<PAGE>
As filed with the Securities and Exchange Commission on August 20, 1998
Registration No. 333-53729
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
GARY PLAYER GOLF, INC.*
(Name of Small Business Issuer in its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Delaware 3949 95-4553128
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
2811 Airpark Drive
Santa Maria, California 93455
(805) 346-1600
(Address and Telephone Number of Principal Executive Offices)
---------------------
2811 Airpark Drive
Santa Maria, California 93455
(805) 346-1600
(Address of Principal Place of Business or Intended Principal Place of
Business)
---------------------
Alfonso J. Cervantes, Jr., Chief Executive Officer
Golf One Industries, Inc.
2811 Airpark Drive
Santa Maria, California 93455
(805) 346-1600
(Name, Address and Telephone number of Agent for Service)
---------------------
Copies of all communications to:
ALAN B. SPATZ, ESQ. ROBERT J. MITTMAN, ESQ.
JOHN J. MCILVERY, ESQ. Tenzer Greenblatt LLP
Troop Steuber Pasich Reddick & Tobey, LLP The Chrysler Building
2029 Century Park East 405 Lexington Avenue
Los Angeles, California 90067 New York, New York 10174
Telephone: (310) 728-3200 Telephone: (212) 885-5000
Facsimile: (310) 728-2200 Facsimile: (212) 885-5001
<PAGE>
Approximate date of commencement 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, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
---------------------
*As disclosed on page 3 of the Prospectus included as part of this
Registration Statement, the Prospectus gives effect to a name change to be
effected on or prior to the effective date of the Registration Statement.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Secur-ities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS DATED AUGUST 20, 1998
SUBJECT TO COMPLETION
[LOGO]
1,600,000 Shares
GARY PLAYER GOLF, INC.
Common Stock
Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that any such market will develop. It is
anticipated that the Common Stock will be quoted on the Nasdaq SmallCap Market
under the symbol "PLYR." For a discussion of the factors considered in
determining the initial public offering price, see "Underwriting."
---------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND 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 INVESTMENT. SEE "RISK FACTORS"
COMMENCING ON PAGE 7 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 SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
================================================================================
Price Underwriting Proceeds
to Discounts and to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Share ......... $ 7.00 $ .70 $ 6.30
- --------------------------------------------------------------------------------
Total (3) ......... $11,200,000 $1,120,000 $10,080,000
================================================================================
<PAGE>
(1) In addition, the Company has agreed to pay to the Underwriter a 3%
nonaccountable expense allowance, to sell the Underwriter warrants (the
"Underwriter's Warrants") to purchase 160,000 shares of Common Stock and
to retain the Underwriter as a financial consultant. The Company has also
agreed to indemnify the Underwriter against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses, including the nonaccountable expense allowance
in the amount of $336,000, estimated at $1,026,000 payable by the Company.
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date of this Prospectus, to purchase up to an aggregate of
240,000 additional shares of Common Stock on the same terms as set forth
above, solely for the purpose of covering over-allotments, if any. If the
Underwriter's over-allotment option is exercised in full, the price to
public, underwriting discounts and commissions and proceeds to Company
will be $12,880,000, $1,288,000 and $11,592,000, respectively. See
"Underwriting."
The shares of Common Stock are offered, 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 reserves the right to withdraw, cancel or modify the offering and
to reject any order in whole or in part. It is expected that delivery of the
certificates representing the shares of Common Stock will be made against
payment therefor at the offices of the Underwriter, 650 Fifth Avenue, New York,
New York 10019, on or about , 1998.
---------------------
Whale Securities Co., L.P.
The date of this Prospectus is , 1998
<PAGE>
[PICTURES]
Inside Front Cover of Prospectus:
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS,
ON NASDAQ, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE, WHICH STABILIZE,
MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE
UNDERWRITER MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING AND MAY BID FOR AND
PURCHASE SHARES OF COMMON STOCK AND WARRANTS IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES SEE "UNDERWRITING."
<PAGE>
[PICTURES]
Inside Fold Out Spread (2 pages) of Prospectus:
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Except with respect to historical financial
statements and unless the context indicates otherwise, all information in this
Prospectus, including per share data and information relating to the number of
shares outstanding (i) has been adjusted to give retroactive effect to the
1-for-2 reverse stock split effected by the Company prior to the date of this
Prospectus; (ii) gives effect to the Player Acquisition (as hereinafter
defined); (iii) reflects the change of the Company's name from "Golf One
Industries, Inc." to "Gary Player Golf, Inc." immediately prior to this
offering; (iv) reflects the issuance of 15,306 shares of Common Stock in
exchange for the cancellation of $75,000 of indebtedness immediately following
consummation of this offering; and (v) assumes no exercise of the Underwriter's
over-allotment option to purchase 240,000 additional shares of Common Stock.
The statements which are not historical facts contained in this Prospectus are
forward-looking statements that involve risks and uncertainties, including
those described under "Risk Factors." The Company's actual results may differ
materially from the results discussed in the forward-looking statements.
The Company
Gary Player Golf, Inc. (the "Company") is engaged primarily in the direct
marketing of Gary Player(R) brand golf clubs through telemarketing, direct
response television, the Internet and direct mail. To date, substantially all
of the Company's sales have been generated through telemarketing activities
conducted at the Company's three call centers and direct response television.
By marketing its clubs directly to consumers, the Company believes it offers
its clubs at lower price points than comparable products offered by competitors
through retail outlets, such as golf pro shops and specialty golf stores.
Prior to the offering, the Company marketed its Gary Player golf clubs
pursuant to an agreement with the Gary Player Group, Inc. ("GPG") which
authorized the Company to sell golf clubs, accessories and apparel only through
direct marketing channels in the United States and Canada. On the date of this
Prospectus, the Company purchased the assets of the golf equipment operations
of GPG (the "Player Acquisition"), including principally two licenses (the
"Player Licenses") which together give the Company the perpetual, worldwide,
exclusive right to use the name and likeness of Gary Player, the professional
golfer, and ancillary marks, including Black Knight(TM) and the Knight's Head
logo, in connection with the manufacture, marketing and distribution of golf
clubs, accessories and apparel for an annual license fee for up to ten years
and a royalty of up to 3% of net receipts. The Company also acquired in the
Player Acquisition existing sublicenses based on the Player Licenses, and an
immaterial amount of inventory, furniture and fixtures, and accounts
receivable. The Player Acquisition purchase price consisted of $250,000 and the
issuance of 571,429 shares of Common Stock, and the assumption by the Company
of liabilities of GPG in the aggregate amount of $1,100,000. In connection with
the Player Acquisition, Gary Player became Chairman of the Board of Directors
of the Company and the Company changed its name from Golf One Industries, Inc.
to Gary Player Golf, Inc.
Golf is popular both as a professional sport and a leisure activity.
According to the National Golf Foundation ("NGF"), the number of persons age 12
and older playing at least one round of golf per year in the United States
increased from approximately 20 million in 1986 to 25 million in 1996, while
the total number of rounds of golf played in the United States increased from
approximately 400 million to 477 million during the same period. In 1994,
golfers in the United States spent an estimated $15.1 billion on golf
equipment, related merchandise and greens fees, compared to $7.8 billion in
1986. Wholesale shipments of golf clubs, balls, bags, gloves and shoes in the
United States increased from approximately $1.6 billion in 1991 to $2.9 billion
in 1996. During 1996, approximately two million persons in the United States
played a round of golf for the first time. The Company believes that the
popularity of golf and sales of golf equipment and related merchandise will
rise in the future due to the increasing interest in golf of the aging "baby
boom" population.
3
<PAGE>
The Company's principal product line is the Gary Player Black Knight line
of titanium irons, titanium driver and woods, and specialty clubs. These clubs
feature lightweight graphite shafts, oversized club heads with larger "sweet
spots" and a low center of gravity, and are designed to achieve increased lift,
distance and accuracy. The Company custom assembles each set of golf clubs
based upon the customer's physical attributes, golfing ability and personal
preferences elicited from the customer upon placement of the order. Custom
specifications include length and flex of shaft, overall club weight and grip
preference. The Company uses heads and shafts manufactured to the Company's
specifications by various golf component manufacturers, which currently include
Aldila, Inc. (shafts), and grips manufactured by Eaton Golf Pride.
The Company's objective is to increase sales by capitalizing on the
increasing popularity of golf and Gary Player's knowledge, reputation and
achievements as a professional golfer. The Company's strategy to increase sales
includes:
o Increase telemarketing sales by establishing additional telemarketing
call centers and adding telemarketers to its existing call centers.
o Increase direct response television marketing by producing and
broadcasting additional infomercials and direct response television
commercials.
o Sublicense the right to use the Gary Player trademarks in connection with
the manufacturing, marketing and sale of a wide variety of golf
accessories, such as golf bags, gloves and headwear, and apparel, such as
outerwear, rain gear and casual golf wear in various markets throughout
the world.
o Create and distribute mail order catalogs offering Gary Player brand golf
clubs, accessories and apparel sold by the Company and its sublicensees.
o Increase advertising of its Internet web site and create or acquire
additional content for its web site to increase sales via the Gary Player
Pro Shop, the Company's online store, and to generate leads for
telemarketing and direct mail.
o Establish international marketing operations, either directly or through
sublicensing or joint venture arrangements.
o Increase consumer awareness of the Company and its products through print
advertising in golf and golf-related publications and participation in
golf and direct marketing industry trade shows.
Since its inception, the Company has incurred significant losses.
Following the Player Acquisition and this offering, the Company intends to
expand its operations by increasing its telemarketing activities and commencing
other forms of direct marketing, and by sublicensing rights to the Gary Player
trademarks to third parties. The Company has limited experience implementing a
multi-faceted marketing strategy, expects to incur significant up-front
expenditures and operating costs in connection with expanding its operations,
and could continue to incur losses for the foreseeable future. There can be no
assurance that the Company will be able to capitalize on the expanded scope of
the Player Licenses, implement its marketing strategies, achieve market
acceptance for the Gary Player trademarks or achieve profitable operations.
The Company was incorporated under the laws of the State of Delaware in
October 1995. Unless the context requires otherwise, all references to the
"Company" include the Company's wholly-owned subsidiaries, Gran Prix Marketing,
Inc. and Rhino Marketing, Inc. Gary Player(R), Black Knight(TM), Par Saver(TM)
and the Knight's Head logo are trademarks owned by Gary Player and are used by
the Company pursuant to the Player Licenses. The Company's principal executive
offices are located at 2811 Airpark Drive, Santa Maria, California 93455, its
telephone number is (805) 346-1600, and its Internet web site address is
http://www.garyplayerdirect.com.
4
<PAGE>
The Offering
Common Stock offered..... 1,600,000 shares
Common Stock to be
outstanding after this
offering(1)............. 4,740,870 shares
Use of Proceeds.......... The Company intends to use the net proceeds of
this Offering to repay outstanding indebtedness; for
marketing and advertising; to purchase and maintain
an increased level of inventory; for the Player
Acquisition, including the payment of certain
indebtedness and account payables assumed by the
Company; and for working capital and general
corporate purposes. See "Use of Proceeds."
Risk Factors............. The shares of Common Stock offered hereby are
speculative and 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 investment. See "Risk Factors" and
"Dilution."
Proposed Nasdaq SmallCap
Market Symbol........... "PLYR"
- -------------
(1) Does not include (i) 160,000 shares of Common Stock reserved for issuance
upon exercise of the Underwriter's Warrants; (ii) 370,750 shares of Common
Stock reserved for issuance upon exercise of options granted or available
for future grant under the Company's 1998 Stock Option Plan (the "1998
Plan") and other non-plan options; and (iii) 2,000 shares of Common Stock
reserved for issuance upon exercise of outstanding warrants. See
"Management -- Stock Option Plan," "Shares Eligible for Future Sale" and
"Underwriting."
----------------------
Notice to California Investors: Each purchaser of Common Stock in
California must be an "accredited investor" as that term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act of 1933, as amended
(the "Securities Act"), or satisfy one of the following suitability standards;
(i) minimum gross income of $65,000 and a net worth (exclusive of home, home
furnishings and automobiles) of $250,000; or (ii) minimum net worth (exclusive
of home, home furnishings and automobiles) of $500,000.
Notice to Washington Investors: Each purchaser of Common Stock in
Washington must be an "accredited investor" as that term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act.
Notice to Ohio Investors: Each purchaser of Common Stock in Ohio must be
an "accredited investor" as that term is defined in Rule 501(a) of Regulation D
promulgated under the Securities Act.
Notice to South Carolina Investors: Each purchaser of Common Stock in
South Carolina must be an "accredited investor" as that term is defined in Rule
501(a) of Regulation D promulgated under the Securities Act.
5
<PAGE>
Summary Financial Information
The summary financial information set forth below is derived from and
should be read in conjunction with the Consolidated Financial Statements and
notes thereto and with "Management's Discussion and Analysis of Results of
Operations and Financial Condition" appearing elsewhere in this Prospectus.
During 1997, the Company changed its fiscal year end from December 31 to March
31.
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended Three Months
December 31, Ended March 31,
1996 1997
-------------- -----------------
<S> <C> <C>
Net sales ........................................ $ 4,424,544 $ 909,718
Cost of goods sold ............................... 1,619,568 422,983
Gross profit ..................................... 2,804,976 486,735
Operating expenses ............................... 6,197,358 1,059,455
Other expenses ................................... 666,289 73,881
Net loss ......................................... (4,058,671) (646,601)
Net loss per share(1) ............................ $ (4.22) $ (.55)
Weighted average shares of Common Stock
outstanding ..................................... 965,529 1,243,634
Pro forma net loss(2) ............................
Pro forma net loss per share(1)(2) ...............
Pro forma weighted average shares outstanding(2) .
Year Ended Three Months
March 31, Ended June 30,
1998 1997 1998
--------------- ------------- ---------------
(unaudited)
Net sales ........................................ $ 4,768,032 $1,137,534 $ 2,853,067
Cost of goods sold ............................... 1,973,105 342,114 1,174,609
Gross profit ..................................... 2,794,927 795,420 1,678,458
Operating expenses ............................... 6,568,875 1,235,077 2,813,199
Other expenses ................................... 1,850,566 39,211 1,365,087
Net loss ......................................... (5,624,514) (478,868) (2,499,828)
Net loss per share(1) ............................ $ (3.89) $ (.39) $ (1.50)
Weighted average shares of Common Stock
outstanding ..................................... 1,484,147 1,343,200 1,694,454
Pro forma net loss(2) ............................ $ (5,901,956) $(2,448,641)
Pro forma net loss per share(1)(2) ............... $ (2.95) $ (1.10)
Pro forma weighted average shares outstanding(2) . 2,055,576 2,265,883
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
June 30, 1998
-----------------------------------------------------
Actual Pro Forma(3) As Adjusted(4)
----------------- ----------------- ---------------
<S> <C> <C> <C>
Working capital (deficit) .............. $ (8,561,807) $ (6,994,783) $ 2,102,062
Total assets ........................... 2,773,332 7,877,364 13,277,969
Total liabilities ...................... 10,008,231 9,069,763 5,828,511
Stockholders' equity (deficit) ......... (7,234,899) (1,192,399) 7,449,458
</TABLE>
- -------------
(1) The net loss per share is computed after deduction for preferred dividend
requirements. See Consolidated Financial Statements.
(2) Gives effect to the net loss incurred by GPG for the twelve months ended
March 31, 1998 and for the three months ended June 30, 1998 and
attributable to the assets acquired by the Company in the Player
Acquisition, adjusted to account for intercompany transactions between the
Company and GPG, amortization expenses related to the Player Licenses, and
the issuance of 571,429 shares of Common Stock and the payment of $250,000
to GPG pursuant to the Player Acquisition. See Consolidated Financial
Statements -- Pro Forma Consolidated Financial Statements.
(3) Gives effect to: (i) the Player Acquisition, pursuant to which the Company
acquired certain assets (including the Player Licenses) in exchange for
571,429 shares of Common Stock, $250,000 and the assumption of liabilities
in the aggregate amount of $1,100,000 ($205,000 of which is being
converted into 41,837 shares of Common Stock); (ii) the conversion of the
outstanding shares of Series B Convertible Preferred Stock into 286,325
shares of Common Stock; (iii) the issuance of 175,109 shares of Common
Stock in exchange for outstanding warrants; (iv) the issuance of 421,352
shares of Common Stock in exchange for the cancellation of $1,752,500 of
indebtedness and $36,500 of accrued interest; (v) the extension of the
maturity of $552,500 principal amount of indebtedness to a date 13 months
following the consummation of this offering; (vi) cancellation of $48,500
of accounts payable and accrued liabilities; (vii) cancellation of 92,033
shares of Common Stock; (viii) the issuance of 14,500 shares of Common
Stock for services; and (ix) the issuance of 36,339 shares of Common Stock
as additional interest expense (collectively, the "Pro Forma
Adjustments"). See "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and Consolidated Financial Statements
-- Pro Forma Consolidated Financial Statements.
(4) Gives effect to: (i) the Pro Forma Adjustments: (ii) the sale of 1,600,000
shares of Common Stock offered hereby and the application of the estimated
net proceeds therefrom; and (iii) $454,988 of deferred offering costs and
non-recurring charges of $412,143 representing loan discounts and costs.
See "Use of Proceeds."
6
<PAGE>
RISK FACTORS
The securities offered hereby are highly speculative and involve a high
degree of risk and therefore should not be purchased by anyone who cannot
afford a loss of his or her entire investment. Each prospective investor should
carefully consider the following risk factors before purchasing shares of
Common Stock offered by this Prospectus.
Limited Relevant Operating History; Significant and Continuing Losses. The
Company was organized in October 1995, commenced marketing of a now
discontinued line of golf clubs in November 1995, and commenced marketing of
its Gary Player Gran Prix and Gary Player Black Knight lines of golf clubs in
February 1997 and November 1997, respectively. Following the date of this
Prospectus, the Company will begin marketing its Gary Player brand golf clubs
through additional direct marketing techniques and begin marketing Gary Player
golf accessories and apparel. Accordingly, the Company has a limited relevant
operating history upon which an evaluation of its prospects and future
performance can be made. The Company's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered in the operation
and expansion of a new business and commercialization of new products. The
Company has incurred net losses of $4,058,671 for the year ended December 31,
1996, $646,601 for the three months ended March 31, 1997, $5,624,514 for the
year ended March 31, 1998 and $2,499,828 for the three months ended June 30,
1998. At June 30, 1998, the Company had an accumulated deficit of $13,607,644.
The Company expects to incur substantial up-front capital expenditures and
operating costs in connection with the expansion of its marketing efforts and
product lines, which may result in significant losses for the foreseeable
future. The Company will also incur non-recurring charges during the remaining
nine months of fiscal year ending March 31, 1999 of approximately $690,000
relating to loan discounts and costs. There can be no assurance that the
Company will ever achieve profitable operations. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition" and Consolidated
Financial Statements.
Significant Capital Requirements; Working Capital Deficit; Dependence on
Proceeds for Implementation of Business Strategy; Continuing Need for
Additional Financing. Since inception, the Company's cash requirements have
exceeded its cash flows from operations and, at June 30, 1998, the Company had
a working capital deficit of $8,561,807. As a result, the Company has depended
on loans and sales of securities to fund its operations. The Company must
increase its net sales to obtain sufficient cash flows from operations to meet
its cash requirements. The Company is dependent upon the proceeds of this
offering to implement its growth strategy and finance its short-term working
capital requirements. If the net proceeds of this offering and projected
revenues prove to be insufficient to fund the implementation of the Company's
growth plan or working capital requirements, the Company could be required to
seek additional financing sooner. The Company has no current arrangements with
respect to any additional financing, and it is not anticipated that existing
stockholders will provide any portion of the Company's future financing
requirements. Consequently, there can be no assurance that any additional
financing will be available to the Company when needed, on commercially
reasonable terms, or at all. Any inability to obtain additional financing when
needed would have a material adverse effect on the Company, requiring it to
curtail and possibly cease its operations. In addition, any additional equity
financing may involve substantial dilution to the interests of the Company's
then existing stockholders. See "Use of Proceeds", "Management's Discussion and
Analysis of Results of Operations and Financial Condition" and Note B (Going
Concern) to Notes to Consolidated Financial Statements.
Dependence on Player Licenses and Gary Player. Pursuant to the Player
Licenses, the Company has the perpetual worldwide, exclusive right to use Gary
Player's name and likeness and certain ancillary marks in connection with the
manufacture, marketing and distribution of golf clubs, accessories and apparel.
The Company expects to derive all of its revenues for the foreseeable future
from exploitation of its rights under the Player Licenses. The Company is
required to make certain minimum payments during the first ten years of the
Player Licenses (ranging from $225,000 in the first year to $350,000 in each of
the last six years), to pay royalties of up to 3% of net receipts from sales of
licensed products, and to obtain the licensors' approval to the specific manner
in which the Gary Player name is used in connection with the Company's
marketing efforts and on the Company's products. Failure to make any required
payment under, or other material breach of, the Player Licenses could result in
termination of the licenses which would have a material adverse effect on the
Company.
7
<PAGE>
In addition, the Company may not assign the Player Licenses except in
connection with a sale of all or substantially all of the assets of the Company
to, or a merger of the Company with, a person or entity other than a person or
entity whose sales of golf clubs exceed 10% of the total sales of golf clubs
during the calendar year, whose name includes the name of a recognized
professional golfer or has over 25% of its capital stock owned by a recognized
professional golfer. Gary Player and his son, Marc B. Player, as the Chairman
of the Board and a Director of the Company, respectively, would be in a
conflict of interest position with the Company on any matter presented to the
Board of Directors which could adversely affect the Player Licenses or the
revenues derived under the Player Licenses. See "Business -- Player Licenses."
The Company is also dependent upon the reputation of Gary Player and his
continuing services to the Company, primarily his availability to appear in
infomercials and commercials. Failure or any significant delay in Gary Player
being available for the Company, his death, disability or retirement from
tournament play or any significant decline in the level of his tournament play
could have a material adverse effect on the Company. In addition, the
commission by Gary Player of any serious crime, act of moral turpitude or other
serious act which adversely affects his reputation could also have an adverse
effect on the Company. While the Company has obtained "key-man" insurance on
the life of Gary Player in the amount of $5,000,000, there can be no assurance
that the proceeds of this policy will be sufficient to offset the loss to the
Company in the event of the death of Gary Player.
Uncertainty of Market Penetration. The golf equipment industry is
currently dominated by several companies which have strong brand name
recognition. As a result, the market demand for new products from new companies
is subject to a high level of uncertainty. Achieving significant market
penetration and consumer recognition for the Company's products will require
significant efforts and expenditures by the Company to inform potential
customers about the Company's products. Although the Company intends to use a
substantial portion of the net proceeds of this offering for marketing and
advertising, there can be no assurance that the Company will be able to
penetrate existing markets for golf equipment and related accessories on a
broad basis, position its products to appeal to a broad base of customers, or
that any marketing efforts undertaken by the Company will result in any
increased demand for or greater market acceptance of the Company's products.
See "Business."
Competition. The markets for the Company's golf clubs and accessories are
highly competitive and contain limited barriers to entry. The Company competes
primarily on the basis of providing higher quality products at its products'
price points. The Company competes with golf equipment manufacturers and
marketers as well as manufacturers and marketers of other sporting equipment
that offer consumers products with similar entertainment or recreational value,
such as ski and tennis equipment. Many of these competitors are well
established companies with broad consumer recognition and greater financial,
marketing, distribution, personnel and other resources than the Company. The
golf equipment industry is currently dominated by four companies, Callaway Golf
Company, Titleist/Cobra Golf, Karsten Manufacturing (Ping) and Taylor Made,
which, in the aggregate, accounted for approximately 50% of the golf clubs sold
in the United States in 1997. In addition, the Company is aware of a number of
companies which use infomercials to sell golf clubs (principally specialty
clubs). Competition in the market for golf apparel is also extremely
competitive. The Company intends to compete in this market by attempting to
establish the Gary Player brand and offering, principally through sublicensees,
a variety of products at various price and quality levels. In the golf apparel
market, the Company will compete with a large number of manufacturers and
retailers of golf and other sports apparel and casual and outerwear. There can
be no assurance that the Company will be able to compete successfully.
Risks Relating to Telemarketing Activities. To date, substantially all of
the Company's sales have been generated through telemarketing. The success of
telemarketing companies is subject to a number of risks and uncertainties,
including the ability to obtain a number of customer "leads" with an acceptable
rate of successful sales ("quality leads"). The proposed expansion of the
Company's telemarketing efforts will require the Company to obtain a greater
number of quality leads. While the Company has no reason to believe that it
will not be able to acquire the increasing numbers of quality leads it will
require at acceptable prices, the unavailability of quality leads could result
in incremental marketing costs without corresponding increased sales. Moreover,
the Company also believes that sales through telemarketing result in higher
product return rates than sales through retail stores. See"Business -- Direct
Marketing -- Telemarketing" and "--Product Returns; Warranty."
Risks Relating to Direct Response Television Marketing. The Company
intends to expand its direct marketing efforts through direct response
television, including infomercials and direct response commercials. The
8
<PAGE>
success of direct response television is speculative and will depend upon
numerous factors, including the Company's ability to produce infomercials and
commercials which attract and retain viewer interest, feature products that
appeal to viewers and generate revenues sufficient to offset their cost of
production and broadcast. Industry sources estimate that only one out of eight
infomercials generate a level of sales sufficient to offset the costs
associated with their production and broadcast. The Company has limited
experience in utilizing direct response television to market its products,
having only broadcast one infomercial in 1996, test marketed another
infomercial in 1997 and recently began to test market one direct response
commercial. The infomercial test marketed in 1997 did not result in consumer
acceptance and was discontinued. The Company attributes the poor response to
the infomercial primarily to the type of golf clubs (steel club heads) being
marketed, and not to the effectiveness of infomercials as a means to sell golf
clubs. At the time the Company broadcast the infomercial, club heads with
titanium-face inserts were being introduced into the market. In the future, the
Company intends to offer in its infomercials products with features that are
popular in the market and in demand by consumers, which the Company believes
will result in greater consumer response to its infomercials. The revenues
generated by the direct response commercial which the Company recently began to
test market have exceeded the media costs incurred in broadcasting the
commercial. The production and broadcast of infomercials and commercials also
require up-front cash expenditures. The Company expects that a typical
infomercial will cost approximately $200,000 to $300,000 to produce and a
typical direct response commercial will cost approximately $25,000 to $50,000
to produce. Media broadcast time, the largest expense in marketing through
infomercials and commercials, must be paid for in advance and typically
accounts for a substantial portion of the total costs associated with the
marketing of products through direct response television, depending upon the
broadcast markets and hours at which the infomercial or commercial airs. Media
costs have increased recently and greater demand for broadcast time could
result in increased costs, as well as the unavailability of preferred hours and
channels for broadcast and the unwillingness of broadcasters to air the
Company's advertisements. See "Business -- Direct Marketing -- Direct Response
Television."
Product Returns. The Company currently accepts returns of golf clubs for
any reason generally 60 days following delivery of the clubs. As is typical of
companies which market products primarily through telemarketing, the Company
has experienced high product return rates. The Company recorded allowances for
returns of 45%, 40%, 50% and 44% of gross sales for the year ended December 31,
1996, the three months ended March 31, 1997, the year ended March 31, 1998 and
the three months ended June 30, 1998, respectively. The Company believes that
its product return rate has been high because, until the introduction of the
Gary Player Black Knight line of golf clubs in the quarter ended December 31,
1997, the Company offered only steel clubs at a time when the market
increasingly demanded titanium clubs. Although the Company believes that its
product return rate will decline as the Company currently features titanium
clubs and as its market recognition increases, the Company expects to continue
to experience a high product return rate because its direct marketing customers
do not have the opportunity to examine the Company's golf clubs before they are
purchased. A continuing high product return rate or product returns which
significantly exceed the Company's allowances for returns will adversely affect
the Company's operating results. Moreover, the Company offers returned products
as demonstration models at significantly reduced prices, after cleaning and
refurbishing the products. Any inability to resell returned products could
result in a significant buildup of inventory of demonstration models which may
become obsolete and could otherwise adversely affect operating results. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" and "Business -- Product Returns; Warranty."
Consumer Preferences and Industry Trends. The golf equipment industry is
characterized by frequent introductions of new products and innovations and is
subject to rapidly changing consumer preferences and industry trends (such as
the recent introduction of titanium clubs and oversized club heads), which may
adversely affect the Company's ability to plan for future design, development
and marketing of its products. Because of rapidly changing consumer preferences
and industry trends, most golf club models and designs have short product life
cycles. In addition, new club models and basic designs are frequently
introduced and often rejected by customers. Although the Company does not
devote significant resources to product design and does not strive to be a
market innovator in club design, the Company's success will depend on its
ability to anticipate and respond to these factors and introduce products that
meet consumer expectations. There can be no assurance that the Company will be
able to anticipate and respond to changing consumer preferences and industry
trends or that competitors will not develop and commercialize new innovations
that render the Company's golf clubs less marketable. See "Business --
Competition."
9
<PAGE>
The Company's future operating results are also likely to be dependent
upon the continuing popularity of golf as a sport and leisure activity.
Although golf has gained increasing popularity over the last several years,
there can be no assurance that its popularity as a sport and leisure activity
will continue. Any significant decline in the popularity of golf could
materially adversely affect the Company. Moreover, golf, as a leisure activity,
is affected by a number of factors relating to discretionary consumer spending,
including general economic conditions affecting disposable consumer income such
as employment and business conditions, interest rates and taxation. Any
significant change in general economic conditions or uncertainties regarding
future economic prospects that adversely affect discretionary consumer spending
generally, and golfers specifically, could have a material adverse effect on
the Company. See "Business -- The Golf Industry."
Risks Relating to Sublicensing. The Company's growth strategy includes
sublicensing to third parties the right to manufacture and market various types
of golf accessories and apparel under the Gary Player trademarks. In connection
with the Player Acquisition, the Company assumed several sublicenses granted by
GPG, some of which historically have not satisfied minimum purchase
requirements or generated material revenues. While the Company believes that
sublicensees will devote sufficient resources to successfully commercialize
products using the Company's trademarks, the time and resources devoted to
these activities generally will be contributed and controlled by the
sublicensees and not the Company. The Company does not expect that its
sublicensing agreements will prohibit sublicensees from selling competitive
products. There can be no assurance that the Company will be able to enter into
any additional sublicenses or that any sublicensing arrangements will result in
material revenues for the Company. See "Business -- Sublicensing."
Risks Relating to Operation of a Web Site and Advertising on the
Internet. One element of the Company's growth strategy is to expand its
Internet web site and increase Internet and online computer service
advertising. Accordingly, the satisfactory performance, reliability and
availability of the Company's web site, transaction-processing systems and
network infrastructure will be important to the Company's reputation and its
ability to attract visitors to its web site and maintain adequate customer
service levels. Because the Company's web site is an integrated element of the
Company's growth strategy, any system interruptions that result in the
unavailability of the Company's web site or reduced order fulfillment
performance could reduce the volume of golf clubs, accessories and apparel sold
and could adversely affect consumer perception of the Company and the Company's
web site, either of which could have a material adverse effect on the Company.
The Company's Internet web site relies on encryption and authentication
technology licensed from third parties to provide the security and
authentication necessary to effect secure transmission of confidential
information, such as customer credit card numbers. Any compromise of the
Company's security could have a material adverse effect on the Company. See
"Business -- Direct Marketing -- Internet Web Site."
Dependence on Continued Growth of Online Commerce. The success of the
Company's marketing efforts through the Internet will be substantially
dependent upon the widespread acceptance and use of the Internet and online
services as an effective medium of commerce by consumers. Rapid growth in the
use of and interest in the Internet and online services is a recent phenomenon,
and there can be no assurance that acceptance and use will continue to develop
or that a sufficiently broad base of consumers will adopt and continue to use
the Internet and online services as a medium of commerce. Demand and market
acceptance for recently introduced services and products over the Internet are
subject to a high level of uncertainty. Moreover, critical issues concerning
the commercial use of the Internet, such as ease of access, security,
reliability, cost and quality of service, remain unresolved and may affect the
growth of Internet use or the attractiveness of conducting commerce online. In
addition, the Internet and online services may not be accepted as a viable
commercial marketplace for a number of reasons, including potentially
inadequate development of the necessary network infrastructure or delayed
development of enabling technologies and performance improvements. To the
extent that the Internet and online services continue to experience significant
growth, there can be no assurance that the infrastructure of the Internet and
online services will prove adequate to support increased user demands. If use
of the Internet and online services does not continue to grow or grows more
slowly than expected, if the infrastructure for the Internet and online
services does not effectively support growth that may occur, or if the Internet
and online services do not become a viable commercial marketplace, the success
of the Company's Internet related efforts would be materially adversely
affected.
10
<PAGE>
Dependence on a Limited Number of Suppliers. The Company currently
purchases its club heads from two sources, its shafts from two sources and its
grips from one source. The Company purchases its components pursuant to
purchase orders placed from time to time and, except for those purchase orders,
none of its suppliers is obligated to deliver specified quantities of
components or to deliver components for any specified period. Accordingly, the
Company is substantially dependent on the ability of its suppliers to provide
adequate inventories of golf club components on a timely basis and on
acceptable terms. The Company's suppliers also produce components for certain
of the Company's competitors, as well as other large customers, and there can
be no assurance that any such supplier will have sufficient production capacity
to satisfy the Company's inventory or scheduling requirements during any period
of sustained demand or that the Company will not be subject to the risk of
price fluctuations and periodic delays. Although the Company believes that its
relationships with its suppliers are satisfactory and that alternative sources
of each of the components are currently available, the loss of the services of
a supplier or substantial price increases imposed by a supplier could result in
production delays, thereby causing cancellation of orders by customers and/or
price increases resulting in reduced margins. See "Business -- Supply, Assembly
and Delivery."
Dependence on Credit Card Processor. Substantially all of the Company's
sales are paid for by credit card. The Company has entered into an agreement
with Cardservice International, Inc. ("CSI") pursuant to which CSI provides to
the Company credit card processing services. The Company is dependent upon CSI
to timely process, collect and accurately report customer payments to avoid
delays in collection. Failure by CSI to perform its services in accordance with
the Company's requirements could result in collection delays which could
adversely affect the Company's operating results and financial condition.
Although the Company believes that alternate sources for such services are
available, the unavailability or interruption of services from CSI would result
in a material interruption of the Company's operations. In addition, CSI has
the right to withhold all or a portion of the proceeds from sales as a reserve
against customer charge-backs and returns. Currently, CSI does not withhold any
amount from the Company and if it elects to do so in the future to any
significant extent, the Company's cash flow would be adversely affected. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
Fluctuations in Operating Results. The Company's operating results vary
significantly from period to period as a result of customer purchasing
patterns, new product introductions by the Company and its competitors, product
returns and pricing. Since golf is a warm weather sport and demand for golf
equipment declines during the colder months, sales of the Company's products
are seasonal, with the Company typically experiencing lower sales from December
through February (during the Company's third and fourth fiscal quarters). The
Company also expects that its operating results will vary in the future due to
the timing and success of proposed direct response marketing activities.
Unexpected events, including delays in securing adequate supplies of golf club
components or shipping orders (either of which could result in increased
cancellations), increased product return rates or delays or failure of direct
response marketing, particularly during periods of peak sales, could result in
material losses. There can be no assurance that the foregoing factors will not
have an adverse effect on the Company's future operating results. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition."
Government Regulation. The Company's direct marketing operations are
subject to numerous Federal and state regulations, as well as general public
scrutiny. The Federal Telephone Consumer Protection Act of 1991 limits the
hours during which telemarketers may call consumers to between 8:00 a.m. and
9:00 p.m., and prohibits the use of automated telephone dialing equipment to
call certain telephone numbers. The Federal Telemarketing and Consumer Fraud
and Abuse Prevention Act of 1994, and the Federal Trade Commission ("FTC")
regulations promulgated thereunder, prohibit deceptive, unfair or abusive
practices in telemarketing sales. Both the FTC and state attorneys general have
authority to prevent telemarketing activities that constitute "unfair or
deceptive acts or practices." Additionally, some states have enacted laws and
others are considering enacting laws targeted directly at telemarketing
practices, and there can be no assurance that any such laws, if enacted, will
not adversely affect or limit the Company's current or future operations. The
infomercial industry is also regulated by the FTC, the Consumer Product Safety
Commission, the Federal Communications Commission, various states' attorneys
general and other state and local consumer protection agencies. The Company's
marketing activities and/or products may become subject to the scrutiny of each
of these regulatory agencies. Compliance with regulations promulgated by these
agencies is generally the responsibility of the Company, and the
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<PAGE>
Company could be subject to a variety of enforcement or private actions for any
failure to comply with such regulations. Noncompliance by the Company with any
rules and regulations enforced by a Federal or state consumer protection
authority may subject the Company or its management to fines or various forms
of civil or criminal prosecution, any of which could materially adversely
affect the Company's business, financial condition and results of operations.
Dependence Upon Key Personnel; Need for Qualified Personnel. The success
of the Company will be largely dependent on the personal efforts of Joseph J.
White, its Chief Executive Officer, and Alfonso J. Cervantes, Jr., its
President. Although the Company has entered into two-year employment agreements
with each of Messrs. White and Cervantes, the loss of the services of either of
such officers could have a material adverse effect on the Company's business
and prospects. While the Company has obtained "key-man" insurance on the lives
of Messrs. White and Cervantes in the amount of $2,000,000 and $1,000,000,
respectively, there can be no assurance that the proceeds of these policies
will be sufficient to offset the loss to the Company in the event of the death
of either of these executives. The success of the Company will also be
dependent upon its ability to hire and retain additional qualified marketing,
industry, technical and financial personnel. The Company faces considerable
competition from other sporting equipment manufacturers and direct marketers
for such personnel, many of which have significantly greater resources than the
Company. There can be no assurance that the Company will be able to attract and
retain additional qualified personnel, and any inability to do so could have a
material adverse effect on the Company. See "Management."
Influence by Management. Upon consummation of this offering, the Company's
officers and directors will beneficially own, in the aggregate, approximately
17.2% of the outstanding Common Stock. Accordingly, such persons will continue
to exert influence over the outcome of all matters submitted to a vote of the
holders of Common Stock, including the election of directors, amendments to the
Company's Certificate of Incorporation and approval of significant corporate
transactions. Such consolidation of voting power could also have the effect of
delaying, deterring or preventing a change in control of the Company that might
be beneficial to other stockholders. See "Management" and "Principal
Stockholders."
Use of Proceeds to Repay Indebtedness; Broad Discretion in Application of
Proceeds. The Company has allocated approximately $3,205,100 (or 35.4%) of the
net proceeds of this offering to repay outstanding indebtedness, including
liabilities assumed by the Company in the Player Acquisition. Accordingly, such
proceeds will not be available for other corporate purposes. In addition,
approximately $2,048,900 (or 22.6%) of the net proceeds of this offering has
been allocated to working capital and general corporate purposes. Management
will have broad discretion as to the application of such proceeds. See "Use of
Proceeds."
Immediate and Substantial Dilution. This offering will result in an
immediate and substantial dilution of $6.50 per share (or 92.9%) between the
adjusted net tangible book value per share of Common Stock after this offering
and the initial public offering price per share. See "Dilution."
No Dividends. The Company has never paid any cash dividends on its Common
Stock and does not anticipate paying cash dividends in the foreseeable future.
The Company currently intends to retain net income for use in connection with
the expansion of its business and for general corporate purposes. The
declaration and payment of future dividends, if any, will be at the sole
discretion of the Company's Board of Directors and will depend upon the
Company's profitability, financial condition, cash requirements, future
prospects and other factors deemed relevant by the Board of Directors. See
"Dividend Policy" and "Description of Securities -- Common Stock."
Shares Eligible for Future Sale; Registration Rights. Upon the
consummation of this offering, the Company will have 4,740,870 shares of Common
Stock outstanding, of which the 1,600,000 shares being offered hereby will be
freely tradeable without restriction or further registration under the
Securities Act of 1933, as amended (the "Securities Act"). All of the remaining
3,140,870 shares of Common Stock outstanding are "restricted securities", as
that term is defined in Rule 144 promulgated under the Securities Act, and in
the future may be sold publicly only pursuant to an effective registration
statement under the Securities Act, in compliance with the exemption provisions
of Rules 144 or 701 or pursuant to another exemption under the Securities Act.
Of the 3,140,870 restricted shares, an aggregate of 961,040 shares have
piggyback registration rights, and the Company has granted the Underwriter
demand and piggyback registration rights with respect to the shares of
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<PAGE>
Common Stock issuable upon exercise of the Underwriter's Warrants. No
prediction can be made as to the effect, if any, that sales of such securities
or the availability of such securities for sale will have on the market prices
prevailing from time to time. While stockholders (including the Company's
officers and directors) holding an aggregate of 3,014,931 shares of Common
Stock have agreed not to (i) sell or otherwise dispose of any shares of Common
Stock in any public market transaction (including pursuant to Rule 144) or (ii)
exercise any registration rights for a period of 12 months following the date
of this Prospectus without the Underwriter's prior written consent, the
possibility that a substantial number of the Company's securities may be sold
in the public market may adversely affect prevailing market prices for the
Common Stock and could impair the Company's ability to raise capital through
the sale of its equity securities. The Underwriter has agreed that it will not
consent to the sale or other dispositions of approximately 740,310 of these
shares during such twelve month period. See "Description of Securities" and
"Shares Eligible for Future Sale."
No Assurance of Public Market; Arbitrary Determination of Offering Price;
Possible Volatility of Market Price of Common Stock. Prior to this offering,
there has been no public trading market for the Common Stock. There can be no
assurance that a regular trading market for the Common Stock will develop after
this offering or that, if developed, it will be sustained. The initial public
offering price of the Common Stock has been determined arbitrarily by
negotiation between the Company and the Underwriter and is not necessarily
related to the assets, book value or potential earnings of the Company or any
other recognized criteria of value and may not be indicative of the prices that
may prevail in the public market. In addition, the market price for the Common
Stock following this offering may be highly volatile as has been the case with
the securities of other companies in emerging businesses. Factors such as the
Company's operating results, announcements by the Company or its competitors,
introduction of new products by the Company or its competitors, and various
factors affecting the golf equipment and direct marketing industries generally,
may have a significant impact on the market price of the Common Stock.
Additionally, in recent years, the stock market has experienced a high level of
price and volume volatility and market prices for the stock of many companies,
particularly of small and emerging growth companies, the common stock of which
trade in the over-the-counter market, have experienced wide price fluctuations
which have not necessarily been related to the operating performance of such
companies. See "Underwriting."
Possible Delisting of Securities from Nasdaq System; Risks Relating to
Low-Priced Stocks. It is currently anticipated that the Common Stock will be
eligible for listing on the Nasdaq SmallCap Market upon the completion of this
offering. In order to continue to be listed on the Nasdaq SmallCap Market,
however, the Company must maintain $2,000,000 in net tangible assets (total
assets, other than goodwill, less total liabilities), and a $1,000,000 market
value of the public float. In addition, continued inclusion requires two
market-makers, a minimum bid price of $1.00 per share and adherence to certain
corporate governance provisions. The failure to meet these maintenance criteria
in the future may result in the delisting of the Common Stock from the Nasdaq
SmallCap Market, and trading, if any, in the Common Stock would thereafter be
conducted in the non-Nasdaq over-the-counter market. As a result of such
delisting, an investor could find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of the Common Stock.
In addition, if the Common Stock were to become delisted from trading on
the Nasdaq SmallCap Market and the trading price of the Common Stock were to
fall below $5.00 per share, trading in the Common Stock would also be subject
to the requirements of certain rules promulgated under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), which require additional
disclosure by broker-dealers in connection with any trades involving a stock
defined as a penny stock (generally, any non-Nasdaq equity security that has a
market price of less than $5.00 per share, subject to certain exceptions). Such
rules require the delivery, prior to any penny stock transaction, of a
disclosure schedule explaining the penny stock market and the risks associated
therewith and impose various sales practice requirements on broker-dealers who
sell penny stocks to persons other than established customers and accredited
investors (generally defined as an investor with a net worth in excess of
$1,000,000 or annual income exceeding $200,000 individually or $300,000
together with a spouse). For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transaction prior to the sale.
The broker-dealer also must disclose the commissions payable to the
broker-dealer, current bid and offer quotations for the penny stock and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer's presumed control over the market. Such information
must be provided to the customer orally or in writing before
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<PAGE>
or with the written confirmation of trade sent to the customer. Monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks. The
additional burdens imposed upon broker-dealers by such requirements could, in
the event the Common Stock were deemed to be a penny stock, discourage
broker-dealers from effecting transactions in the Common Stock which could
severely limit the market liquidity of the Common Stock and the ability of
purchasers in this offering to sell the Common Stock in the secondary market.
Adverse Effect of the Authorization of Preferred Stock; Anti-Takeover
Provisions Affecting Stockholders. The Company's Certificate of Incorporation
authorizes the Company's Board of Directors to issue 5,000,000 shares of "blank
check" Preferred Stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares, without further
stockholder approval. The rights of the holders of Common Stock will be subject
to and may be adversely affected by the rights of holders of any Preferred
Stock that may be issued in the future. The ability to issue Preferred Stock
without stockholder approval could have the effect of making it more difficult
for a third party to acquire a majority of the voting stock of the Company,
thereby delaying, deferring or preventing a change in control of the Company.
Moreover, following the consummation of this offering, the Company will be
subject to the State of Delaware's "business combination" statute, which
prohibits a publicly-traded Delaware corporation from engaging in various
business combination transactions with any of its 15% stockholders for a period
of three years after the date of the transaction in which the person became an
"interested stockholder," unless certain approvals are obtained or other events
occur. The stat-ute could prohibit or delay mergers or other attempted
takeovers or changes in control with respect to the Company and, accordingly,
may discourage attempts to acquire the Company. See "Description of
Securities."
Limitations on Liability of Directors and Officers. The Company's
Certificate of Incorporation includes provisions to eliminate, to the fullest
extent permitted by the Delaware General Corporation Law as in effect from time
to time, the personal liability of directors of the Company for monetary
damages arising from a breach of their fiduciary duties as directors. The
Certificate of Incorporation and By-Laws also include provisions to the effect
that the Company may, to the maximum extent permitted from time to time under
applicable law, indemnify any director or officer to the extent that such
indemnification and advancement of expense is permitted under such law, as it
may from time to time be in effect. The Company has also entered into indemnity
agreements with each director and executive officer of the Company pursuant to
which the Company has agreed to indemnify, to the maximum extent permitted
under the law of the State of Delaware, each such director or executive officer
for any amounts which he becomes legally obligated to pay in connection with
any claim against him based upon any action or inaction which he may commit,
omit or suffer while acting in his capacity as a director and/or officer of the
Company or its subsidiaries. See "Management -- Limitation of Liability and
Indemnification Matters."
Underwriter's Potential Influence on the Company. Upon consummation of
this offering, the Underwriter will have the right, for a period of three years
from the date of this Prospectus, to designate one individual to serve on the
Board of Directors of the Company or, at the Underwriter's option, as a
non-voting adviser to the Board of Directors. In addition, the Company has
agreed to sell to the Underwriter the Underwriter's Warrants, which give the
Underwriter the right to purchase up to 160,000 shares of Common Stock at an
exercise price equal to 165% of the initial public offering price and, subject
to certain limitations, to have such shares registered under the Securities
Act. Further, the Company has agreed to retain the Underwriter as a financial
consultant for a period of two years following the consummation of this
offering for a fee of $30,000, payable in full in advance. Pursuant to the
consulting agreement, 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 of the origination of such transaction. The ability to
designate a member to serve on the Company's Board of Directors and the other
foregoing relationships will provide the Underwriter with a certain amount of
influence over the Company's business, operations and future capital raising
efforts following consummation of this offering. See "Underwriting."
Tax Loss Carryforward. The Company's net operating loss carryforwards
("NOLs") expire in the years 2000 to 2013. Under Section 382 of the Internal
Revenue Code of 1986, as amended, utilization of prior NOLs is limited after an
ownership change, as defined in Section 382, to an annual amount equal to the
value of the corporation's outstanding stock immediately before the date of the
ownership change multiplied by the federal
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long-term exempt tax rate. The Company has experienced an ownership change, and
is limited in its use of its prior NOLs. In the event the Company achieves
profitable operations, these limitations would have the effect of increasing
the Company's tax liability and reducing net income and available cash
reserves. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and Note G of Notes to Consolidated Financial
Statements.
Forward-Looking Statements. This Prospectus contains 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 might cause this possible difference include, but are
not limited to, those discussed in this "Risk Factors" section.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,600,000 shares
offered hereby are estimated to be approximately $9,054,000 ($10,515,600 if the
Underwriter's over-allotment option is exercised in full). The Company expects
to use the net proceeds (assuming no exercise of the over-allotment option)
approximately as follows:
<TABLE>
<CAPTION>
Percentage of
Approximate Approximate
Application of Net Proceeds Dollar Amount Dollar Amount
- --------------------------- --------------- --------------
<S> <C> <C>
Repayment of indebtedness(1) .............................. $2,310,100 25.5%
Marketing and advertising(2) .............................. $2,300,000 25.4
Inventory(3) .............................................. 1,250,000 13.8
Player Acquisition costs(4) ............................... 1,145,000 12.7
Working capital and general corporate purposes(5) ......... 2,048,900 22.6
---------- -----
Total ................................................. $9,054,200 100.0%
========== =====
</TABLE>
- ------------------
(1) Represents amounts to be used for the repayment of (i) $1,225,000 principal
amount of indebtedness, plus accrued and unpaid interest thereon of
approximately $112,900, pursuant to promissory notes which bear interest
at the rate of 13.5% per annum; (ii) $605,000 principal amount of
indebtedness, plus accrued and unpaid interest thereon of approximately
$217,200, pursuant to promissory notes which bear interest at the rate of
11.0% per annum; and (iii) $150,000 principal amount of indebtedness,
pursuant to a promissory note which bears interest at the rate of 9.5% per
annum. All of such indebtedness which is repaid with the proceeds of this
offering is due and payable within three days following the consummation
of this offering. The net proceeds of all of this short-term indebtedness
incurred by the Company within one year prior to the date of this
Prospectus were used primarily to retire other indebtedness, for the
purchase of inventory, for sales related expenses, to pay costs associated
with this offering and for working capital and general corporate purposes.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Financial Condition and Liquidity" and Note E to
Notes to Consolidated Financial Statements.
(2) Represents (i) $220,000 to be used to establish two additional
telemarketing call centers and hire additional golf consultants and other
telemarketing personnel; (ii) $1,160,000 to be used to complete the post-
production of an infomercial, develop and produce a second infomercial and
broadcast these infomercials; (iii) $495,000 to be used to design, print and
mail catalogs of Gary Player brand golf clubs and golf-related products;
(iv) $55,000 to be used to create and acquire additional content for the
Company's web site and Internet and online advertising; (v) $285,000 to be
used for print advertising; and (vi) $85,000 to pay the initial salary and
benefits of personnel hired to manage the Company's sublicensing and retail
operations. The foregoing amounts are estimates of the amounts to be
allocated to these marketing and advertising functions, and are subject to
change based upon, among other things, the success of the Company's
marketing and advertising efforts and other opportunities that may arise in
the future, including marketing arrangements with third parties. See
"Business."
(3) Represents amounts to be used to maintain an increased inventory of golf
club components in order to reduce the delivery time to fill orders.
(4) Represents $250,000 to pay a portion of the purchase price to GPG for the
assets acquired by the Company in the Player Acquisition and $895,000 of
indebtedness and accounts payable of GPG assumed by the Company in the
Player Acquisition.
(5) Represents amounts to be used to pay rent, telecommunication expenses,
salaries and benefits, accounts payable, consulting and professional fees,
customer refunds and other expenses. All decisions with respect to the
uses of the amounts allocated to working capital and general corporate
purposes will be made by the Company's executive officers.
If the Underwriter's over-allotment option is exercised in full, the
Company will realize additional net proceeds of approximately $1,461,600 which
will be allocated to working capital and general corporate purposes.
The allocation of the net proceeds from this offering set forth above
represents the Company's best estimate based on its currently proposed plans
and assumptions relating to its operations and certain assumptions
16
<PAGE>
regarding general economic conditions. The amounts actually expended for each
use of the proceeds, if any, are at the discretion of the Company and may vary
significantly depending upon a number of factors, including, among other
things, requirements for launching new product lines, marketing, advertising
and working capital to support growth. Accordingly, the Company reserves the
right to reallocate the proceeds of this offering as it deems appropriate. The
Company may also use a portion of the net proceeds to acquire businesses,
products or proprietary rights; however, the Company currently has no
commitments or agreements relating to any of these types of transactions other
than those disclosed in this Prospectus. Pending such uses, the Company intends
to invest the net proceeds from this offering in United States government
securities, short-term certificates of deposit, money market funds or other
short-term interest bearing investments.
The Company anticipates, based on currently proposed plans and assumptions
relating to the implementation of its business strategy (including the
timetable of costs and expenses associated with, and success of, its marketing
efforts), that the net proceeds of this offering, together with projected
revenues from operations, will be sufficient to satisfy the Company's
operations and capital requirements for at least twelve months following the
consummation of this offering. If the Company's plans change or its assumptions
change or prove to be inaccurate (due to unanticipated expenses, difficulties,
delays or otherwise) or the net proceeds of this offering and projected
revenues otherwise prove to be insufficient to fund the implementation of the
Company's growth plan or working capital requirements, the Company could be
required to seek additional financing sooner than currently anticipated.
17
<PAGE>
DILUTION
The difference between the initial public offering price per share of
Common Stock and the pro forma net tangible book value per share of Common
Stock after this offering constitutes the dilution to investors in this
offering. Net tangible book value per share is determined by dividing the net
tangible book value (total tangible assets less total liabilities) of the
Company by the number of shares of Common Stock outstanding.
At June 30, 1998, the net tangible book deficit of the Company was
$(7,757,268), or $(4.60) per share of Common Stock. After giving effect to the
Pro Forma Adjustments (see footnote 3 of "Prospectus Summary -- Summary
Financial Information"), the pro forma net tangible book deficit of the Company
at June 30, 1998 would have been ($6,724,424), or $(2.14) per share. After also
giving effect to the sale by the Company of the 1,600,000 shares of Common Stock
offered hereby and the receipt of the estimated net proceeds therefrom (after
deducting underwriting discounts and commissions and estimated expenses of this
offering), the pro forma net tangible book value of the Company as of June 30,
1998 would have been $2,372,421, or $.50 per share of Common Stock, representing
an immediate increase in net tangible book value of $2.64 per share to existing
stockholders and an immediate dilution of $6.50 (92.9%) per share to new
investors. The following table illustrates the foregoing information with
respect to new investors on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price ............................................ $ 7.00
Net tangible book deficit per share before Pro Forma Adjustments ........ $(4.60)
Increase per share attributable to Pro Forma Adjustments ................ 2.46
------
Pro forma net tangible book deficit before this offering ................ (2.14)
Increase attributable to investors in this offering ..................... 2.64
------
Adjusted net tangible book value per share after this offering ........... .50
------
Dilution per share to new investors ...................................... $ 6.50
======
</TABLE>
The following table sets forth, with respect to existing stockholders
(including stockholders who were issued shares in connection with the Pro Forma
Adjustments) and new investors in this offering, a comparison of the number of
shares of Common Stock issued by the Company, the percentage ownership of such
shares, the total consideration paid, the percentage of total consideration
paid and the average price per share.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Paid Average
----------------------- -------------------------- Price
Number Percent Amount Percent Per Share
----------- --------- -------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 3,140,870 66.3% $12,734,806 53.2% $ 4.05
New investors ................. 1,600,000 33.7 11,200,000 46.8 7.00
--------- ----- ----------- -----
Total ......................... 4,740,870 100.0% $23,934,806 100.0%
========= ===== =========== =====
</TABLE>
- ------------------
The above table assumes no exercise of the Underwriter's over-allotment
option. If this option is exercised in full, new investors will have paid
$12,880,000 for 1,840,000 shares of Common Stock, representing approximately
50.3% of the total consideration for 36.9% of the total number of shares of
Common Stock outstanding. In addition, the foregoing table assumes no exercise
of outstanding options or warrants.
18
<PAGE>
CAPITALIZATION
The following table sets forth the short-term debt and the capitalization
of the Company (i) as of June 30, 1998; (ii) on a pro forma basis after giving
effect to the Pro Forma Adjustments (see footnote 3 of "Prospectus Summary --
Summary Financial Information"); and (iii) as adjusted to give effect to the
sale of the 1,600,000 shares of Common Stock offered hereby and the anticipated
application of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
June 30, 1998
------------------------------------------------------
Actual Pro Forma As Adjusted
---------------- ---------------- ----------------
<S> <C> <C> <C>
Current portion of notes payable, net of unamortized
discount .......................................... $ 4,072,857 $ 2,230,000 $ --
============= ============= =============
Notes payable, less current portion ................ $ -- $ 552,500 $ 552,500
------------- ------------- -------------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value -- 5,000,000
shares authorized (actual, pro forma and as
adjusted):
Series B Convertible Preferred Stock; 750,750
shares authorized (actual) and no shares
authorized (pro forma and as adjusted);
572,649 shares outstanding (actual) and no
shares outstanding (pro forma and as
adjusted) ................................. 573 -- --
Common Stock, $0.001 par value -- 10,000,000
shares authorized; 1,686,013 shares outstanding
(actual); 3,140,870 shares outstanding (pro
forma); 4,740,870 shares outstanding (as
adjusted)(1) ............................... 1,687 3,140 4,740
Additional paid-in capital ........................ 6,370,485 12,731,666 21,784,066
Accumulated deficit ............................... (13,607,644) (13,927,205) (14,339,348)
------------- ------------- -------------
Total stockholders' equity (deficit) ............ (7,234,899) (1,192,399) 7,449,458
------------- ------------- -------------
Total capitalization ........................... $ (7,234,899) $ (639,899) $ 8,001,958
============= ============= =============
</TABLE>
- ------------
(1) Does not include (i) 160,000 shares of Common Stock reserved for issuance
to the Underwriter upon exercise of the Underwriter's Warrants, (ii)
370,750 shares of Common Stock reserved for issuance upon exercise of
options granted or available for future grant under the 1998 Plan and
other non-plan options, and (iii) 2,000 shares of Common Stock reserved
for issuance upon exercise of outstanding warrants.
DIVIDEND POLICY
The Company has never paid any dividends on its Common Stock. The Board of
Directors has no current intention to declare dividends on the Common Stock in
the foreseeable future and intends to follow a policy of retaining earnings, if
any, to finance the growth of the Company's business. Any future determination
to declare dividends will be at the discretion of the Board of Directors and
will be dependent on the Company's results of operations, financial condition,
contractual and legal restrictions and other factors deemed relevant by the
Board of Directors at that time. In addition, the payment of cash dividends on
the Common Stock in the future could be limited or prohibited by the terms of
financing agreements that may be entered into by the Company (e.g., a bank line
of credit or an agreement relating to the issuance of other debt securities of
the Company) or by the terms of any Preferred Stock that may be authorized and
issued. See "Description of Securities."
19
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected historical and pro forma financial
and operating data for the Company for the periods indicated. The following
selected statements of operations data for the year ended March 31, 1998, the
three months ended March 31, 1997, and the year ended December 31, 1996 and the
three months ended June 30, 1997 and 1998, and the selected balance sheet data
as of March 31, 1998 and June 30, 1998 are derived from the financial
statements and notes thereto included elsewhere herein. During 1997, the
Company changed its fiscal year end from December 31 to March 31. The following
data should be read in conjunction with the Consolidated Financial Statements
and with "Management's Discussion and Analysis of Results of Operations and
Financial Condition" appearing elsewhere in this Prospectus.
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1996 March 31, 1997
------------------- --------------------
<S> <C> <C>
Gross sales ......................... $ 8,116,323 $ 1,509,453
Less allowances for returns ......... 3,691,779 599,735
------------- -----------
Net sales ........................... 4,424,544 909,718
Cost of goods sold .................. 1,619,568 422,983
------------- -----------
Gross profit ........................ 2,804,976 486,735
Telemarketing and
infomercial expenses ............... 2,924,568 529,407
Selling, general and
administrative expenses ............ 2,731,721 525,707
Other operating expenses ............ 541,069 4,341
------------- -----------
Operating loss ...................... (3,392,382) (572,720)
Interest expense .................... 356,484 73,881
Non-cash interest expense ........... 182,011 --
Other expenses, net ................. 127,794 --
------------- -----------
Net loss ............................ $ (4,058,671) $ (646,601)
============= ===========
Net loss per share(1) ............... $ (4.22) $ (.55)
============= ===========
Weighted average shares
outstanding ........................ 965,529 1,243,634
============= ===========
Pro forma net loss(2) ...............
Pro forma net loss per
share(1)(2) ........................
Pro forma weighted average
shares outstanding (2) .............
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended June 30,
Year Ended ------------------------------
March 31, 1998 1997 1998
---------------- ------------- ---------------
Unaudited
<S> <C> <C> <C>
Gross sales ......................... $ 9,567,902 $2,247,085 $ 5,067,006
Less allowances for returns ......... 4,799,870 1,109,551 2,213,939
------------- ---------- ------------
Net sales ........................... 4,768,032 1,137,534 2,853,067
Cost of goods sold .................. 1,973,105 342,114 1,174,609
------------- ---------- ------------
Gross profit ........................ 2,794,927 795,420 1,678,458
Telemarketing and
infomercial expenses ............... 3,142,639 494,610 1,484,606
Selling, general and
administrative expenses ............ 3,366,014 707,907 1,288,209
Other operating expenses ............ 60,222 32,560 40,384
------------- ---------- ------------
Operating loss ...................... (3,773,948) (439,657) (1,134,741)
Interest expense .................... 179,536 41,979 118,384
Non-cash interest expense ........... 1,681,763 7,854 1,278,357
Other expenses, net ................. (10,733) (10,622) (31,654)
------------- ---------- ------------
Net loss ............................ $ (5,624,514) $ (478,868) $ (2,499,828)
============= ========== ============
Net loss per share(1) ............... $ (3.89) $ (.39) $ (1.50)
============= ========== ============
Weighted average shares
outstanding ........................ 1,484,147 1,343,200 1,694,454
============= ========== ============
Pro forma net loss(2) ............... $ (5,901,956) $ (2,448,641)
============= ============
Pro forma net loss per
share(1)(2) ........................ $ (2.95) $ (1.10)
============= ============
Pro forma weighted average
shares outstanding (2) ............. 2,055,576 2,265,883
============= ============
</TABLE>
Balance Sheet Data:
June 30,
1998
----------------
(Unaudited)
Working capital (deficit) ................................... $ (8,561,807)
Total assets ................................................ 2,773,332
Total liabilities ........................................... 10,008,231
Stockholders' deficit ....................................... (7,234,899)
- ------------
(1) The net loss per share is computed after deduction for preferred dividend
requirements. See Consolidated Financial Statements.
(2) Gives effect to the net loss incurred by GPG for the twelve months ended
March 31, 1998 and the three months ended June 30, 1998 attributable to
the assets acquired by the Company in the Player Acquisition, adjusted to
account for intercompany transactions between the Company and GPG and
amortization expense related to the Player Licenses, and the issuance of
571,429 shares of Common Stock and the payment of $250,000 to GPG pursuant
to the Player Acquisition. See Consolidated Financial Statements -- Pro
Forma Consolidated Financial Statements.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the other financial data included
elsewhere in this Prospectus. The statements which are not historical facts
contained in this Section are forward-looking statements that involve risks and
uncertainties, including those described under "Risk Factors." The Company's
actual results may differ materially from the results discussed in the
forward-looking statements.
General
The Company is engaged primarily in the direct marketing of Gary Player
brand golf clubs. Prior to this offering, the Company marketed its Gary Player
golf clubs pursuant to an agreement with GPG which authorized the Company to
sell Gary Player golf products for up to 20 years through direct marketing in
the United States and Canada and which required payment of a royalty of 6% to
7% of net receipts. On the date of this Prospectus, the Company purchased the
assets of the golf equipment operations of GPG (the "Player Acquisition"),
including the Player Licenses which together give the Company the perpetual,
worldwide, exclusive right to sell Gary Player golf products for an annual
license fee for ten years and a royalty of up to 3% of net receipts. See
"Business -- Player Licenses."
The Player Acquisition purchase price was: (i) 571,429 shares of Common
Stock; (ii) $250,000 which is due within three days following the consummation
of this offering; and (iii) the assumption by the Company of $1,100,000 of
liabilities of GPG.
Substantially all of the Company's sales are paid for by credit card. As a
result, the Company receives the payment generally within two business days
after the Company receives the order. However, it is the Company's policy not
to recognize revenues with respect to an order until shipment of the product.
Amounts which the Company collects in advance of shipment are recorded as
deferred revenues, which were $146,862 and $723,459 at June 30, 1998 and March
31, 1998, respectively. Pursuant to its agreement with its credit card
processor, the credit card processor has the right to withhold all or a portion
of the proceeds from sales as a reserve against customer charge-backs and
returns. Currently, the credit card processor does not withhold any amount from
the Company and if it elects to do so in the future to any significant extent,
the Company's cash flow would be adversely affected.
The Company's current policy is to accept returns of golf clubs for a full
refund (excluding shipping and handling charges) for any reason generally
within 60 days of delivery of the clubs to the customer. As is typical of
companies which market products primarily through telemarketing, the Company
has experienced high product return rates. The Company's allowance for product
returns was 46% and 44% of gross sales for the three months ended June 30, 1997
and 1998, respectively, and 45% and 50% of gross sales for the years ended
December 31, 1996 and March 31, 1998, respectively. The Company believes that
its historic rate of return has been high because, until the introduction of
the Gary Player Black Knight line of golf clubs, the Company offered only
steel-faced clubs at a time when the market increasingly demanded clubs with
titanium-face inserts. Although the Company believes that its product return
rate will decline as the Company currently features a line of clubs with
titanium-face inserts and as its market recognition increases, the Company
expects to continue to experience a high return rate because its direct
marketing customers do not have the opportunity to inspect or try the Company's
golf clubs before they are purchased. A continuing high product return rate or
product returns which significantly exceed the Company's reserves will
adversely affect the Company's operating results. Moreover, the Company offers
returned products as demonstration models at significantly reduced prices,
after cleaning and refurbishing the products.
The Company's gross margin was substantially the same in the years ended
December 31, 1996 and March 31, 1998 because the products sold (primarily the
Gary Player Gran Prix clubs in the year ended March 31, 1998 and the now
discontinued lines of clubs in the year ended December 31, 1996) had similar
prices and cost of goods sold. In the quarter ended December 31, 1997, the
Company introduced the Gary Player Black Knight titanium clubs, and the Company
expects that most of its net sales during fiscal year 1999 will consist of
sales of these clubs. The Gary Player Black Knight clubs have a higher list
price than the Gary Player Gran Prix
21
<PAGE>
clubs, and also a higher cost because of the higher cost of club heads with
titanium-face inserts. Accordingly, although the gross profit was higher for
each set of titanium clubs, the Company's gross margin percentage decreased. In
the three months ended June 30, 1998, the Company increased the list price of
its Gary Player Black Knight irons, which should positively impact the
Company's gross margin in subsequent periods. In addition, the Company's gross
margin in any period is affected by the percentage of gross sales during the
period which represent sales of returned clubs. These returned clubs are sold
by the Company at prices ranging from 53% to 73% of the club's original prices.
The Company's operating results vary significantly from period to period
as a result of purchasing patterns of customers, introduction of new products
by the Company and its competitors, product returns and pricing. Since golf is
a warm weather sport and demand for golf equipment declines during the cold
weather months, sales of the Company's products are seasonal, with the Company
typically experiencing weaker sales from December through February (during the
Company's third and fourth fiscal quarters). The Company also expects that its
operating results will vary in the future due to the timing and success of
proposed direct response marketing activities. Unexpected events, including
delays in securing adequate supplies of golf club components or shipping orders
(either of which could result in increased cancellations), increased product
return rates or delays or failure of direct response marketing, particularly
during periods of peak sales, could result in material losses.
Results of Operations
During 1997, the Company changed its fiscal year end from December 31 to
March 31. For this reason, the following discussion compares the three months
ended June 30, 1997 to the three months ended June 30, 1998, and the fiscal
year ended December 31, 1996 to the fiscal year ended March 31, 1998.
Information with respect to the quarter ended March 31, 1997 is also discussed
to the extent it is material to an understanding of the Company's results of
operations since January 1, 1996. Except as otherwise specifically noted,
results of operations for the quarter ended March 31, 1997 were consistent with
the results of operations in the fiscal years ended December 31, 1996 and March
31, 1998.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30,
1997
Net sales for the three months ended June 30, 1998 were $2,853,067, an
increase of 137% as compared to net sales of $1,137,534 for the three months
ended June 30, 1997. Net sales were derived from gross sales of $5,067,006 and
$2,247,085 for the three months ended June 30, 1998 and 1997, respectively. The
increase in net sales was due to an increase in sales of Gary Player golf
clubs, which was due primarily to sales of Black Knight Ti-162 irons and driver
which were introduced in November 1997. Substantially all sales in the three
months ended June 30, 1998 and 1997 were generated by telemarketing.
The Company recorded allowances for returns of 44% and 46% of net sales
for the three months ended June 30, 1998 and 1997, respectively. The Company
establishes allowances for returns at the time of recording sales based on the
Company's historical return rates.
Cost of goods sold was $1,174,609 for the three months ended June 30, 1998
as compared to cost of goods sold of $342,114 for the three months ended June
30, 1997, resulting in a gross margin of 59% and 70% respectively, during these
quarters. The decrease in gross margin was due principally to the introduction
in November 1997 of the Gary Player Black Knight Ti-162 golf clubs which have a
higher cost than the Gary Player Gran Prix line of clubs sold by the Company in
the three months ended June 30, 1997.
Telemarketing and infomercial expenses were $1,484,606 for the three
months ended June 30, 1998, an increase of 200% as compared to telemarketing
and infomercial expenses of $494,610 for the three months ended June 30, 1997.
Telemarketing expenses consist primarily of wages, commissions, benefits and
payroll taxes for telemarketing personnel, salaries and benefits of
non-commissioned personnel located at the Company's telemarketing call centers,
and telephone expenses. Telemarketing expenses increased in the three months
ended June 30, 1998 due principally to an increased number of telemarketing
personnel at existing call centers and at a call center established in Ventura
in August 1997, including dialers who are paid on an hourly (as opposed to
commission) basis, and to increased telephone expenses. The Company recorded no
infomercial expenses in either three month period.
Selling expenses were $888,722 for the three months ended June 30, 1998,
an increase of 198% from selling expenses of $298,022 for the three months
ended June 30, 1997. Selling expenses include royalties and
22
<PAGE>
related fees, salaries, wages and benefits of management personnel involved in
sales and marketing, customer service and sales support, fees paid to the
credit card processor and lead generation costs. Selling expenses increased
primarily due to greater lead generation costs, credit card processing fees and
royalties. Royalties and related fees increased as sales increased, and lead
generation costs increased as the Company acquired an increased number of leads
to support its expanded telemarketing operations.
General and administrative expenses were $399,487 for the three months
ended June 30, 1998, a decrease of 3% as compared to general and administrative
expenses of $409,885 for the three months ended June 30, 1997. General and
administrative expenses include primarily salaries and benefits of executive
officers and administrative personnel, consulting fees, rent and utilities.
Interest expense was $118,384 for the three months ended June 30, 1998, an
increase of 182% as compared to interest expense of $41,979 for the three
months ended June 30, 1997. This increase was due to an increase in the amount
of outstanding indebtedness during the period. Non-cash interest expense
increased from $7,854 for the three months ended June 30, 1997 to $1,278,357
for the three months ended June 30, 1998 due to the amortization of original
issue discount and debt issuance costs incurred in connection with various
financings, and costs incurred in connection with the extension of the maturity
date of existing indebtedness.
As a result of the foregoing, the Company incurred a net loss of
$2,499,828 for the three months ended June 30, 1998, an increase of 422% from
the net loss of $478,868 for the three months ended June 30, 1997. After giving
effect to the net profit realized by GPG during the three months ended June 30,
1998 and attributable to the assets acquired by the Company in the Player
Acquisition, the pro forma net loss for the three months ended June 30, 1998
would have been $2,448,641. See Consolidated Financial Statements -- Pro Forma
Consolidated Financial Statements.
Year Ended March 31, 1998 Compared to Year Ended December 31, 1996
Net sales for the year ended March 31, 1998 were $4,768,032, an increase
of 8% as compared to net sales of $4,424,544 for the year ended December 31,
1996. Net sales were derived from gross sales of $9,567,902 for the year ended
March 31, 1998, and $8,116,323 for the year ended December 31, 1996. Sales in
the year ended December 31, 1996 consisted entirely of sales of now
discontinued lines of golf clubs. Approximately 78% of net sales in the year
ended March 31, 1998 were derived from sales of Gary Player Gran Prix golf
clubs (which were introduced in February 1997), and the remaining sales were
derived primarily from sales of Gary Player Black Knight golf clubs which were
introduced in the quarter ended December 31, 1997. Approximately 18% of gross
sales were derived from sales of returned golf clubs which the Company sells as
demonstration models at a discount from the clubs' original price. Net sales of
$909,718 in the three months ended March 31, 1997 were derived from gross sales
of $1,509,453, which were lower on an annualized basis than net sales for the
fiscal years presented because of the seasonality of the Company's business
(with generally lower sales in winter) and the transition to the Gary Player
Gran Prix line. Substantially all sales through March 31, 1998 were generated
by telemarketing, except for approximately $1,400,000 of gross sales in the
year ended December 31, 1996 which were generated through an infomercial.
The Company recorded allowances for returns of 50% and 45% of net sales
for the years ended March 31, 1998 and December 31, 1996, respectively.
Cost of goods sold was $1,973,105 for the year ended March 31, 1998, an
increase of 22% as compared to cost of goods sold of $1,619,568 for the year
ended December 31, 1996, resulting in a gross margin of 59% and 63%,
respectively, during these fiscal years.
Telemarketing and infomercial expenses were $3,142,639 for the year ended
March 31, 1998, an increase of 7% as compared to telemarketing and infomercial
expenses of $2,924,568 for the year ended December 31, 1996. Telemarketing
expenses almost doubled in the year ended March 31, 1998 due principally to
increased number of telemarketing personnel at existing call centers and at a
call center established in Ventura in August 1997. The Company incurred
infomercial expenses of $1,372,798 in the year ended December 31, 1996 in
connection with an infomercial relating to a now discontinued line of golf
clubs. The Company recorded no infomercial expenses in the year ended March 31,
1998.
23
<PAGE>
Selling expenses were $1,685,291 for the year ended March 31, 1998, an
increase of 61% from selling expenses of $1,045,567 for the year ended December
31, 1996. Selling expenses increased primarily due to increases in royalties
and related fees, lead generation costs and additional customer service and
support personnel. Royalties and related fees increased because the royalty
rate and related fees under the previous agreement with GPG were greater than
the royalty rate under the license for the now discontinued product lines.
General and administrative expenses were $1,680,723 for the year ended
March 31, 1998, as compared to general and administrative expenses of
$1,686,154 for the year ended December 31, 1996.
During the year ended December 31, 1996, the Company incurred $306,128 of
costs in settlement of litigation, including litigation with several former
employees and a supplier. See Note L of Notes to Consolidated Financial
Statements.
During the year ended December 31, 1996, the Company recorded a $200,000
loss on impaired assets relating to its computer system which became inoperable
due to a malfunction. See Note P of Notes to Consolidated Financial Statements.
Interest expense was $179,536 for the year ended March 31, 1998, a
decrease of 50% as compared to interest expense of $356,484 for the year ended
December 31, 1996. This decrease was due to the reduction in the amount of
outstanding indebtedness during the period resulting from the repayment of
certain debt and conversion of certain debt to Common Stock. Non-cash interest
expense increased from $182,011 for the year ended December 31, 1996 to
$1,681,763 for the year ended March 31, 1998 due to the amortization of
original issue discount and debt issuance costs incurred in connection with
various financings. Other expenses for the year ended December 31, 1996 were
$127,794.
As a result of the foregoing, the Company incurred a net loss of
$5,624,514 for the year ended March 31, 1998, an increase of 39% from the net
loss of $4,058,671 for the year ended December 31, 1996. After giving effect to
the net loss incurred by GPG during the twelve months ended March 31, 1998 and
attributable to the assets acquired by the Company in the Player Acquisition,
the pro forma net loss for the year ended March 31, 1998 would have been
$5,929,412. The net loss was $646,601 for the three months ended March 31,
1997. See Consolidated Financial Statements--Pro Forma Consolidated Financial
Statements.
Financial Condition and Liquidity
Since inception, the Company's cash requirements have exceeded its cash
flows from operations and, at June 30, 1998, the Company had a working capital
deficit of $8,561,807. As a result, the Company has depended on loans and sales
of securities to fund its operations. The Company must increase its net sales
to obtain sufficient cash flows from operations to meet its cash requirements.
The Company is dependent upon the proceeds of this offering to implement its
growth strategy and finance its short-term working capital requirements.
During the year ended March 31, 1998, the Company raised an aggregate of
$3,050,654, net of offering costs, through borrowings and the sale of capital
stock, as follows: (i) the Company issued 169,900 shares of Common Stock at a
price of $5.00 per share; (ii) the Company issued 52,375 shares of Common Stock
at a price of $8.00 per share; (iii) the Company issued 25,902 shares of Series
B Convertible Preferred Stock for $3.33 per share; (iv) the Company issued
promissory notes in the aggregate amount of $880,000 bearing interest at a rate
of 11.0% per annum and issued 44,000 shares of Common Stock to the lenders in
connection with this loan; (v) the Company borrowed an aggregate of $76,000 at
a rate of 11.0% per annum and issued 3,400 shares of Common Stock to the lender
in connection with this loan; and (vi) the Company borrowed $1,000,000 secured
by the assets of the Company pursuant to notes in the principal amount of
$1,000,000 bearing interest at a rate of 13.5% per annum and issued 76,250
shares of Common Stock to the lender in connection with this loan.
During the three months ended June 30, 1998, the Company borrowed an
additional $1,325,000, net of offering costs, secured by the assets of the
Company pursuant to notes in the aggregate principal amount of $1,450,000
bearing interest at a rate of 13.5% per annum and issued 90,625 shares of
Common Stock to the lenders in connection with these loans.
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<PAGE>
At June 30, 1998, the Company had outstanding borrowings of $4,485,000
(including the unamortized discount on debt of $412,143), of which the Company
was in default on $680,000 principal amount. Subsequent to June 30, 1998, the
Company retired $200,000 of the outstanding indebtedness. The Company intends to
use approximately $2,310,100 of the proceeds of this offering to retire a
portion of the outstanding indebtedness. In addition, the Company has extended
the maturity of approximately $552,500 of these notes to a date thirteen months
following the consummation of this offering, and as of the date of this
Prospectus is not in default on any of this indebtedness. These notes bear
interest at a rate of 11.0% per annum.
The $250,000 cash payment portion of the purchase price of the Player
Acquisition will be paid from the proceeds of this offering.
At June 30, 1998, the Company had customer refunds payable of $1,612,673,
deferred revenue of $146,862 and an allowance for returns of $883,318.
Other assets at June 30, 1998 included principally deferred direct
response advertising costs of $333,724, deferred costs associated with this
offering and certain debt issuances of $454,988, and a note with an outstanding
balance (principal and interest) of $172,248 from a corporation owned by
Alfonso J. Cervantes, a director and executive officer of the Company. See Note
D to Notes to Consolidated Financial Statements.
The Company anticipates, based on currently proposed plans and assumptions
relating to the implementation of its growth strategy (including the timetable
of costs and expenses associated with, and success of, its marketing efforts),
that the net proceeds of this offering, together with projected revenues from
operations, will be sufficient to satisfy the Company's operations and capital
requirements for at least twelve months following the consummation of this
offering. If the Company's plans change or its assumptions change or prove to
be inaccurate (due to unanticipated expenses, difficulties, delays or
otherwise) or the net proceeds of this offering and projected revenues
otherwise prove to be insufficient to fund the implementation of the Company's
growth plan or working capital requirements, the Company could be required to
seek additional financing sooner than currently anticipated. The Company has no
current arrangements with respect to, or potential sources of, any additional
financing, and it is not anticipated that existing stockholders will provide
any portion of the Company's future financing requirements. Consequently, there
can be no assurance that any additional financing will be available to the
Company when needed, on commercially reasonable terms, or at all. Any inability
to obtain additional financing when needed would have a material adverse effect
on the Company, requiring it to curtail and possibly cease its operations. In
addition, any additional equity financing may involve substantial dilution to
the interests of the Company's then existing stockholders.
Inflation
Inflation has not had any material impact on the Company's results of
operations.
Year 2000 Issue
The inability of computer systems to recognize and properly process date
fields with a two digit year reference such as "00" for the year 2000 is
commonly referred to as the Year 2000 issue. The Company currently does not
anticipate that any material modifications or expenditures will be required to
address the Year 2000 issue.
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<PAGE>
BUSINESS
General
The Company is engaged primarily in the direct marketing of Gary Player
brand golf clubs through telemarketing, direct response television, the
Internet and direct mail. To date, substantially all of the Company's sales
have been generated through telemarketing activities conducted at the Company's
three call centers and direct response television. By marketing its clubs
directly to consumers, the Company believes it offers its clubs at lower price
points than comparable products offered by competitors through retail outlets,
such as golf pro shops and specialty golf stores.
The Company's principal product line is the Gary Player Black Knight line
of titanium irons, titanium driver and woods, and specialty clubs. These clubs
feature lightweight graphite shafts, oversized club heads with larger "sweet
spots" and a low center of gravity, and are designed to achieve increased lift,
distance and accuracy. The Company custom builds each set of golf clubs based
upon the customer's physical attributes, golfing ability and personal
preferences elicited from the customer upon placement of the order. Custom
specifications include length and flex of shaft, weight of the club head and
grip preference. The Company uses heads and shafts manufactured to the
Company's specifications by various golf component manufacturers, which
currently include Aldila, Inc. (shafts), and grips manufactured by Eaton Golf
Pride.
The Company was incorporated in Delaware in October 1995. In November
1995, the Company acquired Rhino Marketing, Inc., which was engaged in the
direct marketing of golf clubs and accessories. In November 1996, the Company
entered into a direct marketing agreement with GPG pursuant to which the
Company obtained the exclusive right to market and sell golf clubs and golf
accessories and apparel under the name "Gary Player" on a direct marketing
basis in the United States and Canada. The Company introduced its line of Gary
Player Gran Prix golf clubs and related accessories in February 1997, and
shortly thereafter discontinued the sale of all other lines of golf clubs.
The Company acquired on the date of this Prospectus the assets of the golf
equipment operations of GPG (the "Player Acquisition"), including principally
two licenses (the "Player Licenses") which together give the Company the
perpetual, worldwide, exclusive right to use the name and likeness of Gary
Player and ancillary marks, including Black Knight and the Knights Head(TM)
logo, in connection with the manufacture, marketing and distribution of golf
clubs, accessories and apparel for an annual license fee for up to ten years
and a royalty of up to 3% of net receipts. The Company also acquired in the
Player Acquisition existing sublicenses based on the Player Licenses, and an
immaterial amount of inventory, furniture and fixtures, and accounts
receivable. The Company also obtained a right of first refusal to purchase the
golf instruction and training business of GPG. The Player Acquisition purchase
price consisted of $250,000 and the issuance of 571,429 shares of Common Stock,
and the assumption by the Company of liabilities of GPG in the aggregate amount
of $1,100,000. In connection with the Player Acquisition, Gary Player became
Chairman of the Board of Directors of the Company and the Company changed its
name from Golf One Industries, Inc. to Gary Player Golf, Inc.
The Golf Industry
Golf is popular both as a professional sport and a leisure activity.
According to the National Golf Foundation ("NGF"), the number of persons age 12
and older playing at least one round of golf per year in the United States
increased from approximately 20 million in 1986 to 25 million in 1996, while
the total number of rounds of golf played in the United States increased from
approximately 400 million to 477 million during the same period. In 1994,
golfers in the United States spent an estimated $15.1 billion on golf
equipment, related merchandise and greens fees, compared to $7.8 billion in
1986. Wholesale shipments of golf clubs, balls, bags, gloves and shoes in the
United States increased from approximately $1.6 billion in 1991 to $2.9 billion
in 1996. During 1996, approximately two million persons in the United States
played a round of golf for the first time. The Company believes that the
popularity of golf and sales of golf equipment and related merchandise will
rise in the future due to the increasing interest in golf of the aging "baby
boom" population. All golf industry data in this Prospectus was obtained from
the NGF.
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Consumer spending on golf-related equipment, merchandise, accessories,
greens fees and miscellaneous items has been categorized by the NGF on the
following golfer frequency segments: avid golfer, a golfer aged 18 or older who
played 25 rounds or more of golf during the survey year; moderate golfer, a
golfer aged 18 or older who played between eight and 24 rounds of golf during
the survey year; and occasional golfer, a golfer aged 18 or older who played
between one and seven rounds of golf during the survey year. The Company's
customers are primarily occasional and moderate golfers. The following table
sets forth the number of golfers, the average age, average years played and
average household income per golfer segment for 1996:
<TABLE>
<CAPTION>
Occasional Moderate Avid
------------- ------------ ------------
<S> <C> <C> <C>
Number of golfers ................. 11,626,000 6,084,000 5,266,000
Average age ....................... 39 41 50
Average years played .............. 13 15 22
Average household income .......... $ 57,500 $ 61,500 $ 62,500
</TABLE>
Over the past thirty years, golf club design and manufacturing processes
have evolved rapidly. Improved materials, technologies and testing and
manufacturing processes have resulted in new club designs that have been
successfully introduced to the marketplace. Some of the industry's most
significant product innovations have been graphite shafts and cavity back or
perimeter weighted and oversized club heads, innovations which are integrated
into many of the Company's golf clubs. A recent technological breakthrough has
been the introduction of titanium alloy components. Titanium heads are lighter
and stronger than steel heads and enable manufacturers to increase head size
and lengthen the shaft of the club without increasing the club's weight. The
Company's Gary Player Black Knight irons and woods feature club heads with
titanium-face inserts.
Growth Strategy
The Company's objective is to increase sales of its Gary Player brand golf
clubs and golf-related accessories and apparel by capitalizing on the
increasing popularity of golf and Gary Player's reputation and achievements as
a professional golfer. The Company's strategy to increase sales includes:
o Increase Telemarketing Activities. Virtually all of the Company's sales
have been generated through telemarketing. The Company believes it can increase
telemarketing sales by establishing additional telemarketing call centers and
adding telemarketers to its three existing call centers. The Company currently
plans to establish two additional telemarketing call centers in California
within 12 months following this offering. See "-- Direct Marketing --
Telemarketing."
o Increase Direct Response Television Marketing. The Company believes
that direct response television will generate additional sales. Direct response
television includes infomercials and direct response commercials. This direct
market channel generates sales through customers calling the Company as
compared to telemarketing, where the Company initiates the call. In addition to
generating sales, direct response television is expected to increase consumer
awareness of the Company's products and brand name, thereby enhancing the
effectiveness of other marketing activities. Pursuant to the Player Licenses,
Gary Player has agreed to be available to the Company at no charge for up to
six days per year for infomercials and other promotional activities. The
Company recently began to test market nationwide a one-minute direct response
commercial featuring Gary Player. See "-- Direct Marketing -- Direct Response
Television."
o Sublicensing. The Player Licenses permit marketing and distribution of
golf clubs, accessories and apparel through all marketing and sales channels,
whereas the Company's prior agreement with GPG permitted the marketing of these
products only through direct marketing channels. In connection with the Player
Acquisition, the Company acquired GPG's rights as licensor under several
sublicenses for the distribution of headwear, outerwear, other apparel and golf
balls in various markets. The Company intends to identify additional potential
sublicensees for Gary Player golf apparel and accessories in various markets
and enter into sublicenses with third parties whom the Company believes will
maintain the integrity of the Company's brand names. See "-- Direct Marketing
- -- Sublicensing."
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<PAGE>
o Create and Distribute Mail Order Product Catalogs. The Company believes
that it can increase sales through targeted mailings of product catalogs to
existing and potential customers. The Company anticipates that its catalogs
will feature products of both the Company and its sublicensees. See "-- Direct
Marketing -- Mail Order Product Catalogs."
o Increase Internet Advertising. The Company intends to increase
advertising of its Internet web site and create or acquire additional content
for its web site to increase sales of the Company's and its sublicensees'
products via the Gary Player Pro Shop, the Company's online store, and to
generate a customer list for its telemarketing and mail order catalog
activities. See "-- Direct Marketing -- Internet Web Site."
o Establish International Marketing Operations. The Company's marketing
of Gary Player products was limited to the United States and Canada under its
prior agreement with GPG. The Player Licenses permit the Company to market and
distribute Gary Player products worldwide. The Company expects that its
international marketing efforts will focus on entering into sublicensing, joint
venture and other arrangements for the marketing and distribution of Gary
Player golf products on a territory and/or product specific basis. The Company
believes that Gary Player's international reputation will be valuable in
creating international interest in the Company's products.
o Increase Advertising and Trade Show Participation. The Company believes
that its overall sales efforts will be enhanced by greater consumer recognition
of the Company and its products. The Company intends to increase its
expenditures on print advertising in various golf and golf-related publications
and golf and direct marketing industry trade shows to create consumer
awareness.
Products
The Company's principal products are golf clubs sold under the Gary Player
Black Knight and Gary Player Gran Prix trademarks. The Company intends to
commence marketing Gary Player Par Saver and Gary Player Ti-360 Aluminum Bronze
golf clubs which were marketed by GPG prior to the Player Acquisition.
The Company custom assembles each set of golf clubs based upon the
customer's physical attributes, golfing ability and personal preferences. The
Company obtains this information from a 20-point survey completed with the
customer at the time of order. The survey elicits information about the
customer's physical attributes, such as his or her gender, age, height, weight,
arm length and hand size, as well as information about the customer's golfing
ability, such as handicap, swing speed and the number of years playing golf.
Using this information, the Company chooses the appropriately weighted club
head, the flex and length of the club shaft, and the customer's preferred grip
to fit a golf club to the particular needs of the customer. The Company offers
a variety of grips to its customers which vary as to gender and size, as well
as by special need, such as arthritic grips.
Gary Player Black Knight Clubs
The Company's principal line of golf clubs is the Gary Player Black Knight
line, which is available for men, women, seniors and juniors. The Gary Player
Black Knight line currently consists of titanium irons, titanium driver and
woods, and specialty clubs.
Black Knight Ti-162 Titanium Irons. The Company introduced the Black
Knight Ti-162 irons in November 1997. A set of Ti-162 irons including 8 clubs,
consisting of the 3 through 9 irons and a pitching wedge, has a list price of
$699. The Company also markets a 1 iron and a 2 iron which have a list price of
$89.00 per club. The Ti-162 irons feature club heads with titanium-face inserts
which are oversized, deep cavity backed and perimeter weighted to provide the
most forgiveness for off-center hits. The club heads have a low center of
gravity to promote increased lift, distance and accuracy. The club shafts are
made from lightweight 100% high modulus graphite for greater strength.
Black Knight Titanium Driver. The Black Knight titanium driver, which was
introduced in December 1997, features an oversized, perimeter-weighted club
head which is 25% larger than most oversize metal woods and provides a larger
"sweet spot" and increased hitting area. The driver's 58 gram graphite shaft is
25% lighter than standard graphite shafts. The lower overall weight and design
of the titanium driver promotes increased swing speed and reduces twisting on
off-center hits. The Black Knight titanium driver has a list price of $299.
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<PAGE>
Black Knight Ti-162 Titanium Woods. The Company introduced its Black
Knight Ti-162 3 and 5 woods in July 1998 at a list price of $299 per club, or
both for $575. These woods feature titanium club heads.
Black Knight Specialty Clubs. The Company's Black Knight line also
includes two specialty clubs, a 56o sand wedge and a 60o lob wedge, which have
a list price of $89.00 per club. The sand wedge and the lob wedge feature
stainless steel club heads.
Gary Player Ti-360 Aluminum Bronze Titanium Irons
The Ti-360 irons include the 3 through 9 irons and pitching, sand and lob
wedges. These clubs are substantially identical to the Black Knight Ti-162
irons, except that the club head, other than the titanium face, is made of
aluminum bronze instead of steel. A set of the Ti-360 irons is expected to have
a list price of $1,200.
Gary Player Par Saver Wedges
The Par Saver wedges are available in six different lofts. The wedges
feature aluminum bronze club heads and steel shafts and have a list price of
$99.00 per club.
Gary Player Gran Prix Clubs
The Gary Player Gran Prix line of golf clubs consists of irons and woods
featuring graphite shafts and steel heads. The Company currently plans to phase
out sales of this line in 1998 as it focuses its efforts on marketing its
titanium clubs.
Golf Apparel and Accessories
Following this offering, the Company intends to market Gary Player brand
golf apparel and accessories directly or through sublicensing arrangements with
third parties. On the date of this Prospectus, the Company acquired from GPG
several sublicensing agreements granting third parties the right to
manufacture, among other things, headwear, outerwear, golf bags and golf balls
under the name Gary Player and certain ancillary marks. The Company intends to
enter into additional sublicensing agreements to provide for the manufacture of
a broader range of Gary Player golf products, including casual and golf
clothing, shoes and gloves. The Company may sell some or all of these products
directly to consumers. See "-- Direct Marketing -- Sublicensing."
Direct Marketing
Sales through direct marketing have grown steadily in the United States
during the past several years as consumer buying preferences have shifted to
take advantage of the convenience offered by home shopping and technological
advances in telecommunications, information systems, multimedia and computing.
The Direct Marketing Association ("DMA") estimates that consumer sales
resulting from all forms of direct marketing were approximately $685 billion in
1997 and that business-to-business direct marketing sales were approximately
$542 billion in 1997.
By marketing its clubs directly to consumers, the Company believes it
offers its clubs at lower price points than comparable products offered by
competitors through retail outlets, such as golf pro shops and specialty golf
stores. To date, the Company has marketed its products throughout the United
States primarily by telemarketing and direct response television. The Company
also maintains a web site on the Internet to advertise the Company and its
products, generate telemarketing leads, and receive orders. The Company intends
to utilize additional direct marketing methods, including direct response
television and mail order product catalogs, and expand its web site.
Telemarketing
Virtually all of the Company's sales have been generated through
telemarketing. The Company operates three telemarketing call centers located in
Santa Maria, San Luis Obispo, and Ventura, California. At March 31, 1998, the
Company had approximately 166 employees engaged in telemarketing.
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<PAGE>
The Company utilizes dialers who initiate contact with potential
customers, Company "golf consultants" to whom the customer is transferred if
the customer expresses an interest in purchasing golf clubs and verifiers who
confirm customer purchases. The golf consultants, acting pursuant to a script
developed by the Company, are responsible for educating the customer as to the
characteristics of the golf clubs and completing sales. Each call center has a
manager and assistant manager who oversee telemarketing operations at the call
center.
On weekdays, sales calls are made only in the evenings and, in accordance
with applicable laws and regulations, are not made after 9:00 p.m. local time
of the potential customer. The Company currently has the capacity to place
approximately 6,000 to 7,500 connected calls each day. The Company intends to
use a portion of the proceeds of this offering to add telemarketers in its
existing call centers and to establish two additional call centers in
California within 12 months following consummation of this offering. The
Company expects each new call center will cost approximately $100,000 in
start-up costs, which include costs of furniture and equipment and salaries,
rent and other costs of operating the call center during its initial three
months. The two new call centers are expected to increase the Company's calling
capacity by as much as 4,000 to 5,000 connected calls each day.
The Company obtains leads for its telemarketing operations from third
party customer lists and visitors to its web site. The Company presently
engages Direct Media, Inc., one of the nation's largest list brokers and
managers, to obtain lists of potential customers, which are obtained from golf
publications, golf societies and other organizations based on the geographic,
economic and other criteria specified by the Company. New leads are compared to
a database of previously called leads to eliminate duplicate names. The Company
also compiles a list of potential customers from visitors to its web site, and
contacts former customers for new or additional products. In the future, the
Company intends to obtain leads from sublicensees of Gary Player brand
products. The Company believes that it will be able to continue to acquire
sufficient leads for its telemarketing operations for the foreseeable future.
Direct Response Television
The Company intends to increase its emphasis on marketing through direct
response television. Direct response television includes infomercials and
direct response commercials. Infomercials are long-form television commercials,
28 1/2 minutes in length that are typically broadcast on cable and local
broadcast stations. Direct response commercials are short-form infomercials
that typically range from one to two minutes in length.
In June 1998, the Company began to test market nationwide a one-minute
direct response commercial featuring Gary Player and retired professional
baseball player, Steve Garvey, advertising the Company's Gary Player Black
Knight Ti-162 titanium irons. The revenues generated by the direct response
commercial have exceeded the media costs incurred in broadcasting the
commerical.
The Company also intends to produce a long-form infomercial featuring Gary
Player marketing another line of the Company's golf clubs, such as the Gary
Player Par Saver wedges or Gary Player Black Knight Ti-162 woods. Pursuant to
the Player Licenses, Gary Player has agreed to be available to the Company at
no charge six days per year for infomercials and other promotional activities.
The Company intends to utilize Mr. Player's services during the first year
following this offering primarily for the production of infomercials. The cost
of producing this infomercial is estimated to be approximately $200,000. The
Company will also incur significant costs in purchasing broadcast time for the
infomercial on local and cable broadcast stations. Accordingly, the Company
intends to test market this infomercial and future infomercials it develops in
selected markets prior to incurring material commitments for broadcast time.
During Spring 1997, the Company produced a 28 1/2 minute infomercial
featuring the Company's Gary Player Gran Prix line of golf clubs. The
infomercial was test-marketed and generated few sales, therefore, the Company
discontinued broadcasting the infomercial as a result of the poor test market
results. The Company attributes the poor response to the infomercial to the
type of golf clubs (steel club heads) being marketed, and not to the
effectiveness of infomercials as a means to sell golf clubs. At the time the
Company broadcast the infomercial, club heads with titanium-face inserts were
being introduced into the market.
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<PAGE>
In addition to generating direct sales, the Company believes that direct
response television will build consumer awareness of the Company's products and
help establish the Gary Player brand name. The Company believes that these
activities may aid database development for telemarketing and mail order
product catalog marketing and may reduce the product return rate.
Mail Order Product Catalogs
The Company expects to increase sales through targeted mailings of product
catalogs to existing and potential customers. The Company is in the process of
creating its first catalog, which the Company intends to test market during the
first quarter following consummation of this offering. The initial test catalog
will consist of 8 to 10 pages and will have a limited distribution to between
50,000 and 100,000 homes. If the Company receives a favorable response, it
intends to produce additional catalogs on a quarterly basis which will feature
Gary Player golf products marketed by the Company as well as those marketed by
its sublicensees. The Company anticipates that each catalog will consist of 16
to 18 pages. The Company intends to retain an outside firm to assist in
producing the catalogs, which will be designed to capture the reader's interest
through the use of distinctive covers, colorful product presentations and
product descriptions that highlight significant features.
Internet Web Site
The Company established a web site in 1996. The Company's web site is
fully interactive, using audio, video and secured shopping cart technology to
educate consumers as to the quality, design and performance of the Company's
products, expand the Company's database for possible telemarketing follow up,
promote the Company and its products, provide customer service and, through the
Gary Player Pro Shop, the Company's online store, sell the Company's golf clubs
and other products directly to consumers. Although product orders can be placed
through its web site, to date, the Company has received few orders.
The Company has implemented a number of web-based promotional programs
designed to generate telemarketing leads. These programs, which include
sweepstakes and product giveaways, are carried on the Company's web site as
well as on other golf and non-golf web sites. The Company sponsors an annual
Gary Player sweepstakes which invites visitors to the Company's web site to
enter for a chance to win golf clubs, other golf products and, for first place
winners, the opportunity to play 9 holes of golf with Gary Player. The
information obtained from the sweepstakes entry form is used by the Company in
its telemarketing efforts and will contribute to a mailing list for the
Company's catalogs.
The Company intends to use a portion of the proceeds of this offering to
increase advertising of its web site and create or obtain additional content
for its web site to increase sales via the Internet and to generate a customer
list for its telemarketing and mail order operations.
Guthy-Renker Letter of Intent
The Company has entered into a non-binding letter of intent with
Guthy-Renker Corporation ("Guthy-Renker") which contemplates an agreement
pursuant to which Guthy-Renker would provide services to the Company for the
direct marketing of its products. Guthy-Renker is a leading producer of
high-quality infomercials and products designed for home shopping and direct
response television sales with annual sales in excess of $350 million.
Guthy-Renker also owns Choice Mall, a large electronic retail venue on the
Internet, to which the Company would have access to sell its products.
The letter of intent contemplates that, for its services, Guthy-Renker
would receive compensation of $500,000 per year (payable monthly) and a royalty
of 3% of net sales of products designated by the parties as subject to the
agreement. In addition, the Company would issue to Guthy-Renker five-year
warrants to purchase a number of shares of Common Stock equal to 15% of the
fully diluted number of shares outstanding on the date of this Prospectus
(including the shares sold in the offering and the shares underlying the
Underwriter's Warrants) at an exercise price of $8.75 per share. One half of
the warrants would be immediately vested, and the other half would vest if the
agreement had not been terminated by either party within its first 17 months.
Guthy-Renker would receive registration rights with respect to the warrant
shares. Guthy-Renker would agree not to transfer any shares for two years
without the consent of the Company and the Underwriter. The warrants would
expire prior to their stated expiration date under certain circumstances,
including a sale of the Company or termination of the agreement (subject to the
ability of Guthy-Renker to resell publicly the warrant shares). Guthy-Renker
would agree not to acquire any additional shares of the Common Stock without
the prior written consent
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<PAGE>
of the Board of Directors of the Company during the term of the agreement and
for two years thereafter, and that it would not market directly, or assist
others in marketing, golf equipment, apparel or accessories without the prior
consent of the Company. The term of the agreement would be for three years and
three months, and the Company would have the right to terminate the agreement
in any year that the net sales on which royalties would be payable to
Guthy-Renker were less than $5,000,000. In addition, the Company would agree to
appoint a qualified designee of Guthy-Renker to serve as a director of the
Company and to nominate such person as a director at the Company's next
succeeding annual meeting of shareholders. There is no assurance that the
Company will enter into a definitive agreement with Guthy-Renker.
Sublicensing
The Company intends to sublicense the rights to use the Gary Player
trademarks to third parties to market a wide variety of golf accessories, such
as golf bags, gloves and headwear, and apparel, such as outerwear, rain gear
and casual wear. The Company anticipates that sublicenses will be entered into
principally for golf accessories and apparel, although the Company may enter
into sublicenses outside the United States for golf clubs.
The Company currently plans to develop three brands which it intends to
sublicense for distribution of golf accessories and apparel in three market
segments as follows:
o Gary Player Signature: The Gary Player Signature line is expected to
be the Company's premier line of golf apparel and accessories and will be
licensed for distribution in golf pro shops and better golf specialty stores.
o Gary Player: Products bearing the Gary Player trademark are expected
to be licensed for sale in golf specialty stores and better department stores.
o Black Knight: The Black Knight line is expected to be licensed for
distribution in golf specialty stores, department stores, mass merchandise
retail stores and through direct marketing.
In connection with the Player Acquisition, the Company acquired several
sublicenses pursuant to which GPG licensed to third parties the rights to
manufacture, market and distribute products under the Gary Player trademarks.
The sublicenses authorize the manufacture, distribution and sale in specified
territories of one or more golf accessories, including golf bags, gloves, balls
and headwear, apparel, such as outerwear, rain gear and casual wear, and golf
clubs for juniors. The sublicenses generally provide for the payment to the
Company of royalties on the sale of products, grant the Company approval rights
with respect to the quality and advertising of the licensed products, and
provide exclusivity to the sublicensees with respect to the specific products
in the specified territories. To date, there have been no significant sales
under any of these sublicensing arrangements, and the Company does not
anticipate royalties from these existing sublicenses to contribute
significantly to its revenues in fiscal year 1999.
The Company intends to enter into sublicenses when it believes such
arrangements will allow products sold under the Gary Player trademarks to be
manufactured, marketed and distributed most effectively without compromising
quality. In determining whether to bring a new product to market on its own or
through a sublicensee, the Company will consider various factors, including the
potential terms of a sublicense, the potential profit and expense (if marketed
by the Company) and the financial, marketing and other resources available to
the Company at such time.
A principal goal of the Company will be to maintain the integrity of the
trademarks under which it markets its products. The Company strives to provide
consumers with high quality products and to maintain a consistent image in all
of its advertising and marketing programs. In entering into sublicenses, the
Company will seek to preserve the integrity of the Gary Player trademarks by
closely monitoring and/or controlling the design and quality of the products
manufactured by sublicensees.
Other Marketing and Advertising
The Company will attempt to capitalize upon Gary Player brand awareness
generated by its direct marketing efforts by selling its products on a limited
basis in retail outlets upon achieving consumer awareness of its products.
Although the Company intends to hire a vice president of retail sales within 30
to 60 days following
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consummation of this offering to develop and oversee the Company's retail
operations, the Company does not currently intend to devote substantial funds
or resources to build a retail marketing infrastructure. The Company believes
that retail sales will complement its direct marketing efforts by increasing
brand awareness.
The Company believes that its overall sales efforts will be enhanced by
greater consumer recognition of the Company and its products. The Company
intends to increase its expenditures on print advertising in various golf and
golf-related publications and golf and direct marketing industry trade shows to
create consumer awareness.
Player Licenses
The Player Licenses grant to the Company the perpetual, worldwide,
exclusive right to use the name and likeness of Gary Player and ancillary marks
in connection with the manufacture, marketing, distribution and exploitation
(including sublicensing) of golf clubs, accessories and apparel. The Player
Licenses do not cover golf instruction products, biographical products about
Gary Player or other of Gary Player's businesses, including golf course design
and management services.
Under the terms of the Player Licenses, the Company will be obligated to
pay an annual license fee during the first ten years of the licenses,
increasing from $225,000 during the first year up to a maximum of $350,000 in
each of the last six years. The Company's obligation to pay the license fee
will terminate earlier if Gary Player does not play in at least ten
internationally televised professional golf tournaments during any twelve-month
period and is no longer Chairman of the Board of the Company (unless he is no
longer Chairman because of his removal without cause or failure to be
re-elected prior to the end of the fifth year, in which event he would receive
the license fee for up to five more years). The Company may offset against the
license fee any cash compensation or fee paid or payable to Gary Player as a
director or officer of the Company. In addition to the license fee, the Company
must pay royalties of (i) 3% of net receipts between $10 million and $20
million from sales of endorsed products through direct marketing during any
year, (ii) 2% of net receipts in excess of $20 million from sales of endorsed
products through direct marketing during any year, and (iii) 3% of net receipts
from endorsed products which are sold other than through direct marketing
(including royalties from sublicensing arrangements). The Company is not
required to pay royalties on the first $10 million of net receipts from sales
of endorsed products through direct marketing during any year.
All uses of the Gary Player name and likeness are subject to the prior
approval of the licensors which may not be unreasonably withheld. The Player
Licenses may be terminated as a result of a material breach or default under
either license by the Company which is not cured within 30 days of notice of
the breach. The Company may not assign the Player Licenses except in connection
with a sale of all or substantially all of the assets of the Company to, or a
merger of the Company with, a person or entity other than a person or entity
whose sales of golf clubs exceed 10% of the total sales of golf clubs during
the calendar year, whose name includes the name of a recognized professional
golfer or has over 25% of its capital stock owned by a recognized professional
golfer.
Supply, Assembly and Delivery
The Company's golf clubs are assembled by the Company at its Santa Maria
facility using components (heads, shafts and grips) purchased from third-party
manufacturers. The Company, in collaboration with Gary Player, selects the
heads, shafts and grips for its clubs from prototypes designed and developed by
component manufacturers based on aesthetics and features popular in the market
at the time. The Company generally does not design its own golf club
components; rather, with input from Gary Player, it works closely with its
component manufacturers to modify their proprietary components when necessary
to meet the Company's specifications. Accordingly, the Company has incurred
immaterial product development expenditures to date.
The Company, however, recently commissioned Tom Stites, a well known golf
club designer, to develop club head molds for the Gary Player Black Knight
Ti-162 woods. The Company expects to release these clubs in June 1998. The club
heads feature a low profile that is very popular in today's market. The Company
may commission the development of club components in the future if it believes
that components with broad consumer acceptance are not being made available to
the Company by its manufacturers.
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The Company selects its suppliers primarily on the basis of quality,
price, payment terms and delivery capability. Currently, the Company purchases
club heads from Magic Mechanical Co. Ltd., shafts primarily from Aldila and
also from Grafalloy, and grips from Eaton Golf Pride. Aldila is a leading
manufacturer of graphite shafts worldwide and a supplier of many of the largest
golf club manufacturers, and Eaton Golf Pride is a leading manufacturer of golf
club grips worldwide. The Company believes that the use of components from
manufacturers with wide brand-name recognition and favorable consumer
perception facilitates sales of its golf clubs and maintains quality.
Historically, because of its financial condition, the Company generally
has been required to pay for components upon shipment which has resulted in
delays in filling orders. The Company intends to use a portion of the proceeds
of this offering to purchase and maintain an increased inventory of golf club
components. Golf clubs currently are shipped directly to customers via three
day air delivery service generally within two to three weeks from the date of
order. The Company believes that increasing its inventory of components will
enable the Company to fill orders more quickly which could reduce order
cancellations.
Product Returns; Warranty
The Company believes that because it markets its golf clubs through direct
marketing channels which do not allow customers to examine and handle the golf
clubs prior to purchase, the Company must offer customers a meaningful right to
return the clubs. Under the Company's current policy, customers may return golf
clubs for a full refund (excluding shipping and handling charges) generally
within 60 days after they are received.
The Company recorded allowances for product returns of approximately 45%,
40%, 50% and 44% of gross sales for the year ended December 31, 1996, the three
months ended March 31, 1997, the year ended March 31, 1998 and the three months
ended June 30, 1998, respectively. The Company believes that its historic rate
of return has been high primarily as a result of selling through direct
marketing channels. Direct marketing customers do not have the opportunity to
examine the clubs before they are purchased. The Company also believes that its
product return rates have been high because, until the introduction of the Gary
Player Black Knight line of golf clubs, the Company offered clubs with steel
heads at a time when the market increasingly demanded club heads with
titanium-face inserts. The Company believes that its product return rate will
decline as the Company currently offers a line of clubs with titanium-face
inserts and graphite shafts and as its market recognition increases. However,
the Company does not strive to be a market innovator in the style or technology
of its golf clubs and may from time to time lag behind market trends, which
could lead to high levels of product returns.
The Company offers returned products as demonstration models at
significantly reduced prices, after cleaning and refurbishing the products.
Demonstration models are sold at prices generally ranging from 53% to 73% of
the clubs' original price, and accounted for approximately 18% and 13% of gross
sales for the year ended March 31, 1998 and the three months ended June 30,
1998. The Company markets demonstration models through telemarketing to
price-sensitive customers who desire a less expensive alternative to the
Company's new golf clubs.
The Company provides a lifetime warranty that the clubs will be free from
defects in materials and workmanship. To date, the Company has not experienced
material warranty expense.
Competition
The markets for the Company's golf clubs and accessories are highly
competitive and contain limited barriers to entry. The Company competes
primarily on the basis of providing higher quality products at lower price
points. The Company competes with golf equipment manufacturers and marketers as
well as manufacturers and marketers of other sporting equipment that offer
consumers products with similar entertainment or recreational value, such as
ski and tennis equipment. Many of these competitors are well established
companies with broad consumer recognition and greater financial, marketing,
distribution, personnel and other resources than the Company. The golf
equipment industry is currently dominated by four companies, Callaway Golf
Company, Titleist/Cobra Golf, Karsten Manufacturing (Ping) and Taylor Made,
which in the aggregate, accounted for approximately 50% of the golf clubs sold
in the United States in 1997. In addition, the Company is aware of a number of
companies which use infomercials to sell golf clubs (principally specialty
clubs). Competition in the market for golf apparel is also extremely
competitive. The Company intends to compete in this market by
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attempting to establish the Gary Player brand and offering, principally through
sublicensees, a variety of products at various price and quality levels. In the
golf apparel market, the Company will compete with a large number of
manufacturers and retailers of golf and other sports apparel and casual and
outerwear. There can be no assurance that the Company will be able to compete
successfully.
Government Regulation
The Company's direct marketing operations are subject to numerous Federal
and state regulations, as well as general public scrutiny. The Federal
Telephone Consumer Protection Act of 1991 limits the hours during which
telemarketers may call consumers to between 8:00 a.m. and 9:00 p.m., and
prohibits the use of automated telephone dialing equipment to call certain
telephone numbers. The Federal Telemarketing and Consumer Fraud and Abuse
Prevention Act of 1994, and the Federal Trade Commission ("FTC") regulations
promulgated thereunder, prohibit deceptive, unfair or abusive practices in
telemarketing sales. Both the FTC and state attorneys general have authority to
prevent telemarketing activities that constitute "unfair or deceptive acts or
practices." Additionally, some states have enacted laws and others are
considering enacting laws targeted directly at telemarketing practices, and
there can be no assurance that any such laws, if enacted, will not adversely
affect or limit the Company's current or future operations. The infomercial
industry is also regulated by the FTC, as well as by the Consumer Product
Safety Commission, the Federal Communications Commission, various states'
attorneys general and other state and local consumer protection agencies. The
Company's marketing activities and/or products may become subject to the
scrutiny of each of these regulatory agencies. Compliance with regulations
promulgated by these agencies is generally the responsibility of the Company,
and the Company could be subject to a variety of enforcement or private actions
or any failure to comply with such regulations. Noncompliance by the Company
with any rules and regulations enforced by a Federal or state consumer
protection authority may subject the Company or its management to fines or
various forms of civil or criminal prosecution, any of which could materially
adversely affect the Company's business, financial condition and results of
operations.
Employees
At June 30, 1998, the Company had 266 full-time employees, including 209
in sales and marketing (of which 199 are in telemarketing), 13 in customer
service and support, 18 in warehouse operations and shipping and 26 in general
administration and finance. None of the employees of the Company is covered by
a collective bargaining agreement. The Company considers its relationship with
its employees to be good.
Properties
The Company's headquarters are located in Santa Maria, California,
approximately 150 miles north of Los Angeles. The Company's headquarters occupy
approximately 23,000 square feet of administrative, telemarketing and
production assembly and fulfilment space pursuant to a sublease agreement which
expires on October 31, 1998 and provides for a current annual rental of
approximately $151,800. The Company is currently negotiating a renewal of this
lease.
Legal Proceedings
The Company is the subject of an unlawful detainer action filed by the
sublessor of the premises serving as the Company's principal place of business.
The lawsuit alleges that the Company owes the sublessor unpaid rent in the
aggregate amount of approximately $182,474.75. The Company contests this claim.
The plaintiff has made a written settlement offer offering to accept the sum of
$75,000 as payment in full of the unpaid rent obligation. This offer is being
considered by the Company.
From time to time the Company expects to be subject to legal proceedings
and claims in the ordinary course of its business. Such claims, even if lacking
merit, could result in the expenditure of significant financial and managerial
resources. The Company is not currently a party to any pending legal
proceedings that it believes will have, individually or in the aggregate, a
material adverse effect on the Company or on its financial condition or results
of operations.
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MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information with respect to the
directors and executive officers of the Company as of the date of this
Prospectus:
<TABLE>
<CAPTION>
Name Age Position
- ---- ----- --------
<S> <C> <C>
Gary Player ........................ 62 Chairman of the Board
Joseph J. White .................... 51 Chief Executive Officer and Director
Alfonso J. Cervantes, Jr. .......... 48 President, Secretary and Director
Joseph A. DePanfilis ............... 43 Chief Financial Officer and Executive Vice President
James Braden ....................... 46 Vice President
Robert J. Friedland ................ 41 Director
Marc B. Player ..................... 37 Director
Steven O. Sparks ................... 52 Director
</TABLE>
Gary Player has agreed to serve as Chairman of the Board of the Company
commencing on the date of this Prospectus. Mr. Player is a professional golfer
and one of only four golfers ever to win all four major golf championships. Mr.
Player's nine major titles include three Masters, three British Opens, two PGA
Championships and one U.S. Open. Mr. Player's accomplishments also include 21
American PGA Tour victories and 23 worldwide titles in his first five years in
Seniors competition. In winning the Senior British Open in 1988, he became the
first man to complete the "Grand Slam" of Senior golf. Since 1984, Mr. Player
has served as Chairman of Gary Player Group, Inc., a company he formed to
manage a number of businesses, including Gary Player Golf Academies, a company
engaged in worldwide golf instruction, Gary Player Enterprises, the licensing
and endorsement company of the group for non-golf related matters, and Gary
Player Design Company, which has designed over 140 internationally acclaimed
golf courses worldwide. Mr. Player also owns the Gary Player Stud Farm, a
breeder of top thoroughbred horses. Mr. Player also instituted and chairs the
Gary Player Foundation, a philanthropic organization dedicated to educating
poor rural children of South Africa.
Joseph J. White has agreed to serve as Chief Executive Officer of the
Company commencing on the date of this Prospectus. Mr. White was President of
Gary Player Golf Equipment from July 1996 until the date of this Prospectus and
President and a Director of Gary Player Group, Inc. from January 1997 until the
date of this Prospectus. From September 1993 to March 1996, Mr. White was Vice
President- Sports and ISP World-Wide Managing Director for The Portman
Companies based in Atlanta, Georgia, where he participated in the initiation
and development of the International Sports Plaza in conjunction with the 1996
Atlanta Olympic Games. From 1989 to 1993, Mr. White was President of Zett USA,
Inc., a joint venture he created with Zett Corporation, Japan's largest
wholesale sporting goods company. Zett USA marketed high end, high technology
golf and baseball equipment. Mr. White is a member of the National Golf
Foundation, has recently served on the Board of Directors of the Golf
Manufacturers and Distributors Association and has been a member of the
National Sporting Goods Association and the Sporting Goods Manufacturers
Association. In addition, Mr. White currently serves on the Board of Directors
for Clark Atlanta University's Graduate School of Sports and Entertainment.
Alfonso J. Cervantes, Jr. co-founded the Company in October 1995 and has
served as a director since its inception. He has also served in various
executive officer capacities since July 1996, and has been the Chief Executive
Officer and President since November 1997. Mr. Cervantes has agreed to resign
as Chief Executive Officer commencing on the date of this Prospectus. Mr.
Cervantes also serves as President and Chief Executive Officer of Trilogy
Capital Group, Inc. ("Trilogy"), a position he has held since he formed that
company in January 1991. Trilogy, which is not currently active, is a venture
capital and consulting firm principally engaged in
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the reorganization and recapitalization (through Chapter 11 of the U.S.
Bankruptcy Code or otherwise) of distressed small to middle market companies.
In this capacity, Mr. Cervantes has developed and implemented reorganization
plans for a number of companies, including three for which he served as
director and Chief Executive Officer and for which he was instrumental in
filing Chapter 11 plans, including International Paging Corporation in February
1994, Mediacom Industries, Inc. in March 1994 and Pearce Systems International,
Inc. in March 1996 (which was converted to Chapter 7). Mr. Cervantes also
serves as President of All Children Count, Inc., a non-profit corporation which
he founded in 1991 that provides services to HIV-infected children and their
families. Mr. Cervantes' employment contract provides that he will devote his
full time business efforts to the Company's business during the term of the
contract.
Joseph A. DePanfilis has served as Executive Vice President of the Company
since December 1997 and Chief Financial Officer of the Company since September
1997. From April 1996 until joining the Company, Mr. DePanfilis served as Vice
President-Finance and Administration and Chief Financial Officer of Gateway
Worldwide Communications, Inc., a provider of international communications
services in 25 countries. From 1990 until April 1996, Mr. DePanfilis was
Financial Controller of RF Technology, Inc., a manufacturer of microwave
communications equipment used in the television and broadcast industries.
James Braden has been Vice President of the Company since December 1997.
He is responsible for recruitment, training and supervision of the sales
personnel of the Company. He has served in the capacity of Director of Sales
and Marketing since the formation of Rhino Marketing, Inc., the Company's
predecessor company, which was incorporated in January 1995. From 1994 until
joining the Company, Mr. Braden served as Sales Manager for Bob Mann Golf, Inc.
Mr. Braden is a former PGA golf professional.
Robert J. Friedland has served as a director of the Company since July
1996. Mr. Friedland is President and Chief Executive Officer of Kittrich
Corporation, a company he formed in 1978. Kittrich Corporation manufactures and
distributes various consumer products, including shelf and window coverings,
stationery products and insecticidal products.
Marc B. Player has agreed to serve as a director of the Company commencing
on the date of this Prospectus. Mr. Player has served as Chief Executive
Officer and a director of GPG since 1984. Mr. Player also served as President
of Sports International, a company he formed in 1986. Sports International
served as the exclusive representative in South Africa of International
Management Group, one of the foremost sports management firms in the world.
Sports International was acquired by International Management Group in 1991.
Mr. Player is the son of Gary Player.
Steven O. Sparks has served as a director of the Company since May 1997.
In 1995, Mr. Sparks co-founded Sherwood Financial Group, a money management
firm, and served as its President from June 1995 to May 1996 and Managing
Director from June 1996 to June 1997. From 1991 to June 1995, Mr. Sparks served
as a Vice President of Paine Webber, a stock brokerage firm. From January 1993
to July 1994, Mr. Sparks also served as President of H.S.H., Inc., a company
engaged in the marketing and distribution of the Loomis golf club shaft. In
1993, Mr. Sparks served as General Partner of Tom Kite Golf Center Limited
Partnership, a California limited partnership engaged in the development of the
Tom Kite Golf Center.
Directors are elected at each annual meeting of stockholders and hold
office until the following annual meeting and their successors are duly elected
and qualified. Executive officers of the Company serve at the discretion of the
Board of Directors and until their successors are duly elected and qualified.
The Company intends to appoint one additional independent director within 90
days following the date of this Prospectus.
Pursuant to the underwriting agreement between the Company and the
Underwriter (the "Underwriting Agreement"), the Company has agreed, for a
period of three years from the date of this Prospectus, at the option of the
Underwriter, to elect a designee of the Underwriter to the Company's Board of
Directors or, at the Underwriter's option, as a non-voting adviser to the
Company's Board of Directors. The Underwriter has not yet exercised its right
to designate such a person.
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Audit Committee
The Board of Directors intends to establish an Audit Committee of two or
more independent directors following the consummation of this offering. The
Audit Committee's functions will include recommending to the Board of Directors
the engagement of the Company's independent certified public accountants,
reviewing with those accountants the plan and results of their audit of the
financial statements and determining the independence of the accountants.
Director Compensation
The Company does not compensate as directors the Chairman of the Board or
directors who are also employees of the Company. The Company pays non-employee
directors a fee of $4,000 per year, plus $300 for their personal attendance at
any meeting of the Board and $150 for attendance at any telephonic meeting of
the Board or at any meeting of a committee of the Board. As additional
consideration for their services as directors, the Company granted to Messrs.
Friedland, Sparks and Marc Player options under the Company's 1998 Plan to
purchase 12,000, 12,000 and 9,000 shares of Common Stock, respectively, at an
exercise price of $7.00 per share. All of these options vest on April 1, 1999.
Executive Compensation
The following table sets forth compensation paid by the Company to each
person (the "Named Executive Officers") who served as the Chief Executive
Officer of the Company during the fiscal year ended March 31, 1998 (no other
executive officer received compensation in excess of $100,000 during such
year):
Summary Compensation Table
Annual Compensation
---------------------------------------
Other
Name and Principal Position Salary Bonus Compensation
- --------------------------- ------ ----- ------------
Alfonso J. Cervantes ......... $104,039 $-- $ 1,540(1)
Chief Executive Officer(2)
John Pike (3) ................ $ 55,385 $-- $ 2,088(1)
Chief Executive Officer
- ------------
(1) Represents an automobile allowance.
(2) Mr. Cervantes served as Senior Vice President prior to becoming Chief
Executive Officer in November 1997.
(3) Mr. Pike served as Chief Executive Officer from July 1996 to November 1997.
Mr. Cervantes served as Chief Executive Officer from November 1997 through
the end of the fiscal year.
Employment and Consulting Agreements
The Company has entered into an employment agreement with Joseph J. White
to serve as Chief Executive Officer for two years following the date of this
Prospectus. Pursuant to his employment agreement, Mr. White will receive a
salary of $165,000 for the first year and $181,500 for the second year, a bonus
of $25,000 upon commencement of employment and a bonus, not to exceed 20% of
Mr. White's base salary per year, equal to 10% of the pre-tax earnings of the
Company in excess of (i) $3,000,000 (for the year ending March 31, 1999) and
(ii) the greater of $5,000,000 or 150% of pre-tax earnings of the Company for
the year ending March 31, 1999 (for the year ending March 31, 2000). Mr. White
will also receive certain other benefits, including a $1,000 per month
automobile allowance and up to $25,000 of the initiation fee for a corporate
membership in a golf country club. The Company will reimburse Mr. White for his
expenses in relocating his home from South Carolina to California and the
brokerage commissions on the sale of his South Carolina home. In addition, if
Mr. White is unable to sell his residence in South Carolina by October 21,
1998, the Company has agreed to pay interest until the end of his employment
term on a new loan obtained by Mr. White to purchase a residence near the
Company's executive offices.
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The Company has entered into an employment agreement with Alfonso J.
Cervantes, Jr. to serve as President for two years following the date of this
Prospectus. Pursuant to his employment agreement, Mr. Cervantes will receive a
salary of $150,000 for the first year and $165,000 for the second year and
certain benefits, including an automobile and related expenses up to a $12,000
per year. The Company will also reimburse Mr. Cervantes for any expenses in
relocating from Los Angeles, California to Santa Maria, California.
The Company has entered into an employment agreement with Joseph A.
DePanfilis for one year following the date of this Prospectus. Pursuant to his
employment agreement, Mr. DePanfilis will receive a salary of $90,000, a bonus
of $5,000 upon the date of this Prospectus and certain benefits, including an
automobile and related expenses up to $6,000 per year.
The Company may, under the terms of each of the employment agreements,
terminate the employee's employment at any time with or without cause. Upon
termination without cause, the Company must continue to pay the employee's
salary and certain other benefits for the duration of the employment term. In
addition, each employee may terminate his employment upon a change of control
of the Company (as defined) and receive a lump sum payment equal to the
remaining salary due under his employment agreement and continuation of certain
other benefits for the duration of the employment term.
In October 1996, the Company entered into a consulting agreement with
Robert Friedland, a director of the Company. Pursuant to this agreement (as
amended), Mr. Friedland provided management services to the Company related to
the manufacture and shipment of its products, order processing and fulfillment,
financial analysis and labor matters. As compensation for these services, the
Company granted to Mr. Friedland warrants to purchase 22,500 shares of Common
Stock at an exercise price of $4.00 per share. Mr. Friedland exchanged his
warrants for 7,500 shares of Common Stock prior to the consummation of this
offering. The Company and Mr. Friedland have entered into a new consulting
agreement pursuant to which Mr. Friedland will continue to provide these types
of management services to the Company for one year following the consummation
of this offering. For these services, Mr. Friedland received an option under
the 1998 Plan to purchase 10,000 shares of Common Stock at an exercise price of
$7.00 per share.
The Company and Sparks Financial, Inc. ("Sparks Financial"), a company
owned by Steven Sparks, a director of the Company, have entered into a
consulting agreement pursuant to which Sparks Financial has agreed to perform
various services for the Company for one year following the consummation of
this offering, including services related to the identification of new golf
club features and design trends and the development by the Company of
relationships with strategic partners. For these consulting services, Sparks
Financial has received an option under the 1998 Plan to purchase 25,000 shares
of Common Stock at an exercise price of $7.00 per share.
The Company and Marc B. Player, a director of the Company, have entered
into a consulting agreement pursuant to which Mr. Player has agreed for a
period of one year following consummation of this offering to provide services
to the Company relating to investor relations, strategic planning, development
of new product lines and identification and development of domestic and foreign
business opportunities. For these services, Mr. Player will receive a
consulting fee of $5,000 per month during the term of the agreement.
Stock Option Plan
The Company has a Stock Option Plan (the "1998 Plan") which provides for
the issuance of up to 350,000 shares of Common Stock pursuant to options
granted from time to time to directors, officers, employees and consultants.
Unless extended or terminated sooner by the Board of Directors, the 1998 Plan
will terminate in 2008.
The 1998 Plan may be administered by the Company's Board of Directors or,
at the discretion of the Board, a committee of two or more directors (the
"Administrator"). Subject to the provisions of the 1998 Plan, the Administrator
will have full and final authority to select persons to whom options will be
granted and to determine the terms and conditions of the options.
Options granted under the 1998 Plan may, at the discretion of the
Administrator, either be "incentive stock options" within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
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or options which do not qualify as "incentive stock options." The exercise
price of an option granted under the 1998 Plan may not be less than the fair
market value of a share of Common Stock on the date of grant. No participant
may receive options representing more than 50% of the aggregate number of
shares of Common Stock that may be issued pursuant to all options under the
1998 Plan. An option may provide for the issuance of Common Stock for any
lawful consideration, including services rendered or, to the extent permitted
by applicable state law, to be rendered. Currently, Delaware law does not
permit the issuance of common stock for services to be rendered.
An option granted under the 1998 Plan may include a provision conditioning
or accelerating the receipt of benefits, either automatically or in the
discretion of the Administrator, upon the occurrence of specified events,
including a change of control of the Company, an acquisition of a specified
percentage of the voting power of the Company or a dissolution, liquidation,
merger, reclassification, sale of substantially all of the property and assets
of the Company or other significant corporate transaction.
An option under the 1998 Plan may permit the recipient to pay all or part
of the purchase price of the shares or other property issuable pursuant to the
option, and/or to pay all or part of the recipient's tax withholding
obligations with respect to such issuance, by delivering previously owned
shares of capital stock of the Company or other property, or by reducing the
amount of shares or other property otherwise issuable pursuant to the option.
If an option granted under the 1998 Plan permitted the recipient to pay for the
shares issuable pursuant thereto with previously owned shares, the option may
grant the recipient the right to "pyramid" his or her previously owned shares,
i.e., to exercise the option in successive transactions, starting with a
relatively small number of shares and, by a series of exercises using shares
acquired from each transaction to pay the purchase price of the shares acquired
in the following transaction, to exercise the option for a larger number of
shares with no more investment than the original share or shares delivered.
The Board of Directors may amend the 1998 Plan at any time and in any
manner, subject to the following: (i) no recipient of any option may, without
his or her consent, be deprived thereof or of any of his or her rights
thereunder or with respect thereto as a result of such amendment or
termination; and (ii) if any rule or regulation promulgated by the Securities
and Exchange Commission, the Internal Revenue Service or any national
securities exchange or quotation system upon which any of the Company's
securities are listed requires that any such amendment be approved by the
Company's stockholders, then such amendment will not be effective until it has
been approved by the Company's stockholders.
Options to purchase an aggregate of 288,000 shares of Common Stock at an
exercise price of $7.00 per share have been granted under the 1998 Plan. These
options include, among others, options to purchase an aggregate of 33,000
shares granted as compensation to the Company's directors, and options to
purchase 150,000, 50,000, 12,500, 25,000, 10,000 and 7,500 shares granted to
Messrs. White, Cervantes, DePanfilis, Sparks, Friedland and Braden,
respectively.
Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation and its By-Laws provide that the
Company may indemnify each director, officer and employee of the Company to the
full extent permitted by law, as the same exists or may hereafter be amended.
Section 145 of the Delaware General Corporation Law provides in relevant part
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe such person's conduct was unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
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corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper. Delaware law further provides that nothing
in the above-described provisions shall be deemed exclusive of any other rights
to indemnification or advancement of expenses to which any person may otherwise
be entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
The Company's Certificate of Incorporation also provides that a director
of the Company shall not be liable to the Company or its stockholders for
monetary damages for breach of fiduciary duty as a director. Section 102(b)(7)
of the Delaware General Corporation Law provides that a provision so limiting
the personal liability of a director shall not eliminate or limit the liability
of a director for, among other things: breach of the duty of loyalty; acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law; unlawful payment of dividends; and transactions
from which the director derived an improper personal benefit.
The Company has entered into separate but identical indemnity agreements
(the "Indemnity Agreements") with each director of the Company and certain of
its officers (the "Indemnitees"). Pursuant to the terms and conditions of the
Indemnity Agreements, the Company has agreed to indemnify, to the maximum
extent permitted under applicable law, each Indemnitee against any amounts
which he becomes legally obligated to pay in connection with any claim against
him based upon any action or inaction which he may commit, omit or suffer while
acting in his capacity as a director and/or officer of the Company or its
subsidiaries, provided, however, that Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company and, with respect to any criminal action, had no
reasonable cause to believe Indemnitee's conduct was unlawful.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of the date of this
Prospectus and as adjusted to reflect the sale by the Company of 1,600,000
shares of Common Stock offered hereby (based on information obtained from the
persons named below), relating to the beneficial ownership of shares of Common
Stock by (i) each person or entity who is known to the Company to beneficially
own more than 5% of the outstanding Common Stock, (ii) each of the Company's
directors, (iii) each of the Named Executive Officers, and (iv) all directors
and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned(2)
----------------------
Number of Shares Before After
Name and Address of Beneficial Owner(1) Beneficially Owned(2) Offering Offering
- --------------------------------------- --------------------- -------- --------
<S> <C> <C> <C>
Gary Player Group, Inc ................... 539,286(3) 17.2% 11.4%
3930 RCA Boulevard, #3001 ...............
Palm Beach Gardens, FL 33410 ............
Gary Player .............................. 539,286(3) 17.2 11.4
Marc B. Player ........................... 539,286(3)(4) 17.2 11.4
Jack Cancellieri ......................... 182,500 5.8 3.8
Alfonso J. Cervantes Jr. ................. 156,783(5) 5.0 3.3
Steven O. Sparks ......................... 47,582(6) 1.5 1.0
Joseph J. White .......................... 32,143(7) * *
Robert Friedland ......................... 26,404(8) * *
James Braden ............................. 9,167(9) * *
Joseph A. DePanfilis ..................... 6,400(10) * *
All of the directors and executive
officers as a group (8 persons) ......... 817,765(9)(11) 26.0% 17.2%
</TABLE>
- ------------
* Less than 1%.
(1) Unless otherwise indicated, the address of each beneficial owner is in the
care of the Company, 2811 Airpark Drive, Santa Maria, California 93455.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to all shares
of Common Stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities which may be acquired by such person within
60 days from the date of this Prospectus upon the exercise of options,
warrants or convertible securities. Each beneficial owner's percentage
ownership is determined by assuming that options, warrants or convertible
securities that are held by such person (but not those held by any other
person) and which are exercisable or convertible within 60 days of this
Prospectus have been exercised or converted. Assumes a base of 3,140,870
shares of Common Stock outstanding prior to this offering and a base of
4,740,870 shares of Common Stock outstanding immediately after this
offering, before any consideration is given to other outstanding options.
(3) These shares are held of record by GPG. By virtue of their positions with
and control of GPG and their investment and voting power with respect to
these shares, Gary Player and Marc B. Player are principal and beneficial
owners of these shares.
(4) Does not include 9,000 shares of Common Stock issuable upon exercise of
stock options exercisable commencing April 1, 1999.
(5) Includes 5,000 shares of Common Stock pledged to the Company to secure the
obligations of Trilogy Capital, Inc., a corporation wholly-owned by Mr.
Cervantes, to the Company pursuant to a promissory note. Does not include
50,000 shares of Common Stock issuable upon exercise of stock options
exercisable commencing one year from the date of this Prospectus. See
"Certain Transactions."
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<PAGE>
(6) Includes 22,000 shares of Common Stock held by Sparks Financial, Inc., a
corporation of which Mr. Sparks is the sole stockholder. Does not include
37,000 shares of Common Stock issuable upon exercise of stock options
exercisable at various times commencing April 1, 1999.
(7) Does not include 150,000 shares of Common Stock issuable upon exercise of
stock options exercisable commencing one year from the date of this
Prospectus.
(8) Does not include 22,000 shares of Common Stock issuable upon exercise of
stock options exercisable at various times commencing April 1, 1999.
(9) Includes 7,500 shares of Common Stock issuable upon exercise of stock
options that are currently exercisable. Does not include 7,500 shares of
Common Stock issuable upon exercise of stock options exercisable
commencing one year from the date of this Prospectus.
(10) Includes 500 shares of Common Stock held by Mr. DePanfilis' wife as
custodian for their son. Does not include 12,500 shares of Common Stock
issuable upon exercise of stock options exercisable commencing one year
from the date of this Prospectus.
(11) Does not include 280,500 shares of Common Stock issuable upon exercise of
stock options exercisable at various times commencing April 1, 1999.
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<PAGE>
CERTAIN TRANSACTIONS
In March 1996, the Company made a loan of $142,160 to Trilogy, a venture
capital and consulting firm owned by Alfonso J. Cervantes, Jr., in lieu of fees
payable to Trilogy for services rendered in connection with the Company's
formation and the acquisition of Rhino Marketing, Inc. and financing
activities. Mr. Cervantes was a director of the Company at the time of the
loan. The loan is evidenced by a promissory note which bears interest at the
rate of 1% over the prime rate (8.5% as of April 30, 1998), and is due and
payable as follows: (i) twelve months of accrued interest only is payable on
December 31, 1998; (ii) principal and accrued interest are payable monthly
commencing January 1, 1999 based on a 10-year amortization schedule until
December 31, 2002; and (iv) the remaining balance of principal and accrued
interest is payable on December 31, 2002. Mr. Cervantes pledged 5,000 shares of
his Common Stock as collateral for the loan.
In October 1996, Alfonso J. Cervantes, Jr. transferred an aggregate of
27,083 shares of Common Stock owned by him to certain of the Company's lenders
in consideration of their agreement to extend the maturity date of a loan in
the principal amount of $400,000 to the Company.
Sparks Financial, Inc. ("Sparks Financial"), a company owned by Steven
Sparks, a director of the Company, and Mr. Sparks have served as consultants to
the Company in connection with sales by the Company of its securities, for
which they received an aggregate of 44,000 shares of Common Stock and warrants
to purchase 10,745 shares of Common Stock at an exercise price of $4.00 per
share. Mr. Sparks and Sparks Financial have exchanged their warrants for 3,581
shares of Common Stock prior to consummation of this offering.
Alfonso J. Cervantes, Jr. has personally guaranteed the repayment by the
Company of certain indebtedness in the aggregate principal amount of $750,000,
of which $400,000 was outstanding at June 30, 1998. In November 1997, as
consideration for his personal guarantee, the Company issued 17,500 shares of
Common Stock to Mr. Cervantes.
In November 1997, the Company entered into an agreement with GPG, pursuant
to which the Company acquired on the date of this Prospectus the assets of the
golf equipment operations of GPG, including the Player Licenses, which,
directly or indirectly are granted by Gary Player. Gary Player, the Company's
Chairman of the Board, Joseph White, the Chief Executive Officer and a director
of the Company, and Marc Player, a director of the Company, are executive
officers and directors of GPG, and Gary Player and Marc Player are beneficial
stockholders of GPG. Messrs. White, Gary Player and Marc Player were not
officers, directors or stockholders of the Company at the time the agreement
was negotiated and entered into with GPG. The purchase price for these assets
is (i) $250,000 which is due within three days following the consummation of
this offering, (ii) 571,429 shares of Common Stock and (iii) the assumption by
the Company of $1,100,000 of liabilities of GPG. Pursuant to an agreement
between Joseph White and GPG, Mr. White received 32,143 shares of Common Stock
issued by the Company to GPG in the Player Acquisition. See "Business -- Player
Licenses."
All future transactions, including loans, between the Company and its
officers, directors and stockholders holding 5% or more of the Company's
outstanding voting securities will be on terms no less favorable to the Company
than could be obtained in arm's length transactions from unaffiliated third
parties. Further, all such transactions, and the forgiveness of indebtedness
owed by such persons to the Company, must be approved by a majority of the
Company's independent directors who do not have an interest in the transaction
and who have access, at the Company's expense, to the Company's or to
independent legal counsel.
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<PAGE>
DESCRIPTION OF SECURITIES
General
The Company is authorized to issue 10,000,000 shares of Common Stock, par
value $0.001 per share, and 5,000,000 shares of Preferred Stock, par value
$0.001 per share. As of the date of this Prospectus, there are 3,140,870 shares
of Common Stock outstanding held by approximately 217 holders of record and no
shares of Preferred Stock outstanding.
Common Stock
Holders of Common Stock are entitled to one vote for each share held of
record on all matters on which the holders of Common Stock are entitled to
vote, and holders of Common Stock may cumulate votes in the election of
directors. The holders of Common Stock are entitled to receive ratable
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled, subject to the
rights of holders of Preferred Stock issued by the Company, if any, to share
ratably in all assets remaining available for distribution to them after
payment of liabilities and after provision is made for each class of stock, if
any, having preference over the Common Stock. The holders of Common Stock have
no preemptive or conversion rights and they are not subject to further calls or
assessments by the Company. There are no redemption or sinking fund provisions
applicable to the Common Stock. The outstanding shares of Common Stock are, and
the Common Stock issuable pursuant to this Prospectus will be, when issued,
fully paid and nonassessable.
Preferred Stock
The Company is authorized to issue "blank check" Preferred Stock in one or
more series from time to time 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 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 way of discouraging, delaying or
preventing an acquisition or change in control of the Company. The Company does
not currently intend to issue any shares of its Preferred Stock.
Warrants
The Company has outstanding 4,000 Class A Warrants held by one security
holder. Each "Class A Warrant" entitles the holder thereof to purchase one-half
share of Common Stock for $2.21 per share. The Class A Warrants are immediately
exercisable, expire on December 31, 1998 and are subject to equitable
adjustments in the purchase price and in the number of shares of Common Stock
deliverable upon exercise thereof in the event of a stock dividend, stock
split, reclassification, reorganization, consolidation or merger. The Class A
Warrants provide for piggyback registration rights. See "-- Registration
Rights."
Section 203 of the Delaware General Corporation Law
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. That section provides, with certain exceptions, that a
Delaware corporation may not engage in any of a broad range of business
combinations with a person or affiliate, or associate of such person, who is an
"interested stockholder" for a period of three years from the date that such
person became an interested stockholder unless: (i) the transaction resulting
in a person becoming an interested stockholder, or the business combination, is
approved by the board of directors of the corporation before the person becomes
an interested stockholder; (ii) the interested stockholder acquires 85% or more
of the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined
45
<PAGE>
as any person that is (a) the owner of 15% or more of the outstanding voting
stock of the corporation or (b) an affiliate or associate of the corporation
and was the owner of 15% or more of the outstanding voting stock of the
corporation at any time within the three-year period immediately prior to the
date on which it is sought to be determined whether such person is an
interested stockholder.
Registration Rights
The holders of 961,040 shares of Common Stock are entitled to piggyback
registration rights with respect to such shares under the Securities Act. If
the Company proposes to register any of its securities under the Securities Act
at least 180 days subsequent to this offering, these holders are entitled to
notice of such registration and are entitled to include their shares in such
registration, provided, among other conditions, that the underwriters of any
offering have the right to limit the number of shares included in such
registration. All holders of registration rights have agreed to waive such
rights in connection with this offering and to not exercise any such rights for
one year from the date of this Prospectus without the Underwriter's prior
written consent.
In connection with this offering, the Company has agreed to grant to the
Underwriter certain demand and piggyback registration rights in connection with
the 160,000 shares of Common Stock issuable upon exercise of the Underwriter's
Warrants. See "Underwriting."
Transfer Agent
The Company's transfer agent and registrar for its Common Stock is
American Stock Transfer and Trust Company, 40 Wall Street, New York, New York
10005.
Reports to Stockholders
The Company has registered its Common Stock under the provisions of
Section 12(g) of the Exchange Act. Such registration will require the Company
to comply with periodic reporting, proxy solicitation and certain other
requirements of the Exchange Act. The Company intends to furnish its
stockholders with annual reports containing audited financial statements and
such other periodic reports as the Company may deem to be appropriate or as may
be required by law, and to make available copies of quarterly reports for the
first three quarters of each fiscal year containing unaudited interim financial
information.
46
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of this offering, the Company will have 4,740,870 shares
of Common Stock outstanding, of which the 1,600,000 shares of Common Stock
offered hereby will be freely tradable without restriction or further
registration under the Securities Act, except for any shares purchased by an
"affiliate" of the Company, as that term is defined in Rule 144 under the
Securities Act. The remaining 3,140,870 shares of Common Stock held by existing
stockholders are "restricted" securities within the meaning of Rule 144 under
the Securities Act. Restricted securities may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rules
144 or 701 promulgated under the Securities Act, which rules are summarized
below.
In general, under Rule 144, restricted securities which have been
outstanding for at least two years are freely transferrable by persons who are
not affiliates of the Company. Restricted securities which have been
outstanding for at least one year but less than two years are transferrable in
the public market only if the Company is current in its public reporting
obligations and subject to the following limitations: (i) the holder may not
sell an amount of restricted shares which exceeds the greater of (A) 1% of the
then outstanding shares of Common Stock (approximately 47,409 shares
immediately following this offering) or (B) the average weekly trading volume
of the Common Stock during the prior four calendar weeks; and (ii) the shares
must be sold in "brokers' transactions" or directly to a market maker.
Affiliates may sell shares (restricted shares and unrestricted shares) in
public transactions only in compliance with the Rule 144 limitations applicable
to restricted securities outstanding less than two years. In general, under
Rule 701 under the Securities Act as currently in effect, any non-affiliate
employee, consultant or advisor of the Company who acquires shares from the
Company in connection with a compensatory stock or option plan or other written
agreement related to compensation is eligible to resell such shares 90 days
after the date of this Prospectus in reliance on Rule 144, but without
compliance with certain restrictions contained in Rule 144.
In addition, stockholders (including all officers and directors) holding
an aggregate of 3,014,931 shares of Common Stock have agreed with the
Underwriter that without the prior consent of the Underwriter, they will not
sell or contract to sell any shares of Common Stock, or any options or warrants
to purchase Common Stock, or otherwise dispose of or transfer any shares of
Common Stock or any securities convertible into or exchangeable or exercisable
for Common Stock, of the Company for one year after the date of this
Prospectus. The Underwriter has agreed that it will not consent to the sale or
other disposition of approximately 740,310 of these shares during such twelve
month period. Further, each officer, director and 5% stockholder has agreed,
for a period of one year commencing on the first anniversary of the date of
this Prospectus, not to sell during any three-month period shares of Common
Stock in excess of the amount such person would be permitted to sell if they
were deemed an "affiliate" of the Company within the meaning of Rule 144 under
the Securities Act.
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<PAGE>
UNDERWRITING
Whale Securities Co., L.P. (the "Underwriter"), has agreed, subject to the
terms and conditions contained in the underwriting agreement between the
Company and the Underwriter, to purchase 1,600,000 shares of Common Stock from
the Company. The Underwriter is committed to purchase and pay for all of the
shares of Common Stock offered hereby if any of such securities are purchased.
The Common Stock is 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
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus. The Underwriter may allow certain dealers
who are members of the NASD concessions not in excess of $____ per share of
Common Stock, of which not in excess of $ ___ per share may be reallowed to
other dealers who are members of the NASD.
The Company has granted to the Underwriter an option, exercisable during
the 45-day period from the date of this Prospectus, to purchase from the
Company up to 240,000 additional shares of Common Stock at the public offering
price set forth on the cover page of this Prospectus, less underwriting
discounts and commissions. The Underwriter may exercise this option in whole,
or from time to time, in part, solely for the purpose of covering
over-allotments, if any, made in connection with the sale of the shares of
Common Stock offered hereby.
The Company has agreed to pay the Underwriter a non-accountable expense
allowance of 3% of the gross proceeds of the offering of which $50,000 has been
paid as of the date of this Prospectus. The Company has also agreed to pay all
expenses in connection with qualifying the shares of Common Stock 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 $160, warrants (the "Underwriter's Warrants") to purchase up to
160,000 shares of Common Stock at an exercise price equal to 165% of the
initial public offering price per share. The Underwriter's Warrants may not be
sold, transferred, assigned or hypothecated for one year from the date of this
Prospectus, except to officers and partners of the Underwriter and members of
the selling group, and are exercisable during the five-year period commencing
on 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 from a rise in the market price of the
Company's Common Stock. To the extent that the Underwriter's Warrants are
exercised, dilution of the interests of the Company's stockholders will occur.
Further, the terms on 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 any 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 or the
underlying shares of Common Stock 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 and
the shares of Common Stock issuable upon exercise of the Underwriter's Warrants
under the Securities Act on one occasion during the Warrant Exercise Term and
to include the Underwriter's Warrants and such underlying shares in any
appropriate registration statement which is filed by the Company during the
seven years following the date of this Prospectus.
The Company has also agreed to retain the Underwriter as a financial
consultant for a period of two years following the consummation of the offering
for a fee of $30,000, payable in full in advance. The consulting agreement with
the Underwriter does not require the Underwriter 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 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 of the origination of such transaction.
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<PAGE>
The Company has also agreed, for a period of three years from the date of
this Prospectus, at the option of the Underwriter, to elect a designee of the
Underwriter to the Company's Board of Directors or, at the Underwriter's
option, as a non-voting adviser to the Company's Board of Directors. The
Underwriter has not yet exercised its right to designate such a person.
Stockholders of the Company (including the Company's officers and
directors) beneficially owning an aggregate of 3,014,931 shares of Common Stock
have agreed not to sell or otherwise dispose of any securities of the Company
beneficially owned by them for a period of twelve months from the date of this
Prospectus, without the prior written consent of the Underwriter. The
Underwriter has agreed that it will not consent to the sale or other
disposition of approximately 740,310 of these shares during such twelve month
period.
The Underwriter has advised the Company that it does not expect sales of
the shares offered hereby to discretionary accounts to exceed 1% of the
securities offered hereby.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act.
Prior to the offering, there has been no public trading market for the
Company's Common Stock. Consequently, the initial public offering price of the
Common Stock has been determined by negotiations between the Company and the
Underwriter. Among the factors considered in determining the offering price of
the Common Stock were the Company's financial condition and prospects, 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 market.
In order to facilitate the offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriter may over-allot in connection with
the offering, creating a short position in the Common Stock for its own
account. In addition, to cover over-allotments or to stabilize the price of the
Common Stock, the Underwriter may bid for, and purchase, shares of Common Stock
in the open market. The Underwriter may also reclaim selling concessions
allowed to a dealer for distributing the Common Stock in the offering, if the
Underwriter repurchases previously distributed Common Stock in transactions to
cover short positions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriter is not required to engage in these
activities, and may end any of these activities at any time.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to a
copy of each such agreement which is filed as an exhibit to the Registration
Statement of which this Prospectus is a part. See "Additional Information."
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<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Troop Steuber Pasich Reddick & Tobey, LLP, Los Angeles, California.
Certain legal matters will be passed upon for the Underwriter by Tenzer
Greenblatt LLP, New York, New York.
EXPERTS
The following financial statements have been audited by Grant Thornton
LLP, independent certified public accountants, as set forth in their reports
appearing elsewhere in this Prospectus and Registration Statement: (i) the
financial statements of the Company at March 31, 1998, and for the year ended
December 31, 1996, three months ended March 31, 1997 and year ended March 31,
1998; and (ii) the financial statements of Gary Player Golf Equipment (a
division of GPG) at December 31, 1997 and for the years ended December 31, 1996
and 1997. These financial statements are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") in Washington, D.C., a Registration Statement under the
Securities Act for the shares offered by this Prospectus. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all of
the information set forth in the Registration Statement and the exhibits
thereto. Statements contained in this Prospectus as to the contents of any
contract or any other document referred to are not necessarily complete, and
with respect to any contract or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement is qualified in its
entirety by this reference. For further information about the Company and the
shares offered by this Prospectus, reference is hereby made to the Registration
Statement and exhibits included with the Registration Statement. a copy of the
Registration Statement, including exhibits, may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the following regional offices of the
Commission: Offices located at 7 World Trade Center, Suite 1300, New York, New
York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of the material can be obtained at prescribed rates by writing to the
Securities and Exchange Commission, Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549. In addition, the Company is required to file
electronic versions of these documents with the Commission through the
Commission's Electronic Data Gathering Analysis and Retrieval (EDGAR) system.
The Commission maintains an Internet web site which contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission, including the Company, at
http://www.sec.gov.
50
<PAGE>
GARY PLAYER GOLF, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Gary Player Golf, Inc
Report of Independent Certified Public Accountants .................................... F-2
Consolidated Balance Sheets as of March 31, 1998 and June 30, 1998 (unaudited) ........ F-3
Consolidated Statements of Operations for the year ended December 31, 1996,
the three months ended March 31, 1997, the year ended March 31, 1998 and the
three months ended June 30, 1998 and 1997 (unaudited) ................................. F-4
Consolidated Statement of Stockholders' Deficit for the year ended December
31, 1996, the three months ended March 31, 1997, the year ended March 31,
1998 and the three months ended June 30, 1998 (unaudited) ............................. F-5
Consolidated Statements of Cash Flows for the year ended December 31, 1996,
the three months ended March 31, 1997, the year ended March 31, 1998 and the
three months ended June 30, 1998 and 1997 (unaudited) ................................. F-7
Notes to Consolidated Financial Statements ............................................ F-9
Gary Player Golf Equipment (A division of Gary Player Group, Inc.)
Report of Independent Certified Public Accountants .................................... F-19
Statements of Assets, Liabilities and Division Deficit as of June 30, 1998
(unaudited) and December 31, 1997 ..................................................... F-20
Statements of Operations and Changes in Division Deficit for the six months
ended June 30, 1998 and 1997(unaudited) and for the years ended December 31,
1997 and 1996 ......................................................................... F-21
Statements of Cash Flows for the six months ended June 30, 1998 and
1997(unaudited) and for the years ended December 31, 1997 and 1996 .................... F-22
Notes to Financial Statements ......................................................... F-23
Gary Player Golf, Inc. Pro Forma Consolidated Financial Statements
Notes to Pro Forma Consolidated Financial Statements .................................. F-26
Pro Forma Consolidated Balance Sheet as of March 31, 1998 ............................. F-27
Pro Forma Consolidated Statement of Operations for the year ended March 31, 1998 ...... F-29
Pro Forma Consolidated Statement of Operations for the three months ended
June 30, 1998 ......................................................................... F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Gary Player Golf, Inc.
We have audited the accompanying consolidated balance sheet of Gary Player
Golf, Inc. and Subsidiaries as of March 31, 1998, and the related consolidated
statements of operations, stockholders' deficit, and cash flows for the year
ended March 31, 1998, the three months ended March 31, 1997 and the year ended
December 31, 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.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Gary Player
Golf, Inc. and Subsidiaries as of March 31, 1998, and the consolidated results
of their operations and their consolidated cash flows for the year ended March
31, 1998, the three months ended March 31, 1997 and the year ended December 31,
1996, in conformity with generally accepted accounting principles.
Los Angeles, California
April 24, 1998 (except for Note P, items 1 and 2 as to which the date is
_________, 1998)
- --------------------------------------------------------------------------------
The foregoing report is in the form which will be signed upon consummation of
the transactions described in Note P, items 1 and 2 to the financial
statements.
Grant Thornton LLP
Los Angeles, California
April 24, 1998
F-2
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, June 30,
1998 1998
---------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ............................................................. $ 129,008 $ 217,968
Accounts receivable, less allowance for returns of $26,184 at
March 31, 1998 and $46,490 at June 30, 1998..................... 49,284 73,910
Inventories ...................................................... 408,491 815,713
Prepaid expenses and other ....................................... 103,423 338,833
------------- -------------
Total current assets ........................................ 690,206 1,446,424
PROPERTY AND EQUIPMENT, net ....................................... 158,486 245,305
OTHER ASSETS ...................................................... 781,983 1,081,603
------------- -------------
$ 1,630,675 $ 2,773,332
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities ......................... $ 2,505,624 $ 3,292,521
Notes payable, net of unamortized discount of $790,857 at March
31, 1998 and $412,143 at June 30, 1998.......................... 2,306,643 4,072,857
Customer refunds payable, deferred revenue and allowance
for returns .................................................... 2,278,479 2,642,853
------------- -------------
Total current liabilities ................................... 7,090,746 10,008,231
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT
Preferred stock, par value $.001 per share -- authorized,
5,000,000 shares
Series B Convertible Preferred Stock -- authorized 750,750 shares;
572,649 shares issued and outstanding .......................... 573 573
Common stock, par value $.001 per share -- authorized,
10,000,000 shares, issued and outstanding 1,700,770 shares at
March 31, 1998 and 1,686,013 at June 30, 1998 .................. 1,701 1,687
Capital in excess of par value ................................... 5,645,472 6,370,485
Accumulated deficit .............................................. (11,107,817) (13,607,644)
------------- -------------
(5,460,071) (7,234,899)
------------- -------------
$ 1,630,675 $ 2,773,332
============= =============
</TABLE>
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Three months ended Year ended Three months ended
December 31, March 31, March 31, June 30,
1996 1997 1998 1997 1998
---------------- -------------------- --------------- ------------- ---------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Gross sales .......................... $ 8,116,323 $1,509,453 $ 9,567,902 $2,247,085 $ 5,067,006
Less allowances for returns .......... 3,691,779 599,735 4,799,870 1,109,551 2,213,939
------------ ---------- ------------ ---------- ------------
Net sales ...................... 4,424,544 909,718 4,768,032 1,137,534 2,853,067
Cost of goods sold ................... 1,619,568 422,983 1,973,105 342,114 1,174,609
------------ ---------- ------------ ---------- ------------
Gross profit ................... 2,804,976 486,735 2,794,927 795,420 1,678,458
Operating expenses
Telemarketing and infomercial
expenses .......................... 2,924,568 529,407 3,142,639 494,610 1,484,606
Selling expenses .................... 1,045,567 157,979 1,685,291 298,022 888,722
General and administrative .......... 1,686,154 367,728 1,680,723 409,885 399,487
Depreciation and amortization ....... 34,941 4,341 34,028 7,560 17,051
Litigation settlements .............. 306,128 -- 26,194 25,000 23,333
Loss on impaired assets ............. 200,000 -- -- -- --
------------ ---------- ------------ ---------- ------------
Total operating expenses ....... 6,197,358 1,059,455 6,568,875 1,235,077 2,813,199
------------ ---------- ------------ ---------- ------------
Operating loss ................. (3,392,382) (572,720) (3,773,948) (439,657) (1,134,741)
Other expenses
Interest expense .................... 356,484 73,881 179,536 41,979 118,384
Non-cash interest expense ........... 182,011 -- 1,681,763 7,854 1,278,357
Other, net .......................... 127,794 -- (10,733) (10,622) (31,654)
------------ ---------- ------------ ---------- ------------
Total other expenses ........... 666,289 73,881 1,850,566 39,211 1,365,087
------------ ---------- ------------ ---------- ------------
NET LOSS ....................... $ (4,058,671) $ (646,601) $ (5,624,514) $ (478,868) $ (2,499,828)
============ ========== ============ ========== ============
Net loss attributable to common
shares
Net loss ............................ $ (4,058,671) $ (646,601) $ (5,624,514) $ (478,868) $ (2,499,828)
Preferred dividends ................. (19,250) (32,080) (155,799) (39,007) (38,181)
------------ ---------- ------------ ---------- ------------
$ (4,077,921) $ (678,681) $ (5,780,313) $ (517,875) $ (2,538.009)
============ ========== ============ ========== ============
Weighted average shares of common
stock outstanding ................... 965,529 1,243,634 1,484,147 1,343,200 1,694,454
============ ========== ============ ========== ============
Net loss per share -- Basic and
diluted ............................. $ (4.22) $ (0.55) $ (3.89) $ (.39) $ (1.50)
============ ========== ============ ========== ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
JUNE 30, 1998 (UNAUDITED), MARCH 31, 1998, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
Preferred stock Common stock
------------------------ -----------------------
Shares Amount Shares Amount
------------- --------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 .................. 191,579 $ 192 724,099 $ 724
Common stock warrants issued ................ -- -- -- --
Issuance of common stock through con-
version of Series A preferred stock ........ (191,579) (192) 402,027 402
Issuance of common stock in connection
with employment agreement .................. -- -- 50,000 50
Issuance of common stock as debt issu-
ance incentives ............................ -- -- 50,000 50
Issuance of common stock in connection
with guarantee of Company obligations -- -- 25,000 25
Issuance of common stock to extend
accounts payable terms ..................... -- -- 2,500 3
Issuance of Series B preferred stock, net
of issuance costs of $494,596 .............. 356,165 356 -- --
Conversion of notes payable to preferred
stock ...................................... 92,533 93 -- --
Writeoff of note receivable in connection
with litigation settlement ................. -- -- -- --
Net loss for the year ....................... -- -- -- --
-------- ------- ------- -------
Balance at December 31, 1996 ................ 448,698 449 1,253,626 1,254
Common stock cancelled in connection
with litigation settlement ................. -- -- (53,523) (54)
Common stock issued in connection with
litigation settlement ...................... -- -- 20,000 20
Common stock issued as payment for con-
sulting fees ............................... -- -- 7,285 8
Issuance of Series B preferred stock ........ 88,074 88 -- --
Conversion of notes payable to preferred
stock ...................................... 9,975 10 -- --
Common stock subscriptions .................. -- -- -- --
Net loss for the period ..................... -- -- -- --
-------- ------- --------- -------
Balance at March 31, 1997 ................... 546,747 547 1,227,388 1,228
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common stock Capital in excess Note Accumulated
subscriptions of par value receivable deficit
--------------- ------------------- ------------ ---------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996 .................. $ -- $ 404,450 $ (20,703) $ (778,031)
Common stock warrants issued ................ -- 47,125 -- --
Issuance of common stock through con-
version of Series A preferred stock ........ -- (210) -- --
Issuance of common stock in connection
with employment agreement .................. -- 50 -- --
Issuance of common stock as debt issu-
ance incentives ............................ -- 50 -- --
Issuance of common stock in connection
with guarantee of Company obligations -- 25 -- --
Issuance of common stock to extend
accounts payable terms ..................... -- 2 -- --
Issuance of Series B preferred stock, net
of issuance costs of $494,596 .............. -- 691,077 -- --
Conversion of notes payable to preferred
stock ...................................... -- 308,042 -- --
Writeoff of note receivable in connection
with litigation settlement ................. -- -- 20,703 --
Net loss for the year ....................... -- -- -- (4,058,671)
--------- ----------- --------- -------------
Balance at December 31, 1996 ................ -- 1,450,611 -- (4,836,702)
Common stock cancelled in connection
with litigation settlement ................. -- (53) -- --
Common stock issued in connection with
litigation settlement ...................... -- 20 -- --
Common stock issued as payment for con-
sulting fees ............................... -- 7 -- --
Issuance of Series B preferred stock ........ -- 293,199 -- --
Conversion of notes payable to preferred
stock ...................................... -- 33,207 -- --
Common stock subscriptions .................. 275,000 -- -- --
Net loss for the period ..................... -- -- -- (646,601)
--------- ----------- --------- -------------
Balance at March 31, 1997 ................... 275,000 1,776,991 -- (5,483,303)
</TABLE>
F-5
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT--(Continued)
JUNE 30, 1998 (UNAUDITED) MARCH 31, 1998, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
Preferred stock Common stock
-------------------- -------------------------
Shares Amount Shares Amount
---------- -------- ------------- ----------
<S> <C> <C> <C> <C>
Class A common stock
warrants issued in
connection with Series B
preferred stock issuance,
common stock issuances,
as employee incentives
and in exchange for
consulting services .......... -- -- -- --
Class B common stock
warrants issued in
connection with
extensions of notes
payable ...................... -- -- -- --
Issuance of Series B
preferred stock, net of
issuance costs of
$20,932 ...................... 25,902 26 -- --
Issuance of common stock at
$5.00 per share, net of
issuance costs of
$247,387 ..................... -- -- 225,400 226
Issuance of common stock at
$8.00 per share, net of
issuance costs of
$67,050 ...................... -- -- 52,625 52
Issuance of common stock in
connection with notes
payable ...................... -- -- 228,900 229
Issuance of common stock
as payment for consulting
fees ......................... -- -- 12,250 12
Common stock cancelled in
connection with litigation
settlement ................... -- -- (45,793) (46)
Net loss for the year ......... -- -- -- --
------ -- ------- ---
Balance at March 31, 1998 ..... 572,649 $573 1,700,770 $1,701
======= ==== ========= ======
Issuance of common stock in
connection with notes
payable ...................... -- -- 90,625 91
Common stock cancelled in
connection with litigation
settlement ................... -- -- (105,382) (105)
Net loss for the quarter ...... -- -- -- --
------- ---- --------- ------
Balance at June 30, 1998 ...... 572,649 $573 1,686,013 $1,687
======= ==== ========= ======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common stock Capital in excess Note Accumulated
subscriptions of par value receivable deficit
--------------- ------------------- ------------ -----------------
<S> <C> <C> <C> <C>
Class A common stock
warrants issued in
connection with Series B
preferred stock issuance,
common stock issuances,
as employee incentives
and in exchange for
consulting services .......... -- 223,898 -- --
Class B common stock
warrants issued in
connection with
extensions of notes
payable ...................... -- 435,000 -- --
Issuance of Series B
preferred stock, net of
issuance costs of
$20,932 ...................... -- 65,296 -- --
Issuance of common stock at
$5.00 per share, net of
issuance costs of
$247,387 ..................... (275,000) 879,387 -- --
Issuance of common stock at
$8.00 per share, net of
issuance costs of
$67,050 ...................... -- 353,898 -- --
Issuance of common stock in
connection with notes
payable ...................... -- 1,830,971 -- --
Issuance of common stock
as payment for consulting
fees ......................... -- 79,988 -- --
Common stock cancelled in
connection with litigation
settlement ................... -- 43 -- --
Net loss for the year ......... -- -- -- (5,624,514)
-------- --------- -- ----------
Balance at March 31, 1998 ..... $ -- $5,645,472 $ -- $ (11,107,817)
=========== ========== ===== =============
Issuance of common stock in
connection with notes
payable ...................... -- 724,909 -- --
Common stock cancelled in
connection with litigation
settlement ................... -- 104 -- --
Net loss for the quarter ...... -- -- -- (2,499,827)
----------- ---------- ----- -------------
Balance at June 30, 1998 ...... -- $6,370,485 -- $ (13,607,644)
=========== ========== ===== =============
</TABLE>
F-6
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three
Year ended months ended
December 31, March 31,
1996 1997
---------------- --------------
<S> <C> <C>
Increase (decrease) in cash:
Cash flows from operating activities:
Net loss ............................................ $ (4,058,671) $ (646,601)
Adjustments to reconcile net loss to net cash
used in operating activities:
Allowance for obsolete inventory ................. -- --
Allowance for uncollectible receivables .......... 7,458 (5,765)
Depreciation and amortization .................... 34,941 4,341
Loss on impared assets ........................... 200,000 --
Amortization of discount on debt ................. 182,011 --
Issuance of Class A warrants
for consulting services ........................ -- --
Issuance of common stock
for consulting services ........................ -- --
Changes in assets and liabilities
Decrease in accounts receivable ................ 6,569 23,820
(Increase) decrease in inventories ............. (224,138) 164,598
Decrease (increase) in prepaid expenses
and other ..................................... 29,269 4,872
(Increase) decrease in other assets ............ (99,986) (48,032)
Increase (decrease) in accounts payable
and accrued liabilities ....................... 1,043,759 79,571
Increase in customer refunds payable, deferred
revenue and allowance for returns ............. 942,137 25,916
------------ ----------
Net cash used in operating activities ......... (1,936,651) (397,280)
<CAPTION>
Three
Year ended months ended
March 31, June 30,
1998 1997 1998
---------------- -------------- ----------------
<S> <C> <C> <C>
(unaudited)
Increase (decrease) in cash:
Cash flows from operating activities:
Net loss ............................................ $ (5,624,514) $ (478,867) $ (2,499,828)
Adjustments to reconcile net loss to net cash
used in operating activities:
Allowance for obsolete inventory ................. 87,270 -- --
Allowance for uncollectible receivables .......... (36,489) -- 20,306
Depreciation and amortization .................... 34,028 7,560 17,051
Loss on impared assets ........................... -- -- --
Amortization of discount on debt ................. 1,681,763 7,854 1,278,357
Issuance of Class A warrants
for consulting services ........................ 129,750 -- --
Issuance of common stock
for consulting services ........................ 80,000 -- --
Changes in assets and liabilities
Decrease in accounts receivable ................ 112,924 (65,546) (44,932)
(Increase) decrease in inventories ............. (302,334) (205,320) (407,222)
Decrease (increase) in prepaid expenses
and other ..................................... (92,628) (114,116) (235,410)
(Increase) decrease in other assets ............ (493,309) 20,787 (474,262)
Increase (decrease) in accounts payable
and accrued liabilities ....................... 567,088 (238,743) 786,898
Increase in customer refunds payable, deferred
revenue and allowance for returns ............. 1,147,176 329,485 364,373
------------ ------------ ------------
Net cash used in operating activities ......... (2,709,275) (736,906) (1,194,669)
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Three
Year ended months ended
December 31, March 31,
1996 1997
-------------- --------------
<S> <C> <C>
Cash flows from investing activities:
Purchases of equipment ................................. $ (176,871) $ (1,934)
Cash flows from financing activities:
Proceeds from notes payable ............................ 1,550,000 49,361
Payments on notes payable .............................. (172,000) (5,854)
Proceeds from common and preferred stock ............... 755,433 293,287
Proceeds from common stock subscriptions ............... -- 275,000
---------- --------
Net cash provided by financing activities ......... 2,133,433 611,794
---------- --------
Net increase (decrease) in cash ................... 19,911 212,580
Cash at beginning of period ............................. 82,736 102,647
---------- --------
Cash at end of period ................................... $ 102,647 $315,227
========== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ............... $ 32,658 $ 450
========== ========
Supplemental disclosure of noncash financing activity:
Conversion of notes payable into Series B
Convertible preferred stock .......................... $ 308,135 $ 33,217
========== ========
<CAPTION>
Three
Year ended months ended
March 31, June 30,
1998 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from investing activities:
Purchases of equipment ................................. $ (163,542) $ (104,428) $ (103,870)
Cash flows from financing activities:
Proceeds from notes payable ............................ 2,030,639 32,679 1,450,000
Payments on notes payable .............................. (364,056) -- (62,500)
Proceeds from common and preferred stock ............... 1,020,015 663,946 --
Proceeds from common stock subscriptions ............... -- -- --
---------- ---------- ----------
Net cash provided by financing activities ......... 2,686,598 696,625 1,387,500
---------- ---------- ----------
Net increase (decrease) in cash ................... (186,219) (144,709) 88,961
Cash at beginning of period ............................. 315,227 315,227 129,008
---------- ---------- ----------
Cash at end of period ................................... $ 129,008 $ 170,518 $ 217,969
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ............... $ 93,147 $ 34,041 $ 4,916
========== ========== ==========
Supplemental disclosure of noncash financing activity:
Conversion of notes payable into Series B
Convertible preferred stock .......................... $ 0 $ 0 $ 0
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Gary Player Golf, Inc. (the "Company"), is engaged principally in the
direct marketing of Gary Player brand golf clubs pursuant to an exclusive
license from the Gary Player Group, Inc. ("GPG"). The Company's golf clubs are
currently marketed and sold under the names Gary Player Black Knight and Gary
Player Gran Prix.
The Company was incorporated in Delaware in October 1995. In November
1995, the Company acquired Rhino Marketing, Inc. ("Rhino"), which was engaged
in the direct marketing of golf clubs and accessories. In November 1996, the
Company entered into a 20-year direct marketing agreement (the "Player
Licensing Agreement") with GPG, pursuant to which the Company obtained the
exclusive right to market and sell golf clubs and golf accessories and apparel
under the name "Gary Player" on a direct marketing basis in the United States
and Canada. The Company introduced the line of Gary Player Gran Prix golf clubs
and related accessories in February 1997 through its newly organized operating
subsidiary Gran Prix Marketing, Inc. ("Gran Prix"), a California corporation.
Shortly after introducing the Gary Player Gran Prix line of golf clubs, the
Company discontinued the sale of all other lines. Consequently, the Company has
wound down substantially all the operations of Rhino.
Insofar as these financial statements and notes relate to information at
June 30, 1998 and for the three-month periods ended June 30, 1998 and 1997,
they are unaudited. In the opinion of management, such unaudited financial
statements and notes thereto reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position, operations and cash flows for such periods. The financial position at
June 30, 1998 and results of operations for the three months then ended are not
necessarily indicative of the financial position that may be expected at March
31, 1999 or results of operations that may be expected for the year ending
March 31, 1999.
The Company changed its fiscal year end from December 31 to March 31
during 1997.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
2. Inventories
Inventories consist of golf club components and finished golf clubs, which
are all stated at the lower of cost or market. Cost is determined principally
by the first-in, first-out method.
3. Depreciation and Amortization
Property and equipment are stated at cost. For financial and tax reporting
purposes, depreciation is provided using the straight-line method over the
estimated useful lives of the related assets (3 to 5 years). Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or estimated useful life of the asset. Expenditures for
maintenance and repairs are charged to operations as incurred, while renewals
and betterments are capitalized.
4. Income Taxes
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 at currently enacted rates when such amounts are expected to be realized
or settled.
F-9
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE A -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES -- (Continued)
5. Revenue Recognition
The Company recognizes revenue when products are shipped. Amounts which
the Company has collected in advance of shipment are recorded as deferred
revenues. The Company generally allows customers to return items purchased
within sixty days of receipt. Allowances for returns are recorded at the time
of recording the sale based upon historical return rates experienced by the
Company. It is at least reasonably possible that these estimates will change in
the near term due to future events.
6. Direct Response Advertising
The Company capitalizes costs relating to direct-response advertising.
These costs are amortized over the expected period of future benefits based
upon current and expected future revenues. Direct-response advertising for the
year ended March 31, 1998, the three months ended March 31, 1997 and the year
ended December 31, 1996 was approximately $0, $48,000 and $1,373,000,
respectively.
7. Deferred Offering Costs
Costs incurred in connection with the proposed initial public offering
(IPO) of common stock have been deferred. If the offering is completed, such
costs will be charged against the proceeds received. If the offering is not
completed, such costs will be charged to operations at that time.
8. Deferred Debt Issuance Costs
Costs incurred in connection with the issuance of debt are deferred and
amortized over the expected life of the debt.
9. Basic and Diluted Loss Per Share
Basic and diluted loss per share are based upon the weighted average
number of common shares outstanding. The preferred dividend requirements on the
Series B Convertible Preferred Stock are deducted in computing basic and
diluted loss per share. The effect of outstanding warrants is antidilutive for
all periods presented.
10. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
11. Financial Statement Reclassifications
Certain amounts reflected in the consolidated statement of operations for
the year ended December 31, 1996 and the consolidated statements of cash flows
for the year ended December 31, 1996 and the three months ended March 31, 1997
have been reclassified to conform to the presentation for the year ended March
31, 1998.
NOTE B -- GOING CONCERN
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate continuation
of the Company as a going concern. However, the Company has incurred
substantial recurring losses from operations since inception. In addition, the
Company has used, rather
F-10
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE B -- GOING CONCERN -- (Continued)
than provided, cash in its operations and at March 31, 1998 and June 30, 1998,
the Company had a deficit in working capital of $6,400,540 and $8,561,807,
respectively. As disclosed in the accompanying notes, the Company is also in
default on the payment terms of certain notes payable.
In view of the matters described in the preceding paragraph,
recoverability of a major portion of the recorded asset amounts shown in the
accompanying balance sheet is dependent upon continued operations of the
Company, which in turn, is dependent upon the Company's ability to meet its
financing requirements on a continuing basis, to maintain present financing,
and to succeed in its future operations. The financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue in existence.
Management has taken the following steps to revise its operating and
financial requirements, which it believes are sufficient to provide the Company
with the ability to continue in existence at least until March 31, 1999:
The Company is undertaking an IPO to sell 1.6 million shares of common
stock at $7.00 per share. The Company has also closed loans of $1,450,000,
subsequent to March 31, 1998, to provide working capital and repay certain
indebtedness (See Note E(7)).
On November 1, 1997, the Company entered into an agreement to acquire the
assets of Gary Player Golf Equipment, a division of GPG. In connection with the
acquisition, the Company will acquire licenses which provide the perpetual,
worldwide, exclusive right to use the name "Gary Player" and ancillary marks in
connection with the manufacture, marketing and distribution of golf clubs,
accessories and apparel. The Company anticipates a reduction of royalty expense
with respect to the royalties paid as a licensee upon completion of this
acquisition and the IPO.
The Company has implemented a new marketing plan, including (i) the
expansion of the existing call centers with additional personnel, (ii) the
production of a new infomercial featuring Gary Player and Steve Garvey
promoting the custom fitted Gary Player Black Knight Ti-162 (Titanium) irons
which aired in June 1998, and (iii) the introduction of new products such as
the Gary Player Black Knight Titanium Driver and woods, the Gary Player Black
Knight Ti-162 Titanium irons and Gary Player Parsaver wedges and the Gary
Player Ti-360 (aluminum and bronze) golf clubs.
The Company also intends to reduce its costs through (i) the
implementation of a new compensation program which management believes will
reduce commissions paid on the sale of golf clubs, (ii) the renegotiation of
the prices paid to current suppliers of golf club components resulting in
reduced costs for these products and (iii) the reduction of outbound freight
costs and telephone costs.
NOTE C -- PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
March 31, June 30,
1998 1998
------------- -------------
<S> <C> <C>
Property and equipment is comprised of the following:
Office equipment and fixtures .......................... $ 120,958 $ 186,542
Production equipment and fixtures ...................... 9,944 26,310
Computer software and hardware ......................... 147,940 165,842
Telemarketing equipment and fixtures ................... 22,294 25,944
---------- ----------
301,136 404,638
Less accumulated depreciation and amortization ......... (142,650) (159,333)
---------- ----------
$ 158,486 $ 245,305
========== ==========
</TABLE>
F-11
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE D -- OTHER ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1998 1998
----------- -------------
<S> <C> <C>
Other assets are comprised of the following:
Note receivable (see Note J) ....................... $168,872 $ 172,248
Deferred direct-response advertising costs ......... 301,099 333,724
Deferred offering costs ............................ 162,975 454,988
Deferred debt issuance costs ....................... 117,024 67,381
Other .............................................. 32,013 53,262
-------- ----------
$781,983 $1,081,603
======== ==========
</TABLE>
NOTE E -- NOTES PAYABLE
<TABLE>
<CAPTION>
March 31, June 30,
1998 1998
------------- -------------
<S> <C> <C>
Notes payable consist of the following:
11% notes (1) ............................. $ 417,500 $ 417,500
12% collateralized note (2) ............... 200,000 200,000
11% note (3) .............................. 250,000 250,000
11% notes (4) ............................. 200,000 200,000
Bank loan (5) ............................. 150,000 150,000
11% note (6) .............................. 880,000 817,500
13.5% collateralized note (7) ............. 1,000,000 2,450,000
Less unamortized discount on debt ......... (790,857) (412,143)
---------- ----------
$2,306,643 $4,072,857
========== ==========
</TABLE>
- ------------
(1) During 1995 and 1996, the Company borrowed $800,000 from unrelated parties
pursuant to notes bearing interest at 11% per annum and due and payable on
the earlier of November 8, 1996 or the completion of the private placement
of Series B Convertible Preferred Stock. As additional consideration for
the original borrowings, the Company issued warrants to purchase 5,883
shares of common stock at $2.21 per share for each $25,000 borrowed. These
warrants were valued at $60,190 and recorded as a discount on debt and
amortized over the expected life of the debt. During the three months
ended March 31, 1997 and the year ended December 31, 1996, principal and
interest amounting to $33,217 and $308,135 was converted to approximately
10,000 and 93,000 shares of Series B Convertible Preferred Stock,
respectively. At March 31, 1998 and June 30, 1998, the Company was
delinquent on $417,500 and $40,000 principal amount, respectively, of
these notes. As consideration for an extension of these notes in 1997, the
Company issued warrants to purchase 36,250 shares of common stock during
January 1997.
(2) In 1996, the Company borrowed $400,000 from several lenders pursuant to a
note bearing interest at a rate of 12% per annum and due and payable
November 30, 1996. An affiliate of one of these lenders later became, but
no longer is, a director of the Company. During 1996, the Company reached
an agreement with the lenders to extend the maturity of the note to
November 30, 1997. As part of the agreement, the lenders were granted a
first security interest in all of the assets of the Company. At March 31,
1998 and June 30, 1998, the Company was delinquent on the outstanding
balance of this note.
(3) In 1996, the Company borrowed $250,000 from an unrelated party pursuant to
a note bearing interest at a rate of 11% per annum, due on the earlier of
December 31, 1996 or ten days after the Company's IPO. As additional
consideration for the original borrowing under this note, the Company
issued 25,000 shares of common stock which were valued at par value. The
Company was delinquent on this note at March 31, 1998. As consideration
for an extension of the maturity of this note, the Company issued
F-12
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE E -- NOTES PAYABLE -- (Continued)
12,500 shares of common stock which were valued at $100,000 and recorded as
a discount on debt. This additional consideration results in an effective
interest rate of 171%. Provisions of the note increase the interest rate by
4% per annum in the event of default. The note is collateralized by 100% of
the stock of Rhino.
(4) In 1996, the Company borrowed $150,000 from an unrelated lender pursuant to
a note bearing interest at a rate of 11% per annum and due at the earlier
of June 1, 1997 or the sale of a minimum of $250,000 of the Series B
Convertible Preferred Stock. In 1997, the Company reached an agreement
with the lender to extend the maturity of the note to the earlier of June
30, 1998 or the closing of the Company's IPO. As consideration for this
extension, the Company issued 20,000 shares of common stock which were
valued at $160,000 and recorded as a discount on debt. This additional
consideration results in an effective interest rate of 171%.
In 1997, the Company borrowed $50,000 from an unrelated lender pursuant to a
note bearing interest at a rate of 11% per annum and due at the earlier of
December 31, 1997 or the closing of the Company's IPO. Later that year, the
maturity date was extended to the tenth day of the thirteenth month
following the closing of the Company's IPO.
(5) This loan is with a bank bearing interest at the bank's prime rate (8.50%
at March 31, 1998) plus one percent. The Company was delinquent on this
note at March 31, 1998 and June 30, 1998.
(6) In fiscal 1998, the Company borrowed $880,000 from unrelated parties under
notes bearing interest at 11% per annum and due at the earlier of six
months from the date of the notes or the closing of the Company's IPO. As
additional consideration for the notes, the Company issued 44,000 shares
of common stock which were valued at $352,000 and issued 44,000 shares of
common stock which were valued at $352,000 to a consultant/director who
located investors in the offering, all of which were recorded as a
discount on debt. This additional consideration results in an effective
interest rate of 171%. The maturity of the notes ranges from April 13,
1998 through July 21, 1998. At June 30, 1998, the Company was delinquent
on $290,000 principal amount of these notes.
(7) In March 1998, the Company borrowed $1,000,000 from an unrelated party
pursuant to a note bearing interest at a rate of 13.5% per annum and
maturing on the earlier of the third business day after the closing of the
IPO or December 31, 1998. The obligation is collateralized by all assets
of the Company. The interest rate increases to 15% on and after August 1,
1998 and the Company must issue 6,250 shares of common stock on the first
day of each calendar month commencing August 1998 that the loan is not
repaid. As additional consideration for the note, the Company issued
76,250 shares of common stock which were valued at $610,000 and recorded
as a discount on debt. The agreement stipulates that the number of shares
shall be adjusted so as to equal $610,000 divided by the IPO price. This
additional consideration results in an effective interest rate of 223%.
In April and May 1998, the Company borrowed $1,450,000 from unrelated
parties pursuant to notes bearing interest at a rate of 13.5% per annum and
maturing on the earlier of the third business day after the closing of the
IPO or December 31, 1998. These obligations are collateralized by all assets
of the Company. As additional consideration for the note, the Company issued
90,625 shares of Common Stock which were valued at $725,000 and recorded as
a discount on debt. The agreement stipulates that the number of shares shall
be adjusted so as to equal $725,000 divided by the IPO price.
F-13
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE F -- CUSTOMER REFUNDS PAYABLE, DEFERRED REVENUE AND ALLOWANCE FOR RETURNS
Customer refunds payable, deferred revenue and allowance for returns is
comprised of the following:
March 31, June 30,
1998 1998
------------- -------------
Customer refunds payable ......... $ 937,517 $1,612,673
Deferred revenue ................. 723,459 146,862
Allowance for returns ............ 617,503 883,318
---------- ----------
$2,278,479 $2,642,853
========== ==========
NOTE G -- INCOME TAXES
Through March 31, 1998, the Company incurred net operating losses for tax
purposes of approximately $8,691,000 which may be used to reduce federal
taxable income through 2013. Net operating loss carryforwards for the State of
California are approximately $4,346,000 and are generally available to reduce
taxable income through 2003.
The availability of the Company's net operating loss carryforwards are
subject to an annual limitation. Internal Revenue Code Section 382 limits the
use of a Company's net operating loss if there is a greater than 50% change in
the ownership of the Company's common stock. This annual limitation is equal to
the value of the Company's outstanding common stock immediately before the
change multiplied by the federal long-term tax exempt rate.
As of March 31, 1998, the Company has experienced an ownership change
under Internal Revenue Code Section 382. Therefore, the use of the Company's
net operating loss, on an annual basis, will be severely limited.
Deferred income taxes result from the effect of transactions that are
recognized in different periods for financial and tax reporting purposes. They
relate primarily to net operating losses and allowances for returns. The
Company had total deferred tax assets of approximately $3,340,000 at March 31,
1998. These deferred tax assets were fully offset by a valuation allowance, as
the realization cannot be reasonably assured.
NOTE H -- COMMITMENTS AND CONTINGENCIES
Litigation
The Company was a party to litigation related to the termination of
employment of several employees in 1996. Agreements were reached to settle
these matters which (i) required the Company to make payments to former
employees (including the former Chief Executive Officer) (ii) included the
surrender of shares of common stock owned by these individuals and (iii) the
settlement of other amounts owed by the employees to the Company. In addition,
the Company reached an agreement in 1996 with a supplier and has accrued
amounts in 1998 with a trade creditor for settlement of disputes. All amounts
provided have been included in the statement of operations as litigation
expense in the year settled. Any amounts unpaid as of March 31, 1998 and June
30, 1998, are included in accounts payable and accrued liabilities.
Management of the Company believes that the settlement of current
litigation will not have a material effect on the Company's financial position
or results of operations.
F-14
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE H -- COMMITMENTS AND CONTINGENCIES -- (Continued)
Leases
The Company conducts a portion of its operations and warehouses certain of
its products in leased facilities classified as operating leases. The following
is a schedule of the future minimum rental payments under such operating
leases, which expire at various dates through December 2000.
Year ending March 31,
- -----------------------
1999 ................ $130,000
2000 ................ 39,000
2001 ................ 27,000
--------
$196,000
========
Rent expense for the three months ended June 30, 1998, the year ended
March 31, 1998, the three months ended March 31, 1997, and the year ended
December 31, 1996 was approximately $54,000, $189,000, $34,500 and $138,000,
respectively.
Acquisition
The Company has entered into an agreement to purchase the assets of Gary
Player Golf Equipment (a division of Gary Player Group, Inc.). The agreement
calls for the Company to (i) pay cash of $250,000, (ii) issue 571,429 shares of
common stock of the Company and (iii) assume $1,100,000 of liabilities.
NOTE I -- EQUITY TRANSACTIONS
Effective May 7, 1998, the Company reached an agreement with a shareholder
and cancelled 105,382 shares of Common Stock previously outstanding. During the
three months ended June 30, 1998, the Company issued 90,625 shares of Common
Stock in connection with the notes payable described in Note E.
During the fiscal year ended March 31, 1998, the Company issued 224,900
and 52,375 shares of common stock at $5.00 and $8.00 per share, respectively.
These issuances had associated offering costs of $247,387 and $67,050,
respectively. Shares of common stock aggregating 228,900 were issued in
connection with the notes payable described in Note E and 12,250 shares were
issued as payment for consulting fees.
From July 1996 through March 1997, the Company issued 127,500 shares of
its common stock as incentives to various individuals. The Company has recorded
the stock at its par value as management believes that this approximates its
fair value at the time of issuance. The following summarizes the issuances:
<TABLE>
<S> <C>
Shares issued to an officer as an employment incentive ........... 50,000
Shares issued to individuals as debt issuance incentives ......... 50,000
Shares issued in connection with guarantee of Company
obligations ................................................... 25,000
Shares issued to extend account payable terms .................... 2,500
------
Total shares issued .............................................. 127,500
=======
</TABLE>
The Company has authorized 5,000,000 shares of preferred stock and has
designated 191,579 shares as Series A Convertible Preferred Stock and 750,750
shares as Series B Convertible Preferred Stock.
In August 1996, all outstanding Series A Convertible Preferred stock was
converted into common stock at the rate of approximately 4.2 common shares for
each share of Series A Convertible Preferred Stock. The Company issued 402,027
common shares. During the fiscal year ended March 31, 1998, 45,793 of these
shares were cancelled.
F-15
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE I -- EQUITY TRANSACTIONS -- (Continued)
Since 1996, the Company has issued a total of 572,649 shares of Series B
Convertible Preferred stock at $3.33 per share. Of the total shares issued,
102,508 shares were issued through the conversion of certain notes payable
described in Note E.
Series B Convertible Preferred Stock is cumulative, non-participating
convertible stock. The dividend rate on these shares is $0.2667 per share. Each
preferred share may be converted, at the option of the holder at any time, and
is automatically converted with a public offering by the Company into one share
of common stock, subject to adjustment. Cumulative dividends in arrears were
$207,129 at March 31, 1998.
Class A warrants were issued in connection with the Series B Convertible
Preferred Stock issuances, certain common stock issuances, as employee
incentives and in exchange for consulting services. These warrants are
exercisable through various dates at $2.21 to $4.00 per share.
Class B warrants were issued in connection with extensions of notes
payable described in Note E and loan guarantee fees. These warrants are
exercisable through various dates at $0.20 per share.
The following summarizes the Class A and Class B warrants:
<TABLE>
<CAPTION>
Class A Class B
--------- --------
<S> <C> <C>
Balance at January 1, 1996 ........................... 290,811 --
Issued ............................................... 308,206 --
------- ------
Balance at December 31, 1996 ......................... 599,017 --
Issued ............................................... 78,442 15,000
------- ------
Balance at March 31, 1997 ............................ 677,459 15,000
Issued ............................................... 64,240 75,000
------- ------
Balance at March 31, 1998 and June 30, 1998 .......... 741,699 90,000
======= ======
</TABLE>
NOTE J -- RELATED PARTY TRANSACTIONS
In March 1996, the Company advanced $142,160 to an affiliated company
which is wholly-owned by one of the Company's directors. This advance bore
interest at 9% per annum through October 31, 1997 and bears interest at the
prime rate (8.50% at March 31, 1998) plus one percent thereafter. The maturity
date is December 31, 2002, with the note receivable collateralized by 5,000
shares of the Company's common stock. The outstanding balance, including unpaid
interest, was approximately $169,000 and $172,000 at March 31, 1998 and June
30, 1998, respectively.
See Note E for related party notes payable and finder's fees given to a
director of the Company.
NOTE K -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash, accounts receivable and accounts payable and
accrued liabilities approximates their carrying value due to their short
maturity. The fair value of the notes payable can not be determined because it
is impracticable to estimate their fair value, due to the fact that many of the
notes are in default and contain features for which market quotes are not
available.
NOTE L -- STOCK-BASED COMPENSATION
Management has determined to continue to follow Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25),
and adopt only the pro forma disclosure requirements of Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), Accounting for Stock-Based
Compensation. Pro forma disclosures have not been provided since the provisions
of SFAS 123 have no pro forma impact on the reported results of operations.
F-16
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE M -- UNAUDITED FINANCIAL INFORMATION
Unaudited results of operations for the three months ended March 31, 1996
are as follows:
Gross sales ............................... $1,608,080
Less allowances for returns ............... 605,259
----------
Net sales .............................. 1,002,821
Cost of goods sold ........................ 263,614
----------
Gross profit ........................... 739,207
Operating and other expenses, net ......... 887,875
----------
Net loss ............................... $ (148,668)
==========
Weighted average shares of common stock
outstanding .............................. 724,099
==========
Net loss per share ........................ $ (.21)
==========
NOTE N -- EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), Reporting
Comprehensive Income, which prescribes standards for reporting comprehensive
income and its components. Comprehensive income consists of net earnings or
loss for the current period and other comprehensive income (income, expenses,
gains and losses that currently bypass the income statement and are reported
directly in a separate component of equity). SFAS 130 is effective for
financial statements issued for periods beginning after December 15, 1997. The
Company has determined that the adoption of SFAS 130 will not have a material
effect on the Company's financial statements.
In June 1997, the FASB also issued SFAS 131, Disclosures about Segments of
an Enterprise and Related Information, which prescribes standards for reporting
information about operating segments in annual financial statements and
requires reporting of selected information about operating segments in interim
financial reports issued to shareholders. SFAS 131 is effective for financial
statements issued for periods beginning after December 15, 1997. The Company
has determined that the adoption of SFAS 131 will not have a material effect on
the Company's financial statements.
NOTE O -- IMPAIRED ASSETS
During 1996, the Company experienced a malfunction in its computer system
that rendered the hardware and related software inoperable. The cost of the
equipment and related software was approximately $293,000, and had a net book
value of $200,000. Management believes that the value of these assets was
impaired and wrote off the remaining book value as a loss on impaired assets in
1996.
NOTE P -- SUBSEQUENT EVENTS
1. Stock Split
Effective _________, 1998, the Company effected a 1-for-2 reverse stock
split. All loss per share amounts and references to common stock in the
consolidated financial statements have been retroactively restated for all
periods presented to reflect the decreased number of common shares outstanding
and give effect to the reverse stock split.
2. Name Change
Effective _________, 1998, the Company changed its name from Golf One
Industries, Inc. to Gary Player Golf, Inc.
F-17
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NOTE P -- SUBSEQUENT EVENTS -- (Continued)
3. Extension of Note Payable Due Dates
In July, 1998, the Company extended the due date of a $150,000 note to the
earlier of August 31, 1998 or the closing of the Company's IPO.
In July, 1998, the Company reached agreement with certain lenders
extending the due date of principal note balances of $352,500 to thirteen
months following the closing of the Company's IPO.
4. Issuances of Common Stock
In August, 1998, the Company (i) issued 6,250 shares of Common Stock in
connection with short term debt of $1,000,000 (ii) issued 14,500 shares of
Common Stock in exchange for various services, and (iii) issued an additional
30,089 shares of Common Stock in connection with short term debt in the amount
of $2,450,000.
In August, 1998, the Company reached agreement with various lenders to
issue 421,352 shares of Common Stock in exchange for the cancellation of
$1,789,000 of indebtedness, which exchange is contingent upon consummation of,
and will occur on or around the closing of, the Company's IPO.
In July, 1998, the Company reached agreement with shareholders to cancel
184,065 shares of Common Stock prior to the closing of the Company's IPO
pursuant to various settlement agreements.
In August, 1998, the Company reached agreement with various creditors to
issue 41,837 shares of Common Stock in exchange for the cancellation of $205,000
of liabilities to be assumed by the Company in connection with its acquisition
of certain assets of Gary Player Golf Equipment (a division of Gary Player
Group, Inc.), which exchange is expected to occur on or around the closing of
the Company's IPO.
From June to August, 1998, the Company reached agreement with holders of
warrants to purchase the Company's Common Stock to issue 175,109 shares of
Common Stock in exchange for the cancellation of warrants to purchase 525,328
shares of Common Stock, which exchange is expected to occur prior to the
Company's IPO.
On the effective date of the Company's IPO, the outstanding shares of
Series B Convertible Preferred Stock will automatically convert into 286,325
shares of Common Stock.
F-18
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Gary Player Golf, Inc.
We have audited the accompanying statement of assets, liabilities and division
deficit of Gary Player Golf Equipment (a division of Gary Player Group, Inc., a
Florida corporation) as of December 31, 1997, and the related statements of
operations and changes in division deficit, and cash flows for the years ended
December 31, 1997 and 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 audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets, liabilities, and division deficit of Gary
Player Golf Equipment (a division of Gary Player Group, Inc.) as of December
31, 1997 and the results of its operations and its cash flows for the years
ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
Grant Thornton LLP
Los Angeles, California
April 8, 1998
F-19
<PAGE>
GARY PLAYER GOLF EQUIPMENT
(A DIVISION OF GARY PLAYER GROUP, INC.)
STATEMENTS OF ASSETS, LIABILITIES AND DIVISION DEFICIT
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
-------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ................................................ $ 24,522 $ 196,191
Accounts receivable, Gary Player Golf, Inc. ......... 144,217 30,801
Inventories ......................................... 65,008 79,865
------------ ------------
Total current assets ............................. 233,747 306,857
PROPERTY AND EQUIPMENT, net .......................... 20,791 8,444
OTHER ................................................ 9,875 9,875
------------ ------------
$ 264,413 $ 325,176
============ ============
LIABILITIES AND DIVISION DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities ............ $ 600,526 $ 1,084,832
Note payable ........................................ 520,701 --
Shareholder loans ................................... 1,924,653 1,924,653
Due to affiliates ................................... 1,097,200 1,014,634
------------ ------------
Total current liabilities ........................ 4,143,080 4,024,119
CONTINGENCIES ........................................ -- --
DIVISION DEFICIT ..................................... (3,878,667) (3,698,943)
------------ ------------
$ 264,413 $ 325,176
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
GARY PLAYER GOLF EQUIPMENT
(A DIVISION OF GARY PLAYER GROUP, INC.)
STATEMENTS OF OPERATIONS AND CHANGES IN DIVISION DEFICIT
<TABLE>
<CAPTION>
Six months ended June 30, Year ended December 31,
--------------------------------- ---------------------------------
1998 1997 1997 1996
--------------- --------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C> <C>
Revenues
License and royalty income .................. $ 389,941 $ 193,696 $ 663,773 $ 110,000
Sales of golf clubs and accessories ......... 50,110 66,952 116,955 512,936
------------ ------------ ------------ ------------
440,051 260,648 780,728 622,936
Costs and expenses
Cost of goods sold .......................... 23,286 43,019 74,119 303,590
Selling expenses ............................ 15,547 83,311 128,341 151,673
General and administrative .................. 187,696 272,963 714,150 741,646
Depreciation ................................ 12,346 18,074 30,296 28,941
------------ ------------ ------------ ------------
238,875 417,367 946,906 1,225,850
------------ ------------ ------------ ------------
Operating income (loss) .................. 201,176 (156,719) (166,178) (602,914)
Interest expense .............................. 21,452 41,786 94,079 135,779
------------ ------------ ------------ ------------
NET INCOME (LOSS) ........................ 179,724 (198,505) (260,257) (738,693)
Division deficit, beginning of period .......... (3,878,667) (3,618,410) (3,618,410) (2,879,717)
------------ ------------ ------------ ------------
Division deficit, end of period ................ $ (3,698,943) $ (3,816,915) $ (3,878,667) $ (3,618,410)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
GARY PLAYER GOLF EQUIPMENT
(A DIVISION OF GARY PLAYER GROUP, INC.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended June 30, Year ended December 31,
----------------------------- ------------------------------
1998 1997 1997 1996
------------- -------------- -------------- --------------
Increase (decrease) in cash: (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ 179,724 $ (198,505) $ (260,257) $ (738,693)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation ............................................... 12,346 18,074 30,296 28,941
Allowance for doubtful accounts ............................ -- -- 171,211 15,637
Changes in assets and liabilities:
(Increase) decrease in accounts receivable ............... 113,416 (60,958) (313,580) 15,674
Decrease (increase) in inventories ....................... (14,857) 13,562 62,539 159,438
Decrease (increase) in prepaids .......................... -- 23,967 14,092 (5,967)
(Increase) decrease in accounts payable and accrued
liabilities ............................................. 484,307 14,312 (501,587) (144,505)
(Decrease) increase in due to affiliates ................. (82,566) 207,394 323,300 340,746
---------- ---------- ---------- ----------
Net cash used in operating activities ................... 692,370 17,846 (473,986) (328,729)
Cash flows from investing activities:
Purchases of equipment ........................................ -- (27,050) (27,050) --
Proceeds from the sale of equipment ........................... -- -- -- 3,466
---------- ---------- ---------- ----------
Net cash (used in) provided by investing activities ..... -- (27,050) (27,050) 3,466
Cash flows from financing activities:
Proceeds from note payable .................................... -- -- 500,000 --
Payments on note payable ...................................... (520,701) -- -- (316,835)
Proceeds from shareholder loans ............................... -- 9,945 17,478 641,504
---------- ---------- ---------- ----------
Net cash provided by financing activities ............... (520,701) 9,945 517,478 324,669
---------- ---------- ---------- ----------
Net (decrease) increase in cash ......................... 171,669 741 16,442 (594)
Cash at beginning of period .................................... 24,522 8,080 8,080 8,674
---------- ---------- ---------- ----------
Cash at end of period .......................................... $ 196,191 $ 8,821 $ 24,522 $ 8,080
========== ========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest ...................... $ 251 $ 41,786 $ 94,079 $ 165,128
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-22
<PAGE>
GARY PLAYER GOLF EQUIPMENT
(A DIVISION OF GARY PLAYER GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE A -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Gary Player Golf Equipment (the "Company"), a division of Gary Player
Group, Inc. (GPG), a Florida corporation, manufactures and distributes golf
clubs and golf accessories to customers throughout the United States. The
Company has also entered into a variety of licensing and royalty agreements.
The Company intends to sell its assets to Gary Player Golf, Inc. (Player)
in accordance with an Asset Purchase Agreement which was executed in November
1997. Player currently distributes products endorsed by the Company in
accordance with some of the aforementioned licensing and royalty agreements.
The Company earned license and royalty income of $314,922 and $358,077 from
Player for the six months ended June 30, 1998 and for the year ended December
31, 1997, respectively.
Insofar as these financial statements and notes relate to information at
June 30, 1998 and for the three-month periods ended June 30, 1998 and 1997,
they are unaudited. In the opinion of management, such unaudited financial
statements and notes thereto reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the assets,
liabilities and division deficit, operations and cash flows for such periods.
The financial position at June 30, 1998 and results of operations for the six
months then ended are not necessarily indicative of the financial position that
may be expected at December 31, 1998 or results of operations that may be
expected for the year ending December 31, 1998.
1. Revenue Recognition
The Company recognizes revenue for product sales when products are
shipped. Licensing and royalty income is recorded when earned. Discounts and
allowances for returns are recorded at the time of recording the sale.
2. Inventories
Inventories primarily consist of golf accessories, golf club components
and finished golf clubs, which are all stated at the lower of cost or market.
Cost is determined principally by the first-in, first-out method.
3. Property and equipment
Property and equipment are carried at cost less accumulated depreciation.
For financial and tax reporting purposes, depreciation is provided using the
straight-line method over the estimated useful lives of the related assets (2
to 5 years).
4. Income Taxes
GPG allocates income taxes among divisions. No tax benefit is allocated by
GPG in periods where losses are incurred. Losses are, however, used by the
Company to offset income when earned.
5. Advertising Expense
The Company expenses advertising costs when the advertisement occurs.
Total advertising expense amounted to $446, $15,293, $21,893 and $57,290 for
the six months ended June 30, 1998 and 1997 and the years ended December 31,
1997 and 1996, respectively.
6. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-23
<PAGE>
GARY PLAYER GOLF EQUIPMENT
(A DIVISION OF GARY PLAYER GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 consist of the following:
Office equipment ...................... $ 4,087
Computer equipment .................... 48,280
Furniture and fixtures ................ 9,588
Tools and warehouse equipment ......... 49,223
--------
111,178
Less accumulated depreciation ......... 90,387
--------
$ 20,791
========
The amount of depreciation included in costs and expenses was $12,346,
$18,074, $30,296 and $28,941 for the six months ended June 30, 1998 and 1997
and the years ended December 31, 1997 and 1996, respectively.
NOTE C -- NOTE PAYABLE
During 1997, the Company borrowed $500,000 from a related party (Gary
Player's London management company) under an uncollateralized promissory note
bearing interest at LIBOR (approximately 5.5% at December 31, 1997) plus 2
percent per annum with no stated maturity. Such borrowing is due and payable at
the completion of the initial public offering by Player as stipulated in the
Asset Purchase Agreement. Interest amounted to $21,452 and $20,701 for the six
months ended June 30, 1998 and the year ended December 31, 1997, respectively.
NOTE D -- SHAREHOLDER LOANS
The Company's ultimate sole shareholder has provided funding to the
Company that is interest-free and has no stated maturity. The outstanding loans
are uncollateralized.
NOTE E -- DUE TO AFFILIATES
The Company entered into a management agreement with Gary Player Group,
USA (the "Group"). The agreement provides for the allocation of group expenses
to the Company. Salaries and employee related costs are allocated based upon
projects performed by such employees. Rent is allocated based upon square
footage occupied by the Company. Other costs are allocated based upon actual
usage. Management of the Company believes the methods used are reasonable. The
Company recognized $150,000, $133,200, $368,980 and $223,400 for the six months
ended June 30, 1998 and 1997 and the years ended December 31, 1997 and 1996,
respectively, in expense associated with this agreement, all of which was
included in "Due to affiliate" in the accompanying balance sheet.
Since inception, affiliated companies have provided funds to the Company
for its operations. These transactions are generally non-interest bearing, have
no stated maturity date and are payable on demand. Advances from one affiliated
company bears interest at the South African Economy Rate (approximately 17% at
December 31, 1997).
NOTE F -- FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash, accounts receivable and accounts payable and
accrued liabilities approximates their carrying value due to their short
maturity. The fair value of the note payable, shareholder loans and amounts due
to affiliates can not be determined because it is impracticable to estimate
their fair value due to the related party nature of these financial
instruments.
NOTE G -- LITIGATION
There are lawsuits pending and unasserted claims against the Company.
Although the ultimate outcome of these lawsuits cannot be determined at this
time, and liabilities of indeterminate amounts may be imposed upon
F-24
<PAGE>
GARY PLAYER GOLF EQUIPMENT
(A DIVISION OF GARY PLAYER GROUP, INC.)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE G -- LITIGATION -- (Continued)
the Company, it is the opinion of management that the resolution of these
lawsuits will not have a material adverse effect on the financial position and
results of operations of the Company. Therefore, no provision for any liability
that may result has been reflected in the financial statements. However, it is
at least reasonably possible that the Company's estimates of loss contingencies
may change in the near term.
F-25
<PAGE>
GARY PLAYER GOLF, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
(unaudited)
The unaudited pro forma consolidated financial statements presented herein
are derived from the historical consolidated financial statements of Gary
Player Golf, Inc. and Subsidiaries (the "Company"), and Gary Player Golf
Equipment ("GPGE", a division of Gary Player Group, Inc.) The unaudited pro
forma balance sheet as of June 30, 1998 gives pro forma effect to the Pro Forma
Adjustments (see footnote 2 of "Prospectus Summary --Summary Financial
Information"). The unaudited pro forma consolidated statement of operations for
the year ended March 31, 1998 and for the three months ended June 30, 1998
gives pro forma effect to the Player acquisition as if it had occurred at the
beginning of the period presented.
The unaudited pro forma financial statements give effect to the
acquisition described above under the purchase method of accounting and are
based on the assumptions and adjustments described in the accompanying notes to
the unaudited pro forma financial statements presented on the following pages.
The allocation of the total purchase price for the acquisition presented is
based on preliminary estimates and are subject to final allocation adjustments.
The unaudited pro forma financial statements do not purport to represent
what the Company's results of operations or financial condition would have
actually been or what operations would be if the transactions that give rise to
the pro forma adjustments had occurred on the dates assumed. The unaudited pro
forma financial statements presented below should be read in conjunction with
the audited and unaudited historical consolidated financial statements and
related notes thereto of the Company and GPGE, and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere.
F-26
<PAGE>
GARY PLAYER GOLF, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Gary Player Pro Forma
Golf, Inc. GPGE Adjustments Pro Forma
---------------- --------------- ------------------- ----------------
<S> <C> <C> <C> <C>
CURRENT ASSETS
Cash ............................................. $ 217,968 $ 196,191 $ (200,000) n $ 214,159
--
Accounts receivable .............................. 73,,910 30,801 (30,801) a 73,910
Inventories ...................................... 815,713, 79,865 895,578
Prepaid expenses and other ....................... 338,833 -- 338,833
------------- ------------ ------------- -------------
Total current assets ........................... 1,446,424 306,857 (230,801) 1,522,480
PROPERTY AND EQUIPMENT, net ....................... 245,305 8,445 253,750
OTHER ASSETS ...................................... 1,081,603 9,875 5,009,656 c 6,101,134
$ 2,773,332 $ 325,177 $ 4,778,855 $ 7,877,364
============= ============ ============= =============
LIABILITIES AND STOCKHOLDERS DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities ......... $ 3,292,521 $ 1,084,833 $ (30,801) a $ 4,056,553
(205,000) m
(36,500) g
(48,500) i
Notes payable .................................... 4,072,857 2,939,287 (2,939,287) b 1,817,857
250,000 c
(200,000) n
(1,752,500) g
(552,500) h
Customer refunds payable, deferred revenue
and allowance for returns ...................... 2,642,853 2,642,853
------------- ------------ ------------- -------------
Total current liabilities ...................... 10,008,231 4,024,120 (5,515,088) 8,517,263
LONG TERM DEBT .................................... 552,500 h 552,500
STOCKHOLDERS DEFICIT
Series B Convertible Preferred ................... 573 (573) e
Common stock ..................................... 1,687 571 c 3,140
30 d
286 e
29 m
6 k
14 l
175 f
(92) j
421 g
Capital in excess of par value ................... 6,370,485 3,999,429 c 12,731,666
210,593 d
287 e
(175) f
199,971 m
32,807 k
76,111 l
1,788,579 g
48,500 l
92 j
Accumulated Deficit .............................. (13,607,644) (3,698,943) 2,939,287 b (13,927,205)
(32,813) i
(210,623) d
(76,125) m
759,656 c
------------- ------------ ------------- -------------
(7,234,899) (3,698,943) 9,741,443 (1,192,399)
------------- ------------ ------------- -------------
$ 2,773,332 $ 325,177 $ 4,778,855 $ 7,877,364
============= ============ ============= =============
</TABLE>
F-27
<PAGE>
Description of Pro Forma Adjustments
- ------------
a Elimination of intercompany receivable / payable
b Elimination of GPGE liabilities not assumed in purchase
c Record purchase price of GPGE as follows:
Common Stock issued:
Par value .............................. $ 571
Capital in excess of par value ......... 3,999,429
----------
4,000,000
Liabilities assumed .................... 1,084,833
Notes issued ........................... 250,000
----------
Total purchase price ................... $5,334,833
==========
Allocate assets as follows:
Historical assets of GPGE .............. $ 325,177
Gary Player licenses acquired .......... 5,009,656
----------
5,334,833
==========
Management of the Company has estimated the useful life of the Gary Player
licenses to be twenty-five years based upon Gary Player's reputation and
achievements as a professional golfer, his positive image in the golf
community and the Company's belief that the marketability of the Gary
Player brand name will survive well past Mr. Player's retirement from the
game of golf.
d Issuance of an additional 30,089 shares of common stock as additional
interest expense
e Conversion of Series B Preferred Stock into 286,325 shares of common stock
f Issuance of 175,109 shares of common stock in exchange for cancellation of
warrants to purchase 525,328 shares of common stock from $0.20 to $4.00
per share, which common stock had a fair value equal to the fair value of
the warrants cancelled
g Issuance of 421,352 shares of common stock in exchange for cancellation of
$1,789,000 of indebtedness
h Extend the maturity date of debt
i Cancellation of amounts due to former stockholder
j Cancellation of: (a) 73,033 shares of common stock delivered by a former
officer of the Company to settle claims of the Company to his entitlement
to shares received in connection with the formation of the Company; and
(b) 19,000 shares of common stock delivered by a group of lenders to
settle claims by the Company relating to the loans made by the lenders to
the Company (and in connection with such settlement, the Company agreed to
repay the outstanding balance ($200,000) of the lenders' loans). Except as
set forth above, the Company did not make any payment or incur any payment
obligation in connection with these settlements
k Issuance of an additional 6,250 shares of common stock as additional
interest expense
l Issuance of 14,500 shares of common stock in exchange for various services
m Issuance of 41,837 shares of common stock in exchange for cancellation of
$205,000 of indebtedness in connection with the GPGE acquisition
n Record payment of indebtedness
F-28
<PAGE>
GARY PLAYER GOLF INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
Gary Player Pro Forma
Golf, Inc. GPGE Adjustments Pro Forma
--------------- ------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Gross sales ........................ $ 9,567,902 $ 856,457 $ (434,405) O $ $9,989,954
Less allowances for returns ........ 4,799,870 4,799,870
------------ --------- ------------ ------------
Net sales ....................... 4,768,032 856,457 (434,405) 5,190,084
Cost of goods sold ................. 1,973,105 77,928 2,051,033
------------ --------- ------------ ------------
Gross profit .................... 2,794,927 778,529 (434,405) 3,139,051
Operating expenses
Telemarketing and infomercial
expenses ........................ 3,142,639 3,142,639
Selling expenses .................. 1,685,291 96,111 (434,405) O 1,346,997
General and administrative ........ 1,680,723 659,776 2,340,499
Depreciation and amortization ..... 34,028 28,933 200,386 P 263,347
Litigation settlements ............ 26,194 26,194
Loss on impaired assets ........... --
------------ --------- ------------ ------------
Total operating expenses ........ 6,568,875 784,820 (234,019) 7,119,676
------------ --------- ------------ ------------
Operating loss .................. (3,773,948) (6,291) (200,386) (3,980,625)
Other expenses
Interest expense .................. 179,536 70,765 250,301
Non-cash interest expense ......... 1,681,763 1,681,763
Other, net ........................ (10,733) (10,733)
------------ --------- ------------ ------------
Total other expenses ............ 1,850,566 70,765 -- 1,921,331
------------ --------- ------------ ------------
NET LOSS ........................ $ (5,624,514) $ (77,056) $ (200,386) $ (5,901,956)
============ ========= ============ ============
Net loss attributable to common
shares
Net loss .......................... $ (5,624,514) $ (5,901,956)
Preferred dividends ............... (155,799) (155,799)
------------ ------------
$ (5,780,313) $ (6,057,755)
============ ============
Weighted average shares of com-
mon stock outstanding ............. 1,484,147 571,429 2,055,576
============ ============
Net loss per share - Basic and
diluted ........................... $ (3.89) $ (2.95)
============ ============
</TABLE>
- ------------
O Elimination of intercompany license fees
P Record amortization of Player Licenses acquired over estimated life of
twenty-five years
F-29
<PAGE>
GARY PLAYER GOLF, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
Gary Player Pro Forma
Direct, Inc. GPGE Adjustments Pro Forma
---------------- ----------- ----------------- ---------------
<S> <C> <C> <C> <C>
Gross slaes ................................ $ 5,067,006 $225,943 $ (10 ,594) $ 5,154,355
Less allowances for returns ................ 2,213,939 2,213,939
------------ -------- ----------- ------------
Net sales ................................ 2,853,067 225,943 (138,594) 2,940,416
Cost of goods sold ......................... 1,174,609 11,145 1,185,754
------------ -------- ----------- ------------
Gross profit ............................. 1,678,458 214,798 (138,594) 1,754,662
Operating expenses
Telemarketing and informercial
expenses ................................ 1,484,606 -- 1,484,606
Selling expenses .......................... 888,722 2,251 (138,594) O 752,379
General and administrative ................ 399,487 94,291 493,778
Depreciation and amortization ............. 17,051 6,173 50,096 P 73,320
Litigation settlements .................... 23,333 23,333
Loss on impaired assets ................... --
------------ -------- ----------- ------------
Total operating expenses ................ 2,813,199 102,715 (88,498) 2,287,416
------------ -------- ----------- ------------
Operating loss .......................... (1,134,741 112,083 (50,096) (1,072,754)
Other expenses
Interest expense .......................... (31,654) 10,800 (20,854)
Non-cash interest expense ................. 118,384 118,384
Other, net ................................ 1,278,357 1,278,357
------------ -------- ----------- ------------
Total other expenses .................... 1,365,087 10,800 -- 1,375,887
------------ -------- ----------- ------------
NET LOSS ................................ $ (2,499,828) $101,283 $ (50,096) $ (2,448,641)
============ ======== =========== ============
Net loss attributable to common shares
Net loss .................................. $ (2,499,828) $ (2,448,641)
Preferred dividends ....................... (38,181) (38,181)
------------ ------------
$ (2,538,009) $ (2,486,822)
============ ============
Weighted average shares of common
stock ..................................... 1,694,454 571,429 2,265,883
============ ============
Net loss per share -- Basic and diluted..... $ (1.50) $ (1.10)
============ ============
</TABLE>
- ------------
O Elimination of intercompany license fees
P Record amortization of asset acquired over estimated life of twenty five
years
F-30
<PAGE>
Inside Back Cover Fold Out Spread (2 pages) of Prospectus:
A marketing brochure with the line "Gary Player's New Black Knight Ti 162
Titanium Irons" in the upper left corner and a depiction of 2 Black Knight Ti
162 titanium irons with accompanying copy and diagrams describing the design
and engineering features of the Black Knight TI 162 titanium irons. The Left of
the brochure is a picture of Gary Player Swinging a golf club and the line
"WHAT DID WE GET WHEN WE COMBINED THE WORLDS BEST "PLAYER" WITH THE WORLD'S
BEST DESIGNED IRONS?" placed above it.
<PAGE>
Inside Back Cover:
A collage of some of the Company's marketing images from its direct response
television commercials, telesales, direct mail brochures and Internet website.
The Gary Player Black Knight logo appears in the top left corner.
<PAGE>
================================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer made in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or the Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the securities offered by this Prospectus, or an offer to sell or a
solicitation of an offer to buy any securities by anyone in any jurisdiction in
which such offer or solicitation is not authorized or is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information herein is correct as
of any time subsequent to the date hereof.
-----------------
TABLE OF CONTENTS
Page
----
Prospectus Summary ....................... 3
Risk Factors ............................. 7
Use of Proceeds .......................... 16
Dilution ................................. 18
Capitalization ........................... 19
Dividend Policy .......................... 19
Selected Financial Data .................. 20
Management's Discussion and Analysis
of Results of Operations and Financial
Condition ............................. 21
Business ................................. 26
Management ............................... 36
Principal Stockholders ................... 42
Certain Transactions ..................... 44
Description of Securities ................ 45
Shares Eligible for Future Sale .......... 47
Underwriting ............................. 48
Legal Matters ............................ 50
Experts .................................. 50
Additional Information ................... 50
Index to Financial Statements ............ F-1
-----------------
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 of
subscriptions.
================================================================================
<PAGE>
================================================================================
GARY PLAYER GOLF, INC.
1,600,000 Shares
Common Stock
----------------
PROSPECTUS
----------------
Whale Securities Co., L.P.
, 1998
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Registrant's Certificate of Incorporation and its Bylaws provide that
the Registrant may indemnify each director, officer and employee of the
Registrant to the full extent permitted by law, as the same exists or may
hereafter be amended. Section 145 of the Delaware General Corporation Law
provides in relevant part that a corporation may indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful.
In addition, Section 145 provides that a corporation may indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper. Delaware law further provides that nothing
in the above-described provisions shall be deemed exclusive of any other rights
to indemnification or advancement of expenses to which any person may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
The Registrant's Certificate of Incorporation provides that a director of
the Registrant shall not be liable to the Registrant or its stockholders for
monetary damages for breach of fiduciary duty as a director. Section 102(b)(7)
of the Delaware General Corporation Law provides that a provision so limiting
the personal liability of a director shall not eliminate or limit the liability
of a director for, among other things: breach of the duty of loyalty; acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law; unlawful payment of dividends; and transactions
from which the director derived an improper personal benefit.
The Registrant has entered into separate but identical indemnity
agreements (the "Indemnity Agreements") with each director of the Registrant
and certain officers of the Registrant (the "Indemnitees"). Pursuant to the
terms and conditions of the Indemnity Agreements, the Registrant indemnified
each Indemnitee against any amounts which he or she becomes legally obligated
to pay in connection with any claim against him or her based upon any action or
inaction which he or she may commit, omit or suffer while acting in his or her
capacity as a director and/or officer of the Registrant or its subsidiaries,
provided, however, that Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Registrant and, with respect to any criminal action, had no reasonable
cause to believe Indemnitee's Conduct was unlawful.
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Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, 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 Securities
Act and is, therefore, unenforceable.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
Document Exhibit Number
- ---------- ---------------
<S> <C>
Registrant's Amended and Restated Certificate of Incorporation .......... 3.1
Registrant's Bylaws ..................................................... 3.2
Registrant's Form of Indemnification Agreement .......................... 10.1
</TABLE>
Item 25. Other Expenses of Issuance and Distribution
The following table itemizes the expenses incurred by the Registrant in
connection with the issuance and distribution of the securities being
registered. All the amounts shown are estimates except the Securities and
Exchange Commission registration fee, the NASD filing fee, the Nasdaq Small Cap
fee and the Pacific Stock Exchange fee:
<TABLE>
<S> <C>
Registration fee -- Securities and Exchange Commission ......... $ 5,276
NASD filing fee ................................................ 2,288
Nasdaq SmallCap fee ............................................ 9,129
Accounting fees and expenses ................................... 150,000
Legal fees and expenses (other than blue sky) .................. 285,000
Blue sky fees and expenses, including legal fees ............... 60,000
Printing; stock certificates ................................... 140,000
Transfer agent and registrar fees .............................. 5,000
Consulting fees ................................................ 30,000
Non-accountable expense allowance .............................. 336,000
Miscellaneous .................................................. 3,307
----------
Total ..................................................... $1,026,000
==========
</TABLE>
Item 26. Recent Sales of Unregistered Securities
All shares of Common Stock and the exercise price of warrants and options
have been adjusted to reflect a 1.810246525-for-1 stock split in August 1996
and a 1-for-2 reverse stock split to be effected prior to the effective date of
this Registration Statement.
In November 1995, the Company issued (i) 181,024 shares of Common Stock
for $250.00 to each of Alfonso J. Cervantes, Jr., Peter W. Damisch, Barry
Dickstein and Norman A. Kunin and (ii) an aggregate of 191,579 shares of Series
A Convertible Preferred Stock to six shareholders (the "Rhino Stockholders") of
Rhino Marketing, Inc. ("Rhino") in exchange for 100% of the outstanding capital
stock of Rhino, all in connection with the initial capitalization of the
Company. In connection with the offering, (i) each of the stockholders
represented to the Company, and the Company believed, that each investor was an
"Accredited Investor" (as that term is defined under Regulation D promulgated
under the Securities Act), (ii) the certificates representing the securities
contain an appropriate restrictive legend regarding resale, and (iii) the
Company did not engage in any general solicitation or general advertisement.
The issuance and sale of these securities was made in reliance on Section 4(2)
of the Securities Act as a transaction not involving any public offering.
In November 1995, the Company issued warrants to purchase an aggregate
271,536 shares of Common Stock at an exercise price of $2.21 per share to
Robert Murphy Living Trust, Gargoyle Productions Ltd., Retirement Trust, Futura
Investments Inc., Defined Benefit Pension Plan and Forest Lake Associates.
These warrants were issued as additional consideration for a loan made to the
Company by these persons through Futura Investments, Inc. (the "Futura Loan")
in the principal amount of $210,000. In connection with the offering, (i) each
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of these persons has represented to the Company, and the Company believed, that
each person was an Accredited Investor, (ii) the certificates representing the
securities contain appropriate restrictive legends regarding resale, and (iii)
the Company did not engage in any general solicitation or general
advertisement. The issuance and sale of these securities was made in reliance
on Section 4(2) of the Securities Act as a transaction not involving any public
offering.
From December 1995 through April 1996, the Company issued to 22 purchasers
units (the "Rhino Acquisition Units") comprised of an aggregate of $800,000 in
notes and warrants to purchase an aggregate of 188,265 shares of Common Stock
at an exercise price of $2.21 per share. The Rhino Acquisition Units were
issued to raise capital to satisfy a condition subsequent (the "Post Closing
Conditions") to which the Company agreed in connection with its acquisition of
Rhino. In January 1997, the Company issued 75,000 Class A Warrants to 16 of the
purchasers who purchased the Rhino Acquisition Units as consideration for their
agreement to extend the maturity date of the promissory notes included in the
Rhino Acquisition Units. Each "Class A Warrant" represents the right to
purchase one-half share of Common Stock for $4.00 per share. In connection with
the offering, (i) each of the purchasers represented to the Company, and the
Company believed, that each purchaser was an Accredited Investor, (ii) the
certificates representing the securities contain appropriate restrictive
legends regarding resale, and (iii) the Company did not engage in any general
solicitation or general advertisement. The issuance and sale of these
securities was made in reliance on Section 4(2) of the Securities Act as a
transaction not involving any public offering.
In connection with the offering of Rhino Acquisition Units, the Company
issued warrants to purchase 51,795 shares of Common Stock at an exercise price
of $2.21 per share to eight consultants who assisted the Company in locating
investors in the offering. The Company and/or its principal executive officers
or directors had a preexisting relationship with each of the consultants and,
based on this relationship, the Company reasonably concluded and believed that
each of the consultants was a sophisticated purchaser and was acquiring the
securities for themselves and not for other persons. Each consultant had
adequate access, through their employment or other relationships, to sufficient
information about the Company to make an informed investment decision. Each of
the warrant certificates issued to the consultants includes a legend providing
that neither the warrants nor the common stock issuable upon their exercise
have been registered under the Securities Act, and may not be transferred in
the absence of an effective registration statement or unless an exemption from
registration is available. Further, the Company did not engage in any general
advertisement or general solicitation in connection with the issuance of the
warrants. Based on the foregoing, the issuance and sale of these securities was
made in reliance on Section 4(2) of the Securities Act as a transaction not
involving any public offering.
In April 1996, the Company issued warrants to purchase 12,671 shares of
Common Stock at an exercise price of $2.21 per share to John McKey as
compensation for consulting services performed for the Company consisting of
the promotion of the Company's business and the investigation of strategic
acquisitions. Mr. McKey has represented to the Company, and the Company
believed, that Mr. McKey was an Accredited Investor, and the certificate
representing the securities issued to Mr. McKey contains an appropriate
restrictive legend regarding resale. The issuance and sale of these securities
was made in reliance on Section 4(2) of the Securities Act as a transaction not
involving any public offering.
In June 1996, the Company issued an aggregate of 402,027 shares of Common
Stock upon the automatic conversion of outstanding Series A Convertible
Preferred Stock in accordance with the Company's Certificate of Incorporation.
The issuance of these securities was made without payment to the Company of any
additional consideration and therefore was not a "sale" within the meaning of,
and not subject to, Section 5 of the Securities Act.
In June 1996, the Company issued an aggregate of 26,378 shares of Common
Stock to the Rhino Stockholders, who the Company believed were all Accredited
Investors, in consideration of their agreement to extend the date by which the
Company was required to satisfy the Post Closing Conditions. The issuance and
sale of these securities was made in reliance on Section 4(2) of the Securities
Act as a transaction not involving any public offering.
In June 1996, the Company issued options to purchase an aggregate of
20,750 shares of Common Stock to six employees at an exercise price of $4.00
per share. The Company believed that each of the employees was a
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sophisticated investor. Each of the employees had adequate access, through
their employment and other relationships with the Company, to sufficient
information about the Company to make an informed investment decision. The
certificates representing these options contain an appropriate restrictive
legend regarding resale. The issuance and sale of these securities was made in
reliance on Section 4(2) of the Securities Act as a transaction not involving
any public offering.
From June 1996 to August 1997, the Company issued an aggregate of
572,649.25 shares of Series B Convertible Preferred Stock at a price of $3.33
per share to 76 purchasers, of which 85,937 shares were purchased through the
conversion of $286,170 of outstanding indebtedness (the "Series B Offering").
In connection with the Series B Offering, each of the purchasers represented to
the Company, and the Company believed, that he was a "Qualified Purchaser" (as
that term is defined under Section 25102(n) of the California Corporations
Code), and the certificates representing the securities issued to the
purchasers contain an appropriate restrictive legend regarding resale. The
issuance and sale of these securities was made in reliance on Section 3(b) of
the Securities Act and Regulation CE promulgated thereunder.
In connection with the Series B Offering, the Company issued as
compensation to consultants who assisted the Company in locating investors in
the offering (i) an aggregate of 2,500 shares of Common Stock to Andrew Pollet
valued at $5, and (ii) 137,450 Class A Warrants to 19 consultants. The Company
believed that each of the consultants was a sophisticated investor. The
consultants had adequate access to sufficient information about the Company,
including all of the information contained in the private placement memorandum
used in the Series B Offering, to make an informed investment decision. The
certificates representing the securities issued to the consultants contain
appropriate restrictive legends regarding resale. The issuance and sale of
these securities was made in reliance on Section 4(2) of the Securities Act as
a transaction not involving any public offering.
In July 1996, the Company issued 25,000 shares of Common Stock valued at
$50 to American Growth Fund I L.P. ("American Growth") as additional
consideration for a $250,000 loan (the "AGF Loan") made by American Growth to
the Company. In April 1997, the Company issued an additional 12,500 shares of
Common Stock valued at $100,000 to American Growth in consideration of the
extension of the maturity date of the AGF Loan. American Growth represented to
the Company, and the Company believed, that American Growth was an Accredited
Investor, and the certificates representing the securities issued to American
Growth contain an appropriate restrictive legend regarding resale. The issuance
and sale of these securities was made in reliance on Section 4(2) of the
Securities Act as transactions not involving any public offering.
In May 1998, the Company agreed, effective upon consummation of this
offering, to issue to American Growth 15,306 shares of Common Stock in exchange
for the cancellation of $75,000 of the AGF Loan. American Growth has
represented to the Company, and the Company believes, that American Growth is
an Accredited Investor and that it will acquire the securities for its own
account for investment purposes and not with a view to or for sale in
connection with any distribution of the securities. The certificates
representing the securities to be issued to American Growth will contain
appropriate restrictive legends regarding resale. No underwriting fees,
brokerage or other fees or commissions will be paid in connection with this
exchange. The issuance and sale of these securities will be made in reliance on
Section 3(a)(9) of the Securities Act as a security exchanged by the Company
with an existing security holder exclusively.
In July and October 1996, the Company issued an aggregate of 50,000 shares
of Common Stock valued at $100 to John Pike, the Company's then Chief Executive
Officer and, by virtue of his position with the Company, an Accredited
Investor, as compensation for employment services. The certificates
representing these securities contain an appropriate restrictive legend
regarding resale. The issuance and sale of these securities was made in
reliance on Section 4(2) of the Securities Act as a transaction not involving
any public offering.
In July 1996, the Company issued 10,000 Class A Warrants to Robert Rein, a
stockholder of the Company and a partner in the law firm Saphler, Rein &
Walden, which serves as legal counsel to the Company, as additional
consideration for a $100,000 loan made to the Company by Mr. Rein. Mr. Rein has
represented to the Company, and the Company believed, that Mr. Rein was an
Accredited Investor, and the certificates representing these securities contain
an appropriate restrictive legend regarding resale. The issuance and sale of
these securities was made in reliance on Section 4(2) of the Securities Act as
a transaction not involving any public offering.
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<PAGE>
From August 1996 to October 1996, the Company issued an aggregate of
75,000 Class A Warrants to John Pike, Marco Garcia, James Braden and William
Bennetti, employees of the Company, as compensation for employment services.
The Company believed that each of the employees was a sophisticated purchaser.
Each of the employees had adequate access, through their employment and other
relationships with the Company, to sufficient information about the Coompany to
make an informed investment decision. The certificates representing the
securities issued to the employees contain an appropriate restrictive legend
regarding resale. The issuance and sale of these securities was made in
reliance on Section 4(2) of the Securities Act as a transaction not involving
any public offering.
In October 1996, the Company issued 10,000 Class A Warrants to Alex Trebek
as compensation for his appearance as a spokesperson in a corporate video
produced by the Company. Mr. Trebek represented to the Company, and the Company
believed, that he was an Accredited Investor, and the certificate representing
these securities contains an appropriate restrictive legend regarding resale.
The issuance and sale of these securities was made in reliance on Section 4(2)
of the Securities Act as a transaction not involving any public offering.
In December 1996, the Company issued 22,500 Class A Warrants to Racada
Corporation, a corporation owned by Robert Rein, a stockholder of the Company
and a partner in the law firm of Saphier, Rein & Walden, which serves as legal
counsel to the Company. Mr. Rein has represented to the Company, and the
Company believed, that Mr. Rein was an Accredited Investor. The warrants were
issued as compensation for business and financial consulting services performed
for the Company by Racada Corporation pursuant to a written Consulting
Agreement, dated October 11, 1996. The Company disclosed in the Consulting
Agreement that the warrants were subject to restrictions on transfer. The
Company believed that Racada Corporation would be acquiring the securities for
itself and not for other persons. The value of the services provided by Racada
Corporation and the value of all issuances of securities of the Company made in
reliance on the exemption afforded by Rule 701 under the Securities Act during
the 12 months preceding the issuance to Racada Corporation was less than
$500,000. The warrant certificate issued to Racada Corporation includes a
legend providing that neither the warrants nor the common stock issuable upon
their exercise have been registered under the Securities Act of 1933, as
amended, and may not be transferred in the absence of an effective registration
statement or unless an exemption from registration is available. The Company
did not engage in any general advertisement or general solicitation in
connection with the issuance of the securities to Racada Corporation. Based on
the foregoing, the issuance and sale of these securities was made in reliance
on Rule 701 as securities issued pursuant to a written compensation contract
with a consultant.
In December 1996, the Company issued an aggregate of 25,000 shares of
Common Stock valued at $50 to Futura Investments Inc. Defined Benefit Pension
Plan, Robert Murphy IRA, City National Bank Custodian, and Gargoyle Productions
Ltd. Retirement Trust (the "BMT Stockholders") in consideration of an extension
of the maturity date of a promissory note evidencing a loan (the "BMT Loan") in
the principal amount of $400,000 made by the BMT Stockholders to the Company in
June 1996. In August and October 1997, the Company issued an aggregate of
50,000 Class B Warrants valued at $240,000 and 25,000 Class B Warrants valued
at $195,000, respectively, to Forest Lake Associates, Alex Trebek, Trustee of
the Gargoyle Productions, Ltd. Retirement Trust and City National Bank, Trustee
for the Murphy Living Trust, all affiliates of the BMT Stockholders, in
consideration of two additional extensions of the maturity date of the BMT
Loan. Each "Class B Warrant" entitles the holder to purchase one-half share of
Common Stock for $.20. Each of the BMT Stockholders has represented to the
Company, and the Company believed, that it was an Accredited Investor, and the
certificates representing the securities issued to the BMT Stockholders and
their affiliates contain an appropriate restrictive legend regarding resale.
The issuance and sale of these securities was made in reliance on Section 4(2)
of the Securities Act as transactions not involving any public offering.
In December 1996 and March 1997, the Company issued an aggregate of 25,000
shares of Common Stock valued at $50 to John Pike, the Company's then Chief
Executive Officer and, by virtue of his position with the Company, an
Accredited Investor, as consideration for Mr. Pike's personal guaranty of the
Company's obligations under an agreement with its credit card processor. The
certificate representing these securities contains an appropriate restrictive
legend regarding resale. The issuance and sale of these securities was made in
reliance on Section 4(2) of the Securities Act as a transaction not involving
any public offering.
In January 1997, the Company issued 7,500 shares of Common Stock valued at
$15 to Rescor, Inc. as compensation for consulting services provided by Rescor,
Inc. to the Company consisting of administrative and
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management services. Rescor, Inc. is a corporation wholly-owned by Donald
Bergman, a former director of the Company who was serving on the board of
directors at the time of the issuance. Accordingly, by virtue of Mr. Bergman's
position with the Company, Rescor, Inc. was an Accredited Investor at the time
of the issuance. The Company believed that Rescor, Inc. was acquiring the
securities for itself and not for other persons. The Common Stock certificate
issued to Rescor, Inc. includes a legend providing that the securities have not
been registered under the Securities Act, and may not be transferred in the
absence of an effective registration statement or unless an exemption from
registration is available. Further, the Company did not engage in any general
advertisement or general solicitation in connection with the issuance of the
securities to Rescor, Inc. Based on the foregoing, the issuance and sale of
these securities was made in reliance on Section 4(2) of the Securities Act as
a transaction not involving any public offering.
In January 1997, the Company issued 15,000 Class A Warrants to John McKey
in consideration of the extension of the maturity date of a loan made by Mr.
McKey to the Company in the principal amount of $100,000. Mr. McKey has
represented to the Company, and the Company believed, that he was an Accredited
Investor, and the certificate representing the securities issued to Mr. McKey
contain an appropriate restrictive legend regarding resale. The issuance and
sale of these securities was made in reliance on Section 4(2) of the Securities
Act as transactions not involving any public offering.
In March 1997, the Company issued an aggregate of 15,000 Class B Warrants
to Forest Lake Associates, Alex Trebek and the Robert Murphy Living Trust as
consideration for their guaranties of the Company's obligations under a
promissory note evidencing a loan made to the Company by City National Bank in
March 1997. Each of these purchasers has represented to the Company, and the
Company believed, that it was an Accredited Investor, and the certificates
representing the securities issued to the purchasers contain an appropriate
restrictive legend regarding resale. The issuance and sale of these securities
was made in reliance on Section 4(2) of the Securities Act as a transaction not
involving any public offering.
In April 1997, the Company issued 6,000 shares of Common Stock to Steve
Garvey for $120 and for promotional services provided by Mr. Garvey to the
Company valued at $30,000. Mr. Garvey has represented to the Company, and the
Company believed, that he was an Accredited Investor, and the certificate
representing the securities issued to Mr. Garvey contains an appropriate
restrictive legend against resale. The issuance and sale of these securities
was made in reliance on Section 4(2) of the Securities Act as a transaction not
involving any public offering.
From May 1997 to September 1997, the Company issued an aggregate of
223,400 shares of Common Stock at a price of $5.00 per share to 23 purchasers
(the "May 1997 Offering"). In connection with the offering, (i) each of these
purchasers represented to the Company, and the Company believed, that it was a
Qualified Purchaser, (ii) the certificates representing the securities issued
to the purchasers contain an appropriate restrictive legend regarding resale,
and (iii) the Company did not engage in any general solicitation or general
advertisement. The issuance and sale of these securities was made in reliance
on Section 3(b) of the Securities Act and Regulation CE promulgated thereunder.
In connection with the May 1997 Offering, the Company issued as
compensation to consultants who assisted the Company in locating Investors in
the offering (i) an aggregate of 21,490 Class A Warrants valued at $21,490 to
each of Steven Sparks, a director of the Company, and Private Equity Partners,
L.L.C., and (ii) 250 shares of Common Stock valued at $1,250 to each of Michael
Frellich and Arnold Cooperman. In addition to its relationship with Steven
Sparks, who was a director of the Company and, by virtue of his position with
the Company, an Accredited Investor at the time of the issuance, the Company
had a preexisting relationship with each of the other consultants who received
securities in the issuance. Based on the Company's relationship with each of
the consultants, the Company believed that each of the consultants was a
sophisticated purchaser and was acquiring the securities for itself and not for
other persons. Each of the certificates representing the securities issued to
the consultants includes a legend providing that the securities have not been
registered under the Securities Act of 1933, as amended, and may not be
transferred in the absence of an effective registration statement or unless an
exemption from registration is available. Further, the Company did not engage
in any general advertisement or general solicitation in connection with the
issuance of the securities to these consultants. Based on the foregoing, the
issuance and sale of these securities was made in reliance on Section 4(2) of
the Securities Act as a transaction not involving any public offering.
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In June 1997, the Company issued 12,500 Class A Warrants valued at $6,250
to Richard Casey as compensation for business and financial consulting services
performed for the Company. Mr. Casey has represented to the Company, and the
Company believed, that he was an Accredited Investor, and the certificate
representing the securities issued to Mr. Casey contains an appropriate
restrictive legend regarding resale. The issuance and sale of these securities
was made in reliance on Section 4(2) of the Securities Act as a transaction not
involving any public offering.
In June 1997 and November 1997, the Company issued an aggregate of 45,000
Class A Warrants valued at $67,500 to Robert Friedland, a director of the
Company and, by virtue of his position with the Company, an Accredited
Investor, as compensation for management services performed for the Company.
The certificates representing the securities issued to Mr. Friedland contain an
appropriate restrictive legend regarding resale. The issuance and sale of these
securities was made in reliance on Section 4(2) of the Securities Act as
transactions not involving any public offering.
From September 1997 to April 1998, the Company issued an aggregate of
52,375 shares of Common Stock at a price of $8.00 per share to 20 purchasers
(the "September 1997 Offering"). In connection with the September 1997
Offering, (i) each of the stockholders represented to the Company, and the
Company believed, that it was a Qualified Purchaser, (ii) the certificates
representing these securities contain an appropriate restrictive legend
regarding resale, and (iii) the Company did not engage in any general
solicitation or general advertisement. The issuance and sale of these
securities was made in reliance on Section 3(b) of the Securities Act and
Regulation CE promulgated thereunder.
In connection with the September 1997 Offering, the Company issued 250
shares of Common Stock valued at $2,000 to Monte A. Stern as consideration for
assistance to the Company in locating investors in the offering. Mr. Stern has
represented to the Company, and the Company believed, that he was an Accredited
Investor, and the certificate representing these securities contains an
appropriate restrictive legend regarding resale. The issuance and sale of these
securities was made in reliance on Section 4(2) of the Securities Act as a
transaction not involving any public offering.
In November 1997, the Company issued 6,250 shares of Common Stock valued
at $50,000 to Anthony Tesoro as compensation for corporate finance and new
business development services performed for the Company. Mr. Tesoro has
represented to the Company, and the Company believed, that he was an Accredited
Investor, and the certificate representing these securities contains an
appropriate restrictive legend regarding resale. The issuance and sale of these
securities was made in reliance on Section 4(2) of the Securities Act as a
transaction not involving any public offering.
In November 1997, the Company issued 10,000 Class A Warrants valued at
$20,000 to James Robertson for computer modeling services performed for the
Company. The Company and Alfonso J. Cervantes, Jr., the Company's Chief
Executive Officer and director, had a preexisting relationship with Mr.
Robertson at the time of the issuance. Mr. Robertson has performed computer
modeling services for the Company from time to time since inception, and Mr.
Robertson has also performed such services for other business in which Mr.
Cervantes has been involved. Based on the foregoing, the Company believed that
Mr. Robertson was a sophisticated purchaser and that he would be acquiring the
securities for himself and not for other persons. Mr. Robertson had adequate
access, through his relationship with the Company, to sufficient information
about the Company to make an informed investment decision. The Common Stock
certificate issued to Mr. Robertson includes a legend providing that the
securities have not been registered under the Securities Act, and may not be
transferred in the absence of an effective registration statement or unless an
exemption from registration is available. Further, the Company did not engage
in any general advertisement or general solicitation in connection with the
issuance of the securities to Mr. Robertson. Based on the foregoing, the
issuance and sale of these securities was made in reliance on Section 4(2) of
the Securities Act as a transaction not involving any public offering.
In November 1997, the Company issued 20,000 shares of Common Stock valued
at $160,000 to Robert Rein as consideration for his agreement to extend the
maturity date of two promissory notes evidencing loans made to the Company by
Mr. Rein in June and October 1996. Mr. Rein represented to the Company, and the
Company believed, that he was an Accredited Investor, and the certificate
representing these securities contains an appropriate restrictive legend
regarding resale. The issuance and sale of these securities was made in
reliance on Section 4(2) of the Securities Act as a transaction not involving
any public offering.
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In November 1997, the Company issued 15,000 Class A Warrants to Joseph
DePanfilis, the Company's Chief Financial Officer, and, by virtue of his
position with the Company, an Accredited Investor, as compensation for
employment services. The certificate representing these securities contains an
appropriate restrictive legend regarding resale. The issuance and sale of these
securities was made in reliance on Section 4(2) of the Securities Act as a
transaction not involving any public offering.
From November 1997 through March 1998, the Company obtained loans (the
"1998 Loans") from ten lenders in the aggregate amount of $880,000. In
connection with the loans, the Company issued to the lenders an aggregate of
44,000 shares of Common Stock which the Company valued at $352,000. In
connection with these loans, (i) each of the lenders represented to the
Company, and the Company believed, that he was an Accredited Investor, (ii) the
certificates representing these securities contain an appropriate restrictive
legend regarding resale, and (iii) the Company did not engage in any general
solicitation or general advertisement. The issuance and sale of these
securities was made in reliance on Section 4(2) of the Securities Act as a
transaction not involving any public offering.
In connection with the 1998 Loans, the Company issued an aggregate of
44,000 shares of Common Stock valued at $352,000 to Steven Sparks, a director
of the Company, and Sparks Financial, Inc., a corporation wholly-owned by Mr.
Sparks, as consideration for assistance to the Company in locating the lenders.
By virtue of his position with the Company, Mr. Sparks and Sparks Financial,
Inc. are Accredited Investors. The certificates representing these securities
contain an appropriate restrictive legend regarding resale. The issuance and
sale of these securities was made in reliance on Section 4(2) of the Securities
Act as a transaction not involving any public offering.
In November 1997, the Company issued 17,500 shares of Common Stock valued
at $140,000 to Alfonso J. Cervantes, Jr., the Company's Chief Executive
Officer, and by virtue of his position with the Company, an Accredited Investor
and 8,750 shares of Common Stock valued at $70,000 to Norman A. Kunin, a
founder and former executive officer of the Company, who the Company believes
is an Accredited Investor, as consideration for their personal guarantees of
the Company's obligations under certain promissory notes evidencing amounts
owed by the Company in the aggregate principal amount of $750,000 for Mr.
Cervantes and $450,000 for Mr. Kunin. The certificates representing these
securities contain an appropriate restrictive legend regarding resale. The
issuance and sale of these securities was made in reliance on Section 4(2) of
the Securities Act as a transaction not involving any public offering.
In November 1997, the Company issued 2,500 shares of Common Stock valued
at $20,000 to Robert Friedland, a director of the Company, and by virtue of his
position with the Company, an Accredited Investor, in connection with a loan
made to the Company by Mr. Friedland in the principal amount of $40,000. The
certificate representing these securities contains an appropriate restrictive
legend regarding resale. The issuance and sale of these securities was made in
reliance on Section 4(2) of the Securities Act as a transaction not involving
any public offering.
In January 1998, the Company issued 3,000 Class A Warrants to Sharna
Dixon, the Company's Controller, as compensation for employment services. The
Company believed that Ms. Dixon was a sophisticated investor. Ms. Dixon had
adequate access, through her employment and other relationships with the
Company, to sufficient information about the Company to make an informed
investment decision. The certificate representing these securities contains an
appropriate restrictive legend regarding resale. The issuance and sale of these
securities was made in reliance on Section 4(2) of the Securities Act as a
transaction not involving any public offering.
In March 1998, the Company issued 3,400 shares of Common Stock valued at
$27,200 to Joseph DePanfilis, the Company's Chief Financial Officer, and, by
virtue of his position with the Company, an Accredited Investor, as
consideration for loans aggregating of $76,000 made to the Company by Mr.
DePanfilis. The certificate representing these securities contains an
appropriate restrictive legend regarding resale. The issuance and sale of these
securities was made in reliance on Section 4(2) of the Securities Act as a
transaction not involving any public offering.
In March 1998, the Company obtained a secured loan (the "March Loan") in
the amount of $1,000,000 from Jack Cancellieri. In connection with the loan,
the Company issued 76,250 shares of Common Stock to Mr.
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<PAGE>
Cancellieri which the Company valued at $610,000. If the number of shares issued
to Mr. Cancellieri (as adjusted for any stock dividend, reverse stock split or
stock split prior to the Offering) multiplied by the initial public offering
price shall be different than $610,000, Mr. Cancellieri and the Company have
agreed to adjust the number of shares so that the number of shares shall equal
$610,000 divided by the initial public offering price. In addition, the Company
has agreed to issue an additional 6,250 shares of Common Stock on the last day
of each calendar month, commencing the month of August 1998, that the loan shall
not have been repaid. The Company issued 6,250 shares of Common Stock to Mr.
Cancellieri in August 1998 pursuant to this provision. In connection with the
offering, (i) Mr. Cancellieri represented to the Company, and the Company
believed, that he was an Accredited Investor, (ii) the certificates representing
the securities issued to Mr. Cancellieri contain an appropriate restrictive
legend regarding resale, and (iii) the Company did not engage in any general
solicitation or general advertisement. The issuance and sale of these securities
was made in reliance on Section 4(2) of the Securities Act as a transaction not
involving any public offering. The Company paid a finder's fee of $125,000 to
Barry Grumman in connection with this loan. Prior to the date of this
Prospectus, the Company will issue 100,000 shares of Common Stock in exchange
for the cancellation of $400,000 principal amount of the March Loan. In
connection with this exchange, Mr. Cancellieri represented to the Company, and
the Company believes, that Mr. Cancellieri is an Accredited Investor and that he
is acquiring the securities for his own account for investment purposes
and not with a view to or for sale in connection with any distribution of the
securities. No underwriting fees, brokerage or other fees of commissions will be
paid in connection with the exchange. The certificates representing the
securities will contain appropriate restrictive legends regarding resale. The
issuance of these securities will be made in reliance on Section 3(a)(9) of the
Securities Act as a security exchanged by the Company with an existing security
holder exclusively.
In May 1998, the Company obtained secured loans (the "May Loans") in the
aggregate amount of $1,450,000 from Thomas Gallagher, Ritch Gaiti, Augustine
Fund, LP., IAC, Higgins Family LP., Corporate Communications Network, Inc.,
Stephen E. Hoffman and William Schuler. In connection with these loans, the
Company issued an aggregate of 90,625 shares of Common Stock to the lenders
which the Company valued at $725,000. If the number of shares issued to lenders
(as adjusted for any stock dividend, reverse stock split or stock split prior
to the public offering) multiplied by the initial public offering price shall
be different than $725,000, the lenders and the Company have agreed to adjust
the number of shares so that the number of shares shall equal $725,000 divided
by the initial public offering price. In addition, the Company has agreed to
issue an additional 10,272 shares of Common Stock on September 30, 1998 and
November 30, 1998 if the loans shall not have been repaid. In connection with
these loans, (i) each lender represented to the Company, and the Company
believed, that he was an Accredited Investor, (ii) the certificates
representing the securities issued to the lenders contain an appropriate
restrictive legend regarding resale, and (iii) the Company did not engage in
any general solicitation or general advertisement. The issuance and sale of
these securities was made in reliance on Section 4(2) of the Securities Act as
a transaction not involving any public offering. The Company paid a
finder's-fee of $130,000 to Stone Pine Capital in connection with these loans.
Prior to the date of this Prospectus, the Company will issue an aggregate of
206,250 shares of Common Stock in exchange for the cancellation of $825,000
principal amount on the May Loans. In connection with this exchange, each of the
persons or entities represented to the Company, and the Company believes, that
he or it is an Accredited Investor and that he or it is acquiring the securities
for his or its own account for investment purposes and not with a view to or for
sale in connection with any distribution of the securities. No underwriting
fees, brokerage or other fees or commissions will be paid in connection with the
exchange. The certificates representing the securities will contain appropriate
restrictive legends regarding resale. The issuance of these securities will be
made in reliance on Section 3(a)(9) of the Securities Act as a security
exchanged by the Company with existing security holders exclusively.
Prior to the date of the Prospectus, the Company will issue an aggregate
of 81,122 shares of Common Stock in exchange for the cancellation of $397,500
amount of principal and accrued interest on the 1998 Loans to Anthony J.
Tesoro, Chuck Burtzloff as trustee for the Burtzloff Family Trust, Stephen R.
Pate, PacWest Group, JHS, LLC, Dan Sandel, the William Bickley Family Trust and
James M. Agate. In connection with this exchange, each of the persons
represented to the Company, and the Company believes, that he is an Accredited
Investor and that such person is acquiring the securities for his own account
for investment purposes and not with a view to or for sale in connection with
any distribution of the securities. No underwriting fees, brokerage or other
fees or commissions will be paid in connection with the exchange. The
certificates representing the securities issued to these persons will contain
appropriate restrictive legends regarding resale. The issuance and sale of
these securities will be made in reliance on Section 3(a)(9) of the Securities
Act as a security exchanged by the Company with its existing security holders
exclusively.
Prior to the date of the Prospectus, the Company will issue an aggregate
of approximately 175,109 shares of Common Stock in exchange for 1,050,655 Class
A Warrants held by approximately 71 warrant holders of the
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<PAGE>
Company. In connection with this exchange, each of the warrant holders
represented to the Company that he was an Accredited Investor and/or that such
person had a pre-existing personal or business relationship with one or more of
the Company's officers or directors and had the knowledge and experience in
financial and business matters that enabled such person to evaluate the merits
and risks of the investment in the securities and in protecting such persons
interest in the transaction. The Company believes that each of the warrant
holders is an Accredited Investor and/or a sophisticated purchaser. Each of the
warrant holders represented to the Company that such person was acquiring the
securities for its own account for investment purposes and not with a view to
or for sale in connection with any distribution of the securities. No
underwriting fees, brokerage or other fees or commissions were paid in
connection with the exchange. The certificates representing the securities to
be issued to these persons will contain appropriate restrictive legends
regarding resale. The issuance and sale of these securities will be made in
reliance on Section 3(a)(9) of the Securities Act as a security exchanged by
the Company with its existing security holders exclusively.
In July 1998, the Company issued 2,500 shares of Common Stock to Frank
Norton, as part of the consideration for software developed by Mr. Norton for
the Company. In June 1998, Frank Norton became the Company's Director of
Management Information Services. In connection with this issuance, the Company
believed that Mr. Norton was a sophisticated investor. Mr. Norton had adequate
access, through his employment or other relationships with the Company, to
sufficient information about the Company to make an informed investment
decision. Mr. Norton represented to the Company that he was acquiring the
securities for his own account for investment purposes and not with a view to
or for sale in connection with any distribution of the securities. The
certificates representing the securities issued to Mr. Norton contain
appropriate restrictive legends regarding resale. The issuance and sale of
these securities was made in reliance on Section 4(2) of the Securities Act as
a transaction not involving any public offering.
In July 1998, the Company issued 10,000 shares of Common Stock to Robert
Rein, Esq., of the law firm of Saphier, Rein & Walden, who serves as legal
counsel to the Company, in consideration of legal services rendered by Mr.
Rein. In connection with this issuance, Mr. Rein represented to the Company,
and the Company believed, that he was an Accredited Investor. In addition, Mr.
Rein represented to the Company that he was purchasing the securities for his
own account for investment purposes and not with a view to or for sale in
connection with any distribution of the securities. The certificates
representing the securities issued to Mr. Rein contain appropriate restrictive
legends regarding resale. The issuance and sale of these securities was made in
reliance on Section 4(2) of the Securities Act as a transaction not involving
any public offering.
Prior to the date of the Prospectus, the Company will issue to Richard
Casey 18,674 shares of Common Stock in exchange for the cancellation of $91,500
of principal and accrued interest. In connection with this issuance, Mr. Casey
represented to the Company, and the Company believes, that he is an Accredited
Investor and that he is acquiring the securities for his own account for
investment purposes and not with a view to or for sale in connection with any
distribution of the securities. The certificates representing the securities to
be issued to Mr. Casey will contain appropriate restrictive legends regarding
resale. No underwriting fees, brokerage or other fees or commissions will be
paid in connection with this exchange. The issuance and sale of these
securities will be made in reliance on Section 3(a)(9) of the Securities Act as
a security exchanged by the Company with an existing security holder
exclusively.
Effective immediately prior to the effective date of this Registration
Statement, the Company will issue 571,429 shares of Common Stock to Gary Player
Golf, Inc. ("GPG") as partial consideration for the acquisition by the Company
of the assets of the golf equipment operations of GPG (the "Player
Acquisition"). In connection with this issuance, GPG has represented to the
Company, and the Company believes, that GPG is an Accredited Investor. In
addition, GPG has represented to the Company that it will acquire the
securities for its own account for investment purposes and not with a view to
or for sale in connection with any distribution of the securities. The
certificates representing the securities to be issued to GPG will contain
appropriate restrictive legends regarding resale. The issuance and sale of
these securities will be made in reliance on Section 4(2) of the Securities Act
as a transaction not involving any public offering.
Prior to the date of this Prospectus, the Company will issue to Eurogolf
Ltd. Hallard & Knight, Chase America and Shaifer & Olsen an aggregate of 41,837
shares of Common Stock in exchange for the cancellation of $205,000 of
liabilities to be assumed by the Company in the Player Acquisition. In
connection with this exchange, each of the entities represented to the Company,
and the Company
II-10
<PAGE>
believes, that it is an Accredited Investor and that such entity is acquiring
the securities for its own account for investment purposes and not with a view
to or for sale in connection with any distribution of the securities. The
certificates representing these securities will contain approprate rrestrictive
legends regarding resale. The issuance and sale of these securities will be
made in reliance on Section 4(2) of the Securities Act as a transaction not
involving any public offering.
Item 27. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- -------- ----------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
1.2 Form of Underwriter's Warrant Agreement, including form of warrant certificate.
1.3 Form of Underwriter's Consulting Agreement.
2.1 Asset Purchase Agreement, dated November 1, 1997, by and between the Registrant and the Gary
Player Group, Inc., as amended.*
3.1 Proposed Form of Amended and Restated Certificate of Incorporation of Registrant.*
3.2 Bylaws of Registrant.*
4.1 Specimen Stock Certificate of Common Stock of Registrant.*
5.1 Opinion and Consent of Troop Meisinger Steuber & Pasich, LLP.*
10.1 Form of Indemnification Agreement.*
10.2 Standard Sublease Agreement, dated as of January 20, 1995, between Comstream Corporation and
Rhino Marketing Inc.*
10.3 Form of Proposed 1998 Stock Option Plan.*
10.4 Employment Agreement between Registrant and Alfonso J. Cervantes, Jr.*
10.5 Employment Agreement between Registrant and Joseph J. White.*
10.6 Employment Agreement between Registrant and Joseph A. DePanfilis.*
10.7 Consulting Agreement, dated May 31, 1998, between Sparks Financial, Inc. and the Registrant.*
10.8 Consulting Agreement, dated May 31, 1998, between Robert Friedland and the Registrant.*
10.9 Consulting Agreement, dated May 31, 1998, between Marc B. Player and the Registrant.*
10.10 Player License Agreement, dated as of November 1, 1997, between Gary Player Group, Inc. and
Gary Player.*
10.11 WSE License Agreement, dated as of November 1, 1997, between Gary Player Group, Inc. and
World Services Establishment.*
10.12 Promissory Note, dated as of March 4, 1996, from Trilogy Capital Group, Inc. to the Registrant.*
10.13 Secured Promissory Note in the principal amount of $1,000,000, dated as of March 13, 1998, in
favor of Jack Cancellieri.*
10.14 Form of Secured Promissory Note in favor of eight lenders in connection with loans aggregating
$1,450,000.*
21.1 List of Subsidiaries of Registrant.*
23.1 Consent of Troop, Steuber, Pasich, Reddick & Tobey, LLP.
23.2 Consent of Grant Thornton LLP.
24.1 Power of Attorney (included in signature page).*
27.1 Financial Data Schedule.
99.1 Consent of Gary Player to be named in the Registration Statement.*
99.2 Consent of Joseph J. White to be named in the Registration Statement.*
99.3 Consent of Marc Player to be named in the Registration Statement.*
</TABLE>
- ------------
* Previously filed.
Item 28. Undertakings.
The undersigned Registrant hereby undertakes:
(a) 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.
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<PAGE>
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer of
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by a controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For the purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and has duly caused this Amendment No. 2
to Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Los Angeles, State of California, on
August 18, 1998.
GARY PLAYER GOLF, INC.
By: /s/ Alfonso J. Cervantes, Jr.
-----------------------------------
Alfonso J. Cervantes, Jr.
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Alfonso J. Cervantes, Jr. President, Chief Executive Officer and August 18, 1998
------------------------------- Director
Alfonso J. Cervantes, Jr.
* Chief Financial Officer and Secretary August 18, 1998
------------------------------- (Principal Financial and Accounting
Joseph A. DePanfilis Officer)
* Director August 18, 1998
-------------------------------
Robert J. Friedland
* Director August 18, 1998
-------------------------------
Steven O. Sparks
*By: /s/ Alfonso J. Cervantes, Jr.
-----------------------------
Alfonso J. Cervantes, Jr.
his Attorney-In-Fact
</TABLE>
II-13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
- ------- -------------------
<S> <C>
1.1 Form of Underwriting Agreement.
1.2 Form of Underwriter's Warrant Agreement, including form of warrant certificate.
1.3 Form of Underwriter's Consulting Agreement.
2.1 Asset Purchase Agreement, dated November 1, 1997, by and between the Registrant and the Gary
Player Group, Inc., as amended.*
3.1 Proposed Form of Amended and Restated Certificate of Incorporation of Registrant.*
3.2 Bylaws of Registrant.*
4.1 Specimen Stock Certificate of Common Stock of Registrant.*
5.1 Opinion and Consent of Troop Meisinger Steuber & Pasich, LLP.*
10.1 Form of Indemnification Agreement.*
10.2 Standard Sublease Agreement, dated as of January 20, 1995, between Comstream Corporation and
Rhino Marketing Inc.*
10.3 Form of Proposed 1998 Stock Option Plan.*
10.4 Employment Agreement between Registrant and Alfonso J. Cervantes, Jr.*
10.5 Employment Agreement between Registrant and Joseph J. White.*
10.6 Employment Agreement between Registrant and Joseph A. DePanfilis.*
10.7 Consulting Agreement, dated May 31, 1998, between Sparks Financial, Inc. and the Registrant.*
10.8 Consulting Agreement, dated May 31, 1998, between Robert Friedland and the Registrant.*
10.9 Consulting Agreement, dated May 31, 1998, between Marc B. Player and the Registrant.*
10.10 Player License Agreement, dated as of November 1, 1997, between Gary Player Group, Inc. and
Gary Player.*
10.11 WSE License Agreement, dated as of November 1, 1997, between Gary Player Group, Inc. and
World Services Establishment.*
10.12 Promissory Note, dated as of March 4, 1996, from Trilogy Capital Group, Inc. to the Registrant.*
10.13 Secured Promissory Note in the principal amount of $1,000,000, dated as of March 13, 1998, in
favor of Jack Cancellieri.*
10.14 Form of Secured Promissory Note in favor of eight lenders in connection with loans aggregating
$1,450,000.*
21.1 List of Subsidiaries of Registrant.*
23.1 Consent of Troop, Steuber, Pasich, Reddick & Tobey, LLP.
23.2 Consent of Grant Thornton LLP.
24.1 Power of Attorney (included in signature page).*
27.1 Financial Data Schedule.
99.1 Consent of Gary Player to be named in the Registration Statement.*
99.2 Consent of Joseph J. White to be named in the Registration Statement.*
99.3 Consent of Marc Player to be named in the Registration Statement.*
</TABLE>
- ------------
* Previously filed.
<PAGE>
GARY PLAYER GOLF, INC.
1,600,000 Shares of Common Stock
(Par Value $.001 Per Share)
UNDERWRITING AGREEMENT
----------------------
Whale Securities Co., L.P New York, New York
650 Fifth Avenue ___________, 1998
New York, New York 10019
Dear Sirs:
Gary Player Golf, Inc., a Delaware corporation (the
"Company"), proposes to issue and sell to Whale Securities Co., L.P. (the
"Underwriter") 1,600,000 shares of common stock, par value $.001 per share (the
"Offered Shares"), which Offered Shares are presently authorized but unissued
shares of the common stock, par value $.001 per share (individually, a "Common
Share" and collectively the "Common Shares"), of the Company. In addition, the
Underwriter, in order to cover over-allotments in the sale of the Offered
Shares, may purchase up to an aggregate of 240,000 Common Shares (the "Optional
Shares"; the Offered Shares and the Optional Shares are hereinafter sometimes
collectively referred to as the "Shares"). The Shares are described in the
Registration Statement, as defined below. The Company also proposes to issue and
sell to the Underwriter for its own account and the accounts of its designees,
warrants to purchase an aggregate of 160,000 Common Shares at an exercise price
of $11.55 per share (the "Underwriter's Warrants"), which sale will be
consummated in accordance with the terms and conditions of the form of
Underwriter's Warrant filed as an exhibit to the Registration Statement (as
hereinafter defined).
The Company hereby confirms its agreement with the Underwriter
as follows:
1. Purchase and Sale of Offered Shares. On the basis of the
representations and warranties herein contained, but subject to the terms and
conditions herein set forth, the Company hereby agrees to sell the Offered
Shares to the Underwriter, and the Underwriter agrees to purchase the Offered
Shares from the Company, at a purchase price of $6.30 per share. The Underwriter
plans to offer the Shares to the public at a public offering price of $7.00 per
Offered Share.
2. Payment and Delivery.
(a) Payment for the Offered Shares will be made to
the Company by wire transfer or certified or official bank check or
<PAGE>
checks payable to its order in New York Clearing House funds, at the offices of
the Underwriter, Whale Securities Co., L.P., 650 Fifth Avenue, New York, New
York 10019, against delivery of the Offered Shares to the Underwriter (the
"Closing"). Such payment and delivery will be made at ______________, New York
City time, on the third business day following the Effective Date (the fourth
business day following the Effective Date in the event that trading of the
Offered Shares commences on the day following the Effective Date), the date and
time of such payment and delivery being herein called the "Closing Date." The
certificates representing the Offered Shares to be delivered will be in such
denominations and registered in such names as the Underwriter may request not
less than two full business days prior to the Closing Date, and will be made
available to the Underwriter for inspection, checking and packaging at the
office of the Company's transfer agent or correspondent in New York City,
American Stock Transfer & Trust Company, 40 Wall Street, New York, New York
10005 not less than one full business day prior to the Closing Date.
(b) On the Closing Date, the Company will sell the
Underwriter's Warrants to the Underwriter or to the designees of the Underwriter
limited to officers and partners of the Underwriter, members of the selling
group and/or their officers or partners (collectively, the "Underwriter's
Designees"). The Underwriter's Warrants will be in the form of, and in
accordance with, the provisions of the Underwriter's Warrant attached as an
exhibit to the Registration Statement. The aggregate purchase price for the
Underwriter's Warrants is $160.00. The Underwriter's Warrants will be restricted
from sale, transfer, assignment or hypothecation for a period of one year from
the Effective Date, except to the Underwriter's Designees. Payment for the
Underwriter's Warrants will be made to the Company by check or checks payable to
its order on the Closing Date against delivery of the certificates representing
the Underwriter's Warrants. The certificates representing the Underwriter's
Warrants will be in such denominations and such names as the Underwriter may
request prior to the Closing Date.
3. Option to Purchase Optional Shares.
----------------------------------
(a) For the purposes of covering any overallotments
in connection with the distribution and sale of the Offered Shares as
contemplated by the Prospectus, the Underwriter is hereby granted an option to
purchase all or any part of the Optional Shares from the Company. The purchase
price to be paid for the Optional Shares will be the same price per Optional
Share as the price per Offered Share set forth in Section 1 hereof. The option
granted hereby may be exercised by the Underwriter as to all or any part of the
Optional Shares at any time within 45 days after the Effective Date. The
Underwriter will not be under any obligation
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<PAGE>
to purchase any Optional Shares prior to the exercise of such option.
(b) The option granted hereby may be exercised by the
Underwriter by giving oral notice to the Company, which must be confirmed by a
letter, telex or telegraph setting forth the number of Optional Shares to be
purchased, the date and time for delivery of and payment for the Optional Shares
to be purchased and stating that the Optional Shares referred to therein are to
be used for the purpose of covering over-allotments in connection with the
distribution and sale of the Offered Shares. If such notice is given prior to
the Closing Date, the date set forth therein for such delivery and payment will
not be earlier than either two full business days thereafter or the Closing
Date, whichever occurs later. If such notice is given on or after the Closing
Date, the date set forth therein for such delivery and payment will not be
earlier than two full business days thereafter. In either event, the date so set
forth will not be more than five full business days after the date of such
notice. The date and time set forth in such notice is herein called the "Option
Closing Date." Upon exercise of such option, the Company will become obligated
to convey to the Underwriter, and, subject to the terms and conditions set forth
in Section 3(d) hereof, the Underwriter will become obligated to purchase, the
number of Optional Shares specified in such notice.
(c) Payment for any Optional Shares purchased will be
made to the Company by wire transfer or certified or official bank check or
checks payable to its order in New York Clearing House funds, at the office of
the Underwriter, against delivery of the Optional Shares purchased to the
Underwriter. The certificates representing the Optional Shares to be delivered
will be in such denominations and registered in such names as the Underwriter
requests not less than two full business days prior to the Option Closing Date,
and will be made available to the Underwriter for inspection, checking and
packaging at the aforesaid office of the Company's transfer agent or
correspondent not less than one full business day prior to the Option Closing
Date.
(d) The obligation of the Underwriter to purchase and
pay for any of the Optional Shares is subject to the accuracy and completeness
(as of the date hereof and as of the Option Closing Date) of and compliance in
all material respects with the representations and warranties of the Company
herein, to the accuracy and completeness of the statements of the Company or its
officers made in any certificate or other document to be delivered by the
Company pursuant to this Agreement, to the performance in all material respects
by the Company of its obligations hereunder which are required to be performed
prior to the Option Closing Date, to the satisfaction by the Company of the
conditions, as of the date hereof and as of the Option Closing Date, set forth
in
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<PAGE>
Section 6 hereof, and to the delivery to the Underwriter of opinions,
certificates and letters dated the Option Closing Date substantially similar in
scope to those specified in Section 5, 6(b), (c), (d) and (e) hereof, but with
each reference to "Offered Shares" and "Closing Date" to be, respectively, to
the Optional Shares and the Option Closing Date.
4. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriter that:
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
with full power and authority, corporate and other, to own or lease and operate,
as the case may be, its properties, whether tangible or intangible, and to
conduct its business as described in the Registration Statement and to execute,
deliver and perform this Agreement and the Underwriter's Warrant Agreement and
to consummate the transactions contemplated hereby and thereby. The Company is
duly qualified to do business as a foreign corporation and is in good standing
in all jurisdictions wherein such qualification is necessary and failure so to
qualify could have a material adverse effect on the financial condition, results
of operations, business or properties (a "Material Adverse Effect") of the
Company. The Company has no subsidiaries other than Gran Prix Marketing, Inc.
(the "Material Subsidiary") and Rhino Marketing, Inc. (collectively, the
"Subsidiaries"), and the Company has no equity interests in any entity other
than the Subsidiaries.
Each Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of the state of California,
with full power and authority, corporate or other, to own or lease and operate,
as the case may be, its respective properties, whether tangible or intangible,
and to conduct its respective business as described in the Registration
Statement. Each Subsidiary is duly qualified to do business as a foreign
corporation and is in good standing in all jurisdictions wherein such
qualification is necessary and failure to so qualify could have a Material
Adverse Effect on the Company and the Subsidiaries, taken as a whole.
The Company owns all of the issued and outstanding
shares of capital stock of the Material Subsidiary, free and clear of any
security interests, liens, encumbrances, claims and charges, except for such
security interests, liens, encumbrances, claims and charges which secure
indebtedness which is described in the Registration Statement and which the
Company covenants to repay within three days following the Closing Date, and all
of such shares have been duly authorized and validly issued and are fully paid
and nonassessable. There are no options or warrants for the
-4-
<PAGE>
purchase of, or other rights to purchase, or outstanding securities convertible
into or exchangeable for, any capital stock or other securities of any
Subsidiary.
(b) This Agreement has been duly executed and
delivered by the Company and constitutes the valid and binding obligation of the
Company, and each of the Underwriter's Warrant Agreement and the Consulting
Agreement described in Section 5(r) hereof (the "Consulting Agreement"), when
executed and delivered by the Company on the Closing Date, will be the valid and
binding obligations of the Company, enforceable against the Company in
accordance with their respective terms. The execution, delivery and performance
of this Agreement, the Consulting Agreement and the Underwriter's Warrant
Agreement by the Company, the consummation by the Company of the transactions
herein and therein contemplated and the compliance by the Company with the terms
of this Agreement, the Consulting Agreement and the Underwriter's Warrant
Agreement have been duly authorized by all necessary corporate action and do not
and will not, with or without the giving of notice or the lapse of time, or
both, (i) result in any violation of the Certificate of Incorporation or
By-Laws, each as amended, of the Company; (ii) result in a breach of or conflict
with any of the terms or provisions of, or constitute a default under, or result
in the modification or termination of, or result in the creation or imposition
of any lien, security interest, charge or encumbrance upon any of the properties
or assets of the Company or any Subsidiary pursuant to any indenture, mortgage,
note, contract, commitment or other agreement or instrument to which the Company
or any Subsidiary is a party or by which the Company or any Subsidiary or any of
their respective properties or assets is or may be bound or affected; (iii)
violate any existing applicable law, rule, regulation, judgment, order or decree
of any governmental agency or court, domestic or foreign, having jurisdiction
over the Company or any Subsidiary or any of their respective properties or
businesses; or (iv) have any effect on any permit, certification, registration,
approval, consent order, license, franchise or other authorization
(collectively, the "Permits") necessary for the Company or the Material
Subsidiary to own or lease and operate their respective properties and to
conduct their respective businesses or the ability of the Company to make use
thereof.
(c) No Permits of any court or governmental agency or
body, other than under the Securities Act of 1933, as amended (the "Act"), the
Regulations (as hereinafter defined) and applicable state securities or Blue Sky
laws, are required (i) for the valid authorization, issuance, sale and delivery
of the Shares to the Underwriter, and (ii) the consummation by the Company of
the transactions contemplated by this Agreement, the Consulting Agreement or the
Underwriter's Warrant Agreement.
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(d) The conditions for use of a registration
statement on Form SB-2 set forth in the General Instructions to Form SB-2 have
been satisfied with respect to the Company, the transactions contemplated herein
and in the Registration Statement. The Company has prepared in conformity with
the requirements of the Act and the rules and regulations (the "Regulations") of
the Securities and Exchange Commission (the "Commission") and filed with the
Commission a registration statement (File No. 333-53729) on Form SB-2 and has
filed one or more amendments thereto, covering the registration of the Shares,
the Underwriter's Warrants and the Warrant Shares under the Act, including the
related preliminary prospectus or preliminary prospectuses (each thereof being
herein called a "Preliminary Prospectus") and a proposed final prospectus. Each
Preliminary Prospectus was endorsed with the legend required by Item 501(a)(5)
of Regulation S-B of the Regulations and, if applicable, Rule 430A of the
Regulations. Such registration statement including any documents incorporated by
reference therein and all financial schedules and exhibits thereto, as amended
at the time it becomes effective, and the final prospectus included therein are
herein, respectively, called the "Registration Statement" and the "Prospectus,"
except that, (i) if the prospectus filed by the Company pursuant to Rule 424(b)
of the Regulations differs from the Prospectus, the term "Prospectus" will also
include the prospectus filed pursuant to Rule 424(b), and (ii) if the
Registration Statement is amended or such Prospectus is supplemented after the
date the Registration Statement is declared effective by the Commission (the
"Effective Date") and prior to the Option Closing Date, the terms "Registration
Statement" and "Prospectus" shall include the Registration Statement as amended
or supplemented.
(e) Neither the Commission nor, to the best of the
Company's knowledge, any state regulatory authority has issued any order
preventing or suspending the use of any Preliminary Prospectus or has instituted
or, to the best of the Company's knowledge, threatened to institute any
proceedings with respect to such an order.
(f) The Registration Statement when it becomes
effective, the Prospectus (and any amendment or supplement thereto) when it is
filed with the Commission pursuant to Rule 424(b), and both documents as of the
Closing Date and the Option Closing Date, will contain all statements which are
required to be stated therein in accordance with the Act and the Regulations and
will in all material respects conform to the requirements of the Act and the
Regulations, and neither the Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, on such dates, 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, in light of the
circumstances under
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which they were made, not misleading, except that this representation and
warranty does not apply to statements or omissions 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.
(g) The Company had at the date or dates indicated in
the Prospectus a duly authorized and outstanding capitalization as set forth in
the Prospectus. Based on the assumptions stated in the Registration Statement
and the Prospectus, the Company will have on the Closing Date the adjusted stock
capitalization set forth therein. Except as set forth in the Registration
Statement or the Prospectus, on the Effective Date and on the Closing Date,
there will be no options to purchase, warrants or other rights to subscribe for,
or any securities or obligations convertible into, or any contracts or
commitments to issue or sell shares of the Company's capital stock or any such
warrants, convertible securities or obligations. Except as set forth in the
Prospectus, no holders of any of the Company's securities has any rights,
"demand," "piggyback" or otherwise, to have such securities registered under the
Act.
(h) The descriptions in the Registration Statement
and the Prospectus of contracts and other documents are accurate in all material
respects and present fairly the information required to be disclosed, and there
are no contracts or other documents required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement under the Act or the Regulations which have not been so described or
filed as required.
(i) Grant Thornton LLP, the accountants who have
certified certain of the consolidated financial statements filed and to be filed
with the Commission as part of the Registration Statement and the Prospectus,
are independent public accountants within the meaning of the Act and
Regulations. The consolidated financial statements and schedules and the notes
thereto filed as part of the Registration Statement and included in the
Prospectus are complete, correct and present fairly the financial position of
the Company as of the dates thereof, and the results of operations and changes
in financial position of the Company for the periods indicated therein, all in
conformity with generally accepted accounting principles applied on a consistent
basis throughout the periods involved except as otherwise stated in the
Registration Statement and the Prospectus. The selected financial data set forth
in the Registration Statement and the Prospectus present fairly the information
shown therein and have been compiled on a basis consistent with that of the
audited and unaudited financial
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statements included in the Registration Statement and the Prospectus.
(j) The Company and each Subsidiary has filed with
the appropriate federal, state and local governmental agencies, and all
appropriate foreign countries and political subdivisions thereof, all tax
returns, including franchise tax returns, which are required to be filed or has
duly obtained extensions of time for the filing thereof and has paid all taxes
shown on such returns and all assessments received by it to the extent that the
same have become due, except where the failure to do so would not have a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole;
and the provisions for income taxes payable, if any, shown on the consolidated
financial statements filed with or as part of the Registration Statement are
sufficient for all accrued and unpaid foreign and domestic taxes, whether or not
disputed, and for all periods to and including the dates of such consolidated
financial statements. Except as disclosed in writing to the Underwriter, neither
the Company nor any Subsidiary has executed or filed with any taxing authority,
foreign or domestic, any agreement extending the period for assessment or
collection of any income taxes and is not a party to any pending action or
proceeding by any foreign or domestic governmental agency for assessment or
collection of taxes; and no claims for assessment or collection of material
taxes have been asserted against the Company or any Subsidiary which are
currently outstanding.
(k) The outstanding Common Shares and outstanding
options and warrants to purchase Common Shares have been duly authorized and
validly issued. The outstanding Common Shares are fully paid and nonassessable.
None of the outstanding Common Shares or options or warrants to purchase Common
Shares has been issued in violation of the preemptive rights of any shareholder
of the Company, except for such violations which have been waived or with
respect to which there would not be a Material Adverse Effect on the Company and
the Subsidiaries, taken as a whole. The offers and sales of the outstanding
Common Shares and outstanding options and warrants to purchase Common Shares
were at all relevant times either registered under the Act and the applicable
state securities or Blue Sky laws or exempt from such registration requirements,
except where the failure to have been so registered or except would not have a
Material Adverse Effect on the Company and the Subsidiaries, taken as a whole.
The authorized Common Shares and Preferred Shares and outstanding options and
warrants to purchase Common Shares conform to the descriptions thereof contained
in the Registration Statement and Prospectus.
(l) No securities of the Company have been sold by
the Company within the three years prior to the date hereof, except as disclosed
in the Registration Statement.
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<PAGE>
(m) The issuance and sale of the Shares have been
duly authorized and, when the Shares have been issued and duly delivered against
payment therefor as contemplated by this Agreement, the Shares will be validly
issued, fully paid and nonassessable, and the holders thereof will not be
subject to personal liability solely by reason of being such holders. The Shares
will not be subject to preemptive rights of any shareholder of the Company.
(n) The issuance and sale of the Common Shares
issuable upon exercise of the Underwriter's Warrants have been duly authorized
and, when such Common Shares have been duly delivered against payment therefor,
as contemplated by the Underwriter's Warrant Agreement, such Common Shares will
be validly issued, fully paid and nonassessable. Holders of Common Shares
issuable upon the exercise of the Underwriter's Warrants will not be subject to
personal liability solely by reason of being such holders. Neither the
Underwriter's Warrants nor the Common Shares issuable upon exercise thereof will
be subject to preemptive rights of any shareholder of the Company. The Common
Shares issuable upon exercise of the Underwriter's Warrants have been duly
reserved for issuance upon exercise of the Underwriter's Warrants in accordance
with the provisions of the Underwriter's Warrant Agreement. The Underwriter's
Warrants conform to the descriptions thereof contained in the Registration
Statement and the Prospectus.
(o) Neither the Company nor the Material Subsidiary
is in violation of, or in default under, (i) any term or provision of its
Certificate of Incorporation or By-Laws, each as amended; (ii) any material term
or provision or any financial covenants of any indenture, mortgage, contract,
commitment or other agreement or instrument to which it is a party or by which
it or any of its property or business is or may be bound or affected, except for
indebtedness under certain notes as set forth in the Prospectus which the
Company covenants to repay within three business days from the Closing Date; or
(iii) any existing applicable law, rule, regulation, judgment, order or decree
of any governmental agency or court, domestic or foreign, having jurisdiction
over the Company or the Material Subsidiary or any of the Company's or the
Material Subsidiary's properties or business, except where such breaches or
defaults, individually or in the aggregate, would not have a Material Adverse
Effect on the Company and the Subsidiaries, taken as a whole. The Company and
each Subsidiary owns, possesses or has obtained all governmental and other
(including those obtainable from third parties) Permits, necessary to own or
lease, as the case may be, and to operate its properties, whether tangible or
intangible, and to conduct its business and operations as presently conducted
and all such Permits are outstanding and in good standing, and there are no
proceedings pending or, to the best of
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the Company's knowledge, threatened, or any basis therefor, seeking to cancel,
terminate or limit such Permits.
(p) Except as set forth in the Prospectus, there are
no claims, actions, suits, proceedings, arbitrations, investigations or
inquiries before any governmental agency, court or tribunal, domestic or
foreign, or before any private arbitration tribunal, pending, or, to the best of
the Company's knowledge, threatened against the Company or any Subsidiary or
involving the Company's or any Subsidiary's properties or business which, if
determined adversely to the Company or any Subsidiary, would, individually or in
the aggregate, would not have a Material Adverse Effect on the Company and the
Subsidiaries, taken as a whole, or which question the validity of the capital
stock of the Company or this Agreement or of any action taken or to be taken by
the Company pursuant to, or in connection with, this Agreement; nor, to the best
of the Company's knowledge, is there any basis for any such claim, action, suit,
proceeding, arbitration, investigation or inquiry. There are no outstanding
orders, judgments or decrees of any court, governmental agency or other tribunal
naming the Company or the Material Subsidiary and enjoining the Company or the
Material Subsidiary from taking, or requiring the Company or the Material
Subsidiary to take, any action, or to which the Company or the Material
Subsidiary, or the Company's or the Material Subsidiary's properties or
businesses is bound or subject.
(q) Neither the Company nor any of its affiliates has
incurred any liability for any finder's fees or similar payments in connection
with the transactions herein contemplated.
(r) Each of the Company and the Material Subsidiary
owns or possesses adequate and enforceable rights to use all patents, patent
applications, trademarks, service marks, copyrights, rights, trade secrets,
confidential information, processes and formulations used or proposed to be used
in the conduct of their businesses as described in the Prospectus (collectively
the "Intangibles"); to the best of the Company's knowledge, neither the Company
nor any Subsidiary has infringed nor is infringing upon the rights of others
with respect to the Intangibles, except for any infringements which,
individually or in the aggregate, could not have a Material Adverse Effect on
the Company and the Subsidiaries, taken as a whole; and neither the Company nor
any Subsidiary has received any notice of conflict with the asserted rights of
others with respect to the Intangibles which could, singly or in the aggregate,
have a Material Adversely Affect on the Company and its Subsidiaries, taken as a
whole, and the Company knows of no basis therefor; and, to the best of the
Company's knowledge, no others have infringed upon the Intangibles of the
Company or the Material Subsidiary.
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<PAGE>
(s) Since the respective dates as of which
information is given in the Registration Statement and the Prospectus and the
Company's latest consolidated financial statements, except as disclosed in or
contemplated by the Prospectus or Registration Statement, neither the Company
nor any Subsidiary has incurred any material liability or obligation, direct or
contingent, or entered into any material transaction, whether or not incurred in
the ordinary course of business, and has not sustained any material loss or
interference with its business from fire, storm, explosion, flood or other
casualty, whether or not covered by insurance, or from any labor dispute or
court or governmental action, order or decree; and since the respective dates as
of which information is given in the Registration Statement and the Prospectus,
except as disclosed in or contemplated by the Prospectus or Registration
Statement, there have not been, and prior to the Closing Date referred to below
there will not be, any changes in the capital stock or any material increases in
the long-term debt of the Company or any material adverse change in or affecting
the general affairs, management, financial condition, shareholders' equity,
results of operations or prospects of the Company or any Subsidiary, otherwise
than as set forth or contemplated in the Prospectus or Registration Statement.
(t) The Company does not own any real property.
The Company and the Material Subsidiary has good title to all personal property
(tangible and intangible) owned by it, free and clear of all security interests,
charges, mortgages, liens and encumbrances, except such as are described in the
Registration Statement and Prospectus, which secure indebtedness which is
described in the Registration Statement and Prospectus and which the Company
covenants to repay within three days following the Closing Date or such as do
not materially affect the value or transferability of such property and do not
interfere with the use of such property made, or proposed to be made, by the
Company or the Material Subsidiary. The material leases, licenses or other
contracts or instruments under which the Company and the Material Subsidiary
leases, holds or is entitled to use any property, real or personal, are valid,
subsisting and enforceable only with such exceptions as are not material and do
not interfere with the use of such property made, or proposed to be made, by the
Company or any Subsidiary, and all rentals, royalties or other payments accruing
thereunder which became due prior to the date of this Agreement have been duly
paid, and neither the Company nor the Material Subsidiary, nor, to the best of
the Company's knowledge, any other party is in default thereunder and, to the
best of the Company's knowledge, no event has occurred which, with the passage
of time or the giving of notice, or both, would constitute a default thereunder,
except for such defaults which, individually or in the aggregate, would not have
a Material Adverse Effect on the Company and the Material Subsidiary, taken as a
whole. Neither the Company
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<PAGE>
nor the Material Subsidiary has received notice of any violation of any
applicable law, ordinance, regulation, order or requirement relating to its
owned or leased properties. Each of the Company and the Material Subsidiary has
adequately insured its properties against loss or damage by fire or other
casualty and maintains, in adequate amounts, such other insurance as is usually
maintained by companies engaged in the same or similar businesses located in its
geographic area.
(u) Each contract or other instrument (however
characterized or described) to which the Company or the Material Subsidiary is a
party or by which their properties or businesses are or may be bound or affected
and to which specific reference is made in the Prospectus has been duly and
validly executed, is in full force and effect in all material respects and is
enforceable against the parties thereto in accordance with its terms, and none
of such contracts or instruments has been assigned by the Company or the
Material Subsidiary, and neither the Company nor the Material Subsidiary, nor,
to the best of the Company's knowledge, any other party, is in default
thereunder and, to the best of the Company's knowledge, no event has occurred
which, with the lapse of time or the giving of notice, or both, would constitute
a default thereunder, except for such defaults which, individually or in the
aggregate, would not have a Material Adverse Effect on the Company and the
Material Subsidiary, taken as a whole.
None of the material provisions of such contracts or
instruments violates any existing applicable law, rule, regulation, judgment,
order or decree of any governmental agency or court having jurisdiction over the
Company or any Subsidiary or any of their respective assets or businesses,
including, without limitation, those promulgated by the Federal Trade
Commission, including, without limitation, the Federal Telephone Consumer
Protection Act of 1991 and the Federal Telemarketing and Consumer Fraud and
Abuse Prevention Act of 1994 and the rules and regulations promulgated
thereunder, except for such violations which, individually or in the aggregate,
would not have a Material Adverse Effect on the Company and the Subsidiaries,
taken as a whole.
(v) The employment and consulting agreements between
the Company and its officers, employees and consultants, described in the
Registration Statement, are binding and enforceable obligations upon the
respective parties thereto in accordance with their respective terms, except
with respect to the non-competition provisions of such agreements and as such
enforceability may be limited by applicable bankruptcy, insolvency, moratorium
or other similar laws or arrangements affecting creditors' rights generally and
subject to principles of equity.
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<PAGE>
(w) 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.
(x) To the best of the Company's knowledge, no labor
problem exists with any of the Company's or any Subsidiary's employees or is
imminent which could have a Material Adverse Affect on the Company and the
Subsidiaries, taken as a whole.
(y) The Company has not, directly or indirectly, at
any time (i) made any contributions to any candidate for political office, or
failed to disclose fully any such contribution in violation of law or (ii) made
any payment to any state, federal or foreign governmental officer or official,
or other person charged with similar public or quasi-public duties, other than
payments or contributions required or allowed by applicable law. The Company's
internal accounting controls and procedures are sufficient to cause the Company
to comply in all material respects with the Foreign Corrupt Practices Act of
1977, as amended.
(z) The Shares have been approved for listing on the
Nasdaq SmallCap Market.
(aa) The Company has provided to Tenzer Greenblatt
LLP, counsel to the Underwriter ("Underwriter's Counsel"), all agreements,
certificates, correspondence and other items, documents and information
requested by such counsel's Corporate Review Memorandum dated January 28, 1998.
Any certificate signed by an officer of the Company
or of any Subsidiary and delivered to the Underwriter or to Underwriter's
Counsel shall be deemed to be a representation and warranty by the Company to
the Underwriter as to the matters covered thereby.
5. Certain Covenants of the Company. The Company
covenants with the Underwriter as follows:
(a) The Company will not at any time, whether before
the Effective Date or thereafter during such period as the Prospectus is
required by law to be delivered in connection with the sales of the Shares by
the Underwriter or a dealer, file or publish any amendment or supplement to the
Registration Statement or Prospectus of which the Underwriter has not been
previously advised and furnished a copy, or to which the Underwriter shall
object in writing.
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<PAGE>
(b) The Company will use its best efforts to cause
the Registration Statement to become effective and will advise the Underwriter
immediately upon becoming aware of, and, if requested by the Underwriter,
confirm such advice in writing, (i) when the Registration Statement, or any
post-effective amendment to the Registration Statement or any supplemented
Prospectus is filed with the Commission; (ii) of the receipt of any comments
from the Commission; (iii) of any request of the Commission for amendment or
supplementation of the Registration Statement or Prospectus or for additional
information; and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use of any Preliminary Prospectus, or of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, or of the initiation of any proceedings for any of such purposes.
The Company will use its best efforts to prevent the issuance of any such stop
order or of any order preventing or suspending such use and to obtain as soon as
possible the lifting thereof, if any such order is issued.
(c) The Company will deliver to the Underwriter,
without charge, from time to time until the Effective Date, as many copies of
each Preliminary Prospectus as the Underwriter may reasonably request, and the
Company hereby consents to the use of such copies for purposes permitted by the
Act. The Company will deliver to the Underwriter, without charge, as soon as the
Registration Statement becomes effective, and thereafter from time to time as
requested, such number of copies of the Prospectus (as supplemented, if the
Company makes any supplements to the Prospectus) as the Underwriter may
reasonably request. The Company has furnished or will furnish to the Underwriter
two signed copies of the Registration Statement as originally filed and of all
amendments thereto, whether filed before or after the Registration Statement
becomes effective, two copies of all exhibits filed therewith and two signed
copies of all consents and certificates of experts.
(d) Until the expiration of the Underwriter's option
to purchase the Optional Shares, the Company will comply with the Act, the
Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and the rules and regulations thereunder so as to permit the continuance
of sales of and dealings in the Offered Shares and in any Optional Shares which
may be issued and sold. If, at any time when a prospectus relating to the Shares
is required to be delivered under the Act, any event occurs as a result of which
the Registration Statement and Prospectus as then amended or supplemented would
include an untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, or if it shall be necessary to
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<PAGE>
amend or supplement the Registration Statement and Prospectus to comply with the
Act or the regulations thereunder, the Company will promptly file with the
Commission, subject to Section 5(a) hereof, an amendment or supplement which
will correct such statement or omission or which will effect such compliance.
(e) The Company will furnish such proper information
as may be required and otherwise cooperate in qualifying the Shares for offering
and sale under the securities or Blue Sky laws relating to the offering in such
jurisdictions as the Underwriter may reasonably designate, provided that no such
qualification will be required in any jurisdiction where, solely as a result
thereof, the Company would be subject to service of general process or to
taxation or qualification as a foreign corporation doing business in such
jurisdiction.
(f) If the Closing occurs, the Company will make
generally available to its security holders, in the manner specified in Rule
158(b) under the Act, and deliver to the Underwriter and Underwriter's Counsel
as soon as practicable and in any event not later than 45 days after the end of
its fiscal quarter in which the first anniversary date of the effective date of
the Registration Statement occurs, an earning statement meeting the requirements
of Rule 158(a) under the Act covering a period of at least 12 consecutive months
beginning after the effective date of the Registration Statement.
(g) If the Closing occurs, the Company will deliver
to the Underwriter and to Underwriter's counsel on a timely basis, (i) for a
period of five (5) years from the Effective Date, (A) a copy of each report or
document, including, without limitation, reports on Forms 8-K, 10-C, 10-K (or
10-K SB), 10-Q (or 10-Q SB) and 10-C and exhibits thereto, filed or furnished to
the Commission, any securities exchange or the National Association of
Securities Dealers, Inc. (the "NASD") on the date each such report or document
is so filed or furnished; (B) as soon as practicable, copies of any reports or
communications (financial or other) of the Company mailed to its security
holders; and (C) as soon as practicable, a copy of any Schedule 13D, 13G, 14D-1
or 13E-3 received or prepared by the Company from time to time; and (ii) for a
period of three (3) years from the Effective Date, (x) monthly statements
setting forth such information regarding the Company's results of operations and
financial position (including balance sheet, profit and loss statements and data
regarding outstanding purchase orders) as is regularly prepared by management of
the Company; and (y) such additional information concerning the business and
financial condition of the Company as the Underwriter may from time to time
reasonably request and which can be prepared or obtained by the Company without
unreasonable effort or expense. If the Closing occurs, for a period of three (3)
years from the
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Effective Date, the Company will furnish to its shareholders annual reports
containing audited financial statements and such other periodic reports as it
may determine to be appropriate or as may be required by law.
(h) Until the expiration of the Underwriter's option
to purchase the Optional Shares, the Company will not and will use its best
efforts to cause any person that controls, is controlled by or is under common
control with the Company not to take any action designed to or which might be
reasonably expected to cause or result in the stabilization or manipulation of
the price of the Common Shares.
(i) If the Closing occurs, the Underwriter shall
retain the $50,000 previously paid to it, and the Company will pay or cause to
be paid the following: all costs and expenses incident to the performance of the
obligations of the Company under this Agreement, including, but not limited to,
the fees and expenses of accountants and counsel for the Company; the
preparation, printing, mailing and filing of the Registration Statement
(including financial statements and exhibits), Preliminary Prospectuses and the
Prospectus, and any amendments or supplements thereto; the printing and mailing
of the Selected Dealer Agreement, the issuance and delivery of the Shares to the
Underwriter; all taxes, if any, on the issuance of the Shares; the fees,
expenses and other costs of qualifying the Shares for sale under the Blue Sky or
securities laws of those states in which the Shares are to be offered or sold,
including fees and disbursements of counsel in connection therewith, and
including those of such local counsel as may have been retained for such
purpose; the filing fees incident to securing any required review by the NASD
and either the Boston Stock Exchange or Pacific Stock Exchange; the cost of
printing and mailing the "Blue Sky Survey", the cost of furnishing to the
Underwriter copies of the Registration Statement, Preliminary Prospectuses and
the Prospectus as herein provided; the costs of placing "tombstone
advertisements" in any publications which may be selected by the Underwriter;
and all other costs and expenses incident to the performance of the Company's
obligations hereunder which are not otherwise specifically provided for in this
Section 5(i).
In addition, at the Closing Date or the Option
Closing Date, as the case may be, the Underwriter will deduct from the payment
for the Offered Shares or any Optional Shares three percent (3%) of the gross
proceeds from the sale of such Offered Shares and/or Optional Shares at the
initial public offering price set forth in the Prospectus (less the sum of
$50,000 previously paid to the Underwriter), as payment for the Underwriter's
nonaccountable expense allowance relating to the transactions contemplated
hereby, which amount will include the fees and
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expenses of Underwriter's Counsel (other than the fees and expenses of
Underwriter's Counsel relating to Blue Sky qualifications and registrations,
which, as provided for above, shall be in addition to the three percent (3%)
nonaccountable expense allowance and shall be payable directly by the Company to
Underwriter's Counsel on or prior to the Closing Date).
(j) If the transactions contemplated by this
Agreement are not consummated because the Company decides not to proceed with
the offering for any reason or because the Underwriter decides not to proceed
with the offering as a result of a material breach by the Company of its
representations, warranties or covenants in the Agreement or as a result of
material adverse changes in the affairs of the Company, then the Company will be
obligated to reimburse the Underwriter for its accountable out-of-pocket
expenses up to the sum of $75,000, inclusive of $50,000 previously paid to the
Underwriter by the Company. In all cases other than those set forth in the
preceding sentence, if the Company or the Underwriter decide not to proceed with
the offering, the Company will only be obligated to reimburse the Underwriter
for its accountable out-of-pocket expenses up to $50,000, and inclusive of
$50,000 previously paid to the Underwriter by the Company. In no event, however,
will the Underwriter, in the event the offering is terminated, be entitled to
retain or receive more than an amount equal to its actual accountable
out-of-pocket expenses.
(k) The Company intends to apply the net proceeds
from the sale of the Shares for the purposes set forth in the Prospectus.
(l) If the Closing occurs, during the period of
twelve (12) months from the Effective Date, the Company will not offer for sale
or sell or otherwise dispose of, directly or indirectly, any securities of the
Company, without the prior written consent of the Underwriter, except for the
issuance of Common Shares upon the exercise of outstanding options and warrants
and as contemplated by the Prospectus and Registration Statement.
(m) If the Closing occurs, 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 twelve
(12) months from the Effective Date, without the Underwriter's prior written
consent.
(n) If the Closing occurs, for a period of three (3)
years from the Effective Date, the Company will 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.
(o) If the Closing occurs, for a period of five (5)
years from the Effective Date, the Company will, unless and until the holders of
a majority of the Common Shares following the consummation of the Company's
initial public offering of securities vote otherwise (directly or indirectly in
connection with a reorganization): (i) use its best efforts to maintain the
listing of the Shares on NASDAQ or a national securities exchange and (ii) if so
qualified, list the Shares, and maintain such listing for so long as qualified,
on the NASDAQ National Market System.
(p) The Company will, concurrently with the
Effective Date, register the Common Shares under Section 12(g) or Section 12(b)
of the Exchange Act and, if the Closing occurs the Company will maintain such
registration (under at least one of such sections) for a minimum of five (5)
years from the Effective Date, unless and until the holders of a majority of the
Common Shares following the consummation of the Company's initial public
offering of securities vote (directly or indirectly in connection with a
reorganization) otherwise.
(q) Subject to the sale of the Offered Shares, the
Underwriter and its successors by operation by law will have the right to
designate a nominee for election, at its or their option, either as a member of
or a non-voting advisor to the Board of Directors of the Company (which Board,
during such period, shall be comprised of five (5), seven (7) or nine (9)
persons, a majority of the members of which Board must, during such period, be
persons not otherwise affiliated with the Company, its management or its
founders), and the Company will use its best efforts to cause such nominee (or a
successor nominee) to be elected and continued in office as a director of the
Company or as such advisor until the expiration of three (3) years from the
Effective Date. Following the election of such nominee as a director or advisor,
such person shall receive no more or less compensation than is paid to other
non-officer directors of the Company for attendance at meetings of the Board of
Directors of the Company and shall be entitled to receive reimbursement for all
reasonable costs incurred in attending such meetings including, but not limited
to, food, lodging and transportation (in accordance with the Company's standard
policies for travel). The Company agrees to enter into an indemnification
agreement in the form filed as an exhibit to the Registration Statement.
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The Company agrees to give the Underwriter
notice of each such meeting and to provide the Underwriter with an agenda and
minutes of the meeting no later than it gives such notice and provides such
items to the directors.
(r) If the Closing occurs, the Company agrees to
enter into a consulting agreement on the Closing Date, in form and substance
reasonably acceptable to the Company and the Underwriter, pursuant to which the
Company will (i) engage the Underwriter or a designee of the Underwriter as a
financial consultant on a non-exclusive basis for a period of two (2) years from
the Closing Date, at an annual rate of Fifteen Thousand Dollars ($15,000)
(inclusive of any accountable out-of-pocket expenses) payable in full, in
advance on the Closing Date; and (ii) agree to pay the Underwriter a finder's
fee in the event that the Underwriter originates a financing, merger,
acquisition, joint venture or other transaction to which the Company is a party.
(s) If the Closing occurs, the Company shall retain
a transfer agent for the Common Shares, reasonably acceptable to the
Underwriter, for a period of three (3) years from the Effective Date. In
addition, for a period of three (3) years from the Effective Date, the Company,
at its own expense, shall cause such transfer agent to provide the Underwriter,
if so requested in writing, with copies of the Company's daily transfer sheets,
and, when requested by the Underwriter, a current list of the Company's
securityholders, including a list of the beneficial owners of securities held by
a depository trust company and other nominees.
(t) If the Closing occurs, the Company hereby
agrees, at its sole cost and expense, to supply and deliver to the Underwriter
and Underwriter's Counsel, within a reasonable period from the date hereof, four
bound volumes, including the Registration Statement, as amended or supplemented,
all exhibits to the Registration Statement, the Prospectus and all other
underwriting documents.
(u) The Company shall, as of the date hereof, have
applied for listing in Standard & Poor's Corporation Records Service (including
annual report information) or Moody's Industrial Manual (Moody's OTC Industrial
Manual not being sufficient for these purposes) and shall use its best efforts
to have the Company listed in such manual and shall maintain such listing until
the earlier of three (3) years from the Effective Date or the date on which the
Common Shares are listed on a national securities exchange or the NASDAQ
National Market System.
(v) For a period of three (3) years from the
Effective Date, the Company shall provide the Underwriter, on a not less than
annual basis, with internal forecasts setting forth
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projected results of operations for each quarterly and annual period in the two
(2) fiscal years following the respective dates of such forecasts. Such
forecasts shall be provided to the Underwriter more frequently than annually if
prepared more frequently by management, and are submitted to the Company's Board
of Directors for formal review.
(w) If the Closing occurs, for a period of three (3)
years from the Effective Date, or until such earlier time as the Common Shares
are listed on the New York Stock Exchange or the American Stock Exchange, the
Company shall cause its legal counsel to provide the Underwriter with a list, to
be updated at least annually, of those states in which the Common Shares may be
traded in non-issuer transactions under the Blue Sky laws of the 50 states.
(x) If the Closing occurs, for a period of three (3)
years from the Effective Date, the Company shall continue to retain Grant
Thornton LLP (or such other nationally recognized accounting firm reasonably
acceptable to the Underwriter) as the Company's independent public accountants.
(y) If the Closing occurs, for a period of three (3)
years from the Effective Date, the Company, at its expense, shall cause its then
independent certified public accountants, as described in Section 5(x) above, to
review (but not audit) the Company's financial statements for each of the first
three fiscal quarters prior to the announcement of quarterly financial
information, the filing of the Company's 10-Q (or 10-QSB) quarterly report (or
other equivalent report) and the mailing of quarterly financial information to
shareholders.
(z) For a period of twenty-five (25) days from the
Effective Date, the Company will not issue press releases or engage in any other
publicity without the Underwriter's prior written consent, other than normal and
customary releases issued in the ordinary course of the Company's business or
those releases required by law.
(aa) If the Closing occurs, the Company will not
increase or authorize an increase in the compensation of its employees whose
employment agreements are described in the Prospectus greater than those
increases provided for in their employment agreements with the Company in effect
as of the Effective Date and disclosed in the Registration Statement without the
prior written consent of the Underwriter, for a period of three (3) years from
the Effective Date.
(ab) If the Closing occurs, for a period of three
(3) years from the Effective Date, the Company will promptly submit
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to the Underwriter copies of management reports and similar correspondence
between the Company's independent auditors and the Company.
(ac) If the Closing occurs, except as described in
the Registration Statement, 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.
(ad) If the Closing occurs, for a period of three
(3) years from the Effective Date, the Company will provide to the Underwriter
ten days' written notice prior to any issuance by the Company of any equity
securities or securities exchangeable for or convertible into equity securities
of the Company, except for (i) Common Shares issuable upon exercise of currently
outstanding options and warrants or conversion of currently outstanding
convertible securities, (ii) options available for future grant pursuant to any
stock option plan in effect on the Effective Date and the issuance of Common
Shares upon the exercise of such options and (iii) securities issuable upon
exercise or conversion of securities for which notice pursuant to this Paragraph
5(ad) was previously given to the Underwriter.
(ae) Prior to the Effective Date and if the Closing
occurs for a period of three (3) years thereafter, the Company will retain a
financial public relations firm reasonably acceptable to the Underwriter.
(af) For a period of three (3) years from the
Effective Date, the Company will cause its Board of Directors to meet, either in
person or telephonically, a minimum of four (4) times per year and will hold a
shareholder's meeting at least once per year.
(ag) Prior to the Effective Date, the Company shall
have obtained directors' and officers' insurance naming the Underwriter as an
additional insured party, in an amount not less than twenty-five percent (25%)
of the gross proceeds of the offering, and, if the Closing occurs the Company
will use its best efforts to maintain such insurance for a period of at least
three (3) years from the Closing Date.
6. Conditions of the Underwriter's Obligation to
Purchase Shares from the Company. The obligation of the Underwriter to purchase
and pay for the Offered Shares which it has agreed to purchase from the Company
is subject (as of the date hereof and the Closing Date) to the accuracy of and
compliance in all material respects with the representations and warranties of
the Company herein, to the performance in all material respects by
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the Company of its obligations hereunder, and to the following additional
conditions:
(a) The Registration Statement will have become
effective not later than .M., New York City time, on the day following
the date of this Agreement, or at such later time or on such later date as the
Underwriter may agree to in writing; prior to the Closing Date, no stop order
suspending the effectiveness of the Registration Statement will have been issued
and no proceedings for that purpose will have been initiated or will be pending
or, to the best of the Underwriter's or the Company's knowledge, will be
contemplated by the Commission; and any request on the part of the Commission
for additional information will have been complied with to the satisfaction of
Underwriter's Counsel.
(b) At the time that this Agreement is executed and
at the Closing Date, there will have been delivered to the Underwriter a signed
opinion of Troop Meisinger Steuber & Pasich, LLP, counsel for the Company
("Company Counsel"), dated as of the date hereof or the Closing Date, as the
case may be (and any other opinions of counsel referred to in such opinion of
Company Counsel or relied upon by Company Counsel in rendering their opinion),
reasonably satisfactory to Underwriter's Counsel, to the effect that:
(i) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
with full corporate power and authority necessary to own or lease, as the case
may be, and operate its properties, whether tangible or intangible, and to
conduct its business as described in the Registration Statement. The Company is
duly qualified to do business as a foreign corporation and is in good standing
in all jurisdictions in which the Company has advised Company Counsel that it
owns or leases properties or maintains permanent employees. To Company Counsel's
knowledge, other than the Subsidiaries, the Company has no subsidiaries and no
equity interests in any other entity.
(ii) Each Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the state of
California, with full corporate power and authority to own or lease and operate,
as the case may be, its respective properties, whether tangible or intangible,
and to conduct its respective business as described in the Registration
Statement. Each Subsidiary is duly qualified to do business as a foreign
corporation and is in good standing in all jurisdictions in which the Company
has advised Company Counsel that such Subsidiary owns or leases properties or
maintains permanent employees.
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<PAGE>
(iii) To Company Counsel's knowledge, the
Company owns all of the issued and outstanding shares of capital stock of the
Material Subsidiary, free and clear of any security interests, liens,
encumbrances, claims and charges, other than security interests, liens,
encumbrances, claims and charges subject to indebtedness described in the
Prospectus as being due and payable within three days following the consummation
of the offering, and all of such shares have been duly authorized and validly
issued and are fully paid and nonassessable.
(iv) The Company has full corporate power and
authority to execute, deliver and perform this Agreement, the Consulting
Agreement and the Underwriter's Warrant Agreement and to consummate the
transactions contemplated hereby and thereby. The execution, delivery and
performance of this Agreement, the Consulting Agreement and the Underwriter's
Warrant Agreement by the Company, the consummation by the Company of the
transactions herein and therein contemplated and the compliance by the Company
with the terms of this Agreement, the Consulting Agreement and the Underwriter's
Warrant Agreement have been duly authorized by all necessary corporate action,
and this Agreement [Note: for Closing Date opinion add:] [and each of the
Consulting Agreement and the Underwriter's Warrant Agreement] has been duly
executed and delivered by the Company. This Agreement is and, when executed and
delivered by the Company on the Closing Date, each of the Consulting Agreement
and the Underwriter's Warrant Agreement will be, valid and binding obligations
of the Company, enforceable in accordance with their respective terms, subject
to the Enforceability Exceptions (defined below).
(v) The execution, delivery and performance of
this Agreement, the Consulting Agreement and the Underwriter's Warrant Agreement
by the Company, the consummation by the Company of the transactions herein and
therein contemplated and the compliance by the Company with the terms of this
Agreement, the Consulting Agreement and the Underwriter's Warrant Agreement do
not, and will not, with or without the giving of notice or the lapse of time, or
both, (A) result in a violation of the Certificate of Incorporation or By-Laws,
each as amended, of the Company or any Subsidiary, (B) result in a breach of or
conflict with any terms or provisions of, or constitute a default under, or
result in the modification or termination of, or result in the creation or
imposition of any lien, security interest, charge or encumbrance upon any of the
properties or assets of the Company or any Subsidiary pursuant to any Material
Contract (defined below); (C) violate any existing applicable California or
federal law, rule, regulation, judgment, order or decree of any governmental
agency or court, domestic or foreign, having jurisdiction over the Company or
any Subsidiary or any of the Company's or any Subsidiary's properties or
business; or (D) have any material adverse effect on any
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<PAGE>
Permit of which Company Counsel is aware (based on an officer's certificate)
necessary for the Company or any Subsidiary to own or lease and operate its
their respective properties or conduct their businesses or the ability of the
Company to make use thereof.
(vi) To Company Counsel's knowledge, no Permits
of any California or federal court or governmental agency or body (other than
under the Act, the Regulations and applicable state securities or Blue Sky laws)
are required for the valid authorization, issuance, sale and delivery of the
Shares or the Underwriter's Warrants to the Underwriter, and the consummation by
the Company of the transactions contemplated by this Agreement, the Consulting
Agreement or the Underwriter's Warrant Agreement.
(vii) The Registration Statement has become
effective under the Act; to Company Counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued, and
no proceedings for that purpose have been instituted or are pending, threatened
or contemplated under the Act or applicable state securities laws.
(viii) The Registration Statement and the
Prospectus (except for the financial statements and other financial data
included therein or omitted therefrom, as to which Company Counsel expresses no
opinion) comply as to form in all material respects with the requirements of the
Act and Regulations and the conditions for use of a registration statement on
Form SB-2 have been satisfied by the Company.
(ix) The descriptions in the Registration
Statement and the Prospectus of statutes, regulations, government
classifications, specifically named contracts and other documents (including
opinions of Company Counsel); and the response to Item 13 of Form SB-2 have been
reviewed by Company Counsel, and, based upon such review, are accurate in all
material respects and present fairly the information required to be disclosed,
and there are no material California or federal statutes, regulations or
government classifications, or, to Company Counsel's knowledge, material
contracts or documents, of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not so described or filed as required.
(x) The outstanding Common Shares and
outstanding options and warrants to purchase Common Shares have been duly
authorized and validly issued. The outstanding Common Shares are fully paid and
nonassessable. None of the outstanding Common Shares or options or warrants to
purchase Common Shares has been issued in violation of: (A) except as discussed
below, the preemptive rights of any stockholder of the Company pursuant to
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California law, the Company's Certificate of Incorporation or By-Laws or the
Material Contracts or (B) to our knowledge, any other contractual preemptive
rights. None of the holders of the outstanding Common Shares is subject to
personal liability solely by reason of being such a holder. The authorized
Common Shares and outstanding options and warrants to purchase Common Shares
conform in all material respects to the descriptions thereof contained in the
Registration Statement and Prospectus. To Company Counsel's knowledge, except as
set forth in the Prospectus, no holders of any of the Company's securities has
any rights, "demand", "piggyback" or otherwise, to have such securities
registered under the Act.
(xi) The issuance and sale of the Shares have
been duly authorized and, when the Shares have been issued and duly delivered
against payment therefor as contemplated by this Agreement, the Shares will be
validly issued, fully paid and nonassessable, and the holders thereof will not
be subject to personal liability solely by reason of being such holders. The
Shares are not subject to: (A) preemptive rights of any shareholder of the
Company pursuant to California law, the Company's Certificate of Incorporation
or by-laws or the Material Contracts or (B) to Company Counsel's knowledge,
other contractual preemptive rights. The certificates representing the Shares
are in proper legal form.
(xii) The issuance and sale of the Common Shares
issuable upon exercise of the Underwriter's Warrants have been duly authorized
and, when such Common Shares have been duly delivered against payment therefor,
as contemplated by the Underwriter's Warrant Agreement, such Common Shares will
be validly issued, fully paid and nonassessable. Holders of Common Shares
issuable upon exercise of the Underwriter's Warrants will not be subject to
personal liability solely by reason of being such holders. Neither the
Underwriter's Warrants nor the Common Shares issuable upon exercise thereof are
subject to: (A) any existing preemptive rights of any shareholder of the Company
pursuant to California law, the Company's Certificate of Incorporation or
by-laws or the Material Contracts, or (B) to Company Counsel's knowledge, any
other contractual preemptive rights. The Warrant Shares issuable upon exercise
of the Underwriter's Warrants have been duly reserved for issuance upon exercise
of the Underwriter's Warrants in accordance with the provisions of the
Underwriter's Warrant Agreement. The Underwriter's Warrants conform in all
material respects to the descriptions thereof in the Registration Statement and
Prospectus.
(xiii) Upon delivery of the Offered Shares to
the Underwriter against payment therefor as provided in this Agreement, the
Underwriter (assuming it is a bona fide purchaser within the meaning of the
California Uniform Commercial Code) will
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be the owners of such Offered Shares, free and clear of any adverse claims.
(xiv) [On the Option Closing Date], assuming
that the Underwriter exercises the over-allotment option to purchase any of the
Optional Shares and makes payment therefor in accordance with the terms of this
Agreement, upon delivery of the Optional Shares to the Underwriter hereunder,
the Underwriter (assuming it is a bona fide purchaser within the meaning of the
California Uniform Commercial Code) will be the owners of such Optional Shares,
free and clear of any adverse claims.
(xv) To Company Counsel's knowledge, there are
no claims, actions, suits, proceedings, arbitrations, investigations or
inquiries before any governmental agency, court or tribunal, foreign or
domestic, or before any private arbitration tribunal, pending or threatened
against the Company or any Subsidiary, or involving the Company's or any
Subsidiary's properties or businesses, which is required to be disclosed
pursuant to Item 103 of Regulation S-B other than as described in the
Prospectus.
(xvi) To Company Counsel's knowledge, except as
set forth in the Prospectus and this opinion, neither the Company nor any
Subsidiary has received any notice that it has or may have infringed, is
infringing upon or is conflicting with the asserted rights of others with
respect to any patents, patent applications, trademarks, service marks,
copyrights, rights, trade secrets, confidential information, processes and
formulations (collectively the "Intangibles") which might, singly or in the
aggregate, materially adversely affect its business, results of operations or
financial condition and Company Counsel is not aware of any licenses with
respect to the Intangibles which are required to be obtained by the Company.
Company Counsel hereby advises the Underwriter
that Company Counsel has participated in the preparation of the Registration
Statement and the Prospectus, including participation in conferences with
officers and representatives of the Company and with its independent public
accountants, and with the Underwriter's Counsel, at which conferences the
contents of the Registration Statement and the Prospectus and related matters
were discussed, and while Company Counsel has not independently verified the
accuracy or completeness of the statements contained in the Registration
Statement or the Prospectus except as necessary to render the opinions provided
above and Company Counsel has not made any investigation or analysis with
respect to the financial statements or other financial information included in
the Registration Statement or the Prospectus, no facts have come to Company
Counsel's attention which would give Company Counsel reason
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to believe that the Registration Statement, at the time the Registration
Statement became effective, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus, at the time
the Registration Statement became effective and at the date hereof, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
As set forth in the foregoing opinion, the term
"Material Contract" refers to all indentures, mortgages, deeds of trust, loan
agreements, bonds, debentures, note agreements, leases, contracts and other
agreements, instruments and evidences of indebtedness which were filed as
exhibits to the Registration Statement, which have been certified to Company
Counsel by the Company as being all of the indentures, mortgages, deeds of
trust, loan agreements, bonds, debentures, note agreements, leases, contracts
and other agreements, instruments and evidences of indebtedness material to the
Company to which the Company or any Subsidiary is a party or by which any of
their properties or assets are bound.
The opinion set forth in Section 6(b)(iv) above
is subject to the following qualifications (the "Enforceability Exceptions"):
(A) enforceability may be subject to or limited
by bankruptcy, insolvency, reorganization, or moratorium or other similar laws
relating to or affecting creditors' rights generally or the appointment of a
receiver or a conservator pursuant to state or federal law;
(B) the availability of equitable remedies,
specific performance and injunctive relief is subject to the discretion of the
court before which any proceeding therefore is brought;
(C) the validity or binding effect of certain
covenants may be limited to the extent that the court before which any
proceedings therefor are brought includes that such enforcement would be
unreasonable, unconscionable or unnecessary for the protection of the other
parties to such agreement under the circumstances existing at such time;
(D) enforcement of certain rights may be
unavailable if any of the parties seek to enforce their rights other than in
good faith or other than in a commercially reasonable manner; and
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(E) rights to indemnity may be limited by
applicable law or the public policy underlying such law.
In rendering its opinion pursuant to this
Section 6(b), Company Counsel may rely upon the certificates of government
officials and officers of the Company as to matters of fact, provided that
Company Counsel shall state that they have no reason to believe, and do not
believe, that they are not justified in relying upon such opinions or such
certificates of government officials and officers of the Company as to matters
of fact, as the case may be.
(c) At the Closing Date, there will have been
delivered to the Underwriter a signed opinion of Underwriter's Counsel, dated as
of the Closing Date, to the effect that the opinions delivered pursuant to
Section 6(b) hereof appear on their face to be appropriately responsive to the
requirements of this Agreement, except to the extent waived by the Underwriter,
specifying the same, and with respect to such related matters as the Underwriter
may reasonably require.
(d) At the Closing Date (i) the Registration
Statement and the Prospectus and any amendments or supplements thereto will
contain all material statements which are required to be stated therein in
accordance with the Act and the Regulations and will conform in all material
respects to the requirements of the Act and the Regulations, and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto 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, in light of the circumstances under which they were made,
not misleading; (ii) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, there will not have been any
material adverse change in the financial condition, results of operations or
general affairs of the Company from that set forth or contemplated in the
Registration Statement and the Prospectus, except changes which the Registration
Statement and the Prospectus indicate might occur after the Effective Date;
(iii) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there shall have been no material
transaction, contract or agreement entered into by the Company, other than in
the ordinary course of business, which would be required to be set forth in the
Registration Statement and the Prospectus, other than as set forth therein; and
(iv) no action, suit or proceeding at law or in equity will be pending or, to
the best of the Company's knowledge, threatened against the Company which is
required to be set forth in the Registration Statement and the Prospectus, other
than as set forth therein, and no proceedings will be pending or, to the best of
the Company's knowledge, threatened against the Company
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before or by any federal, state or other commission, board or administrative
agency wherein an unfavorable decision, ruling or finding would not have a
Material Adverse Effect on the Company, other than as set forth in the
Registration Statement and the Prospectus. At the Closing Date, there will be
delivered to the Underwriter a certificate of the Company signed by the Chairman
of the Board or the President or a Vice President of the Company, dated the
Closing Date, evidencing compliance with the provisions of this Section 6(d) and
stating that the representations and warranties of the Company set forth in
Section 4 hereof were accurate and complete in all material respects when made
on the date hereof and are accurate and complete in all material respects on the
Closing Date as if then made; that the Company has performed all covenants and
complied with all conditions required by this Agreement to be performed or
complied with by the Company prior to or as of the Closing Date; and that, as of
the Closing Date, no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
initiated or, to the best of his knowledge, are contemplated or threatened. In
addition, the Underwriter will have received such other and further certificates
of officers of the Company as the Underwriter or Underwriter's Counsel may
reasonably request.
(e) At the time that this Agreement is executed
and at the Closing Date, the Underwriter will have received a signed letter from
Grant Thornton LLP, dated the date such letter is to be received by the
Underwriter and addressed to it, confirming that it is a firm of independent
public accountants within the meaning of the Act and Regulations and stating
that: (i) insofar as reported on by them, in their opinion, the financial
statements of the Company included in the Prospectus comply as to form in all
material respects with the applicable accounting requirements of the Act and the
applicable Regulations; (ii) on the basis of procedures and inquiries (not
constituting an examination in accordance with generally accepted auditing
standards) consisting of a reading of the unaudited interim financial statements
of the Company, if any, appearing in the Registration Statement and the
Prospectus and the latest available unaudited interim financial statements of
the Company, if more recent than that appearing in the Registration Statement
and Prospectus, inquiries of officers of the Company responsible for financial
and accounting matters as to the transactions and events subsequent to the date
of the latest audited financial statements of the Company, and a reading of the
minutes of meetings of the shareholders, the Board of Directors of the Company
and any committees of the Board of Directors, as set forth in the minute books
of the Company, nothing has come to their attention which, in their judgment,
would indicate that (A) during the period from the date of the latest financial
statements of the Company appearing in the Registration Statement and Prospectus
to a specified date not more than three business days prior to the
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date of such letter, there have been any decreases in net current assets or net
assets as compared with amounts shown in such financial statements or decreases
in net sales or decreases [increases] in total or per share net income [loss]
compared with the corresponding period in the preceding year or any change in
the capitalization or long-term debt of the Company, except in all cases as set
forth in or contemplated by the Registration Statement and the Prospectus, and
(B) the unaudited interim financial statements of the Company, if any, appearing
in the Registration Statement and the Prospectus, do not comply as to form in
all material respects with the applicable accounting requirements of the Act and
the Regulations or are not fairly presented in conformity with generally
accepted accounting principles and practices on a basis substantially consistent
with the audited financial statements included in the Registration Statement or
the Prospectus; and (iii) they have compared specific dollar amounts, numbers of
shares, numerical data, percentages of revenues and earnings, and other
financial information pertaining to the Company set forth in the Prospectus
(with respect to all dollar amounts, numbers of shares, percentages and other
financial information contained in the Prospectus, to the extent that such
amounts, numbers, percentages and information may be derived from the general
accounting records of the Company, and excluding any questions requiring an
interpretation by legal counsel) with the results obtained from the application
of specified readings, inquiries and other appropriate procedures (which
procedures do not constitute an examination in accordance with generally
accepted auditing standards) set forth in the letter, and found them to be in
agreement.
(f) There shall have been duly tendered to the
Underwriter certificates representing the Offered Shares to be sold on the
Closing Date.
(g) The NASD shall have indicated that it has no
objection to the underwriting arrangements pertaining to the sale of the Shares
by the Underwriter.
(h) No action shall have been taken by the
Commission or the NASD the effect of which would make it improper, at any time
prior to the Closing Date or the Option Closing Date, as the case may be, for
any member firm of the NASD to execute transactions (as principal or as agent)
in the Shares, and no proceedings for the purpose of taking such action shall
have been instituted or shall be pending, or, to the best of the Underwriter's
or the Company's knowledge, shall be contemplated by the Commission or the NASD.
The Company represents at the date hereof, and shall represent as of the Closing
Date or Option Closing Date, as the case may be, that it has no knowledge that
any such action is in fact contemplated by the Commission or the NASD.
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(i) The Company meets the current and any
existing and proposed criteria for inclusion of the Shares in Nasdaq.
(j) All proceedings taken at or prior to the
Closing Date or the Option Closing Date, as the case may be, in connection with
the authorization, issuance and sale of the Shares shall be reasonably
satisfactory in form and substance to the Underwriter and to Underwriter's
Counsel, and such counsel shall have been furnished with all such documents,
certificates and opinions as they may request for the purpose of enabling them
to pass upon the matters referred to in Section 6(c) hereof and in order to
evidence the accuracy and completeness of any of the representations, warranties
or statements of the Company, the performance of any covenants of the Company,
or the compliance by the Company with any of the conditions herein contained.
(k) As of the date hereof, the Company will have
delivered to the Underwriter the written undertakings, in form satisfactory to
the Underwriter, of (i) its officers, directors and securityholders agreeing not
to offer for sale, sell or otherwise dispose of, directly or indirectly, any
securities of the Company in any manner whatsoever, whether pursuant to Rule 144
of the Regulations or otherwise during the twelve (12) month period from the
Effective Date (the "Lock-Up Period") in form and substance reasonably
satisfactory to the Underwriter and (ii) of the holders of registration rights
relating to securities of the Company not to exercise any such registration
rights, in either case, without the prior written consent of the Underwriter. In
addition, such undertakings shall provide that, for a period of twelve (12)
months following the Lock-Up Period, no officer, director or securityholder
beneficially owning 5% or more of the outstanding Common Shares of the Company
(calculated in accordance with Rule 13d-3(d)(1) under the Exchange Act) (each, a
"Principal Shareholder") may, without the Underwriter's prior written consent,
sell any of its Common Shares during any three (3) month period in excess of the
amount that the Principal Shareholder would be allowed to sell if it were deemed
an "affiliate" of the Company and its shares were deemed "restricted," as those
terms are defined in Rule 144 promulgated under the Act, i.e., in general, no
more than the greater of (a) 1% of the then outstanding Common Shares, and (b)
the average weekly trading volume of the Common Shares during the four calendar
weeks preceding such sale.
If any of the conditions specified in this
Section 6 have not been fulfilled, this Agreement may be terminated by the
Underwriter on notice to the Company.
7. Indemnification.
(a) The Company agrees to indemnify and hold
harmless the Underwriter, each officer, director, partner, employee and agent of
the Underwriter, and each person, if any, who controls the Underwriter within
the meaning of Section 15 of the Act or
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Section 20(a) of the Exchange Act, from and against any and all losses, claims,
damages, expenses or liabilities, joint or several (and actions in respect
thereof), to which they or any of them may become subject under the Act or under
any other statute or at common law or otherwise, and, except as hereinafter
provided, will reimburse the Underwriter and each such person, if any, for any
legal or other expenses reasonably incurred by them or any of them in connection
with investigating or defending any actions, whether or not resulting in any
liability, insofar as such losses, claims, damages, expenses, liabilities or
actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained (i) in the Registration Statement, in any
Preliminary Prospectus or in the Prospectus (or the Registration Statement or
Prospectus as from time to time amended or supplemented) or (ii) in any
application or other document executed by the Company, or based upon written
information furnished by or on behalf of the Company, filed in any jurisdiction
in order to qualify the Shares under the securities laws thereof (hereinafter
"application"), 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 in order to make the statements therein not misleading, in light of
the circumstances under which they were made, unless such untrue statement or
omission was made in such Registration Statement, Preliminary Prospectus,
Prospectus or application in reliance upon and in conformity with information
furnished in writing to the Company in connection therewith by the Underwriter
or any such person through the Underwriter expressly for use therein; provided,
however, that the indemnity agreement contained in this Section 7(a) with
respect to any Preliminary Prospectus will not inure to the benefit of the
Underwriter (or to the benefit of any other person that may be indemnified
pursuant to this Section 7(a)) if (A) the person asserting any such losses,
claims, damages, expenses or liabilities purchased the Shares which are the
subject thereof from the Underwriter or other indemnified person; (B) the
Underwriter or other indemnified person failed to send or give a copy of the
Prospectus to such person at or prior to the written confirmation of the sale of
such Shares to such person; and (C) the Prospectus did not contain any untrue
statement or alleged untrue statement or omission or alleged omission giving
rise to such cause, claim, damage, expense or liability.
(b) The Underwriter agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement 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, from and against any and all losses, claims, damages, expenses or
liabilities, joint or several (and actions in respect thereof), to which they or
any of them may become subject under the Act or under any other statute or at
common law or otherwise, and, except as hereinafter provided, will reimburse the
Company and each such director, officer or controlling person for any legal or
other expenses reasonably incurred by them or any of them in connection with
investigating or
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<PAGE>
defending any actions, whether or not resulting in any liability, insofar as
such losses, claims, damages, expenses, liabilities or actions arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained (i) in the Registration Statement, in any Preliminary Prospectus
or in the Prospectus (or the Registration Statement or Prospectus as from time
to time amended or supplemented) or (ii) in any application (including any
application for registration of the Shares under state securities or Blue Sky
laws), 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 in
order to make the statements therein not misleading, in light of the
circumstances under which they were made, but only insofar as any such statement
or omission was made in reliance upon and in conformity with information
furnished in writing to the Company in connection therewith by the Underwriter
expressly for use therein.
(c) Promptly after receipt of notice of the
commencement of any action in respect of which indemnity may be sought against
any indemnifying party under this Section 7, the indemnified party will notify
the indemnifying party in writing of the commencement thereof, and the
indemnifying party will, subject to the provisions hereinafter stated, assume
the defense of such action (including the employment of counsel satisfactory to
the indemnified party and the payment of expenses) insofar as such action
relates to an alleged liability in respect of which indemnity may be sought
against the indemnifying party. After notice from the indemnifying party of its
election to assume the defense of such claim or action, the indemnifying party
shall no longer be liable to the indemnified party under this Section 7 for any
legal or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than reasonable costs of
investigation; provided, however, that if, in the reasonable judgment of the
indemnified party or parties, a conflict of interest exists making it advisable
for the indemnified party or parties to be represented by separate counsel, the
indemnified party or parties shall have the right to employ a single counsel to
represent the indemnified parties who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the indemnified parties
thereof against the indemnifying party, in which event the fees and expenses of
such separate counsel shall be borne by the indemnifying party. Any party
against whom indemnification may be sought under this Section 7 shall not be
liable to indemnify any person that might otherwise be indemnified pursuant
hereto for any settlement of any action effected without such indemnifying
party's consent, which consent shall not be unreasonably withheld.
8. Contribution. To provide for just and equitable
contribution, if (i) an indemnified party makes a claim for indemnification
pursuant to Section 7 hereof (subject to the limitations thereof) and it is
finally determined, by a judgment, order or decree not subject to further
appeal, that such claim for
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<PAGE>
indemnification may not be enforced, even though this Agreement expressly
provides for indemnification in such case; or (ii) any indemnified or
indemnifying party seeks contribution under the Act, the Exchange Act, or
otherwise, then the Company (including, for this purpose, any contribution made
by or on behalf of any director of the Company, any officer of the Company who
signed the Registration Statement and any controlling person of the Company) as
one entity and the Underwriter (including, for this purpose, any contribution by
or on behalf of each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act and each
officer, director, partner, employee and agent of the Underwriter) as a second
entity, shall contribute to the losses, liabilities, claims, damages and
expenses whatsoever to which any of them may be subject, so that the Underwriter
is responsible for the proportion thereof equal to the percentage which the
underwriting discount per Share set forth on the cover page of the Prospectus
represents of the initial public offering price per Share set forth on the cover
page of the Prospectus and the Company is responsible for the remaining portion;
provided, however, that if applicable law does not permit such allocation, then,
if applicable law permits, other relevant equitable considerations such as the
relative fault of the Company and the Underwriter in connection with the facts
which resulted in such losses, liabilities, claims, damages and expenses shall
also be considered. The relative fault, in the case of an untrue statement,
alleged untrue statement, omission or alleged omission, shall be determined by,
among other things, whether such statement, alleged statement, omission or
alleged omission relates to information supplied by the Company or by the
Underwriter, and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement, alleged statement,
omission or alleged omission. The Company and the Underwriter agree that it
would be unjust and inequitable if the respective obligations of the Company and
the Underwriter for contribution were determined by pro rata or per capita
allocation of the aggregate losses, liabilities, claims, damages and expenses or
by any other method of allocation that does not reflect the equitable
considerations referred to in this Section 8. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) will be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. For purposes of this Section 8, each person, if any, who
controls the Underwriter within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act and each officer, director, partner, employee and
agent of the Underwriter will have the same rights to contribution as the
Underwriter, 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, each
officer of the Company who has signed the Registration Statement and each
director of the Company will have the same rights to contribution as the
Company, subject in each case to the provisions of this Section 8. Anything in
this Section 8 to the contrary notwithstanding, no party will be liable for
contribution with respect to the settlement of any claim
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<PAGE>
or action effected without its written consent. This Section 8 is intended to
supersede, to the extent permitted by law, any right to contribution under the
Act or the Exchange Act or otherwise available.
9. Survival of Indemnities, Contribution, Warranties and
Representations. The respective indemnity and contribution agreements of the
Company and the Underwriter contained in Sections 7 and 8 hereof, and the
representations and warranties of the Company contained herein shall remain
operative and in full force and effect, regardless of any termination or
cancellation of this Agreement or any investigation made by or on behalf of the
Underwriter, the Company or any of its directors and officers, or any
controlling person referred to in said Sections, and shall survive the delivery
of, and payment for, the Shares.
10. Termination of Agreement.
(a) The Company, by written or telegraphic notice
to the Underwriter, or the Underwriter, by written or telegraphic notice to the
Company, may terminate this Agreement prior to the earlier of (i) 11:00 A.M.,
New York City time, on the first full business day after the Effective Date; or
(ii) the time when the Underwriter, after the Registration Statement becomes
effective, releases the Offered Shares for public offering. The time when the
Underwriter "releases the Offered Shares for public offering" for the purposes
of this Section 10 means the time when the Underwriter releases for publication
the first newspaper advertisement, which is subsequently published, relating to
the Offered Shares, or the time when the Underwriter releases for delivery to
members of a selling group copies of the Prospectus and an offering letter or an
offering telegram relating to the Offered Shares, whichever will first occur.
(b) This Agreement, including without limitation,
the obligation to purchase the Shares and the obligation to purchase the
Optional Shares after exercise of the option referred to in Section 3 hereof,
are subject to termination in the absolute discretion of the Underwriter, by
notice given to the Company prior to delivery of and payment for all the Offered
Shares or such Optional Shares, as the case may be, if, prior to such time, any
of the following shall have occurred: (i) the Company withdraws the Registration
Statement from the Commission or the Company does not or cannot expeditiously
proceed with the public offering; (ii) the representations and warranties in
Section 4 hereof are not materially correct or cannot be complied with; (iii)
after the date hereof trading in securities generally on the New York Stock
Exchange or the American Stock Exchange will have been suspended; (iv) after the
date hereof, limited or minimum prices will have been established on either such
Exchange; (v) after the date hereof, a banking moratorium will have been
declared either by federal or New York State authorities; (vi) after the date
hereof,
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<PAGE>
any other restrictions on transactions in securities materially affecting the
free market for securities or the payment for such securities, including the
Offered Shares or the Optional Shares, 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) after the date hereof, trading in any
securities of the Company shall have been suspended or halted by any national
securities exchange, the NASD or the Commission; (viii) there has been a
materially adverse change in the condition (financial or otherwise), prospects
or obligations of the Company; (ix) the Company will have sustained a material
loss, whether or not insured, by reason of fire, flood, accident or other
calamity; (x) after the date hereof, any action has been taken by the government
of the United States or any department or agency thereof which, in the judgment
of the Underwriter, has had a material adverse effect upon the market or
potential market for securities in general; or (xi) after the date hereof, the
market for securities in general or political, financial or economic conditions
will have so materially adversely changed that, in the judgment of the
Underwriter, it will be impracticable to offer for sale, or to enforce contracts
made by the Underwriter for the resale of, the Offered Shares or the Optional
Shares, as the case may be.
(c) If this Agreement is terminated pursuant to
Section 6 hereof or this Section 10 or if the purchases provided for herein are
not consummated because any condition of the Underwriter's obligations
hereunder is not satisfied or because of any refusal, inability or failure on
the part of the Company to comply with any of the terms or to fulfill any of the
conditions of this Agreement, or if for any reason the Company shall be unable
to or does not perform all of its obligations under this Agreement, the Company
will not be liable to the Underwriter for damages on account of loss of
anticipated profits arising out of the transactions covered by this Agreement,
but the Company will remain liable to the extent provided in Sections 5(j), 7, 8
and 9 of this Agreement.
11. Information Furnished by the Underwriter to the Company.
It is hereby acknowledged and agreed by the parties hereto that for the purposes
of this Agreement, including, without limitation, Sections 4(f), 7(a), 7(b) and
8 hereof, the only information given by the Underwriter to the Company for use
in the Prospectus are the statements set forth in the last sentence of the last
paragraph on the cover page, the statement appearing in the last paragraph on
page __ with respect to stabilizing the market price of Shares, the information
in the __ paragraph on page __ with respect to concessions and reallowances, and
the information in the ___ paragraph on page ___ with respect to the
determination of the public offering price, as such information appears in any
Preliminary Prospectus and in the Prospectus.
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<PAGE>
12. Notices and Governing Law. All communications hereunder
will be in writing and, except as otherwise provided, will be delivered at, or
mailed by certified mail, return receipt requested, or telegraphed to, the
following addresses: if to the Underwriter, to Whale Securities Co., L.P.,
Attention: William G. Walters, 650 Fifth Avenue, New York, New York 10019, with
a copy to Tenzer Greenblatt LLP, Attention: Robert J. Mittman, Esq., 405
Lexington Avenue, New York, New York 10174; if to the Company, addressed to it
at Gary Player Golf, Inc., Attention: Joseph J. White, President and Chief
Executive Officer, 2811 Airpark Drive, Santa Maria, California 93455, with a
copy to Troop Meisinger Steuber & Pasich, LLP, Attention: Alan B. Spatz, Esq.,
10940 Wilshire Boulevard, Los Angeles, California 90024.
This Agreement shall be deemed to have been made and
delivered in New York City and shall be governed as to validity, interpretation,
construction, effect and in all other respects by the internal laws of the State
of New York. 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
proceeding. The Company further agrees to accept and acknowledge service of any
and all process which may be served in any such suit, action or proceeding in
the New York State Supreme Court, County of New York, or in 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.
13. Parties in Interest. This Agreement is made solely for the
benefit of the Underwriter, the Company and, to the extent expressed, any person
controlling the Company or the Underwriter, each officer, director, partner,
employee and agent of the Underwriter, the directors of the Company, its
officers who have signed the Registration Statement, and their respective
executors, administrators, successors and assigns, and, no other person will
acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" will not include any purchaser of the Shares from the
Underwriter, as such purchaser.
14. Entire Agreement. This Agreement contains the entire
agreement and understanding of the parties with respect to the entire subject
matter hereof, and there are no representations, inducements, promises or
agreements, oral or otherwise, not embodies herein. Any and all prior
discussions, negotiations, commitments and understanding relating thereto,
including without
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limitation, that certain letter of intent between the Company and the
Underwriter dated January 20, 1998, are superseded hereby.
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement between the Company and the
Underwriter in accordance with its terms.
Very truly yours,
GARY PLAYER GOLF, INC.
By:
-----------------------
Name:
Title:
Confirmed and accepted in New York, N.Y., as of the date first above written:
WHALE SECURITIES CO., L.P.
By: Whale Securities Corp.,
General Partner
By:
---------------------------------
Name:
Title:
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<PAGE>
WARRANT AGREEMENT dated as of ______, 1998 between Gary Player
Golf, Inc., a Delaware corporation with executive offices located at 2811
Airpark Drive, Santa Maria, California 93455 (the "Company"), and Whale
Securities Co., L.P., with executive offices located at 650 Fifth Avenue, New
York, New York 10019 (hereinafter referred to as the "Underwriter").
W I T N E S S E T H:
WHEREAS, the Company proposes to issue to the Underwriter
warrants (the "Warrants") to purchase up to 160,000 (as such number may be
adjusted from time to time pursuant to Article 8 of this Agreement) shares (the
"Shares") of common stock, par value $.001 per share (the "Common Stock"), of
the Company; and
WHEREAS, the Underwriter has agreed, pursuant to the
underwriting agreement (the "Underwriting Agreement") dated ____________, 1998
between the Underwriter and the Company, to act as the underwriter in connection
with the Company's proposed public offering (the "Public Offering") of 1,600,000
shares of Common Stock (the "Public Shares") at an initial public offering price
of $7.00 per Public Share; and
WHEREAS, the Warrants issued pursuant to this Agreement are
being issued by the Company to the Underwriter or to its designees who are
officers and partners of the Underwriter or to members of the selling group
participating in the distribution of the Public Shares to the public in the
Public Offering and/or their respective officers or partners (collectively, the
"Designees"), in
<PAGE>
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 premises, the payment
by the Underwriter to the Company of ONE HUNDRED SIXTY DOLLARS ($160.00), 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.
The Underwriter, and/or the Designees are hereby granted the
right to purchase, at any time from _________, 1999 until 5:00 P.M., New York
time, on _______, 2003 (the "Warrant Exercise Term"), up to 160,000 fully-paid
and non-assessable Shares. Notwithstanding the foregoing, in the event that the
Company consummates a merger pursuant to which its stockholders receive solely
cash in exchange for their shares (a "Cash-Out Merger"), the right to purchase
the Shares upon exercise of the Warrants shall expire on the earlier of (i) the
expiration of the Warrant Exercise Term and (ii) provided that the Holders of
the Warrants have received notice of the Cash-Out Merger at the same time that
notice is given to the Company's stockholders, ten (10) business days following
the effective date of a Cash-Out Merger.
2. Warrant Certificates.
The warrant certificates delivered and to be delivered
pursuant to this Agreement (the "Warrant Certificates") shall be in
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<PAGE>
the form set forth in Exhibit A attached hereto and made a part hereof, with
such appropriate insertions, omissions, substitutions and other variations as
required or permitted by this Agreement.
3. Exercise of Warrant.
3.1. Cash Exercise. The Warrants initially are
exercisable at a price of $11.55 per Share, payable in cash or by check to the
order of the Company, or any combination thereof, subject to adjustment as
provided in Article 8 hereof. Upon surrender of the Warrant Certificate with the
annexed Form of Election to Purchase duly executed, together with payment of the
Exercise Price (as hereinafter defined) for the Shares purchased, at the
Company's principal offices (currently located at 2811 Airpark Drive, Santa
Maria, California 93455), the registered holder of a Warrant Certificate
("Holder" or "Holders") shall be entitled to receive a certificate or
certificates for the Shares 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). In the case of the purchase
of less than all the Shares 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 purchasable thereunder.
3.2. Cashless Exercise. At any time during the
Warrant Exercise Term, the Holder may, at the Holder's option,
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exchange, in whole or in part, the Warrants represented by such Holder's Warrant
Certificate (a "Warrant Exchange"), into the number of Shares determined in
accordance with this Section 3.2, by surrendering such Warrant Certificate at
the principal office of the Company or at the office of its transfer agent,
accompanied by a notice stating such Holder's intent to effect such exchange,
the number of Warrants to be so exchanged and 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 later, the date the Notice of Exchange is received by the
Company (the "Exchange Date"). Certificates for the Shares issuable upon such
Warrant Exchange and, if applicable, a new Warrant Certificate of like tenor
representing the Warrants which were subject to the surrendered Warrant
Certificate and not included in the Warrant Exchange, shall be issued as of the
Exchange Date and delivered to the Holder within three (3) days following the
Exchange Date. In connection with any Warrant Exchange, the Holder shall be
entitled to subscribe for and acquire (i) the number of Shares (rounded to the
next lowest integer) which would, but for the Warrant Exchange, then be issuable
pursuant to the provision of Section 3.1 above upon the exercise of the Warrants
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 (as hereinafter
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defined) by (b) the Market Price (as hereinafter defined) of a Public Share on
the day preceding the Warrant Exchange. "Market Price" at any date shall be
deemed to be the last reported sale price, or, in case no such reported sales
takes place on such day, the average of the last reported sale prices for the
last three (3) trading days, in either case as officially reported by the
principal securities exchange on which the Common Stock is listed or admitted to
trading or as reported in the NASDAQ National market System, or, if the Common
Stock is not listed or admitted to trading on any national securities exchange
or quoted on the NASDAQ National Market System, the closing bid price as
furnished by (i) the National Association of Securities Dealers, Inc. through
NASDAQ or (ii) a similar organization if NASDAQ is no longer reporting such
information.
4. Issuance of Certificates.
Upon the exercise of the Warrants, the issuance of
certificates for the Shares purchased 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 certi-
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<PAGE>
ficates 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.
The Warrant Certificates and the certificates representing the
Shares 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, Chief Executive Officer 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.
Upon exercise, in part or in whole, of the Warrants,
certificates representing the Shares shall bear a legend substantially similar
to the following:
"The securities represented by this certificate have not been
registered for purposes of public distribution 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 satisfactory to counsel to the Company,
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<PAGE>
stating that an exemption from registration under such
Act is available."
5. Restriction on Transfer of Warrants.
The Holder of a Warrant Certificate, by the Holder's
acceptance thereof, covenants and agrees that the Warrants are being acquired as
an investment and not with a view to the distribution thereof, and that the
Warrants 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 the Designees.
6. Exercise Price. The term "Exercise Price" herein shall mean
the initial exercise price 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 or 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 Security" means each of the Shares and any shares of Common Stock
issued upon any stock split or stock dividend in respect of such Shares;
provided, however, that with respect to any particular Registrable Security,
such security shall cease to be a Registrable Security 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
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required for the subsequent public distribution of such security or (iii) it has
ceased to be outstanding. The term "Registrable Securities" means any and/or all
of the securities falling within the foregoing definition of a "Registrable
Security." 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 Security"
as is appropriate in order to prevent any dilution or enlargement of the rights
granted pursuant to this Article 7.
7.3. Piggyback Registration. If, at any time during
the seven years following the effective date of the Public Offering, the Company
proposes to prepare and file one or more post-effective amendments to the
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 (in any such case, other than in connection with a merger,
acquisition or pursuant to Form S-8 or successor form), (for purposes of this
Article 7, collectively, the "Registration Statement"), it will give written
notice of its intention to do so by registered mail ("Notice"), at least twenty
(20) business days prior to the filing of each such Registration Statement, to
all holders of the Registrable Securities (other than in connection with a
post-effective amendment to the Registration Statement filed in connection with
the Public Offering, provided
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that the Company includes the Registrable Securities in such Amendment). Upon
the written request of such a holder (a "Requesting Holder"), made within ten
(10) 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; provided, however, that if, in the opinion of the Company's managing
underwriter, if any, for such offering, the inclusion of all or a portion of the
Registrable Securities requested to be registered would not be advisable then
the Company may exclude from such offering all or a portion of the Registrable
Securities which it has been requested to register.
If securities are proposed to be offered for sale
pursuant to such Registration Statement by other security holders of the
Company, the Company shall include securities in such Registration Statement in
the following order (i) first, securities being sold by the Company, (ii)
second, securities being sold by a holder pursuant to the exercise of demand
registration rights (including the Holders if the Holders' securities are
included pursuant to a Demand Registration Request (as hereinafter defined)),
and (iii) third, by the Requesting Holders and other
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selling securityholders (collectively, the "Piggyback Holders"). If the total
number of securities to be offered by the Requesting Holders and such other
Piggyback Holders, is required to be reduced pursuant to a request from the
managing underwriter, the aggregate number of Registrable Securities to be
offered by Requesting Holders pursuant to such Registration Statement shall
equal the number which bears the same ratio to the maximum number of securities
that the underwriter believes may be included for all the Piggyback Holders
(including the Requesting Holders) of the prior sentence, as the original number
of Registrable Securities proposed to be sold by the Requesting Holders bears to
the total original number of securities proposed to be offered by the Requesting
Holders and the other Piggyback Holders.
7.4. Demand Registration.
(a) At any time during the Warrant Exercise
Term, any "Majority Holder" (as such term is defined in Section 7.4(c) 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
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the Company and counsel for such Majority 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 that the holders of the Registrable Securities receive an opinion of
counsel to the Company that all of the Registrable Securities may be freely
traded (without limitation or restriction as to quantity or timing and without
registration under the Act) under Rule 144(k) promulgated under the Act or
otherwise.
(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
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securities included within ten (10) days of their receipt of the Company's
notice.
(c) The term "Majority Holder" as used in
Section 7.4 hereof 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 Shares issuable pursuant to the exercise of outstanding Warrants) as would
constitute a majority of the aggregate number of Shares (including Shares
already issued and Shares issuable pursuant to the exercise of outstanding
Warrants) included in all the Registrable Securities.
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 any event no later than thirty (30) days
(forty five (45) days if the Company is not eligible to file a registration
statement on Form S-3) following receipt of any demand therefor, 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.
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(b) The Company shall pay all costs, fees
and expenses (other than underwriting fees, discounts and nonaccountable expense
allowance applicable to the Registrable Securities and the fees and expenses of
counsel retained by the holders of Registrable Securities) in connection with
all Registration Statements filed pursuant to Sections 7.3 and 7.4(a) hereof
including, without limitation, the Company's legal and accounting fees, printing
expenses, and blue sky fees and expenses.
(c) The Company will take all necessary
action which may be required in qualifying or registering the Registrable
Securities included in the 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.
(d) The Company shall indemnify any holder
of the Registrable Securities to be sold pursuant to any Registration Statement
and any underwriter or person deemed to be an underwriter under the Act and each
person, if any, who controls such holder or underwriter or person deemed to be
an underwriter 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
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effect as the provisions pursuant to which the Company has agreed to indemnify
the Underwriter as set forth in Section 7 of the Underwriting Agreement and to
provide for just and equitable contribution as set forth in Section 8 of the
Underwriting Agreement.
(e) Any holder of Registrable Securities to
be sold pursuant to a registration statement, and such Holder's 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 or 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 by or on behalf of such holder, or
such Holder's successors or assigns, for specific inclusion in such Registration
Statement to the same extent and with the same effect as the provisions pursuant
to which the Underwriter has agreed to indemnify the Company as set forth in
Section 7 of the Underwriting Agreement and to provide for just and equitable
contribution as set forth in Section 8 of the Underwriting Agreement.
(f) Nothing contained in this Agreement
shall be construed as requiring any Holder to exercise the Warrants held
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by such Holder prior to the initial filing of any registration statement or the
effectiveness thereof.
(g) 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 Majority Holders, which consent shall not be
unreasonably withheld.
(h) The Company shall promptly deliver
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 to each holder of Registrable
Securities included for such registration in such Registration Statement
pursuant to Section 7.3 hereof or Section 7.4 hereof requesting such
correspondence and memoranda and to the managing underwriter, if any, of the
offering in connection with which such Holder's Registrable Securities are being
registered and shall permit each holder of Registrable Securities and such
underwriter to do such reasonable investigation, upon reasonable advance notice,
with respect to information contained in or omitted from the Registration
Statement as it deems reasonably necessary to comply with applicable securities
laws or rules of the National Association of Securities Dealers, Inc. Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the Company with its officers and
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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.
7.6 Covenant of the Holder. The Holder, upon receipt
of written notice from the Company that an event has occurred which requires a
post-effective amendment to the Registration Statement or a supplement to the
prospectus included therein so that the prospectus delivered by the Holder to
the purchaser of Registrable Securities would not contain an untrue statement of
material fact, or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances under which they were made, not misleading, shall promptly
discontinue the sale of Registrable Securities until the Holder receives a copy
of a supplemented or amended prospectus from the Company, which the Company
shall provide as soon as practicable after such notice; provided, however, that
the Company shall not be required to amend or supplement the Prospectus to
disclose any merger, reorganization, acquisition or other significant corporate
transaction or development prior to the time the Company would otherwise be
requested to make public disclosure of such event.
8. Adjustments of Exercise Price and Number of
Shares.
8.1. Computation of Adjusted Price. In case
the Company shall at any time after the date hereof pay a dividend in shares of
Common Stock or make a distribution in shares of Common
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Stock, then upon such dividend or distribution the Exercise Price in effect
immediately prior to such dividend or distribution shall forthwith be reduced to
a price determined by dividing:
(a) an amount equal to the total number of
shares of Common Stock outstanding immediately prior to such dividend or
distribution multiplied by the Exercise Price in effect immediately prior to
such dividend or distribution, by
(b) the total number of shares of Common
Stock outstanding immediately after such issuance or sale.
For the purposes of any computation to be made in
accordance with the provisions of this Section 8.1, the Common Stock issuable by
way of dividend or other distribution on any stock of the Company shall be
deemed to have been issued immediately after the opening of business on the date
following the date fixed for the determination of stockholders entitled to
receive such dividend or other distribution.
8.2. Subdivision and Combination. In case
the Company shall at any time subdivide or combine the outstanding shares of
Common Stock, the Exercise Price shall forthwith be proportionately decreased in
the case of subdivision or increased in the case of combination.
8.3. Adjustment in Number of Shares. Upon
each adjustment of the Exercise Price pursuant to the provisions of this Article
8, the number of Shares issuable upon the exercise of each Warrant shall be
adjusted to the nearest whole number by multi-
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plying a number equal to the Exercise Price in effect immediately prior to such
adjustment by the number of Shares issuable upon exercise of the Warrants
immediately prior to such adjustment and dividing the product so obtained by the
adjusted Exercise Price.
8.4. Reclassification, Consolidation,
Merger, etc. In case of any reclassification or change of the outstanding shares
of Common Stock (other than a change in par value to no par value, or from no
par value to par value, or as a result of a subdivision or combination), or in
the case of any consolidation of the Company with, or merger of the Company
into, another corporation (other than a consolidation or merger in which the
Company is the surviving corporation and which does not result in any
reclassification or change of the outstanding shares of Common Stock, except a
change as a result of a subdivision or combination of such shares or a change in
par value, as aforesaid), or in the case of a sale or conveyance to another
corporation of the property of the Company as an entirety, the Holders shall
thereafter have the right to purchase the kind and number of shares of stock and
other securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance as if the Holders were the owners of
the shares of Common Stock underlying the Warrants immediately prior to any such
events at a price equal to the product of (x) the number of shares of Common
Stock issuable upon exercise of the Holder's Warrants and (y) the Exercise Price
in effect immediately prior to the record date for
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such reclassification, change, consolidation, merger, sale or conveyance as if
such Holders had exercised the Warrants.
8.5. Determination of Outstanding Shares of
Common Stock. The number of shares of Common Stock at any one time outstanding
shall include the aggregate number of shares of Common Stock issued and the
aggregate number of shares of Common Stock issuable upon the exercise of
options, rights, warrants and upon the conversion or exchange of convertible or
exchangeable securities.
8.6. Dividends and Other Distributions with
Respect to Outstanding Securities. In the event that the Company shall at any
time prior to the exercise of all Warrants make any distribution of its assets
to holders of its Common Stock as a liquidating or a partial liquidating
dividend, then the holder of Warrants who exercises its Warrants after the
record date for the determination of those holders of Common Stock entitled to
such distribution of assets as a liquidating or partial liquidating dividend
shall be entitled to receive for the Warrant Price per Warrant, in addition to
each share of Common Stock, the amount of such distribution (or, at the option
of the Company, a sum equal to the value of any such assets at the time of such
distribution as determined by the Board of Directors of the Company in good
faith) which would have been payable to such holder had he been the holder of
record of the Common Stock receivable upon exercise of his Warrant on the record
date for the determination of those entitled
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to such distribution. At the time of any such dividend or distribution, the
Company shall make appropriate reserves to ensure the timely performance of the
provisions of this Subsection 8.6.
8.7. Subscription Rights for Shares of
Common Stock or Other Securities. In the case that the Company or an affiliate
of the Company shall at any time after the date hereof and prior to the exercise
of all the Warrants issue any rights, warrants or options to subscribe for
shares of Common Stock or any other securities of the Company or of such
affiliate to all the shareholders of the Company, the Holders of unexercised
Warrants on the record date set by the Company or such affiliate in connection
with such issuance of rights, warrants or options shall be entitled, in addition
to the shares of Common Stock or other securities receivable upon the exercise
of the Warrants, to receive such rights, warrants or options to receive such
rights at the time such rights, warrants or options that such Holders would have
been entitled to receive had they been, on such record date, the holders of
record of the number of whole shares of Common Stock then issuable upon exercise
of their outstanding Warrants (assuming for purposes of this Section 8.7), that
the exercise of the Warrants is permissible immediately upon issuance).
9. Exchange and Replacement of Warrant Certificates.
Each Warrant Certificate is exchangeable without expense,
upon the surrender thereof by the registered Holder at the principal executive
office of the Company, for a new Warrant
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Certificate of like tenor and date representing in the aggregate the right to
purchase the same number of securities in such denominations as shall be
designated by the Holder thereof at the time of such surrender.
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
the Warrant Certificate, if mutilated, the Company will make 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, nor shall it 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
next lowest whole number of Shares.
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 the Warrants, such number of shares of Common Stock as
shall be issuable upon the exercise thereof. The Company covenants and agrees
that, upon exercise of
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the Warrants and payment of the Exercise Price therefor, all Shares issuable
upon such exercise shall be duly and validly issued, fully paid, non-assessable
and not subject to the preemptive rights of any shareholder. As long as the
Warrants shall be outstanding and the Common Stock is listed on or quoted by
NASDAQ or listed on a national securities exchange, the Company shall use its
best efforts to cause all of the shares of Common Stock issuable upon exercise
of the Warrants to be so listed or quoted.
12. Notices to 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 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 or retained earnings, as
indicated by the accounting treatment of such dividend or
distribution on the books of the Company; or
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(b) the Company shall offer to all the
holders of its Common Stock as a class 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; or
(d) reclassification or change of the
outstanding shares of Common Stock (other than a change in par
value to no par value, or from no par value to par value, or
as a result of a subdivision or combination), consolidation of
the Company with, or merger of the Company into, another
corporation (other than a consolidation or merger in which the
Company is the surviving corporation and which does not result
in any reclassification or change of the outstanding shares of
Common Stock, except a change as a result of a subdivision or
combination of such shares or a change in par value, as
aforesaid), or a sale or conveyance to another corporation of
the property of the Company as an entirety is proposed; or
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(e) The Company or an affiliate of the Company shall
propose to issue any rights to subscribe for shares of Common
Stock or any other securities of the Company or of such
affiliate to all the shareholders of the Company;
then, in any one or more of said events, the Company shall give written notice
to the Holder or Holders 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
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:
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(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 the address set
forth in Section 3 of this Agreement 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 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 the
earlier of (i) __________, 2005 and (ii) the eleventh (11th)
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business day following a Cash-Out Merger. 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 the Warrants have been
resold to the public; provided, however, that the provisions of Section 7 shall
survive any termination pursuant to this Section 16 until the close of business
on the earlier of (i)_________, 2008 and (ii) the date which is three years
following the eleventh (11th) business day following the effective date of a
Cash-Out Merger.
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
Shares 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 Shares.
19. Counterparts.
This Agreement may be executed in any number of counterparts
and each of such counterparts shall for all purposes
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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.
[SEAL] GARY PLAYER GOLF, INC.
By:__________________________________
Name:
Title:
Attest:
- -----------------------
WHALE SECURITIES CO., L.P.
By: Whale Securities Corp.,
General Partner
By:__________________________________
Name:
Title:
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EXHIBIT A
THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE OTHER SECURITIES ISSUABLE
UPON EXERCISE THEREOF HAVE NOT BEEN REGISTERED FOR PURPOSES OF PUBLIC
DISTRIBUTION 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. W- 160,000 Warrants
WARRANT CERTIFICATE
This Warrant Certificate certifies that Whale Securities Co.,
L.P. or registered assigns, is the registered holder of 160,000 Warrants to
purchase, at any time from _______, 1999 until 5:00 P.M. New York City time on
________, 2003 ("Expiration Date"), subject to earlier termination as provided
for in the Warrant Agreement (as hereinafter defined), up to 160,000 fully-paid
and non-assessable shares ("Shares") of common stock, par value $.001 per share
(the "Common Stock"), of Gary Player Golf, Inc., a Delaware corporation (the
"Company"), at the initial exercise price, subject to adjustment in certain
events (the "Exercise Price"), of $11.55 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 Whale
Securities Co., L.P. (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 thereof.
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
<PAGE>
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 the type 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.
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: ___________, 1998 GARY PLAYER GOLF, INC.
[SEAL] By:________________________________
Name:
Title:
Attest:
- ----------------------
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to purchase _________ shares of
Common Stock and herewith tenders in payment for such securities cash or a
certified or official bank check payable in New York Clearing House Funds to the
order of Gary Player Golf, Inc. in the amount of $____________ , all in
accordance with the terms hereof. The undersigned requests that a certificate
for such securities be registered in the name of ___________________________ ,
whose address is ___________________________, and that such Certificate be
delivered to ___________________________, whose address is ____________________.
The undersigned hereby agrees to comply with all applicable restrictions, if
any, on the transfer of the shares of Common Stock purchased hereby.
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)
<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 Holder)
<PAGE>
CONSULTING AGREEMENT
____________, 1998
Gary Player Golf, Inc.
2811 Airpark Drive
Santa Maria, California 93455
Attention: Joseph J. White,
Chief Executive Officer
Dear Mr. White:
This will confirm the arrangements, terms and conditions
pursuant to which Whale Securities Co., L.P. ("Consultant"), has been retained
to serve as a financial consultant and advisor to Gary Player Golf, Inc., a
Delaware corporation (the "Company"), on a non-exclusive basis for a period of
two (2) years commencing on ________________, 1998. The undersigned hereby
agrees to the following terms and conditions:
1. Duties of Consultant. 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. 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, Consultant will assist the
Company in developing, studying and evaluating financing and merger and
acquisition proposals based upon documentary information provided to the
Consultant by the Company.
(b) Financing. Consultant will assist and
represent the Company in obtaining both short and long-term financing. The
Consultant will be entitled to additional compensation under certain
circumstances in accordance with the terms set forth in Section 3 hereof.
(c) Wall Street Liaison. Consultant will, when
appropriate, arrange meetings between representatives of the Company and
individuals and financial institutions in the investment community, such as
security analysts, portfolio managers and market makers.
<PAGE>
The services described in this Section 1 shall be rendered by
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 Consultant may determine.
2. Compensation. As compensation for Consultant's services
hereunder, the Company shall pay to Consultant an annual fee of Fifteen Thousand
Dollars ($15,000), the entire Thirty Thousand Dollars ($30,000) payable in full,
in advance, on _______________, 1998.
3. Additional Compensation in Certain Circumstances. If, at
any time up until the second anniversary of the date hereof, the Company enters
into an agreement with any "Qualifying Person" (as hereinafter defined), the
Company purchases substantially all of the stock or assets of another entity or
the Company is merged with or into another entity, or pursuant to which the
Company enters into a joint venture or other on or off balance sheet corporate
finance transaction (each a "Transaction"), the Company will pay to Consultant,
in accordance with the formula set forth below, additional compensation based on
the aggregate value of the consideration, whether in cash, securities,
assumption of (or purchase subject to) debt or liabilities (including, without
limitation, indebtedness for borrowed money, pension liabilities and
guarantees), or other property, obligations or services, paid or payable
directly or indirectly (in escrow or otherwise) or otherwise assumed in
connection with such Transaction (the "Consideration"). For purposes of this
Section 3, (i) the "Company" shall include its subsidiaries and any other entity
in which it owns (directly or indirectly) a majority interest; and (ii)
"Qualifying Person" shall mean any person or entity which Consultant has
introduced to the Company, or any affiliate thereof, after (I) Consultant has
advised the Company that (a) it intends to make an introduction of such person
or entity (without identifying the name or names) for purposes of a Transaction
and, if requested by the Company in writing, provide general information
regarding the type of Transaction and/or business of such entity, and (b) with
respect to which the Company notifies Consultant in writing within five (5)
business days after Consultant identifies such person or entity to the Company,
that neither the Company nor Gary Player Group, Inc. ("GPG"), nor any of their
respective directors, executive officers or principal shareholders, have had
discussions within the prior twelve months with respect to a potential
transaction (either involving the Company or GPG or any subsidiary or affiliate
of either entity) or otherwise have had a significant business relationship.
The additional compensation to be paid will be paid upon the
closing of the Transaction (except that, if any part of the
-2-
<PAGE>
Consideration is in the form of contingent payments to be calculated to
reference to uncertain future occurrences, such as future financial or business
performance, than the portion of the fees of Consultant relating to such part of
the Consideration shall be payable at the earlier of (i) the receipt or payment
of such Consideration; or (ii) the time that the amount of such Consideration
can be determined, by certified check, in the following amounts:
5% of the first $5,000,000 of the Consideration;
4% of the Consideration in excess of $5,000,000 and up to
$6,000,000;
3% of the Consideration in excess of $6,000,000 and up to
$7,000,000;
2% of the Consideration in excess of $7,000,000 and up to
$8,000,000; and
1% of any Consideration in excess of $8,000,000.
4. Available Time. Consultant shall make available such time
as it, in its sole discretion, shall deem appropriate for the performance of its
obligations under this agreement and may in certain circumstances be entitled to
additional compensation in connection therewith.
5. Relationship. Nothing herein shall constitute Consultant as
an employee or agent of the Company, except to such extent as might hereinafter
be agreed upon for a particular purpose. Except as might hereinafter be
expressly agreed, Consultant shall not have the authority to obligate or commit
the Company in any manner whatsoever.
6. Confidentiality. Except in the course of the performance of
its duties hereunder, Consultant agrees that it shall not disclose any trade
secrets, know-how, or other proprietary information not in the public domain
learned as a result of this Agreement unless and until such information becomes
generally known.
7. Assignment and Termination. This Agreement shall not be
assignable by any party except to successors to all or substantially all of the
business of either party for any reason whatsoever without the prior written
consent of the other party, which consent may be arbitrarily withheld by the
party whose consent is required.
-3-
<PAGE>
8. Governing 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.
Very truly yours,
WHALE SECURITIES CO., L.P.
By: Whale Securities Corp.,
General Partner
By:
--------------------------
Name:
Title:
AGREED AND ACCEPTED:
GARY PLAYER GOLF, INC.
By:
---------------------------------
Name:
Title:
-4-
<PAGE>
TROOP Direct Voice 310.728.3000
STEUBER Direct Fax 310.728.2200
PASICH
REDDICK
& TOBEY, LLP
August 18, 1998
Gary Player Direct, Inc.
2811 Airpark Drive
Santa Maria, CA 93455
Dear Ladies/Gentlemen:
We consent to the use of our name in the Prospectus constituting a part of
the Registration Statement on Form SB-2 of Gary Player Direct, Inc. (File No.
333-53729).
Respectfully submitted,
/s/ Troop Steuber Pasich Reddick & Tobey
----------------------------------------
Troop Steuber Pasich Reddick & Tobey
- --------------------------------------------------------------------------------
2029 Century Park East, 24th Floor, Los Angeles, California 90067-3010
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have included our report dated April 24, 1998, accompanying the financial
statements of Gary Player Golf, Inc. and Subsidiaries contained in the
Registration Statement and Prospectus of Gary Player Golf, Inc., which will be
signed upon consummation of the transactions described in Note P, items 1 and 2
to the financial statements. We have also issued our report dated April 8, 1998,
accompanying the financial statements of Gary Player Golf Equipment (a division
of Gary Player Group, Inc.) contained in the Registration Statement and
Prospectus of Gary Player Golf, Inc. We consent to the use of the aforementioned
reports in the Registration Statement and Prospectus, and to the use of our name
as it appears under the caption "Experts."
GRANT THORNTON LLP
/s/ Grant Thornton LLP
- -----------------------
Grant Thornton LLP
Los Angeles, California
August 17, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
FINANCIAL STATEMENTS OF GARY PLAYER GOLF, INC. FOR THE THREE MONTHS ENDED JUNE
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 217,968
<SECURITIES> 0
<RECEIVABLES> 120,400
<ALLOWANCES> 46,490
<INVENTORY> 815,713
<CURRENT-ASSETS> 1,446,424
<PP&E> 404,638
<DEPRECIATION> 159,333
<TOTAL-ASSETS> 2,773,332
<CURRENT-LIABILITIES> 10,008,231
<BONDS> 0
0
573
<COMMON> 1,687
<OTHER-SE> (7,237,159)
<TOTAL-LIABILITY-AND-EQUITY> 2,773,332
<SALES> 2,853,067
<TOTAL-REVENUES> 2,853,067
<CGS> 1,174,609
<TOTAL-COSTS> 2,813,199
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,396,741
<INCOME-PRETAX> (2,489,828)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,489,828)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,489,828)
<EPS-PRIMARY> (1.50)
<EPS-DILUTED> (1.50)
</TABLE>
