AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 26, 1999
REGISTRATION NO. 333-80761
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
AMENDMENT NO. 1
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HAT WORLD CORPORATION
(Exact name of small business issuer as specified in charter)
MINNESOTA 46-0452694 5699
(State or other (I.R.S. Employer (Primary Standard
Jurisdiction of Identification No.) Industrial Classification
incorporation or Code Number)
organization)
4912 S. Minnesota Avenue
Sioux Falls, South Dakota 57108
(605) 336-0551
(Address and telephone number of principal
executive office and place of business)
-----------------
Charles Clayton
527 Marquette
Minneapolis, MN 55402
(612) 338-3738
(Name and address and telephone number of agent for service)
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Copies to:
<TABLE>
<CAPTION>
<S> <C> <C>
Harold M. Golz Anthony B. Petrelli Ward E. Terry, Jr.
EBI Securities Corporation Neidiger, Tucker, Brunner, Inc. Clanahan, Tanner, Downing
6300 S. Syracuse Way, Suite 645 1675 Larimer St., Ste. 300 & Knowlton, P.C.
Englewood, CO 80111 Denver, CO 80202 730 17th Street, Suite 500
(303) 694-0295 (303) 825-1825 Denver, CO 80202
(720) 359-9500
</TABLE>
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APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, 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 of 1933, 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 of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. []
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. []
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
Common Stock $.01 par value (2)................... $11,902,500 $ 3,511.24
Total............................................. $ 3,511.24
=========================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee in accordance with Rule 457(b) under the Securities Act of
1933.
(2) Includes shares that the representatives of the underwriters have the option
to purchase from Hat World Corporation to cover over-allotments, if any,
equal to fifteen percent (15%) of the initial shares.
-----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a), OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
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<PAGE>
Prospectus
Subject to completion, dated August , 1999
1,150,000 SHARES
HAT WORLD CORPORATION
[LOGO]
COMMON STOCK
This is our initial public offering. We are offering all of the 1,150,000
shares. We estimate that the share price will be $7.00 to $9.00. No public
market currently exists for our shares.
We have applied to have our shares approved for listing on the Nasdaq
National Market with the symbol "HATS."
INVESTING IN OUR SHARES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
PER SHARE TOTAL
-------------- --------------
Public offering price $ $
Underwriting discounts $ $
Proceeds to Hat World $ $
Solely to cover any over-allotments, we have granted the representatives of
the underwriters a 60-day option to purchase up to 172,500 additional shares of
common stock on the same terms. This is a firm commitment offering.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS A CRIME TO MAKE ANY REPRESENTATION TO
THE CONTRARY.
NEIDIGER, TUCKER, BRUNNER, INC.
EBI SECURITIES CORPORATION
AMERICAN FRONTEER FINANCIAL CORPORATION
JOSEPH STEVENS & COMPANY, INC.
PROSPECTUS DATED , 1999
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
A REGISTRATION STATEMENT RELATING TO THESE SHARES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. WE MAY NOT SELL THESE SHARES UNTIL THE
REGISTRATION STATEMENT IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SHARES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE SHARES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
[IMAGE]
[IMAGE]
[IMAGE]
Our Internet site address is "hatworld.com"; however, the information on the
site is not a part of this prospectus.
We intend to furnish stockholders with annual reports containing financial
statements audited by an independent public accounting firm and quarterly
reports containing unaudited financial information for the first three quarters
of each year.
The Hat World logos are trademarks of Hat World Corporation.
<PAGE>
HAT WORLD CORPORATION PROSPECTUS
INTRODUCTION
Please read this prospectus carefully. It describes our business,
products, services and finances. We have prepared this prospectus so that you
will have information necessary to make an investment decision.
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, our shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of the prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
PROSPECTUS DELIVERY OBLIGATIONS
Until , 1999 (25 days after the date of this prospectus) all dealers
making transactions in the common stock, whether or not participating in this
distribution, may be required to deliver a prospectus. This is in addition to
the obligation of dealers to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
TABLE OF CONTENTS
PAGE
---
Prospectus Summary ...................... 2
Risk Factors ............................ 4
Additional Information .................. 9
Use of Proceeds ......................... 10
Dividend Policy ......................... 10
Capitalization .......................... 11
Dilution ................................ 12
Selected Financial Data ................. 13
Management's Discussion ................. 14
Business ................................ 17
Management .............................. 29
Certain Transactions .................... 35
Principal Stockholders .................. 36
Description of Capital Stock ............ 37
Shares Eligible for Future Sale ......... 38
Underwriting ............................ 39
Legal Matters ........................... 41
Experts ................................. 41
Index to Financial Statements ........... F-1
<PAGE>
PROSPECTUS SUMMARY
We are a leading specialty retailer of sports related headwear. Our stores
offer a large selection of licensed, baseball-style caps featuring logos of
college and professional sports teams such as baseball, basketball, football,
hockey, and motorsports. Our stores are located primarily in enclosed malls in
the eastern half of the continental United States. At the date of this
prospectus, we had 91 stores in 25 states with the average store occupying
approximately 675 square feet and contributing approximately $500 in annual
sales per-square-foot. To date our strategy has been to open stores in middle
market cities, many near college campuses, where we can best serve our target
market, the young adult between 12 and 35 years old. This strategy has enabled
us to be profitable each year since we opened our first store in 1995. As a
result of seasonal influences on our business, historically, 60% of our annual
sales have occurred during the last half of the year. It is during this same
period that we have previously attained profitability. Our current strategy
includes opening stores in larger urban areas. The primary purpose of this
offering is to provide us with capital to accelerate expansion. We currently
intend to open 19 additional stores during the remainder of 1999 and 70
additional stores during each of the next 2 years.
In April 1999, we opened our Internet site, www.hatworld.com. Recently, we
enhanced the site to sell products. Consumers from anywhere in the world can
access our Internet site and buy any of over 4,000 different hats. We expect our
Internet site to serve as a profit center as well as an information source for
tracking geographical changes in consumer preferences. This offering will enable
us to further expand our e-commerce capabilities.
Our operating subsidiary was incorporated in Minnesota on June 1, 1995. Our
operations and distribution center are located in Indianapolis, Indiana. On
April 26, 1999, we incorporated our holding company, also in Minnesota. The
office for our holding company, investor relations, financial and accounting
departments is at 4912 South Minnesota Avenue, Sioux Falls, South Dakota 57108.
Our telephone number is (605) 336-0551.
THE OFFERING
Common stock offered by Hat World ................... 1,150,000 shares
Common stock to be outstanding after this offering... 4,293,446 shares
Use of proceeds...................................... To open and operate
additional stores, to pay
indebtedness, to make
complementary
acquisitions or
investments, and for
working capital, and
other general purposes
including enhancements to
our e-commerce site.
Proposed Nasdaq National Market symbol............... HATS
The number of shares of common stock to be outstanding after this offering does
not include:
* 433,500 shares that would be issued upon the exercise of stock options
outstanding under our 1999 Stock Option Plan at a weighted average exercise
price of $5.61 per share;
* 446,500 additional shares that have been reserved for issuance and may be
granted under such plan;
* 40,000 shares issuable upon the exercise of a warrant that we have agreed to
issue after the offering as partial consideration for a loan guarantee. The
warrant will be for two years and will have an exercise price equivalent to
125% of the initial public offering price per share;
* 36,000 shares issuable upon the exercise of options granted to directors
(4,000 shares per director), exercisable for a period of three years at a
price of 125% of the initial public offering price per share; and
* 115,000 shares issuable upon the exercise of warrants to be issued to the
representatives of the underwriters of this offering. The warrants are to be
exercisable for a period of four years
2
<PAGE>
commencing one year after the effective date of the offering and shall be
exercisable at 120% of the initial public offering price per share.
SUMMARY FINANCIAL DATA
The following table summarizes the financial data for our business. Please
see our audited and unaudited financial information beginning on page F-1.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------- -------------------------------
1997 1998 1998 1999
--------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales .................................. $ 3,761,107 $ 10,975,102 $3,159,810 $ 7,518,135
Net income (loss) .......................... $ 275,558 $ 642,569 $ (44,290) $ (459,038)
=========== ============ ========== ===========
Earnings (loss) per share, diluted ......... $ 0.13 $ 0.22 $ (0.02) $ (0.15)
=========== ============ ========== ===========
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
------------------------------------------- ----------------------
1995 1996 1997 1998 1998 1999
------ --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of stores:
Opened during period .................... 1 4 13 35 14 27
Closed during period .................... 0 0 0 0 0 0
Open at end of period ................... 1 5 18 53 32 80
Comparable store sales increases ......... N/A N/A 6.4% 12.4% 13.3% 9.9%
Net sales increases ...................... N/A 778% 300% 192% 308% 138%
</TABLE>
JUNE 30, 1999
-------------------------------
ACTUAL AS ADJUSTED
--------------- -------------
BALANCE SHEET DATA:
Cash and cash equivalents ......... $ 13,405 $8,017,405
Working capital (deficit) ......... (1,041,681) 6,962,319
Stockholders' equity .............. 4,916,458 12,920,458
The as adjusted column reflects our receipt of the estimated net proceeds from
the sale of 1,150,000 shares of common stock at an assumed initial public
offering price of $8.00 per share, after deducting underwriting discounts and
other estimated offering expenses and prior to use of net proceeds.
ABOUT THIS PROSPECTUS
Unless otherwise indicated, all information in this prospectus assumes that
the representatives of the underwriters do not exercise their over-allotment
option or their warrants and that no other person exercises any other
outstanding option or warrant.
This summary highlights some information from this prospectus and may not
contain all the information that is important to you.
Unless the context requires otherwise, "Hat World," "we," "us," and "our"
in this prospectus refer to Hat World Corporation, including our subsidiary, Hat
World, Inc.
3
<PAGE>
RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE OF VARIOUS
RISKS, INCLUDING THOSE DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THESE
RISKS, TOGETHER WITH ALL THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS,
BEFORE YOU DECIDE WHETHER TO PURCHASE SHARES OF OUR COMMON STOCK.
THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. THESE STATEMENTS RELATE TO OUR FUTURE PLANS,
OBJECTIVES, EXPECTATIONS AND INTENTIONS. THESE STATEMENTS MAY BE IDENTIFIED BY
THE USE OF WORDS SUCH AS "BELIEVES," "EXPECTS," "ESTIMATES," "ANTICIPATES,"
"INTENDS," "PLANS," AND SIMILAR EXPRESSIONS. OUR ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT
OF VARIOUS FACTORS, INCLUDING ALL THE RISKS DISCUSSED IN THIS SECTION AND
ELSEWHERE IN THIS PROSPECTUS.
DIFFICULTIES IN MANAGING OUR GROWTH WILL AFFECT OUR OPERATING RESULTS AND MAY
CAUSE OUR STOCK PRICE TO DECLINE.
We cannot guarantee that we will be able to effectively or successfully
manage our growth, and if we do not, our operational and financial performance
and our stock price may suffer. We intend to pursue an expansion strategy
involving opening more stores than we have in recent years, and our future
operating results will depend to a substantial extent upon our ability to open
and operate new stores successfully. There will always be some uncertainty
whether our new stores will be as profitable or generate sales comparable to our
existing stores.
We will also enter certain new markets in new regions and larger urban
areas that may present competitive and merchandising challenges that are
different from those that we have encountered in our existing markets. Our
ability to open new stores on a timely basis will depend upon a number of
factors. These include our ability to:
* properly identify and enter new markets,
* locate suitable store sites,
* negotiate acceptable lease terms,
* access adequate inventory,
* secure capital resources and financing,
* construct or refurbish sites,
* hire, train and retain skilled managers and personnel,
* open stores on a timely basis, and
* manage other factors, many of which will be beyond our control.
THE LOSS OF KEY PERSONNEL AND OUR FAILURE TO ATTRACT AND RETAIN ADDITIONAL
HIGHLY SKILLED PERSONNEL COULD HARM OUR BUSINESS AND CAUSE OUR STOCK PRICE TO
FALL.
We believe that our success will depend on the continued services of our
senior management team. The loss of the services of any of our senior management
team or other key employees could adversely affect our business, financial
condition and operating results.
Our future success also depends on our ability to identify, attract,
hire, train, retain and motivate highly skilled technical, managerial, sales and
marketing personnel. We have expanded our operations and we will continue to
hire additional personnel as our business grows. Competition for such personnel
is intense, and we cannot guarantee that we will successfully attract,
assimilate or retain a sufficient number of qualified personnel. Failure to
retain and attract necessary personnel could adversely affect our business,
financial condition and operating results.
AS COMPETITION BECOMES STRONGER, OUR FINANCIAL PERFORMANCE AND THE VALUE OF YOUR
INVESTMENT MAY DECLINE.
Due to increased competition, we may experience difficulty in continuing
to compete successfully against existing or future competition. Our expansion
into the markets served by our competitors, entry of new competitors or
expansion of existing competitors into our markets could have a material adverse
effect on our business, financial condition and results of operations. We
compete with a large variety of stores and retailers that carry the same type of
merchandise we sell. Many competitors are larger than us and have access to
significantly greater financial, marketing and other resources. It is uncertain
that our stores can continue to compete on the basis of merchandise quality and
selection, price, visual appeal of the merchandise and the convenience of the
store location.
4
<PAGE>
IF WE MAKE MISTAKES IN JUDGING CONSUMER PREFERENCES, OUR SALES, PROFIT MARGINS
AND STOCK PRICE COULD GO DOWN.
Any failure to anticipate and respond to changing consumer preferences
could lead to lower sales, excess inventory and lower margins, any of which
could have a material, adverse effect on our business, financial condition and
results of operations. All of our products are subject to changing consumer
preferences. Consumer preferences and demand could shift to types of headwear
other than those sold by us. Any shift could have a material adverse effect on
our operating results. Our future success will depend on our ability to
anticipate and respond to changes in consumer preferences. We may not be able to
anticipate or respond to changes on a timely basis, or at all.
ANY TROUBLE DEALING WITH A FEW KEY VENDORS COULD SLOW THE SUPPLY OF VITAL
PRODUCTS, WHICH WOULD ADVERSELY AFFECT SALES, REDUCE OPERATING PERFORMANCE AND
HURT OUR STOCK PRICE.
We buy significant amounts of our products from five vendors with whom we
have no long-term purchase commitments or exclusive contracts. If we experience
problems with respect to vendor fulfillment and retention or if any of our key
vendors experience business interruptions, we may have difficulty in obtaining
desired merchandise on acceptable terms.
SYSTEM FAILURES, DELAYS AND CAPACITY RESTRAINTS COULD ADVERSELY AFFECT OUR
OPERATIONAL AND FINANCIAL PERFORMANCE AND CAUSE OUR STOCK PRICE TO DECLINE.
Our business depends on the efficient and uninterrupted operation of our
computer and communications systems. Our principal computer center and
communications systems are located at our operations headquarters in
Indianapolis, Indiana. Any systems interruptions that cause malfunctions or
result in slower response times could result in losses of data and revenue. Any
of these losses could materially and adversely affect our business, financial
condition and operating results. Interruptions could result from natural
disasters as well as power loss, telecommunications failure and similar events.
We do not presently have a formal disaster recovery plan and our insurance may
not be sufficient to cover losses from these events.
In addition, we rely on our existing management information systems for
operating and monitoring all major aspects of our business, including sales,
warehousing, distribution, purchasing, inventory control, merchandise planning
and replenishment, as well as various financial functions. Any failure by us to
upgrade such systems or unexpected difficulties encountered with such systems as
our business expands, or in general any disruption in these systems, could
adversely affect our results of operations and financial performance.
ANY FACTORS NEGATIVELY AFFECTING OUR BUSINESS DURING THE FOURTH QUARTER IN ANY
YEAR, INCLUDING UNFAVORABLE ECONOMIC CONDITIONS, COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND MAY CAUSE
CONSIDERABLE FLUCTUATIONS IN OUR STOCK PRICE.
The market value of our common stock will likely vary significantly in
response to changes in our quarterly results of operations. We have experienced,
and expect to continue to experience, substantial seasonal fluctuations in our
sales and operating results, which are typical of many mall-based specialty
retailers and common to most retailers generally. Due to the importance of the
fall selling season, which includes Thanksgiving, Christmas and the peak selling
period of major team sports, the fourth calendar quarter has historically
contributed, and is expected to continue to contribute, a substantial majority
of our operating income and net income for the entire year. We expect this
pattern to continue during the current fiscal year and anticipate that in
subsequent years the fourth quarter will continue to contribute
disproportionately to our operating results, particularly during November and
December.
Our quarterly results of operations may also fluctuate significantly as a
result of a variety of other factors, including the timing and pre-opening
expenses of new stores, the relative proportion of new stores to mature stores,
net sales contributed by new stores, increases or decreases in comparable store
sales, adverse weather conditions, shifts in the timing of holidays and changes
in our product mix.
OUR REGIONAL MARKET CONCENTRATION SUBJECTS US TO REGIONAL CONDITIONS WHICH COULD
ADVERSELY IMPACT OUR REVENUES AND THE MARKET PRICE OF OUR STOCK.
Our results of operations are more subject to the regional economic
conditions, weather
5
<PAGE>
and population changes and other factors specific to our particular regions than
the operations of more geographically diverse competitors. Most of our stores
are located in the eastern half of the continental United States and, in some
cases, are clustered in groups. Our current expansion plans anticipate that many
of our new stores will be located in the states where we already have operations
or in contiguous states. In addition, changes in regional factors which reduce
the appeal of our stores and merchandise to local consumers could have a
material adverse effect on our business, results of operations and financial
condition.
VARIATIONS IN OUR COMPARABLE STORE SALES RESULTS COULD CAUSE THE MARKET PRICE OF
OUR COMMON STOCK TO FLUCTUATE SIGNIFICANTLY.
Numerous factors affect comparable store sales results, including among
others, weather conditions, retail trends, the retail sales environment,
economic conditions and our success in executing our business strategy. Our
comparable store sales results have experienced monthly fluctuations. In
addition, it is possible that opening new stores in existing markets may result
in decreases in comparable store sales for existing stores in such markets.
Comparable store sales may decrease in the future. The perception of analysts
and other investors of our performance compared to our prior performance and
that of competitors and other retailers may affect our stock price.
AS A "BRICK AND MORTAR" RETAILER, WE HAVE A STRONG COMMITMENT TO MALL-BASED
LOCATIONS AND ANY SIGNIFICANT IMPACT FROM INTERNET SALES OR A DECLINE IN
POPULARITY OF MALL SHOPPING COULD HURT OUR PERFORMANCE AND STOCK PRICE.
Internet commerce, though now a small component of retailing, is expected
to grow at a rapid rate. Our Internet commerce site is new. We do not know the
impact that our or competitive Internet commerce may have on sales in our mall
stores.
Our future operating results will depend on many factors that are beyond
our control, including the overall level of mall traffic and general economic
conditions affecting consumer confidence and spending. Substantially all of our
existing stores are located in enclosed malls. As a result, we must rely, in
part, on the ability of mall anchor tenants and other tenants to generate
customer traffic in the vicinity of our stores.
Enclosed shopping malls may not continue to attract a sufficient number
of shoppers for our business or malls in which we have stores may fail to
attract strong anchors, which could have a material, adverse effect on our
business, results of operations and financial performance.
OUR FINANCIAL PERFORMANCE AND STOCK PRICE COULD BE HURT BY OUR DEPENDENCY ON
FOREIGN-SOURCED MERCHANDISE, FOREIGN TRADE PRACTICES AND ECONOMIC CONDITIONS.
Changes in foreign governments, regulations and political stability may
cause disruption of trade from the countries in which the suppliers of our
vendors are located. Such disruptions could adversely affect sales and financial
performance. Some of our vendors are importers of merchandise manufactured by or
for them in the Far East. Risks involved in buying products manufactured abroad
include fluctuations in the value of currencies and increases in customs duties
and related fees resulting from position changes by the United States Customs
Service. Our vendors are also subject to import controls and trade barriers
(including the unilateral imposition of import quotas), loss of
most-favored-nation trading status, restrictions on the transfer of funds, labor
disputes, work stoppages and strikes, negative publicity from certain work or
trade practices and economic uncertainties.
FAILURE TO PROTECT TRADEMARKS, TRADE SECRETS AND OTHER PROPRIETARY RIGHTS AND
ANY INFRINGEMENT OF THE PROPRIETARY RIGHTS OF THIRD PARTIES COULD IMPACT OUR
COMPETITIVENESS, FINANCIAL PERFORMANCE AND STOCK PRICE.
Any infringements of our trademarks, trade secrets and intellectual
property could have a material, adverse effect on our business, financial
condition and operating results. We seek to protect our rights, but our efforts
may be inadequate and may not prevent others from claiming violations by us of
their proprietary rights. The unauthorized misappropriation of our proprietary
rights could have a material, adverse effect on our business, financial
condition and operating results. Trade secret, copyright and trademark laws
offer only limited protection. Further, we may not be able to use our U.S.
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<PAGE>
trademarks in other countries where we may expand. Trademark, copyright and
trade secret protection may not be available in those countries. Policing
unauthorized use of our proprietary information is difficult. If we resort to
legal proceedings to enforce our proprietary rights, the proceedings could be
burdensome and expensive, and the outcome could be uncertain.
We may also be subject to claims alleging infringement by us of third
party proprietary rights. If we were to discover that any of our products
infringed third party rights, we may not be able to obtain permission to use
such rights on reasonable terms. This inability may require us to expend
significant resources to make our products non-infringing or to discontinue the
use of such products. Any claim of infringement could cause us to incur
substantial costs defending against the claim, even if the claim is invalid, and
could distract our management from our business. Further, a party making such a
claim could secure a judgment that requires us to pay substantial damages or
that prevents us from using or selling our products.
WE MAY MAKE ACQUISITIONS THAT WILL EXPOSE US TO NEW RISKS AND UNCERTAINTIES,
DILUTE OUR STOCKHOLDERS' OWNERSHIP, CAUSE US TO INCUR DEBT AND ASSUME
CONTINGENT LIABILITIES.
We may acquire or make investments in additional complementary
businesses, technologies, services or products if appropriate opportunities
arise. This acquisition and investment strategy has the following risks:
* We may not be able to identify suitable acquisition or investment
candidates at reasonable prices;
* We may make errors in determining which business opportunities are
complementary or appropriate;
* We may not be able to successfully integrate services, products or
personnel of any acquisition or investment into our operations;
* Acquisitions and investments may cause a disruption in our ongoing
business, distract our management and other personnel and make it
difficult to maintain our standards, controls and procedures;
* We may acquire unknown liabilities in these acquisitions or
investments;
* Costs associated with these acquisitions, including the amortization
of intangible assets, will adversely affect profitability;
* We may acquire companies or make investments in markets in which we
have little experience;
* As consideration for such acquisitions, we may be required to issue
additional shares of our capital stock. This would have a dilutive
effect upon our existing shareholders' stock ownership; and
* We may be required to assume or incur substantial indebtedness in
connection with any acquisition or in order to fund the operation or
existing commitments of the acquired company.
WE MAY ENCOUNTER INTERNET REGULATORY UNCERTAINTIES IN OUR ATTEMPT TO ESTABLISH
ONLINE SALES, WHICH COULD RAISE OUR COSTS AND HURT OUR FINANCIAL PERFORMANCE
AND STOCK PRICE.
Few laws or regulations are currently directly applicable to certain
activities on the Internet. However, because of the Internet's popularity and
growth, new laws and regulations may be adopted in such areas as:
* online content;
* user privacy;
* taxation;
* access charges;
* linkage fees;
* copyrights;
* characteristics and quality of products and services; and
* consumer protection.
Such government regulation may impose additional burdens on our business.
They may also impede the growth in Internet use and thereby decrease the demand
for our products and services via the Internet.
Additionally, U.S. and foreign laws applicable to e-commerce or Internet
communications are becoming more prevalent. These laws have been recently
enacted and there is uncertainty regarding their marketplace impact. Any new
legislation or regulation regarding the Internet, or application of existing
laws and regulations, to the Internet, could materially affect us.
CONFLICTS WITH OTHER WEB SITE ADDRESSES MAY CAUSE OUR INTERNET SALES TO SUFFER
AND NEGATIVELY AFFECT OUR OVERALL PERFORMANCE AND STOCK PRICE.
We may not be able to prevent third parties from acquiring web site
addresses that are
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<PAGE>
similar to our addresses, which could materially and adversely affect our
business, financial condition and operating results. We currently hold various
Internet web site addresses related to our business. Governmental agencies and
their designees generally regulate the acquisition and maintenance of web site
addresses. The regulation of web site addresses in the United States and foreign
countries is subject to change. As a result, we may not be able to acquire or
maintain relevant web site addresses in all countries where our services and
products are made available through the Internet. Furthermore, the relationship
between regulations governing such addresses and laws protecting trademarks is
unclear.
OUR CURRENT DIRECTORS AND OFFICERS CONTROL HAT WORLD AND ANALYSTS AND OTHER
INVESTORS MAY DISAGREE WITH THEIR DECISIONS, CAUSING OUR STOCK PRICE TO SUFFER.
After this offering, our officers and directors will control a minimum of
67% of our outstanding common stock. As a result, they may be able to exercise a
controlling influence over matters requiring approval of our shareholders,
including the election of directors, and over our business and affairs.
Investors in this offering will not be able to exercise control. This would
include determinations with respect to mergers and other business combinations,
and the acquisition and disposition of our assets.
WE MAY NEED AND BE UNABLE TO OBTAIN ADDITIONAL CAPITAL, WHICH WOULD CURTAIL OUR
GROWTH AND HURT OUR STOCK PRICE.
We may not be able to achieve our goals without additional capital and we
may not be able to raise the additional capital. Even if additional capital is
obtained, it may not be on favorable terms.
FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET COULD CAUSE OUR STOCK
PRICE TO FALL AND DECREASE THE VALUE OF YOUR INVESTMENT.
The market price of our common stock could fall if our stockholders sell
substantial amounts of common stock, including shares issued upon the exercise
of outstanding options and warrants, in the public market following this
offering. Such sales might also make it more difficult for us to sell equity
securities in the future at a time, at a price and on terms that we deem
appropriate.
Restrictions under the securities laws and certain lock-up agreements
limit the number of shares of common stock available for sale in the public
market. However, the representatives of the underwriters may, in their sole
discretion, release all or any portion of the securities subject to the lock-up
agreements.
Upon the closing of this offering, some stock and warrant holders are
entitled to certain registration rights. The exercise of such rights could
adversely affect the market price of our common stock.
IF WE ARE UNABLE TO RENEW OUR STORE LEASES AS THEY REACH THEIR MATURITY, OUR
FUTURE PERFORMANCE MAY BE ADVERSELY AFFECTED AND YOUR STOCK VALUE MAY DECLINE.
The store leases for the 91 retail store locations where we are currently
located provide for a fixed term ranging for most leases from seven to eight
years, at which time they expire. Because the leases do not contain provisions
for renewal options, there is no guarantee that the leases for favorable and
highly profitable store locations will be renewed. Any failure to renew leases
expiring in the same years in the future could materially, adversely affect our
financial condition and operations.
All existing store leases provide for the payment of fixed rent and
additional rent. Such rent is subject to increases. If gross sales in any
particular store exceed an annual base amount (or, in a few cases, a base
monthly amount) as provided in the lease for that store, we will be required to
pay additional rent equal to a fixed percentage rate ranging from 6% to 7% of
such annual amount (or monthly amount) of gross sales. In addition, we are
required under the leases to pay additional rent for each store's proportionate
share of real estate taxes and assessments, common area maintenance charges,
utility charges, advertising promotional and media fund charges associated with
the promotion of the malls where the stores are located. In many cases, we are
required to pay a proportionate share of the landlord's insurance premium costs
for insuring the malls in which stores are located. Under some leases, we are
required to pay a proportionate share of the interior sprinkler system and
heating, air conditioning and ventilation costs for certain malls. Our operating
expenses could increase significantly each year, particularly after the first
8
<PAGE>
year of operations of the particular stores. The effect on our financial
operating expenses could be significantly impacted by the cumulative effect of
such increases as the bulk of our existing stores which have opened in the last
12 months reach maturity.
In addition, several of our leases allow the landlords to increase our
fixed rent or terminate a lease for particular stores after the passage of a
number of years if our gross sales do not exceed the annual base rent at any
time prior to such date.
With few exceptions, our store leases contain a provision which restricts
within a prescribed area measured from the site of an existing store, the
opening of any additional stores by us. Under the terms of most leases, any
failure by us to comply with such restriction will result in the landlord of the
existing store location having the right to include the gross sales of such
additional store as part of the percentage rent calculation for the existing
store. Such provision could limit our ability to open stores in locations
included in such restrictive areas which we may subsequently determine are more
favorable locations in the future than a particular existing store.
Some of the store leases contain a cross default provision which provides
that a breach by us of any lease term or provision for a particular store
location may be treated by the landlord as a default of any other store lease we
may have with such landlord. The landlord as a consequence may terminate our
rights under all store leases to which the landlord is a party.
CERTAIN PROVISIONS IN OUR CORPORATE DOCUMENTS MAY DISCOURAGE OUR ACQUISITION BY
OTHERS AND THUS DEPRESS OUR STOCK PRICE.
Our corporate documents and Minnesota law could make it more difficult
for a third party to acquire us, even if a change in control would be beneficial
to our stockholders.
These and other provisions might discourage, delay or prevent a change in
control for us or a change in our management. These provisions could also limit
the price that investors might be willing to pay in the future for shares of
common stock.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed, with the Securities and Exchange Commission, Washington, DC,
a registration statement on Form SB-2 under the Securities Act with respect to
the common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement, the exhibits and schedules.
For further information, about our common stock and us, please refer to the
registration statement, exhibits and schedules. Statements made in this
prospectus as to the contents of any contract, agreement or other documents
referred to are not necessarily complete. With respect to each such contract,
agreement 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.
The registration statement, exhibits and schedules may be inspected without
charge and copied at the public reference facilities maintained by the SEC in
Room 1024, 450 Fifth Street, NW, Washington, D.C. 20549, and at the SEC's
regional offices located at Citicorp Center, 500 West Madison, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New York
10048. Copies of such material may be obtained at prescribed rates from such
offices upon the payment of the fees proscribed by the SEC.
The SEC maintains a web site that contains registration statements,
reports, proxy and other information regarding registrants that file
electronically with the SEC. The address for the Internet site is
http://www.sec.gov.
9
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $8,004,000 or $9,204,600 if the representatives of the
underwriters exercise their over-allotment option in full. Each of these amounts
is based upon an assumed initial public offering price of $8.00 per share.
We expect to use the net proceeds of this offering for the following
purposes:
* to repay approximately $4.5 million in debt consisting of short-term
indebtedness of approximately $2.5 million (interest at .25% above the
prime rate, matures September 30, 1999) and a bridge loan of $2.0
million (interest at .25% above the prime rate to a bank plus 4% to
the affiliated guarantor, matures September 30, 1999) which were used
to fund the opening of new stores;
* to fund the expansion of new stores after the offering, estimated at
$2.0 million, which would increase to $2.5 million if the
over-allotment option is exercised in full;
* to make complementary acquisitions or investments, estimated at $1.0
million, which would increase to $1.7 million if the over-allotment
option is exercised in full; and
* for working capital and other general corporate purposes, including
enhancements to our e-commerce site, estimated at $.5 million.
We have not identified specific uses for all of the proceeds from this
offering, and management will have broad discretion over their use and
investment. As noted above, we may acquire or invest in complementary
businesses, and a portion of the net proceeds may be used for such acquisitions
or investments. However, we currently have no understandings, commitments or
agreements for any material acquisition or investment.
Pending use of the net proceeds of this offering, we intend to invest the
net proceeds in short-term, interest-bearing investment grade securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock.
We currently expect to retain future earnings, if any, for use in the
operation and expansion of our business and do not anticipate paying any cash
dividends in the foreseeable future.
10
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. Our
capitalization is presented:
* on an actual basis; and
* on an as-adjusted basis to reflect our receipt of the estimated net
proceeds from the sale of 1,150,000 shares of common stock at an
assumed initial public offering price of $8.00 per share, after
deducting underwriting discounts and estimated offering expenses.
<TABLE>
<CAPTION>
ACTUAL AS ADJUSTED
------------ --------------
<S> <C> <C>
Common stock, $.01 par value, 10,000,000 shares
authorized, 3,143,446 shares issued and outstanding;
4,293,446 shares issued and outstanding as adjusted ......... $ 31,436 $ 42,936
Additional paid in capital ................................... 4,383,230 12,375,730
Retained earnings ............................................ 501,792 501,792
---------- -----------
Stockholders' Equity ......................................... $4,916,458 $12,920,458
========== ===========
</TABLE>
We expect there will be 4,293,446 shares of common stock outstanding after
this offering. In addition to the shares outstanding after the offering, we may
issue additional shares of common stock under the following plans and
arrangements:
* 433,500 shares issuable upon the exercise of stock options outstanding
under the 1999 Stock Option Plan at a weighted average exercise price
of $5.61 per share;
* 446,500 shares available for issuance under the same Plan; o 40,000
shares issuable upon the exercise of a warrant that we have agreed to
issue after the offering as partial consideration for a loan
guarantee. The warrant will be for two years after the effective date
of the offering and will have an exercise price equivalent to 125% of
the initial public offering price per share;
* 36,000 shares issuable upon the exercise of options granted to
directors (4,000 shares per director), exerciseable for a period of
three years at a price of 125% of the initial public offering price
per share; and
* 115,000 shares issuable upon the exercise of warrants to be issued to
the representatives of the underwriters of this offering. The warrants
are to be exercisable for a period of four years commencing one year
after the effective date of the offering and shall be exercisable at
120% of the initial public offering price per share.
11
<PAGE>
DILUTION
As of June 30, 1999, the net tangible book value was $4,894,562 or $1.56
per common share. Net tangible book value per common share represents the amount
of our total tangible assets less total liabilities, divided by the number of
common shares outstanding.
After giving effect to the sale of the 1,150,000 shares of common stock
offered at an assumed initial public offering price of $8.00 per share, and
after deducting the underwriting discounts and estimated offering expenses
payable by us, our as adjusted net tangible book value at June 30, 1999 would
have been $3.00 per share. This represents an immediate increase in the as
adjusted net tangible book value of $1.44 to existing stockholders and an
immediate dilution in as adjusted net tangible book value of $5.00 per share to
purchasers of common stock in this offering. Dilution per share represents the
difference between the price per share paid by public investors and the as
adjusted net tangible book value per share at June 30, 1999. The following table
illustrates this per share dilution as of June 30, 1999.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share ........... $ 8.00
Net tangible book value before the offering .............. $ 1.56
Increase to existing shareholders after offering ......... 1.44
-------
As adjusted net tangible book value per share after
the offering. ............................................. 3.00
-------
Dilution per share to new investors ....................... $ 5.00
=======
</TABLE>
The following tables set forth, as of June 30, 1999, after giving effect to
the sale of the number of common shares, and without adjustment for the
underwriting discount and other expenses related to this offering, the number
and percentage of shares of common stock purchased from the Company, the amount
and percentage of cash consideration paid and the average price per share paid
by the new investors pursuant to this offering and by existing shareholders.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders ......... 3,143,446 73% $ 4,414,666 32% $ 1.40
New investors ................. 1,150,000 27% 9,200,000 68% $ 8.00
--------- --- ----------- ---
Total ........................ 4,293,446 100% $13,614,666 100%
========= === =========== ===
</TABLE>
See "Capitalization" for information about shares issuable and reserved for
stock options and warrants that would also effect dilution.
12
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes beginning on page F-1. The
statements of operations data are set forth below for the years ended December
31, 1997 and 1998 and the six months ended June 30, 1998 and 1999. These figures
are derived from and qualified by reference to our financial statements included
elsewhere in this prospectus. The results are not necessarily indicative of
results to be expected for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------- -----------------------------
1997 1998 1998 1999
--------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales .................................... $ 3,761,107 $ 10,975,102 $3,159,810 $7,518,135
Gross profit ................................. 2,054,081 6,077,172 1,720,676 4,171,846
Income (loss) from operations ................ 480,674 1,014,493 (71,322) (638,353)
Income (loss) before income taxes ............ 470,858 1,008,269 (80,528) (765,063)
Provision (benefit) for income taxes ......... 195,300 365,700 (36,238) (306,025)
----------- ------------ ---------- ----------
Net income (loss) ............................ $ 275,558 $ 642,569 $ (44,290) $ (459,038)
=========== ============ ========== ==========
Earnings (loss) per share, basic ............. $ 0.13 $ 0.23 $ (0.02) $ (0.15)
=========== ============ ========== ==========
Earnings (loss) per share, diluted ........... $ 0.13 $ 0.22 $ (0.02) $ (0.15)
=========== ============ ========== ==========
Weighted average shares outstanding .......... 2,074,902 2,820,890 2,545,816 3,143,446
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEAR ENDED DECEMBER 31, 30,
---------------------------------------------- ----------------------
1995 1996 1997 1998 1998 1999
--------- --------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of stores:
Opened during period ................... 1 4 13 35 14 27
Closed during period ................... 0 0 0 0 0 0
Open at end of period .................. 1 5 18 53 32 80
Comparable store sales increases ......... N/A N/A 6.4% 12.4% 13.3% 9.9%
Net sales increases ...................... N/A 778% 300% 192% 308% 138%
</TABLE>
JUNE 30, 1999
-------------------------------
ACTUAL AS ADJUSTED
--------------- -------------
BALANCE SHEET DATA:
Cash and cash equivalents ......... $ 13,405 $8,017,405
Working capital (deficit) ......... (1,041,681) 6,962,319
Total assets ...................... 10,724,461 18,728,461
Stockholders' equity .............. 4,916,458 12,920,458
The as adjusted column reflects our receipt of the estimated net proceeds
from the sale of 1,150,000 shares of common stock at an assumed initial public
offering price of $8.00 per share, after deducting underwriting discounts and
other estimated offering expenses and prior to use of net proceeds.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
discussed in the forward-looking statements as a result of certain factors,
including those set forth under "risk factors" and elsewhere in this prospectus.
The following discussion and analysis should be read in conjunction with
"selected financial data," and the financial statements and notes thereto,
appearing elsewhere in this prospectus.
GENERAL
Our operating subsidiary, Hat World, Inc. was incorporated on June 1, 1995.
We made this company a subsidiary of a new holding company, Hat World
Corporation, which was incorporated on April 26, 1999. We have generated net
income each year that we have been in business, and sales and net income have
grown each year.
Our annual sales increases have been mainly due to having more stores each
year. Total same store sales have also increased since inception. Price
increases for our merchandise have been much less a factor in the sales
increases.
Sales are seasonal due to holiday shopping and peak selling periods of
major team sports. For example, in the fourth quarter, in addition to Christmas
sales, the National Football League (NFL), the National Basketball Association
(NBA), the National Hockey League (NHL) and both college basketball and football
are in season. For a typical store we expect 19% of annual sales to occur in the
first quarter, 21% in the second, 23% in the third and 37% in the fourth
quarter. At the store level, profits generally follow these same percents.
However, it has historically taken until the fourth quarter to generate net
profits, due to the burden of selling, general and administrative and other
expenses at the company level.
RESULTS OF OPERATIONS
From the calendar year ended December 31, 1996 to December 31, 1998 our net
sales increased at a compounded annual rate of 341.5%. Net income increased from
$53,632 in 1996 to $642,569 in 1998, or at a compounded annual rate of 1098.1%.
FIRST SIX MONTHS OF 1999 COMPARED TO FIRST SIX MONTHS OF 1998
The number of our stores increased to 80 from 32.
NET SALES. Net sales increased by $4,358,325, or 138%, to $7,518,135 for
the six months ended June 30, 1999 compared to $3,159,810 for the six months
ended June 30, 1998. This increase in net sales was due to the addition of 48
new stores and a same-store sales increase of 9.9%.
COST OF SALES. Cost of sales increased by $1,907,155, or 133%, to
$3,346,289 for the six months ended June 30, 1999 compared to $1,439,134 in
1998. Principal reasons for this increase were the rise in the number of stores
and the volume of merchandise sold. As a percentage of net sales, cost of sales
decreased to 44.5% in 1999 compared to 45.5% in 1998. The decrease, as a
percentage of sales, was due to our increasing buying power to negotiate lower
prices from vendors, which resulted in higher gross margins.
OPERATING EXPENSES. Operating expenses increased by $3,018,201, or 168%,
to $4,810,199 in 1999 from the 1998 level of $1,791,998. This increase was due
to the increased cost of opening and operating the additional stores.
Rent and common area maintenance expenses are included in operating
expenses, are relatively fixed in nature, and remained relatively stable as a
percent of sales from 1999 compared to 1998.
Depreciation and amortization increased by $273,121, or 176%, to $428,194
for the six months ended June 30, 1999 from the 1998 level of $155,073. This
increase was primarily due to the investment in 48 new stores.
OTHER. Due to the decrease in cash levels attributed to new store
financing and the existence of short-term debt, interest expense exceeded
interest income for the first six months of 1999 compared
14
<PAGE>
to the first six months of 1998. As a percentage of sales, interest income, net
and other income, were immaterial for both periods.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The number of our stores increased to 53 from 18.
NET SALES. Net sales increased by $7,213,995, or 192%, to $10,975,102 for
the year ended 1998 compared to $3,761,107 for the year ended 1997. This
increase in net sales was due to the addition of 35 new stores, a same-store
sales increase of 12.4% and an 8.7% increase in the average unit retail price in
all stores.
COST OF SALES. Cost of sales increased by $3,190,904, or 187%, to
$4,897,930 in 1998 compared to $1,707,026 in 1997. Principal reasons for this
increase were the rise in the number of stores and the volume of merchandise
sold. As a percentage of net sales, these expenses decreased to 44.6% in 1998
compared to 45.4% in 1997. The decrease, as a percentage of sales, was due to
our increasing buying power to negotiate lower prices from vendors, which
resulted in higher gross margins.
OPERATING EXPENSES. Operating expenses increased by $3,489,272, or 222%, to
$5,062,679 in 1998 from the 1997 level of $1,573,407. This increase was due to
the cost of opening and operating the additional stores. As a percentage of net
sales, these expenses increased to approximately 46.1% in 1998 compared to 41.8%
in 1997. The increase in general and administrative expenses as a percentage of
sales is primarily attributable to the increased staff needed to open the 35 new
stores as well as additional staff needed to maintain product flow to the
additional stores.
Rent, rent support and the cost of the merchandising department are
included in operating expenses, are relatively fixed in nature, and remained
relatively stable as a percent of sales from 1998 compared to 1997.
Depreciation and amortization increased by $323,216, or 234%, to $461,233
in 1998 from the 1997 level of $138,017. This increase was primarily due to the
investment in 35 new stores and the relocation of 3 stores.
OTHER. Due to the decrease in cash levels attributed to new store financing
and the existence of long-term debt, interest expense exceeded interest income
in 1998. As a percentage of sales, interest income, net and other income, were
immaterial for both 1998 and 1997.
INCOME TAXES. Income taxes increased by $170,400 to $365,700 in 1998
compared to $195,300 in 1997. Our effective tax rate decreased 5.2% from 1998
compared to 1997.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have historically provided cash flow which, together with
our credit facilities and equity financing, have provided adequate liquidity to
meet our operational needs. Cash and cash equivalents, including short-term
investments, totaled $433,354 at the end of 1998.
Net cash provided by operating activities amounted to ($348,572) in 1998
compared to $556,330 in 1997. The decrease in 1998 was primarily due to
additional inventory purchased to support the 35 new locations in 1998 and
anticipated store openings for early 1999. Our current ratio, current assets
over current liabilities, was 1.96 for 1998 and 1.52 for 1997.
At the end of 1998, we had available a $650,000 credit line with a bank to
finance our working capital requirements. This facility was to mature on March
30, 1999; however, in March 1999 we obtained a $3,500,000 credit line with a
different bank. On April 21, 1999, we received an additional $2,000,000 credit
line with the new bank in the form of a bridge loan. This bridge loan is
guaranteed by Bluestem Capital Partners I. For the guarantee, we will pay
Bluestem an additional interest payment of 4% over the bank rate plus a warrant
to buy additional shares. The warrant is for the purchase of 40,000 shares of
our common stock at 125% of the initial public offering price. The warrant is
exercisable for two years following the effective date of the offering.
At the end of 1998, we increased our investment in inventories to
$2,682,854, or 246%, from the 1997 balance of $775,701. The increase in
inventories was due to our opening and operating 35 additional stores in 1998
compared to 1997, a 194% increase. It was also due to inventory purchases
15
<PAGE>
made near the end of 1998 for new store openings planned for early 1999. As a
result, inventory turnover decreased from 3.5 times in 1997 to 2.9 times in
1998. We believe inventories are appropriate given the increase in the number of
stores and the level of sales currently being achieved.
During 1998, we continued to expand and relocate our store base.
Significant capital projects included the opening of 35 new stores and
relocating 3 stores. Funds expended for capital improvements totaled $3,072,226
in 1998 compared to $969,805 in 1997. In the year ending December 31, 1999,
capital expenditures are expected to be approximately $6,800,000 as we continue
to invest in our store base, technology, and enhancements to our new
distribution facility.
YEAR 2000 COMPLIANCE
We may realize exposure and risks if the systems on which we are dependent
to conduct our operations are not Year 2000 compliant. Our potential areas of
exposure include products purchased from third parties, computers, software,
telephone systems and other equipment used internally. We expect to resolve Year
2000 compliance issues primarily through normal upgrades of our software or by
replacing existing software with Year 2000 compliant applications. The cost of
these upgrades or replacements is included in our capital expenditure budget and
is not expected to be material to our financial position or operating results.
However such upgrades and replacements may not be completed on schedule or
within estimated costs or may not successfully address our Year 2000 compliance
issues.
We use software and hardware developed by third parties both for our
network and internal information systems. We are currently conducting an
analysis to determine the extent to which vendors and suppliers have Year 2000
issues. If they are not yet Year 2000 compliant, we are asking them to provide a
description of their plans to become compliant.
Based on our work and assessments to date, we believe future costs relating
to the Year 2000 issue will not have a material impact on our consolidated
financial position, results of operations or cash flows. Because all our
computer equipment has been purchased in the past few years, it is compliant as
represented by computer vendors. We expect that the greatest exposure will be
short-term product delays from vendors due to their systems or their suppliers'
systems not being compliant. However, even then, we don't anticipate a
significant problem because we can more easily tolerate shipping delays in
January. We generally have some excess inventories in January, which is one of
the months we do sidewalk sales. Furthermore, if delays occur, we expect the
vendors will work to rectify their problems in order to resume shipments, and in
most cases we believe we will be able to purchase good substitutes from other
vendors.
We anticipate that we will incur little or no additional cost in becoming
ready for Year 2000 because all of our equipment is relatively new. Our future
cost is low because, as represented to us by our equipment vendors, the new
equipment is already compliant.
Recently we mailed Year 2000 preparedness questionnaires to our primary
vendors and suppliers and expect responses by October 1, 1999.
IMPACT OF INFLATION
Inflation has not affected us, as we have generally been able to pass along
inflationary increases in our costs through increased sales prices.
RECENT ACCOUNTING PRONOUNCEMENTS
In Fiscal 1997, we adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share" which establishes
new guidelines for the calculation of earnings per share. Basic earnings per
share have been computed by dividing net income by the weighted-average number
of shares outstanding during the period. Diluted earnings per share have been
computed assuming the exercise of stock options as well as their related income
tax effects. Earnings per share for all periods have been restated to reflect
the provisions of this Statement.
16
<PAGE>
BUSINESS
OUR COMPANY
We are a specialty retailer of sports related headwear. We believe that our
stores carry the largest and most complete selection of quality licensed and
branded baseball-style hats in the markets we serve. Our products are emblazoned
with logos representing the major sports teams in both the professional and
college leagues such as baseball, basketball, football, and motorsports. We also
sell branded, lifestyle, fashion and novelty hats, seasonal hats such as
stocking caps and golf hats, hat accessories such as hat-bill benders, hat racks
and cleaning products. In addition, we sell other sports novelty items and
posters.
We opened our first store on November 3, 1995, in Lafayette, Indiana. We
grew to 5 stores in 1996, to 18 in 1997, to 53 stores in 1998 and to 91 stores
at the date of this prospectus. Our stores can be found primarily in enclosed
malls where our core customer, the young adult between the ages of 12 and 35,
shops frequently. Through our efficient store operations, focus on customer
service, and relationships with key vendors and mall developers, we believe that
we have grown to be the second largest sports-headwear specialty retailer in the
US and have been profitable annually since inception.
Hat World Corporation is a holding company that was incorporated in
Minnesota on April 26, 1999, in anticipation of this offering. We believe that
our holding company structure benefits us as we grow, especially if we acquire
other companies or operations. The holding company presently has only one active
operating subsidiary, Hat World, Inc., which was incorporated in Minnesota on
June 1, 1995.
EXISTING AND UPCOMING STORE LOCATIONS
The following are our store locations, listed in the order in which they
were opened:
STORE OPENED DURING 1995
Tippecanoe Mall Lafayette, Indiana November 3, 1995
Total Stores Open: 1
STORES OPENED DURING 1996
Muncie Mall Muncie, Indiana February 29, 1996
Market Place Shopping Center Champaign, Illinois June 29, 1996
Washington Mall Indianapolis, Indiana November 7, 1996
White Oaks Mall Springfield, Illinois November 14, 1996
Total Stores Open: 5
STORES OPENED DURING 1997
Northgate Mall Cincinnati, Ohio March 5, 1997
Glenbrook Square Mall Ft. Wayne, Indiana April 11, 1997
Green Tree Mall Clarksville, Indiana May 5, 1997
Jefferson Mall Louisville, Kentucky June 27, 1997
Florence Mall Florence, Kentucky July 11, 1997
Castleton Square Mall Indianapolis, Indiana July 20, 1997
Indianapolis Airport Indianapolis, Indiana July 30, 1997
River Valley Mall Lancaster, Ohio September 4, 1997
Lafayette Square Mall Indianapolis, Indiana October 23, 1997
Eastland Mall Bloomington, Illinois October 24, 1997
Bashford Manor Mall Louisville, Kentucky October 29, 1997
Honey Creek Mall Terre Haute, Indiana November 1, 1997
Greenwood Park Mall Greenwood, Indiana November 2, 1997
Total stores open: 18
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STORES OPENED DURING 1998
Greenwood Mall Bowling Green, Kentucky February 13, 1998
Janesville Mall Janesville, Wisconsin March 5, 1998
Southpark Mall Moline, Illinois March 27, 1998
Salem Mall Dayton, Ohio April 1, 1998
Lansing Mall Lansing, Michigan April 3, 1998
Dayton Mall Dayton, Ohio April 3, 1998
Crossroads Center Waterloo, Iowa April 9, 1998
Regency Mall Racine, Wisconsin April 15, 1998
Midland Mall Midland, Michigan April 17, 1998
Fashion Square Mall Saginaw, Michigan April 18, 1998
East Towne Mall Madison, Wisconsin April 24, 1998
Knoxville Center Knoxville, Tennessee June 3, 1998
Cherryvale Mall Rockford, Illinois June 5, 1998
Lakeview Square Mall Battlecreek, Michigan June 9, 1998
College Square Mall Cedar Falls, Iowa July 1, 1998
Coral Ridge Mall Coralville, Iowa July 1, 1998
Union Station St. Louis, Missouri July 9, 1998
Circle Centre Mall Indianapolis, Indiana July 14, 1998
Kentucky Oaks Mall Padacuh, Kentucky July 31, 1998
Governor's Square Mall Clarksville, Tennessee September 3, 1998
Grand Central Mall Parkersburg, West Virginia September 24, 1998
Morgantown Mall Morgantown, West Virginia September 25, 1998
Meridian Mall Okemos, Michigan October 11, 1998
Meadowbrook Mall Bridgeport, West Virginia October 21, 1998
Indian Mound Mall Heath, Ohio October 23, 1998
The Empire Sioux Falls, South Dakota October 28, 1998
Ohio Valley Mall St. Clairsville, Ohio November 17, 1998
Uniontown Mall Uniontown, Pennsylvania November 18, 1998
University Mall Carbondale, Illinois November 18, 1998
The Mall at Fairfield Commons Beavercreek, Ohio November 20, 1998
Anderson Mall Anderson, South Carolina November 21, 1998
Bellevue Center Nashville, Tennessee November 24, 1998
Hamilton Place Chattanooga, Tennessee November 25, 1998
New Towne Mall New Philadelphia, Ohio December 1, 1998
Charlottesville Fashion Square Charlottesville, Virginia December 8, 1998
Total stores open: 53
STORES OPENED DURING 1999
College Square Mall Morristown, Tennessee January 19, 1999
Foothills Mall Maryville, Tennessee January 21, 1999
University Mall Little Rock, Arkansas February 24, 1999
McCain Mall Little Rock, Arkansas February 25, 1999
Huntington Mall Barboursville, West Virginia March 3, 1999
Oak Court Mall Memphis, Tennessee March 5, 1999
Nittany Mall State College, Pennsylvania March 13, 1999
Spotsylvania Mall Fredericksburg, Virginia March 16, 1999
The Centre at Salisbury Salisbury, Maryland March 24, 1999
Crossroads Centre St. Cloud, Minnesota April 1, 1999
MetroCenter Mall Jackson, Mississippi April 7, 1999
The Pines Pine Bluff, Arkansas April 13, 1999
Northwoods Mall Charleston, South Carolina April 14, 1999
Tower Place Cincinnati, Ohio April 17, 1999
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Stones River Mall Murfreesboro, Tennessee May 11, 1999
Randhurst Mall Mt. Prospect, Illinois May 13, 1999
Lakeland Square Lakeland, Florida May 14, 1999
Wiregrass Commons Dothan, Alabama May 18, 1999
River Ridge Mall Lynchburg, Virginia May 19, 1999
Capital Mall Jefferson City, Missouri June 2, 1999
North Park Mall Joplin, Missouri June 3, 1999
Golf Mill Center Niles, Illinois June 11, 1999
Pierre Bossier Mall Shreveport, Louisiana June 12, 1999
South Park Mall Colonial Heights, Virginia June 16, 1999
Tallahassee Mall Tallahassee, Florida June 17, 1999
Chesterfield Town Centre Richmond, Virginia June 18, 1999
Concord Mall Elkhart, Indiana June 23, 1999
Chapel Hills Mall Colorado Springs, Colorado July 1, 1999
Coventry Mall Pottstown, Pennsylvania July 14, 1999
Century Plaza Birmingham, Alabama July 15, 1999
Dover Mall Dover, Delaware July 16, 1999
Westwood Mall Jackson, Michigan July 20, 1999
Oak Hollow Mall High Point, North Carolina July 21, 1999
Apple Blossom Mall Winchester, Virginia July 23, 1999
Lincoln Mall Matteson, Illinois July 27, 1999
Plymouth Meeting Mall Plymouth, Pennsylvania August 12, 1999
Colony Square Mall Zanesville, Ohio August 17, 1999
Crossroads Mall Oklahoma City, Oklahoma August 18, 1999
Total stores open: 91 to date
We have signed leases for the following locations, but have not yet moved
into the stores:
Cool Springs Galleria Franklin, Tennessee
Chesapeake Square Chesapeake Bay, Virginia
Northpark Mall Ridgeland, Mississippi
Patrick Henry Mall Newport News, Virginia
New River Valley Mall Christianburg, Virginia
Rivertown Crossings Grandville, Michigan
Francis Scott Key Mall Frederick, Maryland
Valley Mall Hagerstown, Maryland
Northwest Arkansas Mall Fayetteville, Arkansas
Central Mall Fort Smith, Arkansas
Crossroads Mall Omaha, Nebraska
In addition to the above, we anticipate opening additional stores in 1999,
at locations to be identified, for which we have not executed leases.
INDUSTRY OVERVIEW
We compete in the large market for headwear and in the even larger market
for sports affinity products. Estimates of the sports related headwear market
segment vary widely, from $3 billion to over $9 billion in 1998. Recognizing
this wide range, our observation is that all specialty retailers of sports
related headwear represent a small fraction of the total market. This is because
the market for our products is highly fragmented, with competition coming from a
variety of retailers, including arena concessionaires, sporting goods stores,
department stores, discount stores, street vendors, catalog and internet
operations, and other specialty stores. We also believe that the specialty
retail format adds sales to the industry because we make the right products more
readily available to the consumer. Given the wide variance in estimates of the
existing market and our belief that we can increase the size of the market, we
believe our industry is sufficiently large for us to increase our market share.
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We believe that the sports related headwear industry is benefiting from
certain favorable demographic and sports trends and economic factors, as
follows:
* We believe the interest in traditionally popular sports has remained
relatively stable, though product selection has grown considerably. In
the U.S., these would include the major college and professional
sports, such as baseball, football, basketball and hockey. According
to the most recent data from the National Sporting Goods Association,
the four major professional sports leagues represented over half of
all sports logo clothing purchases in 1998. Hat Business Quarterly,
July 1997, reported that 1996 sales of the four major professional
sports accounted for $8.75 billion in U.S. retail sales;
* Interest in traditionally less popular sports has grown. In the U.S.,
these would include golf, professional wrestling, motorsports and
brands of local interest. For example, according to Sporting Goods
Business Magazine, May 17, 1999, ". . . NASCAR driver jackets have
become so hot among urban teens and young adults recently that they're
outselling a lot of popular urban brands." The growth of interest in
more sports increases the demand for all types of licensed products
associated with those sports, thereby increasing the product
assortment demands of consumers;
* Growth of interest in sports has been accompanied by growth in the
variety of sports related products. This growth enhances the need for
a "specialty retail presentation" of these products. According to
Barnard's Retail Trend Report, February 1999 edition, "The shift of
consumer dollars away from conventional department stores continues
unabated. . . . Successful apparel specialty stores target lifestyles
and the consumers that identify with them. Customers are made to feel
the stores exist for the express purpose of serving their specific
tastes. Large merchandise assortments and displays converge to yield
that effect";
* American teenagers, an important part of our target market, have more
disposable income than ever. According to USA Weekend's 12th Annual
Teen Survey, The Richest Generation Ever, dated May 2, 1999, "They're
not just rich -- they spend billions. Teens spent a record $141
billion last year, an average of $4,548 each -- and a gold mine that
has everyone from Hollywood executives to retailers scrambling to
produce new teen-targeted movies and magazines. Almost half the survey
respondents had spent at least $20 in stores within the previous
week";
* Low unemployment and a strong stock market boost consumer confidence
and retail spending; and
* Prevalence or awareness of skin cancer and debate about the effects of
pollution on the ozone layer of the earth's atmosphere has created
demand for skin care and sun-blocking products.
These demographic trends and economic factors have created a favorable
economic environment and market for headwear, and especially sports related
headwear. We believe that our retail store concept and Internet site are in good
positions to take advantage of these trends. We believe that due to the
proliferation of sports related headwear and the inability of non-specialty
retailers to carry the latest styles and varieties, there is considerable unmet
demand in the marketplace. By developing our specialty retail concept that
offers broad and deep product choices in sports related headwear, we position
ourselves to capture this demand. As a result, we expect that we will be able to
increase our sales, and subsequently, increase the size of our industry.
BUSINESS STRATEGY
Our goal is to be the leading specialty retailer of sports related
headwear. We define leading to include being a profitable, market-driven company
in which our employees enjoy their work. We believe the following elements of
our business strategy will continue to position us for growth:
CATEGORY-FOCUSED MERCHANDISING. Virtually all the products we sell are
available at other retailers. However, a consumer would have to shop many
different stores, and in some cases, other cities, to find the selection of
products that we carry. We offer a large selection at each location, at
attractive prices. We intend to be a leader in the sports-licensed headwear
category. We can do this
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by offering a broad range of products and by identifying fashionable merchandise
reflecting the latest trends. We must select and test-market products, and
monitor and react to individual and group item sales demands.
CONVENIENT LOCATIONS. Our stores are generally located in shopping centers
or malls. We prefer high traffic mall locations because a significant portion of
our business comes from convenience shopping. Our customers, heavily influenced
by the sports industry, want to buy hats but generally postpone purchasing until
the purchase opportunity is made easy and attractive. We provide this easy,
attractive buying opportunity through our convenient store locations, vast
product selection, and welcoming product display. We believe that high traffic
areas offer greater revenue potential than stand-alone locations where we would
be more dependent on the consumer making the store a shopping destination. We
must continue to locate our stores in areas with favorable demographic
characteristics.
TALENTED, MOTIVATED PERSONNEL. Generally, we have been able to attract high
quality personnel. We believe it is important that we recruit and hire
sports-minded, friendly managers and support personnel for our stores. A key
component of our business strategy is to make our stores a welcoming, fun
environment in which to work and shop. We believe sales increase in relation to
enjoyment of the buying experience. Enthusiasm for sports and our products is,
to some extent, conveyed by our personnel to the consumer, who is then more
motivated to purchase and enjoy our products.
GROWTH STRATEGY
At the date of this prospectus, we have opened 38 new stores in 1999, for a
total of 91 stores. We intend to open 19 additional stores in the remainder of
1999 and add 70 stores in each of the next two years. Our future expansion will
come from opening new stores and through acquisitions. In the U.S., we have
identified 1,800 potential shopping mall locations, 200 strip centers, 25
airports and 25 outlet centers that would be suitable for a traditional store.
Our growth strategy is as follows:
* maximize the value of our existing stores by investing in our people,
locations, inventory and systems;
* open new stores in desirable locations on reasonable terms based on
our review of the local market and demographics;
* explore new retail formats, including the kiosk format;
* build and improve our Internet web site;
* renegotiate and remodel desirable existing stores as leases expire;
* consider strategic acquisitions; and
* consider entering new business segments, such as embroidery and team
sales, as opportunities provide and resources allow.
Certain other elements of our growth strategy that are significant are as
follows:
IMPORTANCE OF BEING FIRST OR THE RACE FOR REAL ESTATE. As a single
classification store, we sell primarily hats and have strong appeal to mall
management companies for placement in their malls. Nothing prevents a mall
management company from adding more than one hat retailer to a mall; however,
the incentive diminishes as such stores are added. In other words, there is an
advantage to being first in the mall. The first store tends to have a
preferential market position. We believe there is also an advantage to be
perceived as the first of a kind in the minds of consumers, and this is
facilitated by being the first hat retailer in a consumer's local mall. We
believe our competitors also recognize these factors. As a result, there is
essentially a race for real estate between companies in our industry to obtain
mall locations.
We have developed strong relationships with mall management companies for a
number of reasons, as follows:
* we are a desirable mall tenant because we generate high sales
per-square-foot;
* other tenants welcome us because we are generally not a threat to
their sales;
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* specialty headwear retailers have recently become recognized as a
standard tenant group for malls;
* the relative uniqueness of our area of specialty retail makes the
concept less intrusive to the existing sales patterns in many malls;
* our store design and store size requirements are flexible which
facilitates our use of a variety of locations not often viewed as
desirable by potential tenants with more rigid store designs;
* we have a reputation for paying rent promptly and accurately; and
* our growth while maintaining profitability has also brought us the
attention of mall management firms looking to fill spaces with
reliable, professional tenants.
NATIONAL EXPOSURE. We presently have 91 stores in 25 states. We believe
that customer confidence and convenience is enhanced as we increase the number
of stores and our geographic presence. We believe that more stores and greater
geographical coverage give us greater exposure and recognition among consumers
in the regions where our stores are located and increase the benefits which
would otherwise be derived from advertising. We believe that for us there are
compelling benefits to growth. However, we prefer to grow in a well-managed
fashion, maintaining focus on key objectives such as profitability and enjoyment
of the workplace. We believe that we can continue to grow rapidly and well,
though this may not occur.
KIOSK. In addition to the traditional store format, we also have the
flexibility to use kiosks. It would generally be true that a kiosk would produce
lower sales and less profits than a traditional store in the same mall. However,
kiosks are less costly to open and can be used on a permanent or temporary
basis. A kiosk might be used when a traditional space is not available on
favorable terms. In such cases, operating a kiosk tends to give us priority for
a traditional store on favorable terms when space subsequently becomes
available. A kiosk may also be used when we estimate that sales would be
insufficient to justify a traditional store space but yet desirable enough to
justify the cost of a kiosk. The inventory in a kiosk is about half that of a
traditional store, but the products offered represent approximately 80% of those
sold in a traditional store. While the per-square-foot rents are higher with a
kiosk, the space requirement is lower, so rents can still be favorable as a
percentage of sales through a kiosk. Also, since the cost to construct and set
up a kiosk is considerably less than a traditional store, the
return-on-investment can be higher with a kiosk, though the actual dollar
profits are less. We have two kiosks in operation and plans for opening
additional kiosk locations in 1999 and thereafter. We expect the kiosk format
will prove to be a suitable complement to our traditional stores.
TEMPORARY STORES. We have opened stores with temporary leases, which are
generally those for less than one year. We may employ this strategy during the
Christmas season in order to capture incremental sales and profits while
avoiding the expense of constructing and placing fixtures in a permanent store.
We have also used temporary stores to test a mall or location.
INTERNET WEB SITE. Use of the Internet by the general public has
experienced considerable growth in recent years. We believe that our core
customer may be inclined to use the Internet on a regular basis to purchase
consumer items. We expect that an Internet web site may prove to further enhance
the growth of our sales. Due to the constant entertainment needs of our core
market, a web site, like our stores would need constant updating. Like our
stores, profits would have to be sufficient to justify the costs. We intend to
explore strategic alliances linking our Internet site with all sports leagues
that license the use of team names and logos to vendors who market and supply
our products, and with the vendors themselves. We plan to extract from our
passport club membership data base the buying preferences and purchase frequency
of our customers. With this information we will be able to send e-mail and other
advertisements to our customers about new products. We also plan to continue to
support our e-commerce activities with in store point of purchase displays that
advertise and reinforce our Internet presence.
MERCHANDISING STRATEGY
DISTINCTIVE, ITEM-FOCUSED MERCHANDISING. We fit the definition of a niche
or specialty retailer by offering a broad line of hats and hat accessories in a
single location. We are a desirable mall tenant
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because we are a single classification store -- we sell hats, and that is
relatively unique in specialty retail. Our niche facilitates mall planning and
balances the retail store mix with a highly prized specialty venue. Furthermore,
our niche gives us the ability to generate more than the average mall sales
per-square-foot, without taking significant revenue away from current mall
merchants. This has enabled us to establish favorable relationships with
companies that manage malls throughout the country. We expect to leverage these
contacts when securing mall space for our expansion strategy.
Due to the marketing power of sports, we expect that our primary market
category will likely always be sports-licensed headwear. We expect other
categories to be important, though not primary, categories from time-to-time.
LOCALIZED PRODUCTS. While the majority of our stores carry similar
products, each store's product assortment is tailored to meet the demands of the
consumer in the local market. This strategy allows each store to capitalize on
marketing advantages unique to its particular location. The sales patterns of
each store are monitored on a daily basis to maximize inventory turns while
satisfying local demands.
MULTIPLE SIZES, STYLES. We offer over 1,200 different styles of hats, which
include fitted and adjustable for a total variety of approximately 4,000
different hats. Our stores offer mainly traditional, adjustable baseball-style
caps. We offer multiple styles, colors, textures and designs that most merchants
don't offer in one location. Some of our products are the authentic hats that
the professional players wear. We pride ourselves in staying current with styles
and fashion. In addition we have hat bill benders or curving devices and other
accessories. We believe product availability and convenience are greater factors
than price in our business.
CHANGING MERCHANDISE MIX. The success of a team or player, particularly
professionals, has a considerable degree of influence on the demand for their
licensed products. Since we have no advance knowledge of their future successes,
our pre-season buying decisions for some teams are relatively conservative. As
players and teams distinguish themselves and win games, demand increases for
their licensed products, including hats. Our buyers then place additional orders
to supplement earlier buys.
PRODUCT PRESENTATION. We display our products in a visually appealing
manner. The variety of colors and styles of our product facilitates this effort.
We design our stores and product presentations to encourage customers to browse
and examine the products closely. Each manager has some flexibility to
creatively highlight those products that are expected to have the greatest
appeal to local shoppers. We agree with the viewpoint of the WWD/DNR Specialty
Stores Newsletter, April 1999 edition: "A specialty retailer that makes its
store inviting and visually exciting will always have a niche with its
customers."
WE ARE A CASH BUSINESS. We have no customer receivables since we do not
directly extend credit. We accept national credit cards and personal checks. We
special order products if a customer provides a deposit or pays in advance.
A TYPICAL HAT WORLD STORE
FORMAT. Our prototype store ranges between 500 and 800 square feet,
although we have stores ranging in size from 200 to 1,200 square feet. The sales
floor is generally about 85% of the total leasehold space. The remainder is
storage and inset entryways. Merchandise is displayed according to display
guidelines and directives given to each store by the operations team. This
procedure ensures uniform display standards and efficient allocation of products
throughout our stores. Our large product assortment is designed and displayed to
create buying interest. The checkout counter, or cash-wrap, is generally located
towards the center of the store, providing the store personnel with a broad view
of the entire store within a few steps.
STORE OPERATIONS. Hat World stores are open seven days a week during mall
hours. Malls are typically open 70 hours per week. A Senior Vice President of
Operations, Four District Managers, and 15 Area Market Leaders manage our store
operations. District Managers generally have responsibility for 25 stores within
a geographic district. Often, we designate our more experienced managers
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to serve as Area Market Leaders. They become mentors to managers in their
geographic areas. The store manager is responsible for the day-to-day operation
of the store, including inventory receipt and merchandise display, personnel
functions, store security and sales. A typical store has one full or part-time
assistant manager and several part time sales associates, depending on the size
of the store, volume, and season. Additional part-time sales associates are
typically hired to assist with increased traffic and sales volume in the fourth
quarter. We compensate our district and store managers with a base salary plus a
performance bonus based on store sales. Sales associates are compensated on an
hourly basis.
We believe that our continued success is dependent on our ability to
attract, retain and motivate quality employees. In particular, the success of
our expansion program will be dependent on our ability to promote and/or recruit
qualified district and store managers and maintain quality sales associates. To
date, we have been able to hire district managers with prior supervisory
experience in the athletic apparel retail industry. Store managers, many of whom
were selected from among our sales associates, generally complete in-store
training before taking responsibility for a store. Store managers are
responsible for hiring and training new sales associates, assisted, where
appropriate, by our personnel administrator, district managers, or other
operations staff. We are continuing to develop enhanced training programs for
our store managers, assistant managers and sales associates. We constantly look
for motivated and talented people to promote from within Hat World, in addition
to recruiting from elsewhere.
SITE SELECTION. We seek to locate our stores in malls that are destinations
for large numbers of shoppers, which reinforces our quality image. To assess
potential new mall locations, we review financial and demographic criteria and
analyze the type and quality of tenants and competitive factors, square footage
availability, frontage space and location and other relevant criteria to
determine the overall acceptability of a mall and the optimal locations within
it. We locate our stores in middle market and larger cities with a history of
high sales per-square-foot and multiple national department stores as anchors.
We prefer the presence of successful sporting goods stores or sports apparel
retailers that have modest hat inventories. Our ability to generate more than
the average mall sales per-square-foot, without taking significant revenue away
from current mall merchants, has enabled us to establish favorable relationships
with mall developers. Furthermore, we believe we are a desirable tenant for mall
developers because of our performance track record. We pay our rent on time,
provide audited financial statements, deliver sales productivity and have a
strong position in the sports related headwear and accessory categories.
PURCHASING AND DISTRIBUTION
PURCHASING. We believe that our disciplined approach to purchasing, our
relationships with suppliers and our strong buying power contribute to our
successful purchasing strategy. We buy inventory on a centralized basis to take
advantage of volume purchase discounts and improve our ability to control
inventory product mix. Our four-person centralized buying group, located in
Indianapolis, Indiana, is responsible for all purchasing decisions and price
negotiations with vendors. We purchase merchandise on a product by product
basis, rather than based upon broad category classifications.
We manage our total purchases based upon annual budgets that are set at the
beginning of the year and updated throughout the year. We purchase our products
from approximately 30 vendors; however, five vendors supply approximately 65% of
our products. They are New Era Cap Company, Zephyr Grafx, Logo Athletic/ Puma
(which now controls Starter), The Game and Nike USA (formerly Sports
Specialties). Even though we do no direct importing, many of our vendors either
own production facilities in the Far East or contract their manufacturing with
firms in the Far East. We believe that by buying from importers and domestic
firms instead of directly from foreign manufacturers enables us to maximize
flexibility and minimize risks. We believe that our executive management and
buyers are more effective and efficient by focusing on managing the retail
business and allowing importers, wholesalers and manufacturers to handle the
procurement and shipment of foreign-manufactured merchandise for our stores. The
purchase of our products from domestic manufacturers and wholesalers enables us
to reduce the time between ordering products and displaying them in our stores.
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INTEREST IN NEW MERCHANDISE. Regardless of the quality of an inventory
management system, no system monitors hats not in the system. In other words, if
we do not carry a hat, our computer does not rate its potential in the
marketplace. For information on new hats, we rely on several sources. Vendors,
being eager to sell their merchandise, usually show us hats well in advance of
the hats being offered in stores. We will often buy a small order of new hats to
test sales before making larger commitments. At that point, the new hat enters
our system and sales can be monitored. We are not always correct in our buying
decisions; however, if our buyers reject a hat that subsequently proves to sell
well in other stores, vendors will generally re-introduce the hat to us with
sales information to entice us to buy.
We also rely on information feedback from our store managers regarding the
types of hats of interest to customers that we may not carry. This is
particularly important as we grow and expand geographically. Demand for
different styles varies geographically, especially with certain items such as
motorsports and brands of local interest.
GOOD VENDOR RELATIONSHIPS. We believe we have excellent relationships with
our vendors. We enjoy reasonable prices and credit terms. As we have grown over
the years, our alliances with merchandise suppliers have strengthened.
We buy all our products from United States-based vendors and manufacturers,
many of whom have offshore production facilities or contract their production
with such facilities. Our five key vendors have the broadest licensing
agreements with teams and leagues and offer the greatest number of design
choices. While we are dependent on key suppliers, they have some dependency on
us as well. We believe that we are among the largest buyers of the complete, or
near complete, lines of some of our vendors. Other national retailers, such as
department stores, may buy more of one design or another, but we buy a broad
selection from these key vendors. Additionally, our vendors are eager for us to
test the marketplace with their new products. Also, the retail market is very
fragmented with many small retailers. We believe that our key vendors recognize
a considerable efficiency working with us in contrast to working with a large
number of smaller accounts where credit worthiness is often a concern. These
factors contribute to our good working relationship with our vendors.
PRODUCT DISTRIBUTION. Historically, we have both vendor-to-store direct
distribution and a centralized warehouse distribution center in order to
maintain a low cost operating structure. Most of our inventory is distributed
through our warehouse, which gives us more centralized quality control and
flexibility to make distribution decisions based on product deliveries from
vendors. Most of our merchandise is inspected and distributed through our
warehouse. Our vendors ticket approximately 80% of our merchandise.
Merchandise that is shipped directly to the stores is inspected and
ticketed at the stores, displayed in the store by store personnel and later
entered into the main computer system at our warehouse.
We believe our 17,600 square foot distribution/office facility will be
capable of handling 6,000,000 hats per year, which will be adequate to support
up to 300 stores. Our warehouse features a custom-designed, pallet-rack system
integrated with sloped plastic racks designed to expedite sorting and picking of
hats before shipment to stores. The warehouse design facilitates bundling of
palletizing goods, which helps contain freight costs. We believe that adequate
additional distribution center space will be available in the future on
acceptable terms as may be needed in order to accommodate our expansion plans.
MANAGEMENT INFORMATION SYSTEMS AND COMPUTERS
INVENTORY MANAGEMENT SYSTEM. We have historically placed considerable
emphasis on our management information and inventory control systems. We believe
that our systems are an important factor in enabling us to achieve our goals of
effective purchasing, merchandising and store management.
Our management information systems have always included automated
point-of-sale merchandising and financial applications. Our merchandise is
bar-coded, enabling us to manage and
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control inventory more efficiently and effectively. Sales reports are updated
daily in the merchandise reporting system by polling sales information from each
store's cash register. Our information system consists of registers providing
price look-up and scanning of bar-coded labels on a per item basis. Through
automated dial-up electronic communications to each store, sales information is
uploaded to the main system nightly. Information obtained from such daily
polling is used to implement merchandising decisions and to identify the
required merchandise reorders for each store. Shipments are made at least
weekly, and more often in some cases during the peak selling seasons. Our buyers
and merchandisers study the data to determine whether to add inventory by
buying, reduce inventory with price reductions or adjust stock-out points. A
complete physical count of inventory is made at least annually, utilizing
hand-held scanning equipment.
Our management information and control systems enable our operating team to
regularly identify sales trends, replenish depleted store inventories, change
prices, monitor merchandise mix and determine inventory shrinkage at individual
stores and throughout our store network. We believe these systems provide a
number of benefits, including improved store inventory management, better
in-stock availability, higher operating efficiencies and fewer markdowns.
INVENTORY MANAGEMENT SYSTEM UPGRADES. While our current system provides
useful data, we believe we may benefit by upgrading the sophistication of the
system. We have examined alternative systems that statistically interpret the
data, which should help improve the quality of our inventory management system
as we grow. When individual item sales show signs of slowing, they are
discounted. Our objective is to maintain fresh, new and clean inventory, as this
is what appeals most to our core market. It is important to us to maintain our
image of having the latest styles. Usually, moderate discounts are sufficient to
clear slow moving inventory if the discounts are taken promptly in response to
slowing customer demand for a product. We believe a new inventory control system
will identify slowing in sales of individual items more quickly than our current
system. One of our goals in upgrading to a more refined system is to reduce
discounting to clear slower moving inventory. Conversely, the new system should
identify increases in demand more efficiently, which will help the buyers
replenish hot items sooner. Inventory management is recognized as an important
aspect of our business. We have not determined, yet, the extent of change and
costs involved in upgrading or switching to a different system. Estimates are
between several hundred thousand dollars to almost a million dollars. We
recognize the importance of a strong inventory management system and are
continually examining ways to cost-effectively improve our methods and systems.
We expect to have a new inventory management system in place in 2000. The
new system may integrate the existing information system with new back-office
software, or the entire system will be replaced. The new system will be Year
2000 compliant and will be compatible with most of our existing hardware
systems. We expect to select a system that will allow for future expansion to
accommodate our growth plans.
ADVERTISING AND PROMOTION
The marketing power of the sports industry drives our sales. We believe
that people like to identify themselves with heroes and role models, and that
sports teams and celebrities fill that need for some people. People also like
group activities. Sports fans enjoy the group activity of viewing, discussing,
and arguing about sports teams and games. The sports industries are
multi-billion dollar marketing networks that promote themselves and the
affinities with their teams. Therefore, in many respects, our products are
inherently sold by the sports industry. Our job is to offer their products in
desirable locations, at attractive prices and in a friendly manner. Therefore,
much of our advertising and promotion costs are built into the wholesale cost of
our products and our mall rents.
HISTORICAL ADVERTISING AND PROMOTION. Historically, we have not engaged in
extensive advertising because we believe that demand for our product is driven
by the sports industry. By paying mall rents for strategic locations in
high-traffic shopping malls, we make the products available in locations
frequented by our core market. In the past, we have relied on location and
word-of-mouth advertising by our customers to generate traffic in our stores.
Our advertising was largely limited to sponsoring events, though we have placed
local newspaper and radio ads on occasion to promote our
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stores or specific items in our stores. We have also budgeted for store
promotion by managers who provide hats for community fundraisers and events.
ADVERTISING TESTS. We believe it is unlikely that advertising would
increase the demand for products of teams out of favor. Advertising also does
not make our stores more convenient. The only remaining promotional need would
seem to be advertising to inform our target market that we have in-demand
products at convenient locations. To this extent, we have recently begun to
experiment with certain advertising and promotion techniques geared towards our
core market. We have yet to determine the impact that such advertising might
have on store performance.
Key elements of our advertising experiment are to promote ten store grand
openings. We are running traditional television, radio and newspaper ads on a
sample basis. We also plan to increase the level of our co-op advertising with
certain manufacturers. We are working to evaluate the effectiveness of the
various approaches and intend to define a promotion and advertising plan to
include the more successful strategies. The results of this study have not been
determined prior to this offering.
In addition, many shopping mall leases require some advertising, although
an industry shift to media funds has largely been implemented. Media funds are
contributions made by most mall retailers to the shopping mall's advertising
fund. The amount of the contribution is generally based on the square footage of
each store. Media funds are used to promote the shopping mall, which encourages
consumer visits. We believe that we benefit from such advertising, though we
consider it part of our rent payment.
SALE EVENTS. We do not have traditional sale events, as do many retailers.
We discount products as sales of products slow, and we generally do more
discounting in January and July than the remainder of the year. Shopping malls
also traditionally have sidewalk sales in these months, and in which all tenants
are encouraged to participate. Sidewalk sale events enable us to sell
merchandise that we buy at discounted prices for sale purposes at such events
and to clear previously marked-down inventory.
GIFT CERTIFICATES/LIBERAL RETURN POLICY. Recognizing the challenges
experienced by gift givers to our core customer group, we offer gift
certificates and have a liberal return policy. These are used more heavily
during holiday shopping seasons.
FREQUENT BUYER CARD. We promote customer loyalty through our Passport Club,
a frequent buyer card. To obtain membership to this program, our customers buy
their first hat at the regular price and pay an additional $3 for the club
membership. Thereafter, membership provides for a lifetime discount, from the
regular price, of 20% on hats and 10% on other items. We have over 186,000
members in our Passport Club program.
TRADEMARKS
We have received a Certificate of U.S. Registration for our mark consisting
of a triangle with a character and a bar logo. We have applied for U.S.
registration of our mark "Hat World." We are not aware of any claims of
infringement or other challenges to our right to use our marks in the United
States.
COMPETITION
The retail sports related headwear industry is competitive with respect to
product selection, quality, location, service, and price. Our industry is highly
fragmented, and we compete against a variety of retailers that sell hats,
including arena concessionaires, sporting goods stores, department stores,
discount stores, street vendors, catalog and Internet operations, and other
specialty stores. We believe our range of products offered on a timely basis,
our price and service quality, make us a strong competitor. Furthermore, our
local market merchandising focus and our ability to identify trends and respond
quickly to the changing consumer demands throughout our store network give us a
competitive advantage. In addition to sports related headwear products, we
compete against other specialty retailers for high traffic mall locations. We
believe that our current relationships with mall
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developers and our aggressive expansion strategy will continue to give us an
advantage in obtaining strategic store locations.
We compete with all specialty retailers for mall space. We compete most
aggressively with specialty headwear retailers vying for the same spaces. Our
largest specialty headwear competitor has approximately 350 locations. There are
several smaller chains with less than 20 stores each, and an unknown number of
single store operations.
CUSTOMERS
Our core customer is a young adult, 12 to 35 years old. We have found that
at $15 to $25 each, sports hats are a relatively affordable purchase for this
group. In particular, part of the Company's target market, teenagers, have
experienced a greater percentage increase of spending than any other consumer
group at 50% over the past 5 years. To effectively penetrate this market, many
of our stores are located in shopping malls frequented by this age group, such
as those near colleges and universities.
EMPLOYEES
We have 469 employees, 179 of them are full time, and 290 are part time.
Five of the employees are in executive management. Relations with our employees
are satisfactory, and none are subject to collective bargaining agreements.
There will be new employees added as new stores are opened.
FACILITIES
Our holding company occupies 1,400 square feet of leased office space in
Sioux Falls, South Dakota. The lease expires May 31, 2000.
Our operating unit occupies approximately 17,600 square feet of leased
office and warehouse space in Indianapolis, Indiana. Our lease on that facility
expires on January 31, 2002.
LEGAL PROCEEDINGS
From time to time, we have been involved in legal proceedings incidental to
the conduct of our business, none of which have been material. There are no
material legal proceedings pending or, to our knowledge, threatened against us
or management.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- -------------------------------- ----- ------------------------------------------
<S> <C> <C>
George N. Berger ............ 43 Chairman of the Board of Directors and
Secretary
James Harris ................ 42 Director and Chief Executive Officer; and
President of Hat World, Inc.
Kenneth J. Kocher ........... 33 Director, Chief Financial Officer and
Treasurer
J. Glenn Campbell ........... 34 Director; and Senior Vice President of
Operations of Hat World, Inc.
Scott A. Molander. .......... 34 Director; and Senior Vice President of
Logistics & Planning of Hat World, Inc.
Steve Kirby ................. 46 Director
Paul A. Schock .............. 40 Director
John Andretti ............... 36 Director
Mark E. Griffin ............. 48 Director
</TABLE>
GEORGE N. BERGER has served as Chairman of the Board of Directors and
Secretary of Hat World Corporation since inception. He has served as Corporate
Secretary of Hat World, Inc. and as a Director and Chairman of the Board of
Directors since inception. He has served as Senior Vice President of Investor
Relations from September 1998 to June 1999, and as Senior Vice President,
Strategic Planning & Investor Relations from July 1998 to September 1998. From
1984 to present, he has been a business consultant and investor. Mr. Berger
received an MBA degree from the University of Minnesota, Minneapolis, in 1981;
and a BA degree in Economics from Concordia College, Moorhead, Minnesota in
1977.
JAMES HARRIS has served as Director and Chief Executive Officer of Hat
World Corporation since inception. He has served as President of Hat World,
Inc. since June 1997 and as a director since June 1998. From June 1981 until
June 1997, Mr. Harris was employed by the Foot Locker division of Kinney Shoe
Corp., a subsidiary of Woolworth Corp. (now "Venator Group Inc."). He began his
career at Foot Locker as a Store Manager/Manager Trainer and was promoted to
District Sales Manager and then Regional Vice President. As Regional Vice
President, he was responsible for the direct supervision of twelve District
Sales managers with 292 specialty retail stores including Foot Locker, World
Footlocker, Athletic Express and Foot Locker Outlets. Mr. Harris attended
Central Michigan University, Mt. Pleasant, Michigan.
KENNETH J. KOCHER, CPA has served as a Director and as Chief Financial
Officer and Treasurer of Hat World Corporation since inception. He has served as
Chief Financial Officer and Treasurer of Hat World, Inc. since July 1997. He
began with us as an accountant in January 1997. He also served as the Corporate
Secretary from July 1997 to January 1998. For four years prior to joining us he
was employed as a corporate controller with two medium size companies, one in
manufacturing and one in retail. Mr. Kocher worked in public accounting for five
years, three of which were with a large regional CPA firm, Charles Bailly & Co.
(now "Eide Bailly LLP"), as both an auditor and tax professional. Mr. Kocher
received a BA degree in Business Administration with a major in Accounting from
the University of North Dakota, Grand Forks, in December 1988.
J. GLENN CAMPBELL has served as a Director of Hat World Corporation since
inception. He has served Hat World, Inc. as a Director since inception and as
Senior Vice President of Operations since July 1998. He served as Corporate
Secretary from inception to July 1997, and as Chief Operating Officer from
inception to July 1998. From 1987 to September 1995, Mr. Campbell was employed
by the Foot Locker division of Kinney Shoe Corp., a subsidiary of Woolworth
Corp. (now "Venator Group Inc."). Mr. Campbell received a BS degree in Marketing
from Southeast Missouri State University in December 1987.
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SCOTT A. MOLANDER has served as a Director of Hat World Corporation since
inception. He has served Hat World, Inc. as a Director since inception and as
Senior Vice President of Logistics and Planning from July 1998 to present. He
has served as Chief Executive Officer from inception until July 1998, President
from inception until June 1997, and Chief Financial Officer from inception until
July 1997. He became a full-time, salaried employee starting in October 1996.
Mr. Molander was employed in warehouse management by Target Stores, a division
of Dayton-Hudson Corporation, from July 1994 to October 1996. From April 1994 to
June 1994, he was a Sales Representative for Preston Trucking Corp. From March
1989 to March 1994, Mr. Molander was employed by the Foot Locker division of
Kinney Shoe Corp., a subsidiary of Woolworth Corporation (now "Venator Group
Inc."). He received a BA degree in Business Administration from Dickinson State
University, Dickinson, North Dakota in May 1988.
STEVE KIRBY has served as a Director of Hat World Corporation since
inception and a Director of Hat World, Inc. since July 1997. Mr. Kirby is a
principal of Bluestem Capital Partners II, LP, an SBIC, and a member of the
Board of Managers of Bluestem Capital Partners I, LLC, each of which is an
investment fund. He is also an officer of the fund manager for the Bluestem
funds, Bluestem Capital Company. He is the owner and President of Kirby Capital
Corp., a private equity firm. For the past five years, Mr. Kirby has worked in
partnership with Schock Financial Services, Inc., a company owned by Paul A.
Schock, in finding and structuring investments, as well as developing an
investor network for their joint private equity business, Bluestem Capital
Company and funds. Prior to forming Kirby Capital, Mr. Kirby was part owner,
secretary and senior claim counsel for Western Surety Company, a national surety
company, from 1972 to 1992. Mr. Kirby served as the 35th Lieutenant Governor of
South Dakota from May 1993 through January 1995. He is active in civic concerns,
serving on many boards and foundations. Mr. Kirby has a BS degree in Political
Science from Arizona State University and a JD degree from the University of
South Dakota Law School.
PAUL A. SCHOCK has served as a Director of Hat World Corporation since
inception and a Director of Hat World, Inc. since July 1997. Mr. Schock is a
principal of Bluestem Capital Partners II, LP, an SBIC, and a member of the
Board of Managers of Bluestem Capital Partners I, LLC, each of which is an
investment fund. He is also an officer of the fund manager for the Bluestem
funds, Bluestem Capital Company. He is the owner and President of Schock
Financial Services, Inc. ("SFS"). He is a certified financial planner and
private equity specialist who focuses on finding, structuring and managing
equity investments for his clients. SFS is a general partner in several motel
properties and has initiated and managed a number of manufacturing/operating
projects. Mr. Schock was a commercial banker and manager for eight years with
First Bank Systems of Minneapolis. He left to become CFO of publicly-held
manufacturing company in Sioux Falls, South Dakota. Mr. Schock graduated from
Augustana College, Sioux Falls, SD, with a Business Degree.
JOHN ANDRETTI has served as a Director of Hat World Corporation since
August 1999. He has been a self-employed, professional race car driver for the
past eighteen years. He has amassed many career accomplishments, and presently
drives the #43 STP Pontiac for Petty Enterprises. For the past seven years he
has been a Partner and Vice President of Andretti-Helmling Automotive, an auto
parts retailer with two locations in Indiana. He is also Co-Owner of
Andretti-Laird Racing, a NASCAR Busch Team, and a Partner in Quality First
Products, which produces chemical cleaners and polishes for specialty markets.
Mr. Andretti graduated from Moravian College in 1985 with a Bachelors degree in
Business Management.
MARK E. GRIFFIN has served as a Director of Hat World Corporation since
August 1999. He has served as President and Chief Executive Officer of Lewis
Drugs, Inc., Sioux Falls, South Dakota since November 1986 where he previously
served as Executive Vice President. He is a Director of Raven Industries, Inc.
(Nasdaq: RAVN), President and CEO of Griffson Realty Company, Fredin Assoc. &
G.E.F. Assoc., Sioux Falls, South Dakota. He serves on the Board of Directors
of the National Association of Chain Drug Stores and as Chairman of the Sioux
Falls Regional Airport Authority. He has served in the following capacities:
Director, Norwest Bank of South Dakota; Chairman, Junior Achievement of South
Dakota; Member of the American Greetings Research Council; Chairman, Sioux
Falls Development Foundation; Chairman, Sioux Falls Chamber of Commerce;
Chairman, Forward Sioux Falls; Director, South Dakota Chamber of Commerce and
on the Executive
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Committee Board of Directors for the Chain Drug Industry/Dominant Trade
Association. Mr. Griffin attended the University of South Dakota and Arizona
State University.
Scott Molander and John Andretti are brothers-in-law.
BOARD OF DIRECTORS
We currently have nine directors. The directors are elected annually by the
shareholders for a term of one year or until their successors are elected and
qualified. The officers serve at the pleasure of the Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The compensation committee consists of Mark Griffin, James Harris, Ken
Kocher and Steve Kirby. The compensation committee reviews and recommends
compensation and benefits for the executive officers.
The audit committee consists of John Andretti, Mark Griffin, and Paul
Schock. The functions of the audit committee are:
* to review the scope of the audit procedures used by the independent
auditors;
* to review with the independent auditors the accounting practices and
policies;
* to consult with the independent auditors during the year;
* to approve the audit fee charged by the independent auditors; and
* to report to the Board of Directors on such matters and to recommend
the selection of the independent auditors.
DIRECTOR COMPENSATION
Each director has been issued a three year option to purchase 4,000 shares
of common stock, exercisable at 125% of the initial public offering price per
share. Additionally, each director will be paid $400 for each board meeting
attended in person and $200 for attendance by teleconference. We will also
reimburse directors for travel expenses to attend meetings. Grant of future
options will be at the discretion of the board of directors and will be reviewed
annually; however, the grant is expected to be for approximately 2,000 shares
per director per year.
STOCK PLANS
1999 STOCK OPTION PLAN. Our stock option plan was adopted and approved by
shareholders on June 15, 1999. It replaced a similar plan that was adopted by
Hat World, Inc. on June 8, 1995. No options are to be granted under the 1999
Stock Option Plan after December 31, 2005. The plan is administered by the board
or a committee appointed by the board.
Grants may be made to employees, including officers and employee directors,
consultants and non-employee directors of Hat World Corporation or any of its
subsidiaries. Grants under the plan may consist of options intended to qualify
as incentive stock options within the meaning of Section 422A of the Internal
Revenue Code, as amended, and nonqualified stock options that are not intended
to so qualify.
Under the plan, 880,000 shares of common stock have been reserved for
issuance. Shares issued and not expired, voided or forfeited under the prior
plan were "grandfathered" into this plan. Therefore, as of June 15, 1999, there
were outstanding options to purchase 433,500 shares of common stock at a
weighted-average exercise price of approximately $5.61 per share. There are
446,500 additional shares available for which stock options can be granted under
the plan.
The board determines the exercise price of options granted under the plan
in accordance with the guidelines set forth in the plan. The exercise price of
incentive stock options granted pursuant to the plan cannot be less than 100% of
the fair market value of the common stock on the date of the grant. The exercise
price of options granted to any person who at the time of grant owns stock
representing more than 10% of the total combined voting power of all classes of
our capital stock or any of its affiliates must be at least 110% of the fair
market value of our common stock on the date
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<PAGE>
of grant. The term of such options cannot exceed six years. Options granted
under the plan are subject to more restrictive terms and conditions and vest at
the rate specified in the option agreement.
Upon certain changes in control all outstanding options under the plan must
either be assumed or substituted by the surviving entity. In the event the
surviving entity determines not to assume or substitute such options, then the
exercise of such non-assumed options and awards held by persons will be
accelerated. Such options and awards will terminate if not exercised prior to
such change in control event.
401-K PLAN
We started a 401-K plan in February 1998 for all eligible employees
including executive officers. We contribute to this plan 50% of up to 5% of the
salary of each participating employee.
EXECUTIVE COMPENSATION
The following table sets forth the compensation earned by our executive
officers during the year ended December 31, 1998. There were no executive
officers that earned as much as $100,000 during the same year.
1998 SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ALL OTHER LONG TERM COMPENSATION
NAME AND PRINCIPAL POSITION SALARY COMPENSATION SHARES UNDERLYING OPTIONS
- ------------------------------------------------- ---------- -------------- --------------------------
<S> <C> <C> <C>
George Berger, Chairman ......................... $37,244 $ 0 40,000
James Harris, President ......................... $83,923 $2,769 172,000
Kenneth Kocher, Chief Financial Officer ......... $52,994 $ 0 92,000
J. Glenn Campbell, Vice President. .............. $61,901 $2,769 40,000
Scott Molander, Vice President .................. $61,901 $3,000 40,000
</TABLE>
The amounts set forth in "All Other Compensation" represents payments for
automobile allowances. We have since replaced the automobile allowance program
with the use of company-owned cars.
Effective July 1, 1998, we entered into 3-year employment agreements with
each of Messrs. Berger, Harris, Kocher, Campbell and Molander. The base salary,
incentive adjustments, performance bonuses and stock options were set for the
three year period for Messrs. Harris, Kocher, Campbell and Molander and for one
year for Mr. Berger. The base pay rates were set to begin at $50,000 for Mr.
Berger, $80,000 for Mr. Harris, $60,000 for Mr. Kocher, and $70,000 each for
Messrs. Campbell and Molander.
We increased the base pay of each of the executives listed above by 10% at
the time that we had 50 stores in operation, $55,000 for Mr. Berger, $88,000
for Mr. Harris, $66,000 for Mr. Kocher, and $77,000 each for Mr. Campbell and
Mr. Molander. Effective July 1, 1999 Mr. Berger's salary was set at $77,000. We
also agreed to increase the salaries of the executive officers by 10% at the
time that we have opened 100 stores. We pay health insurance for all of the
executive officers and their families. We provide an automobile for each of the
following: James Harris, Scott Molander and J. Glenn Campbell. Please see the
information below regarding employment agreements, compensation and options
granted to the executive officers.
The employment agreements were structured to provide three different types
of incentives for the executives, as follows:
* to encourage growth, we provide for salary adjustments based on the
number of stores operated;
* to promote profits and financial well-being we provide performance
bonuses based on certain levels of EBITDA or earnings before interest,
taxes, depreciation and amortization; and
* to promote increased appreciation of the value of our company, we
provide stock options.
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The base salary adjustments provide for increases or decreases in annual
base salary for each of these executives as the number of stores which we
operate increases or decreases, as follows:
50 to 99 stores ............ 10% increase or decrease
100 to 149 stores .......... 10% increase or decrease
150 to 199 stores .......... 15% increase or decrease
200 to 249 stores .......... 15% increase or decrease
The increases or decreases are based initially on the base pay rate in the
first year of employment and, after each adjustment, the adjusted base pay rate
is the rate for each period preceding the event triggering such increase or
decrease. For example, Mr. Harris's base salary increased from the initial base
pay rate of $80,000 per year to $88,000 per year when we had 50 to 99 stores in
operation. His adjusted base salary will increase to $96,800 when we operate 100
to 149 stores. In other words, the increases or decreases apply to the
immediately prior adjusted annual base salary amount.
The performance bonus is based on a reasonable projected ratio of EBITDA
for the year, as determined by March 31 of that year by the Board of Directors.
In 1999, even though the EBITDA targets were not obtained for the 1998 fiscal
year, the board of directors unanimously approved a discretionary bonus to these
executives of 5% of their then annual base salary amounts.
The stock options granted to our executives are as follows:
* George Berger was granted an option to purchase 40,000 shares at an
exercise price of $6.50 per share. His options vest over a period of
three years, beginning on July 1, 1998. These options expire on
December 31, 2001, and are exercisable only during Mr. Berger's
employment by us. In the event of an acquisition of more than 50% of
our common stock by any control person or group (as defined by the
Securities and Exchange Commission definitions and guidelines), then
vesting of his options is immediate.
* James Harris was granted an option to purchase 100,000 shares at an
exercise price of $6.50 per share. His options vest over a period of
three years, beginning on July 1, 1998. These options expire on
December 31, 2001, and are exercisable only during Mr. Harris's
employment by us. In the event of an acquisition of more than 50% of
our common stock by any control person or group (as defined by the
Securities and Exchange Commission definitions and guidelines), then
vesting of his options is immediate. We also granted Mr. Harris an
option to purchase 72,000 shares at an exercise price of $1.5625 per
share. Of the total, 52,000 shares were vested as of January 1, 1999
and 20,000 shares will vest on January 1, 2000. These options expire
on May 31, 2000, and are exercisable only during Mr. Harris's
employment by us.
* Kenneth J. Kocher was granted an option to purchase 80,000 shares at
an exercise price of $6.50 per share. His options vest over a period
of three years, beginning on July 1, 1998. These options expire on
December 31, 2001, and are exercisable only during Mr. Kocher's
employment by us. In the event of an acquisition of more than 50% of
our common stock by any control person or group (as defined by the
Securities and Exchange Commission definitions and guidelines), then
vesting of his options is immediate. We also granted Mr. Kocher an
option to purchase 12,000 shares at an exercise price of $1.5625 per
share. These options expire on May 31, 2000, and are exercisable only
during Mr. Kocher's employment by us.
* J. Glenn Campbell was granted an option to purchase 40,000 shares at
an exercise price of $6.50 per share. His options vest over a period
of three years, beginning on July 1, 1998. These options expire on
December 31, 2001, and are exercisable only during Mr. Campbell's
employment by us. In the event of an acquisition of more than 50% of
our common stock by any control person or group (as defined by the
Securities and Exchange Commission definitions and guidelines), then
vesting of his options is immediate.
* Scott A. Molander was granted an option to purchase 40,000 shares at
an exercise price of $6.50 per share. His options vest over a period
of three years, beginning on July 1, 1998.
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<PAGE>
These options expire on December 31, 2001, and are exercisable only
during Mr. Molander's employment by us. In the event of an acquisition
of more than 50% of our common stock by any control person or group
(as defined by the Securities and Exchange Commission definitions and
guidelines), then vesting of his options is immediate.
INDEMNIFICATION
Minnesota Statutes, Section 302A.521, contain an extensive indemnification
provision which requires mandatory indemnification by a corporation of any
officer, director and affiliated person who was or is a party, or who is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a member, director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a member, director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses,
including attorneys' fees, and against judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted, or failed to act, in good faith and in a
manner he 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 his conduct was unlawful. In some instances a court
must approve such indemnification.
Indemnification does not eliminate the duty of care and does not affect an
officer's or a director's responsibilities under any laws, such as the federal
securities laws.
We have entered into indemnity agreements with each of our directors and
executive officers to indemnify them against expenses and losses incurred for
claims brought against them in their capacities as directors or executive
officers. The indemnification agreements provide that the maximum
indemnification by us of each director or officer would be the maximum extent
permissible under Minnesota law as amended from time to time. Indemnification is
available if the director or officer seeking indemnification:
* has not been indemnified by another corporation or employee benefit
plan with respect to the same matters complained of in the proceeding;
* has acted in good faith;
* had no reason, in the case of a criminal proceeding, to believe his
conduct was unlawful;
* received no improper personal benefits and complied with the conflict
of interest provisions of the Minnesota Statutes; and
* reasonably believed the conduct was in our best interests.
There is no pending litigation or proceeding involving any director or
officer as to which indemnification is being sought. We are not aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
As to indemnification for liabilities arising under the Securities Act of
1933 for directors, officers or controlling persons, we are aware that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy and unenforceable.
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<PAGE>
CERTAIN TRANSACTIONS
We have agreed to issue a warrant to Bluestem Capital Partners I to
purchase 40,000 shares of our common stock at an exercise price of 125% of the
initial public offering price. The warrant will expire two years from the
effective date of this initial public offering. The warrants are in partial
consideration for the guarantee of a $2,000,000 bridge loan from a bank, which
has funded new stores and working capital prior to this offering. We have also
agreed to pay Bluestem Capital Partners I an interest rate of 4% as additional
compensation for the guaranty.
We believe the transaction summarized above was made on terms no less
favorable than terms we could have obtained from unaffiliated third parties. The
board of directors has determined that any future transactions between us and
our officers, directors or principal stockholders will be approved by a majority
of the disinterested directors and will be on terms no less favorable than we
could obtain from an unaffiliated third party. The board of directors may obtain
independent counsel or other independent advice to assist in that determination.
As part of its purchase of shares of our common stock in 1998, Bluestem
Capital Partners II, LP granted us a "put" option to sell to such entity
additional shares of our common stock at $8.44 per share for up to $2,000,000
for two years in increments as we may desire to sell to it. Such put option is
subject to our having achieved certain projected financial goals at the time of
exercise which were determined at the date of the granting of the option. We do
not intend to exercise this put if the capital is available from another source
on more favorable terms.
Since inception in June 1995, Hat World, Inc. issued 100,000 shares of
Class M common stock to each of Messrs. Berger, Campbell and Molander for $1,000
per person, and we issued 50,000 shares of Class M common stock to CR Ventures,
Inc., a corporation which was controlled by Mr. Berger, for $50,000 cash. The
Class M common stock had the same voting rights as the Class A common stock
which was authorized at the time under our articles of incorporation. The Class
A common stock was entitled to receive a 12.5% per year priority return on a
noncumulative basis based on the amount of the purchase price of such stock. The
Class M common stock was automatically convertible into Class A common stock
upon the occurrence of certain events, including the offer by Hat World, Inc. to
repurchase the Class A common stock for the full amount of the purchase price
paid by the owners of such stock plus the priority return. Such an offer was
made in July 1997, and both classes of common stock were converted into an equal
number of shares of common stock of a single class. As a result, Messrs. Berger,
Campbell and Molander became owners of our common stock. Mr. Berger acquired
additional shares of stock as a result of the distribution of his pro rata
shares of CR Ventures, Inc.'s assets when that company was subsequently
dissolved. Since the inception of Hat World, Inc. the number of shares has
increased due to the declaration of one 10% stock dividend and two 100% stock
dividends.
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PRINCIPAL STOCKHOLDERS
The following table details certain information with respect to the
beneficial ownership of our common stock as of July 31, 1999 by:
* each stockholder known by us to beneficially own more than 5% of our
common stock;
* each named executive officer;
* each director; and
* all directors and executive officers as a group.
The table also presents information as adjusted to reflect the sale by us
of the shares offered hereby (assuming no exercise of the representatives'
over-allotment option).
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
------------------------
SHARES BENEFICIALLY
OWNED PRIOR EXERCISABLE NUMBER PRIOR TO AFTER
TO OFFERING OF OPTIONS OFFERING OFFERING
-------------------- -------------------- ---------- -----------
<S> <C> <C> <C> <C>
George Berger (1) .................. 576,524 24,000 18.96% 13.91%
Bluestem Capital
Partners I, LLC (2)(3)(6) ......... 878,576 48,000 29.03 21.34
Bluestem Capital
Partners II, LP (2)(3) ............ 597,630 19.01 13.92
J. Glenn Campbell (4) .............. 390,000 24,000 13.07 9.59
James Harris (4) ................... 4,000 126,000 3.98 2.94
Ken Kocher (1) ..................... 30,500 56,000 2.70 1.99
Scott Molander (4) ................. 390,000 24,000 13.07 9.59
John Andretti (4) .................. -- 4,000 .13 .09
Mark E. Griffin (5) ................ -- 4,000 .13 .09
All directors and officers
as a Group (9 persons) ............ 2,867,230 310,000 92.00% 69.02%
</TABLE>
- ------------------
(1) The address is Hat World Corporation, 4912 S. Minnesota Avenue, Sioux Falls,
South Dakota 57108.
(2) The address is 122 S. Phillips Avenue, Sioux Falls, South Dakota 55104.
(3) Steve Kirby and Paul A. Schock, directors, are control persons and
principals of Bluestem Capital Partners I, LLC and Bluestem Capital Partners
II, LP.
(4) The address is Hat World, Inc., 8142 Woodland Drive, Indianapolis, Indiana
46278.
(5) The address is 2701 S. Minnesota Avenue, Sioux Falls, South Dakota 57105.
(6) The directors' options for Messrs. Kirby and Schock have been assigned to
Bluestem Capital Partners I, LLC.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to warrants or options held by that person that
are currently exercisable or will become exercisable within 60 days after July
31, 1999 are deemed outstanding, while such shares are not deemed outstanding
for purposes of computing percentage ownership of any other person. Applicable
percentages are based on 3,143,446 shares of common stock outstanding as of July
31, 1999 and 4,293,446 shares of common stock outstanding after completion of
this offering. Unless otherwise indicated in the following paragraphs, the
persons and entities named in the table have sole voting and investment power
with respect to all shares beneficially owned, subject to community property
laws where applicable.
36
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description summarizes certain terms of our capital stock and
certain provisions of our restated certificate of incorporation and bylaws.
Please refer to our restated certificate of incorporation and bylaws, which have
been filed as exhibits to this registration statement.
COMMON STOCK
We have authorized 10,000,000 shares of common stock, with a par value of
$.01 per share. Each holder of common stock has one vote per share on all
matters voted upon by the shareholders. Such voting rights are not cumulative
and as such shareholders holding more than 50% of the outstanding shares of
common stock are able to and will be able to elect all members of the Board of
Directors. There are no preemptive rights or other rights of subscription.
Each share of common stock is entitled to participate equally in dividends
as and when declared by the Board of Directors of Hat World out of funds legally
available, and is entitled to participate equally in the distribution of assets
in the event of liquidation. All shares, when issued and fully paid, are not
assessable and are not subject to redemption or conversion and have no
conversion rights.
MINNESOTA ANTI-TAKEOVER LAW
We are governed by the provisions of Sections 302A.671 and 302A.673 of the
Minnesota Business Corporation Act. In general, Section 302A.671 restricts the
voting of certain percentages of voting control to be acquired in a control
share acquisition of our voting stock (in excess of 20%, 33.3% or 50%) until
after shareholder approval of the acquisition is obtained. A "control share
acquisition" is an acquisition, directly or indirectly, of beneficial ownership
of shares that would, when added to all other shares beneficially owned by the
acquiring person, entitle the acquiring person to have voting power of 20% or
more in the election of directors. In general, Section 203A.673 prohibits a
public Minnesota corporation from engaging in a "business combination" with an
"interested shareholder" for a period of four years after the date of the
transaction in which the person became an interested shareholder, unless the
business combination is approved by a majority of disinterested directors prior
to the date the shareholder becomes an interested shareholder. "Business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested shareholder. An "interested shareholder" is
a person who is the beneficial owner, directly or indirectly, of 10% or more of
the corporation's voting stock or who is an affiliate or associate of the
corporation and at any time within four years prior to the date in question was
the beneficial owner, directly or indirectly, of 10% or more of the
corporation's voting stock.
In the event of certain tender offers for capital stock Section 302A.675
precludes the tender offeror from acquiring additional shares of capital stock
(including acquisitions pursuant to mergers, consolidations or statutory share
exchanges) within two years following the completion of such an offer unless the
selling shareholders are given the opportunity to sell the shares of capital
stock on terms that are substantially equivalent to those contained in the
earlier tender offer. Section 302A.675 does not apply if a committee of the
Board of Directors consisting of all of its disinterested directors (excluding
present and former officers) approves the subsequent acquisition before shares
are acquired pursuant to the earlier tender offer.
These provisions of the Minnesota law could delay and make more difficult a
business combination, particularly one opposed by the board of directors, even
if the business combination could be beneficial, in the short term, to the
interests of shareholders. These statutory provisions could also depress the
price certain investors might be willing to pay in the future for shares of our
common stock (because it may make hostile takeovers more difficult and costly,
and therefore, less attractive to the potential pursuer).
LISTING
We have applied for listing of our common stock on the Nasdaq National
Market under the trading symbol "HATS."
37
<PAGE>
TRANSFER AGENT AND REGISTRAR
American Securities Transfer and Trust, Incorporated has been appointed as
the transfer agent and registrar for our common stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 4,293,446, shares of common
stock outstanding, or 4,465,946 shares if the over allotment option is exercised
in full. Of these shares, the 1,150,000 sold in this offering (1,322,500 with
the over allotment) will not be deemed to be restricted shares under the
Securities Act of 1933. The remaining 3,143,446 shares were issued and sold in
transactions and in reliance on the exemptions under the Securities Act.
The 3,143,446 restricted shares will be eligible for sale pursuant to Rule
144 of the Securities Act at the expiration of a one-year holding period from
their date of acquisition and after ninety days from the effective date of this
offering. The one-year holding period for these shares has ended.
Hat World's executive officers, directors, and 5% stockholders, who
collectively hold an aggregate of approximately 2,867,230 restricted shares,
have agreed not to offer, sell, contract to sell, grant any option to purchase
or otherwise dispose of any such shares for a period of one year, with a few
isolated exceptions, from the date of this prospectus. The representatives of
the underwriters may, in their sole discretion and at any time without prior
notice, release all or any portion of the common stock subject to these lock-up
agreements. The representatives currently have no plans to release any portion
of the securities subject to these lock-up agreements. When determining whether
or not to release shares from the lock-up agreements, the representatives will
consider, among other factors, earnings history, market conditions and other
factors deemed relevant by the representatives.
In general, under Rule 144 a person who has beneficially owned his
restricted shares for at least one year, and persons who are affiliates are
entitled to sell within any three month period a number of shares that does not
exceed the greater of 1% of the then outstanding shares of our common stock
(approximately 42,936 shares immediately after this offering) or the average
weekly trading volume in our common stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about us. However, a person who is not deemed to have been our
affiliate at any time during the three months preceding a sale and who has
beneficially owned his registered stock for at least two years would be entitled
to sell his shares under Rule 144 without regard to the volume limitations,
manner of sale provisions or notice requirements.
Prior to this offering there has been a limited market for the common stock
and no predictions can be made of the effect, if any, that market sales of
restricted shares or the availability of restricted shares for sale will have on
the market price of the shares if a market for the shares develops.
Nevertheless, sales of substantial amounts of the restricted shares in the
public market could adversely affect such market prices.
Taking into account the lock-up agreements the number of restricted shares
that will be available for sale under the provisions of Rules 144, 144(k) and
701, as of the date of this prospectus, 276,216 shares will be eligible for
sale, and 2,765,446 shares will be eligible for sale 12 months after the date of
this prospectus upon the expiration of the lock-up agreements. This does not
take into account any early release from the lock-up agreements or for sales in
reliance on Rule 701 with the consent of the representatives.
38
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in the underwriting
agreement, the underwriters named below, for which Neidiger, Tucker, Brunner,
Inc., EBI Securities Corporation, American Fronteer Financial Corporation, and
Joseph Stevens & Company, Inc. are acting as representatives, have severally
agreed to purchase from us the respective number of shares of common stock set
forth opposite each underwriter's name.
UNDERWRITER NUMBER OF SHARES
Neidiger, Tucker, Brunner, Inc.
EBI Securities Corporation
American Fronteer Financial Corporation
Joseph Stevens & Company, Inc.
---------
Total 1,150,000
The underwriting agreement provides that the obligations of the several
underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in our business and the receipt of certain
certificates opinions and letters from us, our counsel and independent auditors.
The underwriters will be obligated to purchase all the shares of common stock
offered, if any shares are purchased.
The underwriters propose initially to offer the shares of common stock
directly to the public at the public offering price set forth on the cover page
of this prospectus and to certain dealers at such price less a concession not in
excess of $_____ per share. The underwriters may allow and such dealers may
allow a concession not in excess of $_____ per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the representatives. The representatives have
advised us that the underwriters do not expect any sales to accounts for which
any of the underwriters or dealers will exercise discretion as to such sale.
We have granted to the representatives an option, expiring at the close of
business on the 60th day after the date of this prospectus, to purchase up to
172,500 additional shares at the initial public offering price, less the
underwriting discounts, all as set forth on the cover page of this prospectus.
The representatives may exercise such option only to cover over-allotments made
in connection with the sale of common stock in this offering.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
Upon completion of this offering we will sell warrants to purchase 115,000
shares of common stock, to the representatives for $115 in the aggregate. The
representatives' warrants will become exercisable immediately after the
completion of this offering at a per share exercise price equal to 120% of the
initial public offering price, and will expire five years from the date of this
prospectus. The representatives' warrants and underlying shares of common stock
will be restricted from sale, transfer, assignment or hypothecation for a period
of one year from the date of this prospectus, except to the representatives,
underwriters, selling group members and their officers, partners and employees.
During the exercise period, holders of the representatives' warrants are
entitled to certain demand and incidental rights with respect to the shares of
common stock issuable upon exercise of the representatives' warrants. The common
stock issuable on exercise of the representatives' warrants is subject to
adjustment in certain events to prevent dilution.
We will pay the representatives a nonaccountable expense allowance of 2.5%
of the gross proceeds of the offering, which will include proceeds from the
over-allotment option, if exercised. The representatives expenses in excess of
the nonaccountable expense allowance, including its legal expenses, will be
borne by the representatives. We have paid $40,000 to the representatives as an
advance for expenses.
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, and to contribute to
payments which the underwriters may be required to make regarding these
liabilities.
39
<PAGE>
We have agreed to give notice to the representatives of meetings of the
board of directors and to grant access to such meetings to advisors designated
by the representatives to attend the meetings as observers. The representatives
have the right, but not the obligation, to nominate one director to our board of
directors until July 2003. The representatives have indicated that they have no
intention of making such nomination in the near future.
For a period of three years after this offering, the representatives have
the right to participate as co-managing underwriters in any additional public or
private offering of debt or equity securities by us, excluding debt financing
transactions with banks. During this period, the representatives also have the
right to serve as a financial advisors with respect to mergers or other
strategic transactions involving us. The representatives may waive such rights
if the terms of its participation are unacceptable.
The underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Exchange Act. Over-allotment involves syndicate sales in excess of the
offering size, which creates a syndicate short position. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the securities in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representatives to reclaim a selling concession from a
syndicate member when the securities originally sold by such syndicate member
are purchased in a syndicate covering transaction to cover short positions. Such
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the common stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
Neither Hat World nor the underwriters can predict the effect that the
transactions described may have on the price of the common stock. In addition,
neither Hat World nor the underwriters represent that the underwriters will
engage in such transactions. If begun, the transactions may be discontinued at
any time without notice. It is anticipated that certain of the underwriters will
make a market in the common stock on completion of this offering, as permitted
by law. The underwriters are not obligated to make a market in the common stock,
and if they do so may discontinue making a market at any time. An active trading
market may never develop for the common stock.
Before this offering there has been no market for the common stock.
Negotiations between the representatives and us will determine the initial
public offering price. The main factors to be considered in determining the
initial public offering price include:
* the information set forth in this prospectus and otherwise available;
* the history and the prospects for the industry in which we compete;
* the ability of our management;
* the prospects for our future earnings;
* the present state of our development and our financial condition;
* the general condition of the securities markets at the time of this
offering; and
* the recent market prices of, and the demand for, publicly traded stock
of generally comparable companies
The estimated initial public offering price per share range set forth on
the cover of this preliminary prospectus is subject to change as a result of
these and other factors.
40
<PAGE>
LEGAL MATTERS
The validity of the common stock offered will be passed upon for Hat World
by Charles Clayton, Minneapolis, Minnesota and by , Minneapolis,
Minnesota. Clanahan, Tanner, Downing and Knowlton, P.C., Denver, Colorado will
pass upon certain legal matters for the representatives of the underwriters.
EXPERTS
The audited financial statements of Hat World, Inc. included in this
prospectus and elsewhere in the registration statement have been audited by
EideBailly LLP, independent public accountants, as indicated in their reports,
and are included in reliance on the authority of the firm as experts in giving
reports.
In June 1999, Hat World, Inc. stockholders approved a plan wherein Hat
World, Inc. would become the sole operating subsidiary of Hat World
Corporation, a holding company, incorporated in April 1999. This became
effective in July 1999.
41
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditor's Report ........................................................... F-2
Balance Sheets, December 31, 1998 (Audited) and June 30, 1999 (Unaudited) .............. F-3
Statements of Operations, Years Ended December 31, 1997 and 1998 (Audited) and
Six Months Ended June 30, 1998 and 1999 (Unaudited) ................................... F-4
Statements of Stockholders' Equity, Years Ended December 31, 1997 and 1998 (Audited) and
Six Months Ended June 30, 1999 (Unaudited) ............................................ F-5
Statements of Cash Flows, Years Ended December 31, 1997 and 1998 (Audited) and
Six Months Ended June 30, 1998 and 1999 (Unaudited) ................................... F-6
Notes to Financial Statements .......................................................... F-8
</TABLE>
F-1
<PAGE>
EIDE BAILLY LLP
-----------------------------------
CONSULTANTS * CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Hat World, Inc.
Sioux Falls, South Dakota
We have audited the accompanying balance sheet of Hat World, Inc. as of December
31, 1998, and the related statements of operations, stockholders' equity, and
cash flows for the years ended December 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hat World, Inc. as of December
31, 1998, and the results of its operations and its cash flows for the years
ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
/s/ Eide Bailly LLP
Sioux Falls, South Dakota
January 15, 1999
F-2
<PAGE>
HAT WORLD, INC.
BALANCE SHEETS
DECEMBER 31, 1998 (AUDITED) AND JUNE 30, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................. $ 433,354 $ 13,405
Receivables ............................................... 120,794 129,065
Income taxes refundable ................................... -- 314,272
Inventories ............................................... 2,682,854 3,898,320
Prepaid expenses .......................................... 67,192 272,533
---------- ------------
Total current assets .................................... 3,304,194 4,627,595
---------- ------------
DEFERRED INCOME TAXES ...................................... 114,770 114,770
---------- ------------
INTANGIBLE ASSETS, net of accumulated amortization ......... 2,566 21,896
---------- ------------
PROPERTY AND EQUIPMENT
Leasehold improvements .................................... 3,368,917 5,269,689
Furniture and fixtures .................................... 513,192 863,119
Equipment, office and computer ............................ 329,990 738,037
Vehicles .................................................. 110,243 146,329
---------- ------------
4,322,342 7,017,174
Less accumulated depreciation & amortization ............ (628,780) (1,056,974)
---------- ------------
3,693,562 5,960,200
---------- ------------
Total Assets ............................................ $7,115,092 $ 10,724,461
========== ============
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable -- bank ..................................... $ -- $ 3,600,000
Current maturities of long-term debt ...................... 15,511 72,661
Accounts payable, trade ................................... 836,317 1,553,271
Accrued expenses .......................................... 456,858 443,344
Income taxes payable ...................................... 373,221 --
---------- ------------
Total current liabilities ............................... 1,681,907 5,669,276
---------- ------------
LONG-TERM DEBT, less current maturities .................... 57,689 138,727
---------- ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share
Authorized, 10,000,000 shares
Issued, 3,143,446 shares ................................ 31,436 31,436
Additional paid-in capital ................................ 4,383,230 4,383,230
Retained earnings ......................................... 960,830 501,792
---------- ------------
Total Stockholders' Equity ................................ 5,375,496 4,916,458
---------- ------------
Total Liabilities and Stockholders' Equity ................ $7,115,092 $ 10,724,461
========== ============
</TABLE>
See Notes to Financial Statements
F-3
<PAGE>
HAT WORLD, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (AUDITED) AND
SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------ -------------------------------
1997 1998 1998 1999
------------- -------------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES ............................. $3,761,107 $10,975,102 $3,159,810 $ 7,518,135
COST OF SALES ......................... 1,707,026 4,897,930 1,439,134 3,346,289
---------- ----------- ---------- -----------
GROSS PROFIT .......................... 2,054,081 6,077,172 1,720,676 4,171,846
OPERATING EXPENSES .................... 1,573,407 5,062,679 1,791,998 4,810,199
---------- ----------- ---------- -----------
INCOME (LOSS) FROM OPERATIONS ......... 480,674 1,014,493 (71,322) (638,353)
OTHER INCOME (EXPENSE)
Interest income ...................... 3,126 15,151 3,114 448
Interest expense ..................... (18,620) (41,404) (18,046) (72,718)
Other ................................ 5,678 20,029 5,726 (54,440)
---------- ----------- ---------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES ......................... 470,858 1,008,269 (80,528) (765,063)
INCOME TAXES (BENEFIT) ................ 195,300 365,700 (36,238) (306,025)
---------- ----------- ---------- -----------
NET INCOME (LOSS) ..................... $ 275,558 $ 642,569 $ (44,290) $ (459,038)
========== =========== ========== ===========
EARNINGS (LOSS) PER
COMMON SHARE, basic .................. $ 0.13 $ 0.23 $ (0.02) $ (0.15)
========== =========== ========== ===========
EARNINGS (LOSS) PER
COMMON SHARE, diluted ................ $ 0.13 $ 0.22 $ (0.02) $ (0.15)
========== =========== ========== ===========
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
HAT WORLD, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1998 (AUDITED) AND SIX MONTHS ENDED JUNE 30,
1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK CLASS A COMMON STOCK
----------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ---------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 ................. -- $ -- 35,540 $ 355
Issuance of 216,474 shares of Class A
common stock, net of offering costs
of $3,117 ................................ -- -- 216,474 2,166
Purchase and retirement of 560 shares
of Class A common stock .................. -- -- (560) (6)
Conversion of all shares of Class M
common stock to shares of common
stock .................................... 636,454 6,365 (251,454) (2,515)
Issuance of 636,454 shares of common
stock pursuant to a stock split in the
form of a stock dividend ................. 636,454 6,365 -- --
Net income ................................ -- -- -- --
------- ------- -------- ----------
BALANCE, DECEMBER 31, 1997 ................. 1,272,908 12,730 -- --
Issuance of 248,815 shares of common
stock, net of offering costs of $928 ..... 248,815 2,488 -- --
Issuance of 50,000 shares of common
stock upon the exercise of options ....... 50,000 500 -- --
Issuance of 1,571,723 shares of common
stock pursuant to a stock split in the
form of a stock dividend ................. 1,571,723 15,718 -- --
Net income ................................ -- -- -- --
--------- ------- -------- ----------
BALANCE, DECEMBER 31, 1998 ................. 3,143,446 31,436 -- --
Net (loss) ................................ -- -- -- --
--------- ------- -------- ----------
BALANCE, JUNE 30, 1999
(UNAUDITED) ............................... 3,143,446 $31,436 -- $ --
========= ======= ======== ==========
</TABLE>
[WIDE TABLE CONTINUED FROM ABOVE]
<TABLE>
<CAPTION>
CLASS M COMMON STOCK ADDITIONAL
------------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 ................. 385,000 $ 3,850 $ 205,848 $ 64,786 $ 274,839
Issuance of 216,474 shares of Class A
common stock, net of offering costs
of $3,117 ................................ -- -- 1,034,468 -- 1,036,634
Purchase and retirement of 560 shares
of Class A common stock .................. -- -- (3,170) -- (3,176)
Conversion of all shares of Class M
common stock to shares of common
stock .................................... (385,000) (3,850) -- -- --
Issuance of 636,454 shares of common
stock pursuant to a stock split in the
form of a stock dividend ................. -- -- -- (6,365) --
Net income ................................ -- -- -- 275,558 275,558
-------- --------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1997 ................. -- -- 1,237,146 333,979 1,583,855
Issuance of 248,815 shares of common
stock, net of offering costs of $928 ..... -- -- 2,996,584 -- 2,999,072
Issuance of 50,000 shares of common
stock upon the exercise of options ....... -- -- 149,500 -- 150,000
Issuance of 1,571,723 shares of common
stock pursuant to a stock split in the
form of a stock dividend ................. -- -- -- (15,718) --
Net income ................................ -- -- -- 642,569 642,569
-------- --------- ---------- ----------- ----------
BALANCE, DECEMBER 31, 1998 ................. -- -- 4,383,230 960,830 5,375,496
Net (loss) ................................ -- -- -- (459,038) (459,038)
-------- --------- ---------- ----------- ----------
BALANCE, JUNE 30, 1999
(UNAUDITED) ............................... -- $ -- $4,383,230 $ 501,792 $4,916,458
======== ========= ========== =========== ==========
</TABLE>
See Notes to Financial Statements
F-5
<PAGE>
HAT WORLD, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (AUDITED) AND
SIX MONTHS ENDED JUNE 30, 1998 AND 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------- --------------------------------
1997 1998 1998 1999
------------- --------------- -------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ........................... $ 275,558 $ 642,569 $ (44,290) $ (459,038)
Charges and credits to net income
(loss) not affecting cash
Depreciation .............................. 33,250 116,435 27,555 118,908
Amortization of leasehold improvements
and intangibles .......................... 104,767 344,798 127,518 309,286
Deferred income taxes ..................... (20,585) (98,585) -- --
Changes in assets and liabilities
Receivables ............................... 10,954 (116,748) 1,423 19,554
Inventories ............................... (587,591) (1,907,153) (653,772) (1,215,466)
Prepaid expenses .......................... 146 (61,324) (38,973) (205,341)
Accounts payable, trade ................... 389,664 332,647 211,925 563,572
Accounts payable, stockholders ............ (3,733) -- -- --
Accrued expenses .......................... 168,394 230,636 (56,372) (13,514)
Unearned membership dues .................. (4,225) -- -- --
Income taxes payable ...................... 189,731 168,153 (328,123) (687,493)
---------- ------------ ------------ ------------
NET CASH FROM (USED FOR)
OPERATING ACTIVITIES ........................ 556,330 (348,572) (753,109) (1,569,532)
---------- ------------ ------------ ------------
INVESTING ACTIVITIES
Property and equipment purchases ............ (969,805) (3,072,226) (1,468,632) (2,420,380)
Reimbursement received on property and
equipment purchases ........................ -- -- -- 34,175
Payment of start-up costs and loan fees ..... -- -- -- (19,438)
---------- ------------ ------------ ------------
NET CASH USED FOR INVESTING
ACTIVITIES .................................. (969,805) (3,072,226) (1,468,632) (2,405,643)
---------- ------------ ------------ ------------
FINANCING ACTIVITIES
Net borrowings (payments) on notes
payable .................................... (198,584) -- 1,650,000 3,600,000
Proceeds from long-term debt borrowings ..... -- 78,194 -- 15,586
Principle payments on long-term debt ........ -- (4,994) -- (32,649)
Proceeds from stock issuance, net of
offering costs ............................. 1,036,634 2,999,072 -- --
Proceeds from stock issuance upon the
exercise of options ........................ -- 150,000 -- --
Payment of offering costs ................... -- -- (928) --
</TABLE>
(continued on next page)
F-6
<PAGE>
STATEMENTS OF CASH FLOWS -- PAGE 2
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------- ---------------------------
1997 1998 1998 1999
------------- ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES (Con't.)
Purchase and retirement of stock ............ $ (3,176) $ -- $ -- $ --
Payment of short-term payable used to
finance equipment purchases ................ -- -- -- (27,711)
--------- --------- ---------- ----------
NET CASH FROM FINANCING
ACTIVITIES .................................. 834,874 3,222,272 1,649,072 3,555,226
--------- --------- ---------- ----------
NET CHANGE IN CASH AND CASH
EQUIVALENTS ................................. 421,399 (198,526) (572,669) (419,949)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD ......................... 210,481 631,880 631,880 433,354
--------- --------- ---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD ............................... $ 631,880 $433,354 $ 59,211 $ 13,405
========= ========= ========== ==========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the period
Interest .................................. $ 22,561 $ 41,404 $ 18,046 $ 17,225
Income taxes .............................. 26,175 296,132 248,965 373,270
========= ========= ========== ==========
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of property and equipment
through accounts and notes payable ......... $ -- $137,954 $ 145,059 $ 181,093
Reimbursement due for property and
equipment purchases included in
receivables ................................ -- 118,700 -- 62,000
Common stock subscription ................... -- -- 3,150,000 --
Stock split in the form of a stock dividend 6,365 15,718 -- --
Capital lease obligations incurred for use
of equipment ............................... -- -- -- 155,251
========= ========= ========== ==========
</TABLE>
See Notes to Financial Statements
F-7
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 -- PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
PRINCIPAL BUSINESS ACTIVITY
Hat World, Inc. (the "Company") was incorporated June 1, 1995 for the
purpose of operating specialty retail stores, primarily to sell baseball-style
caps. The first store was opened November 3, 1995 and at December 31, 1998
fifty-three stores were operating in fourteen states.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The unaudited interim financial statements as of June 30, 1999 and for the
six months ended June 30, 1998 and 1999, are unaudited but, in the opinion of
management, include all adjustments, consisting of normal recurring adjustments,
which are necessary for a fair presentation of financial condition, results of
operations, and cash flows. The operating results for the six months ended June
30, 1999 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1999.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers money market funds to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost, (first-in, first-out method)
or market.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Furniture and fixtures 5 - 7 years
Equipment, office and computer 3 - 5 years
</TABLE>
Amortization of the leasehold improvements is computed over the lives of
the respective leases which are one to nine years.
INTANGIBLE ASSET
Amortization of the cost of developing Company trademarks for registration
is computed using the straight-line method over an estimated life of fifteen
years.
CONCENTRATION OF CREDIT RISK
At December 31, 1998, one bank account had $437,119 in excess of the
Federal Deposit Insurance Corporation insurance limits.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in
the financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between
F-8
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 1-- PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
property and equipment for financial and income tax reporting. The deferred tax
assets represent the future tax return consequences of those differences, which
will be deductible when the assets are recovered.
ADVERTISING
Advertising costs are expensed as incurred. The Company incurred $28,584
and $13,932 for advertising costs in 1998 and 1997, respectively.
RECLASSIFICATIONS
Certain amounts in 1997 have been reclassified to conform with 1998
presentation.
NOTE 2 -- LINE OF CREDIT AND LONG-TERM DEBT
<TABLE>
<S> <C>
The Company has a variable rate line of credit of $650,000 at December 31,
1998, due on demand and secured by substantially all assets of the Company.
Interest is .5% above the bank's prime rate, and was 9.25% at December 31,
1998 ............................................................................ $ --
=========
Long-term debt at December 31, 1998 consists of:
3.9% note payable to finance corporation, due in monthly installments of
$357, including interest, to July 2002; secured by a vehicle .............. $ 18,623
9.77% note payable to bank, due in monthly installments of $449,
including interest, to August 2003; secured by two vehicles ............... 40,255
8.0% note payable to finance corporation, due in monthly installments of
$490, including interest, to August 2002; secured by a vehicle ............ 14,322
---------
73,200
Less current maturities ................................................... (15,511)
---------
$ 57,689
=========
</TABLE>
Long-term debt maturities are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
- --------------------- ----------
<S> <C>
1999 .............. $15,511
2000 .............. 16,772
2001 .............. 18,145
2002 .............. 15,863
2003 .............. 6,909
-------
$73,200
=======
</TABLE>
F-9
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 3 -- ACCRUED EXPENSES
Accrued expenses at December 31, 1998 include:
<TABLE>
<S> <C>
Compensation, related withholdings & benefits ......... $234,675
Sales taxes ........................................... 182,170
Rent .................................................. 11,703
Other ................................................. 28,310
--------
$456,858
========
</TABLE>
NOTE 4 -- EMPLOYEE BENEFIT PLAN
The Company established a 401(K) retirement plan in 1998, which covers all
employees who meet eligibility requirements. Employees may defer a maximum of
15% of their salary. The Company will match 50% of the first 5% of the
employee's elective deferral. The Company may also make additional contributions
to the plan at the discretion of the Board of Directors. The Company's
contribution for 1998 was $15,681.
NOTE 5 -- INCOME TAXES
The provision for income taxes for the years ended December 31, 1997 and
1998 follows:
<TABLE>
<CAPTION>
1997 1998
----------------------------------------- -----------------------------------------
TOTAL CURRENT PREPAID TOTAL CURRENT PREPAID
----------- ----------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Federal ......... $146,600 $164,185 $ (17,585) $283,700 $366,285 $ (82,585)
State ........... 48,700 51,700 (3,000) 82,000 98,000 (16,000)
-------- -------- --------- -------- -------- ---------
Total ........... $195,300 $215,885 $ (20,585) $365,700 $464,285 $ (98,585)
======== ======== ========= ======== ======== =========
</TABLE>
The income tax provision differs from the amount of income tax determined
by applying the U.S. federal income tax rate of 34% to pretax income for the
years ended December 31, 1997 and 1998 due to the following:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Computed "expected" tax expense .......................... $160,092 $ 342,799
Increase (decrease) in income taxes resulting from:
State income taxes, net of federal tax benefit .......... 32,149 54,180
Other ................................................... 3,059 (31,279)
-------- ---------
$195,300 $ 365,700
======== =========
</TABLE>
Deferred income taxes represent the accumulated depreciation differences
between financial statement and income tax reporting of property and equipment.
There is no valuation allowance account.
F-10
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 6 -- LEASE COMMITMENTS
The Company leases all fifty-three of its store locations and a warehouse
under noncancelable lease agreements with terms ranging from less than one year
to nine years. In most cases, management expects that in the normal course of
business, leases will be renewed or replaced by other leases. Generally, under
these leases, the Company is obligated for certain minimum rentals, real estate
taxes, utilities, insurance and contingent rentals based upon sales volume. Rent
expense under these leases was $1,230,657 and $390,531 for the years ended
December 31, 1998 and 1997, respectively. Included in the total rent expense for
the years ended December 31, 1998 and 1997 was $18,667 and $28,264,
respectively, representing contingent rent based upon sales volume. At December
31, 1998, the Company had also entered into lease agreements for nine new stores
and a new warehouse, with plans to begin operation at these locations during
1999. Minimum lease payments in future years are as follows:
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31, AMOUNT
- ------------------------------------------------ -------------
<S> <C>
1999 .................................. $ 1,759,868
2000 .................................. 1,786,361
2001 .................................. 1,801,257
2002 .................................. 1,644,264
2003 .................................. 1,533,408
Remaining Years ....................... 2,380,944
-----------
Total minimum lease payments ......... $10,906,102
===========
</TABLE>
Subsequent to year end, the Company entered into a lease agreement for a
new store. The lease will commence on March 1, 1999, with a term of 107 months.
The annual minimum lease payment on the store will be $35,280.
NOTE 7 -- EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY
During 1997, all Class M and Class A shares were converted to shares of
common stock, and basic earnings per share was computed for a single class of
common stock. Diluted earnings per share assume the execution of all stock
options at the shareholders' most advantageous price. Earnings per share has
been computed using the weighted average of the number of shares outstanding
during each of the periods presented.
In both 1998 and 1997 the Company declared two for one stock splits in the
form of a stock dividend of two shares of common stock for each share
outstanding. All stock option per share information in these financial
statements has been adjusted retroactively for the effect of these splits.
F-11
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 7-- EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY (CONTINUED)
Following is a reconciliation of the numerators and the denominators for
the earnings per share computations:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- ----------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common
stockholders ...................... $275,558 2,074,902 $ 0.13
Effect of Dilutive Securities Options -- 40,936 --
-------- --------- ------
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions ....................... $275,558 2,115,838 $ 0.13
======== ========= ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
--------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- ----------
<S> <C> <C> <C>
Basic Earnings Per Share
Income available to common
stockholders ...................... $642,569 2,820,890 $ 0.23
Effect of Dilutive Securities Options -- 62,122 --
-------- --------- ------
Diluted Earnings Per Share
Income available to common
stockholders and assumed
conversions ....................... $642,569 2,883,012 $ 0.22
======== ========= ======
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
----------------------------------------------
LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- ------------
<S> <C> <C> <C>
Basic and Diluted Loss Per Share
Loss available to common
stockholders ................. $ (44,290) 2,545,816 $ (0.02)
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
----------------------------------------------
LOSS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------- --------------- ------------
<S> <C> <C> <C>
Basic and Diluted Loss Per Share
Loss available to common
stockholders ................. $ (459,038) 3,143,446 $ (0.15)
========== ========= =========
</TABLE>
F-12
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 8 -- COMMON STOCK
Two classes of common stock were created to facilitate selling shares in an
initial offering of Class A shares to the public utilizing a Small Corporate
Offering Registration Exemption Form (Form U-7). The Class M shares were created
to demonstrate a commitment by the founders of the Company that they would not
participate in the direct financial rewards of owning shares in the Company
until such time as Class A shareholders had an opportunity to receive a priority
return on their investment. Class M shares were to be automatically converted
into Class A shares, on a one for one basis, at such time as the 24,400 Class A
shares sold in the initial U-7 offering achieved a 12.5% Annual, Cumulative,
Priority Return.
Such a priority return was achieved during 1997, in accordance with the
terms of the Company's articles of incorporation, by tendering an offer to
buy-back all outstanding shares issued pursuant to the U-7 offering at a cash
purchase price determined in the prescribed manner. The Company purchased and
retired 560 Class A shares as a result of the buy-back offer. Acceptance of the
buy-back offer by shareholders was not a condition of conversion of the Class M
shares to Class A shares. Subsequent to tendering the buy-back offer, all
outstanding Class M and Class A shares were converted to shares of common stock,
and the Company's articles of incorporation were amended to reflect only one
class of common stock.
NOTE 9 -- STOCK OPTIONS
The Company has reserved 880,000 shares of common stock in its 1995 Stock
Option Plan, as amended, and intends to grant such options to officers, store
managers and other employees as performance incentives. The incentive stock
options will vest over a three to five year period. The Plan expires on December
31, 2005.
During 1998 and 1997, the Company granted options to certain officers and
employees to purchase 329,000 and 114,000 shares, respectively, of common stock
under the Plan. The fair value of each option was estimated using a model
similar to the Black-Scholes option pricing model, with the following weighted
average assumptions: dividend yield of 0%; risk-free interest rate of 5% and 6%
in 1998 and 1997, respectively; and expected life of 3.4 years and 3 years in
1998 and 1997, respectively. Because the exercise price exceeded the market
value at grant date, it was determined that the fair value of the options was
insignificant and no compensation expense would be recorded. Vesting of certain
options granted to an officer was contingent upon the Company meeting net sales
and before tax profit goals during 1997 and 1998. The 1997 goals were met and
the related options vested in 1998. The 1998 goals were not met and the related
options expired.
The Company also reserved 100,000 shares of common stock under an option
agreement with a significant shareholder of the Company. These options were
granted by the Company in 1997 and were exercised by the shareholder in 1998.
The fair value of these options at grant date, determined using the same
assumptions as those stated above, was insignificant, and no value would be
recognized in the financial statements.
F-13
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 9-- STOCK OPTIONS (CONTINUED)
A summary of the status of the Company's stock options as of December 31,
1997 and 1998, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1997 1998
------------------------------- ---------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ------------------ ------------- -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year -- $ -- 214,000 $ 1.53
Granted ................................ 214,000 1.53 329,000 6.46
Exercised .............................. -- -- (100,000) 1.50
Forfeited .............................. -- -- (28,000) 2.08
------- --------
Outstanding at end of year .............. 214,000 1.53 415,000 5.41
======= ========
Options exercisable at year-end ......... 122,000 1.53 142,500 4.53
======= ========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/98 LIFE PRICE AT 12/31/98 PRICE
- -------------------- ------------- ------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Fixed Options:
$ 1.5625 .......... 76,000 1.5 years $ 1.5625 36,000 $ 1.5625
$ 4.00 ............ 13,000 2.0 years 4.0000 13,000 4.0000
$ 6.50 ............ 300,000 3.0 years 6.5000 75,000 6.5000
$10.00 ............ 10,000 3.0 years 10.0000 2,500 10.0000
Performance Based:
$1.5625 ........... 16,000 1.5 years 1.5625 16,000 1.5625
------- ------
415,000 2.6 years 5.4100 142,500 4.5300
======= =======
</TABLE>
On January 6, 1999, stock options were granted to an employee of the
Company to purchase 2,500 shares of common stock for $10 per share. The options
expire on May 31, 2002.
F-14
<PAGE>
HAT WORLD, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 10 -- NOTES PAYABLE -- BANK (UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1999
--------------
(UNAUDITED)
<S> <C>
The Company has a $3,500,000 variable rate line of credit with a
bank at June 30, 1999, due September 30, 1999, and secured by
substantially all assets of the Company. Interest is .25% above the
Wall Street Journal prime rate, and was 8.00% at June 30, 1999. The
line is renewable for an additional six months, and is subject to
certain financial performance covenants. .......................... $2,000,000
The Company has a $2,000,000 variable rate line of credit with a
bank at June 30, 1999, due September 30, 1999; secured by
substantially all assets of the Company and guaranteed by Bluestem
Capital Partners I, LLC (BCPI), a stockholder of the Company.
Interest is .25% above the Wall Street Journal prime rate, and was
8.00% at June 30, 1999. ........................................... 1,600,000
----------
$3,600,000
==========
</TABLE>
In connection with the guarantee of the $2,000,000 line of credit, the
Company has agreed to pay interest of 4% to BCPI on the amounts borrowed, and
has agreed to issue to BCPI a warrant to purchase up to 40,000 shares of Company
stock at 25% over the offering price of the anticipated public offering
exercisable for a period of two years following the offering.
F-15
<PAGE>
[GRAPHIC]
STORE LOCATIONS
NUMBER OF STORES BY STATE
<PAGE>
[LOGO]
HAT WORLD CORPORATION
<PAGE>
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The statutes of the State of Minnesota provide for indemnification of any
officer, director or affiliated person for acts or omissions if he acted in good
faith and in what he believed to be the best interests of the corporation. The
registrant has indemnification agreements with its officers and directors. The
registrant understands that the Securities and Exchange Commission feels that
this indemnification is against public policy as to liability arising out of the
Securities Act of 1933.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration Fees .............................. $ 3,125
NASD filing fee ................................ $ 1,690
Nasdaq National Market application fee ......... $ 5,000
Accounting Fees. ............................... $ 30,000
Legal Fees ..................................... $ 20,000
Printing Expenses .............................. $ 40,000
Blue Sky Fees .................................. $ 10,000
Transfer Agent and Registrar Fees .............. $ 10,000
Miscellaneous .................................. $ 40,000
TOTAL ......................................... $159,815
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following are all sales of unregistered securities for the past three
years.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES DATE AMOUNT PAID
- ------------------------------- ------------------ -------- --------------
<S> <C> <C> <C>
Bernadette A. Berger .......... 10,200 8/95 $ 14,000
George N. Berger .............. 495,440 6/95 $ 64,000
Ida Berger .................... 4,400 9/95 $ 5,000
Ramona A. Berger .............. 24,760 8/95 $ 33,260
Bluestem Capital I ............ 838,576 7/97 $1,000,000
Bluestem Capital II ........... 597,630 7/98 $3,150,000
J. Glenn Campbell ............. 440,000 6/95 $ 1,000
CR Ventures, Inc. ............. 220,000 6/95 $ 50,000
James I. Davis ................ 340 4/97 $ 510
Neil C. Davis ................. 340 4/97 $ 510
Gerard Hanson ................. 4,800 2/95 $ 5,550
James Harris .................. 4,000 10/97 $ 0
William Heupel ................ 4,400 9/95 $ 5,000
Thomas D. Houle ............... 1,760 8/95 $ 2,000
John M. Kavali ................ 4,000 3/97 $ 6,000
Becky Knudson ................. 4,000 12/96 $ 5,500
Les Knudson ................... 4,000 12/96 $ 5,500
Kenneth Kocher ................ 10,000 10/97 $ 15,000
Donna Molander ................ 2,640 12/95 $ 3,000
Scott A. Molander ............. 440,000 6/95 $ 1,000
Shane Molander ................ 800 12/96 $ 1,100
Harry Overholtzer ............. 400 8/95 $ (175)
Jack G. Rentschler ............ 7,200 10/96 $ 9,900
David W. Stewart .............. 22,000 8/95 $ 25,000
Grant Washnok ................. 1,760 9/95 $ 2,000
</TABLE>
II-1
<PAGE>
The registrant believes that all transactions were transactions not
involving any public offering within the meaning of Section 4(2) of the
Securities Act of 1933, since (a) each of the transactions involved the offering
of such securities to a substantially limited number of persons; (b) each person
took the securities as an investment for his own account and not with a view to
distribution; (c) each person had access to information equivalent to that which
would be included in a registration statement on the applicable form under the
Act; (d) each person had knowledge and experience in business and financial
matters to understand the merits and risk of the investment; therefore no
registration statement need be in effect prior to such issuances.
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------
<S> <C>
1.1 Underwriting Agreement
1.2 Representative's Warrant Agreement
10.8 1999 Stock Option Plan
10.9 401-k Plan
24.0 Consent of Accountant
</TABLE>
ITEM 28. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement to reflect in
the prospectus any facts or events arising after the effective date of
the registration statement (or the most recent post-effective amendment
thereof) which, individually, or in the aggregate, represents a
fundamental change in the information set forth in the registration
statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a
new registration statement relating to securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) 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 expressed in the Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid
by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of
II-2
<PAGE>
appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(4) To file, during any period in which offers or sales are being made, a
post effective amendment to this registration statement: (i) to include
any prospectus required by Section 10(a)(3) of the Securities Act of
1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement; (iii) to include any material information
with respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement; (iv) that for the purpose of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof;
and (v) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
II-3
<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 registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, on August 24, 1999.
HAT WORLD CORPORATION
By: /S/ JAMES HARRIS
--------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on August 24, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ----------------------------------- -----------------------------------
<S> <C> <C>
/S/ GEORGE N. BERGER Director, Secretary
- ---------------------------------
George N. Berger
/S/ KENNETH J. KOCHER Director, Chief Financial Officer
- ---------------------------------
Kenneth J. Kocher
/S/ J. GLENN CAMPBELL Director
- ---------------------------------
J. Glenn Campbell
/S/ JAMES HARRIS Director, Chief Executive Officer
- ---------------------------------
James Harris
/S/ SCOTT A. MOLANDER Director
- ---------------------------------
Scott A. Molander
/S/ STEVE KIRBY Director
- ---------------------------------
Steve Kirby
/S/ PAUL A. SCHOCK Director
- ---------------------------------
Paul A. Schock
/S/ JOHN ANDRETTI Director
- ---------------------------------
John Andretti
/S/ MARK E. GRIFFIN Director
- ---------------------------------
Mark E. Griffin
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
ITEM 27. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ---------- ------------------------------------------
<S> <C>
1.1 Underwriting Agreement
1.2 Representative's Warrant Agreement
10.8 1999 Stock Option Plan
10.9 401-k Plan
24.0 Consent of Accountant
</TABLE>
Exhibit 1.1
HAT WORLD CORPORATION
UNDERWRITING AGREEMENT
August ____, 1999
EBI Securities Corporation
6300 South Syracuse Way, Suite 645
Englewood, Colorado 80111
Gentlemen:
HAT WORLD CORPORATION, a Minnesota corporation, hereby confirms its
agreement with you, as Representative, and with the other members of the
Underwriting Group as set forth below. For purposes of this Agreement, all
references throughout this Agreement to the "Company" shall include Hat World
Corporation and its wholly owned subsidiary, Hat World, Inc., a Minnesota
corporation, as shall be appropriate in the context used.
SECTION 1
Description of Offering and Shares
The Underwriting Group proposes to purchase from the Company in an
initial public offering ("Public Offering") a total of 1,150,000 shares of the
Company's $.01 par value common stock ("Firm Shares"). The Representative,
either on its own behalf or on behalf of the members of the Underwriting Group,
will have an overallotment option ("Overallotment Option") to purchase up to an
additional 172,500 Shares ("Overallotment Shares") exercisable for a period of
sixty (60) days after the Effective Date (hereinafter defined) to cover
overallotments, which may occur during the Offering. The Firm Shares and the
Overallotment Shares as used throughout this Agreement shall be referred to
herein as the "Shares." The Company's $.01 par value common stock when not
referring specifically to the "Shares" shall be referred to herein as the
"Company's Common Stock." The Company agrees to sell to the Underwriting Group
all of the Firm Shares and the Company agrees to sell to the Representative all
or such portion of the Overallotment Shares under the Overallotment Option to
the extent exercised by the Representative from time to time during the sixty
(60) day period following the Effective Date. The Shares will initially be
offered and sold to the public at a price of $ ___________ for each Share. Such
price is referred to herein as the "Public Offering Price." The Company's
authorized and outstanding capitalization when the Public Offering of the Shares
is permitted to commence and at the Closing Date (hereinafter defined) and at
the Option Closing Date (hereinafter defined) will be as set forth in the
Registration Statement (hereinafter defined) and the Prospectus (hereinafter
defined) included therein.
On the Effective Date, the Shares will be listed for quotation on the
NASDAQ National Market System under the symbol "HATS." Such listing is subject
to the Company's ability to meet the NASDAQ National Market System maintenance
requirements on the Effective Date. In connection with the application for such
listing, the Company will furnish the Representative or legal counsel for the
Representative five (5) complete copies of the Registration Statement
(hereinafter defined) and all amendments thereto for filing with the National
Association of Securities Dealers, Inc. ("NASD").
SECTION 2
Representations and Warranties of the Company
In order to induce the members of the Underwriting Group to enter into
this Agreement, the Company hereby represents and warrants to and agrees with
the Representative and the members of the Underwriting Group as follows:
2.1 Registration Statement and Prospectus. A registration statement on
Form SB-2 (File No. 333-80761) ("Registration Statement") with respect to the
Shares, and the Representative's Warrants (hereinafter
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defined), including the related Prospectus, copies of which have heretofore been
delivered by the Company to the Representative, has been prepared by the Company
in conformity with the requirements of the Securities Act of 1933, as amended
("Act"), and the rules and regulations ("Rules and Regulations") of the
Commission thereunder, and said Registration Statement has been filed with the
Commission under the Act; one or more amendments to said Registration Statement,
copies of which have heretofore been delivered to the Representative, has or
have heretofore been filed with the Commission; and the Company may file with
the Commission on or prior to the Effective Date additional amendments to said
Registration Statement, including the final Prospectus. The Company shall use
its best efforts to cause the Registration Statement to be declared effective by
the Commission. As used in this Agreement, the term "Registration Statement"
refers to and means said Registration Statement and all amendments thereto,
including the Prospectus, all exhibits and all financial statements, as it
becomes effective; the term "Prospectus" refers to and means the Prospectus
included in the Registration Statement when it becomes effective which shall
include such changes and amendments as are required by Rule 430A under the Act
or permitted by Rule 424(b) under the Act, and as have been provided to and
approved by the Representative prior to the Effective Date; and the term
"Preliminary Prospectus" refers to and means any Prospectus included in said
Registration Statement before it becomes effective. The terms "Effective Date"
and "effective" refer to the date the Commission declares the Registration
Statement effective, pursuant to Section 8 of the Act. Prior to the later of (i)
the Closing Date or the Option Closing Date or (ii) the completion of the
distribution of the Shares, neither the Company nor its Subsidiary will have
distributed any written offering material in connection with the offering and
sale of the Shares other than the Registration Statement and any amendment
thereto or the Prospectus and any amendment or supplement thereto, or other
materials, if any, permitted by the Act.
2.2 Accuracy of Registration Statement and Prospectus. The Commission
has not issued any order preventing or suspending the use of any Preliminary
Prospectus with respect to the Shares and each Preliminary Prospectus has
conformed in all material respects with the requirements of the Act and the
applicable Rules and Regulations of the Commission thereunder and to the best of
the Company's knowledge has not included at the time of filing any untrue
statement of a material fact or omitted to state a material fact necessary to
make the statements therein not misleading. When the Registration Statement
becomes effective and on the Closing Date and on the Option Closing Date, (i)
the Registration Statement and Prospectus and any further amendments or
supplements thereto will contain all statements which are required to be stated
therein in accordance with the Act and the Rules and Regulations thereunder for
the purposes of the proposed Public Offering of the Shares, (ii) all statements
of material fact contained in the Registration Statement and Prospectus will be
true and correct, and (iii) neither the Registration Statement nor the
Prospectus will include any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, the Company does not make
any representations or warranties as to information contained in or omitted from
the Registration Statement or the Prospectus in reliance upon written
information furnished on behalf of the members of the Underwriting Group
specifically for use therein.
2.3 Financial Statements and Definition of Subsidiary. The consolidated
financial statements of the Company and the pro forma (i.e., as adjusted)
financial or other information together with related schedules and notes as set
forth in the Registration Statement and Prospectus present fairly the financial
position of the Company and Hat World, Inc., a Minnesota corporation which is
its wholly owned subsidiary, on a combined basis and the results of their
operations and cash flows and the changes in their financial position at the
respective dates and for the respective periods for which they apply. The term
"Subsidiary" or "Subsidiaries" as used throughout this Agreement refers to each
corporation, limited liability company, partnership or other entity in which the
Company currently owns, or directly or indirectly may hereafter acquire, a fifty
percent (50%) or greater interest ("Controlling Interest"). Unless otherwise
indicated, the term "Company" as used in this Agreement, where appropriate in
the context used, shall include the Company and its Subsidiary as of the date
being referenced in this Agreement. Such financial statements have been prepared
in accordance with generally accepted accounting principles consistently applied
throughout the periods concerned, except as otherwise stated therein, and fairly
present the financial condition of the Company and its Subsidiary as of the date
of, or period covered by, such financial statements. The pro forma information,
including related notes and schedules, has been prepared on a basis consistent
with the historical financial statements and other historical information, as
applicable, to the extent included in the Registration Statement and the
Prospectus, except for the pro forma adjustments specified therein and give
effect to the assumptions made on a reasonable basis to give effect to
historical and, if applicable, proposed transactions described in the
Registration Statement and the Prospectus. The selected financial data set forth
in the Prospectus under the captions "Summary Financial Data," "Capitalization,"
"Selected Financial Data" fairly present, in accordance with generally accepted
principles, on the basis stated in the Prospectus, the
2
<PAGE>
information included therein. No other financial statements or schedules are
required to be included in the Registration Statement.
2.4 Independent Public Accountants. Eide Bailly, LLP, the accountants
which have audited the financial statements of the Company or its Subsidiary
filed or to be filed with the Commission as part of the Registration Statement
and Prospectus which are designated as audited financial statements, are
independent certified public accountants with respect to the Company within the
meaning of the Act and the Rules and Regulations thereunder.
2.5 Authorization. The Company has full power and authority (both
corporate and otherwise) to enter into and execute this Agreement and to execute
and deliver the Representative's Warrants (as provided in Section 3.4 of this
Agreement) and to carry out the terms and provisions of this Agreement and the
Representative's Warrants required to be carried out by it under such
agreements.
2.6 No Contingent Liabilities and No Material Adverse Change. Except as
disclosed in the Registration Statement and Prospectus, neither the Company nor
its Subsidiary has any contingent liabilities, obligations or claims nor have
either of them received threats of claims or regulatory action. Except as may be
reflected in or contemplated by the Registration Statement or the Prospectus,
subsequent to the dates as of which information is given in the Registration
Statement and Prospectus and prior to the Closing Date and the Option Closing
Date, (i) there shall not have been any material adverse change in the
condition, financial or otherwise, of the Company or its Subsidiary or in their
respective businesses; (ii) there shall not have been any material adverse
transaction entered into by the Company or its Subsidiary; (iii) neither the
Company nor its Subsidiary shall have incurred any material obligations,
contingent or otherwise, which are not disclosed in the Prospectus; (iv) there
shall not have been any change in the outstanding securities or long term debt
(except current payments) of the Company or its Subsidiary; (v) neither the
Company nor its Subsidiary has or will have paid or declared any dividends or
other distributions on its Common Stock or other securities; and (vi) there
shall not have been any change in the officers or directors of the Company or
its Subsidiary except to the extent disclosed in the Registration Statement and
Prospectus.
2.7 No Defaults. Neither the Company nor its Subsidiary is in default
under any of the contracts, leases, subleases, licenses, sublicenses or any
other agreements, arrangements or understandings to which they are a party. The
Company is in compliance with all of the provisions of each and every lease
agreement entered into by the Company with various owners of the shopping
centers, malls or other properties in or upon which its retail stores and kiosks
are located. The Company has not located any stores within the area restricted
or prohibited by any lease agreement which would entitle the lessor of such
lease to include the gross or net sales of the store in violation of such
restriction with the gross sales of any existing store in computing percentage
rent with respect to any such agreement. No lease agreement for any store or
kiosk has terminated or is subject to termination by any lessor or its
designated agent or representative. As of the date of this Agreement, the
Company is not obligated to pay any percentage rent except as disclosed in the
Prospectus. Except as disclosed in the Prospectus, neither the Company nor its
Subsidiary is in default, which default has not been waived, in the performance
of any obligation, agreement or condition contained in any debenture, promissory
note or other evidence of indebtedness or any indenture or loan agreement. The
execution and delivery of this Agreement, the consummation of the transactions
herein contemplated and the compliance with the terms of this Agreement will not
conflict with or result in a breach of any of the terms, conditions or
provisions of, or constitute a default under, the charter, articles of
association, articles of incorporation, as amended, articles of organization,
operating agreement or bylaws as amended, of the Company or its Subsidiary as of
the date of such Prospectus, or any promissory note, indenture, mortgage, deed
of trust or other agreement or instrument to which the Company or its Subsidiary
is a party or by which it, its Subsidiary or any of their properties are bound,
or any existing law, order, rule, regulation, writ, injunction or decree of any
government, governmental instrumentality, agency or body, arbitration tribunal
or court, domestic or foreign, having jurisdiction over the Company, its
Subsidiary, or their properties. The consent, approval, authorization or order
of any court or governmental instrumentality, agency or body is not required for
the consummation of the transactions herein contemplated except such as may be
required under the Act or under the blue sky or securities laws of any state or
jurisdiction.
2.8 Incorporation and Standing. The Company and its Subsidiary are and
at the Closing Date and at the Option Closing Date have been duly incorporated
and are validly existing as corporations, in good standing
3
<PAGE>
under the state law of the Company's or such Subsidiary's state of
incorporation. The Company has the authorized and outstanding capital stock as
set forth in the Registration Statement and the Prospectus. The Company and its
Subsidiary have full power and authority (corporate and other) to own their
properties and conduct their business, present and proposed, as described in the
Registration Statement and Prospectus; the Company has full power and authority
to enter into this Agreement; and the Company and each of its Subsidiaries are
duly qualified and in good standing as foreign corporations in each jurisdiction
in which they own or lease real property or transact business requiring such
qualification, except where the failure to so qualify would not be materially
adverse to the Company's or such Subsidiary's business.
2.9 Legality of Outstanding Shares. The outstanding shares of Common
Stock of the Company have been duly and validly authorized and issued, are fully
paid and nonassessable and conform to all statements with regard thereto
contained in the Registration Statement and Prospectus. No sales of securities
have been made by the Company in violation of the registration provisions of the
Act or in violation of any other federal or state laws. Except as disclosed in
the Registration Statement and Prospectus, no existing shareholder of the
Company's Common Stock is or as of the Closing Date or the Option Closing Date
will be entitled to any preemptive or other rights to subscribe for any of the
Shares and no shareholder of the Company has any right which has not been fully
exercised or waived to require the Company to register the offer or sale of such
Common Stock or any other securities owned by such shareholders under the Act in
the Public Offering contemplated under this Agreement.
2.10 Legality of Shares. The Shares and the Representative's Warrants to
purchase shares of the Company's Common Stock (described in Section 3.4 of this
Agreement) have been duly and validly authorized and, when issued and delivered
against payment as provided in this Agreement and the Representative's Warrants,
will be validly issued, fully paid and nonassessable. The Shares and the
Representative's Warrants, upon issuance, will not be subject to the preemptive
rights of any of the shareholders of the Company. The Shares and the
Representative's Warrants, when sold and delivered, will constitute valid and
binding obligations of the Company enforceable in accordance with their terms. A
sufficient number of shares of Common Stock have been reserved for issuance upon
exercise of the stock options and warrants, if any, in existence and outstanding
as of the Effective Date of the Registration Statement and upon exercise of the
Representative's Warrants. The holders of the Common Stock issuable pursuant to
the Representative's Warrants will not be subject to personal liability solely
by reason of being such holders. The Shares and the Representative's Warrants
will conform to all statements in the Registration Statement and Prospectus made
with respect thereto. Upon delivery of and payment for the Shares and the
Representative's Warrants to be sold by the Company, as set forth in this
Agreement, the persons paying therefor will receive good and marketable title
thereto, free and clear of all liens, encumbrances, charges and claims. The
Company will have on the Effective Date of the Registration Statement and at the
time of delivery of the Shares and the Representative's Warrants full legal
right and power and all authorizations and approvals required by law to sell and
deliver the Shares and Representative's Warrants in the manner provided
hereunder.
2.11 Noncontravention. Neither (i) the issuance, offering and sale of
the Shares to the Underwriters by the Company pursuant to this Agreement and of
the Representative's Warrants to the Representative by the Company pursuant to
the terms thereof, nor (ii) the execution and delivery of this Agreement and the
Representative's Warrants by the Company'; nor the compliance by the Company
with the provisions of this Agreement and the Representative's Warrants by the
Company; nor the consummation of all transactions contemplated by this Agreement
and the Representative's Warrants will (a) require the consent, approval,
authorization, registration or qualification of or with any court, government or
governmental authority, domestic or foreign, except as have been obtained by the
Company or to the extent the Registration Statement is not effective as of the
date this Agreement is executed as are required under the Act, or as are
required under state securities laws or by the NASD, or (b) conflict with or
result in a breach of violation of any terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, lease or other agreement
to which the Company or its Subsidiary is a party or by which the Company or its
Subsidiary is bound, or the Articles of Incorporation or Bylaws of the Company
or its Subsidiary, or any statute or judgment, decree, order, rule or regulation
of any court or other governmental authority or any arbitrator applicable to the
Company or its Subsidiary which would be materially adverse to the business of
the Company or its Subsidiary.
2.12 Outstanding Shares and Long Term Debt on Effective Date.
Immediately prior to the Effective Date, the only shares of capital stock,
warrants, options, or other convertible securities which have been issued by the
Company and its Subsidiary and which will be outstanding on the Effective Date
will be as described in the
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<PAGE>
Prospectus, and neither the Company nor its Subsidiary will be obligated on any
long term debt, whether or not recorded on the books, records, or accounts of
the Company and its Subsidiary and will not be obligated to issue any capital
stock, warrants, options, or other convertible securities, except as described
in the Prospectus. Unless the Representative has approved in writing a different
maximum number of fully diluted shares, immediately prior to the Effective Date
of the Registration Statement, the number of shares of Common Stock of the
Company outstanding on a fully diluted basis will not exceed the 3,143,446
Shares currently issued and outstanding plus stock options granted to store
managers, junior executives and officers of the Company in the total amount of
433,500 Shares, of which options to purchase up to 131,625 Shares have vested
and excluding the number of shares underlying the warrants granted to Bluestem
Capital Partners I, LLC not to exceed 40,000 Shares as well as any Shares
underlying the options which will be granted after the Effective Date under the
Company's 1995 Stock Option Plan ("Plan") in the amount and to the employees
disclosed in the Prospectus. For purposes of this Underwriting Agreement, the
term "fully diluted basis" shall mean the number of shares of Common Stock
actually issued and outstanding plus the number of shares of Common Stock
underlying all issued and outstanding convertible or excisable securities.
2.13 CUSIP Number. The Company has obtained a CUSIP number for its
Common Stock.
2.14 Options and Treasury Shares. There are no outstanding options,
warrants or other rights to purchase securities of the Company and other similar
derivatives ("cheap stock"), however characterized, except as described in the
Registration Statement. Except as described in the Registration Statement, there
are no securities of the Company, however characterized, held in its treasury.
Except as described in the Registration Statement, the Company has not offered
or agreed to purchase or issue any shares of Common Stock or any convertible
securities or other cheap stock in the future. To the extent any such cheap
stock is issued, the Company shall adjust the valuation of the Company and its
Subsidiary in accordance with all applicable accounting rules (including but not
limited to F.A.S.B. 123) so as to eliminate any material impact on corporate
earnings arising from cheap stock.
2.15 Subsidiary. The Company's only Subsidiary is Hat World, Inc., in
which the Company owns one hundred percent (100%) of the issued and outstanding
capital stock, consisting of the $_____ par value common stock of Hat World,
Inc. The Company is not currently carrying on, and will not as of the Closing
Date or the Option Closing Date carry on, any discussions or negotiations with
any third party or parties except as expressly identified and set forth in the
Prospectus regarding any proposed merger, stock or asset acquisition of any
other entity and does not currently intend to acquire any additional Subsidiary
or engage in mergers with or the acquisition of a Controlling Interest in or
substantially all of the assets of any entity, except as shall otherwise
indicated in the Registration Statement. To the extent that the Company acquires
a Controlling Interest in one or more Subsidiaries in addition to its Subsidiary
mentioned above in this Section 2.15 on or prior to the Closing Date or Option
Closing Date, all references in this Agreement to the "Company and its
Subsidiary" shall include all of such additional "Subsidiaries" as shall be
appropriate in the context used and the acquisition of each such additional
Subsidiary, the terms and provisions of each agreement or arrangement relating
to such acquisition and the pro forma financial information concerning each such
Subsidiary by the Company as required by the Act and the Rules and Regulations
thereunder shall be prepared in accordance with generally accepted accounting
principles and shall be fully disclosed in the Registration Statement and the
Prospectus as of the Effective Date.
2.16 Joint Ventures. Except as described in the Prospectus, the Company
has not entered into any joint venture, partnership, limited liability company,
strategic alliance or similar arrangement in which the Company has a
participating interest in the profits, losses, assets and liabilities as a joint
venturer, partner, member or shareholder of any such entity or under any such
arrangement.
2.17 Prior Sales. No securities of the Company, or of a predecessor of
the Company, have been sold except as described in the Registration Statement or
as disclosed in writing to the Representative.
2.18 Litigation. Except as set forth in the Registration Statement or
except for nonmaterial actions, suits, or proceedings disclosed in writing to
the Representative, there is, and at the Closing Date and at the Option Closing
Date there will be, no action, suit or proceeding before any court or
governmental agency, authority or body pending or to the knowledge of the
Company threatened against the Company, its Subsidiary or any joint venture,
limited liability company, partnership or similar entity or arrangement in which
the Company has an interest or with respect to any of their respective
properties.
5
<PAGE>
2.19 Finder. Except as set forth in the Registration Statement or as the
Company has advised the Representative, neither the Company nor its Subsidiary
has any agreement with any finder, financial consultant or advisor, has not paid
any finder's fee, financial consulting or advisory fees or other compensation
and knows of no outstanding claims against it for compensation for services in
the nature of a finder's fee, origination fee, financial consulting or advisory
fee, commission or any other form of compensation which would accrue to, be
earned by or be required to be paid to any person or to which any person would
be entitled, directly or indirectly, with respect to the offer and sale of the
Shares hereunder and any other transaction contemplated under this Agreement.
2.20 Exhibits and Contracts. There are no contracts or other documents
which are required to be filed as exhibits to the Registration Statement by the
Act or by the Rules and Regulations thereunder, which have not been so filed and
each contract to which the Company or its Subsidiary is a party and to which
reference is made in the Prospectus has been duly and validly executed, is in
full force and effect in all material respects in accordance with its terms, and
none of such contracts has been assigned and the Company knows of no present
situation or condition or fact which would prevent compliance with the terms of
such contracts. Except for amendments or modifications of such contracts in the
ordinary course of business, the Company has not been advised that any party to
any such contract intends to exercise any right which it may have to cancel any
of its obligations under any of such contracts and has no knowledge that any
other party to any such contracts has any intention not to render full
performance under such contracts.
2.21 Tax Returns. The Company and its Subsidiary have filed all foreign,
federal, state and local tax returns which are required to be filed by them and
have paid all taxes shown on such returns and on all assessments, including
interest and penalties, incurred by them to the extent such taxes have become
due and payable, except for any such assessment, fine, or penalty that is
currently being contested in good faith by the Company or its Subsidiary as
disclosed in the Prospectus. All such tax returns so filed were correct and
complete in all material respects. All foreign, federal, state and local taxes
with respect to which the Company and its Subsidiary are obligated have been
paid or adequate accruals have been set up to cover any such unpaid taxes,
including any interest and penalties accrued with respect to any such unpaid
taxes. Except as set forth in the Registration Statement, there is no material
dispute or claim concerning the liability of the Company or its Subsidiary for
any tax.
2.22 No Preemptive Rights and Anti-Dilution Provisions. Except as set
forth in the Prospectus, the Company's securities, however characterized, are
not subject to preemptive rights or to any contractual provision which will
protect existing shareholders of the Company from having their percentage
ownership interest in the Company from being diluted upon the issuance of
additional Shares by the Company.
2.23 Use of Form SB-2. The Company is eligible to use Form SB-2 for the
offering of the Shares and the Representative's Warrants.
2.24 No Other Securities Being Offered; No Other Stock Ownership. Except
as described in the Registration Statement, the Company is not currently
offering any securities of which it is the issuer. Neither the Company nor its
Subsidiary owns any shares of stock or other securities, whether equity or debt,
in any other corporation, partnership, limited liability company or other
entity.
2.25 No Market Stabilization or Manipulation. Except for the sale of the
Shares as contemplated under this Agreement, neither the Company nor its
Subsidiary has, directly or indirectly, taken any action which would cause,
result in or constitute or could reasonably constitute or be designed to cause,
result in or constitute the stabilization or manipulation of the price of any
security of the Company in order to facilitate the sale or resale of the Shares.
Except for the transactions contemplated by this Agreement, neither the Company
nor its Subsidiary or any other person affiliated with the Company since the
filing of the Registration Statement has (i) directly or indirectly sold, bid
for, purchased, or attempted to induce any person to bid for or purchase any of
the Shares or (ii) paid or agreed to pay to any person any compensation for
soliciting another to purchase any other securities of the Company.
2.26 Certificates, Permits, Licenses, Approvals, Patents and Trademarks.
The Company and its Subsidiary possess adequate certificates, permits, licenses,
sublicenses, authorizations, consents or approvals, issued
6
<PAGE>
by the appropriate foreign, federal, state and local regulatory authorities
necessary to conduct their respective businesses and to retain possession of
their assets and properties. Except as set forth in the Prospectus, neither the
Company nor its Subsidiary has received any notice of any proceeding relating to
the revocation or modification of any of these certificates, permits, licenses,
sublicenses, authorizations, consents or approvals. The Company and its
Subsidiary, as is appropriate, has sufficient trademark, patent, patent right,
service mark, logo, trade dress, mask work, copyright and trade secret
protection necessary to the conduct of its business as now being conducted or
otherwise has sufficient licenses or sublicenses granting the Company and such
Subsidiary the exclusive use of the trademarks, patents, patent rights, service
mark, logo, trade dress, mask work, or copyrights to enable the Company or such
Subsidiary to carry on and conduct its business activities and operations as
currently conducted or as contemplated in the Prospectus; and except as
described in the Prospectus, the Company has no knowledge of any use by it or
its Subsidiary of the trade secrets of others, of any interference,
misappropriation, infringement or violation by it or its Subsidiary of any
trademark, patent, patent right, service mark, logo, trade dress, mask work, or
copyright of others, or of any claim being made against the Company or any of
its Subsidiary regarding trademark, patent, service mark, logo, trade dress,
mask work, or copyright infringement or use or misappropriation of trade secrets
of others. Neither the Company nor its Subsidiary has received any charge,
complaint, claim, demand or notice alleging any interference, infringement,
misappropriation or violation of any trademark, patent, patent right, service
mark, logo, trade dress, mask work, copyright or use of trade secrets of others.
2.27 Title to Properties. The Company and its Subsidiary have marketable
title to all real and personal properties, leasehold interests, leasehold
improvements, facilities, equipment, and machinery used in the retail sale,
marketing and promotion of its sports related headwear, jerseys and related
products currently being sold to the consuming public, as well as to all
furniture, trade fixtures and other fixtures, vehicles and any other property
whether real, personal, tangible or intangible, including without limitation,
patents, patent applications, patent rights, trademarks, trademark applications,
service marks, service mark applications, logos, trade dress, mask works,
copyrights, equipment, know-how, technology, and trade secrets, described in the
Registration Statement as owned by it. All such properties are free and clear of
all liens, charges, encumbrances, restrictions, equities claims and other
defects, however characterized, except as described in the Registration
Statement. The Company and its Subsidiary own or lease all such properties as
are necessary to the operations of their respective businesses as presently
being conducted and as described in the Registration Statement and the
Prospectus as of the Effective Date. All of the contracts, leases, subleases,
patents, patent applications, patent rights, if any, trademarks, trademark
applications, service marks, service mark applications, logos, trade dress, mask
works, copyrights, licenses and agreements, however characterized, under which
the Company and its Subsidiary hold their properties, as described in the
Registration Statement, are in full force and effect.
2.28 Inventory. As of the Effective Date, substantially all of the
inventory of sports and related headwear products, jerseys and other products
sold at retail by the Company and its Subsidiary is no more than 180 days old
and no more than one percent (1%) of the inventory of the Company and its
Subsidiary is obsolete and either unable to be sold in the ordinary course of
business of the Company and its Subsidiary or only saleable at a discounted
price below the Company's or such Subsidiary's actual cost. The combined average
profit margin of the retail sales of the Company and its Subsidiary in
accordance with generally accepted accounting principles consistently applied
and fairly reflecting the inventory of the Company and its Subsidiary for the
fiscal year ended December 31, 1998 and the six (6) month period ended June 30,
1999 was consistently fifty-five percent (55%) or more. The inventory management
systems utilized by the Company as described in the Prospectus are being
employed to monitor the inventory of headwear products and related items for
each of the Company's Subsidiary as of the date of this Prospectus. Such
inventory controls enable the Company and its Subsidiary to know within a margin
of error of no more than ____%, the restocking requirements and stock-out points
to maintain optimal inventory levels of products and to identify products which
are subject to increased or decreased levels of popularity based on sales within
the time periods set forth in the Prospectus as well as track and account for
product shrinkage as described in the Prospectus within a margin of error of no
more than one percent (1%) of the Company's gross sales in any twelve (12) month
period.
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2.29 Books, Records and Information Systems. The books and records of
the Company and its Subsidiary accurately and fairly reflect the acquisitions
of, transactions in, and dispositions of the assets of the Company and its
Subsidiary, respectively. The Company and its Subsidiary maintain a system of
internal accounting controls sufficient to provide reliable and accurate
information to the extent described in the Prospectus with respect to the daily,
monthly and annual inventory and sales of the headwear products and other
products sold through each of the retail stores and kiosks operated by the
Company and its Subsidiary and to enable the Company and its Subsidiary to
ascertain at any time with reasonable accuracy that (i) all transactions by each
such retail store and kiosk operated by the Company and its Subsidiary have been
effected in accordance with the policies and general or specific authorizations
of management; (ii) the point of sale, inventory and stock-out points
information with respect to each retail store and kiosk can be and in fact is
available to the Company and its Subsidiary on a daily basis to allow the
Company and its Subsidiary to maintain accurate and precise inventory controls
and order products in a manner to minimize inventory obsolescence; (iii)
transactions are recorded as necessary to permit preparation of financial
statements in accordance generally accepted accounting principles and maintain
asset accountability in addition to inventory control management; (iv) access to
assets is permitted only in accordance with management's general or specific
authorization; and (v) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
2.30 No Directed Sales. The Company has not made any representation,
whether oral or in writing, to any person, whether an existing shareholder or
not, that any of the Shares will be reserved or directed to such person during
the proposed Public Offering of the Company's securities.
2.31 Restricted Shares. The Company has caused each of its current
shareholders who holds "restricted securities" as such term is defined in Rule
144 under the Act to acknowledge that they hold "restricted securities" as
defined in Rule 144.
2.32 Negotiations. During the period from the Effective Date to the
Closing Date or the Option Closing Date, the Company will notify the
Representative in writing from time to time of the status of any negotiations
involving the Company and its Subsidiary relating to any transaction which
would, if consummated, have a material effect upon the Company and its
Subsidiary on a consolidated basis. Also, the Company will consult with its
legal counsel concerning the need to disclose any such negotiations.
2.33 Authority. The execution and delivery by the Company of this
Agreement has been duly authorized by all necessary corporate action. This
Agreement is the valid, binding and legally enforceable obligation of the
Company.
2.34 Registration Under 1934 Act and NASDAQ Listing. The Company will
register the Common Stock in accordance with Section 12 of the Securities
Exchange Act of 1934 (the "1934 Act") as of the Effective Date. The Company
shall obtain a listing of the Shares for trading on the NASDAQ National Market
System on the Effective Date in accordance with a confirmation providing for
such trading received or to be received from all NASDAQ Stock Market, Inc.
2.35 1940 Act. The Company has been advised of the Investment Company
Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" within the meaning of the 1940 Act and such rules and regulations.
2.36 Campaign Contributions and Corrupt Practices Act. The Company has
not at any time since the date of its incorporation made any unlawful
contribution to any candidate for U.S. domestic or foreign office, or failed to
disclose fully any contribution in violation of law, or made any payment to any
federal, state or foreign government, governmental officer or official, employee
or agent, or other person charged with similar public or quasipublic duties,
other than payments required or permitted by the laws of the United States or
any foreign nation or country or any jurisdiction thereof. Further, neither the
Company, its Subsidiary nor their respective officers, directors, employees,
shareholders, agents, representatives, or any other person acting for or on
behalf of the Company or its Subsidiary disbursed or received funds from the
Company or its Subsidiary, entered into any transaction intended to transfer,
directly or indirectly, assets or made improper entries or inaccurate recordings
of
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payments or receipts on the Company's or such Subsidiary's books to cover up any
transaction in violation of the Foreign Corrupt Practices Act or any other laws
of the United States, or any foreign country or nation or jurisdiction thereof.
2.37 Corporate Alliances. The description of any corporate alliances
with third parties and of the suppliers of the Company and its Subsidiary as
described in the Registration Statement and Prospectus are true and complete in
all material respects. All such corporate alliances and supplier relationships
are in effect and neither the Company nor its Subsidiary has received any notice
seeking to terminate or modify such corporate alliances or supplier
relationships.
2.38 Environmental. Except as specifically described in the Prospectus,
the Company and its Subsidiary is in compliance with all foreign, federal,
state, and local laws, statutes, treaties, ordinances, rules, regulations, and
policies relating to the use, treatment, storage, transportation, discharge,
emission, or disposal of, or exposure of others to, toxic substances and
protection of health, safety or the environment ("Environmental Laws") which are
applicable to their respective businesses; there is no pending or asserted
claim, liability, or investigation by any third party or governmental authority
against the Company or its Subsidiary; under Environmental Laws; no substances
which are prohibited or regulated by any Environmental Law or designated to be
radioactive, toxic, hazardous or otherwise a danger to health or the environment
by any foreign, federal, state or local governmental agency ("Hazardous
Material") are present or likely to become present on any property which is
owned, leased, or occupied by the Company or its Subsidiary and no such property
has been designated as a SuperFund site, pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended, or otherwise designated as
a contaminated site under applicable foreign, federal, state or local law; and
the Company and its Subsidiary has received all permits, licenses,
authorizations, consents, waivers or approvals required of them under
Environmental Laws to conduct their respective businesses as presently conducted
by them and are in compliance with all terms and conditions of such permits,
licenses, authorizations, consents, waivers or approvals.
2.39 Year 2000 Considerations. Except as set forth in the Prospectus and
to the Company's best knowledge after reasonable investigation, the Company and
its Subsidiary have taken all action and precautions necessary and appropriate
to assure that the computers and related hardware, firmware and software and all
accessories and support systems (collectively "Systems") owned, leased, operated
and used in connection with any and every aspect of the Company's and such
Subsidiary's business operations have been retrofitted, tested, updated, refined
and all necessary adjustments made to cause the Systems to be adequately
prepared and compliant with the change over of their systems to the year 2000
("year 2000 compliant"), such that as of January 1, 2000 and thereafter, all
such Systems shall recognize, record, conform, and register such date as to
every task, procedure, protocol, function, technique, task, design, methodology
or process and such Systems will as of and after such date continue to function
on a continuous and uninterrupted basis without material error to the same
extent such Systems functioned prior to such date. Neither the Company, nor its
Subsidiary will incur any additional costs in order for its Systems to be year
2000 compliant and be able to (i) completely and accurately function on or after
January 1, 2000 as represented in this Section 2.39 without producing abnormally
ending or incorrect results involving such dates as used in any forward or
regression dated based functions and (ii) provide that date related
functionalities and data fields include the indication of century and millennium
and will perform calculations that involve a four-digit year.
2.40 Condition of Assets. The equipment and other tangible assets of the
Company and its Subsidiary are to the best of the Company's knowledge, free of
any defects, have been maintained in accordance with sound and acceptable
industry practice, and are in good operating condition and repair, subject to
normal wear and tear.
2.41 Undisclosed Liabilities and No Related Party Debt. Except as
disclosed in the Registration Statement, neither the Company nor its Subsidiary
have any material liability (whether known or unknown, whether asserted or
unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due, including,
without limiting the generality thereof, any liability for taxes). Except as set
forth in the Registration Statement and the Prospectus, neither the Company nor
its Subsidiary has made any loans, advances or guarantees of indebtedness to or
for the benefit of any of its affiliates (as defined in Rule 405 of the Act) or
any members of the families of any such affiliates.
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2.42 Headwear Products. The headwear products sold by the are suitable
and fit for the purpose for which they are advertised, displayed and sold and,
to the best of the knowledge of the Company and its Subsidiary, conform with all
express and implied warranties relating to such products. Neither the Company
nor its Subsidiary has any material liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether accrued or
unaccrued, whether liquidated or unliquidated, and whether due or to become due)
for replacement or repair thereof or other damages in connection therewith which
would materially, adversely affect the financial condition and business
operations of the Company and its Subsidiary.
2.43 Product Liability. Neither the Company nor its Subsidiary has any
material liability (whether known or unknown, whether asserted or unasserted,
whether absolute or contingent, whether accrued or unaccrued, whether liquidated
or unliquidated, and whether due or to become due) arising out of any injury to
individuals or property as a result of the ownership, possession, or use of any
product sold, by the Company or its Subsidiary.
2.44 Insurance. The Company and its Subsidiary have in effect, and as of
the Closing Date and the Option Closing Date will have in effect, adequate
insurance policies, including policies providing property, casualty, liability
(whether providing for general, product liability, fire and extended coverage or
other liability coverage) and workers' compensation coverage and bond and surety
arrangements and other losses and risks as are prudent and customary in the
industry in which the Company and its Subsidiary are engaged, to provide
adequate coverage and protection against the risks covered thereunder. The
insurance carriers with respect to such policies are recognized as financially
responsible and reputable insurance companies. Each such insurance policy is (i)
legal, valid, binding, enforceable and in full force and effect in all material
respects; (ii) neither the Company nor its Subsidiary is in material breach or
default (including with respect to paying of premiums or the giving of notices)
and no event has occurred which, with notice or lapse of time, would constitute
such a material breach or default, or permit termination, modification, or
acceleration, under the policy; and (iii) no party to the policy has repudiated
any material provision thereof.
2.45 Employees. To the best knowledge of the Company, no executive, key
employee, or significant group of employees employed by the Company or its
Subsidiary has given notice to the Company or its Subsidiary or intends, to
terminate his or her employment with the Company or its Subsidiary, within the
next twelve (12) months and such employees intent to remain in such capacities
with respect to the Company or its Subsidiary for a reasonable period of time
but in no event less than the next twelve (12) months following the Effective
Date of the Registration Statement. Except as described in the Registration
Statement, neither the Company nor its Subsidiary is a party to or bound by any
collective bargaining agreement, nor has the Company or its Subsidiary
experienced any labor dispute, strike or material grievance, claim of unfair
labor practice or other collective bargaining dispute within the past three (3)
years. Neither the Company nor its Subsidiary has committed any material unfair
labor practice. Except as described in or contemplated by the Prospectus,
neither the Company nor its Subsidiary, to the best of their knowledge, is aware
of any organizational effort, labor disputes presently being made or threatened
by or on behalf of any labor union with respect to the employees of the Company.
2.46 Certain Business Relationships. Except as disclosed in the
Registration Statement, no principal shareholder of the Company nor any of their
affiliates have been involved in any material business arrangement or
relationship with the Company within the past twenty-four (24) months, and no
such shareholder or affiliate owns any material asset, tangible or intangible,
which is used in the business of the Company.
2.47 No Adverse Events. Except as disclosed in the Registration
Statement, neither the Company nor its Subsidiary knows of any facts,
circumstances, developments or events which may adversely affect the
consolidated earnings of the Company and its Subsidiary the business or the
prospects of the Company and its Subsidiary, including without limitation any
loss or interference with their respective businesses or properties resulting
from fire, flood, hurricane, tornado, accident or other calamity or legal or
governmental proceeding.
All of the above representations and warranties set forth in Sections
2.1 through 2.47 hereof shall survive the performance or termination of this
Agreement.
SECTION 3
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Purchase and Sale of the Shares
3.1 Purchase of Shares. The Company hereby agrees to sell to the members
of the Underwriting Group named in Schedule I hereto (for all of whom the
Representative is acting), severally and not jointly, and each member of the
Underwriting Group, upon the basis of the representations and warranties herein
contained, but subject to the conditions hereinafter stated, agrees to purchase
from the Company, severally and not jointly, the number of Shares set forth
opposite the name of each member of the Underwriting Group as set forth in
Schedule I hereto at a purchase price of $_________ for each Share which such
member has so agreed to purchase. One or more certificates in definitive form
for the Firm Shares representing the Firm Shares that the several members of the
Underwriting Group have agreed to purchase from the Company under this Agreement
as set forth in Schedule I shall be delivered against payment on the Closing
Date as provided in Section 3.2.1 of this Agreement in such denominations and
registered as provided in Section 3.2.1 below. The Company hereby grants to the
Representative an option for a period of sixty (60) days after the Effective
Date ("Overallotment Exercise Period") to purchase up to 172,500 Overallotment
Shares in order to cover overallotments. If the sixtieth (60th) day shall fall
on a Saturday, Sunday or holiday, then the Overallotment Option may be exercised
by the Representative on the next business day thereafter when the NASDAQ
National Market System or applicable exchange is open. The purchase price of
each Overallotment Share shall be $________. The Overallotment Option granted
hereunder shall be exercisable by the Representative, in whole or in part, from
time to time during the Overallotment Exercise Period. The Representative shall
exercise the Overallotment Option by giving notice in writing (confirmed within
24 hours in writing) to the Company setting forth the aggregate number of
Overallotment Shares as to which the Representative is exercising such option
and the date and time for delivery of and payment for such Overallotment Shares.
Any Overallotment Shares purchased upon exercise of the Overallotment Option
shall be purchased for the account of the Representative. Delivery of the
Overallotment Shares shall be determined by the Representative but shall not be
less than two (2) business days nor more than five (5) business days after the
exercise of the Overallotment Option and in any event shall not be earlier than
the Closing Date. The date so selected by the Representative shall be the
"Option Closing Date." Payment by the Representative for, and delivery by the
Company, of the Overallotment Shares to shall be made in the manner provided in
Section 3.2.1.
3.1.1 Default by Member of Underwriting Group. If for any reason
one or more of the Underwriters shall fail or refuse (otherwise than for
a reason sufficient to justify the termination of this Agreement under
the provisions of Section 9 hereof) to purchase and pay for the number
of Shares agreed to be purchased by such Underwriter, the Company shall
immediately give notice thereof to the Representative, and the
nondefaulting Underwriters shall have the right within twenty-four (24)
hours after the receipt by the Representative of such notice, to
purchase or request one or more other Underwriters to purchase, in such
proportions as may be agreed upon among the Representative and such
purchasing Underwriter or Underwriters and upon the terms herein set
forth, the Shares which such defaulting Underwriter or Underwriters
agreed to purchase. If the nondefaulting Underwriters fail so to make
such arrangements with respect to all such Shares, the number of Shares
which each nondefaulting Underwriter is otherwise obligated to purchase
under this Agreement shall be automatically increased pro rata to absorb
the remaining Shares which the defaulting Underwriter or Underwriters
agreed to purchase; provided, however, that the nondefaulting
Underwriters shall not be obligated to purchase any of the Shares if the
aggregate Public Offering Price of the Shares which the defaulting
Underwriter or Underwriters agreed to purchase exceeds nine percent (9%)
of the Public Offering Price of the total Shares which all Underwriters
agreed to purchase hereunder. If the total number of Shares which the
defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with this Section 3.1.1, then the
Company shall have the right, within twenty-four (24) hours next
succeeding the twenty-four (24) hour period above referred to, to make
arrangements with other underwriters or purchasers satisfactory to the
Representative for the purchase of all of the Shares which the
defaulting Underwriter or Underwriters agreed to purchase hereunder on
the terms herein set forth. In any such case, either the Representative
or the Company shall have the right to postpone the Closing Date
determined as provided in Section 3.2.2. hereof for not more than seven
(7) business days after the date originally fixed as the Closing Date
pursuant to said Section 3.2.2. in order that any necessary changes in
the Registration Statement, the Prospectus or any other documents or
arrangements may be made. If neither the nondefaulting Underwriters nor
the Company shall make arrangements within the twenty-four (24) hour
periods stated above for the purchase of all the Shares which the
defaulting Underwriter or Underwriters agreed to purchase hereunder,
this Agreement shall be terminated without further act or deed and
without any liability on the part of the Company to any nondefaulting
Underwriter and
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without any liability on the part of any nondefaulting Underwriter to
the Company.
3.1.2 Liability of Defaulting Members of the Underwriting Group.
Nothing contained in this Section 3.1 shall relieve any defaulting
member of the Underwriting Group of its liability, if any, to the
Company or to the remaining members of the Underwriting Group for
damages occasioned by its default hereunder.
3.2 Public Offering Price. After the Commission notifies the Company
that the Registration Statement has become effective and after this Agreement
becomes effective, the members of the Underwriting Group propose to offer
initially the Shares to the public at the Public Offering Price. The members of
the Underwriting Group may allow such concessions and discounts upon sales to
selected dealers as may be determined from time to time by the Representative.
3.2.1 Payment for Shares. Payment for the Shares shall be made
to the Company by regular check or checks at the offices of the
Representative set forth above in Englewood, Colorado, or through the
facilities of the Depository Trust Company, upon delivery to the
Representative of certificates for the Shares in definitive form in such
numbers and registered in such names as the Representative requests in
writing at least two (2) full business days prior to such delivery. The
Company agrees not to seek to obtain (i) certification of the
Representative's closing check or checks from the Representative's bank
or banks or (ii) a cashier's check or checks from the Representative's
bank or banks in substitution for the Representative's closing check or
checks. The Company agrees to deposit the Representative's closing check
or checks into the Company's bank account and to allow such check or
checks to clear through the banking system on a "regular way" basis.
Nothing contained in this Section 3.2.1 shall be construed to relieve
the Representative from its obligations created as a result of the
issuance of the Representative's regular check or checks at the Closing.
In lieu of a check or checks, payment against receipt of the certificate
for the Shares may be made, at the Representative's option, by wire
transfer in same day funds to the Company's account. Such payment,
whether by check or wire transfer of funds, shall not constitute closing
of the purchase and sale of Shares, which shall only occur upon the
execution and delivery of a receipt (facsimile or otherwise) for the
Shares or Overallotment Shares, as the case may be, by the Underwriters,
thereby indicating completion of such closing; and until the
Underwriters execute and deliver a receipt for the Shares, the Company
shall not be entitled to such check or wired funds and will return any
such check or wired funds, upon demand, by wire transfer of same-day
funds or return of check in the absence of execution and delivery of any
such receipt. If such closing is not completed and such funds are not
returned, the Company shall pay the Underwriters' interest at the Prime
Rate with respect to each day the funds are not returned.
3.2.2 Closing. The time and date of delivery and payment
hereunder for the Shares is herein called the "Closing Date" and shall
take place at the office of the Representative at the address set forth
above in Englewood, Colorado, at 8:00 A.M. on the third (3rd) business
day following the Effective Date of this Agreement; provided, however,
the Company and the Representative may agree, on the date that this
Agreement becomes legally effective, to an alternative Closing Date and
such alternative Closing Date shall become the "Closing Date" under this
Agreement. Should the Representative elect to exercise any part of the
Overallotment Option pursuant to Section 3.1 hereof, the time, date of
delivery and payment for the Overallotment Shares being purchased shall
be as mutually agreed between the Company and the Representative, but
not later than the sixtieth (60th) calendar day after the Effective
Date. Said date is hereinafter referred to as the "Option Closing Date."
3.2.3 Inspection of Certificates. For the purpose of expediting
the checking and packaging of the certificates for the Shares, the
Company agrees to make the certificates available for inspection by the
Representative at the place designated by the Representative at least
one full business day prior to the proposed delivery date.
3.3 Representative's Nonaccountable Expense Allowance. It is understood
that the Company shall pay the Representative a nonaccountable expense allowance
in the amount of two and one half percent (2 1/2%) of the aggregate Public
Offering Price of the Shares and Overallotment Shares sold in the Public
Offering. The Representative acknowledges that it has received $40,000 of the
nonaccountable expense allowance, which
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amount will be credited against the unpaid balance of such nonaccountable
expense allowance. On the Closing Date and the Option Closing Date, the Company
shall pay to the Representative the unpaid balance of such nonaccountable
expense allowance then due.
3.4 Representative's Warrants. On the Closing Date, the Company will
sell warrants to the Representative and its designees ("Representative's
Warrants") entitling the Representative to purchase a total of 115,000 shares of
Common Stock at an exercise price of $____________ per Share. The
Representative's Warrants will be in the form of the Representative's Warrants
to Purchase Shares filed as an exhibit to the Registration Statement. The
Representative's Warrants shall be exercisable during the four (4) year period
commencing one (1) year after the Effective Date. The total amount that the
Representative shall pay the Company for the Representative's Warrants is One
Hundred Fifteen Dollars ($115.00). The Company and the Representative agree that
the Representative's Warrants may not be sold, transferred, assigned, pledged,
or hypothecated for a period of one (1) year after the Effective Date of the
Registration Statement, except to officers of the Representative, to members of
the Underwriting Group, and to officers or partners of members of the
Underwriting Group and selected dealers participating in the Public Offering and
except by will or by the laws of descent and distribution. After such one (1)
year period, the Representative's Warrants may be sold, transferred, assigned,
pledged, or hypothecated provided that any such transaction is in accordance
with the registration or exemption from registration provisions of the Act and
any applicable state securities laws. If the Representative's Warrants are
exercised during the first year after the Effective Date of the Registration
Statement, then any shares of Common Stock of the Company acquired as a result
of any such exercise may not be sold, transferred, assigned, pledged, or
hypothecated until after expiration of such one (1) year period.
3.5 Representations of the Parties. The parties hereto respectively
represent that as of the Closing Date and as of the Option Closing Date the
representations herein contained and the statements contained in all the
certificates theretofore or simultaneously delivered by any party to another,
pursuant to this Agreement, shall in all material respects be true and correct.
3.6 Postclosing Information. The Representative covenants that
reasonably promptly after the Closing Date and after the Option Closing Date,
the Representative will supply the Company with all information that the Company
may reasonably request which must be supplied to the Commission or securities
authorities of states in which the Shares have been qualified for sale.
3.7 Reoffers by Selected Dealers. On each sale by the members of the
Underwriting Group of any of the Shares to selected dealers, the members of the
Underwriting Group shall require the selected dealers purchasing any such Shares
to agree to reoffer such Shares on the terms and conditions of the offering set
forth in the Registration Statement and Prospectus.
SECTION 4
Registration Statement and Prospectus
4.1 Delivery of Registration Statement. The Company has delivered to the
Representative without charge two (2) signed printed copies of the Registration
Statement, including all financial statements and exhibits filed therewith and
any amendments or supplements thereto, and shall deliver without charge to the
Representative such number of conformed printed copies of the Registration
Statement as the Representative shall request, including all financial
statements and exhibits filed therewith and any amendments or supplements
thereto. The signed copies of the Registration Statement furnished to the
Representative include signed copies of any and all opinions and consents of the
independent public accountants certifying to the financial statements included
in the Registration Statement and Prospectus and signed copies of any and all
opinions, consents and certificates of any other persons whose profession gives
authority to statements made by them and who are named in the Registration
Statement or Prospectus as having prepared, certified or reviewed any part
thereof.
4.2 Delivery of Preliminary Prospectus and Agreements. The Company will
have caused to be delivered, at its expense, to the members of the Underwriting
Group and to other broker dealers specified by the Representative prior to the
Effective Date of the Registration Statement as many printed copies of (i) each
Preliminary Prospectus filed with the Commission bearing the statements required
by Item 501(a)(10) of Regulation S-B, and (ii) each Agreement Among
Underwriters, Underwriting Agreement, and Selected Dealer
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Agreement, all as may have been requested by the Representative. The Company
consents to the use of such documents by the members of the Underwriting Group
and by prospective selected dealers prior to the Effective Date of the
Registration Statement, so long as such use is in accordance with the applicable
provisions of the Act, the applicable Rules and Regulations thereunder and the
applicable state blue sky or securities laws.
4.3 Delivery of Prospectus. The Company will deliver, at its expense, to
the members of the Underwriting Group and to other broker dealers specified by
the Representative, as many printed copies of the Prospectus as the
Representative may request and will deliver said printed copies of the
Prospectus to the members of the Underwriting Group and such other persons on
the Effective Date and for such period of time thereafter as the Prospectus is
required by law to be delivered in connection with offers and sales of the
Shares.
4.4 Further Amendments and Supplements. If during the period of time
that the Company's Prospectus is required to be delivered under the Act, any
event occurs or any event known to the Company relating to or affecting the
Company shall occur, as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact, or omit to
state any material fact necessary to make the statements made therein, in light
of the circumstances under which they were made, not misleading or if it is
necessary at any time after the Effective Date to amend or supplement the
Prospectus to comply with the Act, the Company agrees to notify immediately the
Representative thereof and prepare and file with the Commission such further
amendment to the Registration Statement or supplemental or amended Prospectus as
may be required and furnish and deliver to the Representative and to others
designated by the Representative, all at the Company's expense, a reasonable
number of copies of the amended or supplemented Prospectus which as so amended
or supplemented will not contain any untrue statement of a material fact or omit
to state any material fact necessary to make the statements made therein, in the
light of the circumstances under which they were made, not misleading when it is
delivered to a purchaser or prospective purchaser, and which will comply in all
respects with the Act; and in the event the Representative is required to
deliver a Prospectus after the date specified in Rule 174 of the Rules and
Regulations, the Company upon request will prepare promptly such Prospectus or
Prospectuses as may be necessary to permit compliance with the requirements of
Section 10 of the Act.
4.5 Use of Prospectus. The Company authorizes the members of the
Underwriting Group in connection with the distribution of the Shares and all
dealers who may distribute any of the Shares to use the Prospectus, as from time
to time amended or supplemented, in connection with the offering and sale of the
Shares so long as such use is in accordance with the applicable provisions of
the Act, the applicable Rules and Regulations thereunder and applicable state
blue sky or securities laws.
SECTION 5
Covenants of the Company
The Company covenants and agrees with the members of the Underwriting
Group that:
5.1 Objection of Representative to Amendments or Supplements. After the
date hereof, the Company will not at any time, whether before or after the
Effective Date of the Registration Statement, file any amendment or supplement
to the Registration Statement or Prospectus (i) unless and until a copy of such
amendment or supplement has been previously furnished to the Representative
within a reasonable time period (but in no event less than three (3) business
days before the Company proposes to file such amendments and to the extent of
any changes are made to such amendment not less than two (2) business days)
prior to the filing thereof or (ii) to which the Representative or legal counsel
to the Representative has reasonably objected, in writing, on the ground that
such amendment or supplement is not in compliance with the Act or the Rules and
Regulations.
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5.2 Company's Best Efforts to Cause Registration Statement to Become
Effective. The Company agrees to use its best efforts to cause the Registration
Statement and any amendment thereto to become effective as promptly as
reasonably practicable and will promptly advise the Representative and will
confirm such advice in writing (i) when the Registration Statement shall have
become effective and when any amendment thereto shall have become effective and
when any amendment of or supplement to the Prospectus shall be filed with the
Commission, (ii) when the Commission shall make, either orally or in writing, a
request or suggestion for any amendment to the Registration Statement or the
Prospectus or for any additional information and the nature and substance
thereof, (iii) of the issuance by the Commission of an order suspending the
effectiveness of the Registration Statement pursuant to Section 8 of the Act or
of the initiation of any proceedings for that purpose, (iv) of the happening of
any event which in the judgment of the Company makes any material statement in
the Registration Statement or Prospectus untrue or which requires the making of
any changes in the Registration Statement or Prospectus in order to make the
statements therein not misleading, and (v) of the refusal to qualify or the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction or of the institution of any proceedings for any such purposes. The
Company will use every reasonable effort to prevent the issuance of any such
order or of any order preventing or suspending such use, to prevent any such
refusal to qualify or any such suspension, and to obtain as soon as possible a
lifting of any such order, the reversal of any such refusal and the termination
of any such suspension.
5.3 Preparation and Filing of Amendments and Supplements. The Company
agrees to prepare and file promptly with the Commission, upon request of the
Representative, such amendments or supplements to the Registration Statement or
Prospectus, in form satisfactory to legal counsel for the Representative, as in
the opinion of the Representative and of legal counsel for the Representative,
may be necessary in connection with the offering or distribution of the Shares
and will use its best efforts to cause the same to become effective as promptly
as possible.
5.4 Blue Sky Qualifications. To the extent required, the Company agrees
to use its best efforts to register or qualify the Shares or such part thereof
as the Representative may determine for sale under the blue sky laws of such
states as are requested by the Representative. The Company will be assisted by
Clanahan, Tanner, Downing and Knowlton, P.C., legal counsel for the
Representative, in registering or qualifying the Shares for sale under such blue
sky laws. However, if the Company receives confirmation from Nasdaq that the
Company qualifies for inclusion and listing of the Shares on the Nasdaq National
Market System under one of the three Standards set forth in Rule 4420 of the
NASD Manual, under Section 18(b)(1) of the Act, the shares shall be treated as
"covered securities" and as such shall be exempt from any requirement by any of
the states to register or qualify such Shares under any such blue sky laws. Only
to the extent that the Shares are not covered securities under the Act, the
Company will pay all of the filing fees and legal fees, costs and expenses
incurred by such legal counsel in so registering or qualifying such Shares. If
the Company is required to register or qualify the Shares for sale under the
blue sky laws, it shall advance a retainer of Seven Thousand Five Hundred
Dollars ($7,500) against which the legal fees of legal counsel for the
Representative may be billed. Such filing fees, legal fees, costs and expenses
associated with registering or qualifying the Public Offering in the various
states, if required, shall not exceed Thirty Thousand Dollars ($30,000). The
Representative's legal counsel will forward to legal counsel for the Company
copies of all correspondence, comments, orders or other documents
("correspondence and documents") sent to or received from such states in
connection with such registrations and qualifications at the time such
correspondence and documents are sent or received by legal counsel for the
Representative. Immediately prior to the distribution of the preliminary
Prospectus to potential investors and prior to the Effective Date of the
Registration Statement, legal counsel for the Representative will issue to the
Company and the Underwriting Group a written blue sky memorandum of all states
in which the preliminary Prospectus may be distributed and in which the proposed
initial Public Offering (the "Public Offering") of the Shares has been
registered or qualified for sale, canceled, withdrawn, denied or exempt, the
date of such event(s) and the number of Shares registered or qualified for sale
in each such state. The Company understands that one of the factors considered
by the Representative and the Underwriting Group in deciding to execute this
Underwriting Agreement was the states in which the Shares have been registered
or qualified for resale. The Representative, immediately following the Effective
Date, shall be provided an opinion of legal counsel for the Representative as to
which states offers and sales may be made in the trading aftermarket. The
Company shall pay all legal fees and costs and expenses, including filing fees,
incurred in connection with such opinion.
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5.5 Financial Statements. The Company, at its own expense, agrees to
prepare and give and will continue to give such financial statements and other
information and reports to and as may be required by the Commission or the
proper public bodies of the states in which the Shares may be registered or
qualified.
5.6 Reports, Financial Statements and Projections to the Representative.
The Registration Statement will include audited financial statements of the
Company and its Subsidiary (including the fiscal years of the Subsidiary before
it became the wholly owned Subsidiary of the Company) for the two (2) fiscal
years then ended preceding the Effective Date of the Registration Statement
which shall have been reported by Eide Bailly LLP, independent public accounts.
The Company has prepared and delivered to the Representative a copy of its most
recent quarterly financial statement for the six (6) month period ended June 30,
1999. The Company has previously prepared and delivered and shall prepare and
deliver its projections constituting its best estimates of revenues, earnings
and cash flow for the current fiscal year and each fiscal year thereafter
through December 31, 2003. The Company shall continue to furnish to the
Representative on a monthly basis after June 30, 1999 with updated estimates
relating to such projections through the Effective Date of the Registration
Statement and thereafter as shall be requested from time to time by the
Representative during the period of five (5) years following the Closing Date.
From and after June 30, 1999, the date of the most recent quarterly financial
statement filed with the Commission and continuing through the Closing Date, the
Company shall furnish to the Representative and to legal counsel for the
Representative, the Company's unaudited monthly financial statements. For a
period of five (5) years from the Closing Date, the Company agrees to deliver to
the Representative copies of each annual report of the Company and copies of all
reports it is required to file or make available pursuant to the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and will deliver to the
Representative: (i) within ninety (90) days (plus any extensions of time that
the Commission grants to the Company to file its annual report on the
appropriate Form) after the close of each fiscal year of the Company, a
financial report of the Company which shall include a balance sheet as of the
end of the preceding fiscal year, a statement of operations, a statement of
stockholders' equity and statement of cash flows covering such fiscal year, and
shall be in reasonable detail and certified by the independent public
accountants for the Company; (ii) within forty-five (45) days (plus any
extensions of time that the Commission grants to the Company to file its
quarterly report on the appropriate Form) after the end of each quarterly fiscal
period of the Company other than the last quarterly fiscal period in any fiscal
year, copies of the Company's statements of operations, stockholders' equity and
cash flows for the quarterly fiscal period and the fiscal year then ended prior
to the end of such quarterly fiscal period, and the balance sheet as of the end
of that period of the Company subject to year end adjustment and certified by
the principal financial or accounting officer of the Company; (iii) copies of
all other statements, documents or other information which the Company mails or
otherwise makes available to any class of its security holders or files with the
Commission; (iv) copies of all news, press or public information releases when
made; (v) copies of all letters to the Company from its independent certified
public accountants concerning actual or potential deficiencies in the Company's
accounting procedures or internal control of funds; and (vi) upon request in
writing from the Representative, such other information as may reasonably be
requested and which may be properly disclosed to the Representative with
reference to the property, business and affairs of the Company. If the Company
fails to furnish the Representative with financial statements as herein
provided, within the times specified herein, the Representative shall have the
right to have such financial statements prepared by independent public
accountants of the Representative's own choosing and the Company agrees to
furnish such independent public accountants such data and assistance and access
to such records as they may reasonably require to enable them to prepare such
statements and to pay their reasonable fees and expenses in preparing the same;
provided, however, the Company shall have the right to furnish the financial
statements to the Representative at any time after the Representative retains
independent public accountants to prepare the financial statements, in which
event the amount of fees that the Company shall be obligated to pay to the
independent public accountants selected by the Representative will be limited to
those fees (including any retainer paid) actually incurred to the point in time
that the Company furnishes the required financial statements. All such financial
statement shall have been or shall be prepared in accordance with generally
accepted accounting principles consistently applied and present or shall present
fairly the financial condition of the Company and its Subsidiary and the results
of operation at the time and for the periods covered by such financial
statements.
5.7 Expenses Paid by the Company. The Company shall be responsible for,
and agrees to pay, whether or not the transactions contemplated hereunder are
consummated or this Agreement is prevented from becoming effective or is
terminated, all costs and expenses incident to the performance of its
obligations under this Agreement, including all expenses incident to the
authorization, issuance, and delivery of the Shares and Representative's
Warrants, any original issue taxes in connection therewith, all transfer taxes,
if any, incident to the
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initial sale of the Shares to the public, the fees and expenses of the Company's
personnel in connection with the proposed Public Offering, the costs, fees, and
expenses incident to the preparation, printing and filing under the Act and with
the NASD of the Registration Statement, or amendments or supplements thereto,
the cost of printing, reproducing and filing all exhibits to the Registration
Statement, the Agreement Among Underwriters, this Agreement, the Selected Dealer
Agreement and any other underwriting documents, and the cost of printing and
delivering to the Representative, the members of the Underwriting Group, and
selected dealers copies of the Registration Statement and copies of the
Agreement Among Underwriters, this Agreement and the Selected Dealer Agreement,
and any other underwriting documents, and as many Preliminary Prospectuses and
the Final Prospectuses (which Final Prospectuses shall be delivered no later
than the day following the Effective Date) as the Representative may deem
reasonably necessary as herein provided, the costs and legal counsel fees of
qualifying the Shares under the state securities or blue sky laws as provided in
Section 5.4 hereof, including fees of the Representative's counsel to render an
opinion for blue sky states as provided in Section 5.4 hereof, the fees and
disbursements of legal counsel and accountants for the Company, DTC Tracking
Service, the cost of providing the Representative with two (2) bound volumes of
the Registration Statement, as amended, all exhibits thereto, all state filings
and all correspondence relating to the Registration Statement and all state
filings, the cost for undertaking a background search of the Company's officers,
directors, key employees and five percent (5%) or greater shareholders, all
expenses incurred in connection with the holding of "due diligence" and
"road-show" meetings (which shall include without limitation the cost of the
meeting room, food and beverage, and expenses incurred by representatives of the
Company in attending a reasonable number of such meetings and which shall
include all expenses of presentations as reasonably requested by the
Representative) with the Representative's representatives, prospective dealers
and their representatives and others, including all expenses incurred in
connection with "road-show" meetings, held in Europe or other overseas
countries, and the cost of advertising one (1) or more suitable tombstone
notices in the national edition of the Wall Street Journal relating to the
proposed Public Offering, including graphic slide costs, and such other expenses
for advertising undertaken by the Representative at the Company's request,
including without limiting the generality thereof graphic slide costs, and any
other expenses customarily paid by an issuer. Except as otherwise specified
above, the Representative agrees to pay all fees and expenses of any legal
counsel which it may employ to represent it separately in connection with or on
account of the Public Offering and agrees to pay any advertising not paid by the
Company, mailing, telephone, travel and clerical costs and all other office
costs incurred or to be incurred by the Representative or by its representatives
in connection with the Public Offering.
5.8 Reports to Shareholders. For so long as the Company's Common Stock
is registered under the Exchange Act, the Company agrees to hold an annual
meeting of shareholders for the election of directors within one hundred eighty
(180) days after the end of each of the Company's fiscal years and, within one
hundred eighty (180) days after the end of each of the Company's fiscal years,
to send to each of the Company's shareholders the audited financial statements
of the Company as of the end of the fiscal year just completed prior thereto.
Such financial statements shall be those required by Rule 14c-3 under the
Exchange Act and shall be included in an annual report meeting the requirements
of such Rule. Further, the Company agrees, so long as such Common Stock is so
registered:
(i) to provide the Company's shareholders with quarterly summary
operating financial statements;
(ii) to send, within thirty (30) days after the Closing Date, a
letter to shareholders of the Company which welcomes them as
shareholders and discusses the business conducted by the Company since
the Effective Date;
(iii) to send, as least every ninety (90) days for a period of
three (3) years after the Effective Date, a letter or report to
shareholders of the Company and to broker dealers which are then market
markers of Shares of the Company on NASDAQ ("market markers"), which
contains a narrative discussion of the Company's financial status and
results of operations and a narrative discussion of the business
conducted by the Company since the last report or letter to shareholders
and market markers;
(iv) during the period after three (3) years from the Effective
Date, to send to each of the Company's shareholders and market markers
in printed form within ninety (90) days after the end of each fiscal
quarter just ended a narrative discussion of such financial statements
and the business conducted by the Company during such quarter.
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If the Company breaches any of its agreements set forth in this Section
5.8, the parties agree that any such breach will result in irreparable harm to
the Representative for which an adequate remedy for damages will not exist and
therefore the Representative shall be entitled to seek and obtain a court
injunction in equity which orders the Company to comply with its agreements set
forth in this Section 5.8 and which requires the Company to reimburse the
Representative for its costs, including reasonable attorney fees, incurred in
obtaining such injunctive order.
5.9 Section 11(a) Financial. The Company agrees to send to each of its
security holders and agrees to deliver to the Representative, as soon as
practicable, but in no event later than the first day of the sixteenth (16th)
full calendar month following the Effective Date, an earnings statement (as to
which no opinion need be rendered but which will satisfy the provisions of
Section 11(a) of the Act) covering a period of at least twelve (12) months
beginning after the Effective Date. Compliance with Rule 158(b) under the Act
shall be deemed compliance with Section 11(a) of the Act.
5.10 Posteffective Availability of Prospectus. Within the time during
which the Prospectus is required to be delivered under the Act, the Company
agrees to comply, at its own expense, with all requirements imposed upon it by
the Act, as now or hereafter amended, by the Rules and Regulations, as from time
to time may be in force, and by any order of the Commission, so far as necessary
to permit the continuance of sales of the Shares.
5.11 Application of Proceeds. The Company intends to apply the net
proceeds from the sale of the Shares substantially in the manner set forth in
the Registration Statement. Except for cumulative changes of less than ten
percent (10%) in each specific item set forth in the "Use of Proceeds" section
of the definitive Prospectus, the Company will not deviate from such use without
giving written notice of such proposed deviation to the Representative at least
ten (10) business days prior to any such deviation. Pending utilization of the
net proceeds by the Company for business purposes, all of the unused net
proceeds from the sale of the Shares will be invested in short term United
States government securities purchased through a bank or in a nondiscretionary
account of the Company with the Representative.
5.12 Delivery of Documents. Prior to the Closing Date, the Company
agrees to deliver to the Representative true and correct copies of the charter,
articles of incorporation and certificate of incorporation of the Company and
all amendments thereto, all such copies to be certified by the secretary of
state of the state of incorporation of the Company; true and correct, fully
executed copies of the bylaws of the Company and of the minutes of all meetings
of the directors and shareholders of the Company held prior to the Closing Date;
and true and correct, fully executed copies of all material contracts to which
the Company is a party.
5.13 Cooperation with Representative's Due Diligence. At all times prior
to the Closing Date, the Company agrees to cooperate with the Representative,
legal counsel for the Representative, and the Representative's consultants in
such investigation as the Representative may make or cause to be made of the
Company and its affiliates regarding the Company's past and present business as
the Representative and legal counsel for the Representative shall desire. At all
times prior to the Closing Date, the Company shall supply and deliver to both
the Representative and legal counsel for the Representative, at their respective
offices, all documents and other information required to enable them to make
such investigation of the Company and its past and present business as the
Representative or legal counsel for the Representative shall deem reasonably
necessary or appropriate in order to verify or substantiate any document or
other information regarding the Company and the preparation and filing of the
Registration Statement. The Company acknowledges that the Representative and
legal counsel for the Representative will be undertaking a thorough review of
the Company's past and present business activities, including contractual
commitments and operational practices, and background verifications of persons
affiliated with the Company. In the event that the results of such review do not
meet with the approval of the Representative, the Representative may elect not
to proceed with the Public Offering. The Representative shall promptly bring
matters to the attention of counsel for the Company that might prevent the
Public Offering from proceeding and permit such counsel to provide explanations
and mitigations. Further, the Representative shall retain, and the Company may
retain, professional services to conduct any background investigations required
for the Public Offering. All information relating to such investigation shall be
shared by the Company and the Representative. The Company shall be obligated and
responsible for the payment of all costs and expenses
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associated with any such background investigation and shall reimburse the
Representative for any such costs and expense within five (5) days after
receiving a written request from the Representative for such reimbursement.
5.14 Limitations on Company. Except with the Representative's prior
written consent, the Company agrees that the Company will not do the following
until (a) the termination of this Agreement or (b) the number of days after the
Effective Date for which the Prospectus is required to be used pursuant to Rule
174 of the Rules and Regulations, whichever occurs first:
(i) Undertake or authorize any change in its capital structure;
(ii) Borrow any funds other than in the ordinary course of
business and as contemplated by the Prospectus;
(iii) Consolidate or merge with or into any other corporation;
(iv) Purchase all or substantially all of the assets of another
corporation or any other entity or person or sell all or substantially
all of the Company's assets to another corporation, entity or person;
(v) Purchase fifty percent (50%) or more of the securities of
another corporation or other entity or sell or enter into an exchange
transaction pursuant to which the Company or the Company's shareholders
sell or exchange or otherwise dispose of fifty percent (50%) of the
issued and outstanding shares of the Company's Common Stock in a taxable
or tax free transaction; or
(vi) Create any mortgage or any lien upon any of its properties
or assets other than in the ordinary course of business and as
contemplated by the Prospectus.
5.15 Appointment of Transfer Agent. Prior to the Effective Date, the
Company will have appointed American Securities Transfer & Trust, Inc., 938
Quail Street, Suite 101, Lakewood, Colorado 80215, as transfer agent for the
Company's Shares and Common Stock. The Company shall not change its transfer
agent for a period of two (2) years after the Effective Date without the
Representative's prior written consent.
5.16 Daily Transfer Sheets. For the two (2) year period following the
Effective Date, the Company, at its expense, shall provide the Representative,
when requested by the Representative in writing, with copies of the Company's
daily Common Stock transfer sheets and the Depository Trust Company ("DTC")
special security position listing reports.
5.17 Certificates. The Company agrees to make arrangements to have
available at the office of the transfer agent sufficient quantities of the
Company's certificates as may be needed for the quick and efficient transfer of
the Shares and Common Stock.
5.18 Compliance with Conditions Precedent. The Company agrees to use all
reasonable efforts to comply or cause to be complied with the conditions
precedent to the obligations of the members of the Underwriting Group in Section
8 hereof.
5.19 Reports Relating to Use of Proceeds and State Reports. The Company
agrees to report on its first periodic report filed pursuant to Sections 13(a)
and 15(d) of the Exchange Act after the Effective Date, and thereafter on each
of its subsequent periodic reports filed pursuant to Sections 13(a) and 15(d) of
the Exchange Act through the later to occur of the complete disclosure by the
Company of the application of all the proceeds from the Public Offering or
disclosure by the Company of the termination of the Public Offering, the use of
proceeds received by the Company from the Public Offering in accordance with the
provisions of Rule 463 of the Rules and Regulations under the Act. The Company
will file with the appropriate state securities authorities any sales and other
reports required by the rules and regulations of such agencies and will provide
copies of such reports to the Representative and to the legal counsel for the
members of the Underwriting Group.
5.20 Registration Under the Exchange Act. Prior to the Effective Date of
the Registration Statement, the Company will have made a filing under Section
12(g) of the Exchange Act with respect to the Company's
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Common Stock. The Company agrees to deliver a copy of such filing to the
Representative and to legal counsel for the Representative when filed. On the
Effective Date of the Registration Statement, the Company will cause the
Company's filing under Section 12(g) of the Exchange Act to become effective
with the Commission.
5.21 Listing in Manuals. To the extent that the shares do not qualify as
covered securities under Section 18(b)(1) of the Act, the Company will use its
commercially reasonable efforts to qualify (if not already qualified) the
Company's Shares and Common Stock for trading in all states as soon as legally
possible. In addition, if it has not done so, prior to and after the Effective
Date, the Company will apply to have the Company listed in Standard & Poor's
Standard Corporation Records, Moody's Over-The-Counter Manual or such other
comparable recognized security manuals as are reasonably requested by the
Representative.
5.22 NASDAQ/NMS. The Company agrees that it shall cause the Shares to be
on the NASDAQ National Market System, or listing on a national securities
exchange satisfactory to the Representative, on the Effective Date of the
Registration Statement. Subject to the Company's ability to meet the maintenance
requirements of the NASDAQ National Market System, the Company agrees to
maintain the listing of its Common Stock such that such Shares will continue to
be available for quotation on the NASDAQ National Market System. The trading
symbol "Hat" is acceptable to both the Company and the Representative. As soon
as the Company meets the qualifications required with respect thereto, the
Company will designate its eligible securities for inclusion on such national
stock exchange as requested and designated by the Representative.
5.23 Secondary Trading Qualifications. The Company agrees to qualify its
securities for secondary trading, as soon as legally possible, in such states as
are reasonably requested by the Representative from time to time.
5.24 Legends on Stock Certificates. The Company agrees to cause the
stock certificates of its current shareholders that represent "restricted
securities," and the stock and warrant certificates held by officers, directors,
or controlling persons of the Company to be clearly legended as being restricted
against transfer without compliance with the Act and to cause the Company's
transfer agent and warrant agent to put stop transfer instructions against such
certificates.
5.25 Stockholders and Warrantholders Lists and Transfer Summaries.
Within ten (10) business days after the Closing Date and within ten (10)
business days after the Option Closing Date, the Company will deliver to the
Representative complete lists of all holders of the Shares and Common Stock of
the Company as of the Closing Date and as of the Option Closing Date,
respectively. Each such list shall include the name and address of each such
holder and the number of Shares and shares of Common Stock owned by each such
person as of such date. Within ten (10) business days after the end of each of
the first twenty-four (24) calendar months after the Closing Date, the Company
will provide the Representative with a new list containing the information
described above with respect to the Shares and Common Stock as of the end of
each such month and a list which shows each transaction involving a transfer of
a Share or Common Stock certificate during such month. This transfer list shall
include the name and address of the transferor and the transferee and the number
of Shares and shares of Common Stock transferred.
5.26 Directors, Officers and Committees. By no later than the Closing
Date, the Company will, if it has not already done so, have at least two (2)
outside independent directors serving on the Board of Directors. The Company
shall continue to maintain at least two (2) independent outside directors for at
least the next two (2) fiscal years beyond the Effective Date or as otherwise
required by the NASDAQ System for the continued listing of the Company's Shares
on the NASDAQ National Market System. The Company agrees that for a period of
forty-eight (48) months after the Closing Date, the Representative shall have
the right to designate one (1) nominee for election to the Company's Board of
Directors. If the Company is unable to obtain Directors and Officers liability
insurance as provided in Section 5.27 of this Agreement, the Representative
during such forty-eight (48) month period shall have the right to designate a
consultant to the Company's Board of Directors. Such consultant, as designated
by the Representative shall be entitled to receive from the Company notice of,
and to attend all meetings of, the Company's Board of Directors and any of the
Committees of the Board of Directors. The Representative shall be provided with
the same notice of each meeting of the Board of Directors as is provided to
members of the Board of Directors. Such consultant shall be compensated by the
Company and entitled to receive compensation in an amount not less the
compensation paid by the Company to the outside independent
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members of the Company's Board of Directors. In addition, the Company will
reimburse out of pocket expenses incurred by such consultant to attend meetings
to the extent such expenses are reimbursed by the Company with respect to the
outside independent directors. Such consultant shall have no voting rights at
such meetings; and, such consultant shall be required, prior to attending any
such meeting, to represent in writing to the Company that such consultant is
familiar with and will comply with all requirements of the federal securities
laws applicable to a person who comes into possession of material nonpublic
information concerning the Company. Such consultant shall be indemnified by the
Company against all claims arising out of his participation at the meetings of
the Board of Directors, except for gross negligence or knowing and willful
violation of an applicable law by the consultant. The Board of Directors of the
Company will establish an audit and a management compensation committee and will
maintain such committees so long as the Common Stock of the Company is
registered under the Exchange Act. For a period of not less than two (2) years
beyond the Effective Date, at least two (2) outside independent director's will
serve on the Company's audit and compensation committees and as such shall
comprise a majority of the members of such committees. The Board of Directors
will manage and oversee the application of the proceeds received by the Company
from the Public Offering. Any material modification in the application of such
proceeds which varies from the specific use described in the final Prospectus
shall require the prior review and approval of all of the members of the Board
of Directors.
5.27 Officers and Directors Liability Insurance. Prior to the Effective
Date of the Registration Statement, the Company shall acquire a reasonable
amount of Officers and Directors liability insurance from a responsible and
reputable insurance carrier satisfactory to and approved by the Representative
prior to such date. However, the Company shall not be required to obtain such
insurance if such insurance cannot be obtained at a reasonable cost as
determined by the Company and the Representative.
5.28 Right of Inspection. The Company agrees that for a period of three
(3) years following the date of the final Prospectus, the Representative, at the
Representative's expense, will have the right to have a person or persons
selected by the Representative review the books, records and operations of the
Company, upon seven (7) days written notice. Any person designated by the
Representative to conduct such review shall be required to execute a
confidentiality agreement which will, in part, prohibit disclosure of
information to any person other than the Representative. Unless the Company
specifically agrees otherwise, any such information shall be held in confidence.
5.29 Public Relations Firm. At least thirty (30) days prior to the
Effective Date, the Company will engage the services of a public relations
advisory firm which is acceptable to the Representative. The Company shall
retain the services of such public relations advisory firm for at least one (1)
year following the Effective Date. The Company shall have sole authority to
determine the compensation and the utilization of such public relations firm.
The Company shall provide reasonable and frequent notices to the public
concerning material developments in the Company's business operations,
activities, acquisitions and any other material developments in the Company's
business. Such public relations firm shall not be a member of the Underwriting
Group or a "related person" of any such member of the Underwriting Group. The
term "related person" is described in Section 5.32 of this Agreement.
5.30 Management and Dissemination of Information. All necessary and
appropriate measures will be taken by the Company to ensure continuity of its
management. Further, in order to avoid any appearance of the early commencement
of the Public Offering, or the use of improper prospectuses, the Company shall
consult with its counsel and the Representative prior to distribution to third
parties of any financial information, news releases and/or other publicity
regarding the Company, its business or any terms of the proposed Public
Offering, unless such dissemination is required by law or by prior Company
practices. Prior to the distribution thereof, the Company shall furnish to the
Representative for its review copies of all documents, including, without
limitation, financial information, news releases and other documents regarding
the Company, its business, its properties or any of the terms of the proposed
Public Offering, which the Company or its public relations advisors intend to
distribute prior to the Closing Date.
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5.31 Management Referrals. Persons whom management of the Company
believe may be interested in purchasing Shares in the Public Offering will be
referred only to the Representative and management of the Company will purchase
Shares in the Public Offering only through the Representative. The
Representative will have complete control of the distribution of the Shares in
the Public Offering.
5.32 No NASD Member Payments or Affiliation. For purposes of Section
5.29 hereof and this Section 5.32, a "related person" of an NASD member is a
person who has any of the following relationships with any NASD member: legal
counsel, financial consultant or advisor, finder, associated person, or member
of the immediate family of any such person. The Company represents to the
Representative that, in connection with the Public Offering, the Company does
not have any agreement, has not paid and will not pay, except as described in
the Registration Statement or the next sentence, or agreed to pay or deliver any
item of value, including securities, to any member of the NASD or to any person
associated with a member of the NASD or to any related person of an NASD member
during the period beginning on the three hundred sixty-sixth (366th) day prior
to the filing of the Registration Statement with the Commission and ending on
the forty-fifth (45th) day after the Effective Date of the Registration
Statement. The representation contained in the foregoing sentence shall not
include cash discounts or commissions paid by the Company in connection with a
distribution of the Company's securities which occurs prior to the filing of the
Registration Statement with the Commission. If the NASD decides that any
securities issued by the Company or any affiliate or associated person or
related person to an NASD member or any other compensation paid to any such
person is or was "underwriter's compensation" for the Public Offering and such
determination is not reversed by the NASD within a reasonably prompt time after
it is decided, the Company shall make commercially reasonable efforts to arrange
for the recipient to return forthwith to the Company all such securities or
compensation. The Company shall supply to legal counsel for the Representative
no later than three (3) weeks before the expected filing date of the
Registration Statement, the written representation of the Company's president or
chief executive officer as to (i) the existence or non-existence of any NASD
affiliation or association of any officer, director, or five percent (5%) or
greater shareholder of the Company, and, if a shareholder of the Company is a
corporation, the existence or non-existence of such NASD affiliation or
association of any officer, director or five percent (5%) or greater shareholder
of such corporation, (ii) whether or not any unregistered securities of the
Company have been acquired by any NASD member or related persons during the
thirteen (13) month period prior to the anticipated filing date of the
Registration Statement, and (iii) whether or not key-man life insurance has been
or will be provided for any officer or director of the Company by any NASD
member or related person.
5.33 Future Sales.
5.33.1 Company Sales to Others and Repurchase of Its Stock.
During the period of twelve (12) months after the Closing Date, the
Company will not sell any securities not covered by the Registration
Statement without the Representative's prior written consent nor will
the Company purchase any shares of the capital stock or other securities
during such period without the Representative's prior written consent.
Excepted from this provision shall be sales of Excluded Shares. The term
"Excluded Shares" shall mean options and warrants which are issued and
outstanding on the Effective Date of the Registration Statement or which
are issued pursuant to a plan ("Plan") which may be adopted by the
Company prior to the Effective Date and which has been approved in
writing by the Board of Directors of the Company and the Representative
prior to the Effective Date of the Registration Statement and the grant
of options to the officers and employees of the Company and its
Subsidiary under any such Plan at an exercise price equal to the
purchase price of the Shares as set forth in Section 3.1 of this
Agreement.
5.33.2 Covered Persons. Prior to the Effective Date of the
Registration Statement, the Company will cause each of its officers,
directors, five percent (5%) or more shareholders, and their affiliates
and any other persons as shall be required by NASDAQ ("Covered Persons")
to agree with the Representative in a written agreement in form and
substance satisfactory to the Representative and legal counsel for the
Representative that, without the prior written consent of the
Representative, each such Covered Person will not sell or otherwise
dispose of any of the Company's shares of Common Stock for a period of
one (1) year after the Effective Date. Such agreement will also provide
that if a Covered Person who is an officer or director of the Company on
the Effective Date of the Registration Statement ceases to be an officer
or director of the Company at any time during the period of one (1) year
after the Closing Date, then such Covered Person and the affiliates of
such Covered Person will agree not to sell any of the
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Company's shares of Common Stock which are owned by such Covered Person
and such Covered Person's affiliates on the Effective Date of such
Registration Statement until the expiration of one (1) year after the
Effective Date; provided, however, that nothing contained in this
Section 5.33.2 shall prevent a transfer for purposes of estate planning
by a Covered Person to his spouse or lineal descendants or to a
revocable or irrevocable trust in which he is the grantor and in which
his spouse and/or lineal descendants are the beneficiaries or to an
entity ("controlled entity") in which the Covered Person, his spouse and
lineal descendants own an eighty percent (80%) or greater interest so
long as such spouse, lineal descendants or controlled entity agree to
the terms of this Section 5.33.2 For purposes of this Agreement, the
term "affiliate" shall have the meaning ascribed to it in Rule 405 of
the Act. Such agreements between the Representative and the Covered
Persons will also provide that any sales of shares of Common Stock of
the Company by such persons during the six (6) month period after the
Closing Date, whether under Rule 144 promulgated by the SEC under the
Act ("Rule 144 Sales") or otherwise, will be executed only through the
Representative acting as a broker or dealer. In such agreement the
Representative will agree to execute any such Rule 144 Sales on a
competitive basis. If any person required to execute an agreement under
this Section 5.33.2 has pledged, or during the applicable period
pledges, any of the Company's shares of Common Stock which are covered
by such agreement, such person shall cause his pledgee to also agree in
writing to comply with the pledgor's agreement with the Representative.
A copy of any such written agreement from the pledgee shall be promptly
delivered by the pledgor to the Representative after execution thereof
by the pledgee.
5.34 Exclusive Dealing. The Company at no time prior to the Closing
Date, as contemplated under this Agreement, shall enter into discussions,
negotiate or otherwise make any arrangements with any other underwriter or other
person which relate in any manner to the undertaking of a possible Public
Offering of the Company's securities by any such person other than the
Representative, so long as the Representative is discharging and performing its
duties and responsibilities under this Agreement and has not indicated in
writing its decision not to consummate the proposed Public Offering as
contemplated under this Agreement.
5.35 Financial Printer. The Representative has approved the Company's
selection and engagement of American Financial Printing, Inc., whose offices are
located in Minneapolis, Minnesota, as the financial printing company selected by
the Company to print the Preliminary and Final Prospectuses and for the
transmitting of all electronic filings to the Commission prior to the engagement
by the Company of the services of such financial printing company. In addition,
the Representative shall approve the form, size, style and quality of the
Preliminary and Final Prospectuses.
5.36 Standstill. Pending the completion of the Public Offering, the
Company and its Subsidiary shall not solicit or negotiate and shall refrain
during the period from March 26, 1999 until December 26, 1999 from negotiating
with any other underwriter or investment banker or other person regarding a
possible private or public offering of the securities (whether debt or equity)
of the Company or its Subsidiary.
SECTION 6
Indemnification
6.1 Indemnification by Company. The Company agrees to indemnify and hold
harmless the Representative and the other members of the Underwriting Group and
each officer, director, employee, representative, agent, surety, guarantor, and
each person who controls the Representative or any other member of the
Underwriting Group within the meaning of Section 15 of the Act against any and
all losses, claims, damages or liabilities, joint or several, or litigation,
arbitration or mediation proceedings (collectively referred to as "litigation"),
including any and all awards or judgments rendered in connection therewith, to
which they or any of them may become subject under the Act or any other statute
or at common law and to reimburse the persons indemnified for any legal or other
expenses (including the cost of any investigation and preparation) incurred by
them in connection with any litigation, whether or not resulting in any
liability, but only insofar as such losses, claims, damages, liabilities and
litigation (including awards and/or judgments in connection therewith) arise out
of or are based upon any matter relating to the Public Offering, including
without limitation any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereto
and the Prospectus and related exhibits included in the Registration Statement
or any application or other document filed in order to qualify the Shares under
the blue sky or securities laws of the states where filings were made, or the
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omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, all
as of the date when the Registration Statement or such amendment, as the case
may be, becomes effective, or any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or supplemented if
the Company shall have filed with the Commission any amendments thereof or
supplements thereto), or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however
that the indemnity agreement contained in this Section 6.1 shall not apply to
the Representative or any of the other members of the Underwriting Group or any
person controlling the Representative or any other member of the Underwriting
Group in respect of any such losses, claims, damages, liabilities or litigation
arising out of or based upon information peculiarly within the knowledge of the
Representative or another member of the Underwriting Group and furnished in
writing to the Company by a member of the Underwriting Group specifically for
use in connection with the preparation of the Registration Statement and
Prospectus or any such amendment or supplement thereto and such person in making
any such statement, or any such omission or alleged omission, knowingly and
willfully violated applicable law or was guilty of gross negligence in
connection therewith. This indemnity agreement is in addition to any other
liability which the Company may otherwise have to the Representative and other
members of the Underwriting Group or to any person controlling the
Representative or a member of the Underwriting Group. Each member of the
Underwriting Group agrees within ten (10) days after the receipt by it of
written notice of the commencement of any action against it or against any
person controlling it as aforesaid, in respect of which indemnity may be sought
from the Company on account of the indemnity agreement contained in this Section
6.1 to notify the Company in writing of the commencement thereof. The failure of
such a member of the Underwriting Group so to notify the Company of any such
action shall relieve the person to whom such notice was not given from any
liability which it may have to that member of the Underwriting Group or any
person controlling it as aforesaid on account of the indemnity agreement
contained in this Section 6.1, but shall not relieve the Company from any other
liability which it may have to that member of the Underwriting Group or such
controlling person. In case any such action shall be brought against the
Representative or any other member of the Underwriting Group or any such
controlling person and the Representative or other member of the Underwriting
Group shall notify the Company of the commencement thereof, the Company shall be
entitled to participate in (and, to the extent that it shall wish, to direct)
the defense thereof at its own expense, but such defense shall be conducted by
legal counsel of recognized standing and reasonably satisfactory to such member
of the Underwriting Group or such controlling person or persons, which is a
defendant or which are defendants in such litigation. No settlement, compromise
or other disposition of any such litigation shall be made by the Company without
the prior written consent of the Representative and the other persons
indemnified hereunder. Conversely, any settlement, compromise or other
disposition shall require the Company's written consent and to the extent the
Company does not consent to any such settlement, compromise or other disposition
of any such litigation, the Company shall not be liable for amounts paid in
connection therewith. If the Company elects to direct such defense, the Company
agrees to furnish to each indemnified member of the Underwriting Group at its
request, copies of all pleadings therein and to apprise each indemnified member
of the Underwriting Group of all developments therein, all at the Company's
expense, and to permit the Representative and each indemnified member of the
Underwriting Group to be an consultant therein.
6.2 Indemnification by the Members of the Underwriting Group. The
members of the Underwriting Group agree, in the same manner as set forth in
Section 6.1. above, to indemnify and hold harmless the Company, the directors
and officers of the Company and each person, if any, who controls the Company
within the meaning of Section 15 of the Act, with respect to any statement in or
omission from the Registration Statement or any amendment thereto, or the
Prospectus (as amended or as supplemented, if amended or supplemented as
aforesaid) or any application or other document filed in any state or
jurisdiction in order to qualify the Shares under the blue sky or securities
laws thereof, or any information furnished pursuant to Section 3.6 hereof, if
such statement or omission was made in reliance upon information peculiarly
within the knowledge of a member of the Underwriting Group and furnished in
writing to the Company by a member of the Underwriting Group or on its behalf
specifically for use in connection with the preparation thereof or supplement
thereto and such person in making any such statement, or any such omission or
alleged omission, knowingly or willfully, violated applicable law or was guilty
of gross negligence in connection therewith. No member of the Underwriting Group
shall be liable for amounts paid in settlement of any such litigation if such
settlement was effected without the written consent of the member of the
Underwriting Group. In case of commencement of any action in respect of which
indemnity may be sought from a member of the Underwriting Group on account of
the indemnity agreement contained in this Section 6.2, each person to be
indemnified by the indemnifying member
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of the Underwriting Group shall have the same obligation to notify the member of
the Underwriting Group as the members of the Underwriting Group have toward the
Company as provided in Section 6.1. hereof, subject to the same loss of
indemnity in the event such notice is not given, and the indemnifying member of
the Underwriting Group shall have the same right to participate in (and, to the
extent that the indemnifying member of the Underwriting Group shall wish, to
direct) the defense of such action at the expense of the indemnifying member of
the Underwriting Group, but such defense shall be conducted by legal counsel of
recognized standing and reasonably satisfactory to the Company. If the
indemnifying member of the Underwriting Group elects to direct such defense, the
indemnifying member of the Underwriting Group agrees to furnish to the Company
at its request copies of all pleadings therein and apprise it of all the
developments therein, all at the expense of the indemnifying member of the
Underwriting Group, and permit the Company to be an observer therein.
6.3 Contribution. If the indemnification provided for in this Section 6
is unavailable to or insufficient to hold harmless an indemnified party under
Sections 6.1 and 6.2 hereof, in respect of any losses, claims, damages or
liabilities (or actions or litigation including awards and/or judgments in
respect thereof) referred to therein, then each indemnifying party shall in lieu
of indemnifying such indemnified party contribute to the amount paid or payable
by such indemnified party as a result of such losses, claims, damages, or
liabilities (or actions or litigation including awards and/or judgments in
respect thereof) in such proportion as is appropriate to reflect not only (i)
the relative benefits received by the Company on the one hand and each member of
the Underwriting Group on the other from the Public Offering of the Shares, but
also (ii) the relative fault of the Company and each member of the Underwriting
Group in connection with the statements or omissions which resulted in such
losses, claims, damages, or liabilities (or actions or litigation including
awards and/or judgments in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by the Company on the
one hand and each member of the Underwriting Group on the other shall be deemed
to be in the same proportion as the total net proceeds from the Public Offering
of the Shares (before deducting expenses) received by the Company bears to the
total underwriting discount received by each member of the Underwriting Group,
in each case as set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or one or more members of the Underwriting Group and the person's
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company and the members of the
Underwriting Group agree that it would not be just and equitable if contribution
pursuant to this Section 6.3. were determined by pro rata allocation or by any
other method of allocation which does not take account of the equitable
considerations referred to above in this Section. The amount paid or payable by
an indemnified party as a result of the losses, claims, damages or liabilities
(or actions or litigation including awards and/or judgments in respect thereof)
referred to above in this Section 6.3 shall be deemed to include any legal or
other expenses to which such indemnified party would be entitled if Sections 6.1
and 6.2 hereof were applied. Notwithstanding the provisions of this Section 6.3,
no member of the Underwriting Group shall be required to contribute any amount
in excess of the amount equal to the total price of the Shares underwritten and
distributed by it to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11 of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
6.4 Threat of Regulators' Action. The Company and the Representative
agree to advise each other immediately and confirm in writing the receipt of any
threat of or the initiation of any steps or procedures by the Commission or any
other regulatory authority which would impair or prevent the right to offer or
sell any of the Shares or the issuance of any "suspension orders" or other
prohibitions preventing or impairing the proposed Public Offering of the Shares.
In the case of the happening of any such event, neither the Company nor the
members of the Underwriting Group will acquiesce in such steps, procedures or
suspension orders, and each party agrees actively to defend any such actions or
orders unless all parties agree, in writing, to acquiesce in such actions or
orders.
SECTION 7
Effectiveness of Agreement
After this Agreement has been executed by the Company and the
Representative, this Agreement shall become effective (i) at 10:00 A.M., Denver,
Colorado Time, on the first full business day after the Effective Date of the
Registration Statement or (ii) upon release by the Representative of the Shares
for offering after the Effective Date, whichever shall first occur. The time of
the release by the Representative of the Shares for offering, for the
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purposes of this Section 7, shall mean the time of release by the Representative
for publication of the first newspaper advertisement which is subsequently
published relating to the Shares or the time of the first mailing of copies of
the Prospectus relating to the Shares in connection with a confirmation of a
sale of Shares by an Underwriter or Dealer, whichever shall first occur.
SECTION 8
Conditions of the Obligations of the
Members of the Underwriting Group
After execution of this Agreement by the Company and the Representative,
the obligations of the members of the Underwriting Group to purchase the Shares
and to make payment therefor on the Closing Date and on the Option Closing Date
shall be subject to the accuracy, as of the Closing Date and as of the Option
Closing Date, of the representations and warranties on the part of the Company
herein contained, to the performance by the Company of all of its agreements and
obligations herein contained, to the fulfillment of or compliance by the Company
with all covenants and conditions hereof, and to the following additional
conditions, any of which may be waived or modified by the Representative:
8.1 Effectiveness of Registration Statement. The Registration Statement
shall have become effective and no order suspending the effectiveness of the
Registration Statement shall have been issued and no proceeding for that purpose
shall have been initiated or threatened by the Commission or be pending; any
request for additional information on the part of the Commission (to be included
in the Registration Statement or Prospectus or otherwise) shall have been
complied with to the satisfaction of the Commission; and neither the
Registration Statement nor the Prospectus nor any amendment thereto shall have
been filed to which legal counsel for the Representative shall have reasonably
objected in writing or shall have withheld giving its consent.
8.2 Accuracy of Registration Statement. The Representative shall not
have disclosed in writing to the Company that the Registration Statement or the
Prospectus or any amendment thereof or supplement thereto contains an untrue
statement of a fact which, in the opinion of legal counsel for the
Representative is material, or omits to state a fact which, in the opinion of
such legal counsel, is material and is required to be stated therein, or is
necessary to make the statements therein not misleading.
8.3 No Material Adverse Changes. No material adverse changes shall have
occurred in or with respect to the officers or directors of the Company. No
material adverse changes shall have occurred in or with respect to the business,
properties, financial condition or credit of the Company or in or with respect
to any conditions affecting the prospects of its business.
8.4 Casualty and Other Calamity. The Company shall not have sustained
any loss on account of fire, explosion, flood, accident, calamity or any other
cause, of such character as materially adversely affects the business or
properties of the Company considered as an entire entity, whether or not such
loss is covered by insurance, and no officer or director of the Company shall
have suffered any injury, sickness or disability of a nature which would
materially adversely affect his or her ability to properly function as an
officer or director of the Company.
8.5 Litigation and Other Proceedings. Except as disclosed in the
Prospectus, there shall not have been any litigation instituted or threatened
against the Company and there shall not have been any proceeding instituted or
threatened against the Company before or by any federal or state commission,
regulatory body or administrative agency or other governmental body, domestic or
foreign.
8.6 Lack of Material Change. Except as contemplated herein or as set
forth in the Registration Statement and Prospectus, during the period subsequent
to the date of the last audited balance sheet included in the Registration
Statement, the Company (i) shall have conducted its business in the usual and
ordinary manner as the same was being conducted on the date of the last audited
balance sheet included in the Registration Statement, and (ii) except in the
ordinary course of its business, the Company shall not have incurred any
liabilities or obligations (direct or contingent) or disposed of any of its
assets, or entered into any material transaction or suffered or experienced any
materially adverse change in its condition, financial or otherwise. The capital
stock and surplus accounts of the Company shall be substantially the same as at
the date of the last balance sheet included in
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the Registration Statement, without considering the proceeds from the sale of
the Shares, other than as may be set forth in the Prospectus.
8.7 Approval of Legal Counsel for the Representative. The authorization
of the Shares, the Representative's Warrants, the Registration Statement,
Prospectus and all corporate proceedings and other legal matters incident
thereto and to this Agreement shall be reasonably satisfactory in all respects
to legal counsel for the Representative.
8.8 Opinions of Legal Counsel.
8.8.1 Legal Opinion of Charles Clayton, Esq. The Company shall
have furnished to the members of the Underwriting Group and legal
counsel for the Representative, at least two (2) days in advance of the
Effective Date, and again two (2) days prior to the Closing Date, drafts
of an opinion and on the Closing Date, a duly executed opinion, dated
the Effective Date, the Closing Date, and the Option Closing Date,
addressed to the members of the Underwriting Group, from Charles
Clayton, Esq., legal counsel to the Company, and such other legal
counsel to the Company as is acceptable to the Representative to the
effect that based upon a review by them of the Registration Statement,
Prospectus, the certificate of incorporation, bylaws and relevant
corporate proceedings and contracts of the Company and its Subsidiary,
an examination of such statutes as he has deemed necessary and based
upon such other investigation by such legal counsel as he has deemed
necessary to express such opinion:
(i) The Company and its Subsidiary have been duly
incorporated or formed and are such validly existing
corporations in good standing under the laws of the state of
Minnesota, and that the Company and its Subsidiary have full
power and authority to own and operate their respective
properties and to carry on their businesses as set forth in the
Registration Statement and Prospectus and that the Company and
its Subsidiary are qualified and in good standing as foreign
corporations in each jurisdiction in which they own or lease
real property or transact business requiring such qualification.
(ii) The Company has authorized and outstanding
securities as set forth in the Registration Statement and
Prospectus; the outstanding securities of the Company and the
Shares conform to the statements concerning them in the
Registration Statement and Prospectus; the outstanding
securities of the Company has been duly and validly issued and
are fully paid and nonassessable, and contain no preemptive
rights; the Shares being sold by the Company to the Underwriting
Group and the Representative's Warrants have been duly and
validly authorized and, upon issuance thereof and payment
therefor in accordance with the terms of this Agreement and the
Representative's Warrants, will be duly and validly issued,
fully paid and nonassessable and will not be subject to the
preemptive rights of any shareholder of the Company.
(iii) To legal counsel's knowledge, no consents,
approvals, authorizations or orders of agencies, officers or
other regulatory authorities are known to such legal counsel
which are necessary for the valid authorization, issue or sale
of the Shares being sold by the Company to the Underwriting
Group hereunder, except as required under the Act or the
securities laws of the states in which the Shares are qualified
or except as required by the NASD.
(iv) To legal counsel's knowledge, the issuance and sale
of the Shares being sold by the Company to the Underwriting
Group and the consummation of the transactions herein
contemplated and compliance with the terms of this Agreement
will not conflict with or result in a breach of any of the
terms, conditions, or provisions of or constitute a default
under the certificate of incorporation or bylaws of the Company,
any leases, or any note, indenture, mortgage, deed of trust, or
other agreement or instrument known to such counsel to which the
Company is a party or by which the Company or any of its
properties is bound or any existing law (provided this Section
8.8 (iv) shall not relate to federal or state securities laws),
order, rule, regulation, writ, injunction, or decree of any
government, governmental instrumentality, agency, body,
arbitration tribunal, or court, domestic or foreign, having
jurisdiction over the Company or its property which is known to
such counsel.
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(v) No preemptive rights, including any existing
preemptive rights which have been waived by the holders of such
rights, exist with respect to the Company's securities.
(vi) The Company has authorized capitalization as
described in the Registration Statement.
(vii) Based upon written or oral communications from the
Commission, the Registration Statement has become effective
under the Act and, to the knowledge of such legal counsel, no
stop order suspending the effectiveness of the Registration
Statement has been issued and no proceeding for that purpose has
been instituted or is pending or contemplated; legal counsel has
participated in the preparation of the Registration Statement
and Prospectus and each amendment and supplement thereto, and no
facts have come to the attention of legal counsel to lead
counsel to believe that either the Registration Statement or the
Prospectus or any amendment or supplement thereto contains any
untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances
under which made (except for the financial statements and other
financial data included therein, as to which legal counsel
expresses no opinion); and such counsel is familiar with all
contracts referred to in the Registration Statement or
Prospectus and such contracts are sufficiently summarized or
disclosed therein or filed as exhibits thereto as required, and
such legal counsel does not know of any other contracts that are
required to be summarized or disclosed or filed, and such legal
counsel does not know of any legal or governmental proceedings
pending or threatened to which the Company is subject of such a
character required to be disclosed in the Registration Statement
or the Prospectus which are not disclosed and properly described
therein.
(viii) This Agreement has been duly authorized by the
Company and is a valid and binding agreement of the Company
enforceable in accordance with its terms subject to equitable
principles and to applicable bankruptcy, insolvency and other
laws concerning the enforceability of creditors' rights
generally; provided that such counsel need not express any
opinion as to the enforceability of any indemnification or
contribution provisions contained in this Agreement. A
sufficient number of shares of the Company's Common Stock have
been duly reserved for issuance upon exercise of the
Representative's Warrants.
(ix) Except as disclosed in the Registration Statement
and Prospectus, to the knowledge of legal counsel, neither the
Company nor its Subsidiary is in default under any of the
contracts, licenses, leases or agreements to which any of them
is a party and which are described in the Registration Statement
or attached thereto as exhibits and the Public Offering of the
Shares being sold by the Company to the Underwriting Group will
not cause the Company or its Subsidiary to become in default of
any of such contracts, licenses, leases or agreements.
(x) Except as disclosed in the Registration Statement
and Prospectus and subject to equitable principles, to the
knowledge of legal counsel, the properties owned by the Company
and its Subsidiary described in the Registration Statement are
free and clear of all liens, charges, encumbrances or
restrictions; to the knowledge of legal counsel, all of the
leases, subleases and other agreements known to such counsel
under which the Company and its Subsidiary hold their respective
properties and conduct their respective businesses are in full
force and effect; to the knowledge of legal counsel, neither the
Company nor its Subsidiary is in default under any of the
material terms or provisions of any of such leases, subleases or
other agreements known to such counsel; and to the knowledge of
legal counsel, there are no claims against the Company or its
Subsidiary concerning the rights of the Company and its
Subsidiary under such leases, subleases and other agreements and
concerning the right of the Company and its Subsidiary to
continued possession of their respective properties.
(xi) Legal counsel is unaware of any affiliate, parent
or subsidiary of the Company except as are described in the
Registration Statement and Prospectus.
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(xii) Except as disclosed in the Registration Statement,
either the Company or its Subsidiary exclusively owns,
possesses, or lawfully uses, pursuant to licenses, sublicenses
or other agreements, all U.S. or other foreign patents, patent
applications, trademarks, trademark applications, service marks,
trade names, logos, trade dress, mark works, and copyrights
(collectively, "Patents, Trademarks and Copyrights") necessary
to the purchase, sale, distribution, marketing and advertising
of sports related headwear and related accessories currently
being sold through the Company's retail stores; such patents,
Trademarks and Copyrights are legal, valid and enforceable; to
the best of legal counsel's knowledge, either the Company or its
Subsidiary owns, possesses and lawfully uses the Hat World
Corporation domain name on the internet exclusive of any third
party's rights or claims thereto; and to the best of legal
counsel's knowledge, the Company has taken all necessary and
appropriate action to maintain and protect the Patents,
Trademarks and Copyrights.
(xiii) Such counsel has not received and is not aware of
the Company or its Subsidiary having received any notice of any
claim from any third party which notice would cause such counsel
to conclude that the Company or its Subsidiary does not own or
possess adequate rights with respect to the Patents, Trademarks
and Copyrights.
(xiv) The licenses, sublicenses and other agreements
("Licenses") covering the use of any of the Patents, Trademarks
and Copyrights by the Company and its Subsidiary are legal,
binding, enforceable and in full force and effect and to the
best of legal counsel's knowledge, neither the Company nor its
Subsidiary is in breach or default of any such Licenses and no
event has occurred which with notice or lapse of time would
result in a breach or default or permit termination,
modification or acceleration under any such License.
(xv) To such counsel's knowledge, except as set forth in
the Registration Statement and Prospectus, no holders of Common
Stock or other securities of the Company have registration
rights with respect to securities of the Company and, except as
set forth in the Registration Statement and Prospectus, all
holders of securities of the Company having rights to
registration of such Common Stock, or other securities, because
of the filing of the Registration Statement by the Company have,
with respect to the Public Offering contemplated thereby, waived
such rights or such rights have expired by reason of lapse of
time following notification of the Company's intent to file the
Registration Statement, or have included securities in the
Registration Statement pursuant to the exercise of such rights.
In rendering such opinions, such legal counsel shall be entitled to rely
upon Public Authority Documents and upon information provided by client
officials in written Certificates provided that copies of such Public Authority
Documents and Certificates are attached as exhibits to the written opinion of
legal counsel. The term "Public Authority Documents" shall have the meaning
ascribed to it in the Legal Opinion Accord of the ABA Section of Business Law
(1991). Such opinions may be subject to such qualifications, exceptions,
definitions, limitations as are normally included in similar opinions.
8.9 Accountant's Letter. The Representative and legal counsel for the
Representative shall have received, at least ten (10) days prior to the
Effective Date and again two (2) days prior to the Closing Date, drafts of a
letter, and on the Closing Date, a duly executed letter addressed to the
Representative and dated the Closing Date from Eide Bailly LLP, independent
public accountants for the Company and its Subsidiary, stating that with respect
to the Company and its Subsidiary they are independent public accountants within
the meaning of the Act and the applicable published Rules and Regulations
thereunder; in their opinion, the Company's financial statements audited by them
at all dates and for all periods referred to in their opinion and included in
the Registration Statement and Prospectus, comply in all material respects with
the applicable accounting requirements of the Act and the published Rules and
Regulations thereunder with respect to registration statements on Form SB-2; on
the basis of certain indicated procedures (but not an audit in accordance with
generally accepted accounting principles), including reading of the instruments
of the Company and its Subsidiary set forth in the Prospectus, a reading of the
latest available interim unaudited financial statements of the Company, whether
or not appearing in the Prospectus, inquiries of the officers of the Company or
other persons responsible for its financial and accounting matters regarding the
specific items for which representations are requested below and a reading of
the minute book of the Company and its Subsidiary, nothing has come to their
attention, except as disclosed in their
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letter, which would cause them to believe that during the period from the last
audited balance sheet included in the Registration Statement to a specified date
not more than two (2) days prior to the date of such letter:
(i) there has been any material change in the financial position
of the Company and its Subsidiary other than as contemplated by
disclosures contained in the Prospectus;
(ii) there has been any material change in the capital stock or
surplus accounts of the Company and its Subsidiary or any payment or
declaration of any dividend or other distribution in respect thereof or
exchange therefor or in the debt of the Company and its Subsidiary from
that shown in the Company's last audited balance sheet included in the
Prospectus, other than as contemplated by disclosures contained in the
Prospectus;
(iii) there have been any material decreases in working capital
or net worth as compared with amounts shown in the Company's last
audited balance sheet included in the Prospectus other than as
contemplated by disclosures contained in the Prospectus;
(iv) there have been any material decreases, as compared with
amounts shown in the Company's last audited balance sheet included in
the Prospectus, in the cash balances other than as contemplated by
disclosures contained in the Prospectus;
(v) the financial statements and schedules set forth in the
Registration Statement and Prospectus do not present fairly the
financial position and results of operations of the Company and its
Subsidiary for the periods indicated in conformity with generally
accepted accounting principles applied on a consistent basis, and are
not in all material respects a fair presentation of the information
purported to be shown;
(vi) there is any material obligation or liability on the part
of the Company and its Subsidiary to fund any retirement plan maintained
by the Company or its Subsidiary which is currently in effect, which
obligation or liability is not otherwise reflected in Company's audited
financial statements as set forth in the Prospectus; and
(vii) the dollar amounts, percentages and other financial
information set forth in the Registration Statement and Prospectus under
the captions "Summary," "The Offering," "Summary Consolidated Financial
Data," "Risk Factors," "Use of Proceeds," "Capitalization," "Dilution,"
"Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business," "Summary
Compensation," and "Certain Transactions," are not in agreement with the
Company's general ledger, financial records or computations made by the
Company therefrom.
Such letter ("Accountant's Letter") shall also cover such other matters
incident to the transactions contemplated by this Agreement in form satisfactory
to the Representative as the Representative reasonably requests.
8.10 Conformed Copies of Accountant's Letter. The Representative shall
be furnished without charge, in addition to the original signed copies, such
number of signed or photostatic or conformed copies of the Accountant's Letter
as the Representative shall reasonably request.
8.11 Officer's Certificates. The Company shall have furnished to the
Representative and legal counsel for the Representative, at least ten (10) days
prior to the Effective Date and again two (2) days prior to the Closing, drafts
of a certificate and on the Closing Date, two (2) certificates each signed by
the president, chief operating officer and the chief financial officer of the
Company and its Subsidiary, one dated the date of this Agreement and one dated
as of the Closing Date, to the effect that:
(i) The representations and warranties of the Company, including
without limitations those relating to its Subsidiary, as set forth in
this Agreement are true and correct at and as of the date of the
certificate and the Company has complied with all the agreements and has
satisfied all the conditions on its part to be performed or satisfied at
or prior to the date of the certificate;
(ii) The Registration Statement has become effective and no
order suspending the effectiveness
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of the Registration Statement has been issued and to the best of the
knowledge of the respective signers, after such respective signers have
made inquiry, no proceeding for that purpose has been initiated or is
threatened by the Commission;
(iii) The respective signers have each carefully examined the
Registration Statement and Prospectus and any amendments and supplements
thereto, and the Registration Statement and the Prospectus and any
amendments and supplements thereto contain all statements required to be
stated therein, and all statements contained therein are true and
correct, and neither the Registration Statement nor Prospectus nor any
amendment or supplement thereto includes any untrue statement of a
material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein not misleading and,
since the Effective Date of the Registration Statement, there has
occurred no event required to be set forth in an amended or a
supplemented Prospectus which has not been so set forth;
(iv) This Agreement has been, and, as of the Closing Date, the
Representative's Warrants will have been, duly authorized and executed
by the Company;
(v) The respective signers have each reviewed the questionnaires
provided to the Representative by each officer and director of the
Company and its Subsidiary, and five percent (5%) or more shareholder of
the Company and, to the best of their knowledge, the statements made in
such questionnaires are true and correct;
(vi) Except as set forth in the Registration Statement and
Prospectus, since the respective dates as of which information is given
in the Registration Statement and Prospectus and prior to the date of
such certificate, (i) there has not been any change in the officers or
directors of the Company and its Subsidiary, or any substantially
adverse change, financial or otherwise, in the affairs or condition of
the Company, and (ii) neither the Company and its Subsidiary has
incurred any liabilities, direct or contingent, or entered into any
transactions, otherwise than in the ordinary course of business; and
(vii) As of or subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, no
dividends or distributions whatever have been declared and/or paid on or
with respect to the securities of the Company or its Subsidiary.
8.12 Tender for Delivery. All of the Shares being offered by the Company
which are sold in the Public Offering shall be tendered for delivery in
accordance with the terms and provisions of this Agreement.
8.13 Blue Sky Qualification. The Shares shall be qualified in such
states as are reasonably designated by the Representative as set forth in
Section 5.4 hereof and each such qualification shall be in effect and not
subject to any stop order or other proceeding on the Closing Date or Option
Closing Date. On both the Effective Date of the Registration Statement and on
the Closing Date, the Company and the Representative shall receive from
Clanahan, Tanner, Downing and Knowlton, P.C., a written opinion which contains
the following:
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(i) The names of the states in which applications to register or
qualify the Shares have been filed;
(ii) The status of such registrations or qualifications in such
states as of the date thereof;
(iii) A list containing the name of each such state in which the
Shares may be legally offered and sold by a dealer licensed in such
state and the number of each which may be legally offered and sold in
each such state as of the date thereof;
(iv) With respect to the written opinion dated on the Effective
Date, a representation that such legal counsel will continuously update
such written information if any changes occur in the information
provided therein between the Effective Date and the Closing Date and
Option Closing Date; and
(v) A statement that the Company, the members of the
Underwriting Group and selected dealers in the Public Offering may rely
upon the opinions contained therein.
8.14 Approval of Legal Counsel to the Representative. All opinions,
letters, certificates and evidence mentioned above or elsewhere in this
Agreement shall be deemed to be in compliance with the provisions hereof only if
they are in form and substance satisfactory to legal counsel for the
Representative. The suggested form of such documents shall be provided to the
legal counsel for the Representative at least three (3) business days before the
Closing Date.
8.15 Officer's Certificate as a Company Representative. Any certificate
signed by an officer of the Company and delivered to the Representative or to
legal counsel for the Representative will be deemed a representation and
warranty by the Company or its Subsidiary to the members of the Underwriting
Group as to the statements made therein.
SECTION 9
Termination
9.1 Termination Because of Noncompliance. This Agreement may be
terminated by the members of the Underwriting Group by notice to the Company in
the event that the Company shall have failed or been unable to comply with any
of the terms, conditions or provisions of this Agreement on the part of the
Company to be performed, complied with or fulfilled within the respective times
herein provided for, unless compliance therewith or performance or satisfaction
thereof shall have been expressly waived by the Representative in writing, or
the results of the Representative's due diligence investigation of the Company
and its Subsidiary, as provided in Section 5.13 hereof do not meet with the
approval of the Representative after being provided with explanations and
mitigations by counsel for the Company as contemplated under Section 5.13. This
Agreement may be terminated by the Company by notice to the Representative in
the event the members of the Underwriting Group shall have failed or been unable
to comply with any of the terms, conditions or provisions of this Agreement on
the part of the members of the Underwriting Group to be performed, complied with
or fulfilled within the respective times herein provided for, unless compliance
therewith or performance or satisfaction thereof shall have been expressly
waived by the Company in writing.
9.2 Termination Because of Changes. This Agreement may be terminated by
the members of the Underwriting Group by notice to the Company if the
Representative believes in its sole judgment that any changes have occurred in
or with respect to the management of the Company and its Subsidiary, that
material adverse changes have occurred in or with respect to the business,
financial condition, results of operations, prospects or obligations of the
Company and its Subsidiary, or if the Company or its Subsidiary shall have
sustained a loss or anticipated loss as a result of a strike, governmental
action, fire, flood, accident, contract termination, or other calamity of such a
character as, in the sole judgment of the Representative, may interfere
materially with the conduct of the business and operations of the Company and
its Subsidiary regardless of whether or not such loss or anticipated loss shall
have been insured, or if during the course of the Representative's due diligence
investigation of the Company and its Subsidiary facts arise which vary
materially in an adverse manner from the representations which have previously
been made concerning the business and financial condition of the Company and its
Subsidiary.
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9.3 Market Out Termination. This Agreement may be terminated by the
members of the Underwriting Group by notice to the Company at any time if, in
the judgment of the Representative, payment for and delivery of the Shares is
rendered impracticable or inadvisable because (i) additional material
governmental restrictions not in force and effect on the date hereof shall have
been imposed upon the trading in securities generally, or minimum or maximum
prices shall have been generally established on the New York or American Stock
Exchange, or trading in securities generally on either such Exchange shall have
been suspended, or a general moratorium shall have been established by federal
or state authorities, or (ii) a war or other national calamity or emergency
shall have occurred, or (iii) of any suspension of trading of the Common Stock
of the Company in the over-the-counter market, or (iv) substantial and material
adverse changes in the condition of the securities markets beyond normal
fluctuations have occurred which in the Underwriter's sole judgment would not
justify the Public Offering on the terms provided in this Agreement.
9.4 Effect of Termination Hereunder. If the members of the Underwriting
Group decide to terminate this Agreement pursuant to this Section 9 or the
Company decides to terminate this Agreement pursuant to Section 9.1 or 10.3
hereof, such party shall provide notice of such termination to the other party.
In such event, the Company shall reimburse the Representative on an accountable
basis for all reasonable and customary expenses incurred by the Representative
in connection with the proposed Public Offering as herein provided up to and
including the date of termination. The Representative shall provide the Company
with a statement of the Underwriting Group's actual accountable out of pocket
expenses, which shall include but are not limited to, fees of legal counsel for
the Representative and the fees of independent consultants and investigators who
are not directly or indirectly affiliated or associated with a member of the
NASD and who are retained by the Underwriting Group to provide a service in
connection with the due diligence investigation of the proposed Public Offering,
confirmation and other document preparation costs, entertainment expenses,
travel expenses, postage expenses, advertising costs, duplication expenses, long
distance telephone expenses, and any other documented third party expenses
(collectively "accountable expenses") incurred by the Underwriting Group in
connection with the Public Offering. The Representative shall not be required to
include in such accountable expenses any of the expenses to be paid by the
Company under Section 5.7 hereof, and, if the Underwriting Group has paid any of
such expenses on behalf of the Company, the Company shall separately reimburse
the Underwriting Group for such advances immediately upon receipt of a statement
therefor from the Representative. If such accountable expenses are less than the
amount of the nonaccountable expense payments the Company has made to the
Representative as provided in Section 3.3 hereof, the Underwriting Group will
refund the balance of such payments, net of the Representative's accountable
expenses, to the Company within ten (10) days after the delivery of such
statement by the Representative to the Company. If the amount of the accountable
expenses is more than the amount of the nonaccountable expense payments made by
the Company to the Representative, the balance shall be promptly paid by the
Company to the Representative. If the Company fails to pay the amount of
accountable expenses owed to the Representative or members of the Underwriting
Group, their successors or assigns, the Company shall be liable to the
Representative for attorneys' fees and costs incurred in the collection of such
amounts in addition to its liability for the unpaid amount of such accountable
expenses. The members of the Underwriting Group shall not have any liability to
each other if the Company or the members of the Underwriting Group decide not to
proceed with the proposed offering for any reason set forth in this Section 9 or
in Section 10 hereof, except that the Company shall remain obligated to pay the
costs and expenses required to be paid by it as specified in Section 5.7 hereof
and this Section 9.4, and the Company, and the members of the Underwriting Group
shall be obligated to pay, respectively, all losses, claims, damages or
liabilities, joint or several, under Section 6 hereof.
SECTION 10
Representations and Warranties of
the Members of the Underwriting Group
The members of the Underwriting Group represent and warrant to and agree
with the Company that:
10.1 Registration as Broker Dealer and Member of NASD. The members of
the Underwriting Group are registered as broker dealers with the Commission and
are members in good standing of the NASD and are licensed as dealers in all
states in which they will sell the Shares.
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10.2 No Pending Proceedings. There is not now pending against the
Representative any action or proceeding of which it has been advised, either in
any court of competent jurisdiction, before the Commission or any state
securities commission, concerning its activities as a broker or dealer that, in
the opinion of the Representative, would prevent it from acting as such under
federal securities laws or under the laws of the states in which it intends to
offer the Shares.
10.3 Company's Right to Terminate. In the event any action or proceeding
of the type referred to in Section 10.2 hereof shall be instituted against the
Representative at any time prior to the Closing Date hereunder, or in the event
there shall be filed by or against the Representative in any court pursuant to
any federal, state, local or municipal statute, a petition in bankruptcy or
insolvency or for reorganization or for the appointment of a receiver or trustee
of assets of the Representative or if the Representative makes an assignment for
the benefit of creditors, the Company shall have the right on written notice to
the Representative to terminate this Agreement without any liability to the
members of the Underwriting Group of any kind except for the payment of expenses
as provided in Section 5.7 hereof.
10.4 Finder. The members of the Underwriting Group know of no
outstanding claims against them for compensation for services in the nature of a
finder's fee, origination fee, financial consulting fee or any other form of
compensation as a finder with respect to the offer and sale of the Shares
hereunder.
10.5 Compliance. The members of the Underwriting Group, severally and
not jointly, agree to offer and sell the Shares being purchased hereunder in
accordance with the requirements of federal and state securities laws and the
rules of the NASD.
SECTION 11
Fee Payable on Occurrence of Certain Events
11.1 Fee Payable to Representative If Company Elects Out of Public
Offering. If after March 26, 1999, and prior to the execution of this Agreement,
the Company elect not to proceed expeditiously with the Public Offering even
though the Representative is ready, willing and able to effectuate the Public
Offering within the range of the Public Offering Price as set forth in the
Registration Statement and the Prospectus, the Company agrees that (i) it will
not sell any of its capital stock to the public to another underwriter for a
period of at least five (5) months, or (ii) if it does so, then the Company
shall pay to the Representative One Hundred Fifty Thousand Dollars ($150,000) in
addition to the amounts paid pursuant to the provisions set forth under Section
9 of this Agreement, which amount the Company and the Representative agree
constitutes a fair compensation to the Representative for services performed
with respect to the proposed Public Offering as contemplated under this
Agreement.
11.2 A Reorganization of Company Prior to Public Offering. If prior to
the Closing of the Proposed Public Offering contemplated under this Agreement
and during the period from March 26, 1999 until September 26, 1999, the Company
and its Subsidiary or either such entity is acquired, merges, sells or
substantially all of its or their assets or otherwise effects a reorganization
with any other entity and, as a result, the Public Offering contemplated under
this Agreement is abandoned by the Company, the Company shall pay the
Representative a fee in the amount of Fifty Thousand Dollars ($50,000) per month
in cash commencing retroactively to March 26, 1999. The Company and the
Representative agree that such fee and the amount of such fee constitutes fair
compensation to the Representative for services performed with respect to the
proposed Public Offering. Such fees shall be in addition to the payment of the
expenses and the fees discussed in Section 9 of this Agreement. Upon request,
the Representative shall act as the Company's investment banker in connection
with any such acquisition and render such services as their customary connection
therewith, in consideration for such fee.
11.3 First Right of Refusal. For a period of five (5) years after the
Closing Date or until an offering occurs which the Representative declines the
Company shall notify the Representative in writing at least ten (10) days before
the proposed public offering of any debt or equity security (other than bank
debt or similar financing) by the Company or by any of its majority owned or
controlled Subsidiaries (collectively referred to in this Section 11.3 as the
"Company") or any of its stockholders owning at least five percent (5%) of the
Company's Common Stock ("Principle Shareholders") such that the Representative
or, at its option, a group of associated investment
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<PAGE>
bankers, shall have the right of first refusal to effect the offering on terms
as favorable as their before offered in writing by reputable investment banker.
If the Company receives an offer from a major bracket underwriter, such right of
first refusal shall be considered satisfied if the Representatives included in
the offering as a syndicate member and receives a reasonable retention fee. For
purposes of this Section 11.3, the term "major bracket underwriter" any
investment bank which consistently during the past five (5) years has
underwriter as lead underwriter in excess of $100 million in total debt and
equity financing each year during such period. The Representative shall notify
the Company if it intends to exercise the right of first refusal provided under
this Section 11.3 within ten (10) days after receipt by the Representative of
such notice from the Company. If the Representative fails to exercise the right
of first refusal within the ten (10) day period and the terms of the proposed
subsequent financing thereafter are altered in any material respect, the Company
shall be required to offer to the Representative the right of first refusal to
effect subsequent financing on such altered terms and the Representative shall
have ten (10) days from the date of receipt to notify the Company of its
acceptance.
SECTION 12
Notice
Except as otherwise expressly provided in this Agreement:
12.1 Notice to the Company. Whenever notice is required by the
provisions of this Agreement to be given to the Company, such notice shall be in
writing addressed as follows:
Hat World Corporation
4912 South Minnesota Avenue
Sioux Falls, SD 57108
Attn: George N. Berger
Chairman of the Board
12.2 Notices. Whenever notice is required by the provisions of this
Agreement to be given to the members of the Underwriting Group, such notice
shall be given in writing addressed to the Representative at the address set
forth in the beginning of this Agreement.
SECTION 13
Miscellaneous
13.1 Benefit. This Agreement is made solely for the benefit of the
members of the Underwriting Group, the Company, their respective officers and
directors and any controlling person referred to in Section 15 of the Act, and
their respective successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successor" or the
term "successors and assigns" as used in this Agreement shall not include any
purchasers, as such, of any of the Shares. In addition, the indemnity, defense
and contribution obligations of the Company included in Section 6 of this
Agreement also inure to the benefit of the selected dealers and any person who
controls the selected dealers within the meaning of Section 15 of the Act.
13.2 Survival. The respective indemnities, agreements, representations,
warranties, covenants and other statements as set forth in or made pursuant to
this Agreement and the indemnity and contribution agreements contained in
Section 6 of this Agreement shall survive and remain in full force and effect,
regardless of (i) any investigation made by or on behalf of the Company, or the
Representative or any of the other members of the Underwriting Group or any such
officer or director thereof or any controlling person of the Company or of the
Representative or any other member of the Underwriting Group, (ii) delivery of
or payment for the Shares, and (iii) the occurrence of Closing Date and the
Option Closing Date. Any successor of the Company, any member of the
Underwriting Group or any controlling person, officer or director thereof, shall
be entitled to the benefits hereof.
13.3 Governing Law and Forum. The validity, interpretation and
construction of this Agreement and of each part hereof will be governed by the
laws of the State of Colorado. The parties to the Agreement hereby agree to
submit to the jurisdiction of the courts of the State of Colorado located in
Denver, Colorado which shall be the sole tribunal in which any such parties may
institute and maintain a legal proceeding against the other party arising from
any dispute under this Agreement. If any party initiates a legal proceeding in a
jurisdiction other than in the courts of the State of Colorado, the other party
may assert as a complete defense and as a basis for dismissal
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of such legal proceeding failure of the party initiating such proceeding to have
initiated and maintained such proceeding in the courts of the State of Colorado
in accordance with this Section 13.3. In the event of litigation or arbitration
concerning this Agreement, the prevailing party shall be awarded attorney's fees
and costs, subject to the provisions of Section 9.4 hereof.
13.4 The Information of the Members of the Underwriting Group.
Notwithstanding any participation by the legal counsel for the Representative in
the reorganization and/or revision of the Prospectus, the statements with
respect to the Public Offering of the Shares on the cover page of the Prospectus
and the Notes thereto and under the caption "Underwriting" in the Prospectus
constitute the only written information furnished by or on behalf of the members
of the Underwriting Group referred to in Sections 2.2, 6.1 and 6.2 hereof.
13.5 Severability. If any provision or portion of any provision of this
Agreement is determined to be invalid for any reason, such invalid provision or
portion of such invalid provision shall be deemed to be deleted and the validity
of the remaining provisions or portions thereof shall not be affected thereby
and shall remain in full force and effect.
13.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which may be deemed an original and all of which together
will constitute one and the same instrument.
Please confirm that the foregoing correctly sets forth the Agreement
between the members of the Underwriting Group and the Company.
Very truly yours,
HAT WORLD CORPORATION
By: _____________________________________
George N. Berger
Chairman of the Board
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THE REPRESENTATIVE, ON BEHALF OF THE UNDERWRITING GROUP, HEREBY CONFIRMS AS OF
THE DATE HEREOF THAT THE ABOVE LETTER SETS FORTH THE AGREEMENT BETWEEN THE
COMPANY AND THE UNDERWRITING GROUP.
EBI SECURITIES CORPORATION
By: _____________________________________
Harold M. Golz,
Executive Vice President,
as Attorney in Fact for the several
Underwriters named in Schedule I to
the Underwriting Agreement
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SCHEDULE I
TO
UNDERWRITING AGREEMENT
Underwriter Number of Shares
- ----------- ----------------
TOTAL
EXHIBIT 1.2
HAT WORLD CORPORATION
EBI SECURITIES CORPORATION
REPRESENTATIVE'S WARRANT AGREEMENT
DATED AS OF _______, 1999
<PAGE>
TABLE OF CONTENTS
Section Title Page Number
- ------- ----- -----------
1 Definitions 1
2 Warrants and Issuance of Warrant
Certificates 5
3 Form of Warrant Certificate 5
4 Term of Warrants; Exercise of Warrants 6
5 Reservation of Warrant Securities 8
6 Payment of Taxes 9
7 Warrant Securities to be Fully Paid 9
8 Limitation on Transfer 9
9 Adjustment of Exercise Price and
Number of Shares 9
10 Merger or Consolidation of the Company 14
11 Modification of Agreement 14
12 Notice to Holders 15
13 Registration Rights 16
14 Restrictions on Transfer 20
15 No Rights as Stockholder 21
16 Notices 21
17 Arbitration 22
18 Miscellaneous Provisions 22
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT
THIS REPRESENTATIVE'S WARRANT AGREEMENT (the "Agreement"), dated as of
__________________, 1999, is made and entered into by and between HAT WORLD
CORPORATION, a Minnesota corporation (the "Company"), and EBI SECURITIES
CORPORATION ("EBI").
The Company agrees to issue and sell, and EBI agrees to purchase, for
the price of $115, Warrants to purchase up to an aggregate 115,000 shares
("Shares") of the Company's Common Stock, subject to the terms and conditions
set forth below.
In consideration of the foregoing and for the purpose of defining the
terms and provisions of the Warrants and the respective rights and obligations
thereunder, the Company and EBI, for value received, hereby agree as follows:
SECTION 1. DEFINITIONS
The following terms used in this agreement shall have the following
meanings (unless otherwise expressly provided herein).
THE "ACT" The Securities Act of 1933, as amended.
THE "COMMISSION" The United States Securities and Exchange Commission.
THE "COMPANY" Hat World Corporation, a Minnesota corporation.
"COMMON STOCK" The Common Stock, $.01 par value per share, of the
Company, whether now or hereafter authorized, holders of which have the right to
participate in the distribution of earnings and assets of the Company without
limit as to the amount or percentage.
"CURRENT MARKET PRICE" The Current Market Price shall be determined as
follows:
(a) if the security at issue is listed on a national
securities exchange or admitted to unlisted trading privileges on such
an exchange or quoted on either the NASDAQ National Market System or
the NASDAQ Small Cap Market, the Current Market Price shall be the
average of the reported sale price of that security on such exchange or
system for twenty (20) consecutive trading days commencing twenty-one
(21) trading days before such Conversion Date as defined in Section
4.6(b); calculated; or, if no such sale is made on such day, the
average of the highest closing bid and lowest asked price for such day
on such exchange or system; or
(b) if the security at issue is not so listed or quoted or
admitted to unlisted trading privileges, the Current Market Price shall
be the last reported sale price of that security on the OTC Bulletin
Board on the day for which the Current Market
<PAGE>
Price is to be calculated; or if no such sale is made on such day, the
average of the last reported highest bid and lowest asked prices quoted
on the OTC Bulletin Board on the last business day on such day; or
(c) if the security at issue is not so listed or quoted or
admitted to unlisted trading privileges and bid and asked prices are
not reported, the Current Market Price shall be determined in such
reasonable manner as may be prescribed from time to time by the Board
of Directors of the Company, subject to the objection and arbitration
procedure as described in Section 9.9 below.
"EFFECTIVE DATE"________________, 1999.
"EXERCISE DATE" 8:00 a.m. Denver, Colorado, local time, on ___________,
2004.
"EXERCISE PERIOD" The period commencing on the Exercise Date and
extending to and through the Expiration Date.
"EXERCISE PRICE" $______________ per Share, as adjusted in accordance
with Section 9, below.
"EXPIRATION DATE" 5:00 p.m. Denver, Colorado, local time on __________,
2003; provided, however, if such date shall be a holiday or a day on which banks
are authorized to close in the State of Colorado, the Expiration Date shall mean
5:00 p.m. Denver, Colorado, local time on the next following day which in the
State of Colorado is not a holiday or a day on which banks are authorized to
close.
"HOLDER" or "WARRANT HOLDER" The person to whom a Warrant Certificate
is issued, and any valid transferee thereof pursuant to Section 8 below.
"MAJORITY HOLDER" Any Holder, any holder of Warrant Securities, or any
combination of Holders and such holders of Warrant Securities; and any Warrant
Holder, any holder of Warrant Securities, or any combination of such Holders and
such holders of Warrant Securities, if they hold, in the aggregate, unexercised
Warrants plus issued and outstanding Warrant Securities equal to more than fifty
percent (50%) of the total of (i) all Warrant Securities issued and outstanding
as a result of the exercise of the Warrant, and (ii) all Warrant Securities that
may at that time be purchased by exercising the unexercised portion of the
Warrants. For purposes hereof, a Holder of a Warrant which entitles the Holder
to purchase more than one share or Warrant shall be deemed to hold Warrants
equal to the number of shares or Warrants which may be acquired pursuant to any
such Warrant.
"NASD" The National Association of Securities Dealers, Inc.
"NASDAQ" The Nasdaq Stock Market, Inc.
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"WARRANTS" The Warrants issued in accordance with the terms of this
Agreement and any Warrants issued in substitution for or replacement of such
Warrants, or any Warrants into which such Warrants may be divided or exchanged.
"WARRANT SECURITIES" The Common Stock receivable upon exercise or
conversion of a Warrant, and the Common Stock underlying the unexercised portion
of a Warrant.
"OTC BULLETIN BOARD" An electronic quotation medium operated by NASDAQ.
"PUBLIC OFFERING" The public offering by the Company of shares of
Common Stock pursuant to an underwriting agreement dated as of ________________,
1999, between the Company and EBI as Representative of the several Underwriters
named in the underwriting agreement.
"UNDERWRITER" A broker-dealer identified as an Underwriter in the Final
Prospectus for the Public Offering.
SECTION 2. WARRANTS AND ISSUANCE OF WARRANT CERTIFICATES
2.1 DESCRIPTION OF WARRANTS. Each Warrant shall initially entitle the
Warrant Holder to purchase one share of Common Stock on exercise thereof,
subject to modification and adjustment as hereinafter provided in Section 10.
Warrant Certificates representing up to 115,000 Warrants and evidencing the
right to purchase an aggregate of up to 115,000 shares of Common Stock of the
Company shall be executed by the proper officers of the Company. The Company
shall deliver Warrant Certificates in required whole number denominations to the
person entitled thereto in connection with the original issuance of Warrant
Certificates or any transfer or exchange permitted under this Agreement.
2.2 WARRANT SECURITIES. Certificates representing the Warrant
Securities shall be issued only on or after the Exercise Date upon exercise or
conversion of the Warrants or upon transfer or exchange of the Warrant
Securities following exercise of the Warrants.
SECTION 3. FORM OF WARRANT CERTIFICATE
3.1 FORM OF CERTIFICATES. The Warrant Certificates shall be
substantially in the form attached hereto as Exhibit A and may have such
letters, numbers or other marks of identification and such legends, summaries or
endorsements printed, lithographed or engraved thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement.
The Warrant Certificates shall be dated as of the date of issuance, whether on
initial issuance, transfer, exchange or in lieu of mutilated, lost, stolen or
destroyed Warrant Certificates.
3.2 EXECUTION OF CERTIFICATES. The Warrant Certificates shall be
executed on behalf of the Company by its President and Secretary, by manual
signatures thereon, and shall have imprinted thereon a facsimile of the
Company's seal. Any Warrant Certificate may be signed by any person
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who at the actual date of the preparation of such Warrant Certificate shall be a
proper officer of the Company to sign such Warrant Certificate even though such
person was not such an officer upon the date of this Agreement.
3.3 MUTILATED, LOST, STOLEN, OR DESTROYED CERTIFICATE. In case the
certificate or certificates evidencing the Warrants shall be mutilated, lost,
stolen or destroyed, the Company shall, at the request of the Warrant Holder,
issue and deliver in exchange and substitution for and upon cancellation of the
mutilated certificate or certificates, or in lieu of and substitution for the
certificate or certificates lost, stolen or destroyed, a new Warrant Certificate
or Certificates of like tenor and representing an equivalent right or interest,
but only upon receipt of evidence satisfactory to the Company of such loss,
theft or destruction of such Warrant and a bond of indemnity, if requested, also
satisfactory in form and amount, at the applicant's cost. Applicants for such
substitute Warrant Certificate shall also comply with such other reasonable
regulations and pay such other reasonable charges as the Company may prescribe.
3.4 EXCHANGE OF CERTIFICATE. Any Warrant Certificate may be exchanged
for another certificate or certificates entitling the Warrant Holder to purchase
a like aggregate number of Shares as the certificate or certificates surrendered
then entitled such Warrant Holder to purchase. Any Warrant Holder desiring to
exchange a Warrant Certificate shall make such request in writing delivered to
the Company, and shall surrender, properly endorsed, with signatures guaranteed,
the certificate evidencing the Warrant to be so exchanged. Thereupon, the
Company shall execute and deliver to the person entitled thereto a new Warrant
Certificate as so requested.
SECTION 4. TERM OF WARRANTS; EXERCISE OF WARRANT
4.1 EXERCISE OF WARRANT. Subject to the terms of this Agreement, the
Warrant Holder shall have the right, at any time during the four-year period
commencing at 8:00 a.m., Denver Time, on the Exercise Date and ending at 5:00
p.m., Denver Time, on the Expiration Date to purchase from the Company up to the
number of fully paid and nonassessable Shares to which the Warrant Holder may at
the time be entitled to purchase pursuant to this Agreement, upon surrender to
the Company, at its principal office, of the certificate evidencing the Warrants
to be exercised, together with the purchase form on the reverse thereof, duly
filled in and signed, and upon payment to the Company of the Exercise Price for
the number of Shares in respect of which such Warrants are then exercised, but
in no event for less than 100 Shares (unless fewer than an aggregate of 100
Shares are then purchasable under all outstanding Warrants held by a Warrant
Holder).
4.2 PAYMENT OF EXERCISE PRICE. Except as otherwise provided in Section
4.6 hereof, payment of the aggregate Exercise Price shall be made in cash or by
check, or any combination thereof.
4.3 ISSUANCE OF SHARES. Subject to the provisions of Section 9, upon
receipt of a Warrant Certificate with the exercise form thereon duly executed,
together with payment in full of the Exercise Price for the Warrant Securities
being purchased by such exercise, or upon exercise of the Conversion Right
described in Section 4.6, the Company shall requisition from the Company's
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<PAGE>
transfer agent certificates for Warrant Securities and upon receipt shall make
delivery of certificates evidencing the total number of whole Warrant Securities
for which Warrants are then being exercised or converted, together with cash as
provided in Section 4.7 hereof in respect of any fractional Warrant Securities
otherwise issuable upon such surrender. The certificates shall be in such names
and denominations as are required for delivery to, or in accordance with the
instructions of the Warrant Holder; provided that if fewer than all Warrant
Securities issuable on exercise of a Warrant Certificate are purchased, the
Company shall issue a Warrant Certificate for the balance of the Warrant
Securities. Such certificates for the Warrant Securities shall be deemed to be
issued, and the person to whom such Warrant Securities are issued of record
shall be deemed to have become a holder of record of such Warrant Securities, as
of the date of the surrender of such Warrant Certificate and payment of the
Exercise Price, whichever shall last occur; provided further that if the books
of the Company with respect to the Warrant Securities shall be closed as of such
date, the certificates for such Warrant Securities shall be deemed to be issued,
and the person to whom such Warrant Securities are issued of record shall be
deemed to have become a record holder of such Warrant Securities, as of the date
provided in Section 4.5 below, but at the Exercise Price and upon the other
conditions in effect upon the date of surrender of the Warrant Certificate and
payment of the Exercise Price, whichever shall have last occurred, to the
Company.
4.4 CANCELLATION OF CERTIFICATES. All Certificates surrendered upon
exercise or conversion of Warrants shall be cancelled.
4.5 STATUS AS SHAREHOLDER. Upon receipt of the Warrant Certificate by
the Company as described in Sections 4.1 or 4.3 above, the Holder shall be
deemed to be the holder of record of the Warrant Securities issuable upon such
exercise, notwithstanding that the transfer books of the Company may then be
closed or that certificates representing such Warrant Securities may not have
been prepared or actually delivered to the Holder.
4.6 CONVERSION RIGHT. In addition to and without limiting the rights of
the Holder under the terms of the Warrant Agreement, the Holder shall have the
right (the "Conversion Right") during the Exercise Period to convert the Warrant
evidenced by a certificate or any portion thereof into shares of Common Stock as
provided in this Section 4.6 at any time or from time to time prior to its
expiration.
(a) Upon exercise of the Conversion Right with respect to a
particular number of shares of Common Stock (the "Converted Shares"),
the Company shall deliver to the Holder, without payment by the Holder
of any Exercise Price or any cash or other consideration, that number
of Converted Shares equal to the quotient obtained by dividing the Net
Value (as hereinafter defined in this paragraph 4.6(a)) of the
Converted Shares by the Current Market Price of a single Share,
determined in each case as of the close of business on the Conversion
Date (as hereinafter defined). The "Net Value" of the Converted Shares
shall be determined by subtracting the aggregate Exercise Price of the
Converted Shares from the aggregate Current Market Price of the
Converted Shares on the Conversion Date. No fractional securities shall
be issuable upon exercise of the Conversion Right, and if the number of
securities to be issued in accordance with the foregoing formula is
other
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<PAGE>
than a whole number, the Company shall pay to the Holder an amount in
cash equal to the Current Market Price of the resulting fractional
share as provided in Section 4.7.
(b) The Conversion Right may be exercised by the Holder by the
surrender of the Warrant Certificate at the principal office of the
Company or at the office of the Company's stock transfer agent, if any,
together with a written statement specifying that the Holder thereby
intends to exercise the Conversion Right and indicating the number of
shares of Common Stock subject to the Warrants which are being
surrendered (referred to in subparagraph 4(a) above as the Converted
Shares), on the reverse side of the Warrant Certificate, in exercise of
the Conversion Right. Such conversion shall be effective upon receipt
by the Company of the Warrant Certificate, or on such later date as is
specified therein (the "Conversion Date"), but not later than the
Expiration Date. Certificates for the Converted Shares issuable upon
exercise of the Conversion Right, together with a check in payment of
any fractional Converted Share and, in the case of a partial exercise a
new Warrant evidencing the Warrant Securities remaining subject to the
Warrant, shall be issued as of the Conversion Date and shall be
delivered to the Holder within seven (7) days following the Conversion
Date.
4.7 FRACTIONAL SHARES. On exercise of the Warrants by the Warrant
Holders, the Company shall not be required to deliver fractions of shares of
Common Stock; provided, however, that the Company shall purchase such fraction
for an amount in cash equal to the Current Market Price of such fraction,
computed on the trading day immediately preceding the day upon which such
Warrant Certificate was surrendered for exercise. By accepting a Warrant
Certificate, the holder thereof expressly waives any right to receive a Warrant
Certificate evidencing any fraction of a Share or to receive any fractional
share of securities upon exercise of a Warrant, except as expressly provided in
this Section 4.7.
SECTION 5. RESERVATION OF WARRANT SECURITIES
There has been reserved, and the Company shall at all times keep
reserved so long as the Warrants remain outstanding, out of its authorized and
unissued Common Stock, such number of shares of Common Stock as shall be subject
to purchase under the Warrants. Every transfer agent for the Common Stock and
other securities of the Company issuable upon the exercise of the Warrants will
be irrevocably authorized and directed at all times to reserve such number of
authorized shares and other securities as shall be requisite for such purpose.
The Company will keep a copy of this Agreement on file with every transfer agent
for the Common Stock and other securities of the Company issuable upon the
exercise of the Warrants. The Company will supply every such transfer agent with
duly executed stock and other certificates, as appropriate, for such purpose and
will provide or otherwise make available any cash which may be payable as
provided in Section 4.7.
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<PAGE>
SECTION 6. PAYMENT OF TAXES
The Company will pay all documentary stamp taxes, if any, attributable
to the initial issuance of the Warrants or the Warrant Securities and any tax
(except federal or state income tax) which may be payable in respect of any
transfer of the Warrants or the Warrant Securities.
SECTION 7. WARRANT SECURITIES TO BE FULLY PAID
The Company covenants that all Warrant Securities that may be issued
and delivered to a Holder of this Warrant upon the exercise of a Warrant and
payment of the Exercise Price, and all Converted Shares that may be issued and
delivered to a Holder upon a conversion of a Warrant, will be, upon such
delivery, validly and duly issued, fully paid and nonassessable.
SECTION 8. LIMITATION ON TRANSFER
This Warrant may not be sold, transferred, assigned, pledged or
hypothecated until the Exercise Date, except for (a) the sale, transfer, or
assignment, in whole or in part, to or among the officers of EBI and employees
who are also shareholders of EBI or, (b) the transfer by will, pursuant to the
laws of descent and distribution or operation of law as a result of the death of
any transferee to whom all or a portion of this Warrant may be transferred. All
sales, transfers, assignments or hypothecations of this Warrant must be in
compliance with this Section 8. Any assignment or transfer of this Warrant shall
be made by the presentation and surrender of this Warrant to the Company at its
principal office or the office of its transfer agent, if any, accompanied by a
duly executed Assignment Form, in the form attached to and by this reference
incorporated in this Warrant as Exhibit B. Upon the presentation and surrender
of these items to the Company, the Company, at its sole expense, shall execute
and deliver to the new Holder or Holders a new Warrant or Warrants, containing
the same terms and conditions as this Warrant, in the name of the new Holder or
Holders as named in the Assignment Form, and this Warrant shall at that time be
canceled.
SECTION 9. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES
9.1. ADJUSTMENTS. The number and kind of securities purchasable upon
the exercise of the Warrants and the Exercise Price shall be subject to
adjustment from time to time upon the happening of certain events, as follows:
(a) In case the Company shall (i) pay a dividend in Common
Stock or make a distribution to its stockholders in Common Stock, (ii)
subdivide its outstanding Common Stock, (iii) combine its outstanding
Common Stock into a smaller number of shares of Common Stock, (iv)
allocate or reallocate among stockholders its Common Stock as a result
of a reclassification as provided under Section 9.1(b), or (v) issue by
reclassification of its Common Stock other securities of the Company,
the number of Shares purchasable upon exercise of the Warrants
immediately prior thereto shall be adjusted so that the Warrant Holder
shall be entitled to receive the kind and number of Shares or other
securities of the
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Company which it would have owned or would have been entitled to
receive immediately after the happening of any of the events described
above, had the Warrants been exercised immediately prior to the
happening of such event or any record date with respect thereto. Any
adjustment made pursuant to this subsection 9.1(a) shall become
effective immediately after the effective date of such event
retroactive to the record date, if any, for such event.
(b) If, prior to the expiration of the Warrants by exercise,
by their terms, or by redemption, the Company shall be recapitalized by
reclassifying its outstanding shares of Common Stock into shares with a
different par value, or by changing its outstanding shares of Common
Stock into shares without par value or in the event of any other
material change of the capital structure of the Company or of any
successor corporation by reason of any reclassification,
recapitalization, allocation, reallocation or conveyance, prompt,
proportionate, equitable, lawful and adequate provision shall be made
whereby any Warrant Holder shall thereafter have the right to purchase,
on the basis and the terms and conditions specified in this Agreement,
in lieu of the Warrant Securities theretofore purchasable on the
exercise of any Warrant, such securities or assets as may be issued or
payable with respect to or in exchange for the number of Warrant
Securities theretofore purchasable on exercise of the Warrant had such
reclassification, recapitalization, allocation, reallocation or
conveyance not taken place; and in any such event, the rights of any
Warrant Holder to any adjustment in the number of Warrant Securities
purchasable on exercise of such Warrant, as set forth above, shall
continue to be preserved in respect of any stock, securities or assets
which the Warrant Holder becomes entitled to purchase.
(c) In case the Company shall issue rights, options, warrants,
or convertible securities to all or substantially all holders of its
Common Stock, without any charge to such holders, entitling them to
subscribe for or purchase Common Stock at a price per share which is
lower at the record date mentioned below than the then Current Market
Price, the number of Shares thereafter purchasable upon the exercise of
each Warrant shall be determined by multiplying the number of Shares
theretofore purchasable upon exercise of the Warrants by a fraction,
the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such rights, options,
warrants or convertible securities plus the number of additional shares
of Common Stock offered for subscription or purchase, and the
denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to the issuance of such rights, options,
warrants, or convertible securities plus the number of shares which the
aggregate offering price of the total number of shares offered would
purchase at such Current Market Price. Such adjustment shall be made
whenever such rights, options, warrants, or convertible securities are
issued, and shall become effective immediately and retroactively to the
record date for the determination of stockholders entitled to receive
such rights, options, warrants, or convertible securities.
(d) In case the Company shall distribute to all or
substantially all holders of its Common Stock evidences of its
indebtedness or assets (excluding cash dividends or distributions out
of earnings) or rights, options, warrants, or convertible securities
containing
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the right to subscribe for or purchase Common Stock (excluding those
referred to in subsection 9.1(b) above), then in each case the number
of Shares thereafter purchasable upon the exercise of the Warrants
shall be determined by multiplying the number of Shares theretofore
purchasable upon exercise of the Warrants by a fraction, the numerator
of which shall be the then Current Market Price on the date of such
distribution, and the denominator of which shall be such Current Market
Price on such date minus the then fair value (as determined by the
Company's independent public accountants qualifying under Section 9.6
or if determined by the Company as reviewed by such independent public
accountants) of the portion of the assets or evidences of indebtedness
so distributed or of such subscription rights, options, warrants, or
convertible securities applicable to one share. Such adjustment shall
be made whenever any such distribution is made and shall become
effective on the date of distribution retroactive to the record date
for the determination of stockholders entitled to receive such
distribution.
(e) No adjustment in the number of Shares purchasable pursuant
to the Warrants shall be required unless such adjustment would require
an increase or decrease of at least one percent (1%) in the number of
Shares then purchasable upon the exercise of the Warrants or, if the
Warrants are not then exercisable, the number of Shares purchasable
upon the exercise of the Warrants on the first date thereafter that the
Warrants become exercisable; provided, however, that any adjustments
which by reason of this subsection 9.1(e) are not required to be made
immediately shall be carried forward and taken into account in any
subsequent adjustment.
(f) Whenever the number of Shares purchasable upon the
exercise of the Warrant is adjusted, as herein provided, the Exercise
Price payable upon exercise of the Warrant shall be adjusted by
multiplying such Exercise Price immediately prior to such adjustment by
a fraction, the numerator of which shall be the number of Warrant
Shares purchasable upon the exercise of the Warrant immediately prior
to such adjustment, and the denominator of which shall be the number of
Warrant Shares so purchasable immediately thereafter.
(g) Whenever the number of Shares purchasable upon exercise of
the Warrants is adjusted as herein provided, the Company shall cause to
be promptly mailed to the Warrant Holder by first class mail, postage
prepaid, notice of such adjustment and a certificate of the chief
financial officer of the Company setting forth the number of Shares
purchasable upon the exercise of the Warrants after such adjustment, a
brief statement of the facts requiring such adjustment and the
computation by which such adjustment was made.
(h) For the purpose of this subsection 9.1, the term "Common
Stock" shall mean (i) the class of stock designated as the Common Stock
of the Company at the date of this Agreement, or (ii) any other class
of stock resulting from successive changes or reclassifications of such
Common Stock consisting solely of changes in par value, or from par
value to no par value, or from no par value to par value. In the event
that at any time, as a result of an adjustment made pursuant to this
Section 9, the Warrant Holder shall become entitled to purchase any
securities of the Company other than Common Stock, (y) if the
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Warrant Holder's right to purchase is on any other basis than that
available to all holders of the Company's Common Stock, the Company
shall obtain an opinion of an independent investment banking firm
valuing such other securities; and (z) thereafter the number of such
other securities so purchasable upon exercise of the Warrants shall be
subject to adjustment from time to time in a manner and on terms as
nearly equivalent as practicable to the provisions with respect to the
Shares contained in this Section 9.
(i) Upon the expiration of any rights, options, warrants, or
conversion privileges, if such shall have not been exercised, the
number of Shares purchasable upon exercise of the Warrants, to the
extent the Warrants have not then been exercised, shall, upon such
expiration, be readjusted and shall thereafter be such as they would
have been had they been originally adjusted (or had the original
adjustment not been required, as the case may be) on the basis of (i)
the fact that the only shares of Common Stock so issued were the shares
of Common Stock, if any, actually issued or sold upon the exercise of
such rights, options, warrants, or conversion privileges, and (ii) the
fact that such shares of Common Stock, if any, were issued or sold for
the consideration actually received by the Company upon such exercise
plus the consideration, if any, actually received by the Company for
the issuance, sale or grant of all such rights, options, warrants, or
conversion privileges whether or not exercised; provided, however, that
no such readjustment shall have the effect of decreasing the number of
Shares purchasable upon exercise of the Warrants by an amount in excess
of the amount of the adjustment initially made in respect of the
issuance, sale, or grant of such rights, options, warrants, or
conversion rights.
9.2 NO ADJUSTMENT FOR DIVIDENDS. Except as provided in subsection 9.1,
no adjustment in respect of any dividends or distributions out of earnings shall
be made during the term of the Warrants or upon the exercise or conversion of
the Warrants.
9.3 NO ADJUSTMENT IN CERTAIN CASES. No adjustments shall be made
pursuant to Section 9 hereof in connection with the issuance of the Common Stock
sold as part of the public sale pursuant to the Underwriting Agreement or the
issuance of shares of Common Stock upon exercise of the Warrants. No adjustments
shall be made pursuant to Section 9 hereof in connection with the grant or
exercise of presently authorized or outstanding options to purchase, or the
issuance of shares of Common Stock under the Company's director or employee
benefit plans disclosed in the Registration Statement relating to the Public
Offering.
9.4 PRESERVATION OF PURCHASE RIGHTS UPON RECLASSIFICATION,
CONSOLIDATION, ETC. In case of any consolidation of the Company with or merger
of the Company into another corporation, or in case of any sale or conveyance to
another corporation of the property, assets, or business of the Company as an
entirety or substantially as an entirety, the Company or such successor or
purchasing corporation, as the case may be, shall execute with the Warrant
Holder an agreement that the Warrant Holder shall have the right thereafter upon
payment of the Exercise Price in effect immediately prior to such action to
purchase, upon exercise of the Warrants, the kind and amount of shares and other
securities and property which it would have owned or have been entitled to
receive after the happening of such consolidation, merger, sale, or conveyance
had the Warrants been
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exercised immediately prior to such action. In the event of a merger described
in Section 368(a)(2)(E) of the Internal Revenue Code of 1986, in which the
Company is the surviving corporation, the right to purchase Shares under the
Warrants shall terminate on the date of such merger and thereupon the Warrants
shall become null and void, but only if the controlling corporation shall agree
to substitute for the Warrants, its Warrants which entitle the holder thereof to
purchase upon their exercise the kind and amount of shares and other securities
and property which it would have owned or been entitled to receive had the
Warrants been exercised immediately prior to such merger. Any such agreements
referred to in this subsection 9.4 shall provide for adjustments, which shall be
as nearly equivalent as may be practicable to the adjustments provided for in
Section 9 hereof. The provisions of this subsection 9.4 shall similarly apply to
successive consolidations, mergers, sales, or conveyances.
9.5 PAR VALUE OF SHARES OF COMMON STOCK. Before taking any action which
would cause an adjustment effectively reducing the portion of the Exercise Price
allocable to each Share below the par value per share of the Common Stock
issuable upon exercise of the Warrants, the Company will take any corporate
action which may, in the opinion of its counsel, be necessary in order that the
Company may validly and legally issue fully paid and nonassessable Common Stock
upon exercise of the Warrants.
9.6 INDEPENDENT PUBLIC ACCOUNTANTS. The Company may retain a firm of
independent public accountants of recognized national standing (which may be any
such firm regularly employed by the Company) to make any computation required
under this Section 9, and a certificate signed by such firm shall be conclusive
evidence of the correctness of any computation made under this Section 9.
9.7 STATEMENT ON WARRANT CERTIFICATES. Irrespective of any adjustments
in the number of securities issuable upon exercise of the Warrants, Warrant
certificates theretofore or thereafter issued may continue to express the same
number of securities as are stated in the similar Warrant certificates initially
issuable pursuant to this Agreement and shall automatically be deemed to include
the number of securities as so adjusted even though not stated on such Warrant
Certificates. However, the Company may, at any time in its sole discretion
(which shall be conclusive), make any change in the form of Warrant certificate
that it may deem appropriate and that does not affect the substance thereof; and
any Warrant certificate thereafter issued, whether upon registration of transfer
of, or in exchange or substitution for, an outstanding Warrant certificate, may
be in the form so changed.
9.8 TREASURY STOCK. For purposes of this Section 9, shares of Common
Stock owned or held at any relevant time by, or for the account of, the Company,
in its treasury or otherwise, shall not be deemed to be outstanding for purposes
of the calculations and adjustments described.
9.9 OFFICERS' CERTIFICATE REGARDING ADJUSTMENTS. Whenever the Exercise
Price or the aggregate number of Warrant Securities purchasable pursuant to this
Warrant shall be adjusted as required by the provisions of this Section 9, the
Company shall promptly file with its Secretary or an Assistant Secretary at its
principal office, and with its transfer agent, if any, an officers' certificate
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executed by the Company's President and Secretary or Assistant Secretary,
describing the adjustment and setting forth, in reasonable detail, the facts
requiring such adjustment and the basis for and calculation of such adjustment
in accordance with the provisions of this Warrant. Each such officers'
certificate shall be made available to the Holder or Holders of this Warrant for
inspection at all reasonable times, and the Company, after each such adjustment,
shall promptly deliver a copy of the officers' certificate relating to that
adjustment to the Holder or Holders of this Warrant. If the officers'
certificate is not accompanied by the certificate described in Section 9.1, the
officers' certificate described in this Section 9.9 shall be deemed to be
conclusive as to the correctness of the adjustment reflected therein if, and
only if, no Holder of this Warrant delivers written notice to the Company of an
objection to the adjustment within thirty (30) days after the officers'
certificate is delivered to the Holder or Holders of this Warrant. The Company
will make its books and records available for inspection and copying during
normal business hours by the Holder so as to permit a determination as to the
correctness of the adjustment. If written notice of an objection is delivered by
a Holder to the Company and the parties cannot reconcile the dispute, the Holder
and the Company shall submit the dispute to arbitration pursuant to the
provisions of Section 17 below. Failure to prepare or provide the officers'
certificate shall not modify the parties' rights hereunder.
SECTION 10. MERGER OR CONSOLIDATION OF THE COMPANY
The Company will not merge or consolidate with or into any other
corporation or sell all or substantially all of its property to another
corporation, unless it has complied with the provisions of Section 9.4.
SECTION 11. MODIFICATION OF AGREEMENT.
The Company may by supplemental agreement make any changes or
corrections in this Agreement it shall deem appropriate to cure any ambiguity or
to correct any defective or inconsistent provision or mistake or error herein
contained. Additionally, the Company may make any changes or corrections deemed
necessary which shall not adversely affect the interests of the Holders, which
adverse affects to the interests of the Holders would not include either the
lowering the Exercise Price or extending the Exercise Period of the Warrants;
provided, however, this Agreement shall not otherwise be modified, supplemented
or altered in any respect except with the consent in writing of the Holders who
hold not less than a majority of the Warrants then outstanding and provided
further that no such amendment shall accelerate the Warrant Expiration Date or
increase the Exercise Price without the approval of all the holders of all
outstanding Warrants.
SECTION 12. NOTICE TO HOLDERS
If, prior to the expiration of this Warrant either by its terms or by
its exercise in full, any of the following shall occur:
(i) the Company shall declare a dividend or authorize any
other distribution on its Common Stock; or
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(ii) the Company shall authorize the granting to the
shareholders of its Common Stock of rights to
subscribe for or purchase any securities or any other
similar rights; or
(iii) any reclassification, reorganization, allocation,
reallocation or similar change of the Common Stock,
or any consolidation or merger to which the Company
is a party, or the sale, lease, or exchange of any
significant portion of the assets of the Company; or
(iv) the voluntary or involuntary dissolution, liquidation
or winding up of the Company; or
(v) any purchase, retirement or redemption by the Company
of its Common Stock;
then, and in any such case, the Company shall deliver to the Holder or Holders
written notice thereof at least thirty (30) days prior to the earliest
applicable date specified below with respect to which notice is to be given,
which notice shall state the following:
(a) the purpose for which a record of stockholders is to be taken;
(b) the number, amount, price and nature of the shares of Common
Stock or other stock, securities, or assets which will be
deliverable on Warrant Securities following exercise of the
Warrants if such exercise occurs prior to the record date for
such action;
(c) the date on which a record is to be taken for the purpose of
such dividend, distribution or rights, or, if a record is not
to be taken, the date as of which the shareholders of Common
Stock of record to be entitled to such dividend, distribution
or rights are to be determined;
(d) the date on which such reclassification, reorganization,
allocation, reallocation, consolidation, merger, sale,
transfer, dissolution, liquidation, winding up or purchase,
retirement or redemption is expected to become effective, and
the date, if any, as of which the Company's shareholders of
Common Stock of record shall be entitled to exchange their
Common Stock for securities or other property deliverable upon
such reclassification, reorganization, allocation,
reallocation, consolidation, merger, sale, transfer,
dissolution, liquidation, winding up, purchase, retirement or
redemption; and
(e) if any matters referred to in the foregoing clauses are to be
voted upon by shareholders of Common Stock, the date as of
which those shareholders to be entitled to vote are to be
determined.
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SECTION 13. REGISTRATION RIGHTS
13.1 DEMAND REGISTRATION RIGHT. Upon the written request of a Majority
Holder, made at any time after the Exercise Date, but before the Expiration
Date, the Company shall file within ninety (90) days of such written request a
registration statement or Regulation A offering statement pursuant to the Act,
and all necessary amendments thereto, to register or qualify the Warrant,
Warrant Securities and the Warrant Securities underlying the unexercised portion
of this Warrant. The Company may use the Regulation A exemption if available,
but the Company must file a registration statement if the securities that are to
be covered cannot be sold pursuant to Regulation A because of the limitations
applicable to the use of the Regulation A exemption. The Company agrees to use
its best efforts to cause this registration or qualification to become effective
as promptly as practicable and to keep such registration effective for a period
expiring on the earlier of one hundred eighty (180) days after the Effective
Date or the date of completion of the distribution described in the Registration
Statement; and its officers, directors, consultants, auditors and counsel shall
cooperate in all matters necessary or advisable to pursue this objective. All of
the expenses of this registration or qualification shall be borne by the
Company, including, but not limited to, legal, accounting, consulting, printing,
filing and NASD fees, out-of-pocket expenses incurred by counsel, accountants,
and consultants retained by the Company and miscellaneous expenses directly
related to the registration statement or offering statement and the offering,
and the underwriter's accountable and nonaccountable expense allowances and
fees; but the Company shall not pay any expense allowance, brokerage fees,
commissions or underwriting discounts except to the extent they are attributable
to other securities that the Company has registered or qualified in conjunction
with the registration and qualification of the Warrant, Warrant Securities or
the Warrant Securities underlying the unexercised portion of this Warrant.
Notwithstanding the foregoing, if, as a qualification of any offering in any
state or jurisdiction in which the Company (by vote of its Board of Directors)
or any underwriter determines in good faith that it wishes to offer securities
registered in the offering, it is required that offering expenses be allocated
in a manner different from that provided above, then the offering expenses shall
be allocated in whatever manner is most nearly in compliance with the provisions
set out above. The Majority Holder shall be entitled to exercise the rights
described in this subsection 13.1 one (1) time only.
Within ten (10) days after the delivery by the Majority Holder to the
Company of the notice described above, the Company shall deliver written notice
to all other Holders of this Warrant and holders of the Warrant Securities, if
any, advising them that the Company is proceeding with a registration statement
or offering statement and offering them the right to include the Warrant and
Warrant Securities of those Holders or holders therein. If any Holder of a
Warrant and Warrant Securities delivers written acceptance of that offer to the
Company within thirty (30) days after the delivery of the Company's notice, the
Company shall be obligated to include that holder's Warrant and that holder's
Warrant Securities in the contemplated registration statement or offering
statement.
13.2 PIGGY-BACK REGISTRATION RIGHT. If at any time prior to the
Expiration Date the Company files a registration statement with the Commission
pursuant to the Act, or pursuant to any other act passed after the date of this
Agreement, which filing provides for the sale of securities by the Company to
the public, or files a Regulation A offering statement under the Act, the
Company
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shall offer to the Holder or Holders of this Warrant and the holders of any
Warrant Securities the opportunity to register or qualify the Warrant Securities
and any Warrant Securities underlying the unexercised portion of this Warrant,
if any, at the Company's sole expense, regardless of whether the Holder or
Holders of this Warrant or the holders of Warrant Securities or both may have
previously availed themselves of any of the registration rights described in
this Section 13; provided, however, that in the case of a Regulation A offering,
the opportunity to qualify shall be limited to the amount of the available
exemption after taking into account the securities that the Company wishes to
qualify. Notwithstanding anything to the contrary, this subsection 13.2 shall
not be applicable to a registration statement registering securities issued
pursuant to an employee benefit plan or as to a transaction subject to Rule 145
promulgated under the Act or for which a form S-4 registration statement could
be used.
The Company shall deliver written notice to the Holder or Holders of
this Warrant and to any holders of the Warrant Securities of its intention to
file a registration statement or Regulation A offering statement under the Act
at least sixty (60) days prior to the filing of such registration statement or
offering statement, and the Holder or Holders and holders of Warrant Securities
shall have thirty (30) days thereafter to request in writing that the Company
register or qualify the Warrant Securities or the Warrant Securities underlying
the unexercised portion of this Warrant in accordance with this subsection 13.2.
Upon the delivery of such a written request within the specified time, the
Company shall be obligated to include in its contemplated registration statement
or offering statement all information necessary or advisable to register or
qualify the Warrant Securities or Warrant Securities underlying the unexercised
portion of this Warrant for a public offering, if the Company does file the
contemplated registration statement or offering statement; provided, however,
that neither the delivery of the notice by the Company nor the delivery of a
request by a Holder or by a holder of Warrant Securities shall in any way
obligate the Company to file a registration statement or offering statement.
Furthermore, notwithstanding the filing of a registration statement or offering
statement, the Company may, at any time prior to the effective date thereof,
determine not to offer the securities to which the registration statement or
offering statement relates, other than the Warrant, Warrant Securities and
Warrant Securities underlying the unexercised portion of this Warrant.
Notwithstanding the foregoing, if, as a qualification of any offering in any
state or jurisdiction in which the Company (by vote of its Board of Directors)
or any underwriter determines in good faith that it wishes to offer securities
registered in the offering, it is required that offering expenses be allocated
in a manner different from that provided above, then the offering expenses shall
be allocated in whatever manner is most nearly in compliance with the provisions
set out above. The Company shall comply with the requirements to this subsection
13.2 and the related requirements of subsection 13.7 at its own expense. That
expense shall include, but not be limited to, legal, accounting, consulting,
printing, federal and state filing fees, NASD fees, out-of-pocket expenses
incurred by counsel, accountants and consultants retained by the Company, and
miscellaneous expenses directly related to the registration statement or
offering statement and the offering. However, this expense shall not include the
portion of any underwriting commissions, transfer taxes and the underwriter's
accountable and nonaccountable expense allowances attributable to the offer and
sale of the Warrant, Warrant Securities and the Warrant Securities underlying
the unexercised portion of this Warrant, all of which expenses shall be borne by
the Holder or Holders of this Warrant and the holders of the Warrant Securities
registered or qualified.
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13.3 INCLUSION OF INFORMATION. In the event that the Company registers
or qualifies the Warrant, Warrant Securities or the Warrant Securities
underlying the unexercised portion of this Warrant pursuant to subsections 13.1
or 13.2 above, the Company shall include in the registration statement or
qualification, and the prospectus included therein, all information and
materials necessary or advisable to comply with the applicable statutes and
regulations so as to permit the public sale of the Warrant Securities or the
Warrant Securities underlying the unexercised portion of this Warrant. As used
in subsections 13.1 and 13.2 above, reference to the Company's securities shall
include, but not be limited to, any class or type of the Company's securities or
the securities of any of the Company's subsidiaries or affiliates.
13.4 REGISTRATION STATEMENT FILED BY HOLDER. In addition to the
registration rights described in subsections 13.1 and 13.2 above, upon the
written request of any Majority Holder, the Company, as promptly as possible
after delivery of such request, shall cooperate with the requesting Majority
Holder or holders in preparing and signing any registration statement or
offering statement that the Holder or holders may desire to file in order to
sell or transfer the Warrant and Warrant Securities. Within ten (10) days after
the delivery of the written request described above, the Company shall deliver
written notice to all other Holders of this Warrant and holders of Warrant
Securities, if any, advising them that the Company is proceeding with a
registration statement or offering statement and that their Warrant and Warrant
Securities will be included therein if they so desire and agree to pay their pro
rata share of the cost of registration or qualification and provided that the
Holder or holder delivers written notice to the Company of their desire to be
included and their agreement to pay their pro rata share of the cost within
thirty (30) days after the delivery of the Company's notice to them. The Company
will supply all information necessary or advisable for any such registration
statements or offering statements; provided, however, that all the costs and
expenses of such registration statements or offering statements shall be borne,
in a manner proportionate to the number of securities for which they indicate a
desire to register, by the Holders of this Warrant and the holders of Warrant
Securities who seek the registration or qualification of their Warrant, Warrant
Securities or Warrant Securities underlying the unexercised portion of their
Warrant. In determining the amount of costs and expenses to be borne by those
Holders or holders, the only costs and expenses of the Company to be included
are the additional costs and expenses that would not have otherwise been
incurred by the Company if those Holders or holders had not desired to file a
registration statement or offering statement. As an example, and without
limitation, audit fees would not be charged to those Holders or holders if or to
the extent that the Company would have incurred the same audit fees for its
year-end or other use in the absence of the registration statement or offering
statement. The Holders or holders responsible for the costs and expenses shall
reimburse the Company for those reimbursable costs and expenses reasonably
incurred by the Company within thirty (30) days after the initial effective date
of the registration statement or qualification at issue.
13.5 PAYMENT OF EXERCISE PRICE FROM PROCEEDS. In the event that any
such registration statement is utilized for a public offering of any of the
shares of Common Stock or other securities to be received upon exercise of the
Warrants pursuant to this Section 13, the Warrant Holder may elect to pay the
Exercise Price of the Warrants to the Company out of the proceeds of the sale of
the
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shares of Common Stock or such other securities pursuant to the registration
statement concurrently with the closing of such sale of such shares or
securities; provided that if such sale is not closed within ninety (90) days of
the effective date of such registration statement, then the Warrant Holder shall
be obligated to pay the Exercise Price of the Warrants to the Company on such
ninetieth (90th) day.
13.6 CONDITION OF COMPANY'S OBLIGATIONS. As to each registration
statement or offering statement, the Company's obligations contained in this
Section 13 shall be conditioned upon a timely receipt by the Company in writing
of the following:
(a) Information as to the terms of the contemplated public
offering furnished by and on behalf of each Holder or holder intending
to make a public distribution of the Warrant Securities or Warrant
Securities underlying the unexercised portion of the Warrant; and
(b) Such other information as the Company may reasonably
require from such Holders or holders, or any underwriter for any of
them, for inclusion in the registration statement or offering
statement.
13.7 ADDITIONAL REQUIREMENTS. In each instance in which the Company
shall take any action to register or qualify the Warrant Securities or the
Warrant Securities underlying the unexercised portion of this Warrant, if any,
pursuant to this Section 13, the Company shall do the following:
(a) supply to EBI, as the representative of the Holders of the
Warrant and the holders of Warrant Securities whose Warrant Securities
are being registered or qualified, two (2) manually signed copies of
each registration statement or offering statement, and all amendments
thereto, and a reasonable number of copies of the preliminary, final or
other prospectus or offering circular, all prepared in conformity with
the requirements of the Act and the rules and regulations promulgated
thereunder, and such other documents as EBI shall reasonably request;
(b) cooperate with respect to (i) all necessary or advisable
actions relating to the preparation and the filing of any registration
statements or offering statements, and all amendments thereto, arising
from the provisions of this Section 13, (ii) all reasonable efforts to
establish an exemption from the provisions of the Act or any other
federal or state securities statutes, (iii) all necessary or advisable
actions to register or qualify the public offering at issue pursuant to
federal securities statutes and the state "blue sky" securities
statutes of each jurisdiction that the Holders of the Warrant or
holders of Warrant Securities shall reasonably request, and (iv) all
other necessary or advisable actions to enable the Holders of the
Warrant Securities to complete the contemplated disposition of their
securities in each reasonably requested jurisdiction; and
(c) keep all registration statements or offering statements to
which this Section 13 applies, and all amendments thereto, effective
under the Act for a period of at least one
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hundred eighty (180) days after their initial effective date and
cooperate with respect to all necessary or advisable actions to permit
the completion of the public sale or other disposition of the
securities subject to a registration statement or offering statement.
13.8 RECIPROCAL INDEMNIFICATION. In each instance in which pursuant to
this Section 13 the Company shall take any action to register or qualify the
Securities or the Warrant Securities underlying the unexercised portion of this
Warrant, prior to the effective date of any registration statement or offering
statement, the Company and each Holder or holder of Warrants or Warrant
Securities being registered or qualified shall enter into reciprocal
indemnification and contribution agreements, in the form customarily used by
reputable investment bankers with respect to public offerings of securities.
13.9 EBI AS REPRESENTATIVE. For purposes of subsection 13.6 (a) above,
by the receipt of this Warrant or any Warrant Securities, all Holders and all
holders of Warrant Securities acknowledge and agree that EBI is and shall be
their representative.
13.10 SURVIVAL. The Company's obligations described in this Section 13
shall continue in full force and effect regardless of the exercise, surrender,
cancellation or expiration of this Warrant.
SECTION 14. RESTRICTIONS ON TRANSFER
14.1 RESTRICTIONS ON TRANSFER. This Warrant, the Warrant Securities,
and all other securities issued or issuable upon exercise of this Warrant, may
not be offered, sold or transferred, in whole or in part, except in compliance
with the Act, and except in compliance with all applicable state securities
laws. The Warrant Holder agrees that prior to making any disposition of the
Warrants, to the persons as provided in Section 8, the Warrant Holder shall give
written notice to the Company describing briefly the manner in which any such
proposed disposition is to be made; and no such disposition shall be made if the
Company has notified the Warrant Holder that in the opinion of counsel
reasonably satisfactory to the Warrant Holder a registration statement or other
notification or post-effective amendment thereto (hereinafter collectively a
"Registration Statement") under the Act is required with respect to such
disposition and no such Registration Statement has been filed by the Company
with, and declared effective, if necessary, by the Commission.
14.2 RESTRICTIVE LEGEND. The Company may cause substantially the
following legends, or their equivalents, to be set forth on each certificate
representing the Warrants, the Warrant Securities, or any other security issued
or issuable upon exercise or conversion of a Warrant, not theretofore
distributed to the public or sold to underwriters, as defined by the Act:
(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, EXCHANGED, HYPOTHECATED OR
TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH THE AGREEMENT
PURSUANT TO WHICH THEY WERE ISSUED."
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(b) Any legend required by applicable state securities laws.
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legends (except a new certificate issued upon
completion of a public distribution pursuant to a registration statement under
the Act, or the securities represented thereby) shall also bear the above
legends unless, in the opinion of the Company's counsel, the securities
represented thereby need no longer be subject to such restrictions.
SECTION 15. NO RIGHTS AS STOCKHOLDER
Nothing contained in this Agreement or in the Warrants shall be
construed as conferring upon the Warrant Holder or its transferees any rights as
a stockholder of the Company, including the right to vote, receive dividends,
consent or receive notices as a stockholder in respect to any meeting of
stockholders for the election of directors of the Company or any other matter.
The Company covenants, however, that for so long as this Warrant is at least
partially unexercised, it will furnish any Holder of this Warrant with copies of
all reports and communications furnished to the shareholders of the Company.
SECTION 16. NOTICES
16.1 THE COMPANY. All notices, demands, claims, elections, opinions,
requests or other communications hereunder (however characterized or described)
shall be in writing and shall be deemed duly given or made if (and then two (2)
business days after) sent by registered or certified mail, return receipt
requested, postage prepaid and addressed to, in the case of the Company as
follows:
Hat World Corporation
4912 South Minnesota Avenue
Sioux Falls, South Dakota 57108
Attention: George N. Berger, Chairman of the Board
16.2 THE WARRANT HOLDERS. Any distribution, notice or demand required
or authorized by this Agreement to be given or made by the Company to or on the
Warrant Holders shall be sufficiently given or made if sent by mail, first
class, certified or registered, postage prepaid, addressed to the Warrant
Holders at their last known addresses as they shall appear on the registration
books for the Warrant Certificates maintained by the Company.
16.3 EFFECTIVENESS OF NOTICE. The Company may send any notice, demand,
claim, election, opinion, request or communication hereunder to the intended
recipient at the address set forth above using any other means (including
personal delivery, expedited courier, messenger service, telecopy, telex,
ordinary mail or electronic mail), but no such notice, demand, claim, election,
opinion, request or other communication shall be deemed to have been duly given
or made unless and until it actually is received by the intended recipient. The
Company may change the address to which
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notices, demands, claims, elections, opinions, requests and other communications
hereunder are to be delivered by giving the Warrant Holders notice in the manner
herein set forth.
SECTION 17. ARBITRATION
The Company and the Holder, and by receipt of a Certificate or any
Warrant Securities, all subsequent Holders or holders of Warrant Securities,
agree to submit all controversies, claims, disputes and matters of difference
with respect to this Agreement and the Certificates, including, without
limitation, the application of this Section 17, to arbitration in Denver,
Colorado, according to the rules and practices of the American Arbitration
Association from time to time in force; provided, however, that if such rules
and practices conflict with the applicable procedures of Colorado courts of
general jurisdiction or any other provisions of Colorado law then in force,
those Colorado rules and provisions shall govern. This agreement to arbitrate
shall be specifically enforceable. Arbitration may proceed in the absence of any
party if notice of the proceeding has been given to that party. The parties
agree to abide by all awards rendered in any such proceeding. These awards shall
be final and binding on all parties to the extent and in the manner provided by
the rules of civil procedure enacted in Colorado. All awards may be filed, as a
basis of judgment and of the issuance of execution for its collection, with the
clerk of one or more courts, state or federal, having jurisdiction over either
the party against whom that award is rendered or its property. No party shall be
considered in default hereunder during the pendency of arbitration proceedings
relating to that default.
SECTION 18. MISCELLANEOUS PROVISIONS
18.1 PERSONS BENEFITING. This Agreement shall be binding upon and inure
to the benefit of the Company; the Holders, and their respective successors and
assigns. By his acceptance of a Warrant Certificate, the Holder accepts and
agrees to comply with all of the terms and provisions of this Agreement. Nothing
in this Agreement is intended or shall be construed to confer on any other
person any right, remedy or claim or to impose on any other person any duty,
liability or obligation.
18.2 SEVERABILITY. If any term contained herein shall be held, declared
or pronounced void, voidable, invalid, unenforceable or inoperative for any
reason by any court of competent jurisdiction, government authority or
otherwise, such holding, declaration or pronouncement shall not affect adversely
any other term, which shall otherwise remain in full force and effect, and the
effect of such holding, declaration or pronouncement shall be limited to the
territory or jurisdiction in which made.
18.3 TERMINATION. This Agreement shall terminate as of the close of
business on the Expiration Date, or such earlier date upon which all Warrants
shall have been exercised or redeemed; except that the exercise of a Warrant in
full on the Expiration Date shall not terminate the provisions of this Agreement
as it relates to holders of Warrant Securities.
18.4 GOVERNING LAW. These terms and each Certificate issued hereunder
shall be deemed to be a contract under the laws of the State of Minnesota and
for all purposes shall be construed in
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accordance with the laws of said state without giving effect to conflicts of
laws provisions of such state.
18.5 AGREEMENT AVAILABLE TO HOLDERS. A copy of these terms shall be
available at all reasonable times at the office of the Company for inspection by
any Holder. As a condition of such inspection, the Company may require any
Holder to submit a Certificate held of record for inspection.
18.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall together constitute one and the same instrument.
18.7 FAILURE TO PERFORM. If the Company fails to perform any of its
obligations hereunder, it shall be liable to the Holder for all damages, costs
and expenses resulting from the failure, including, but not limited to, all
reasonable attorney's fees and disbursements.
18.8 PARAGRAPH HEADINGS. Paragraph headings used in this Warrant
Agreement are for convenience only and shall not be taken or construed to define
or limit any of the terms or provisions of this Agreement. Unless otherwise
provided, or unless the context shall otherwise require, the use of the singular
shall include the plural and the use of any gender shall include all genders.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
HAT WORLD CORPORATION
By:
---------------------------------------
George N. Berger, Chairman of the Board
EBI SECURITIES CORPORATION
By:
---------------------------------------
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EXHIBIT A
THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, EXCHANGED,
HYPOTHECATED OR TRANSFERRED IN ANY MANNER EXCEPT IN COMPLIANCE WITH THE
AGREEMENT PURSUANT TO WHICH THEY WERE ISSUED.
Warrant Certificate No. ______________
REPRESENTATIVE'S OPTIONS TO PURCHASE
____________ SHARES OF COMMON STOCK
HAT WORLD CORPORATION
INCORPORATED UNDER THE LAWS
OF THE STATE OF MINNESOTA
This Warrant Certificate certifies that _____________________ or
registered assigns (the "Holder") is the registered owner of the above-indicated
number of Warrants ("Warrants") expiring at 5:00 p.m. Denver, Colorado local
time, on ______________, 2004 (the "Expiration Date"). Each Warrant entitles the
Holder to purchase from Hat World Corporation (the "Company") a Minnesota
corporation, at any time during the period commencing at 8:00 a.m., Denver,
Colorado local time, on _________________, 2000, and expiring on the Expiration
Date, one fully paid and non-assessable share of Common Stock of the Company at
a purchase price per Share of $___________ (the "Exercise Price"), upon
surrender of this Certificate, with the exercise form hereon duly completed and
executed, with payment of the Exercise Price, at the principal office of the
Company, but only subject to the conditions set forth herein and in the
Representative's Warrant Agreement between the Company and EBI Securities
Corporation, dated _______________, 1999 (the "Warrant Agreement"). In addition,
the Holder has the right to convert Warrants evidenced by this Certificate into
shares of Common Stock as provided in Section 4.6 of the Warrant Agreement. The
Exercise Price, the Expiration Date, and the number of shares of Common Stock of
the Company purchasable upon exercise of the Warrants evidenced hereby shall be
subject to adjustment from time to time as set forth in the Warrant Agreement.
Reference is hereby made to the other provisions of the Warrant Agreement, all
of which are hereby incorporated by reference herein and made a part of this
Certificate and which shall for all purposes have the same effect as though
fully set forth at this place.
Upon due presentment for registration of transfer of this Certificate
at the office of the Company a new Certificate or Certificates of like tenor and
evidencing in the aggregate a like number of Warrants, subject to any
adjustments made in accordance with the Warrant Agreement, shall be issued to
the transferee in exchange for this Certificate, subject to the limitations
provided in the Warrant Agreement.
<PAGE>
The Holder of the Warrants evidenced by this Certificate may exercise
or convert all or any whole number of such Warrants in the manner stated hereon
and in the Warrant Agreement. The Exercise Price shall be payable in lawful
money of the United States of America in cash or by certified or cashier's check
or bank draft payable to the order of the Company. Upon any partial exercise or
conversion of the Warrants evidenced hereby, there shall be signed and issued to
the Warrant Holder a new Warrant Certificate in respect of the shares of Common
Stock as to which the Warrants evidenced hereby shall not have been exercised or
converted. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of shares of Common Stock as evidenced by
the Warrant or so exchanged. No fractional shares of Common Stock will be issued
upon the exercise of rights to purchase hereunder, but the Company shall pay the
cash value of any fraction upon the exercise of one or more Warrants. These
Warrants are transferable at the office of the Company in the manner and subject
to the limitations set forth in the Warrant Agreement.
This Warrant Certificate does not entitle any Warrant Holder to any of
the rights of a stockholder of the Company.
HAT WORLD CORPORATION
By:
---------------------------------------
Dated:
---------------------------
[Seal]
Attest:
---------------------------
Secretary
2
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NOTICE OF EXERCISE
(To be executed by a Holder desiring to exercise the right to purchase shares of
Common Stock ("Shares").
The undersigned Holder of a Warrant hereby
(a) irrevocably elects to exercise the Warrant to the extent
of purchasing ____________ Shares;
(b) makes payment in full of the aggregate Exercise Price for
those Shares in the amount of $___________ the delivery of certified
funds or a bank cashier's check in the amount of $____________;
(c) requests that certificates evidencing the securities
underlying such Shares be issued in the name of the undersigned, or, if
the name and address of some other person is specified below, in the
name of such other person:
(Name and address of person other than the undersigned in whose name
Shares are to be registered)
(d) requests, if the number of Shares purchased are not all
the Shares purchasable pursuant to the unexercised portion of the
Warrant, that a new Warrant of like tenor for the remaining Shares
purchasable pursuant to the Warrant be issued and delivered to the
undersigned at the address stated below.
Dated:
--------------------------- -----------------------------------------
Signature
(This signature must conform in all
respects to the name of the Holder as
specified on the face of the Warrant.)
Social Security Number Printed Name:
or Employer ID No. ----------------------------
Address:
- ---------------------- ---------------------------------
3
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, the undersigned, ________________________________ hereby
sells, assigns and transfers unto:
Name:
---------------------------------------------------------------
(Please type or print in block letters)
Address:
------------------------------------------------------------
------------------------------------------------------------
the right to purchase _______ shares of the $.01 par value Common Stock
("Shares") of Hat World Corporation (the "Company") pursuant to the terms and
conditions of the Warrant held by the undersigned. The undersigned hereby
authorizes and directs the Company (i) to issue and deliver to the above-named
assignee at the above address a new Warrant pursuant to which the rights to
purchase being assigned may be exercised, and (ii) if there are rights to
purchase Shares remaining pursuant to the undersigned's Warrant after the
assignment contemplated herein, to issue and deliver to the undersigned at the
address stated below a new Warrant evidencing the right to purchase the number
of Shares remaining after issuance and delivery of the Warrant to the
above-named assignee. Except for the number of Shares purchasable, the new
Warrants to be issued and delivered by the Company shall contain the same terms
and conditions as the undersigned's Warrant. To complete the assignment
contemplated by this Assignment Form, the undersigned hereby irrevocably
constitutes and appoints _________________________________ as the undersigned's
attorney-in-fact to transfer the Warrants and the rights thereunder on the books
of the Company with full power of substitution for these purposes.
Dated:
--------------------------- -----------------------------------------
Signature
(This signature must conform in all
respects to the name of the Holder as
specified on the face of the Warrant.)
Printed Name:
----------------------------
Address:
---------------------------------
---------------------------------
4
<PAGE>
OPTION CONVERSION EXERCISE FORM
TO: Hat World Corporation
Pursuant to Section 4.6 of the Warrant Agreement, the Holder hereby
irrevocably elects to convert Warrants into __________ Shares of the Company. A
conversion calculation is attached hereto as Exhibit B-1.
The undersigned requests that certificates for such Shares be issued as
follows:
Name:
------------------------------------------------------------------
Address:
---------------------------------------------------------------
---------------------------------------------------------------
Deliver to:
------------------------------------------------------------
and that a new Certificate for the balance remaining of the Warrants, if any, be
registered in the name of, and delivered to, the undersigned at the address
stated above.
Signature Dated
----------------------------------------- --------------
5
<PAGE>
CALCULATION OF OPTION CONVERSION
Converted Securities Net Value
---------
FMV
FMV $
---------------------
Net Value Aggregate FMV - Aggregate Exercise Price
$
---------------------
$
---------------------
Converted Shares
Fractional Converted Shares (1)
(1)___________ to pay for fractional Shares in cash @ $____________per Share.
6
EXHIBIT 10.8
================================================================================
1999
STOCK OPTION PLAN
HAT WORLD CORPORATION
A MINNESOTA CORPORATION
================================================================================
<PAGE>
TABLE OF CONTENTS
Section 1 Purpose of the Plan ..............................................1
Section 2 Shares Subject to the Plan........................................1
Section 3 Eligible Employees ...............................................1
Section 4 $100,000 Incentive Stock Option Limitation .......................1
Section 5 Minimum Exercise Price ...........................................1
Section 6 Nontransferability ...............................................1
Section 7 Adjustments ......................................................1
Section 8 Maximum Option Term ..............................................1
Section 9 Plan Duration ....................................................1
Section 10 Controlling Shareholders .........................................2
Section 11 Payment ..........................................................2
Section 12 Fair Market Value ................................................2
Section 13 Administration ...................................................2
Section 14 Corporate Reorganizations.........................................2
Section 15 Stock Appreciation Rights.........................................3
Section 16 Restricted Stock..................................................3
16.1 Transfer...............................................3
16.2 Termination of Employment..............................3
16.3 Other Restrictions.....................................4
Section 17 Financial Assistance..............................................4
Section 18 No Prior Right of Award...........................................4
Section 19 Amendment and Termination.........................................4
19.1 Number of Shares.......................................4
19.2 Exercise Price.........................................4
19.3 Extension..............................................4
19.4 Eligible Employees.....................................4
Section 20 Burden & Benefit..................................................4
Section 21 Headings..........................................................5
Section 22 Interpretation....................................................5
<PAGE>
1999 STOCK OPTION PLAN, PAGE 1.
HAT WORLD CORPORATION
1999 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN. Under this 1999 Stock Option Plan (the "Plan")
of Hat World Corporation, a Minnesota corporation (the "Company"), options may
be granted to eligible directors, officers and employees to purchase shares of
the Company's capital stock. This Plan is designed to enable the Company and its
subsidiaries (if any) to attract, retain and motivate their directors, officers
and employees by providing for or increasing the proprietary interests of such
individuals in the Company. The Plan provides for options which qualify as
incentive stock options ("Incentive Options") under Section 422A of the Internal
Revenue Code of 1986, as amended (the "Code"), as well as options which do not
so qualify.
2. SHARES SUBJECT TO THE PLAN. The maximum number of shares of stock
for which options granted hereunder may be exercised shall be not more than
eight hundred eighty thousand (880,000) shares of Common Stock of the Company.
3. ELIGIBLE PARTICIPANTS. The persons eligible to be considered for the
grant of options hereunder are any persons employed by, or any officer of
director of, the Company or its subsidiaries (if any).
4. $100,000 INCENTIVE STOCK OPTION LIMITATION. The aggregate fair
market value of the stock with respect to which Incentive Options are
exercisable for the first time by an eligible participant in any calendar year
under this Plan and under all stock option plans of the Company, its parent or
subsidiaries, shall not exceed $100,000, determining fair market value as of the
time each respective option is granted.
5. MINIMUM EXERCISE PRICE. The exercise price for each option granted
hereunder shall be not less than the fair market value of the stock at the date
of the grant of the option.
6. NONTRANSFERABILITY. Any option granted under this Plan shall by its
terms be nontransferable by the optionee other than by will or the laws of
descent and distribution and is exercisable during the optionee's lifetime only
by the optionee, unless further limited at the time of grant.
7. ADJUSTMENTS. If the outstanding shares of stock of the class then
subject to this Plan are increased or decreased, or are changed into or
exchanged for a different number or kind of shares or securities, as a result of
one or more reorganizations, recapitalizations, stock splits, reverse stock
splits, stock dividends or the like, appropriate adjustments shall be made in
the number and/or kind of shares or securities for which options may thereafter
be granted under this Plan and for which options then outstanding under this
Plan may thereafter be exercised. Any such adjustment in outstanding options
shall be made without changing the aggregate exercise price applicable to the
unexercised portions of such options.
8. MAXIMUM OPTION TERM. No option granted under this Plan may be
exercised in whole or in part more than six (6) years after its date of grant.
9. PLAN DURATION. Options may not be granted under this Plan after
December 31, 2005.
<PAGE>
10. CONTROLLING SHAREHOLDERS. Notwithstanding any other provisions of
this Plan to the contrary, no individual who, at the time of the grant of the
option, owns stock in the Company possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or its parent
or subsidiaries shall be granted an Incentive Option hereunder, unless at the
time the Incentive Option is granted the exercise price is at least 110 percent
of the Fair Market Value of the stock subject to the Incentive Option, and
unless the Incentive Option is not exercisable after the expiration of 5 years
from the date it is granted.
11. PAYMENT. Payment for stock purchased under any exercise of an
option granted under this Plan shall be made in full in cash concurrently with
such exercise, except that, if and to the extent the instrument evidencing the
option so provides and if the Company is not then prohibited from purchasing or
acquiring shares of such stock, such payment may be made in whole or in part
with shares of the same class of stock as that then subject to the option,
delivered in lieu of cash concurrently with such exercise, the shares so
delivered to be valued on the basis of the fair market value of the stock on the
day preceding the date of exercise.
12. FAIR MARKET VALUE. The Fair Market Value of the shares of common
stock of the Company subject to this Plan shall be determined for purposes of
this Plan by the Board of Directors of the Company in accordance with the Code
and such determination shall be final, conclusive and binding upon each eligible
participant and the Company for all purposes of this Plan.
13. ADMINISTRATION. The Plan shall be administered by the Company's
Board of Directors (the "Board") or, in the discretion of the Board, by a
committee (the "Committee") of not less than three members of the Board each of
whom shall not be eligible, and shall not have been eligible at any time within
one year prior to his appointment to the Committee, for selection as a person to
whom stock may be allocated or to whom stock options may be granted pursuant to
the Plan or any other plan of the Company or any of its affiliates entitling the
participants therein to acquire stock or stock options of the Company or any of
its affiliates. Only those eligible persons who execute a stock option agreement
as may be adopted consistent with this Plan by the Board of Directors shall be
entitled to exercise any stock options authorized by adoption of this Plan.
The interpretation and construction of any term or provision of the
Plan or of any option granted under it shall be made by the Board in accordance
with the appropriate state and federal corporate, securities and tax laws so as
to further the intent of this Plan and shall be final. The Board may from time
to time adopt rules and regulations for carrying out this Plan and, subject to
the provisions of this Plan, may prescribe the form or forms of the instruments
evidencing any option granted under this Plan.
Subject to the provisions of this Plan, the Board or, by delegation
from the Board, the Committee shall have full and final authority in its
discretion to select the persons to be granted options, to grant such options
and to determine the number of shares to be subject thereto, the exercise
prices, the terms of exercise, expiration dates and other pertinent provisions
thereof.
14. CORPORATE REORGANIZATIONS. Upon the dissolution or liquidation of
the Company, or upon a reorganization, merger or consolidation of the Company as
a result of which the outstanding securities of the class then subject to
options hereunder are changed into or exchanged for cash or property or
securities not of the Company's issue, or upon a sale of substantially all the
property of the Company to, or the acquisition of
<PAGE>
stock representing more than eighty percent (80%) of the voting power of the
stock of the Company then outstanding by, another corporation or person, the
Plan shall terminate, and all options theretofore granted hereunder shall
terminate, unless provision be made in writing in connection with such
transaction for the continuance of the Plan and/or for the assumption of options
theretofore granted, or the substitution for such options of options covering
the stock of a successor employer corporation, or a parent or a subsidiary
thereof, with appropriate adjustments as to the number and kind of shares and
prices, in which event the Plan and options theretofore granted shall continue
in the manner and under the terms so provided. If the Plan and unexercised
options shall terminate pursuant to the foregoing sentence, all persons entitled
to exercise any unexercised portions of options then outstanding shall have the
right, at such time prior to the consummation of the transaction causing such
termination as the Company shall designate, to exercise the unexercised portions
of their options, including the portions thereof which would, but for this
Section 14, not yet be exercisable.
15. STOCK APPRECIATION RIGHTS. If the instrument evidencing the option
so provides, an option granted under this Plan (herein referred to as the
"corresponding option") may include the right (a "Stock Appreciation Right") to
receive an amount equal to some or all of the excess of the fair market value
(determined in a manner specified in the instrument evidencing the corresponding
option) of the shares subject to unexercised portions of the corresponding
option over the aggregate exercise price for such shares under the corresponding
option as of the date the option is exercised. A Stock Appreciation Right may be
paid in cash or in shares of the class then subject to the corresponding option
(valued on the basis of their fair market value, determined as specified with
respect to the measurement of the amount payable as aforesaid), or in
combination of cash and such shares so valued. No Stock Appreciation Right may
be exercised in whole or in part (a) other than in connection with the
contemporaneous surrender without exercise of such corresponding option, or the
portion thereof that corresponds to the portion of the Stock Appreciation Right
being exercised, or (b) except to the extent that the corresponding option or
such portion thereof is exercisable on the date of exercise of the Appreciation
Right by the person exercising the Stock Appreciation Right, or (c) unless the
class of stock then subject to the corresponding option is then "publicly
traded". For this purpose, a class of stock is "publicly traded" if it is listed
or admitted to unlisted trading privileges on a national securities exchange or
if bid and offer quotations therefore are reported on the automated quotations
system ("NASDAQ") operated by the National Association of Securities Dealers,
Inc., or on any then operative successor to the NASDAQ system.
16. RESTRICTED STOCK. If the instrument evidencing the option so
provides, shares of stock issued on exercise of an option granted under this
Plan may upon issuance be subject to the following restrictions (and, as used
herein, "restricted stock" means shares issued on exercise of options granted
under this Plan which are still subject to restrictions imposed under this
Section 16 that have not yet expired or terminated):
16.1 TRANSFER. Shares of restricted stock may not be sold or
otherwise transferred or hypothecated;
16.2 TERMINATION OF EMPLOYMENT. If the employment of the
holder of shares of restricted stock with the Company or
subsidiary is terminated for any reason other than his death,
normal or early retirement in accordance with his employer's
established retirement policies or practices, or total
disability, the Company (or any subsidiary designated by it)
shall have the option for sixty (60) days after such
termination of employment to purchase for cash all or any part
of his restricted stock at the lesser of (i) the price paid
<PAGE>
therefor by the holder, or (ii) the fair market value of the
restricted stock on the date of such termination of employment
(determined in a manner specified in the instrument evidencing
the option); and
16.3 OTHER RESTRICTIONS. As to the shares of stock affected
thereby, any additional restrictions that may be imposed on
particular shares of restricted stock as specified in the
instrument evidencing the option.
The restrictions imposed under this Section 16 shall apply as well to
all shares or other securities issued in respect of restricted stock in
connection with any stock split, reverse stock split, stock dividend,
recapitalization, reclassification, spin-off, merger, consolidation or
reorganization, but such restrictions shall expire or terminate at such time or
times as shall be specified therefor in the instrument evidencing the option
which provides for the restrictions.
17. FINANCIAL ASSISTANCE. The Company is vested with authority under
this Plan to assist any participant to whom an option is granted hereunder
(including any director or officer of the Company or any of its subsidiaries) in
the payment of the purchase price to such participant on such terms and at such
rates of interest and upon such security (or unsecured) as shall have been
authorized by or under authority of the Board.
18. NO PRIOR RIGHT OF AWARD. Nothing in this Plan shall be deemed to
give any officer or employee of the Company, or such person's legal
representative or assigns, or any other person or entity claiming under or
through such person, any contract or other right to participate in the benefits
of this Plan. Nothing in this Plan shall be construed as constituting a
commitment, guarantee, agreement or understanding of any kind or nature that the
Company shall continue to employ any individual (whether or not a Participant).
This Plan shall not affect in any way the right of the Company to terminate the
employment of any individual (whether or not a Participant) at any time and for
any reason whatsoever. No change of a Participant's duties as an employee of the
Company shall result in a modification of the terms of any rights of such
Participant under this Plan or any Incentive Stock Option Agreement executed by
such Participant.
19. AMENDMENT AND TERMINATION. The Board may alter, amend, suspend or
terminate this Plan, provided that no such action shall deprive an optionee,
without his consent, of any option granted to the optionee pursuant to this Plan
or of any of his rights under such option. Except as herein provided, no such
action of the Board, unless taken with the approval of the shareholders of the
Company, may:
19.1 NUMBER OF SHARES. Increase the maximum number of shares
for which options granted under this Plan may be exercised;
19.2 EXERCISE PRICE. Reduce the minimum permissible exercise
price;
19.3 EXTENSION OF TERM. Extend the duration of this Plan set
forth herein; or
19.4 ELIGIBLE EMPLOYEES. Alter the class of employees eligible
to receive options under the Plan.
20. BURDEN AND BENEFIT. The terms and provisions of this Plan shall be
binding upon, and shall inure to the benefit of, each Participant and such
Participant's executors and administrators, estate, heirs and personal and legal
representatives.
<PAGE>
21. HEADINGS. The headings and other captions contained in this Plan
are for convenience and reference only and shall not be used in interpreting,
construing or enforcing any of the provisions of this Plan.
22. INTERPRETATION. Notwithstanding any provision of this Plan or any
provision of any Incentive Stock Option Agreement to the contrary, this Plan and
each Incentive Stock Option Agreement are intended to comply with the
requirements for qualification under the Code and with any rule or regulation
promulgated or proposed thereunder, and shall be interpreted and construed in a
manner which is consistent with this Plan and each Incentive Stock Option
Agreement being so qualified.
I hereby certify that this is a true and correct copy of the Plan as
adopted by the Company on June 15, 1999.
HAT WORLD CORPORATION
A MINNESOTA CORPORATION
Date By
- ------------------ ---------------------------------------
George N. Berger, Corporate Secretary
EXHIBIT 10.9
ADP PROTOTYPE 401(k) PLAN NON-STANDARDIZED ADOPTION AGREEMENT
(VERSION 01)
Upon acceptance by the Trustee, the undersigned company adopts the
Automatic Data Processing Prototype 401(k) Plan (the "Plan") incorporated by
this reference, agrees to the terms of the Plan, certifies the accuracy of the
following information, and makes the following elections under the Plan:
I. COMPANY AND PLAN REGISTRATION INFORMATION
A. COMPANY INFORMATION
1. NAME AND ADDRESS OF COMPANY
HAT WORLD, INC.
4912 S. MINNESOTA AVE.
SIOUX FALLS, SD 57108
2. Telephone number: (605) 336-0551
3. Type of business entity (choose one):
[ ] Sole Proprietorship [ ] Partnership
[x] Corporation [ ] S Corporation
[ ] Other (specify)
4. Date of incorporation or date business began: 6/1/95
5. Employer Identification Number: 46-0437884
B. PLAN INFORMATION
1. Name of Plan: Hat World, Inc. 401(k) Plan
2. Plan Number: 001
3. Effective date of this Plan: 1/1/98
4. Prior Plan History: Original Effective Date:
Amendments:
C. PLAN ADMINISTRATION
1. Plan Year (Plan Article I) means the calendar year.
2. The initial Plan Year begins on the effective date of
this Plan and ends on the following December 31. If the
initial Plan Year does not begin on January 1, the
initial Plan Year shall be a short Plan Year.
Page 1 of 6
<PAGE>
II. ELIGIBILITY AND PARTICIPATION REQUIREMENTS
A. ELIGIBLE EMPLOYEES (Plan Article I)
Choose one:
[x] All Employees of an Employer are eligible to
participate in the Plan.
[ ] All Employees of an Employer are eligible to participate
in the Plan, except (choose as desired):
[ ] Salaried Employees
[ ] Hourly-Paid Employees
[ ] Any nondiscriminatory classification of Employees
employed in or by one or more specified divisions,
plants, locations, job categories, or other identifiable
groups of Employees as determined by the Board of
Directors. Please specify:
--------------------------------------------------------
--------------------------------------------------------
[ ] Employees included in a bargaining unit covered by a
collective bargaining agreement with the Employer in the
negotiation of which retirement benefits were the
subject of good faith bargaining (unless the bargaining
agreement provides for participation in the Plan).
Please specify:
--------------------------------------------------------
--------------------------------------------------------
[ ] Employees covered under any other tax-qualified
retirement plan with respect to which the Employer is
obligated to contribute. Please specify:
--------------------------------------------------------
--------------------------------------------------------
[ ] Leased employees.
B. MINIMUM AGE FOR PARTICIPATION (PLAN SECTION 2.1.1(a))
Choose One:
[ ] no minimum age requirement; or
[x] after reaching age 18.
C. MINIMUM SERVICE FOR PARTICIPATION (PLAN SECTION 2.1.1(b))
Choose One:
[ ] no minimum service requirement;
[ ] after completing one Year of Eligibility Service; or
[x] after completing 6 months. Employees receive credit for
190 Hours of Service for each month in which they are
credited with one Hour of Service.
Page 2 of 6
<PAGE>
III. COMPENSATION (PLAN ARTICLE I)
Choose one:
[x] Compensation is all compensation paid to a Participant during
a Plan Year which is required to be reflected on Form W-2
under Code Section 6041(d) and 6051(a)(3) (with no
exclusions).
[ ] Except for nondiscrimination testing under Code ss.ss.
401(k)(3)(the Actual Deferral Percentage test) and 401(m) (the
Average Contribution Percentage test), the following items are
excluded from Compensation (choose as desired):
[ ] overtime [ ] employee business expenses
[ ] bonuses [ ] moving expenses
[ ] commissions [ ] nonqualified plan distributions
[ ] severance pay [ ] other noncash fringe benefits
[ ] dependent care [ ] all of the above
[ ] company car
IV. CONTRIBUTIONS
A. ELECTIVE DEFERRALS
The minimum percentage of Compensation a Participant may elect
to defer is 1% and the maximum percentage of compensation a
Participant may elect to defer is 15%.
B. MATCHING CONTRIBUTIONS
The Matching Contribution equals 50% on the first 5% of the
Participant's Elective Deferral.
Select the following only if desired:
[ ] The Matching Contribution will not exceed $_________ a
year.
C. NONELECTIVE CONTRIBUTIONS
Nonelective Contributions may be permitted at the discretion
of the Board of Directors.
Page 3 of 6
<PAGE>
V. VESTING (PLAN ARTICLE IV)
A. VESTING SCHEDULE
Each Participant whose employment terminates for reasons other
than death, Disability, or attainment of Normal Retirement Age
or early retirement if elected in Section VI, is entitled to a
nonforfeitable right to his or her Employer Contribution
Account based on the following schedule (choose one):
[ ] immediate 100% nonforfeitability
[x] 100% nonforfeitability after 5 Years of Service
[ ] 100% nonforfeitability after 3 Years of Service
[ ] graded vesting as set forth below:
Nonforfeitable
Years of Service Percentage
---------------- ----------
Less than 2 0%
At least 2, but less than 3 20%
At least 3, but less than 4 40%
At least 4, but less than 5 60%
At least 5, but less than 6 80%
6 or more 100%
[ ] Other
Nonforfeitable
Years of Service Percentage
---------------- ----------
---------------- ----------------
---------------- ----------------
---------------- ----------------
---------------- ----------------
---------------- ----------------
B. VESTING SERVICE
Choose one:
[x] All Years of Service are credited to determine a
Participant's Vesting Service.
[ ] All Years of Service are credited to determine a
Participant's Vesting Service except Years of Service
before the Employer maintained this Plan or a
predecessor plan.
SPECIAL ELECTION FOR PLANS CONVERTING TO PROTOTYPE VERSION 01
If the Company is adopting this prototype plan as an amendment
and restatement to the plan and the plan provides that the
method for determining Vesting Service is determined on an
Hours of Service basis choose one:
[ ] The Hours of Service Method (190 Hours of Service for
each month in which an Hour of Service is credited).
[ ] Not applicable.
Page 4 of 6
<PAGE>
VI. EARLY RETIREMENT
A. EARLY RETIREMENT DATE
Upon attaining his or her Early Retirement Date, a
Participant, shall be fully vested in his or her Employer
Contribution Account.
[x] No Early Retirement Date.
[ ] To be eligible for Early Retirement, a Participant must
have reached age ___.
VII. DISABILITY
Choose one of the following definitions:
[ ] becoming eligible for disability benefits under the Employer's
long term disability plan.
[x] becoming eligible for disability benefits under the Social
Security Act.
[ ] inability to engage in any substantial gainful activity by
reason of any medically determined physical or mental
impairment that can be expected to result in death or which
has lasted and can be expected to last for a continuous period
of not less than 12 months.
[ ] total and permanent inability to meet the requirements of the
Participant's customary employment which can be expected to
last for a period of not less than 12 months.
VIII. MISCELLANEOUS
A. OTHER PLANS
Does the Company maintain, or has the Company ever maintained,
another qualified plan in which any Participant in this Plan
is (or was) a participant or could possibly become a
participant?
[ ] Yes
[x] No
If the answer is Yes, the Addendum For Companies Who Maintain
Another Plan must be completed and signed.
B. INQUIRIES
If you have any questions about the legal and tax implications
of adopting the Plan, you should consult with your attorney.
However, if you have any questions about either the Prototype
Plan or the Adoption Agreement, please write to the sponsoring
organization at the following address:
Automatic Data Processing Federal Credit Union
One ADP Blvd.
Roseland, NJ 07068 M/S B427
Attn: 401(k) Plan Administrator
201/994-5000
Page 5 of 6
<PAGE>
C. NOTIFICATION
The Plan sponsor will notify you as an adopting Company of any
amendments made to the Plan, or the discontinuance or
abandonement of the Plan; unless services provided by a
related company of ADP Federal Credit Union are discontinued.
D. CAUTIONARY STATEMENT
It is important that you complete the Adoption Agreement with
great care. Failure to fill out the Adoption Agreement
properly may result in disqualification of the Plan.
E. RELIANCE ON OPINION LETTER
The adopting Company may not rely on an opinion letter issued
by the National Office of the Internal Revenue Service, or a
notification letter issued by a Key District Office, as
evidence that the Plan is qualified under Code ss. 401. To
obtain reliance with respect to Plan qualification, the
Company must apply to the appropriate Key District Office for
a determination letter. This Adoption Agreement may be used
only in conjunction with basic plan document No. 01.
IN WITNESS WHEREOF, the Company has caused this Plan to be adopted
effective as of January 1, 1998.
Hat World, Inc.
---------------
(Company Name)
/S/ By: /S/
--------------------------- -----------------------------
Witness: Marc Gregori Scott Molander
Date: 11/10/97 Title: CEO
--------------------- --------------------------
Page 6 of 6
EXHIBIT 24.0
[EIDE BAILLY LLP LETTERHEAD]
--------------------------
CONSULTANTS * CERTIFIED PUBLIC ACCOUNTANTS
CONSENT OF INDEPENDENT AUDITOR
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated January 15, 1999, in the Registration Statement (Form
SB-2 No. 333-80761) and related Prospectus of Hat World Corporation dated June
16, 1999 for the registration of 1,150,000 shares of its common stock.
Eide Bailly LLP
Eden Prairie, Minnesota
June 16, 1999
