Regulations, and no disclosure under Item 13 of a registration statement on Form
SB-2 is required insofar as it relates to them;
(ii) the financial statements included in the Registration
Statement and the Prospectus were examined by them and, in their opinion, comply
as to form in all material respects with the applicable requirements of the Act,
the Rules and Regulations and instructions of the Commission with respect to
registration statements on Form SB-2 and that the Underwriter may rely upon the
opinion of such firm with respect to the financial statements included in the
Registration Statement;
(iii) on the basis of inquiries and procedures conducted
by them (not constituting an examination in accordance with generally accepted
auditing standards), including a reading of the latest available unaudited
interim financial statements or other financial information of the Company (with
an indication of the date of the latest available unaudited interim financial
statements), inquiries of officers of the Company who have responsibility for
financial and accounting matters, reviews of minutes of all meetings of the
shareholders and the Board of Directors of the Company and its subsidiaries
since December 31, 1996, and other specified inquiries and procedures, nothing
has come to their attention as a result of the foregoing inquiries and
procedures that causes them to believe that:
(A) during the period from (and including) December
31, 1996 to a specified date not more than five days prior to the date of such
letter, there has been any change in the Common Stock or other securities of the
Company (except as specifically disclosed in such certificates or letters), any
decreases in shareholders' equity or working capital or any increases in net
current liabilities, net liabilities or long-term debt (except,
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regarding the foregoing, for decreases resulting from operating losses
continuing at rates commensurate with those incurred in prior periods) or in any
other item appearing in the Company's financial statements as to which the
Underwriter may request advice, in each case as compared with amounts shown in
the audited balance sheet as of December 31, 1996, as included in the
Prospectus, except in each case for changes, increases or decreases which the
Prospectus discloses have occurred or will or may occur; and
(B) during the period from (and including) December
31, 1996 to such specified date there was any decrease in revenues or in the
total or per share amounts of income before extraordinary items or net income or
loss, or any other material change in such other items appearing in the
Company's financial statements as to which the Underwriter may request advice,
in each case as compared with the corresponding period in the fiscal period
ended December 31, 1996, except in each case for increases, changes or decreases
which the Prospectus discloses have occurred or will or may occur.
(iv) On the basis of certain procedures specified by the
Underwriter and described in their letter, they have compared specific dollar
amounts, numbers of shares, percentages of revenue and earnings and other
information (to the extent they are contained in or derived from the accounting
records of the Company, and excluding any questions of legal interpretations)
included in the Registration Statement and Prospectus with the accounting
records and other appropriate data of the Company and have found them to be in
agreement.
Any changes, increases or decreases in the items set forth in such
letter which, in the sole judgment of the Underwriter, are materially adverse
with respect to the financial position or results of operations of the Company
shall be deemed to constitute a failure of the Company to comply with the
conditions of the obligations to the Underwriter hereunder.
(e) The Underwriter shall have received from Gersten, Savage,
Kaplowitz & Fredericks LLP ("GSK&F") counsel for the Company, two opinions, one
dated and delivered on the Effective Date and one dated and delivered on the
First Closing Date, in form and substance satisfactory to Zimet, Haines,
Friedman & Kaplan, counsel for the Underwriter.
(f) All corporate proceedings relating to this Agreement, the
Registered Securities, the Registration Statement, each Preliminary Prospectus,
the Prospectus and other related
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matters shall be satisfactory to, or approved by, counsel for the Underwriter,
and the Underwriter shall have received from such counsel a signed opinion, in
form and substance reasonably satisfactory to the Underwriter, dated the First
Closing Date, with respect to such corporate proceedings and other legal matters
in connection with this Agreement, the Registered Securities, the Registration
Statement, the Prospectus (other than the financial statements and other
financial data contained therein) and related matters as the Underwriter may
reasonably require, and the Company shall have furnished to such counsel such
documents, certificates and opinions as they may have requested for the purpose
of enabling them to pass upon such matters.
(g) The Underwriter shall have received a certificate, dated and
delivered as of the date of the First Closing Date, of the Chief Executive
Officer and Secretary of the Company stating that:
(i) The Company and such officers have complied with all
the agreements and satisfied all the conditions on their respective part to be
performed or satisfied hereunder at or prior to such date, including but not
limited to the agreements and covenants of the Company set forth in Section 5
hereof.
(ii) No stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings for that purpose have
been instituted or are pending, contemplated or threatened under the Act.
(iii) Such officers have carefully examined the
Registration Statement and the Prospectus and any supplement or amendment
thereto, each of which contains all statements required to be stated therein or
necessary to make the statements therein not misleading and does not contain any
untrue statement of a material fact, and since the Effective Date there has
occurred no event required to be set forth in the amended or supplemented
prospectus which has not been set forth.
(iv) As of the date of such certificate, the representations
and warranties contained in Section 2 hereof are true and correct as if such
representations and warranties were made in their entirety on the date of such
certificate, and the Company has complied with all its agreements herein
contained as of the date hereof and further certifying as to the matters
referred to in Sections 9(h) and (i).
(v) Subsequent to the respective dates as of which
information is given in the Registration Statement and
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Prospectus, and except as contemplated in the Prospectus, the Company has not
incurred any liabilities or obligations, direct or contingent, or entered into
any material transactions and there has not been any change in the Common Stock
or funded debt of the Company or any adverse change in the condition (financial
or otherwise), business, operations, income, net worth, properties or prospects
of the Company.
(vi) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company shall have not sustained any material loss of or damage to its
properties, whether or not insured, and since such respective dates, no
dividends or distributions whatever shall have been declared or paid, or both,
on or with respect to any security (except interest in respect of loans) of the
Company.
(vii) Neither the Company nor, to the knowledge of the
officers executing such certificate, any of its officers or affiliates shall
have taken, and the Company, its officers and affiliates will not take, directly
or indirectly, any action designed to, or which might reasonably be expected to,
cause or result in the stabilization or manipulation of the price of the
Company's securities to facilitate the sale or resale of the Offered Securities.
(viii) No action, suit or proceeding, at law or in
equity, shall be pending or, to the knowledge of such officers, threatened
against the Company, or affecting any of its properties, before or by any
commission, board or other administrative agency, except as otherwise set forth
in the Registration Statement.
(h) On the First Closing Date, the Company shall not be a party to,
or be involved in, any arbitration, litigation (except as set forth in the
Registration Statement) or governmental proceeding, which is then pending, or,
to the knowledge of the Company, threatened, of a character which might
materially and adversely affect the Company or be required to be disclosed in
the Registration Statement.
(i) The Company shall not have sustained, at any time since December
31, 1996, any loss on account of fire, flood, accident, or other calamity,
whether or not covered by insurance, which, in the sole judgment of the
Underwriter, adversely affects the business of the Company.
(j) All of the Units, Shares and Redeemable Warrants shall have been
tendered for delivery in accordance with the terms and provisions of this
Agreement.
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(k) The Underwriter shall have received the agreements referred to in
Sections________and________hereof.
(l) At each of the Closing Dates, (i) the representations and
warranties of the Company contained in this Agreement shall be true and correct
with the same effect as if made on and as of the Closing Dates and the Company
shall have performed all its obligations due to be performed prior thereto; (ii)
the Registration Statement and the Prospectus and any amendment or supplement
thereto shall contain all statements which are required to be stated therein in
accordance with the Act and the Rules and Regulations and conform in all
material respects to the requirements thereof, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto shall
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading; (iii) there shall have been, since the date as of which
information is given, no material adverse change in the condition, business,
operations, properties, business prospects, securities, long-term or short-term
debt or general affairs of the Company from that set forth in the Registration
Statement or the Prospectus, except changes which the Registration Statement and
the Prospectus indicate will occur after the Effective Date and prior to such
Closing Date, and the Company shall not have incurred any material liabilities
or obligations, direct or contingent, or entered into any material transaction,
contract or agreement not in the ordinary course of business other than as
referred to in the Registration Statement and the Prospectus; and (iv) except as
set forth in the Prospectus, no action, suit or proceeding, at law or in equity,
shall be pending or threatened against the Company which might be required to be
set forth in the Registration Statement, and no proceedings shall be pending or
threatened against the Company before or by any commission, board or
administrative agency in the United States or elsewhere, wherein an unfavorable
decision, ruling or finding might adversely affect the condition, business,
operations, properties, prospects or general affairs of the Company.
(m) Upon exercise of the Over-allotment Option provided for in
Section 3(b) hereof, the obligations of the Underwriter to purchase and pay for
the Option Shares and/or the Redeemable Warrants will be subject to the
following additional conditions:
(i) The Registration Statement shall remain effective at
the Option Closing Date, and no stop order suspending the effectiveness thereof
shall have been issued and no proceedings for that purpose shall have been
instituted or shall be pending,
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or, to the knowledge of the Underwriter or the Company, shall be contemplated by
the Commission, and any request on the part of the Commission for additional
information shall have been complied with to the satisfaction of counsel for the
Underwriter.
(ii) At the Option Closing Date there shall have been
delivered to the Underwriter the signed opinion of GSK&F, counsel for the
Company, in form and substance reasonably satisfactory to Zimet, Haines,
Friedman & Kaplan, counsel for the Underwriter, which opinion shall be
substantially the same in scope and substance as the opinions furnished to the
Underwriter by such counsel at the First Closing Date pursuant to Section 9(e).
(iii) At the Option Closing Date there shall have been
delivered to the Underwriter a certificate of the Chief Executive Officer and
the Secretary of the Company dated the Option Closing Date, in form and
substance satisfactory to counsel for the Underwriter, substantially the same in
scope and substance as the certificates furnished to the Underwriter at the
First Closing Date pursuant to Section 9(g).
(iv) At the Option Closing Date there shall have been
delivered to the Underwriter a certificate or letter, in form and substance
satisfactory to the Underwriter, from BDO Seidman, LLP, dated the Option Closing
Date and addressed to the Underwriter, confirming the information in its
certificate or letter referred to in Section 9(d) hereof and stating that
nothing has come to their attention during the period from the ending date of
their review referred to in said certificate or letter to a date not more than
five business days prior to the Option Closing Date which would require any
change in said certificate or letter if it were required to be dated the Option
Closing Date.
(v) All proceedings taken at or prior to the Option Closing
Date in connection with the sale and transfer of the Option Securities shall be
satisfactory in form and substance to the Underwriter, and the Underwriter and
counsel for the Underwriter, shall have been furnished with all such documents,
certificates, affidavits and opinions as the Underwriter and counsel for the
Underwriter may reasonably request in connection with this transaction in order
to evidence the accuracy and completeness of any of the representations,
warranties or statements of the Company or its compliance with any of the
covenants or conditions contained herein.
(n) The Company shall have executed and delivered the Public Warrant
Agreement, the Underwriter's Warrant Agreement
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and the Consulting Agreement, and shall have issued the Underwriter's Warrants.
(o) The Company shall have furnished to the Underwriter such other
certificates, documents, and opinions as the Underwriter may have reasonably
requested (including certificates of officers of the Company) as to the
accuracy, at the Closing Dates, of the representations and warranties of the
Company herein, as to the performance by the Company of its obligations
hereunder and as to other conditions concurrent and precedent to the obligations
of the Underwriter hereunder.
The opinions and certificates mentioned above or elsewhere in this
Agreement will be deemed to be in compliance with the provisions hereof only if
they are reasonably satisfactory to the Underwriter and to counsel for the
Underwriter.
Any certificate signed by an officer of the Company delivered to the
Underwriters or to counsel for the Underwriters, will be deemed a representation
and warranty by the Company to the Underwriters as to the statements made
therein.
10. Effective Date. This Agreement will become effective at 9:30 a.m. on
the first business day following the date on which the Registration Statement
becomes effective; provided, however, this Agreement will become effective at
such later time after the Registration Statement becomes effective as the
Underwriter may determine on and by notice to the Company or by release of any
of the Offered Securities for sale to the public or by any other action
constituting a commencement of the Public Offering. For the purposes of this
Section 10, the Offered Securities will be deemed to be so released upon the
release for publication of any newspaper advertisement relating to the Offered
Securities or upon the release by the Underwriter of telegrams offering the
Offered Securities for sale to securities dealers, whichever may occur first.
The term "business day" shall mean a calendar day other than a Saturday, Sunday
or holiday. Notwithstanding anything herein to the contrary, the provisions of
this Section and of Sections 6, 7, 11 and 12 hereof will, however, be effective
upon the execution of this Agreement.
11. Termination. This Agreement may be terminated by the Underwriter by
notice to the Company (i) at any time before this Agreement becomes effective in
accordance with Section 9 hereof; (ii) if, prior to the First Closing Date, the
Company shall have failed or refused to fully comply with any of the provisions
of this Agreement on its part to be performed prior thereto, or if any of the
agreements, conditions, covenants, representations or
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warranties of the Company herein contained shall not have been performed or
fulfilled within the times specified; (iii) trading in securities generally on
the New York Stock Exchange or the American Stock Exchange will have been
suspended; (iv) limited or minimum prices will have been established on either
such Exchange or maximum ranges for prices for securities shall have been
required on the over-the-counter market by the NASD; (v) a banking moratorium
will have been declared either by federal or New York State authorities; (vi)
any other restrictions on transactions in securities materially affecting the
free market for securities or the payment for such securities, will be
established by either of such Exchanges, by the Commission by any other federal
or state agency, by action of the Congress or by Executive Order; (vii) the
Company will have sustained a material loss, whether or not insured, by reason
of fire, flood, accident or other calamity; (viii) any action has been taken by
the Government of the United States or any department or agency thereof which,
in the sole judgment of the Underwriter, has had a material adverse effect upon
the general market for securities; (ix) if, prior to the First Closing Date,
there shall have occurred the outbreak of any war or any other event or calamity
which, in the sole judgment of the Underwriter, materially disrupts the
financial markets of the United States; (x) if, prior to the First Closing Date,
the general market for securities or political, legal or financial conditions
should deteriorate so materially from that in effect on the date of this
Agreement that, in the sole judgment of the Underwriter, it becomes
impracticable for the Underwriter to commence or proceed with the Public
Offering of the Offered Securities and with the payment for or acceptance
thereof; (xi) if trading of any securities of the Company shall have been
delisted on any exchange or in any over-the-counter market; or (xii) if, prior
to the First Closing Date, the Underwriter determines, in its sole discretion,
that any materially adverse change shall have occurred, since the date as of
which information is given in the Registration Statement and the Prospectus, in
the financial condition, business, prospects, operations, properties or
obligations of the Company. Notwithstanding any contrary provision contained in
this Agreement, any election hereunder or any termination of this Agreement, and
whether or not this Agreement is otherwise carried out, the provisions of
Section 7, 8 and 12 shall not be in any way affected by such election or
termination or failure to carry out the terms of this Agreement or any part
hereof.
12. Expenses; Blue Sky Filings and Expenses.
(a) Whether or not the Public Offering is consummated, the Company
will pay all costs and expenses incident to the performance of the obligations
of the Company hereunder,
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including without limiting the generality of the foregoing, (i) the preparation,
printing, filing, and copying of the Registration Statement, Prospectus, this
Agreement, the Selected Dealer Agreement, and other underwriting documents, if
any, and any drafts, amendments or supplements thereto, including the cost of
all copies thereof supplied to the Underwriter in such quantities as reasonably
requested by the Underwriter and the costs of mailing Prospectuses to offerees
and purchasers of the Offered Securities; (ii) the out-of-pocket travel expenses
of the Underwriter and counsel to the Underwriter or other professionals
designated by the Underwriter to visit the Company's facilities for purposes of
discharging due diligence responsibilities (and if conferences and discussions
are held outside New York, New York, the Company shall pay such reasonable
amount of pre-approved traveling and lodging out-of-pocket expenses as may be
incurred by the Underwriter and its counsel, payable when incurred and billed);
(iii) the printing, engraving, issuance and delivery of certificates
representing the Offered Securities, including any transfer or other taxes
payable thereon; (iv) the registration or qualification of the Offered
Securities under state securities or "blue sky" laws (including attorneys fees
of $35,000 (payable on the First Closing Date) and disbursements of counsel to
the Underwriter (to be paid monthly as incurred, except that the amount of blue
sky filing fees shall be paid by the Company to the Underwriter's counsel at the
time application for qualification of the offering under blue sky laws is made);
(v) all reasonable fees and expenses of the Company's counsel and accountants;
[(vi) all costs, expenses and filing fees in connection with review of the terms
of the offering by the NASD (it being agreed that all reasonable fees and
expenses of the Underwriter and Underwriter's counsel in securing NASD approval,
shall be paid by the Company)]; (vii) all costs and expenses of any listing of
the Offered Securities on NASDAQ and Boston Stock Exchange; (viii) all costs and
expenses of three (3) bound volumes provided to the Underwriter of all
documents, paper exhibits, correspondence and records forming the materials
included in the offering; (ix) the cost of "tombstone" advertisements to be
placed in one or more daily or weekly periodicals as the Underwriter may
request; (x) all expenses incurred in connection with presentation of two "due
diligence" meetings and (xi) all other costs and expenses incurred or to be
incurred by the Company in connection with the transactions contemplated by this
Agreement. The aforementioned $35,000 payment shall not include fees of special
counsel if the same is required to be incurred in a "merit review" state which
may require local counsel; the Underwriter will not retain special counsel in
any state without the prior consent of the Company. The obligations of the
Company under this subsection (a) shall survive any termination or cancellation
of this Agreement, except as provided in paragraph of this Section 12.
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<PAGE>
(b) In addition to the Company's responsibility for payment of the
foregoing expenses, the Company shall pay to the Underwriter a non-accountable
expense allowance equal to three percent (3%) of the gross proceeds of the
offering, including in such amount the proceeds from the exercise of the
Underwriter's over-allotment option. The non-accountable expense allowance due
shall be paid at the First Closing Date and any Option Closing Date, as
applicable.
(c) If the Company decides not to proceed with the Public Offering
for any reason, and subsequently engages in any public offering, private
placement, merger, acquisition, joint venture or corporate reorganization with
any other business entity within 12 months after the Company notifies the
Underwriter of its decision not to proceed with the Public Offering, the
Underwriter shall be entitled to receive from the Company a cash fee equal to 5%
of the consideration paid or received in any such transaction, less any payments
previously made to the Underwriter pursuant to paragraph (b). The Company and
the Underwriter mutually agree that since the amount of monetary damages
suffered by the Underwriter would be difficult to calculate in the event of
abandonment of the Public Offering, the amount of such fee is a fair measure of
compensation due to the Underwriter in such event. The Company and the
Underwriter shall negotiate in good faith the terms of an investment banking
finders' fee, if any, if the Underwriter is instrumental in arranging such
transaction.
(d) The Underwriter shall determine in which states or jurisdictions
the Offered Securities shall be registered or qualified for sale, provided that
such states or jurisdictions do not require the Company to qualify as a foreign
business corporation or to file a general consent to service of process.
Immediately prior to the Effective Date, counsel for the Underwriter shall
advise counsel for the Company in writing of all states in which the offering
has been registered or qualified for sale or has been cancelled, withdrawn or
denied and the number of Offered Securities registered or qualified for sale in
each such state. The Company shall be responsible for the cost of state
registration or qualification, including the filing fees (which filing fees are
payable to Underwriter's counsel in advance of such filings) and the legal fees
and disbursements of Underwriter's counsel in connection with obtaining such
registration or qualification; provided, however, that the legal fees of
Underwriter's counsel payable by the Company with respect to blue sky filings
shall be $35,000, subject to paragraph (a) above. The disbursements of
Underwriter's counsel shall be paid by the Company monthly as incurred by such
legal counsel. The Underwriter hereby acknowledge that the Company has
previously paid $10,000 to
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<PAGE>
Underwriter's counsel to be applied towards the legal fees payable pursuant to
this paragraph (d) and the Company hereby acknowledges that any remaining
balance with respect to legal fees or blue sky filing fees, and any unpaid
disbursements, shall be due and payable on the First Closing Date.
13. Notices. Any notice hereunder shall be in writing, unless otherwise
expressly provided herein, and if to the respective persons indicated, will be
sufficient if mailed by certified mail, return receipt requested, postage
prepaid, or hand delivered, and confirmed in writing or by telegraph, addressed
as respectively indicated or to such other address as will be indicated by a
written notice similarly given, to the following persons:
(a) If to the Underwriter -- addressed to Briarwood Investment
Counsel, 1851 East First Street, Suite 950, Santa Ana, California 92705,
Attention: Dean Petkanas, President, with a copy to Zimet, Haines, Friedman &
Kaplan, 460 Park Avenue, New York, New York 10022, Attention: James Martin
Kaplan, Esq.
(b) If to the Company -- addressed to Connecticut Valley Sports,
Inc., 4004 Highway 93 North, Stevensville, Montana 59870, Attention: Chief
Executive Officer, with a copy to: Gersten, Savage, Kaplowitz & Fredericks LLP,
101 East 52nd Street, New York, New York 10022, Attention: Jay M. Kaplowitz,
Esq.
Notice shall be deemed delivered upon receipt.
14. Successors. This Agreement will inure to the benefit of and be
binding upon the Underwriter and the Company and their respective successors and
assigns. Nothing expressed or mentioned in this Agreement is intended, or will
be construed, to give any person, corporation or other entity other than the
persons, corporations and other entities mentioned in the preceding sentence any
legal or equitable right, remedy, or claim under or in respect to this Agreement
or any provisions herein contained, this Agreement and all conditions and
provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other persons; except that the
representations, warranties and indemnities of the Company contained in this
Agreement will also be for the benefit of the directors and officers of the
Underwriter and any person or persons who control any of the Underwriter within
the meaning of Section 15 of the Act, and except that the indemnities of the
Underwriter will also be for the benefit of the directors and officers of the
Company and any person or persons who control the Company within the meaning of
Section 15 of the Act. No purchaser of any of the
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<PAGE>
Offered Securities from the Underwriter will be deemed a successor or assign
solely because of such purchase.
15. Finders and Holders of First Refusal Rights.
(a) The Company hereby represents and warrants to the Underwriter
that no person is entitled, directly or indirectly, to compensation for services
as a finder in connection with the proposed transactions or holds a right of
first refusal or similar right in connection with the proposed offering, and the
Company hereby agrees to indemnify and hold harmless the Underwriter, its
officers, directors, agents and each person, if any, who controls such
Underwriter within the meaning of Section 15 of the Act, from and against any
loss, liability, claim, damage or expense whatsoever arising out of a claim by
an alleged finder or alleged holder of a right of first refusal or similar right
in connection with the proposed offering, insofar as such loss, liability,
claim, damage or expense arises out of any action or alleged action of the
Company.
(b) The Underwriter hereby represents and warrants to the Company
that no person is entitled, directly or indirectly, to compensation for services
as a finder in connection with the proposed transactions; and the Underwriter
hereby agrees to indemnify and hold harmless the Company, its officers,
directors and agents, from and against any loss, liability, claim, damage or
expense whatsoever arising out of a claim by an alleged finder in connection
with the proposed offering, insofar as such loss, liability, claim, damage or
expense arises out of any action or alleged action of the Underwriter.
16. Applicable Law. This Agreement shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be construed
in accordance with the laws of said state applicable to contracts made and to be
performed entirely within such State. The Company (1) agrees that any legal
suit, action or proceeding arising out of or relating to this Agreement shall be
instituted exclusively in New York State Supreme Court, County of New York, or
in the United States District Court for the Southern District of New York, (2)
waives any objection which the Company may have now or hereafter to the venue of
any such suit, action or proceeding, and (3) irrevocably consents to the
jurisdiction of the New York State Supreme Court, County of New York and the
United States District Court for the Southern District of New York in any such
suit, action or procedure. Each of the Company and the Underwriter further
agrees to accept and acknowledge service of any and all process which may be
served in any suit, action or proceeding in the New York State Supreme Court,
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<PAGE>
County of New York and the United States District Court for the Southern
District of New York, and agrees that service of process upon the Company mailed
by certified mail to the Company's address shall be deemed in every respect
effective service of process upon the Company in any such suit, action or
proceeding. In the event of litigation between the parties arising hereunder,
the prevailing party shall be entitled to costs and reasonable attorney's fees.
17. Headings. The headings in this Agreement are for purposes of
reference only and shall not limit or otherwise affect any of the terms or
provisions hereof.
18. Counterparts. This Agreement may be executed in any number of
counterparts which, taken together, shall constitute one and the same
instrument.
19. Entire Agreement. This Agreement sets forth the entire agreement and
understanding between the Underwriter and the Company with respect to the
subject matter hereof, and supersedes all prior agreements, arrangements and
understandings, written or oral, between them.
20. Representation of the Underwriter. The Underwriter hereby represents
that it is registered as a broker-dealer with the Commission and is registered
as a broker-dealer in all states in which it of conducts business and it is a
member in good standing of the NASD.
21. Terminology. All personal pronouns used in this Agreement, whether
used in the masculine, feminine or neuter gender, shall include all other
genders and the singular shall include the plural, and vice versa.
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<PAGE>
If the foregoing correctly sets forth our understanding, please
indicate the Underwriter's acceptance thereof, as of the day and year first
above written, in the space provided below for that purpose, whereupon this
letter with the Underwriter's acceptance shall constitute a binding agreement
between us.
Very truly yours,
CONNECTICUT VALLEY SPORTS, INC.
By -----------------------------------
Name: John Tilleli
Title: Chief Executive Officer
Confirmed and accepted on the
day and year first above written.
BRIARWOOD INVESTMENT COUNSEL
By:---------------------------------
Name: Dean Petkanas
Title: President
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<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
[SELECTED DEALER AGREEMENT]
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<PAGE>
Exhibit 1.2
Draft 12/31/97
UNDERWRITER'S WARRANT AGREEMENT dated as of _______, 1997 between
Connecticut Valley Sports, Inc., a Delaware corporation (the "Company"), and
Briarwood Investment Counsel (the "Underwriter").
W I T N E S S E T H:
WHEREAS, the Underwriter has agreed, pursuant to the underwriting agreement
(the "Underwriting Agreement") dated _______, 1997 between the Underwriter and
the Company, to act as the underwriter in connection with the Company's proposed
public offering (the "Public Offering") of 1,500,000 units (the "Units")
consisting of 1,500,000 shares of common stock, par value $0.01 per share
("Common Stock"), and 1,500,000 redeemable Common Stock purchase warrants
("Redeemable Warrants"), plus up to an additional 225,000 shares of Common Stock
and 225,000 Redeemable Warrants pursuant to the Underwriter's over-allotment
option, which securities are included in a registration statement on Form SB-2
(File No. 333-37507) (hereinafter, the "Public Offering Registration
Statement"); and
WHEREAS, the Company proposes to issue to the Underwriter warrants, one for
the purchase of up to 150,000 shares of Common Stock and the other for the
purchase of up to 150,000 Redeemable Warrants; and
WHEREAS, the warrants issued pursuant to this Agreement are being issued
by the Company to the Underwriter or officers and partners of the Underwriter
and members of the selling group (the Selling Group") and/or their officers
or partners, in consideration for, and as part of the Underwriter's
compensation in connection with, the Underwriter acting as the underwriter
pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the foregoing premises, the payment
by the Underwriter to the Company of an aggregate of $10, the receipt of
which is hereby acknowledged by the Company, the agreements herein set forth
and other good and valuable consideration the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Grant. Subject to the terms and conditions of this Agreement, the
Underwriter, and/or its designees who are officers or partners of the
Underwriter or members of the Selling Group in connection with the Public
Offering, are hereby granted the right to purchase, at any time from ______ ,
1999 until 5:00 P.M., New
<PAGE>
York City time, on _______, 2003 (the "Warrant Exercise Term"), up to (i)
150,000 shares of Common Stock (the "Shares") at an initial exercise price
(subject to adjustment as provided in Article 8 hereof) of $5.50 per Share
and (ii) 150,000 Redeemable Warrants at an initial exercise price of $.11 per
Redeemable Warrant. The right to purchase Shares as described in (i) above
is hereinafter referred to as "Warrant No. 1" and the right to purchase
Redeemable Warrants as described in (ii) above is hereinafter referred to as
"Warrant No. 2". Warrant No. 1 and Warrant No. 2 are hereinafter referred to
collectively as the "Warrants". Except as specifically otherwise provided
herein, the Shares and the Redeemable Warrants issued pursuant to Warrant No.
1 and Warrant No. 2, respectively, shall bear the same terms and conditions
as described under the caption "Description of Securities" in the Public
Offering Registration Statement. In addition, the Redeemable Warrants shall
be governed by the terms of the Warrant Agreement dated as of _______, 1998,
executed in connection with the Public Offering (the "Public Warrant
Agreement"), and except that the holder shall have registration rights under
the Securities Act of 1933, as amended (the "Act"), with respect to the
Warrants, the Shares and the Redeemable Warrants subject thereto and the
shares of Common Stock underlying the Redeemable Warrants issuable upon
exercise of Warrant No. 2, which registration rights are more fully described
in paragraph 7 of this Warrant Agreement. In the event of any adjustments to
the exercise price of and the number of shares of Common Stock purchasable
under the Redeemable Warrants pursuant to the Public Warrant Agreement, the
same changes to the Redeemable Warrants subject to Warrant No. 2 shall be
simultaneously effected.
2. Warrant Certificates. The warrant certificates (the "Warrant
Certificates") for Warrant No. 1 and Warrant No. 2 to be delivered pursuant
to this Agreement shall be in the forms set forth as Exhibit A and Exhibit B
attached hereto, respectively, and made a part hereof, with such appropriate
insertions, omissions, substitutions and other variations as required or
permitted by this Agreement.
3. Exercise of Warrants.
3.1 Cash Exercise. The exercise price of the respective Warrants shall
be payable in cash or by certified or official bank check to the order of the
Company, or any combination of cash or check. Upon surrender of the
applicable Warrant Certificate with the annexed Form of Election to Purchase
duly executed, together with payment of the applicable exercise price for the
Shares and/or Redeemable Warrants purchased, at the Company's principal
offices, currently located at 4004 Highway 93 North, Stevensville, Montana
59870, the registered holder of a Warrant Certificate ("Holder" or
2
<PAGE>
"Holders") shall be entitled to receive a certificate or certificates for the
Shares and/or Redeemable Warrants so purchased. The purchase rights represented
by each Warrant Certificate are exercisable at the option of the Holder thereof,
in whole or in part (but not as to fractional Shares or fractional Redeemable
Warrants). In the case of the purchase of less than all the Shares or
Redeemable Warrants, as the case may be, purchasable under any Warrant
Certificate, the Company shall cancel said Warrant Certificate upon the
surrender thereof and shall execute and deliver a new Warrant Certificate of
like tenor for the balance of the Shares or Redeemable Warrants, as the case may
be, purchasable thereunder.
3.2 Cashless Exercise for Warrant No. 1. At any time during the
Warrant Exercise Term, the Holder may, at its option, exchange Warrant No. 1,
in whole or in part (a "Warrant Exchange"), into the number of Shares
determined in accordance with this Section 3.2, by surrendering the Warrant
Certificate representing Warrant No. 1 at the principal office of the
Company, accompanied by a notice stating (i) such Holder's intent to effect
such exchange, (ii) the number of Shares subject to Warrant No. 1 as to which
the exchange is to be effected and (iii) the date on which the Holder
requests that such Warrant Exchange occur (the "Notice of Exchange"). The
Warrant Exchange shall take place on the date specified in the Notice of
Exchange or if the date the Notice of Exchange is received by the Company is
later than the date specified in the Notice of Exchange, such later date (the
"Exchange Date"). Certificates for the Shares issuable upon such Warrant
Exchange and, if applicable, a new warrant of like tenor evidencing the
balance of the Shares remaining subject to this Warrant, shall be issued as
of the Exchange Date and delivered to the Holder within three (3) business
days following the Exchange Date. In connection with any Warrant Exchange,
Warrant No. 1 shall represent the right to subscribe for and acquire the
number of Shares (rounded to the next highest integer) equal to (i) the
number of Shares specified by the Holder in its Notice of Exchange (the
"Total Number") less (ii) the number of Shares equal to the quotient obtained
by dividing (A) the product of the Total Number and the existing exercise
price of Warrant No. 1 by (B) the market price of a share of Common Stock on
the Exchange Date; and, in the case of any Warrant Exchange for less than all
of the Shares purchasable under Warrant No. 1, the Company shall execute and
deliver a new Warrant Certificate of like tenor for the balance of the Shares
purchasable thereunder. By way of example, if the holder of Warrant No. 1
submits a Notice of Exchange relating to _____ of the _____ Shares subject to
Warrant No. 1 and the current market price of a share of Common Stock on the
Exchange Date is
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<PAGE>
$_____, the holder will be entitled to receive _____ shares of Common Stock,
along with a new Warrant Certificate entitling the holder to purchase _____
Shares.
4. Issuance of Certificates.
4.1. Issuance. Upon exercise of the Warrants, the issuance of
certificates for the Shares and/or Redeemable Warrants, as applicable shall
be made forthwith (and in any event within three (3) business days
thereafter) without charge to the Holder thereof including, without
limitation, any tax which may be payable in respect of the issuance thereof,
and such certificates shall (subject to the provisions of Article 5 hereof)
be issued in the name of, or in such names as may be directed by, the Holder
thereof; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance
and delivery of any such certificates in a name other than that of the
Holder, and the Company shall not be required to issue or deliver such
certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
4.2. Forms of Certificates. The Warrant Certificates and certificates
representing the Shares and/or Redeemable Warrants shall be executed on
behalf of the Company by the manual or facsimile signature of the present or
any future Chairman or Vice Chairman of the Board of Directors or President
or Vice President of the Company under its corporate seal reproduced thereon,
attested to by the manual or facsimile signature of the present or any future
Secretary or Assistant Secretary of the Company. Warrant Certificates shall
be dated the date of execution by the Company upon initial issuance,
division, exchange, substitution or transfer. The Warrant Certificates and,
upon exercise of the Warrants, in part or in whole, certificates representing
the Shares and/or Redeemable Warrants shall bear a legend substantially
similar to the following:
"The securities represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Act"), and may not be
offered or sold except (i) pursuant to an effective registration statement
under the Act, (ii) to the extent applicable, pursuant to Rule 144 under
the Act (or any similar rule under such Act relating to the disposition of
securities), or (iii) upon the delivery by the holder to the Company of an
opinion of counsel, reasonably
4
<PAGE>
satisfactory to counsel to the Company, stating that an exemption from
registration under such Act is available."
5. Restriction on Transfer of Warrants. The Holder of a Warrant
Certificate, by acceptance thereof, covenants and agrees that the Warrant is
being acquired as an investment and not with a view to the distribution
thereof, and that the Warrant may not be sold, transferred, assigned,
hypothecated or otherwise disposed of, in whole or in part, for a period of
one (1) year from the date hereof, except to officers or partners of the
Underwriter or to any member of the Selling Group participating in the
distribution to the public of the Common Stock and Redeemable Warrants,
and/or their respective officers or partners.
6. Price.
6.1 Initial and Adjusted Exercise Prices. The initial exercise price
of Warrant No. 1 shall be $5.50 per Share and the initial exercise price of
Warrant No. 2 shall be $.11 per Redeemable Warrant. The adjusted exercise
price shall be the price which shall result from time to time from any and
all adjustments of the initial exercise price in accordance with the
provisions of Article 8 hereof.
6.2 Exercise Price. The term "exercise price" herein shall mean the
initial exercise price of Warrant No. 1 or Warrant No. 2, as the case may be,
or the adjusted exercise price, depending upon the context.
7. Registration Rights.
7.1 Registration Under the Securities Act of 1933. None of the
Warrants, the Shares, the Redeemable Warrants and the Common Stock issuable
upon exercise of the Redeemable Warrants (the "Underlying Shares") have been
registered for purposes of public distribution under the Securities Act of
1933, as amended (the "Act").
7.2 Registrable Securities. As used herein the term "Registrable
Securities" means the Warrants, the Shares issuable upon exercise of Warrant
No. 1, the Redeemable Warrants issuable upon exercise of Warrant No. 2, the
Underlying Shares and any securities issued upon any stock split or stock
dividend in respect of any of the foregoing; provided, however, any of such
securities shall cease to be Registrable Securities when, as of the date of
determination, (i) it has been effectively registered under the Act and
disposed of pursuant thereto, (ii) registration under the Act is no longer
required for the subsequent public distribution of
5
<PAGE>
such securities or (iii) it has ceased to be outstanding. In the event of
any merger, reorganization, consolidation, recapitalization or other change
in corporate structure affecting the Common Stock, such adjustment shall be
made in the definition of "Registrable Securities" as is appropriate in order
to prevent any dilution or enlargement of the rights granted pursuant to this
Article 7.
7.3 Piggyback Registration.
(a) If, at any time during the seven years following the date of
this Agreement, the Company proposes to prepare and file one or more
post-effective amendments to the Public Offering Registration Statement filed
in connection with the Public Offering or any new registration statement or
post-effective amendments thereto covering equity or debt securities of the
Company, or any such securities of the Company held by its shareholders
(other than pursuant to a Form S-4 relating to a merger or acquisition or
pursuant to a Form S-8 or successor form) (for purposes of this Article 7,
collectively, a "Registration Statement"), it will give written notice of its
intention to do so by registered mail ("Notice"), at least thirty (30) days
prior to the filing of each such Registration Statement, to all holders of
the Registrable Securities. Upon the written request of such a holder (a
"Requesting Holder"), made within twenty (20) business days after receipt of
the Notice, that the Company include any of the Requesting Holder's
Registrable Securities in the proposed Registration Statement, the Company
shall, as to each such Requesting Holder, use its best efforts to effect the
registration under the Act of the Registrable Securities which it has been so
requested to register ("Piggyback Registration"), at the Company's sole cost
and expense and at no cost or expense to the Requesting Holders (other than
underwriting discounts and commissions applicable to the sale of such
Registrable Securities and the fees and disbursements, if any, of counsel to
the Requesting Holders); provided, however, that the Company shall in any
event be entitled to withdraw such Registration Statement prior to its
effectiveness if such Registration Statement is withdrawn as to all
securities proposed to be registered thereunder; and provided, further, that
the rights granted under this Section 7.3 shall be subject to the right of
the managing underwriter, in any such offering that is underwritten, to limit
the number of Registrable Securities that may be included hereunder in such
offering on a pro rata basis with any other selling securityholder on whose
behalf securities of the Company are being registered.
(b) If the registration of which the Company gives notice is for a
registered public offering involving an
6
<PAGE>
underwriting, the Company shall so advise the holders as a part of the
written notice given pursuant to paragraph (a) above. If the managing
underwriter determines that a limitation of the number of shares to be
underwritten is required, the underwriter may exclude some or all Registrable
Securities from such registration (the "Excluded Registrable Securities");
provided, however, that any other securityholder may only include the same
pro-rata portion of any such securities in such Registration Statement.
7.4 Demand Registration.
(a) At any time during the Warrant Exercise Term, any "Demand Holder"
(as such term is defined in Section 7.4(d) below) of the Registrable
Securities shall have the right (which right is in addition to the piggyback
registration rights provided for under Section 7.3 hereof), exercisable by
written notice to the Company (the "Demand Registration Request"), to have
the Company prepare and file with the Securities and Exchange Commission (the
"Commission"), on one occasion, at the sole expense of the Company (except as
provided in Section 7.5(b) hereof), a Registration Statement and such other
documents, including a prospectus, as may be necessary (in the opinion of
both counsel for the Company and counsel for such Demand Holder), in order to
comply with the provisions of the Act, so as to permit a public offering and
sale of the Registrable Securities by the holders thereof. The Company shall
use its best efforts to cause the Registration Statement to become effective
under the Act, so as to permit a public offering and sale of the Registrable
Securities by the holders thereof. Once effective, the Company will use its
best efforts to maintain the effectiveness of the Registration Statement
until the earlier of (i) the date that all of the Registrable Securities
have been sold or (ii) the date which is nine months after the effective date
of such Registration Statement. A request for registration under this
Section 7.4(a) shall coincide with the availability of the Company's audited
financial statements, unless such Demand Holder(s) agree to pay the costs to
the Company of any special audit which may be required.
(b) The Company covenants and agrees to give written notice of any
Demand Registration Request to all holders of the Registrable Securities
within ten (10) business days from the date of the Company's receipt of any
such Demand Registration Request. After receiving notice from the Company as
provided in this Section 7.4(b), holders of Registrable Securities may
request the Company to include their Registrable Securities in the
Registration Statement to be filed pursuant to Section 7.4(a) hereof by
notifying the Company of their decision to have such securities
7
<PAGE>
included within ten (10) days of their receipt of the Company's notice.
(c) In addition to the registration rights provided for under Section
7.3 hereof and subsection (a) of this Section 7.4, at any time during the
Warrant Exercise Term, any Demand Holder (as defined below in Section 7.4(d))
of Registrable Securities shall have the right, exercisable by written
request to the Company, to have the Company prepare and file with the
Commission, on one occasion in respect of all holders of Registrable
Securities, a Registration Statement so as to permit a public offering and
sale of such Registrable Securities until the earlier of (i) the date that
all of the Registrable Securities have been sold or (ii) the date which is
nine months after the effective date of such Registration Statement;
provided, however, that all costs incident thereto shall be at the expense of
the holders of the Registrable Securities included in such Registration
Statement (including the costs of any special audit which may be required).
If a Demand Holder shall give notice to the Company at any time of its or
their desire to exercise the registration right granted pursuant to this
Section 7.4(c), then within ten (10) days after the Company's receipt of such
notice, the Company shall give notice to the other holders of Registrable
Securities advising them that the Company is proceeding with such
registration and offering to include therein the Registrable Securities of
such holders, provided they furnish the Company with such appropriate
information in connection therewith as the Company shall reasonably request
in writing.
(d) The term "Demand Holder" as used in this Section 7.4 shall mean any
holder or any combination of holders of Registrable Securities, if included
in such holders' Registrable Securities are that aggregate number of shares
of Common Stock (including Shares already issued and not disposed of in a
public offering and/or Shares issuable pursuant to the exercise of Warrant
No. 1 and Underlying Shares already issued and not disposed of in a public
offering and/or Underlying Shares issuable pursuant to the exercise of
Redeemable Warrants issued and not disposed of in a public offering or
issuable pursuant to exercise of Warrant No. 2 (the "Total Common Shares"))
as would constitute 50% or more of the aggregate number of such Total Common
Shares.
7.5 Covenants of the Company With Respect to Registration. The Company
covenants and agrees as follows:
(a) In connection with any registration under Section 7.4 hereof, the
Company shall file the Registration Statement as expeditiously as possible,
but in no event later than twenty (20) days following receipt of any demand
therefor (unless delayed by
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<PAGE>
the failure of a holder of Registrable Securities to promptly furnish such
information necessary to complete such registration statement), shall use its
best efforts to have any such Registration Statement declared effective at
the earliest possible time, and shall furnish each holder of Registrable
Securities such number of prospectuses as shall reasonably be requested.
(b) Except as otherwise expressly set forth in this Agreement, the
Company shall pay all costs, fees and expenses in connection with all
Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof
(excluding any underwriting discounts and commissions which may be incurred
in connection with the sale of any Registrable Securities and excluding any
fees and expenses of counsel for any Requesting Holder or Demand Holder),
including, without limitation, the Company's legal and accounting fees,
printing expenses, and blue sky fees and expenses. The holders of
Registrable Securities included in any Registration Statement filed pursuant
to Section 7.4(c) hereof will pay all costs, fees and expenses in connection
with such Registration Statement, including their own legal fees and
expenses, if any.
(c) The Company will take all necessary action which may be required in
qualifying or registering the Registrable Securities included in a
Registration Statement for offering and sale under the securities or blue sky
laws of such states as are reasonably requested by the holders of such
securities; provided that the Company shall not be obligated to qualify or
register the Registrable Securities in any jurisdiction, in which it would
have to qualify as a foreign corporation or give a general consent to service
of process in order to so qualify or register.
(d) The Company shall indemnify any holder of the Registrable
Securities to be sold pursuant to any Registration Statement and each person,
if any, who controls such holder within the meaning of Section 15 of the Act
or Section 20(a) of the Securities Exchange Act of 1934, as amended
("Exchange Act"), against all loss, claim, damage, expense or liability
(including all expenses reasonably incurred in investigating, preparing or
defending against any claim whatsoever) to which any of them may become
subject under the Act, the Exchange Act or otherwise, arising from such
Registration Statement to the same extent and with the same effect as the
provisions pursuant to which the Company has agreed to indemnify the
Underwriter contained in Section 6 of the Underwriting Agreement and to
provide for just and equitable contribution as set forth in Section 7 of the
Underwriting Agreement.
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<PAGE>
(e) Each holder of Registrable Securities to be sold pursuant to a
Registration Statement will furnish to the Company such information as may be
reasonably be requested by the Company for inclusion in the Registration
Statement. Any holder of Registrable Securities to be sold pursuant to a
Registration Statement, and its successors and assigns, shall severally, and
not jointly, indemnify, the Company, its officers and directors and each
person, if any, who controls the Company within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act, against all loss, claim,
damage, expense or liability (including all expenses reasonably incurred in
investigating, preparing or defending against any claim whatsoever) to which
they may become subject under the Act, the Exchange Act or otherwise, arising
from information furnished in writing by or on behalf of such holder, or its
successors or assigns, for specific inclusion in such Registration Statement
to the same extent and with the same effect as the provisions contained in
Section 6 of the Underwriting Agreement pursuant to which the Underwriter has
agreed to indemnify the Company and to provide for just and equitable
contribution as set forth in Section 7 of the Underwriting Agreement.
(f) Nothing contained in this Agreement shall be construed as requiring
any Holder to exercise his Warrants prior to the initial filing of any
Registration Statement or the effectiveness thereof.
(g) If the Company shall fail to comply with the provisions of this
Article 7, the Company shall, in addition to any other equitable or other
relief available to the holders of Registrable Securities, be liable for any
or all actual damages (but not punitive or consequential damages) sustained
by the holders of Registrable Securities, requesting registration of their
Registrable Securities.
(h) The Company shall not permit the inclusion of any securities other
than the Registrable Securities to be included in any Registration Statement
filed pursuant to Section 7.4 hereof, without the prior written consent of
the Demand Holders, which consent shall not be unreasonably withheld.
(i) The Company shall deliver promptly to each holder of Registrable
Securities whose securities are included in a Registration Statement copies
of all correspondence between the Commission and the Company, its counsel or
auditors and all memoranda relating to discussions with the Commission or its
staff with respect to the Registration Statement and permit each holder of
Registrable Securities and underwriters to do such investigation, upon
reasonable advance notice, with respect to
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<PAGE>
information contained in or omitted from the Registration Statement as it
deems reasonably necessary to comply with applicable securities laws or rules
of the National Association of Securities Dealers, Inc. ("NASD"). Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable
times and as often as any such holder of Registrable Securities or
underwriter shall reasonably request.
(j) If, in connection with a registration which includes Registrable
Securities pursuant to this Article 7, the Company shall enter into an
underwriting agreement with one or more underwriters selected for such
underwriting, such agreement shall contain such representations, warranties
and covenants by the Company and such other terms as are customarily
contained in agreements of that type used by the underwriters. The holders
of Registrable Securities shall be parties to any underwriting agreement
relating to an underwritten sale of their Registrable Securities and may, at
their option, require that any or all the representations and warranties of
the Company to or for the benefit of such underwriters shall, to the extent
that they may be applicable, also be made to and for the benefit of such
holders of Registrable Securities. Such holders of Registrable Securities
shall not be required to make any representations or warranties to or
agreements with the Company or the underwriters except as they may relate to
such holders of Registrable Securities and their intended methods of
distribution.
8. Adjustments of Exercise Price and Number of Shares.
8.1 Stock Dividend, Split, etc.. In case the Company shall (i) declare
a dividend or make a distribution on its outstanding shares of Common Stock
in shares of Common Stock, (ii) subdivide or reclassify its outstanding
shares of Common Stock into a greater number of shares, or (iii) combine or
reclassify its outstanding shares of Common Stock into a smaller number of
shares, the exercise price under Warrant No. 1 in effect at the time of the
record date for such dividend or distribution or of the effective date of
such subdivision, combination or reclassification shall be adjusted so that
it shall equal the price determined by multiplying the exercise price by a
fraction, the denominator of which shall be the number of shares or Common
Stock outstanding after giving effect to such action, and the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such action.
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<PAGE>
8.2 Rights or Warrants. In the case the Company shall fix a record
date for the issuance of rights or warrants to all holders of its Common
Stock entitling them to subscribe for or purchase shares of Common Stock (or
securities convertible into Common Stock) at a price (the "Subscription
Price") (or having a conversion price per share) less than the current market
price of the Common Stock (as defined in Section 8.5 below) on such record
date, the exercise price of Warrant No. 1 shall be adjusted so that it shall
thereafter equal the price determined by multiplying (i) the exercise price
in effect immediately prior to the date of such issuance and (ii) a fraction,
the numerator of which shall be the sum of the number of shares of Common
Stock outstanding on such record date and the number of additional shares of
Common Stock which the aggregate offering price of the total number of shares
of Common Stock so offered for subscription or purchase (or the aggregate
conversion price of the convertible securities so offered) would purchase at
such current market price per share of the Common Stock, and the denominator
of which shall be the sum of the number of shares of Common Stock outstanding
on such record date and the number of additional shares of Common Stock
offered for subscription or purchase (or into which the convertible
securities so offered are convertible). Such adjustment shall be made
successively whenever such rights or warrants are issued and shall become
effective immediately after the record date for the determination of
shareholders entitled to receive such rights or warrants; and to the extent
that shares of Common Stock are not delivered (or securities convertible into
Common Stock are not delivered) after the expiration of such rights or
warrants the exercise price shall be readjusted to the exercise price which
would then be in effect had the adjustments made upon the issuance of such
rights or warrants been made upon the basis of delivery of only the number of
shares of Common Stock (or securities convertible into Common Stock) actually
delivered.
8.3 Evidences of Indebtedness or Assets. In case the Company shall
hereafter distribute to the holders of its Common Stock evidences of its
indebtedness or assets (excluding cash dividends or distributions of
securities of the type referred to in Section 8.1 above) or subscription
rights or warrants (excluding those referred to in Section 8.2 above), then
in each such case the exercise price of Warrant No. 1 in effect thereafter
shall be determined by multiplying (i) the exercise price in effect
immediately prior thereto and (ii) a fraction, the numerator of which shall
be the total number of shares of Common Stock outstanding multiplied by the
current market price per share of Common Stock (as defined in Section 8.5
below), less the fair market value (as determined by the Company's Board of
Directors) of said assets or evidences of indebtedness so distributed or of
such
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<PAGE>
rights or warrants, and the denominator of which shall be the total number of
shares of Common Stock outstanding multiplied by such current market price
per share of Common Stock. Such adjustment shall be made successively
whenever such a record date is fixed. Such adjustment shall be made whenever
any such distribution is made and shall become effectively immediately after
the record date for the determination of shareholders entitled to receive
such distribution.
8.4 Adjustment of Number of Shares. Whenever the Exercise Price
payable upon exercise of Warrant No. 1 is adjusted pursuant to Sections 8.1,
8.2 or 8.3 above, the number of Shares purchasable upon exercise of Warrant
No. 1 shall simultaneously be adjusted by multiplying the number of Shares
initially issuable upon exercise of Warrant No. 1 by the exercise price in
effect on the date hereof and dividing the product so obtained by the
exercise price, as adjusted.
8.5 Determination of Current Market Price. For the purpose of any
computation under Sections 8.2 and 8.3 above, the current market price per
share of Common Stock at any date shall be deemed to be the average of the
daily closing prices for twenty (20) consecutive business days before such
date. The closing price for each day shall be the last sale price regular
way or, in case no such reported sale takes place on such day, the average of
the last reported bid and asked prices regular way, in either case on the
principal national securities exchange on which the Common Stock is admitted
to trading or listed, or as reported by National Association of Securities
Dealers, Inc. Automatic Quotation System ("NASDAQ") or other similar
organization if NASDAQ is no longer reporting such information, or if not so
available, the fair market price as determined by the Board of Directors.
8.6 No Adjustment for De Minimus Adjustment. No adjustment in the
Exercise Price shall be required unless such adjustment would require an
increase or decrease of at least ten cents ($0.10) in such price; provided,
however, that any adjustments which by reason of this Section 8.6 are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment required to be made hereunder. All calculations under
this Article 8 shall be made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be. Anything in this Article 8 to
the contrary notwithstanding, the Company shall be entitled, but shall not be
required, to make such changes in the exercise price, in addition to those
required by this Article 8, as it shall determine, in its sole discretion, to
be advisable in order that any dividend or distribution in shares of Common
Stock, or any subdivision, reclassification or
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<PAGE>
combination of Common Stock, hereafter made by the Company shall not result
in any Federal income tax liability to the holders of Common Stock or
securities convertible into Common Stock (including Redeemable Warrants
issuable upon exercise of Warrant No. 2).
8.7 Notice. Whenever an exercise price is adjusted, as herein
provided, the Company shall promptly, but no later than 10 days after any
request for such an adjustment by the Holder, cause a notice setting forth
the adjusted exercise price and adjusted number of Shares and/or Warrants
issuable upon exercise of the Warrants and, if requested, information
describing the transactions giving rise to such adjustments, to be mailed to
the Holder, at the address set forth herein, and shall cause a certified copy
thereof to be mailed to its transfer agent, if any. The Company may retain a
firm of independent certified public accountants selected by the Board of
Directors (who may be the regular accountants employed by the Company) to
make any computation required by this Section 8, and a certificate signed by
such firm shall be conclusive evidence of the correctness of such adjustment.
8.8 Other Securities. In the event that at any time, as a result of
any adjustment made pursuant to this Article 8, the Holder thereafter shall
become entitled to receive any securities of the Company other than Common
Stock and Redeemable Warrants, thereafter the number of such other securities
receivable 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 Common Stock and Redeemable Warrants
contained in Sections 8.1 to 8.6, inclusive above.
9. Exchange and Replacement of Warrant Certificates.
9.1 Exchange. Each Warrant Certificate is exchangeable without
expense, upon the surrender hereof by the registered Holder at the principal
executive office of the Company, for a new Warrant Certificate of like tenor
and date representing in the aggregate the right to purchase the same number
of Shares or Redeemable Warrants, as the case may be, in such denominations
as shall be designated by the Holder thereof at the time of such surrender.
9.2 Replacement. Upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any
Warrant Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to it, and reimbursement to the Company
of all reasonable expenses incidental thereto, and upon surrender and
cancellation of any Warrants, if mutilated, the Company will make
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<PAGE>
and deliver a new Warrant Certificate of like tenor, in lieu thereof.
10. Elimination of Fractional Interests. The Company shall not be
required to issue certificates representing fractions of shares of Common
Stock or Redeemable Warrants and shall not be required to issue scrip or pay
cash in lieu of fractional interests, it being the intent of the parties that
all fractional interests shall be eliminated by rounding any fraction up to
the nearest whole number of shares of Common Stock or Redeemable Warrants, as
the case may be.
11. Reservation and Listing of Securities. The Company shall at all
times reserve and keep available out of its authorized shares of Common
Stock, solely for the purpose of issuance upon the exercise of Warrant No. 1
and the exercise of the Redeemable Warrants subject to Warrant No. 2, such
number of shares of Common Stock as shall be issuable upon the exercise
thereof. The Company covenants and agrees that, upon exercise of Warrant No.
1 and payment of the exercise price therefor, all shares of Common Stock
issuable upon such exercise shall be duly and validly issued, fully paid,
non-assessable and not subject to the preemptive rights of any shareholder,
and that, upon exercise of Warrant No. 2 and payment of the exercise price
therefor, the Redeemable Warrants will be valid and binding obligations of
the Company, enforceable against the Company in accordance with their terms.
As long as the Warrants shall be outstanding, the Company shall use its best
efforts to cause all shares of Common Stock and all Redeemable Warrants
issuable upon the exercise of the Warrants, as well as the Underlying Shares,
to be listed on or quoted by NASDAQ or listed on such national securities
exchanges as the Company's Common Stock is then listed.
12. Notices to Warrant Holders. Nothing contained in this Agreement
shall be construed as conferring upon the Holder or Holders the right to vote
or to consent or to receive notice as a shareholder in respect of any
meetings of shareholders for the election of directors or any other matter,
or as having any rights whatsoever as a shareholder of the Company. If,
however, at any time prior to the expiration of the Warrants and their
exercise, any of the following events shall occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock and/or Redeemable Warrants for the purpose of entitling
them to receive a dividend or distribution payable otherwise than in
cash, or a cash dividend or distribution payable otherwise than out
of current
15
<PAGE>
or retained earnings, as indicated by the accounting treatment of such
dividend or distribution on the books of the Company; or
(b) the Company shall offer to all the holders of its Common Stock and/or
Redeemable Warrants any additional shares of capital stock of the
Company or securities convertible into or exchangeable for shares of
capital stock of the Company, or any option, right or warrant to
subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other than in
connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety
shall be proposed;
then, in any one or more of said events, the Company shall give written
notice of such event at least fifteen (15) days prior to the date fixed as a
record date or the date of closing the transfer books for the determination
of the shareholders entitled to such dividend, distribution, convertible or
exchangeable securities or subscription rights, options or warrants, or
entitled to vote on such proposed dissolution, liquidation, winding up or
sale. Such notice shall specify such record date or the date of closing of
the transfer books, as the case may be. Failure to give such notice or any
defect therein shall not affect the validity of any action taken in
connection with the declaration or payment of any such dividend or
distribution, or the issuance of any convertible or exchangeable securities
or subscription rights, options or warrants, or any proposed dissolution,
liquidation, winding up or sale.
13. Notices. All notices, requests, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly made when
delivered, or mailed by registered or certified mail, return receipt
requested:
(a) If to a registered Holder of the Warrants, to the address of such
Holder as shown on the books of the Company; or
(b) If to the Company, to Connecticut Valley Sports, Inc., 4004 Highway
93 North, Stevensville, Montana 59870 or to such other address as the
Company may designate by notice to the Holders.
14. Supplements and Amendments. The Company and the Underwriter may
from time to time supplement or amend this
16
<PAGE>
Agreement without the approval of any Holders of Warrant Certificates in
order to cure any ambiguity, to correct or supplement any provision contained
herein which may be defective or inconsistent with any provisions herein, or
to make any other provisions in regard to matters or questions arising
hereunder which the Company and the Underwriter may deem necessary or
desirable and which the Company and the Underwriter deem not to adversely
affect the interests of the Holders of Warrant Certificates.
15. Successors. All the covenants and provisions of this Agreement by
or for the benefit of the Company and the Holders inure to the benefit of
their respective successors and assigns hereunder.
16. Termination. This Agreement shall terminate at the close of
business on _______, 2006. Notwithstanding the foregoing, this Agreement
will terminate on any earlier date when all Warrants have been exercised and
all the Shares issuable upon exercise of Warrant No. 1 and all the Redeemable
Warrants issuable upon exercise of Warrant No. 2 (or the Underlying Shares)
have been resold to the public; provided, however, that the provisions of
Section 7.5 shall survive such termination until the close of business on
_______, 2009.
17. Governing Law. This Agreement and each Warrant Certificate issued
hereunder shall be deemed to be a contract made under the laws of the State
of New York and for all purposes shall be construed in accordance with the
laws of said State.
18. Benefits of This Agreement. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Underwriter and any other registered holder or holders of the Warrant
Certificates, Warrants or the underlying securities any legal or equitable
right, remedy or claim under this Agreement; and this Agreement shall be for
the sole and exclusive benefit of the Company and the Underwriter and any
other holder or holders of the Warrant Certificates, Warrants or the
underlying securities.
19. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and such counterparts shall together constitute but one
and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
17
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
By:--------------------------------------
Name:
Title:
Attest:
By: --------------------------
Name:
Title
BRIARWOOD INVESTMENT COUNSEL
By:------------------------------------
Name:
Title:
Attest:
By: ---------------------------
Name:
Title
18
<PAGE>
EXHIBIT A
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES
ISSUABLE UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE
EXTENT APPLICABLE, PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE
UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE
DELIVERY BY THE HOLDER TO THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY
SATISFACTORY TO COUNSEL FOR THE COMPANY, STATING THAT AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT IS AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE 5:00 P.M., NEW YORK TIME, ________, 2003.
No. WW-1 150,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that __________ or registered assigns is
the registered holder of 150,000 Warrants to purchase, at any time from _______,
1999 until 5:00 P.M. New York City time on _______, 2003 ("Expiration Date"), up
to 150,000 shares ("Shares") of fully-paid and nonassessable common stock, par
value $.01 per share ("Common Stock"), of Connecticut Valley Sports, Inc. , a
Delaware corporation (the "Company"), at the initial exercise price, subject to
adjustment in certain events (the "Exercise Price"), of $5.50 per Share upon
surrender of this Warrant Certificate and payment of the Exercise Price at an
office or agency of the Company, but subject to the conditions set forth herein
and in the Warrant Agreement dated as of _______, 1998 between the Company and
Briarwood Investment Counsel (the "Warrant Agreement"). Payment of the Exercise
Price may be made in cash, or by certified or official bank check in New York
Clearing House funds payable to the order of the Company, or any combination of
cash or check.
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No Warrant may be exercised after 5:00 P.M., New York City time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to in a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
The Warrant Agreement provides that upon the occurrence of certain events,
the Exercise Price and/or number of the Company's securities issuable thereupon
may, subject to certain conditions, be adjusted. In such event, the Company
will, at the request of the holder, issue a new Warrant Certificate evidencing
the adjustment in the Exercise Price and the number and/or type of securities
issuable upon the exercise of the Warrants; provided, however, that the failure
of the Company to issue such new Warrant Certificates shall not in any way
change, alter, or otherwise impair, the rights of the holder as set forth in the
Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax, or other governmental charge
imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
20
<PAGE>
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
21
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed as of the date below.
Dated: _______, 1998 CONNECTICUT VALLEY SPORTS, INC.
By:--------------------------------
Name:
Title:
Attest:
By: -----------------------------------------
Name:
Title
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<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase Shares and herewith
tenders in payment for such Shares cash or a certified or official bank check
payable in New York Clearing House Funds to the order of in the amount of
$ , all in accordance with the terms hereof. The undersigned requests that a
certificate for such Shares be registered in the name of , whose address is and
that such Certificate be delivered to whose address is.
Dated:__________ Signature:_______________________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant
Certificate.)
------------------------------------------------
(Insert Social Security or Other Identifying
Number of Holder)
23
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to
transfer the Warrant Certificate.)
FOR VALUE RECEIVED
hereby sells, assigns and transfers unto
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint, Attorney, to transfer the
within Warrant Certificate on the books of the within-named Company, with full
power of substitution.
Dated:__________ Signature:________________________________________________
(Signature must conform in all respects to name
of holder as specified on the face of the Warrant
Certificate)
_______________________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
24
<PAGE>
EXHIBIT B
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED OR SOLD EXCEPT (i) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, (ii) TO THE EXTENT APPLICABLE,
PURSUANT TO RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) UPON THE DELIVERY BY THE HOLDER TO
THE COMPANY OF AN OPINION OF COUNSEL, REASONABLY SATISFACTORY TO COUNSEL FOR THE
COMPANY, STATING THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE 5:00 P.M., NEW YORK TIME, _______, 2003
No. WW-2 150,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that _________ or registered assigns is
the registered holder of 150,000 Warrants to purchase, at any time from _______,
1999 until 5:00 P.M. New York City time on , 2003 ("Expiration Date"), up to
150,000 Redeemable Common Stock Purchase Warrants ("Redeemable Warrants"), of
Connecticut Valley Sports, Inc., a Delaware corporation (the "Company"), at the
exercise price (the "Exercise Price"), of $.11 per Redeemable Warrant upon
surrender of this Warrant Certificate and payment of the Exercise Price at an
office or agency of the Company, but subject to the conditions set forth herein
and in the Warrant Agreement dated as of ________, 1998 between the Company and
Briarwood Investment Counsel (the "Warrant Agreement"). Payment of the Exercise
Price may be made in cash, or by certified or official bank check in New York
Clearing House funds payable to the order of the Company, or any combination of
cash or check.
No Warrant may be exercised after 5:00 P.M., New York City time, on the
Expiration Date, at which time all Warrants evidenced hereby, unless exercised
prior thereto, shall thereafter be void.
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<PAGE>
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants issued pursuant to the Warrant Agreement, which
Warrant Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to in a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided herein and in the Warrant
Agreement, without any charge except for any tax, or other governmental charge
imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced by this
Certificate, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing such number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated: ___________ CONNECTICUT VALLEY SPORTS, INC.
By: ----------------------------------
Name:
Title:
26
<PAGE>
Attest:
Name:
Title
27
<PAGE>
FORM OF ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase Redeemable Warrants and
herewith tenders in payment for such Redeemable Warrants cash or a certified or
official bank check payable in New York Clearing House Funds to the order of
_______________ in the amount of $_______, all in accordance with the terms
hereof. The undersigned requests that a certificate for such Redeemable
Warrants be registered in the name of___________, whose address is ________
__________________________ and that such Certificate be delivered to whose
address is _____________________________________.
Dated: ____________ Signature: ___________________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate.)
__________________________________________
(Insert Social Security or Other Identifying
Number of Holder)
28
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires
to transfer the Warrant Certificate.)
FOR VALUE RECEIVED
hereby sells, assigns and transfers unto
_____________________________________________
(Please print name and address of transferee)
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint, Attorney, to transfer the
within Warrant Certificate on the books of the within-named Company, with full
power of substitution.
Dated: ________, 1997 Signature: __________________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
the Warrant Certificate)
___________________________________________
(Insert Social Security or Other Identifying
Number of Assignee)
29
<PAGE>
Exhibit 1.3
Draft 12/31/97
CONSULTING AND INVESTMENT BANKING AGREEMENT
This Agreement is made and entered into as of the ___ day of
___________, 1998 by and between Briarwood Investment Counsel, a
corporation ("Briarwood" or "Consultant"), and Connecticut Valley Sports,
Inc., a Delaware corporation (the "Company").
In consideration of the mutual promises made herein and for other good
and valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. Duties of Consultant. The Company shall retain Briarwood as its
consultant and investment banker, on a non-exclusive basis, pursuant to the
terms and conditions hereof. The Consultant shall, at the request of the
Company, upon reasonable notice, render the following services to the Company
from time to time.
(a) Consulting Services. The Consultant will provide such
financial consulting services and advice pertaining to the Company's business
affairs as the Company may from time to time reasonably request. Without
limiting the generality of the foregoing, the Consultant will assist the
Company in developing, studying and evaluating financing, merger and
acquisition proposals and assist in negotiations and discussions pertaining
thereto.
(b) Financing. The Consultant will assist and represent the
Company in obtaining both short and long-term financing if, as and when
requested by the Company. The Consultant will be entitled to additional
compensation under certain circumstances in accordance with the terms set
forth in Section 3 hereof.
The services described in this Section 1 shall be rendered by the
Consultant without any direct supervision by the Company and at such time and
place and in such manner (whether by conference, telephone, letter or
otherwise) as the Consultant may determine.
2. Term. Except as otherwise specified in Paragraph 4 hereof, this
Agreement shall be effective for a two (2) year period commencing on the date
hereof and ending __________, 2000.
<PAGE>
3. Compensation.
(a) As compensation for the Consultant's services hereunder, the
Company shall pay to the Consultant a fee of Twenty-Five Thousand Dollars
($25,000) per year for the term of this Agreement, payable annually in
advance with the first payment due upon the First Closing date (as defined in
the Underwriting Agreement dated ___________, 1998 by and between Briarwood
and the Company (the "Underwriting Agreement")) and the remaining $25,000 due
on the first anniversary of the First Closing Date.
(b) In addition to the financial consulting services described in
Section 1 above, the Consultant may, at the request of the Company, bring the
Company in contact with persons, whether individuals or entities, that may be
suitable candidates for providing the Company with, or may lead the Company
to other individuals or entities that may provide the Company with, debt or
equity financing or that may be suitable candidates, or may lead the Company
to such suitable candidates, to purchase substantially all of the stock or
assets of the Company, merge with the Company, or enter into a joint venture
or other transaction with the Company. If, at any time during the term of
this Agreement, the Company enters into an agreement with any such persons or
their affiliates, or with any persons introduced to the Company by any such
persons or their affiliates, pursuant to which the Company obtains debt or
equity financing or pursuant to which substantially all of the Company's
stock or assets is purchased or the Company is merged with or into another
entity, or pursuant to which the Company enters into a joint venture or other
transaction, the Company will pay to the Consultant, in accordance with the
formula set forth below, additional compensation based on the aggregate
Transaction Value (as defined below) of such transaction (the "Transaction")
[; provided, that if a fee is payable by Company to a person introduced to
the Company by Consultant, the amount of such fee shall be deducted from the
fee payable to Consultant hereunder.] Nothing herein shall be deemed or
construed to obligate or require the Company to complete or consummate any
Transaction for which the Consultant would be compensated hereunder or to pay
the Consultant any fee or compensation for any Transaction which is not
consummated.
(c) The additional compensation to be paid will be paid upon the
closing of the Transaction, by certified check, in the following amounts:
5% of the first $5,000,000 of Transaction Value in the Transaction;
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<PAGE>
4% of the Transaction Value in excess of $5,000,000 and up to
$6,000,000;
3% of the Transaction Value in excess of $6,000,000 and up to
$7,000,000;
2% of the Transaction Value in excess of $7,000,000 and up to
$8,000,000; and
1% of any Transaction Value in excess of $8,000,000.
(d) "Transaction Value" shall mean the aggregate value of all
cash, securities and other property (i) paid to the Company, its affiliates,
or their securityholders in connection with any Transaction involving an
investment in or acquisition of the Company or any affiliate (or the assets
of either), (ii) paid by the Company or any affiliate in any such Transaction
involving an investment in or acquisition of another party or its equity
holdings by the Company or any affiliate, or (iii) paid or contributed by the
Company or any affiliate and by the other party or parties in the event of
any such Transaction involving a joint venture or similar joint enterprise or
undertaking. The value of any such securities (whether debt or equity) or
other property shall be the fair market value thereof as determined by
agreement of the Consultant and the Company or by an independent appraiser
jointly selected by the Consultant and the Company. "Transaction Value" shall
also include the principal amount of any indebtedness assumed or forgiven as
part of a Transaction.
(e) All fees to be paid pursuant to this Agreement, except as
otherwise specified, are due and payable to Briarwood in cash or company
check at the closing or closings of any Transaction specified herein. In the
event that the consideration in respect of a Transaction is paid out over a
period of time, Briarwood shall be paid its pro-rata portion of such
consideration as the Company is paid. In the event that this Agreement shall
not be renewed or if terminated for any reason, notwithstanding any such
non-renewal or termination, Briarwood shall be entitled to a full fee as
provided under Paragraphs 3 and 4 hereof, for any Transaction for which the
discussions were initiated with a third party at the request of the Company
during the term of this Agreement and which is consummated within a period of
twelve months after non-renewal or termination of this Agreement.
4. Expenses of Briarwood. In addition to the fees payable hereunder
and regardless of whether any Transaction set
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<PAGE>
forth in Paragraph 3 hereof is proposed or consummated, the Company shall
reimburse Briarwood for Briarwood's reasonable travel and out-of-pocket expenses
incurred in connection with the services performed by Briarwood pursuant to this
Agreement and at the request of the Company, including without limitation,
hotels, food and associated expenses and long-distance telephone calls [;
provided, that expenses in excess of $_______ in the aggregate or any single
expense in excess of $1,000 shall be approved by Company in advance].
5. Available Time. The Consultant shall make available such time as it,
in its sole discretion, shall deem appropriate for the performance of its
obligations under this Agreement.
6. Liability of Briarwood.
(a) The Company acknowledges that all opinions and advice (written or
oral) given by Briarwood to the Company in connection with Briarwood's
engagement are intended solely for the benefit and use of the Company in
considering the Transaction to which they relate, and the Company agrees that no
person or entity other than the Company shall be entitled to make use of or rely
upon the advice of Briarwood to be given hereunder, and no such opinion or
advice shall be used for any other purpose or reproduced, disseminated, quoted
or referred to at any time, in any manner or for any purpose, nor may the
Company make any public references to Briarwood, or use Briarwood's name in any
annual reports or any other reports or releases of the Company without
Briarwood's prior written consent or as required by law.
(b) The Company acknowledges that Briarwood makes no commitment
whatsoever as to making a market in the Company's securities or to recommending
or advising its clients to purchase the Company's securities. Research reports
or corporate finance reports that may be prepared by Briarwood will, when and if
prepared, be done solely on the merits or judgement of analysis of Briarwood or
any senior corporate finance personnel of Briarwood.
7. Briarwood's Services to Others. The Company acknowledges that
Briarwood or its affiliates are in the business of providing financial services
and consulting advice to others. Nothing herein contained shall be construed to
limit or restrict Briarwood in conducting such business with respect to others,
or in rendering such advice to others, except that Briarwood will not provide
services to others when such services may materially and adversely affect the
Company.
- 4 -
<PAGE>
8. Company Information.
(a) The Company recognizes and confirms that, in advising the Company
and in fulfilling its engagement hereunder, Briarwood will use and rely on data,
material and other information furnished to Briarwood by the Company. The
Company acknowledges and agrees that in performing its services under this
engagement, Briarwood may rely upon the data, material and other information
supplied by the Company without independently verifying the accuracy,
completeness or veracity of same.
(b) Except as required by applicable law, Briarwood shall keep
confidential all non-public information provided to it by the Company, and shall
not disclose such information to any third party without the Company's prior
written consent, other than such of its employees and advisors as Briarwood
reasonably determines to have a need to know, provided that Briarwood shall
instruct such employees and advisors to keep such information confidential and
Briarwood shall be liable for any breach of such confidentiality. In the event
that Briarwood is required by subpoena to disclose such information, the Company
shall be afforded an opportunity to seek an order preserving the confidentiality
of such information.
9. Indemnification.
(a) The Company shall indemnify and hold Briarwood harmless against
any and all liabilities, claims, lawsuits, including any and all awards and/or
judgments to which it may become subject under the Securities Act of 1933, as
amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the
"1934 Act") or any other federal or state statute, at common law or otherwise,
insofar as said liabilities, claims and lawsuits (including costs, expenses,
awards and/or judgments) arise out of or are in connection with the services
rendered by Briarwood or any transactions in connection with this Agreement,
except for any liabilities, claims and lawsuits (including awards and/or
judgments), arising out of acts or omissions of Briarwood. In addition, the
Company shall also indemnify and hold Briarwood harmless against any and all
costs and expenses, including reasonable counsel fees, incurred relating to the
foregoing.
Briarwood shall give the Company prompt notice of any such liability, claim
or lawsuit which Briarwood contends is the subject matter of the Company's
indemnification and the Company thereupon shall be granted the right to take any
and all necessary and proper action, at its sole cost and expense, with respect
to
- 5 -
<PAGE>
such liability, claim and lawsuit, including the right to settle, compromise and
dispose of such liability, claim or lawsuit, excepting therefrom any and all
proceedings or hearings before any regulatory bodies and/or authorities and
provided that no such settlement shall be made without the prior consent of
Briarwood.
Briarwood shall indemnify and hold the Company harmless against any and all
liabilities, claims and lawsuits, including any and all awards and/or judgments
to which it may become subject under the 1933 Act, the 1934 Act or any other
federal or state statute, at common law or otherwise, insofar as said
liabilities, claims and lawsuits (including costs, expenses, awards and/or
judgments) arise out of or are in connection with the services rendered by
Briarwood or any transactions in connection with this Agreement. In addition,
Briarwood shall also indemnify and hold the Company harmless against any and all
costs and expenses, including reasonable counsel fees, incurred relating to the
foregoing.
The Company shall give Briarwood prompt notice of any such liability, claim
or lawsuit which the Company contends is the subject matter of Briarwood's
indemnification and Briarwood thereupon shall be granted the right to take any
and all necessary and proper action, at its sole cost and expense, with respect
to such liability, claim or lawsuit, including the right to settle, compromise
or dispose of such liability, claim or lawsuit, excepting therefrom any and all
proceedings or hearings before any regulatory bodies and/or authorities and
provided that no such settlement shall be made without the prior consent of the
Company.
(b) In order to provide for just and equitable contribution in any
case in which (i) any person entitled to indemnification under this Paragraph 9
makes claim for indemnification pursuant hereto but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that this Paragraph 9 provides for indemnification in such case, or (ii)
contribution may be required on the part of any such person in circumstances for
which indemnification is provided under this Paragraph 9, then, and in each such
case, the Company and Briarwood shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after any
contribution from others) in such proportion taking into consideration the
relative benefits received by each party from the transactions undertaken in
connection with this Agreement (taking into account the portion of the proceeds
realized by each), the parties' relative knowledge and access to
- 6 -
<PAGE>
information concerning the matter with respect to which the claim was assessed,
the opportunity to correct and prevent any statement or omission and other
equitable considerations appropriate under the circumstances; and provided,
that, in any such case, no person guilty of a fraudulent misrepresentation
(within the meaning of Section 11(f) of the 1933 Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.
Within fifteen (15) days after receipt by any party to this Agreement (or
its representative) of notice of the commencement of any action, suit or
proceeding, such party will, if a claim for contribution in respect thereof is
to be made against another party (the "Contributing Party"), notify the
Contributing Party of the commencement thereof, but the omission so to notify
the Contributing Party will not relieve it from any liability which it may have
to any other party other than for contribution hereunder. In case any such
action, suit or proceeding is brought against any party, and such party notifies
a Contributing Party or his or its representative of the commencement thereof
within the aforesaid fifteen (15) days, the Contributing Party will be entitled
to participate therein with the notifying party and any other Contributing Party
similarly notified. Any such Contributing Party shall not be liable to any
party seeking contribution on account of any settlement of any claim, action or
proceeding effected by such party seeking contribution without the written
consent of the Contributing Party. The indemnification provisions contained in
this Paragraph 9 are in addition to any other rights or remedies which either
party hereto may have with respect to the other or hereunder.
10. Briarwood an Independent Contractor. Briarwood shall perform its
services hereunder as an independent contractor and not as an employee of the
Company or an affiliate thereof. The parties hereto expressly understand and
agree that Briarwood shall have no authority to act for, represent or bind the
Company or any affiliate thereof in any manner, except as may be agreed to
expressly by the Company in writing from time to time.
11. Miscellaneous.
(a) This Agreement between the Company and Briarwood constitutes the
entire agreement and understanding of the parties hereto, and supersedes any and
all previous agreements and understandings, whether oral or written, between the
parties with respect to the matters set forth herein.
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<PAGE>
(b) All communications hereunder, except as herein otherwise
specifically provided, shall be in writing and, if sent to Briarwood, shall be
mailed, delivered or telegraphed and confirmed to Briarwood Investment Counsel,
1851 East First Street, Suite 950, Santa Ana, California 92705, Attention:
President, with a copy to Zimet, Haines, Friedman & Kaplan, 460 Park Avenue, New
York, New York 10022, Attention: James Martin Kaplan, Esq., and if to the
Company, shall be mailed, delivered or telegraphed and confirmed to Connecticut
Valley Sports, Inc., 4004 Highway 93 North, Stevensville, Montana 59870, with a
copy to Gersten, Savage, Kaplowitz & Fredericks LLP, 101 East 52nd Street, New
York, New York 10022, Attention: Jay M. Kaplowitz, Esq.
(c) This Agreement shall be binding upon and inure to the benefit of
each of the parties hereto and their respective successors, legal
representatives and permitted assigns. This Agreement shall not be assignable
by any party without the prior written consent of the other party.
(d) This Agreement may be executed in any number of counterparts,
each of which together shall constitute one and the same original document.
(e) No provision of this Agreement may be amended, modified or
waived, except in a writing signed by all of the parties hereto.
(f) This Agreement shall be construed in accordance with and governed
by the laws of the State of New York, without giving effect to its conflict of
law principles. The parties hereby agree that any dispute which may arise
between them arising out of or in connection with this Agreement shall be
adjudicated before a court located in New York City, and they hereby submit to
the exclusive jurisdiction of the courts of the State of New York located in New
York, New York and of the federal courts in the Southern District of New York
with respect to any action or legal proceeding commenced by any party, and
irrevocably waive any objection they now or hereafter may have respecting the
venue of any such action or proceeding brought in such a court or respecting the
fact that such court is an inconvenient forum, relating to or arising out of
this Agreement, and consent to the service of process in any such action or
legal proceeding by means of registered or certified mail, return receipt
requested, in care of the address set forth in Paragraph 11(b) hereof.
- 8 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
BRIARWOOD INVESTMENT COUNSEL
By:_________________________
Name:
Title:
CONNECTICUT VALLEY SPORTS, INC.
By:_________________________
Name:
Title:
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<PAGE>
Exhibit 4.3
Draft: 12/31/97
WARRANT AGREEMENT
AGREEMENT, dated as of ________, 1998, by and among CONNECTICUT VALLEY
SPORTS, INC., a Delaware corporation (the "Company"), CONTINENTAL STOCK TRANSFER
& TRUST COMPANY, a New York corporation, as Warrant Agent (the "Warrant Agent"),
and BRIARWOOD INVESTMENT COUNSEL, a ___________ corporation (the "Underwriter").
W I T N E S S E T H:
WHEREAS, pursuant to an underwriting agreement (the "Underwriting
Agreement") dated ________, 1997 between the Company and the Underwriter, in
connection with (i) a public offering pursuant to a Registration Statement on
Form SB-2 (Registration No. 333-_____) (the "Registration Statement") filed
pursuant to the Securities Act of 1933, as amended (the "Act"), and declared
effective by the Securities and Exchange Commission on ________, 1997 of up to
1,725,000 units (the "Units"), each Unit consisting of one share of common stock
of the Company, par value $0.01 per share (the "Common Stock"), and one
redeemable Common Stock purchase warrant (the "Warrant") and (ii) the issuance
to the Underwriter or its designees of warrants to purchase up to an aggregate
of 150,000 shares of Common Stock and/or 150,000 Warrants (the "Underwriter's
Warrants"), the Company will issue up to an aggregate of 1,875,000 Warrants; and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer, exchange and redemption of the Warrants, the
issuance of certificates representing the Warrants, the exercise of the
Warrants, and the rights of the holders thereof;
NOW THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth and for the purpose of defining the terms and provisions
of the Warrants and the certificates representing the Warrants and the
respective rights and obligations thereunder of the Company, the holders of
certificates representing the Warrants and the Warrant Agent, the parties hereto
agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall
have the following meanings, unless the context shall otherwise require:
<PAGE>
(a) "Common Stock" shall mean the authorized stock of the Company of
any class, whether now or hereafter authorized, which has the right to
participate in the distribution of earnings and assets of the Company without
limit as to amount or percentage, which at the date hereof consists of Common
Stock of the Company, $.01 par value.
(b) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its principal business shall
be administered, which office is located on the date hereof at 2 Broadway,
19th Floor, New York, New York 10004.
(c) "Exercise Date" shall mean, as to any Warrant, the date on which
the Warrant Agent shall have received both (i) the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by
the Registered Holder thereof or his attorney duly authorized in writing, and
(ii) payment in cash, or by official bank or certified check made payable to
the Warrant Agent, of an amount in lawful money of the United States of
America equal to the applicable Purchase Price.
(d) "Initial Warrant Exercise Date" shall mean, as to each Warrant,
_______, 2000, [24 months from Effective Date]; provided, however, that in
the event the Company calls the Warrants for redemption prior to _________,
2000, the Warrants shall be exercisable from the date on which the Warrants
are called for redemption until the redemption date.
(e) "Purchase Price" shall mean the price to be paid upon exercise of
each Warrant in accordance with the terms hereof, which price shall be $6.00
per share, subject to adjustment from time to time pursuant to the provisions
of Section 9 hereof, and subject to the Company's right to reduce the
Purchase Price upon notice to all Warrant Holders.
(f) "Redemption Price" shall mean the price at which the Company may,
at its option, redeem the Warrants in accordance with the terms hereof, which
price shall be $.10 per Warrant, subject to adjustment from time to time
consistent with the provisions of Section 9 hereof.
(g) "Registered Holder" shall mean the person in whose name any
certificate representing Warrants shall be registered on the books maintained
by the Warrant Agent pursuant to Section 6.
2
<PAGE>
(h) "Transfer Agent" shall mean Continental Stock Transfer & Trust
Company, as the Company's transfer agent, or its authorized successor, as
such.
(i) "Warrant Expiration Date" shall mean, with respect to each Warrant,
5:00 p.m. (Eastern time) on _________, 2003 [5 years after Effective Date],
or on the business day immediately preceding the date fixed for redemption
(as set forth in Section 8), whichever is earlier; provided that if such date
shall in the State of New York be a holiday or a day on which banks are
authorized to close, then 5:00 p.m. (Eastern time) on the next following day
which in the State of New York is not a holiday nor a day on which banks are
authorized to close. Upon notice to all Warrant Holders, the Company shall
have the right to extend the Warrant Expiration Date.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) Each Warrant shall initially entitle the Registered Holder of the
Warrant Certificate representing such Warrant to purchase one (1) share of
Common Stock upon the exercise thereof, in accordance with the terms hereof,
subject to modification and adjustment as provided in Section 9.
(b) Upon execution of this Agreement, Warrant Certificates representing
the number of Warrants sold pursuant to the Underwriting Agreement shall be
executed by the Company and delivered to the Warrant Agent. Upon written
order of the Company signed by its President or Chairman or a Vice President
and by its Secretary or an Assistant Secretary, the Warrant Certificates
shall be countersigned, issued and delivered by the Warrant Agent.
(c) From time to time up to the Warrant Expiration Date, the Transfer
Agent shall countersign and deliver stock certificates in required whole
number denominations representing up to an aggregate of 1,875,000 of Common
Stock, subject to adjustment as described herein, upon the exercise of
Warrants in accordance with this Agreement.
(d) From time to time up to the Warrant Expiration Date, the Warrant
Agent shall countersign and deliver Warrant Certificates in required whole
number denominations to the persons entitled thereto in connection with any
transfer or exchange permitted under this Agreement; provided that no Warrant
Certificates shall be issued except (i) those initially issued hereunder,
(ii) those issued on or after the Initial Warrant Exercise Date upon the
exercise of fewer than all Warrants
3
<PAGE>
represented by any Warrant certificate to evidence any unexercised Warrants held
by the exercising Registered Holder, (iii) those issued upon any transfer or
exchange pursuant to Section 6; (iv) those issued in replacement of lost,
stolen, destroyed or mutilated Warrant Certificates pursuant to Section 7; (v)
those issued pursuant to the Underwriter's Warrants; and (vi) those issued at
the option of the Company, in such form as may be approved by its Board of
Directors, to reflect any adjustment or change in the Purchase Price, the number
of shares of Common Stock purchasable upon exercise of the Warrants or the
Redemption Price therefor made pursuant to Section 9.
(e) Pursuant to the terms of the Underwriter's Warrants, the Underwriter
and its designees may purchase up to an aggregate of 150,000 Warrants.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates shall be substantially in the form annexed
hereto as Exhibit A, and may have such letters, numbers or other marks of
identification or designation 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 or as may be
required to comply with any law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange on which the
Warrants may be listed, or to conform to usage. The Warrant Certificates shall
be dated the date of issuance thereof (whether upon initial issuance, transfer,
exchange or in lieu of mutilated, lost, stolen or destroyed Warrant
Certificates) and issued in registered form. Warrants shall be numbered
serially with the letter W on the Warrants.
(b) Warrant Certificates shall be executed on behalf of the Company by its
Chairman of the Board, President or any Vice President and by its Secretary or
an Assistant Secretary, by mutual signatures or by facsimile signatures printed
thereon, and shall have imprinted thereon a facsimile of the Company's seal. In
case any officer of the Company who shall have signed any of the Warrant
Certificates shall cease to be such officer of the Company before the date of
issuance of the Warrant Certificates or before countersignature by the Warrant
Agent and issue and delivery thereof, such Warrant Certificates may nevertheless
be countersigned by the Warrant Agent, issued and delivered with the same force
and effect as though the person who signed such Warrant Certificates had not
ceased to be such officer of the Company. After countersignature by the Warrant
Agent, Warrant Certificates shall be delivered by the Warrant Agent to the
Registered Holder
4
<PAGE>
without further action by the Company, except as otherwise provided by Section
4(a).
(c) It is contemplated that the securities comprising the Units will
become detachable and trade separately immediately upon issuance.
SECTION 4. Exercise.
(a) Each Warrant may be exercised by the Registered Holder thereof at any
time on or after the Initial Warrant Exercise Date, but not after the Warrant
Expiration Date, upon the terms and subject to the conditions set forth herein
and in the applicable Warrant Certificate. A Warrant shall be deemed to have
been exercised immediately prior to the close of business on the Exercise Date
and the person entitled to receive the securities deliverable upon such exercise
shall be treated for all purposes as the holder upon exercise thereof as of the
close of business on the Exercise Date. As soon as practicable on or after the
Exercise Date, the Warrant Agent shall deposit the cash or check received from
the exercise of a Warrant in an account for the benefit of the Company and shall
notify the Company in writing of the exercise of the Warrants. Promptly
following, and in any event within five (5) days after the date of such notice
from the Warrant Agent, the Warrant Agent, on behalf of the Company, shall cause
to be issued and delivered by the Transfer Agent to the person or persons
entitled to receive the same a certificate or certificates for the securities
deliverable upon such exercise (plus a Warrant Certificate for any remaining
unexercised Warrants of the Registered Holder), provided that the Warrant Agent
shall refrain from causing such issuance of certificates pending clearance of
checks received in payment of the Purchase Price pursuant to such Warrants.
Upon the exercise of any Warrant and clearance of the funds received, the
Warrant Agent shall promptly remit the payment received for the Warrant to the
Company or as the Company may direct in writing. Notwithstanding anything in
the foregoing to the contrary, no Warrant will be exercisable unless at the time
of exercise the Company has filed with the Securities and Exchange Commission a
registration statement under the Act covering the shares of Common Stock
issuable upon exercise of such Warrant and such shares have been so registered
or qualified or deemed to be exempt under the securities laws of the state of
residence of the Registered Holder of such Warrant. The Company shall use its
best efforts to have all shares so registered or qualified on or before the date
on which the Warrants become exercisable.
(b) If, on the Exercise Date in respect of the exercise of any Warrant at
any time on or after the first anniversary of the
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date hereof, (i) the market price of the Common Stock is equal to or greater
than the then Purchase Price of the Warrant, (ii) the exercise of the Warrant is
solicited by the Underwriter at such time as the Underwriter is a member of the
National Association of Securities Dealers, Inc. ("NASD"), (iii) the Warrant is
not held in a discretionary account, (iv) disclosure of the compensation
arrangement is made in documents provided to the holders of the Warrants and (v)
the solicitation of the exercise of the Warrant is not in violation of
Regulation M (as such regulation or any successor regulation or rule may be in
effect as of such time of exercise) promulgated under the Securities Exchange
Act of 1934, as amended, then the Underwriter shall be entitled to receive from
the Company, upon exercise of the each of Warrant(s), a fee of five percent (5%)
of the aggregate Purchase Price of the Warrants so exercised (the "Exercise
Fee"). Within five (5) days of the last day of each month commencing with
________, 1999, [first anniversary of date hereof], the Warrant Agent will
notify the Underwriter of each Warrant Certificate which has been properly
completed for exercise by holders of Warrants during the last month. The
Company and Warrant Agent shall determine, in their sole and absolute
discretion, whether a Warrant Certificate has been properly completed. The
Warrant Agent will provide the Underwriter with such information, in connection
with the exercise of each Warrant, as the Underwriter shall reasonably request.
The Company hereby authorizes and instructs the Warrant Agent to deliver to the
Underwriter the Exercise Fee promptly after receipt by the Warrant Agent from
the Company of a check payable to the order of the Underwriter in the amount of
the Exercise Fee. In the event that an Exercise Fee is paid to the Underwriter
with respect to a Warrant which the Company or the Warrant Agent determines is
not properly completed for exercise or in respect of which the Underwriter is
not entitled to an Exercise Fee, the Underwriter will promptly return such
Exercise Fee to the Warrant Agent which shall forthwith return such fee to the
Company. The Underwriter and the Company may at any time, after ________, 1999,
[first anniversary of date hereof] and during business hours, examine the
records of the Warrant Agent, including its ledger of original Warrant
certificates returned to the Warrant Agent upon exercise of Warrants.
Notwithstanding any provision to the contrary, the provisions of this paragraph
may not be modified, amended or deleted without the prior written consent of the
Underwriter.
SECTION 5. Reservation of Shares; Listing; Payment of Taxes; etc.
(a) The Company has reserved, and covenants that it will at all times
reserve and keep available out of its authorized Common Stock, solely for the
purpose of issuance upon exercise of
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Warrants, such number of shares of Common Stock as shall then be issuable upon
the exercise of all outstanding Warrants. The Company covenants that all shares
of Common Stock which shall be issuable upon exercise of the Warrants shall, at
the time of delivery, be duly and validly issued, fully paid, nonassessable and
free from all taxes, liens and charges with respect to the issuance thereof
(other than those which the Company shall promptly pay or discharge) and that
upon issuance such shares shall be listed on each national securities exchange,
if any, on which the other shares of outstanding Common Stock of the Company are
then listed or, if applicable, The Nasdaq Stock Market.
(b) The Company hereby agrees that, so long as any unexpired Warrants
remain outstanding, the Company will file such post-effective amendments to the
Registration Statement as may be necessary to permit it to deliver to each
person exercising a Warrant a prospectus meeting the requirements of Section
10(a)(3) of the Act and otherwise complying therewith, and will deliver such a
prospectus to each such person.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants or the issuance or delivery of any shares upon exercise of the
Warrants; provided, however, that if the shares of Common Stock are to be
delivered in a name other than the name of the Registered Holder of the Warrant
Certificate representing any Warrant being exercised, then no such delivery
shall be made unless the person requesting the same had paid to the Warrant
Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized to requisition the
Company's Transfer Agent from time to time for certificates representing shares
of Common Stock issuable upon exercise of the Warrants, and the Company will
authorize the Transfer Agent to comply with all such proper requisitions. The
Company will file with the Warrant Agent a statement setting forth the name and
address of the Transfer Agent of the Company for shares of Common Stock issuable
upon exercise of the Warrants, unless the Warrant Agent and the Transfer Agent
are the same entity.
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant Certificates
representing an equal aggregate number of Warrants of the same class or may be
transferred in whole or in part. Warrant Certificates to be exchanged shall be
surrendered to
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the Warrant Agent at its Corporate Office, and upon satisfaction of all the
terms and provisions hereof, the Company shall execute and the Warrant Agent
shall countersign, issue and deliver in exchange therefor the Warrant
Certificate or Certificates which the Registered Holder making the exchange
shall be entitled to receive.
(b) The Warrant Agent shall keep at its office books in which, subject to
such reasonable regulations as it may prescribe, it shall register Warrant
Certificates and the transfer thereof in accordance with its regular practice.
Upon due presentment for registration of transfer of any Warrant Certificate at
such office, the Company shall execute and the Warrant Agent shall issue and
deliver to the transferee or transferees a new Warrant Certificate or
Certificates representing the aggregate number of Warrants so transferred.
(c) With respect to all Warrant Certificates presented for registration or
transfer, or for exchange or exercise, the "Election to Purchase" or
"Assignment" form, as appropriate, on the reverse thereof shall be duly
endorsed, or be accompanied by a written instrument or instruments of transfer
and subscription, in form satisfactory to the Company and the Warrant Agent,
duly executed by the Registered Holder or his attorney-in-fact authorized in
writing.
(d) A service charge may be imposed by the Warrant Agent for any exchange
or registration of transfer of Warrant Certificates requested by a Registered
Holder. In addition, the Company may require payment by such Registered Holder
of a sum sufficient to cover any tax or other governmental charge that may be
imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange in
case of mutilated Warrant Certificates shall be promptly canceled by the Warrant
Agent and thereafter retained by the Warrant Agent until termination of this
Agreement or resignation as Warrant Agent, or, with the prior written consent of
the Underwriter, disposed of or destroyed, at the direction of the Company.
(f) Prior to due presentment for registration of transfer thereof, the
Company and the Warrant Agent may deem and treat the Registered Holder of any
Warrant Certificate as the absolute owner thereof and of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than a duly authorized officer of the Company or
the Warrant Agent) for all purposes and shall not be affected by any notice to
the contrary. The Warrants, which are being publicly
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offered with shares of Common Stock pursuant to the Underwriting Agreement, may
be purchased separately from the shares and will be immediately transferable
separately from the Common Stock.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the
Warrant Agent of evidence satisfactory to them of the ownership of and loss,
theft, destruction or mutilation of any Warrant Certificate and (in case of
loss, theft or destruction) of indemnity satisfactory to them, and (in the case
of mutilation) upon surrender and cancellation thereof, the Company shall
execute and the Warrant Agent shall (in the absence of notice to the Company
and/or Warrant Agent that the Warrant Certificate has been acquired by a bona
fide purchaser) countersign and deliver to the Registered Holder in lieu thereof
a new Warrant Certificate of like tenor representing an equal aggregate number
of Warrants. Applicants for a substitute Warrant Certificate shall comply with
such other reasonable regulations and pay such other reasonable charges as the
Warrant Agent may prescribe pursuant to Section 6(d) or otherwise.
SECTION 8. Redemption.
(a) Commencing _______, 1999, [one year after Effective Date], on prior
written notice as required pursuant to the provisions of paragraph (b) of this
Section 8 below, the Warrants may, with the prior written consent of the
Underwriter, be redeemed by the Company at the Redemption Price, provided the
closing bid quotation of the Common Stock on The Nasdaq Stock Market or the last
sales price if quoted on a national securities exchange equals or exceeds $7.50
per share, subject to adjustment consistent with the provisions of Section 9
hereof, for 20 consecutive trading days ending on the third trading day prior to
the date on which the Company gives notice of redemption. All Warrants must be
redeemed if any of the Warrants are redeemed.
(b) In case the Company shall desire to exercise its right to so redeem
the Warrants, it shall request the Warrant Agent, or the Underwriter, to mail a
notice of redemption to each of the Registered Holders of the Warrants to be
redeemed, first class, postage prepaid, not earlier than the forty-fifth (45th)
day before the date fixed for redemption and not later than the thirtieth (30th)
day before the date fixed for redemption, at such Registered Holder's last
address as it shall appear on the records of the Warrant Agent. Any notice
mailed in the manner provided herein shall be conclusively presumed to have been
duly given whether or not the Registered Holder receives such notice.
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(c) The notice of redemption shall specify (i) the Redemption Price, (ii)
the date fixed for redemption, (iii) the place where the Warrant Certificates
shall be delivered and the Redemption Price paid, (iv) that the Underwriter will
assist each Registered Holder of a Warrant in connection with the exercise
thereof (if the Underwriter has conducted, or caused to be conducted, the
mailing) and (v) that the right to exercise the Warrant shall terminate at 5:00
p.m. (Eastern time) on the business day immediately preceding the date fixed for
redemption. No failure to mail such notice nor any defect therein or in the
mailing thereof shall affect the validity of the proceedings for such redemption
except as to a holder (a) to whom notice was not mailed or (b) whose notice was
defective. An affidavit of the Warrant Agent or of the Secretary or an
Assistant Secretary of the Underwriter or the Company that notice of redemption
has been mailed shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
(d) Any right to exercise a Warrant that has been called for redemption
shall terminate at 5:00 p.m. (Eastern time) on the business day immediately
preceding the date fixed for redemption. After such termination, Holders of the
redeemed Warrants shall have no further rights except to receive, upon surrender
of the redeemed Warrant, the Redemption Price.
(e) From and after the date fixed for redemption, the Company shall, at
the place specified in the notice of redemption, upon presentation and surrender
to the Company by or on behalf of the Registered Holder thereof of one or more
Warrants to be redeemed, deliver or cause to be delivered to or upon the written
order of such Holder a sum in cash equal to the Redemption Price of each such
Warrant. From and after the date fixed for redemption and upon the deposit or
setting aside by the Company of a sum sufficient to redeem all the Warrants
called for redemption, such Warrants shall expire and become void and all rights
hereunder and under the Warrant Certificates, except the right to receive
payment of the Redemption Price, shall cease.
SECTION 9. Adjustment of Exercise Price and Number of Shares of Common
Stock or Warrants.
(a) (i) In the event the Company shall, at any time or from time to time
after the date hereof, issue any shares of Common Stock as a stock dividend to
the holders of Common Stock, or subdivide or combine the outstanding shares of
Common Stock into a greater or lesser number of shares (any such sale, issuance,
subdivision or combination being herein called a "Change of Shares"), then, and
thereafter upon each further Change of Shares,
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the applicable Purchase Price in effect immediately prior to such Change of
Shares shall be changed to a price (calculated to the nearest cent) determined
by multiplying the Purchase Price in effect immediately prior thereto by a
fraction, the numerator of which shall be the total number of shares of Common
Stock outstanding immediately prior to such Change of Shares and the denominator
of which shall be the total number of shares of Common Stock outstanding
immediately after such Change of Shares.
(ii) Subject to the exceptions referred to in Section 9(h), in the
event that the Company shall at any time or from time to time issue or sell any
shares of its Common Stock for a consideration per share of Common Stock less
than the then applicable Purchase Price, the Purchase Price shall thereupon be
reduced to a price (calculated to the nearest cent) determined by dividing (x)
an amount equal to the sum of (i) the number of shares of Common Stock of the
Company outstanding immediately prior to such issue or sale multiplied by the
then applicable Purchase Price plus (ii) the consideration, if any, received by
the Company upon such issuance or sale by (y) the total number of shares of
Common Stock of the Company outstanding immediately after such issuance or sale.
(iii) If the Company shall at any time after the date hereof issue or
sell any shares of any other securities convertible into Common Stock or any
options or warrants to purchase Common Stock (except as provided in Section
9(h)), including in connection with retirement of outstanding debt, for a
consideration per share less than the Purchase Price in effect immediately prior
to the time of such issue or sale, then, forthwith upon such issue or sale, the
Purchase Price shall be reduced to the price (calculated to the nearest cent)
determined by dividing (x)an amount equal to the sum of (i) the number of shares
of Common Stock outstanding immediately prior to such issue or sale multiplied
by the Purchase Price at the time plus (ii) the consideration, if any, received
by the Company upon such issue or sale by (y) the total number of shares of
Common Stock outstanding immediately after such issue or sale.
(iv) For purposes of this Section 9(a) the consideration in connection
with any such issue or sale shall be the amount of cash received by the Company
(or, in the case of securities sold to underwriters or dealers for public
offering or to the public through underwriters, the public offering price) for
the sale of such shares or other securities, options or warrants, before
deducting therefrom any commissions or other expenses paid or incurred by the
Company in connection with the issue or sale of such securities, options or
warrants plus any additional cash
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receivable by the Company on conversion or exercise of such other securities,
options or warrants except that, if any portion of such consideration is a
consideration other than cash, the amount of such consideration other than cash
shall be (i) the principal amount thereof, plus any accrued but unpaid interest
thereon and all other amounts payable in connection with such debt including for
expenses and yield maintenance premiums, in the case of debt forgiven, exchanged
or converted, and (ii) the value of such consideration as determined in good
faith by the Board of Directors of the Company (whose determination shall be
conclusive and shall be evidenced by a resolution of the Company's Board of
Directors filed with the Warrant Agent), in the case of any other non-cash
consideration.
(v) If the conversion or exercise price of any securities convertible
into Common Stock or options or warrants to purchase Common Stock is not
specified at the time of the issue or sale of such securities, option or
warrants, the amount thereof, for purposes only of this Section 9(a), shall be
as determined in accordance with Section 9(i).
(vi) In the event of the issuance or sale by the Company of any
securities convertible into Common Stock or any options or warrants to purchase
Common Stock (except as provided in Section 9(h)), the Company shall be deemed
to have issued the maximum number of shares of Common Stock into which such
convertible securities may be converted or the maximum number of shares of
Common Stock deliverable upon the exercise of such options or warrants, as the
case may be, for the minimum consideration payable in respect thereof. On the
expiration of such options or warrants or the termination of the right to
convert such convertible securities, the Purchase Price shall be readjusted
based upon the number of shares of Common Stock actually delivered upon the
exercise of such options or warrants or upon the conversion of such convertible
securities. Except as provided in the next preceding sentence no further
adjustment of the Purchase Price shall be made as a result of the actual
issuance of shares of Common Stock upon the exercise of such options or warrants
or the conversion of such convertible securities.
(b) Upon each adjustment of the applicable Purchase Price pursuant to
Section 9(a), the total number of shares of Common Stock purchasable upon the
exercise of each Warrant shall (subject to the provisions contained in Section
9(c)) be such number of shares (calculated to the nearest tenth) purchasable at
the applicable Purchase Price immediately prior to such adjustment multiplied by
a fraction, the numerator of which shall be the applicable Purchase Price in
effect immediately prior to such
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adjustment and denominator of which shall be the applicable Purchase Price in
effect immediately after such adjustment.
(c) The Company may elect, upon any adjustment of the applicable Purchase
Price, to adjust the number of Warrants outstanding, in lieu of adjusting the
number of shares of Common Stock purchasable upon the exercise of each Warrant
as hereinabove provided, so that each Warrant outstanding after such adjustment
shall represent the right to purchase one share of Common Stock. Each Warrant
held of record prior to such adjustment of the number of Warrants shall become
that number of Warrants (calculated to the nearest tenth) determined by
multiplying the number one by a fraction, the numerator of which shall be the
applicable Purchase Price in effect immediately prior to such adjustment and the
denominator of which shall be the applicable Purchase Price in effect
immediately after such adjustment. Upon each such adjustment of the number of
Warrants, the Redemption Price in effect immediately prior to such adjustment
also shall be adjusted by multiplying such Redemption Price by a fraction, the
numerator of which shall be the Purchase Price in effect immediately after such
adjustment and the denominator of which shall be the Purchase Price in effect
immediately prior to such adjustment. Upon each adjustment of the number of
Warrants pursuant to this Section 9, the Company shall, as promptly as
practicable, cause to be distributed to each Registered Holder of Warrant
Certificates on the date of such adjustment Warrant Certificates evidencing,
subject to Section 10, the number of additional Warrants, if any, to which such
Holder shall be entitled as a result of such adjustment or, at the option of the
Company, cause to be distributed to such Holder in substitution and replacement
for the Warrant Certificates held by such Holder prior to the date of adjustment
(and upon surrender thereof, if required by the Company) new Warrant
Certificates evidencing the number of Warrants to which such Holder shall be
entitled after such adjustment.
(d) In the case of any consolidation or merger of the Company with or into
another corporation (other than a consolidation or merger in which the Company
is the continuing corporation and which does not result in any reclassification,
capital reorganization or other change of outstanding shares of Common Stock),
or in case of any sale or conveyance to another corporation of the property of
the Company as, or substantially as, an entirety (other than a sale/leaseback,
mortgage or other financing transaction), the Company shall cause effective
provision to be made so that each holder of a Warrant then outstanding shall
have the right thereafter, by exercising such Warrant, to purchase the kind and
number of shares of stock or other securities or property (including cash)
receivable upon such consolidation,
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merger, sale or conveyance by a holder of the number of shares of Common Stock
that might have been purchased upon exercise of such Warrant, immediately prior
to such consolidation, merger, sale or conveyance. Any such provision shall
include provision for adjustments that shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Section 9. The foregoing
provisions shall similarly apply to successive consolidations, mergers, sales or
conveyances.
(e) Irrespective of any adjustments or changes in the Purchase Price or
the number of shares of Common Stock purchasable upon exercise of the Warrants,
the Warrant Certificates theretofore and thereafter issued shall, unless the
Company shall exercise its option to issue new Warrant Certificates, continue to
express the applicable Purchase Price per share, the number of shares
purchasable thereunder and the Redemption Price therefor as were expressed in
the Warrant Certificates when the same were originally issued.
(f) After each adjustment of the Purchase Price pursuant to this Section
9, the Company will promptly after the fiscal quarter in which such adjustment
was triggered prepare a certificate signed by the Chairman or President, and by
the Secretary or an Assistant Secretary, of the Company setting forth: (i) the
applicable Purchase Price as so adjusted, (ii) the number of shares of Common
Stock purchasable upon exercise of each Warrant after such adjustment, and, if
the Company shall have elected to adjust the number of Warrants, the number of
Warrants to which the Registered Holder of each Warrant shall then be entitled,
and the adjustment in Redemption Price resulting therefrom, and (iii) a brief
statement of the facts accounting for such adjustment. The Company will
promptly file such certificate with the Warrant Agent and cause a brief summary
thereof to be sent by ordinary first class mail to the Underwriter and to each
Registered Holder of Warrants at his or her last address as it shall appear on
the registry books of the Warrant Agent. No failure to mail such notice nor any
defect therein or in the mailing thereof shall affect the validity thereof
except as to the holder to whom the Company failed to mail such notice, or
except as to the holder whose notice was defective. The affidavit of an officer
of the Warrant Agent or the Secretary or an Assistant Secretary of the Company
that such notice has been mailed shall, in the absence of fraud, be prima facie
evidence of the facts stated therein.
(g) For purposes of Section 9(a), 9(b) and 9(c) hereof, the following
provisions (i) and (ii) shall also be applicable.
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(i) The number of shares of Common Stock outstanding at any given
time shall include shares of Common Stock owned or held by or for the account of
the Company and the sale or issuance of such treasury shares or the distribution
of any such treasury shares shall not be considered a Change of Shares for
purposes of said sections.
(ii) No adjustment of the Purchase Price shall be made unless such
adjustment would require an increase or decrease of at least $0.05 in such
price; provided that any adjustments which by reason of this clause (ii) are not
required to be made shall be carried forward and shall be made at the time of
and together with the next subsequent adjustment which, together with any
adjustment(s) so carried forward, shall require an increase or decrease of at
least $0.05 in the Purchase Price then in effect hereunder.
(h) No adjustment to the Purchase Price or to the number of shares of
Common Stock purchasable upon the exercise of each Warrant will be made,
however, with respect to the following:
(1) upon the issuance or exercise of any of the Warrants;
(2) upon (i) the issuance or sale of shares of Common Stock pursuant
to options, warrants or convertible or exchangeable securities outstanding as of
the date of this Agreement or (ii) issuance of shares of Common Stock pursuant
to the Company's 1997 Stock Option Plan as such plan exists on the date hereof;
or
(3) upon the issuance of any shares of Common Stock in connection
with a consolidation or merger in which the Company or a wholly owned subsidiary
of the Company is the continuing corporation and which does not result in any
reclassification, capital reorganization or other change of the outstanding
Common Stock, or (ii) pursuant to and in connection with the acquisition by the
Company or any wholly owned subsidiary of the Company of all or substantially
all of the assets or stock (or other equity interests, as the case may be) of
another entity.
(i) Any determination as to whether an adjustment in the Purchase Price in
effect hereunder is required pursuant to Section 9, or as to the amount of any
such adjustment, if required, shall be binding upon the holders of the Warrants
and the Company if made in good faith by the Board of Directors of the Company.
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(j) If and whenever the Company shall grant to the holders of Common
Stock, as such, rights or warrants to subscribe for or to purchase, or any
options for the purchase of, Common Stock or securities convertible into or
exchangeable for or carrying a right, warrant or option to purchase Common
Stock, the Company shall concurrently therewith grant to each of the then
Registered Holders of the Warrants all of such rights, warrants or options to
which each such holder would have been entitled if, on the date of determination
of stockholders entitled to the rights, warrants or options being granted by the
Company, such holder were the holder of record of the number of whole shares of
Common Stock then issuable upon exercise (assuming, for purposes of this Section
9(j), that the exercise of Warrants is permissible during periods prior to the
Initial Warrant Exercise Date) of his Warrants. Such grant by the Company to the
holders of the Warrants shall be in lieu of any adjustment which otherwise might
be called for pursuant to this Section 9.
(k) In case the Company shall, at any time prior to the exercise of a
Warrant, make any distribution of its assets to holders of the Common Stock,
then the Registered Holder of such Warrant who exercises his Warrant after the
record date for determination of those Registered Holders of Common Stock
entitled to such distribution of assets shall be entitled to receive, upon
exercise of the Warrant, in addition to Common Stock, the amount of such
distribution which would have been payable to such Registered Holder had he been
the holder of record of the Common Stock receivable upon exercise of such
Warrant on the record date for the determination of those entitled to such
distribution.
SECTION 10. Fractional Warrants and Fractional Shares.
(a) If the number of shares of Common Stock purchasable upon the exercise
of each Warrant is adjusted pursuant to Section 9 hereof, the Company shall
nevertheless not be required to issue fractions of shares, upon exercise of the
Warrants or otherwise, or to distribute certificates that evidence fractional
shares. With respect to any fraction of a share called for upon any exercise
hereof, the Company shall pay to the Holder an amount in cash equal to such
fraction multiplied by the current market value of such fractional share,
determined as follows:
(i) If the Common Stock is listed on a national securities exchange
or admitted to unlisted trading privileges on such exchange or listed for
trading on The Nasdaq Stock Market, the current value shall be the last reported
sale price of the Common Stock on The Nasdaq Stock Market or such exchange on
the last business day prior to the date of exercise of the Warrant, or if no
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such sale is made on such day, the average of the closing bid and asked prices
for such day on such exchange; or
(ii) If the Common Stock is not listed or admitted to unlisted trading
privileges, the current value shall be the mean of the last reported bid and
asked prices reported by the National Quotation Bureau, Inc. on the last
business day prior to the date of the exercise of the Warrant; or
(iii) If the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the current
value shall be an amount determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company.
SECTION 11. Warrant Holders Not Deemed Stockholders. No holder of
Warrants shall, as such, be entitled to vote or to receive dividends or be
deemed the holder of Common Stock that may at any time be issuable upon exercise
of such Warrants for any purpose whatsoever, nor shall anything contained herein
be construed to confer upon the holder of Warrants, as such, any of the rights
of a stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting thereof,
or to give or withhold consent to any corporate action (whether upon any
recapitalization, issuance or reclassification of stock, change of par value or
change of stock to no par value, consolidation, merger or conveyance or
otherwise), or to receive notice of meetings, or to receive dividends or
subscription rights, until such Holder shall have exercised such Warrants and
been issued shares of Common Stock in accordance with the provisions hereof.
SECTION 12. Rights of Action. All rights of action with respect to this
Agreement are vested in the respective Registered Holders of the Warrants, and
any Registered Holder of a Warrant, without consent of the Warrant Agent or of
the holder of any other Warrant, may, in his own behalf and for his own benefit,
enforce against the Company his right to exercise his Warrants for the purchase
of shares of Common Stock in the manner provided in the Warrant Certificates and
this Agreement.
SECTION 13. Agreement of Warrant Holders. Every holder of a Warrant, by
his acceptance thereof, consents and agrees with the Company, the Warrant Agent
and every other holder of a Warrant that:
(a) The Warrants are transferable only on the registry books of the
Warrant Agent by the Registered Holder thereof in
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person or by his attorney duly authorized in writing and only if the Warrant
Certificates representing such Warrants are surrendered at the office of the
Warrant Agent, duly endorsed or accompanied by a proper instrument of transfer
satisfactory to the Warrant Agent and the Company in their sole discretion,
together with payment of any applicable transfer taxes; and
(b) The Company and the Warrant Agent may deem and treat the person in
whose name the Warrant Certificate is registered as the holder and as the
absolute, true and lawful owner of the Warrants represented thereby for all
purposes, and neither the Company nor the Warrant Agent shall be affected by any
notice or knowledge to the contrary, except as otherwise expressly provided in
Section 7 hereof.
SECTION 14. Cancellation of Warrant Certificates. If the Company shall
purchase or acquire any Warrant or Warrants, the Warrant Certificate or Warrant
Certificates evidencing the same shall thereupon be delivered to the Warrant
Agent and canceled by it and retired.
SECTION 15. Concerning the Warrant Agent. The Warrant Agent acts
hereunder as agent and in a ministerial capacity for the Company, and its duties
shall be determined solely by the provisions of this Agreement. The Warrant
Agent shall not, by issuing and delivering Warrant Certificates or by any other
act hereunder, be deemed to make any representations as to the validity, value
or authorization of the Warrant Certificates or the Warrants represented thereby
or of any securities or other property delivered upon exercise of any Warrant or
whether any stock issued upon exercise of any Warrant is fully paid and
nonassessable.
The Warrant Agent shall not at any time be under any duty or responsibility
to any holder of Warrant Certificates to make or cause to be made any adjustment
of the Purchase Price or the Redemption Price provided in this Agreement, or to
determine whether any fact exists which may require any such adjustments, or
with respect to the nature or extent of any such adjustment, when made, or with
respect to the method employed in making the same. The Warrant Agent shall not
(i) be liable for any recital or statement of facts contained herein or for any
action taken, suffered or omitted by it in reliance on any Warrant Certificate
or other document or instrument believed by it in good faith to be genuine and
to have been signed or presented by the proper party or parties, (ii) be
responsible for any failure on the part of the Company to comply with any of its
covenants and obligations contained in this Agreement or in any Warrant
Certificate, or (iii)
18
<PAGE>
be liable for any act or omission in connection with this Agreement except for
its own negligence or willful misconduct.
The Warrant Agent may at any time consult with counsel satisfactory to it
(who may be counsel for the Company or for the Underwriter) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
Any notice, statement, instruction, request, direction, order or demand of
the Company shall be sufficiently evidenced by an instrument signed by the
Chairman of the Board, President, any Vice President, its Secretary, or
Assistant Secretary (unless other evidence in respect thereof is herein
specifically prescribed). The Warrant Agent shall not be liable for any action
taken, suffered or omitted by it in accordance with such notice, statement,
instruction, request, direction, order or demand believed by it to be genuine.
The Company agrees to pay the Warrant Agent reasonable compensation for its
services hereunder and to reimburse it for its reasonable expenses hereunder; it
further agrees to indemnify the Warrant Agent and save it harmless against any
and all losses, expenses and liabilities, including judgments, costs and counsel
fees, for anything done or omitted by the Warrant Agent in the execution of its
duties and powers hereunder except losses, expenses and liabilities arising as a
result of the Warrant Agent's negligence or willful misconduct.
In the event of a dispute under this Agreement between the Company and the
Underwriter regarding proceeds received by the Warrant Agent from the exercise
of the Warrants, the Warrant Agent shall have the right, but not the obligation,
to bring an interpleader action to resolve such dispute.
The Warrant Agent may resign its duties and be discharged from all further
duties and liabilities hereunder (except liabilities arising as a result of the
Warrant Agent's own negligence or willful misconduct), after giving 30 days'
prior written notice to the Company. At least 15 days prior to the date such
resignation is to become effective, the Warrant Agent shall cause a copy of such
notice of resignation to be mailed to the Registered Holder of each Warrant
Certificate at the Company's expense. Upon such resignation, or any inability
of the Warrant Agent to act as such hereunder, the Company shall appoint a new
warrant agent in writing. If the Company shall fail to make such appointment
within a period of 15 days after it has been notified in writing of such
resignation by the resigning Warrant Agent, then
19
<PAGE>
the Registered Holder of any Warrant Certificate may apply to any court of
competent jurisdiction for the appointment of a new warrant agent. Any new
warrant agent, whether appointed by the Company or by such a court shall be a
bank or trust company having a capital and surplus as shown by its last
published report to its stockholders, of not less than Ten Million Dollars
($10,000,000.00), or a stock transfer company. After acceptance in writing of
such appointment by the new warrant agent is received by the Company, such new
warrant agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named herein as the Warrant Agent,
without any further assurance, conveyance, act or deed; but if for any reason it
shall be necessary or expedient to execute and deliver any further assurance,
conveyance, act or deed, the same shall be done at the expense of the Company
and shall be legally and validly executed and delivered by the resigning Warrant
Agent. Not later than the effective date of any such appointment the Company
shall file notice thereof with the resigning Warrant Agent and shall forthwith
cause a copy of such notice to be mailed to the Registered Holder of each
Warrant Certificate.
Any corporation into which the Warrant Agent or any new warrant agent may
be converted or merged or any corporation resulting from any consolidation to
which the Warrant Agent or any new warrant agent shall be a party or any
corporation succeeding to the trust business of the Warrant Agent shall be a
successor warrant agent under this Agreement without any further act, provided
that such corporation is eligible for appointment as successor to the Warrant
Agent under the provisions of the preceding paragraph. Any such successor
warrant agent shall promptly cause notice of its succession as warrant agent to
be mailed to the Company and to the Registered Holder of each Warrant
Certificate.
The Warrant Agent, its subsidiaries and affiliates, and any of its or their
officers or directors, may buy and hold or sell Warrants or other securities of
the Company and otherwise deal with the Company in the same manner and to the
same extent and with like effects as though it were not Warrant Agent. Nothing
herein shall preclude the Warrant Agent from acting in any other capacity for
the Company or for any other legal entity.
SECTION 16. Modification of Agreement. Subject to the provisions of
Section 4(b), the Warrant Agent and the Company may by supplemental agreement
make any changes or corrections in this Agreement (i) that they shall deem
appropriate to cure any ambiguity or to correct any defective or inconsistent
provision or manifest mistake or error herein contained or (ii) that they may
20
<PAGE>
deem necessary or desirable and which shall not adversely affect the interests
of the holders of Warrant Certificates; provided, however, that this Agreement
shall not otherwise be modified, supplemented or altered in any respect except
with the consent in writing of the Registered Holders of Warrant Certificates
representing not less than a majority of the outstanding Warrants, and provided,
further, that no change in the number of or nature of the securities purchasable
upon the exercise of any Warrant, or the Purchase Price therefor, or the
acceleration of the Warrant Expiration Date, shall be made without the consent
in writing of the Registered Holder of the Warrant Certificate representing such
Warrant, other than such changes as are specifically prescribed by this
Agreement as originally executed.
SECTION 17. Notices. All notices, requests, consents and other
communications hereunder shall be in writing and shall be deemed to have been
made three days after such is mailed first class registered or certified mail,
postage prepaid as follows: if to the Registered Holder of a Warrant
Certificate, at the address of such holder as shown on the registry books
maintained by the Warrant Agent; if to the Company, at 4004 Highway 93 North,
Stevensville, Montana 59870, Attention: Chief Executive Officer, or at such
other address as may have been furnished to the Warrant Agent in writing by the
Company, with a copy to Gersten, Savage, Kaplowitz & Fredericks LLP, 101 East
52nd Street, New York, New York 10022, Attention: Jay M. Kaplowitz, Esq.; if to
the Warrant Agent, at Continental Stock Transfer & Trust Company, 2 Broadway,
New York, New York 10004; if to Briarwood Investment Counsel, at 1851 East First
Street, Suite 950, Santa Ana, California 92705, Attention: President, with a
copy sent to Zimet, Haines, Friedman & Kaplan, 460 Park Avenue, New York, New
York 10022, Attention: James Martin Kaplan, Esq.
SECTION 18. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without
reference to principles of conflict of laws.
SECTION 19. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Company, the Warrant Agent and the Underwriter,
and their respective successors and assigns, and the holders from time to
time of the Warrant Certificates. Nothing in this Agreement is intended or
shall be construed to confer upon any other person any right, remedy or
claim, in equity or at law, or to impose upon any other person any duty,
liability or obligation.
SECTION 20. Termination. This Agreement shall terminate at the close
of business on the Warrant Expiration Date of all the
21
<PAGE>
Warrants or such earlier date upon which all Warrants have been exercised
and/or redeemed, except that the Warrant Agent shall account to the Company
for cash held by it and the provisions of Section 15 hereof shall survive
such termination.
SECTION 21. Counterparts. This Agreement may be executed in several
counterparts, which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this warrant
Agreement to be duly executed as of the date first above written.
CONNECTICUT VALLEY SPORTS, INC.
By:__________________________________
Name:
Title:
CONTINENTAL STOCK TRANSFER &
TRUST COMPANY
By:__________________________________
Name:
Title: Authorized Officer
BRIARWOOD INVESTMENT COUNSEL
By:__________________________________
Name:
Title:
22
<PAGE>
EXHIBIT A
(FORM OF FACE OF WARRANT CERTIFICATE)
No. Warrants
VOID AFTER _______, 2003
WARRANT CERTIFICATE FOR PURCHASE OF COMMON STOCK
CONNECTICUT VALLEY SPORTS, INC.
THIS CERTIFIES THAT, FOR VALUE RECEIVED, __________ or registered assigns
(the "Registered Holder") is the owner of the number of Redeemable Common Stock
Purchase Warrants ("Warrants") specified above. Each Warrant initially entitles
the Registered Holder to purchase, subject to the terms and conditions set forth
in this Certificate and the Warrant Agreement (as hereinafter defined), one (1)
fully paid and nonassessable share of common stock, $0.0001 par value (the
"Common Stock"), of CONNECTICUT VALLEY SPORTS, INC., a Delaware corporation (the
"Company"), at any time from _________, 2000 to the Expiration Date (as
hereinafter defined), upon the presentation and surrender of this Warrant
Certificate with the Election to Purchase Form on the reverse hereof duly
executed, at the corporate office of CONTINENTAL STOCK TRANSFER & TRUST COMPANY
as warrant agent, or its successor (the "Warrant Agent"), accompanied by payment
of $6.00, subject to adjustment (the "Purchase Price") in lawful money of the
United States of America in cash or by official bank or certified check made
payable to the Warrant Agent; provided, however, that in the event the Company
calls the Warrants for redemption prior to _________, 2000, the Warrants shall
be exercisable from the date on which the Warrants are called for redemption
until the redemption date.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement") dated as of _________,
1998, by and among the Company, the Warrant Agent and Briarwood Investment
Counsel (the "Underwriter"). Reference is hereby made to said Warrant Agreement
for a more complete statement of the rights and limitations of rights of the
Registered Holder hereof, the rights and duties of the Warrant Agent and the
rights and obligations of the Company thereunder. Copies of said Warrant
Agreement are on file at the office of the Warrant Agent.
<PAGE>
In the event of certain contingencies provided for in the Warrant
Agreement, the Purchase Price or the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modifications or adjustments.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional shares of Common Stock will be issued. In
case of the exercise of less than all the Warrants represented hereby, the
Company shall cancel this Warrant Certificate upon the surrender hereof and
shall execute and deliver a new Warrant Certificate or Warrant Certificates of
like tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term "Expiration Date" shall mean 5:00 p.m. (Eastern time) on
________, 2003, or on the business day immediately preceding the date fixed
for redemption, whichever is earlier. If such date shall in the State of New
York be a holiday or a day on which the banks are authorized to close, then
the Expiration Date shall mean 5:00 p.m. (Eastern time) on the next following
day which in the State of New York is not a holiday or a day on which banks
are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended, with respect to such securities is
effective. This Warrant shall not be exercisable by a Registered Holder in any
state in which it would be unlawful for the Company to deliver the shares of
Common Stock upon exercise of the Warrants represented hereby.
The Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment of this Warrant Certificate at
such office for registration of transfer, together with any transfer fee and any
tax or other governmental charge imposed in connection with such transfer, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
<PAGE>
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as may be provided in the Warrant Agreement.
Commencing ________, 1999, this Warrant may, with the prior written consent
of the Underwriter, be redeemed at the option of the Company, at the Redemption
Price (as defined in the Warrant Agreement), provided the closing bid quotation
of the Common Stock on The Nasdaq Stock Market or the last sales price if quoted
on a national securities exchange equals or exceeds $7.50 per share (subject to
adjustment as set forth in the Warrant Agreement) for 20 consecutive trading
days ending on the third trading day prior to the date on which the Company
gives notice of redemption. Notice of redemption shall be given not later than
the thirtieth day, and not earlier than the forty fifth day, before the date
fixed for redemption, all as provided in the Warrant Agreement. On and after
the date fixed for redemption, the Registered Holder shall have no rights with
respect to this Warrant except to receive the Redemption Price per Warrant upon
surrender of this Certificate.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the absolute
owner hereof and of each Warrant represented hereby (notwithstanding any
notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary.
The Company has agreed to pay a fee of 5% of the Purchase Price to the
Underwriter upon certain conditions as specified in the Warrant Agreement upon
the exercise of this Warrant.
This Warrant Certificate and each Warrant represented hereby shall be
governed by and construed in accordance with the laws of the State of New
York.
This Warrant Certificate shall not be valid unless countersigned by the
Warrant Agent.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized, and a facsimile of its corporate seal to be imprinted hereon.
CONNECTICUT VALLEY SPORTS, INC.
By__________________________________
Its
By__________________________________
Its
Date: _______________
Seal
COUNTERSIGNED:
CONTINENTAL STOCK TRANSFER
& TRUST COMPANY, as
Warrant Agent
By_______________________
Its Authorized Officer
<PAGE>
(FORM OF REVERSE OF WARRANT CERTIFICATE)
ELECTION TO PURCHASE FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrants
The undersigned Registered Holder hereby irrevocably elects to exercise
(___) Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such securities shall be issued in the name of
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
_________________________
_________________________
_________________________
_________________________
please print or type name and address
and be delivered to
_________________________
_________________________
_________________________
_________________________
please print or type name and address
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
The undersigned represents that the exercise of the within Warrant was
solicited by a member of the National Association of Securities Dealers, Inc.
("NASD"). If not
<PAGE>
solicited by an NASD member, please write "unsolicited" in the space below.
Unless otherwise indicated by listing the name of another NASD member firm, it
will be assumed that the exercise was solicited by Briarwood Investment Counsel.
Please indicate the name of the NASD member firm which solicited the exercise
of the Warrant.
__________________________________
Name of soliciting NASD Member
Dated: __________________
__________________________________
Name
(Please Print or Typewrite)
__________________________________
Signature
__________________________________
Street Address
__________________________________
City, State and Zip Code
__________________________________
Social Security or Other
Taxpayer ID Number
Signature Guaranteed:
__________________________________
<PAGE>
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
_________________________
_________________________
_________________________
_________________________
please print or type name and address
(___) of the Warrants represented by this Warrant Certificate, and hereby
irrevocably constitutes and appoints _______________ Attorney to transfer
this Warrant Certificate on the books of the Company, with full power of
substitution in the premises.
Dated:______________ _______________________________________________________
Signature Guaranteed:
___________________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE ELECTION TO PURCHASE FORM MUST
CORRESPOND TO THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER,
AND MUST BE GUARANTEED BY A MEDALLION BANK.
<PAGE>
Exhibit 10.1
EMPLOYMENT AGREEMENT
AGREEMENT made as of this 1st day of April 1996 by and between THE STOCK
SHOP, LLC, a Montana Limited Liability Company, having an office at 3911 Red
Ranch Road, Unit D, Stevensville, Montana 59870 (the "Employer") and Daniel
Cooper, an individual residing at 3652 Eastside Highway, P.O. Box 377,
Stevensville, Montana 59870 (the "Employee").
W I T N E S S E T H:
WHEREAS, the Employer desires to employ the Employee as Co-Chairman and
President; and
WHEREAS, the Employee is willing to be employed as Co-Chairman and
President in the manner provided for herein, and to perform the duties of such
employment upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the promises and mutual covenants
herein set forth it is agreed as follows:
1. Employment of Employee. The Employer hereby employs the
Employee as Co-Chairman and President of the Employer and the Employee hereby
accepts such employment. During the term hereof, the Employee shall devote
all of his business time and efforts to the Employer.
2. Duties. The Employee shall serve Employer and shall perform
such services and duties and have such powers as may be prescribed by the
Board of Directors (the "Board") , or the board's designee. The Employee
shall report to and be subject to the direction and control of the Board or
its designee.
3. Consideration.
a. The Employee shall be paid a salary at the rate of $48,000
per year, less applicable withholding taxes and other payroll deductions
required by law, payable in accordance
1
<PAGE>
with Employer's customary payroll practices.
b. The Employer shall include the Employee in any health
insurance and other benefit programs available to all its employees.
c. Employee shall receive an annual bonus of $7,500 which
shall be payable only if the Company's revenues exceed $600,000 per year,
which bonus, at Employee's option, shall be convertible to shares of stock in
Employer or any successor thereto under terms to be determined by the Board.
4. Term. This Agreement shall expire on the third Anniversary
hereof. It shall automatically renew for successive one year terms unless one
of the parties hereto notifies the other party in writing of its intention
not to renew at least sixty (60) days prior to the then next termination date.
5. Termination.
a. Expiration. This Agreement shall terminate upon its
expiration pursuant to its terms, as set forth in paragraph 4 above.
b. For Cause. The Employer may terminate this Agreement and
the Employee's employment hereunder upon written notice for cause. For
purposes hereof, "Cause" shall mean (i) failing to carry out in a competent,
workmanlike and diligent manner the business of the Employer as determined by
the Board, (ii) engaging in conduct which is not in the best interests of the
Employer, financially or otherwise (including but not limited to conduct that
constitutes competitive activity), (iii) breach of this Agreement in any
material manner, (iv) conviction of a crime (other than routine traffic
offenses), (v) habitual abuse of alcohol or prescription drugs or (vi) abuse
of controlled substances.
c. Other. This Agreement automatically shall terminate upon
the death of the Employee, except that the Employees's estate shall be
entitled to receive any amount accrued under paragraph 3(a) above for the
period prior to the
2
<PAGE>
Employees's death and any other amount to which the Employee was entitled to
the time of his death.
6. Expenses. The Employee shall be reimbursed for all reasonable,
actual out-of-pocket expenses incurred in the performance of the Employee's
duties hereunder, provided such expenses are acceptable to the Employer, and
that the Employee shall submit to the Employer detailed expense reports and
receipts with respect thereto in order to receive such reimbursement.
7. Vacation. The Employee shall be entitled to receive three
weeks paid vacation time during each year of employment on dates to be agreed
upon between the Employer and the Employee.
8. Confidentiality. At no time shall the Employee disclose to
anyone any confidential or secret information (not already constituting
information available to the public) of the Employer and/or its affiliates
concerning (a) internal affairs or proprietary business operations of the
Employer and/or its affiliates or (b) any trade secrets, new product
developments, patents, or unique processes or methods.
9. Covenant Not to Compete. The Employee will not, at any time,
anywhere in the world, during the term of this Agreement, and for one (1)
year thereafter, either directly or indirectly, engage in, with or for any
enterprise, institution, business, or company, whether or not for profit,
which is competitive with the business of the Employer and/or its affiliates
as such business may be conducted on the date thereof, as a creditor,
guarantor, or financial backer, stockholder, director, officer, consultant,
advisor, employee, member, inventor, producer, director, or otherwise of or
through any corporation, partnership, association, sole proprietorship or
other entity. However the ownership of, by the Employee, his spouse or his
children, of not more than four percent (4%) of the total debt or equity
capital of any such competitive enterprise or business, where the stock is
listed on a national securities
3
<PAGE>
exchange or on the National Association of Securities Dealers, Inc.
Automated Quotation System ("NASDAQ"), shall not be deemed in violation of
the covenants contained in this paragraph.
10. Proprietary Rights - Ownership of Inventions. The Employee
acknowledges that in the event the Employee creates or invents any products
or technology or improves any existing products or technology of the Employer
and/or its affiliates during the term of this Agreement, all patents or other
proprietary rights shall be the exclusive property of the Employer and/or its
affiliates. Employee agrees to execute any documents required to confirm the
Employer's and/or its affiliates' ownership of all rights in and to any
inventions of the Employee made during the term of this Agreement. The
Employee agrees not to challenge the Employer's and/or its affiliates'
ownership of any such invention or the validity of any of the Employer's
and/or its affiliates' patents or other rights relating to such inventions.
11. Entire Agreement. This Agreement contains the entire agreement
between the parties with respect to the employment contemplated herein and
supersedes any prior agreement or understanding between the Employer and the
Employee with respect to the Employee's employment by the Employer. The
unenforceability of any provision of this Agreement shall not effect the
enforceability of any other provision. This Agreement may not be amended,
modified or changed in any way except by an agreement in writing signed by
the Employee and the Employer. Waiver of or failure to exercise any rights
provided by this Agreement and in any respect shall not be deemed a waiver of
any further or future rights.
12. Assignment. This Agreement shall not be assigned to any other
person or entity, except that this Agreement shall be assigned to any
successor or re-organized entity into which the Employer may be re-organized
pursuant to paragraph l.d.2. (ii) of a certain Purchase Agreement by and
among Employer, Employee, Jason Stacy and Victor Wang dated as of March 15,
1996.
13. Governing Law. This Agreement and any amendments
4
<PAGE>
hereto, and waivers and consents with respect thereto shall be governed by
the internal laws of the state of New York, without regard to the conflict of
laws principles thereof.
14. Notices. All notices, responses, demands or other
communications under this Agreement shall be in writing and shall be deemed
to have been given when
a. delivered by hand;
b. sent by telecopier, (with receipt confirmed), provided
that a copy is mailed by registered or certified mail, return receipt
requested; or
c. received by the addressee as sent by express delivery
service (receipt requested) in each case to the appropriate addresses or
telecopier numbers as each party may designate by notice to the other party:
(i) if to the Employer:
The Stock Shop, LLC
3911 Red Ranch Road, Unit D
Stevensville, Montana 59870
Attn: Daniel Cooper
Telecopier: 406-777-7075
Telephone: 406-777-1111
With a copy to:
Gersten, Savage, Kaplowitz & Curtin, LLP
575 Lexington Avenue
27th Floor
New York, New York 10022
Attn: Wesley C. Fredericks, Jr., Esq.
Telecopier: (212) 980-5192
Telephone: (212) 752-9700
5
<PAGE>
(ii) if to the Employee:
Dan Cooper
3652 Eastside Highway P.O. Box 377
Stevensville, Montana 59870
IN WITNESS WHEREOF, THE UNDERSIGNED HAVE EXECUTED THIS AGREEMENT THE DAY AND
YEAR FIRST ABOVE WRITTEN.
THE STOCK SHOP, LLC
By: /s/ Victor Wang
----------------------------------
VICTOR WANG, Chairman and Member
/s/ Daniel Cooper
----------------------------------
DANIEL COOPER, Employee
6
<PAGE>
CONNECTICUT VALLEY SPORTS, INC.
1997 STOCK OPTION PLAN
As adopted August 14, 1997
1
<PAGE>
1. PURPOSE OF PLAN; ADMINISTRATION
1.1 Purpose.
Connecticut Valley Sports, Inc. 1997 Stock Option Plan I (hereinafter, the
"Plan") is hereby established to grant to officers and other employees of
Connecticut Valley Sports, Inc. (the "Company") or of its parents or
subsidiaries (as defined in Sections 424(e) and (f), respectively, of the
Internal Revenue Code of 1986, as amended (the "Code")), if any (individually
and collectively, the Company"), and to non-employee directors, consultants
and advisors and other persons who may perform significant services for or on
behalf of the Company, a favorable opportunity to acquire common stock,
$.0001 par value ("Common Stock"), of the Company and, thereby, to create an
incentive for such persons to remain in the employ of or provide services to
the Company and to contribute to its success.
The Company may grant under the Plan both incentive stock options within
the meaning of Section 422 of the Code ("Incentive Stock Options") and stock
options that do not qualify for treatment as Incentive Stock Options
("Nonstatutory Options"). Unless expressly provided to the contrary herein,
all references herein to "options,' shall include both incentive Stock
Options and Nonstatutory Options.
1.2 Administration.
The Plan shall be administered by the Board of Directors of the Company
(the "Board"), if each member is a "Non-Employee Director" within the meaning
of Rule 16b-3 under the Securities Exchange Act of 1934, as amended ("Rule
16b3"), or a committee (the "Committee") of two or more directors, each of
whom is a Non-Employee Director. Appointment of Committee members shall be
effective upon acceptance of appointment. Committee members may resign at
any time by delivering written notice to the Board. Vacancies in the
Committee may be filled by the Board.
A majority of the members of the Committee shall constitute a quorum for
the purposes of the Plan. Provided a quorum is present, the Committee may
take action by affirmative vote or consent of a majority of its members
present at a meeting. Meetings may be held telephonically as long as all
members are able to hear one another, and a member of the Committee shall be
deemed to be present for this purpose if he or she is in simultaneous
communication by telephone with the other members who are able to hear one
another. In lieu of action at a meeting, the Committee may act by written
consent of a majority of its members.
Subject to the express provisions of the Plan, the Committee shall have
the authority to construe and interpret the Plan and all Stock Option
Agreements (as defined in Section 3.4) entered into pursuant hereto and to
define the terms used therein, to prescribe, adopt, amend and rescind rules
and regulations relating to the administration of the Plan and to make all
other
2
<PAGE>
determinations necessary or advisable for the administration of the Plan;
provided, however, that the Committee may delegate nondiscretionary
administrative duties to such employees of the Company as it deems proper;
and, provided, further, in its absolute discretion, the Board may at any time
and from time to time exercise any and all rights and duties of the Committee
under the Plan. Subject to the express limitations of the Plan, the
Committee shall designate the individuals from among the class of persons
eligible to participate as provided in Section 1.3 who shall receive options,
whether an optionee will receive Incentive Stock Options or Nonstatutory
Options, or both, and the amount, price, restrictions and all other terms and
provisions of such options (which need not be identical).
Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities which members of the Committee incur in connection with the
administration of this Plan shall be borne by the Company. The Committee
may, with the approval of the Board, employ attorneys, consultants,
accountants, appraisers, brokers or other persons. The Committee, the
Company and the Company's officers and directors shall be entitled to rely
upon the advice, opinions or valuations of any such persons. No members of
the Committee or Board shall be personally liable for any action,
determination or interpretation made in good faith with respect to the Plan,
and all members of the Committee shall be fully protected by the Company in
respect of any such action, determination or interpretation.
1.3 Participation.
Officers and other employees of the Company, non-employee directors,
consultants and advisors and other persons who may perform significant
services on behalf of the Company shall be eligible for selection to
participate in the Plan upon approval by the Committee; provided, however,
that only "employees" (within the meaning of Section 3401(c) of the Code) of
the Company shall be eligible for the grant of Incentive Stock Options. An
individual who has been granted an option may, if otherwise eligible, be
granted additional options if the Committee shall so determine. No person is
eligible to participate in the Plan by matter of right; only those eligible
persons who are selected by the Committee in its discretion shall participate
in the Plan.
1.4 Stock Subject to the Plan.
Subject to adjustment as provided in Section 3.5, the stock to be offered
under the Plan shall be shares of authorized but unissued Common Stock,
including any shares repurchased under the terms of the Plan or any Stock
Option Agreement entered into pursuant hereto. The cumulative aggregate
number of shares of Common Stock to be issued under the Plan shall not exceed
600,000, subject to adjustment as set forth in Section 3.5.
If any option granted hereunder shall expire or terminate for any reason
without having been fully exercised, the unpurchased shares subject thereto
shall again be available for the purposes of the Plan. For purposes of this
Section 1.4, where the exercise price of options is paid
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by means of the grantee's surrender of previously owned shares of Common
Stock, only the net number of additional shares issued and which remain
outstanding in connection with such exercise shall be deemed "issued" for
purposes of the Plan.
2. STOCK OPTIONS
2.1 Exercise Price; Payment.
(a) The exercise price of each Incentive Stock Option granted under the
Plan shall be determined by the Committee, but shall not be less than 100% of
the "Fair Market Value" (as defined below) of Common Stock on the date of
grant. If an Incentive Stock Option is granted to an employee who at the
time such option is granted owns (within the meaning of section 424(d) of the
Code) more than 10% of the total combined voting power of all classes of
capital stock of the Company, the option exercise price shall be at least
110% of the Fair Market Value of . Common Stock on the date of grant. The
exercise price of each Non-statuatory Option shall be determined by the
Committee, but shall not be less than 85% of the Fair Market Value. The
status of each option granted under the Plan as either an Incentive Stock
Option or a Nonstatutory Option shall be determined by the Committee at the
time the Committee acts to grant the option, and shall be clearly identified
as such in the Stock Option Agreement relating thereto.
"Fair Market Value" for purposes of the Plan shall mean: (i) the closing
price of a share of Common Stock on the principal exchange on which shares of
Common Stock are then trading, if any, on the day immediately preceding the
date of grant, or, if shares were not traded on the day preceding such date
of grant, then on the next preceding trading day during which a sale
occurred; or (ii) if Common Stock is not traded on an exchange but is quoted
on Nasdaq or a successor quotation system, (1) the last sales price (if
Common Stock is then listed on the Nasdaq Stock Market) or (2) the mean
between the closing representative bid and asked price (in all other cases)
for Common Stock on the day prior to the date of grant as reported by Nasdaq
or such successor quotation system; or (iii) if there is no listing or
trading of Common Stock either on a national exchange or over-the-counter,
that price determined in good faith by the Committee to be the fair value per
share of Common Stock, based upon such evidence as it deems necessary or
advisable.
(b) In the discretion of the Committee at the time the option is
exercised, the exercise price of any option granted under the Plan shall be
paid in full in cash, by check or by the optionee's interest-bearing
promissory note (subject to any limitations of applicable state corporations
law) delivered at the time of exercise; provided, however, that subject to
the timing requirements of Section 2.7, in the discretion of the Committee
and upon receipt of all regulatory approvals, the person exercising the
option may deliver as payment in whole or in part of such exercise price
certificates for Common Stock of the Company (duly endorsed or with duly
executed stock powers attached), which shall be valued at its Fair Market
Value on the day of exercise of the option, or other property deemed
appropriate by the Committee; and, provided further, that, subject to Section
422 of the Code, so-called cashless exercises as permitted under applicable
rules and regulations of the Securities and Exchange Commission and the
Federal
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Reserve Board shall be permitted in the discretion of the Committee. Without
limiting the Committee's discretion in this regard, consecutive book entry
stock-for-stock exercises of options (or "pyramiding") also are permitted in
the Committee's discretion.
Irrespective of the form of payment, the delivery of shares issuable upon
the exercise of an option shall be conditioned upon payment by the optionee
to the Company of amounts sufficient to enable the Company to pay all
federal, state, and local withholding taxes resulting, in the Company's
judgment, from the exercise. In the discretion of the Committee, such
payment to the Company may be effected through (i) the Company's withholding
from the number of shares of Common Stock that would otherwise be delivered
to the optionee by the Company on exercise of the option a number of shares
of Common Stock equal in value (as determined by the Fair Market Value of
Common Stock on the date of exercise) to the aggregate withholding taxes,
(ii) payment by the optionee to the Company of the aggregate withholding
taxes in cash, (iii) withholding by the Company from other amounts
contemporaneously owed by the Company to the optionee, or (iv) any
combination of these three methods, as determined by the Committee in its
discretion.
2.2 Option Period.
(a) The Committee shall provide, in the terms of each Stock Option
Agreement, when the option subject to such agreement expires and becomes
unexercisable, but in no event will an Incentive Stock Option granted under
the Plan be exercisable after the expiration of ten years from the date it is
granted. Without limiting the generality of the foregoing, the Committee may
provide in the Stock Option Agreement that the option subject thereto expires
30 days following a Termination of Employment (as defined in Section 3.2
hereof) for any reason other than death or disability, or six months
following a Termination of Employment for disability or following an
optionee's death.
(b) Outside Date for Exercise. Notwithstanding any provision of this
Section 2.2, in no event shall any option granted under the Plan be exercised
after the expiration date of such option set forth in the applicable Stock
Option Agreement.
2.3 Exercise of Options.
Each option granted under the Plan shall become exercisable and the total
number of shares subject thereto shall be purchasable, in a lump sum or in
such installments, which need not be equal, as the Committee shall determine;
provided, however, that each option shall become exercisable in full no later
than ten years after such option is granted, and each option shall become
exercisable as to at least 10% of the shares of Common Stock covered thereby
on each anniversary of the date such option is granted; and provided,
further, that if the holder of an option shall not in any given installment
period purchase all of the shares which such holder is entitled to purchase
in such installment period, such holder's right to purchase any shares not
purchased in such installment period shall continue until the expiration or
sooner termination of such holder's option. The Committee may, at any time
after grant of the option and from time to time, increase
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the number of shares purchasable in any installment, subject to the total
number of shares subject to the option and the limitations set forth in
Section 2.5. At any time and from time to time prior to the time when any
exercisable option or exercisable portion thereof becomes unexercisable under
the Plan or the applicable Stock Option Agreement, such option or portion
thereof may be exercised in whole or in part; provided, however, that the
Committee may, by the terms of the option, require any partial exercise to be
with respect to a specified minimum number of shares. No option or
installment thereof shall be exercisable except with respect to whole shares.
Fractional share interests shall be disregarded, except that they may be
accumulated as provided above and except that if such a fractional share
interest constitutes the total shares of Common Stock remaining available for
purchase under an option at the time of exercise, the optionee shall be
entitled to receive on exercise a certified or bank cashier's check in an
amount equal to the Fair Market Value of such fractional share of stock.
2.4 Transferability of Options.
Except as the Committee may determine as aforesaid, an option granted
under the Plan shall, by its terms, be nontransferable by the optionee other
than by will or the laws of descent and distribution, or pursuant to a
qualified domestic relations order (as defined by the Code), and shall be
exercisable during the optionee's lifetime only by the optionee or by his or
her guardian or legal representative. More particularly, but without
limiting the generality of the immediately preceding sentence, an option may
not be assigned, transferred (except as provided in the preceding sentence),
pledged or hypothecated (whether by operation of law or otherwise), and shall
not be subject to execution, attachment or similar process. Any attempted
assignment, transfer, pledge, hypothecation or other disposition of any
option contrary to the provisions of the Plan and the applicable Stock Option
Agreement, and any levy of any attachment or similar process upon an option,
shall be null and void, and otherwise without effect, and the Committee may,
in its sole discretion, upon the happening of any such event, terminate such
option forthwith.
2.5 Limitation on Exercise of Incentive Stock Options.
To the extent that the aggregate Fair Market Value (determined on the date
of grant as provided in Section 2.1 above) of the Common Stock with respect
to which Incentive Stock Options granted hereunder (together with all other
Incentive Stock Option plans of the Company) are exercisable for the first
time by an optionee in any calendar year under the Plan exceeds $100,000,
such options granted hereunder shall be treated as Nonstatutory Options to
the extent required by Section 422 of the Code. The rule set forth in the
preceding sentence shall be applied by taking options into account in the
order in which they were granted.
2.6 Disqualifying Dispositions of Incentive Stock Options.
If Common Stock acquired upon exercise of any Incentive Stock Option is
disposed of in a disposition that, under Section 422 of the Code,
disqualifies the option holder from the application of Section 421(a) of the
Code, the holder of the Common Stock immediately before
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the disposition shall comply with any requirements imposed by the Company in
order to enable the Company to secure the related income tax deduction to
which it is entitled in such event.
2.7 Certain Timing Requirements.
At the discretion of the Committee, shares of Common Stock issuable to the
optionee upon exercise of an option may be used to satisfy the option
exercise price or the tax withholding consequences of such exercise, in the
case of persons subject to Section 16 of the Securities Exchange Act of 1934,
as amended, only (i) during the period beginning on the third business day
following the date of release of the quarterly or annual summary statement of
sales and earnings of the Company and ending on the twelfth business day
following such date or (ii) pursuant to an irrevocable written election by
the optionee to use shares of Common Stock issuable to the optionee upon
exercise of the option to pay all or part of the option price or the
withholding taxes made at least six months prior to the payment of such
option price or withholding taxes.
2.8 No Effect on Employment.
Nothing in the Plan or in any Stock Option Agreement hereunder shall
confer upon any optionee any right to continue in the employ of the Company,
any Parent Corporation or any subsidiary or shall interfere with or restrict
in any way the rights of the Company, its Parent Corporation and its
Subsidiaries, which are hereby expressly reserved, to discharge any optionee
at any time for any reason whatsoever, with or without cause.
For purposes of the Plan, "Parent Corporation" shall mean any corporation
in an unbroken chain of corporations ending with the Company if each of the
corporations other than the Company then owns stock possessing 50% or more of
the total combined voting power of all classes of stock in one of the other
corporations in such chain. For purposes of the Plan, "Subsidiary" shall
mean any corporation in an unbroken chain of corporations beginning with the
Company if each of the corporations other than the last corporation in the
unbroken chain then owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
3. OTHER PROVISIONS
3.1 Sick Leave and Leaves of Absence.
Unless otherwise provided in the Stock Option Agreement, and to the extent
permitted by Section 422 of the Code, an optionee's employment shall not be
deemed to terminate by reason of sick leave, military leave or other leave of
absence approved by the Company if the period of any such leave does not
exceed a period approved by the Company, or, if longer, if the optionee's
right to reemployment by the Company is guaranteed either contractually or by
statute. A Stock Option Agreement may contain such additional or different
provisions with respect to leave of absence as the Committee may approve,
either at the time of grant of an option or at a later time.
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3.2 Termination of Employment.
For purposes of the Plan "Termination of Employment," shall mean the time
when the employee-employer relationship between the optionee and the Company,
any Subsidiary or any Parent Corporation is terminated for any reason,
including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding (i) terminations
where there is a simultaneous reemployment or continuing employment of an
optionee by the Company, any Subsidiary or any Parent Corporation, (ii) at
the discretion of the Committee, terminations which result in a temporary
severance of the employee-employer relationship, and (iii) at the discretion
of the Committee, terminations which are followed by the simultaneous
establishment of a consulting relationship by the Company, a Subsidiary or
any Parent Corporation with the former employee. Subject to Section 3.1, the
Committee, in its absolute discretion, shall determine the affect of all
matters and questions relating to Termination of Employment; provided,
however, that, with respect to Incentive Stock Options, a leave of absence or
other change in the employee-employer relationship shall constitute a
Termination of Employment if, and to the extent that such leave of absence or
other change interrupts employment for the purposes of Section 422(a)(2) of
the Code and the then-applicable regulations and revenue rulings under said
Section.
3.3 Issuance of Stock Certificates.
Upon exercise of an option, the Company shall deliver to the person
exercising such option a stock certificate evidencing the shares of Common
Stock acquired upon exercise. Notwithstanding the foregoing, the Committee in
its discretion may require the Company to retain possession of any
certificate evidencing stock acquired upon exercise of an option which
remains subject to repurchase under the provisions of the Stock Option
Agreement or any other agreement signed by the optionee in order to
facilitate such repurchase provisions.
3.4 Terms and Conditions of Options.
Each option granted under the Plan shall be evidenced by a written Stock
Option Agreement ("Stock Option Agreement") between the option holder and the
Company providing that the option is subject to the terms and conditions of
the Plan and to such other terms and conditions not inconsistent therewith as
the Committee may deem appropriate in each case.
3.5 Adjustments Upon Changes in Capitalization; Merger and Consolidation.
If the outstanding shares of Common Stock are changed into, or exchanged
for cash or a different number or kind of shares or securities of the Company
or of another corporation through reorganization, merger, recapitalization,
reclassification, stock split-up, reverse stock split, stock dividend, stock
consolidation, stock combination, stock reclassification or similar
transaction, an appropriate adjustment shall be made by the Committee in the
number and kind of shares as to
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which options may be granted. In the event of such a change or exchange,
other than for shares or securities of another corporation or by reason of
reorganization, the Committee shall also make a corresponding adjustment
changing the number or kind of shares and the exercise price per share
allocated to unexercised options or portions thereof, which shall have been
granted prior to any such change, shall likewise be made. Any such
adjustment, however, shall be made without change in the total price
applicable to the unexercised portion of the option (except for any change in
the aggregate price resulting from rounding-off of share quantities or
prices).
In the event of a "spin-off" or other substantial distribution of assets
of the Company which has a material diminutive effect upon the Fair Market
Value of the Common Stock, the Committee in its discretion shall make an
appropriate and equitable adjustment to the exercise prices of options then
outstanding under the Plan.
Where an adjustment under this Section 3.5 of the type described above is
made to an Incentive Stock Option, the adjustment will be made in a manner
which will not be considered a "modification" under the provisions of
subsection 424(b)(3) of the Code.
In connection with the dissolution or liquidation of the Company or a
partial liquidation involving 50% or more of the assets of the Company, a
reorganization of the Company in which another entity is the survivor, a
merger or reorganization of the Company under which more than 50% of the
Common Stock outstanding prior to the merger or reorganization is converted
into cash or into a security of another entity, a sale of more than 50% of
the Company's assets, or a similar event that the Committee determines, in
its discretion, would materially alter the structure of the Company or its
ownership, the Committee, upon 30 days prior written notice to the option
holders, may, in its discretion, do one or more of the following: (i) shorten
the period during which options are exercisable (provided they remain
exercisable for at least 30 days after the date the notice is given); (ii)
accelerate any vesting schedule to which an option is subject; (iii) arrange
to have the surviving or successor entity grant replacement options with
appropriate adjustments in the number and kind of securities and option
prices, or (iv) cancel options upon payment to the option holders in cash,
with respect to each option to the extent then exercisable (including any
options as to which the exercise has been accelerated as contemplated in
clause (ii) above), of any amount that is the equivalent of the Fair Market
Value of the Common Stock (at the effective time of the dissolution,
liquidation, merger, reorganization, sale or other event) or the fair market
value of the option. In the case of a change in corporate control, the
Committee may, in considering the advisability or the terms and conditions of
any acceleration of the exercisability of any option pursuant to this Section
3.5, take into account the penalties that may result directly or indirectly
from such acceleration to either the Company or the option holder, or both,
under Section 280G of the Code, and may decide to limit such acceleration to
the extent necessary to avoid or mitigate such penalties or their effects.
No fractional share of Common Stock shall be issued under the Plan on
account of any adjustment under this Section 3.5.
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3.6 Rights of Participants and Beneficiaries.
The Company shall pay all amounts payable hereunder only to the option
holder or beneficiaries entitled thereto pursuant to the Plan. The Company
shall not be liable for the debts, contracts or engagements of any optionee
or his or her beneficiaries, and rights to cash payments under the Plan may
not be taken in execution by attachment or garnishment, or by any other legal
or equitable proceeding while in the hands of the Company.
3.7 Government Regulations.
The Plan, and the grant and exercise of options and the issuance and
delivery of shares of Common Stock under options granted hereunder, shall be
subject to compliance with all applicable federal and state laws, rules and
regulations (including but not limited to state and federal securities law)
and federal margin requirements and to such approvals by any listing,
regulatory or governmental authority as may, in the opinion of counsel for
the Company, be necessary or advisable in connection therewith. Any
securities delivered under the Plan shall be subject to such restrictions,
and the person acquiring such securities shall, if requested by the Company,
provide such assurances and representations to the Company as the Company may
deem necessary or desirable to assure compliance with all applicable legal
requirements. To the extent permitted by applicable law, the Plan and
options granted hereunder shall be deemed amended to the extent necessary to
conform to such laws, rules and regulations.
3.8 Amendment and Termination.
The Board or the Committee may at any time suspend, amend or terminate the
Plan and may, with the consent of the option holder, make such modifications
of the terms and conditions of such option holder's option as it shall deem
advisable, provided, however, that, without approval of the Company's
stockholders given within twelve months before or after the action by the
Board or the Committee, no action of the Board or the Committee may, (A)
materially increase the benefits accruing to participants under the Plan; (B)
materially increase the number of securities which may be issued under the
Plan; or (C) materially modify the requirements as to eligibility for
participation in the Plan. No option may be granted during any suspension of
the Plan or after such termination. The amendment, suspension or termination
of the Plan shall not, without the consent of the option holder affected
thereby, alter or impair any rights or obligations under any option
theretofore granted under the Plan. No option way be granted during any
period of suspension nor after termination of the Plan, and in no event may
any option be granted under the Plan after the expiration of ten years from
the date the Plan is adopted by the Board.
3.9 Time of Grant And Exercise of Option.
An option shall be deemed to be exercised when the Secretary of the
Company receives written notice from an option holder of such exercise,
payment of the exercise price determined pursuant to Section 2.1 of the Plan
and set forth in the Stock Option Agreement, and all
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representations, indemnifications and documents reasonably requested by the
Committee.
3.10 Privileges of Stock Ownership; Non-Distributive Intent; Reports to
Option Holders.
A participant in the Plan shall not be entitled to the privilege of stock
ownership as to any shares of Common Stock not actually issued to the
optionee. Upon exercise of an option at a time when there is not in effect
under the Securities Act of 1933, as amended, a Registration Statement
relating to the Common Stock issuable upon exercise or payment therefor and
available for delivery a Prospectus meeting the requirements of Section
10(a)(3) of said Act, the optionee shall represent and warrant in writing to
the Company that the shares purchased are being acquired for investment and
not with a view to the distribution thereof.
The Company shall furnish to each optionee under the Plan the Company's
annual report and such other periodic reports, if any, as are disseminated by
the Company in the ordinary course to its stockholders.
3.11 Legending Share Certificates.
In order to enforce any restrictions imposed upon Common Stock issued upon
exercise of an option granted under the Plan or to which such Common Stock
may be subject, the Committee may cause a legend or legends to be placed on
any share certificates representing such Common Stock, which legend or
legends shall make appropriate reference to such restrictions, including, but
not limited to, a restriction against sale of such Common Stock for any
period of time as may be required by applicable laws or regulations. If any
restriction with respect to which a legend was placed on any certificate
ceases to apply to Common Stock represented by such certificate, the owner of
the Common Stock represented by such certificate may require the Company to
cause the issuance of a new certificate not bearing the legend.
Additionally, and not by way of limitation, the Committee may impose such
restrictions on any Common Stock issued pursuant to the Plan as it may deem
advisable, including, without limitation, restrictions under the requirements
of any stock exchange upon which Common Stock is then traded.
3.12 Use of Proceeds.
Proceeds realized pursuant to the exercise of options under the Plan shall
constitute general funds of the Company.
3.13 Changes in Capital Structure; No Impediment to Corporate Transactions.
The existence of outstanding options under the Plan shall not affect the
Company's right to effect adjustments, recapitalizations, reorganizations or
other changes in its or any other corporation's capital structure or
business, any merger or consolidation, any issuance of bonds,
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debentures, preferred or prior preference stock ahead of or affecting Common
Stock, the dissolution or liquidation of the Company's or any other
corporation's assets or business, or any other corporate act, whether similar
to the events described above or otherwise.
3.14 Effective Date of the Plan.
The Plan shall be effective as of the date of its approval by the
stockholders of the Company within twelve months after the date of the
Board's initial adoption of the Plan. Options may be granted but not
exercised prior to stockholder approval of the Plan. If any options are so
granted and stockholder approval shall not have been obtained within twelve
months of the date of adoption of this Plan by the Board of Directors, such
options shall terminate retroactively as of the date they were granted.
3.15 Termination.
The Plan shall terminate automatically as of the close of business on the
day preceding the tenth anniversary date of its adoption by the Board or
earlier as provided in Section 3.8. Unless otherwise provided herein, the
termination of the Plan shall not affect the validity of any option agreement
outstanding at the date of such termination.
3.16 No Effect on Other Plans.
The adoption of the Plan shall not affect any other compensation or
incentive plans in effect for the Company, any Subsidiary or any Parent
Corporation. Nothing in the Plan shall be construed to limit the right of the
Company (i) to establish any other forms of incentives or compensation for
employees of the Company, any Subsidiary or any Parent Corporation or (ii) to
grant or assume options or other rights otherwise than under the Plan in
connection with any proper corporate purpose including but not by way of
limitation, the grant or assumption of options in connection with the
acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, partnership, firm or
association.
* * *
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LEASE AGREEMENT
THIS AGREEMENT is made and entered into this 20th day of August, 1996,
by and between CURTIS L. MERRIMAN of 599 Popham Lane, Corvallis, Montana
59828, hereinafter referred to as LESSOR; and DAN COOPER, of Cooper Arms,
Inc., hereinafter referred to as LESSEE.
W I T N E S S E T H
WHEREAS, LESSOR is the owner of certain real property located in Ravalli
County, described as 1131 Highway 93 with improvements thereon;
WHEREAS, LESSEE is desirous of leasing a portion of said property;
NOW, THEREFORE, in exchange for good and valuable consideration paid by
LESSEE to LESSOR, the legal sufficiency and receipt of which is hereby
acknowledged, and covenants to be performed, all as more particularly
hereinafter set forth, the parties agree as follows:
1. DESCRIPTION OF LEASED PROPERTY:
LESSOR by these presents does hereby lease unto LESSEE the
following real property located in Ravalli County, Montana:
5200 sq. metal building at 1131 Highway 93 and land 20' north and south
of said building with 40' near yard and frontage to Highway 93 to the east.
TO HAVE AND TO HOLD the said premises unto LESSEE, its successors
and assigns, for the term of this lease as hereinafter set forth.
2. TERM AND PAYMENTS:
The primary term of this lease shall be for a period of three years
commencing September 1, 1996 and shall terminate on September 1, 1999. It is
expressly understood and agreed by the parties that the length of this lease
is a material term and that LESSOR would not have entered into this lease
agreement without the term of the lease agreed to herein.
LESSEE shall pay, prior to taking possession of the leased
premises, the nonrefundable sum of $4,000, which shall represent payment for
the first month of the lease agreement and prepayment of the last one
month(s) of the lease agreement. Thereafter, LESSEE shall pay as rental
payment for the leased premises the sum of $2,000 per month, said payment to
be made by LESSEE to LESSOR on the ______ day of each month. Said monthly
rent payment to
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be made by LESSEE to LESSOR at its address set forth above, unless LESSOR
subsequently designates a different address in writing. The parties expressly
understand and agree that timely rent payments are required herein and that
there shall accrue a late fee penalty of Fifteen Dollars ($15.00) per day
after the __________ of each month until payment in full is made hereunder.
Additionally, prior to taking possession of the leased premises, the LESSEE
shall pay to LESSOR the sum of -0- as a cleaning and security deposit.
3. ASSIGNMENT OF LEASE:
It is expressly understood, agreed and part of the consideration
given hereunder that LESSEE may not assign or transfer any part of this Lease
or LESSEE's interest hereunder and nor may LESSEE sublet or sublease any part
or all of the leased premises without the express written consent of the
LESSOR.
4. POSSESSION, MAINTENANCE AND USE OF PROPERTY:
LESSEE shall be entitled to possession on the first day of the term
of this Lease provided the payments required hereunder have been made to
LESSOR, and shall yield possession to LESSOR on the last day of the term of
the Lease, unless otherwise agreed to by both parties in writing.
LESSEE shall maintain the premises in a clean, safe and sanitary
condition.
LESSEE shall not permit any use of the premises, or any part
thereof, which is in violation of any national, state, country or municipal
law, ordinance or regulation. LESSEE shall be responsible for cleaning the
leased premises and will be responsible for damage caused to the leased
premises by LESSEE. LESSEE expressly agrees and understands that LESSEE is
responsible for maintaining the real property surrounding the improvements
and that there shall be no old cars, junk, garbage, etc. on the real property
and further that there shall be no outside storage without the express
written consent of the LESSOR. LESSEE understands and agrees that LESSEE
shall be responsible for all utilities, waste disposal, garbage disposal etc.
LESSEE understands and agrees that neither the use of nor storage of any
toxic materials is allowed on the leased premises without EPA approval.
5. DEVELOPMENT AND IMPROVEMENT OF PROPERTY:
LESSEE shall be responsible to provide all necessary improvements
to leased premises in connection with the activities LESSEE will conduct on
the leased premises. LESSEE shall obtain LESSOR's advance permission in
writing prior to altering or improving the leased premises.
6. TAXES:
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LESSOR agrees to pay all taxes, assessments, and other charges
levied upon the real property during the term of the lease.
7. INSURANCE:
LESSOR shall maintain fire and extended coverage insurance upon the
premises herein demised. LESSEE and LESSOR shall each be responsible to
maintain appropriate insurance for their respective interests and activities
in the leased premises.
8. DEFAULT:
In the event the LESSEE shall be in default in the performance or
observance of any covenant or agreement or condition of this lease and in the
event of such default or condition, then LESSOR may give LESSEE written
notice of such default or condition. Said notice shall be deemed delivered
when deposited in the United States mail, registered or certified with return
receipt request, properly sealed, stamped and addressed to LESSEE at the
address set forth for LESSEE at the beginning of this lease.
In the event the default or defaults are not cured in their
entirety within thirty (30) days after the delivery of said notice, the
LESSOR may reenter the demised property and take and hold full and complete
possession thereof. Thereafter, LESSOR may recover from LESSEE such damages
as LESSOR may have suffered by reason of such default, together with
attorneys' fees and other costs. In the event that LESSEE vacates, abandons
or terminates this lease agreement prior to the end of the term of this lease
agreement, then said damages shall include, but are not limited to, all of
the monthly rental/lease payments due hereunder up to the end of the term of
this lease agreement. LESSOR agrees, however, to take all reasonable steps to
minimize the damages.
In the event the above default or defaults are not cured within the
thirty (3) day period, LESSOR may, at its option and sole discretion and
without any further notice, reenter the demised property and cancel and
terminate this lease or may seek any other rights or remedies allowed by law.
LESSOR may, in the alternative, elect to cure any default and the cost of
such action shall be added to LESSEE's financial obligations under this Lease.
The provisions of this paragraph shall similarly govern should
LESSOR be in default. Any default by the LESSOR, not cured within the
applicable thirty (30) day time period, shall entitle LESSEE to recover all
damages suffered by reason of such default, together with attorney's fees and
other costs and LESSEE may cancel and terminate this lease.
9. TIME OF ESSENCE:
Time shall be of the essence of this lease and all the terms,
covenants and conditions hereof shall be performed at or before the times
herein set forth. Any forbearance on the
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part of LESSOR or LESSEE in the enforcement of the terms and conditions of
this lease shall in no way be construed as a waiver of default thereof or
waiver of the obligatory effect of such provision.
10. CONSTRUCTION AND VENUE:
This lease shall be construed under the laws of the State of
Montana and the parties agree that venue for any legal proceedings hereunder
shall be in the Twenty-First Judicial District in and for Revalli County.
11. ENTIRE AGREEMENT AND MODIFICATION:
The parties hereto expressly declare that this Agreement contains
the entire agreement and understanding of the parties and supersedes any
prior oral agreements and understandings. This Agreement may be modified only
in writing, signed by both of the parties.
12. BINDING EFFECT:
This Agreement shall be binding upon the parties' assigns and
successors.
13. NOTICES:
Notices under this Lease shall not be deemed valid unless given or
served in writing. Said notices shall be deemed delivered when deposited in
the United States mail, registered or certified with return receipt request,
properly sealed, stamped and addressed to LESSEE or LESSOR at the addresses
set forth above, unless notice of another address is subsequently provided.
14. SAVE HARMLESS:
LESSEE shall save LESSOR harmless from any and all liability,
damages, or claims of damages of any nature or description for injuries
arising out of or in connection with the operation of LESSEE'S business on
the leased premises.
15. SEVERABILITY:
If any portion of this Lease shall be held to be invalid or
unenforceable for any reason, the remaining provisions shall continue to be
valid and enforceable. If a Court finds that any provision of this Lease is
invalid or unenforceable, but that by limiting such provision, it would
become valid and enforceable, then such provision shall be deemed to be
written, construed, and enforced as so limited.
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16. WAIVER:
The failure of either party to enforce any provisions of this Lease
shall not be constructed as a waiver or limitation of that party's right to
subsequently enforce and compel strict compliance with every provision of
this Lease.
17. OTHER:
All three phase electric needs to be supplied by LESSEE. No smoking
in the office area. LESSEE has right of first refusal at time of sale.
IN WITNESS WHEREOF, LESSOR and LESSEE have caused this agreement to
be executed on this 20th day of August, 1996.
LESSOR:
By: /s/ Curtis Merriman
----------------------
Curtis L. Merriman
LESSEE:
By: /s/ Daniel Cooper
----------------------
Daniel Cooper
President
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L E A S E
THIS LEASE, made and entered into and effective the 29th day of July, 1996,
by and between BITTERROOT INVESTMENTS, L.L.C., a Montana Limited Liability
Company of P.O. Box 8929, Missoula, Montana 59807-8929, hereinafter called the
"LESSOR", AND Cooper Firearms Inc., a Montana corporation, of 4004 Hwy. 93
North, Stevensville, Montana 59870, hereinafter called the "LESSEE",
WITNESSETH:
1. DESCRIPTION: In consideration of the terms and conditions herein
contained, the LESSOR hereby leases unto the LESSEE, and the LESSEE hereby
leases from the LESSOR, that certain property situated in Ravalli County,
Montana, and more particularly described as follows:
See Exhibit "A" attached hereto and by
this reference made a part hereof.
2. TERM and RENTAL: To have and to hold the property for a term of 24
months, beginning July 29, 1996 for a rental to be paid without demand or offset
at $2,475.00 per month for the first 12 months. The rent shall be payable at
Bitterroot Investments, L.L.C., P.O. Box 8929, Missoula, Montana 59807-8929 on
or before the 10th day of each month. This lease may be renewed at the option
of LESSEE for an additional period of 12 months by LESSEE providing written
notice to LESSOR at the above address no less than 30 nor more than 60 days from
the end of the lease term. The amount of rent shall be $3,000.00
3. USE AND INDEMNIFICATION: The property subject hereto shall be used
only for LESSEE'S manufacture and sale of firearms. LESSEE indemnifies and
holds LESSOR harmless of any liability due to LESSEE'S or other's use or
occupancy of the premises.
<PAGE>
4. ENJOYMENT: The LESSOR agrees that the LESSEE on payment of the rents
and observing and keeping the terms and conditions of this Lease on its part to
be kept, shall lawfully, peaceably and quietly hold, occupy and enjoy said
premises during the demised terms without hindrance, objection or molestation.
5. UTILITIES and MAINTENANCE: The LESSEE shall pay all expenses of
maintenance and upkeep and utilities prior to delinquency.
6. ACCEPTANCE OF PROPERTY: The LESSEE has personally inspected and
accepts the property in its present condition without representation of any
nature. The LESSOR shall not be liable for any injury to person or property
caused by or resulting from any defects in the property or form any damage or
injury resulting or arising from any other cause or happening whatsoever, unless
said damage or injury be caused by or be due directly to the act or failure to
act of the LESSOR.
7. ALTERATIONS, REPAIRS and SURRENDER: The LESSEE shall not make
any alterations, additions, or improvements to said property without the written
consent of the LESSOR; however, such consent shall not be unreasonably withheld.
LESSEE agrees that it will commit no waste on said premises nor suffer
waste to be committed thereon, and that any improvements now on, or which may be
hereinafter placed on said premises, shall not be removed or destroyed while it
is in possession of said premises; LESSEE shall not make permanent improvements
upon the property without the prior written consent of LESSOR. LESSEE agrees
that such improvements shall be and become the property of LESSOR on termination
of this LEASE, and LESSEE agrees to keep the improvements on said premises in
repair, outside and inside, so as to prevent unreasonable determination of the
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property while it is in possession thereof, ordinary wear and tear excepted.
LESSEE shall be responsible for all repairs and maintenance of the premises,
except for losses covered by causality insurance maintained by LESSOR.
8. INSURANCE: LESSOR to keep premises insured for casualty losses
against loss or damage by fire or other cause in the amount of $300,000.00 and
maintain boiler and other casualty loss with extended coverage in like amounts,
from the effective date of this Lease, payable for benefit of the LESSOR.
LESSEE shall maintain liability insurance coverage of least $1 Million, naming
Lessor as additional insureds. LESSEE agrees that LESSOR is not responsible for
LESSEE'S equipment, inventory, lost profits or any other loss as a result of
calamity or damage to the premises. Nothing in this Lease will prevent LESSEE
from carrying insurance to cover such losses.
In the event of loss to the premises due to fire or other calamity
rendering the premises uninhabitable, either party shall have the right to
terminate this lease on 30 days notice, in which case the termination date will
be effective the date the premises became uninhabitable.
9. REAL PROPERTY TAXES: The LESSOR agrees that it shall pay all real
property taxes incurred during the term of this lease.
10. INSPECTION-PRESERVATION: The LESSEE agrees that the LESSOR and
agents, and other representatives, shall have the right to enter into and upon
said property, or any part thereof, at all reasonable hours for the purpose of
examining the same, or making such repairs or alterations therein as may be
necessary for the safety and preservation thereof, however, the LESSOR shall be
under no obligation to do the same.
LESSEE shall comply with all Federal, State and Local laws and regulations.
Lessee
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shall obtain or maintain all necessary permits for its operations,
including without limitation, permits necessary for the generation, storage, and
disposal of hazardous waste.
LESSEE shall not store any hazardous waste or other by-products of its
operations on the premises for a period of more than 30 days. LESSEE shall
lawfully dispose of all hazardous waste if it does not, then LESSOR may (but is
not required to do so) at LESSEE'S cost.
LESSEE indemnifies and holds LESSOR harmless from all claims, liability,
rights or causes of action, expenses, damages, fines, attorneys fees and costs
arising from the production, use, storage, release, disposal or presence of any
hazardous waste, pollution or contamination of the site or other lands, water or
air by LESSEE or its employees, officers and directors (whether authorized or
not), or those acting at its request or under its direction or control.
11. VIOLATION: It is agreed that time is of the essence of all terms
and conditions of this Lease agreement, and in the event the LESSEE shall fail
to fully pay any rental payment due hereunder when due or the LESSEE shall
breach any other terms or conditions of this Lease, and the LESSEE shall fail to
remedy such default or to discontinue such violation within fifteen (15) days
after a written notice is mailed by LESSOR to LESSEE at the address above, then
LESSEE shall pay to LESSOR in addition to the rental due a penalty in the amount
of One Hundred and no/100 Dollars ($100.00) on the next following day. If the
rent and penalty are not paid on the 30th day after mailing of written notice of
default, then this Lease given herewith shall thenceforth become null, void and
terminated, and the LESSOR, its agents or assigns, may immediately re-enter the
property without further notice or demand and remove all persons therefrom and
repossess itself of said property.
12. ASSIGNMENT AND SUBLEASE: LESSEE may assign this lease or sublease
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<PAGE>
the premises or any part thereof only with the prior written consent of Lessor
which shall not be unreasonably withheld.
13. OPTION TO PURCHASE: The LESSOR in consideration of the amount of
One Hundred and no/100 Dollars ($100.00) paid by LESSEE to LESSOR and receipt
of which is hereby acknowledged, does hereby give and grant unto the LESSEE
the right, privilege and option of purchasing the property as follows:
a. The Purchase price to LESSEE shall be determined within sixty (60)
days after the exercise of the option and notice thereof by LESSEE as
set forth below by an appraisal hereto and which appraisal shall be
conducted by an appraiser mutually agreed to by LESSOR and LESSEE,
with the cost of such appraisal to be paid one-half by LESSOR and
one-half by LESSEE.
The One Hundred and no/100 Dollars ($100.00) option money shall be
considered as down payment to LESSOR and shall be credited against
amounts to be paid by LESSOR to LESSEE. Whether LESSEE exercises the
option or not, LESSOR shall be entitled to retain the full amount of
One Hundred and no/100 Dollars ($100.00) option money paid herewith,
or, in the alternative, the parties shall enter into a contract for
deed upon terms mutually agreeable to them.
b. LESSEE shall exercise this option not later than the 10th day of
July, 1998 by providing written notice to LESSOR of the exercise of the
option. Such notice of exercise of the option shall be deemed given
when a notice is placed in the United States Mail, either registered
or certified postage prepaid, and addressed to the LESSOR at the
address set forth on the first page of this Lease and option and
postage prepaid.
c. Should the LESSEE fail to timely exercise this option, or if the
LESSEE should default upon any other term of this lease and option
agreement, this option shall, without notice of any kind, be
terminated and void.
d. LESSOR may sell in a bona fide arms-length transaction the above
property subject to this lease and option. LESSOR shall provide
written notice to LESSEE at least 45 days prior to closing such a sale
of the property. LESSEE may then exercise its option to purchase by
meeting the same terms and at the same time as the proposed sale and
giving notice of its intention to do so at least 30 days before
closing of the sale. If LESSEE does not exercise this right of first
refusal its option to purchase shall terminate.
14. ATTORNEY FEES AND COSTS: Should it become necessary to institute
an
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<PAGE>
action at law because either party shall be in default in the performance of
this agreement, the successful party to such action shall be entitled to
reasonable attorney fees and costs as may be determined by the Court.
15. NOTICE AND SERVICE: Any written notice required to be given herein
shall be considered adequately and sufficiently delivered and served after it
has been properly addressed, to the last known address of either party or any
other person to whom notice is required to be given herein, duly posted and
mailed certified in any United States Post Office.
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IN WITNESS WHEREOF, the parties hereto have signed this instrument the day
and year first above written.
LESSOR:
BITTERROOT INVESTMENT, L.L.C.
By: /s/ Douglas S. Spencer
_____________________________
Douglas S. Spencer, Member
LESSEE:
COOPER FIREARMS, INC.
By: /s/ John Tilleli
This instrument was acknowledged before me on _________________, 1996 by
___________________.
_________________________________________
Notary Public for the State of __________
Residing at: ____________________________
My Commission Expires:___________________
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<PAGE>
EXHIBIT "A"
Description of Property
A tract of land located in and being a portion of the NE Section 21, Township 9
North, Range 20 West, PMM, Ravalli County, Montana, and being more particularly
described as follows:
Commencing at the northeast corner of Section 21; thence S89 DEG. 52'00"
West, 73.49 feet along the north boundary of Section 21 to the true point of
beginning; thence S. 16 DEG. 34'07" West 280.37 feet, N86 DEG. 52'00" West,
430.12 feet to a point on the easterly right of way of U.S. Highway 93;
thence the following 3 courses along the easterly right of way of U.S.
Highway 93: N16 DEG. 34'19" East 252.23 feet, N89 DEG. 38'56" East 31.37 feet
N15 DEG. 33'06" East 2.46 feet to a point on the north boundary of Section
21; thence N. 89 DEG. 52'22" East 405.46 feet along the north boundary of
Section 21 to the true point of beginning, and all according to Certificate
of Survey No. 1453.
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Exhibit 10.5
The Stock Shop
Mr. Dan Cooper
P.O. Box 66
3911 Red Ranch Rd.
Stevensville, MT 59870
USA
28, March 1996
DA/kk
Your fax of March 26, 1996.
Dear Mr. Cooper,
It is understood that Anschutz is a trademark of J.G. Anschutz GmbH and
no one shall use the trademark without authorization of Anschutz. We hereby
confirm that The Stock Shop may use our trademark when using Anschutz
barrelled actions in a stock of The Stock Shop for advertising and promotion
purposes only. In this case The Stock Shop is also authorized to call the
product described above "Anschutz USA Sporting Rifles".
The Stock Shop will also submit any proposed advertising and promotional
materials using the Anschutz name and logo for the approval of Anschutz prior
to publications.
It is further understood that The Stock Shop may not sell Anschutz
products without authorization of Acu Sport as long as Acu Sport has the
exclusive rights for our sporters.
Sincerely,
J.G. Anschutz BrmbH
/s/ Dieter Anschutz
- --------------------------------
Dieter Anschutz
President
cc: Rick Robison c/o Acu Sport
<PAGE>
Exhibit 10.6
AcuSport Letterhead
Dan Cooper
The Stock Shop
P.O. Box 66
3911 Red Ranch Rd.
Stevensville, MT 59870
Dear Dan,
Please be aware AcuSport is the sole importer of Anschutz product and
will be provide Dan Cooper with Anschutz barreled actions for his custom
rifle business. This is with the provision that credit and federal firearms
license is in good standing.
Prices will be as quoted on 2/22/96 (copy attached) and subject to
change if there are any large swings in the value of the German Mark.
Sincerely,
/s/ Rick L. Robison
- ----------------------------------
Rick L. Robison
Vice President - Merchandising
RLR/pe
enclosure
cc: John Tilleli
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Connecticut Valley Sports, Inc. and Subsidiaries
Stevensville, Montana
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated February 15, 1997, except for Note 1
which is September 17, 1997 relating to the financial statements of Connecticut
Valley Sports, Inc. and Subsidiaries, which is contained in that Prospectus. Our
report contains an explanatory paragraph regarding uncertainties as to the
ability of the Company to continue as a going concern.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
--------------------------------------
BDO Seidman, LLP
New York, New York
January 2, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Cooper Firearms, Inc.
Stevensville, Montana
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated May 8, 1997 relating to the financial
statements of Cooper Firearms, Inc., which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ DAVID TARLOW & CO., P.C.
--------------------------------------
David Tarlow & Co., P.C.
New York, New York
January 2, 1998
