<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission File Number
NOVEMBER 30, 1996 0-25682
BULLET SPORTS INTERNATIONAL, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 13-3561882
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
2803 S. YALE STREET
SANTA ANA, CALIFORNIA 92704
(Address of principal executive offices)
Issuer's telephone number, including area code:
(714) 966-0310
Check whether the issuer (1) filed all reports required to be filed by section
13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
4,428,867 shares of the Registrant's Common Stock, par value $.001 per share
were outstanding as of January 17, 1997.
Transitional Small Business Disclosure Format (check one): Yes No X
----- -----
This document consists of 19 pages, of which this is page 1
<PAGE>
BULLET SPORTS INTERNATIONAL, INC.
FORM 10-QSB
FOR THE QUARTER ENDED NOVEMBER 30, 1996
INDEX
Facing sheet . . . . . . . . . . . . . . . . . . . . . . . . 1
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Part I FINANCIAL INFORMATION
Item 1 Financial Statements:
a) Consolidated Balance Sheet at November 30, 1996
(Unaudited). . . . . . . . . . . . . . . . . . . . . . . . . 3
b) Consolidated Statements of Operations and Accumulated
Deficit for the three and nine months ended
November 30, 1996 and 1995 (Unaudited) . . . . . . . . . . . 4
c) Consolidated Statements of Cash Flows for the nine
months ended November 30, 1996 and 1995 (Unaudited). . . . . 5
d) Notes to Consolidated Financial Statements (Unaudited) . . . 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 12
Part II OTHER INFORMATION
Item 1 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . 16
Item 2 Changes in Securities. . . . . . . . . . . . . . . . . . . . 16
Item 3 Defaults Upon Senior Securities. . . . . . . . . . . . . . . 17
Item 4 Submission of Matters to a Vote of Security Holders. . . . . 17
Item 5 Other Information. . . . . . . . . . . . . . . . . . . . . . 18
Item 6 Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . 19
-2-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
NOVEMBER 30, 1996
(UNAUDITED)
ASSETS
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,938
Accounts receivable, less allowance for sales returns
and doubtful accounts of $132,302 . . . . . . . . . . . . . . . . . . . . . . 1,736,861
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,344,570
Prepaid expenses and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 223,902
Restricted certificate of deposit . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000
--------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,855,271
--------------
Property and equipment, at cost:
Automotive equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,108
Computer systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,026
Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . 484,522
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,172
--------------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 692,828
Less accumulated depreciation and amortization. . . . . . . . . . . . . . . . . . (205,290)
--------------
Total property and equipment, net . . . . . . . . . . . . . . . . . . . . 487,538
--------------
Other assets:
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,574
--------------
$ 6,364,383
--------------
--------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving line of credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,018,506
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,730,592
Accrued expenses and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,647,524
Accrued preferred stock dividends . . . . . . . . . . . . . . . . . . . . . . . . 573,540
Current portion of capital lease obligations. . . . . . . . . . . . . . . . . . . 19,653
--------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 5,989,815
--------------
Long-term liabilities:
Capital lease obligations, less current portion . . . . . . . . . . . . . . . . . 70,337
--------------
Stockholders' equity:
Series A, 6% non-voting cumulative convertible preferred stock - par value
$.001; 500,000 shares authorized, 2,500 issued and outstanding. . . . . . . . 22,500
Series B, 8.75% non-voting cumulative convertible preferred stock - par value
$.001; 8,700 shares authorized, 6,950 issued and outstanding. . . . . . . . . 5,359,959
Series C, 8.75% non-voting cumulative convertible preferred stock - par value
$.001; 2,000 authorized, issued and outstanding . . . . . . . . . . . . . . . 1,815,727
Series D, 8.75% non-voting cumulative convertible preferred stock - par value
$.001; 25,000 authorized, 11,475 issued and outstanding . . . . . . . . . . . 791,975
Common stock - par value $.001; 25,000,000 shares authorized,
4,428,867 issued and outstanding. . . . . . . . . . . . . . . . . . . . . . . 4,429
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,684,499
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,374,858)
--------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . 304,231
--------------
$ 6,364,383
--------------
--------------
</TABLE>
See accompanying notes to consolidated financial statements
-3-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NOVEMBER 30, NINE MONTHS ENDED NOVEMBER 30,
------------------------------- -------------------------------
1996 1995 1996 1995
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Net sales..................................... $ 1,674,292 $ 3,239,524 $ 5,848,768 $ 12,134,287
Cost of goods sold............................ 1,659,880 2,477,327 5,115,291 8,918,866
------------- ------------- ------------- -------------
Gross profit.................................. 14,412 762,197 733,477 3,215,421
------------- ------------- ------------- -------------
Operating expenses:
Product development........................ 95,174 - 112,300 -
Selling, general and administrative........ 2,452,168 1,591,088 5,272,002 4,683,798
------------- ------------- ------------- -------------
Loss from operations.......................... (2,532,930) (828,891) (4,650,825) (1,468,377)
------------- ------------- ------------- -------------
Other income (expense):
Interest income............................ 18,432 844 57,722 3,873
Interest expense........................... (57,828) (114,964) (198,623) (319,692)
Other, net................................. (107) - (11,818) 23
------------- ------------- ------------- -------------
Net other income (expense)............. (39,503) (114,120) (152,719) (315,796)
------------- ------------- ------------- -------------
Loss before provision for income taxes........ (2,572,433) (943,011) (4,803,544) (1,784,173)
Provision (credit) for Income taxes........... - - 1,650 800
------------- ------------- ------------- -------------
Net loss...................................... $ (2,572,433) $ (943,011) $ (4,805,194) $ (1,784,973)
------------- ------------- ------------- -------------
Accumulated deficit, beginning of period...... (9,592,968) (1,073,939) (6,996,124) (231,977)
Less preferred stock dividends................ (209,457) - (573,540) -
------------- ------------- ------------- -------------
Accumulated deficit, end of period............ $ (12,374,858) (2,016,950) (12,374,858) (2,016,950)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Per share information:
Net loss per common share.................. $ (0.63) (0.30) (1.32) (0.85)
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
Weighted average shares outstanding........ 4,402,493 3,288,541 4,079,242 2,292,278
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
See accompanying notes to consolidated financial statements
-4-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED NOVEMBER 30, 1996 AND 1995
(UNAUDITED)
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,805,194) $ (1,784,973)
Adjustments to reconcile net loss to net cash used in operations:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 107,946 434,609
Loss (Gain) on disposal of assets . . . . . . . . . . . . . . . . . . 11,818 (23)
Common stock issued for compensation and services . . . . . . . . . . 596,250 144,375
Changes in operating assets and liabilities:
Increase in accounts receivable. . . . . . . . . . . . . . . . . . (176,997) (225,613)
Decrease (Increase) in inventories . . . . . . . . . . . . . . . . 1,122,202 (458,066)
Increase in prepaid expenses and other . . . . . . . . . . . . . . (101,852) (155,430)
Increase (Decrease) in accounts payable. . . . . . . . . . . . . . (1,531,046) 868,741
Increase in accrued expenses . . . . . . . . . . . . . . . . . . . 936,924 40,708
Increase in non-compete agreement. . . . . . . . . . . . . . . . . - 28,236
------------- -------------
Net cash used in operating activities. . . . . . . . . . . . . . . (3,839,949) (1,107,436)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . (126,891) (129,128)
Increase in restricted certificate of deposit. . . . . . . . . . . . . . (500,000) (250,000)
Purchases of patents and trademarks. . . . . . . . . . . . . . . . . . . - (5,093)
Proceeds from disposal of property and equipment . . . . . . . . . . . . 1,226 2,900
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,090) (2,685)
------------- -------------
Net cash used in investing activities. . . . . . . . . . . . . . . (636,755) (384,006)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuances of preferred stock . . . . . . . . . . . . . 2,603,800 -
Net proceeds from issuances of common stock. . . . . . . . . . . . . . . 782,500 1,527,500
Collection of subscription receivable. . . . . . . . . . . . . . . . . . 1,261,157 -
Proceeds from issuance of notes payable. . . . . . . . . . . . . . . . . - 298,146
Repayments of notes payable. . . . . . . . . . . . . . . . . . . . . . . (51,427) (49,261)
Net repayments of revolving credit facility. . . . . . . . . . . . . . . (123,918) (916,031)
Repayment of capital lease obligations . . . . . . . . . . . . . . . . . (11,999) (6,044)
------------- -------------
Net cash provided by financing activities. . . . . . . . . . . . . 4,460,113 854,310
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS. . . . . . . . . . . . . . . . . (16,591) (637,132)
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . . . . 66,529 661,900
------------- -------------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . . . . $ 49,938 $ 24,768
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION, cash paid for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 202,530 $ 319,692
------------- -------------
------------- -------------
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,650 $ 800
------------- -------------
------------- -------------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES, 1996:
The Company issued 250 shares of Series C Preferred Stock for notes payable,
related accrued interest and less exchange costs for a net total of
$224,142.
The Company issued 135,000 shares of common stock valued at $286,875 to a
key employee, two Company officer/directors and a legal firm in
settlement of liabilities recorded at February 29, 1996.
The Company issued 50,000 shares of common stock valued at $109,375 to a
financial public relations consultant for a one year services contract
which commenced March 18, 1996.
The Company issued 60,000 shares of common stock valued at $200,000 to a
legal firm for services performed in the current and prior fiscal years.
Dividends of $573,540 on preferred stock were accrued but not paid for the
nine months ended November 30, 1996.
See accompanying notes to consolidated financial statements
-5-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAIDED)
NOTE 1 - BUSINESS OF THE COMPANY, BASIS OF PRESENTATION AND GOING CONCERN
DESCRIPTION OF THE BUSINESS - Bullet Sports International, Inc.
("BSI") and the business acquired by its subsidiary, Bullet-Cougar Golf
Corporation ("Bullet-Cougar"), on January 18, 1995 have been engaged since 1979
in the design and assembling of golf clubs and the wholesale distribution of
golf clubs, bags and accessories. As used in these Notes, the term "Company"
includes both Bullet Sports International, Inc. and Bullet-Cougar, unless the
context requires a different meaning.
INTERIM FINANCIAL INFORMATION - The accompanying condensed consolidated
financial statements which present the financial position of Bullet Sports
International, Inc. and subsidiary as of November 30, 1996 and the results of
operations for the three and nine month periods ended November 30, 1996 and 1995
have been prepared by the Company without audit. All significant intercompany
accounts and transactions have been eliminated in consolidation. In the opinion
of management, all adjustments (consisting only of normal recurring accruals)
have been made which are necessary to present fairly the financial position,
results of operations and cash flows of the Company at November 30, 1996 and for
the three and nine month periods then ended.
Although the Company believes that the disclosure in the unaudited condensed
consolidated financial statements is adequate for a fair presentation thereof,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). Audited financial statements were included in the
Company's annual report on Form 10-KSB under the Securities Exchange Act of 1934
for the year ended February 29, 1996. These November 30, 1996 unaudited
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-KSB for the year ended February 29, 1996.
The results of operations for the interim period ended November 30, 1996 are not
necessarily indicative of the results for the full year.
GOING CONCERN - The consolidated financial statements as of November
30, 1996 have been presented on the basis that the Company is a going
concern, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. There is substantial doubt
about the Company's ability to continue as a going concern. On January 17,
1997, Bullet-Cougar filed a voluntary petition in the United States
Bankruptcy Court, Central District of California, for reorganization of its
affairs under Chapter 11 of Title 11 of the United States Code ("Bankruptcy
Code"). The Company had experienced significant operating losses during the
fiscal year ended February 29, 1996, and has continued during fiscal 1997 to
experience operating losses, declining revenues, negative cash flows from
operations, loss of liquidity as a result of cash assets pledged to the
principal lender of Bullet-Cougar (whose debt was guaranteed by BSI, the
parent company), and continuing noncompliance with existing lender covenants.
The Company pursued numerous alternatives for raising additional capital
through and following the close of the third quarter of the fiscal year from
the existing lender as well as potential new lenders or equity investors.
None of these efforts met with success, and on January 8, 1997, the Company
announced that its efforts in this regard had not been successful, and the
Board of Directors of Bullet-Cougar had authorized Bullet-Cougar to file a
voluntary petition for reorganization of it affairs under Chapter 11 of the
Bankruptcy Code. Promptly following such announcement, the lender drew down
a $1,500,000 letter of credit forming part of the loan collateral, and the
letter of credit bank reimbursed itself for the draw with the liquidation of
a certificate of deposit in that amount maintained by Bullet-Cougar as
collateral for the issuing bank's letter of credit obligation. Management
believes that the Company will not have sufficient cash to meet minimum
operating requirements going forward unless the Company is successful in
raising additional capital or otherwise successfully confirming a plan of
reorganization for Bullet-Cougar under the Chapter 11 proceedings. See Note
3 for additional information.
-6-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
As a result of the Chapter 11 filing and circumstances relating to this
event, realization of assets and satisfaction of liabilities is subject to
uncertainty. A plan of reorganization could materially change the amounts
reported in the accompanying consolidated financial statements, which do not
give effect to adjustments to the carrying values of assets and liabilities
which may be necessary as a consequence of the confirmation and
implementation of a plan of reorganization. The ability of Bullet-Cougar to
continue as a going concern is dependent on, among other things, confirmation
of an acceptable plan of reorganization, future profitable operations and the
ability to generate sufficient cash from operations and obtain financing
sources to meet future obligations.
PER SHARE INFORMATION - Net loss per share information is computed
based on the weighted average shares of common stock and common stock
equivalents outstanding during the periods presented. No stock options are
included in the computation of per share information as their effect would be
anti-dilutive. Additionally, the net loss is adjusted for the effect of accrued
cumulative preferred stock dividends of $209,457 or $.05 per common share for
the three ended November 30, 1996 and $573,540 or $.14 per common share for the
nine months ended November 30, 1996.
NOTE 2 - INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market.
Costs include materials, labor and manufacturing overhead. Below is a summary
of the components of inventories at November 30, 1996:
Raw materials $ 945,535
Work in process 45,801
Finished goods 1,353,234
-----------
$2,344,570
-----------
-----------
NOTE 3 - FINANCING TRANSACTIONS
On August 25, 1995, Bullet-Cougar entered into a revolving line of credit with a
financial services corporation. The $3,000,000 line of credit extends to August
31, 1997 with interest at 1.50% over the prime rate (8.25% at November 30,
1996), payable monthly. The credit line is secured by Bullet-Cougar's inventory
and accounts receivable, as defined, and a $1,500,000 letter of credit secured
by a certificate of deposit. During the nine months ended November 30, 1996,
Bullet-Cougar increased the letter of credit to $1,500,000 from $1,000,000 and
the lender rescinded the termination notice it issued in the prior fiscal year.
On January 9, 1997, the lender drew down the letter of credit as described in
Note 1. On January 17, 1997, the lender's position as a secured lender to
Bullet-Cougar was purchased by Clearwater Fund IV, LLC, a Delaware limited
liability company, which in turn entered into a new loan agreement
("Clearwater Loan Agreement") with Bullet-Cougar in the amount of $1,000,000
(taking into account the existing amount of the former secured lender's
outstanding loan balance of approximately $223,000). The loan proceeds are
required under the Clearwater Loan Agreement to be used to pay designated
operating expenses of Bullet-Cougar during the Chapter 11 proceedings and
make certain purchases of inventory. Certain terms and provisions of the
prior loan purchased by Clearwater Fund IV, LLC were amended to conform to
the provisions of the Clearwater Loan Agreement, the material provisions of
which are summarized below.
-7-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Clearwater Loan is secured by a lien on substantially all of
Bullet-Cougar's assets, including inventory, accounts receivable, interests
in real property, intellectual property, furniture, fixtures, equipment and
general intangible property. The Clearwater Loan bears interest at 9.5% per
annum prior to default, and two percentage points above that rate thereafter
until paid in full. Interest is payable monthly in arrears prior to the
maturity date, when all amounts under the Clearwater Loan become due and
payable. The maturity date is specified as July 31, 1997. The Clearwater
Loan Agreement restricts the activities of Bullet-Cougar to the manufacture
and distribution of golf equipment and accessories, and requires
Bullet-Cougar to maintain certain collateral to loan value ratios and to
refrain from taking certain actions without the lender's consent, including
prepaying other indebtedness, paying dividends, entering into transactions
with affiliated entities, creating or acquiring subsidiaries, disposing of
assets or acquiring or merging with other persons. Events of default under
the Clearwater Loan include the borrower's failure to pay principal or
interest on the respective due dates, default by the borrower in keeping its
covenants under the Clearwater Loan Agreement or other agreements, the
borrower's commencing a voluntary case under Chapter 11 of the Bankruptcy
Code (except that it is not an event of default if Bullet-Cougar file such a
petition before January 31, 1997 and an interim or emergency order for
financing by the lender is entered in such case on or before February 14,
1997), entry of judgments against Bullet-Cougar for over $100,000 which
judgments remain unstayed after 60 days, or any enforcement proceedings
relating to such judgments shall have been commenced.
BSI and Bullet-Cougar are continuing to negotiate with Clearwater Fund,
IV LLC regarding the possibility of additional debtor in possession financing
being provided to Bullet-Cougar during the pendency of the Bullet-Cougar Chapter
11 proceedings, but no agreements have been reached as of January 20, 1997.
On May 23, 1996, note holders exchanged four short-term notes payable and
related accrued interest for preferred stock as set forth in Note 4.
NOTE 4 - STOCKHOLDERS' EQUITY
On March 21, 1996, 235,050 shares of Series A, 6% Non-Voting Cumulative
Convertible Preferred Stock ("Series A Convertible Preferred Stock") were
converted into 3,134 shares of Series B, 8.75% Non-Voting Cumulative
Convertible Preferred Stock ("Series B Convertible Preferred Stock") at
$675.00 per share for a total value of $2,115,450. The Company received no
proceeds from this conversion. In conjunction with the above conversion, the
Company granted warrants to purchase 313,400 shares of the Company's $.001
par value common stock ("Common Stock") at $2.95 per share through February
2001.
On March 21, 1996, the Company issued 250 shares of Series B Convertible
Preferred Stock in a private offering at $880.96 per share for net proceeds
of $220,240 and granted warrants to purchase 25,000 shares of the Company's
Common Stock at $2.95 per share through February 2001.
The Company's Series B Convertible Preferred Stock ranks senior to the
Company's Common Stock as to payment of dividends and the distribution of
assets upon liquidation, dissolution or winding up of the Company. As long
as the Company is in compliance in all material respects with its obligations
to holders of the Series B convertible Preferred Stock, the Company has the
right to redeem all or part of the Series B Convertible Preferred Stock based
upon a redemption formula set forth in the Certificate of Designations. The
holders of the Series B Convertible Preferred Stock also have the right to
convert their shares into shares of the Company's Common Stock based upon the
formula and subject to the limitations set forth in the Certificate of
Designations. Except as provided for under the Delaware General Corporation
Law ("DGCL") or the Certificate of Designations, the Series B Convertible
Preferred Stock shall not be entitled to vote on any matter.
-8-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
From April 18, 1996 through May 22, 1996, the Company issued 1,750 shares of
Series C, 8.75% Non-Voting Cumulative Convertible Preferred Stock ("Series C
Convertible Preferred Stock"), which has similar terms and liquidation
preferences as the Series B Convertible Preferred Stock, in a private offering
at $888.52 to $911.47 per share for total net proceeds of $1,591,585 and granted
warrants to purchase 271,582 shares of the Company's Common Stock at $2.95 per
share through February 2001.
On May 23, 1996, the Company issued 250 shares of Series C Convertible Preferred
Stock in exchange for four short-term promissory notes, related accrued interest
and less exchange costs for a net total of $224,142. The Company received no
proceeds from this exchange. The note holders received warrants to purchase
40,290 shares of the Company's Common Stock at $2.87 per share through February
2001.
On July 19, 1996, warrants for the purchase 200,000 shares of Common Stock
were exercised at $2.95 per share for net proceeds of $590,000. In a related
transaction on July 19th, the Company issued 11,475 shares of Series D, 8.75%
Non-voting Cumulative Convertible Preferred Stock ("Series D Convertible
Preferred Stock"), which has similar terms and liquidation preferences as the
Series B Convertable Convertable Preferred Stock, in a private offering at
$69.02 per share for net proceeds of $791,975 after offering costs of $4,525.
The issuance of these preferred stock was in lieu of issuing 270,000 shares
of Common Stock for warrants having an exercise price of $2.95 per share.
The Company did not meet certain deadlines with respect to filing and gaining
effectiveness of a "shelf" registration statement with the SEC covering shares
of Common Stock underlying 6,950 shares of Series B, 2,000 shares of Series C
and 11,475 shares of Series D Convertible Preferred Stock (as defined) causing
the Company to incur additional charges for payment to the preferred
shareholders. The initial additional charges total $266,143 and increase at the
rate of $8,871 per day until the registration statement becomes effective. As
of November 30, 1996, the Company recorded additional cost of $1,275,913. The
initial additional charges are calculated at 3% of the funding provided by the
preferred shareholders and the on going additional cost is calculated at 3% per
month with proration for periods of less than 30 days. The Company filed a
registration statement with the SEC on October 17, 1996; however, the
registration statement has not yet been declared effective by the SEC.
Dividends payable to the holders of Series B, C and D Convertible Preferred
Stock are payable on February 1, May 1, August 1 and November 1 of each year.
Dividends payable but not paid on the due dates bear interest at the rate of
12% per annum until paid. Subject to the terms of the applicable Certificate
of Designations, dividends may, at the option of the Board of Directors, be
paid in stock in lieu of cash. To date, the Board of Directors has not
declared any dividends on the Series B, C or D Convertible Preferred Stock;
however, due to the terms for preferred stock dividends, the Company has
accrued Series B, C and D Convertible Preferred Stock dividends of $573,540
for the nine months ended November 30, 1996.
On June 24, 1996, the Company issued a key employee 5,000 shares and two Company
officers/directors 50,000 shares each of Common Stock under the Company's 1994
Employee Stock Compensation Plan in settlement of liabilities recorded as of
February 29, 1996. These issuances were recorded at an estimated fair market
value of $2.13 per share based on the closing price of the Common Stock on March
11, 1996 (the date the Company approved the number of shares to be issued for
services performed).
On June 24, 1996, the Company issued its principal legal firm 30,000 shares of
Common Stock under the Company's 1994 Employee Stock Compensation Plan in
settlement of liabilities recorded as of February 29, 1996. This issuance was
recorded at an estimated fair market value of $2.13 per share based on the
closing price of the Common Stock on March 11, 1996 (the date the Company
approved the number of shares to be issued for the legal services performed).
-9-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On June 24, 1996, the Company issued a financial public relations consultant
50,000 shares of Common Stock under the Company's 1994 Employee Stock
Compensation Plan at an estimated fair market value of $2.19 per share based on
the closing price of the Common Stock on March 18, 1996, the effective date of
the one year financial public relations contract with the consultant for which
the shares are compensation.
On June 24, 1996, the Company issued a legal firm 60,000 shares of Common Stock
under the Company's 1994 Employee Stock Compensation Plan for legal services
related to securities work that was performed during the current and prior
fiscal years. Under the terms of the common stock grant, no gain or loss was to
be recognized by the legal firm, the full net proceeds from the sale of the
Common Stock totaling $200,000 or $3.33 per share were applied in settlement for
services.
During the nine months ended November 30, 1996, options to purchase 85,000
shares of Common Stock were exercised at $.50 per share for net proceeds of
$42,500 and options to purchase 150,000 shares of common stock were exercised at
$1.00 per shares for net proceeds of $150,000.
NOTE 5 - COMMON STOCK OPTIONS AND WARRANTS
The following table summarizes stock option and warrant transactions for the
nine months ended November 30, 1996:
<TABLE>
<CAPTION>
Number of Weighted
options and Exercise average price
warrants price per share per share
----------- --------------- -------------
<S> <C> <C> <C>
Outstanding at February 29, 1996:
Options . . . . . . . . . . . . . . . . . . 855,000 $0.50 to $6.00 $3.20
Warrants. . . . . . . . . . . . . . . . . . 319,100 $2.95 to $2.95 $2.95
Granted . . . . . . . . . . . . . . . . . . . 3,981,272 $1.75 to $4.81 $2.72
Exercised . . . . . . . . . . . . . . . . . . . (705,000) $0.50 to $2.95 $2.24
Forfeited . . . . . . . . . . . . . . . . . . . (300,000) $5.75 to $5.75 $5.75
---------- -------------- -----
Outstanding at November 30, 1996 . . . . . . . . 4,150,372 $1.00 to $6.00 $2.69
---------- -------------- -----
Exercisable at November 30, 1996 . . . . . . . . 819,372 $1.00 to $6.00 $2.76
---------- -------------- -----
</TABLE>
On August 23, 1996, the Board of Directors approved the 1996 Long-Term Incentive
Stock Plan ("Plan") which provides for the issuance of stock options or Common
Stock to directors, officers, key employees, and key consultants/advisors to
purchase up to 3,000,000 shares of the Company's common stock for a ten year
period. The Plan was approved by the stockholders' on October 17, 1996.
On August 31, 1996, the Compensation Committee of the Board of Directors
granted options to three officer/directors and the Chairman of the Board, Mr.
John Haas, Mr. Mark Green, Mr. Daniel Chandler and Mr. Richard P. Crane, Jr.,
respectively to each purchase 250,000 shares of the Company's Common Stock
for $4.81 per share (the fair market value of the Common Stock on the date of
grant) under the Company's 1994 and 1995 Compensatory Stock Option Plans.
The options vest at 20% per year starting on the first anniversary date and
expire on August 31, 2006.
-10-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On November 10, 1996, the Compensation Committee of the Board of Directors
granted options to certain officers, directors and consultants of the Company
under the Plan. Each option is granted for a term of ten years and is
exercisable in increments of twenty percent (20%) per year beginning on the
first anniversary of the date of grant at an exercise price of $1.75 (the
fair market value of the Common Stock on the date of grant). The options
were granted in the following amounts to the following individuals: (i)
options to purchase 500,000 of Common Stock to each of Mr. Richard P. Crane,
Jr., Mr. John Haas and Mr. Daniel Chandler; (ii) options to purchase 300,000
shares of common Stock to Mr. George Davis; (iii) options to purchase 200,000
shares of Common Stock to Mr. Jimmy Flood; (iv) options to purchase 100,000
shares of Common Stock to each of Mr. William Slater and Mr. Xavier Anguiano;
(v) options to purchase 50,000 shares of Common Stock to each of Mr. Donald
Klosterman and Mr. James Mahoney; and (vi) options to purchase 25,000 shares
of Common Stock to Mr. Douglas Hawthorne.
On November 30, 1996, in accordance with the provisions of the Plan, options to
purchase 2,000 of Common Stock were granted to Messrs. Courtney, Hawthorne and
Nave as Nonemployee Directors of the Company. Each such option was granted at
an exercise price of $1.75 per share (the fair market value of the Common Stock
on the date of the grant), shall fully vest and become exercisable six (6)
months after the date of grant and shall remain exercisable for a period of five
years thereafter. Such options automatically terminate on the date upon which a
Nonemployee Director's service as a Director terminates.
NOTE 6 - SUBSEQUENT EVENTS
On January 17, 1996, BSI's wholly-owned subsidiary and principal operating
entity, Bullet-Cougar, filed for protection under Chapter 11 of the
Bankruptcy Code in the Uneted States Bankruptcy Court for the Central
District of California.
The Board of Directors of Bullet-Cougar decided to seek bankruptcy protection
after extensive efforts to obtain necessary working capital through the
issuance of additional equity and/or debt securities and discussions with
numerous potential lenders proved unsuccessful. These efforts were hindered
by BSI's capital structure and the unwillingness of the holders of certain
classes of BSI's equity securities and of Bullet-Cougar's principal lender to
accept modifications to the terms of those equity securities and the lending
agreement, respectively. The Board of Bullet-Cougar determined that filing
the Chapter 11 Petition might provide Bullet-Cougar the needed time and
flexibility to restructure its operations and obtain additional working
capital.
The consolidated financial statements as of November 30, 1996 have been
presented on the basis that the Company is a going concern, which
comtemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As a result of the Chapter 11 filing and
circumstances relating to this event, realization of assets and satisfaction
of liabilities is subject to uncertainty. A plan of reorganization could
materially change the amounts reported in the accompanying consolidated
financial statements, which do not give effect to adjustments to the carrying
values of assets and liabilities which may be necessary as a consequence of
the confirmation and consummation of a plan of reorganization. The ability
of Bullet-Cougar to continue as a going concern is dependent on, among other
things, confirmation of an acceptable plan of reorganization, future
profitable operations and the ability to generate sufficient cash from
operations and obtain financing sources to meet future obligations.
On January 17, 1997, Bullet-Cougar obtained a new credit facility as more
fully described in Notes 1 and 3.
-11-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion is intended to assist in an understanding of the
Company's financial position and results of operations for the three and nine
month periods ended November 30, 1996 as compared to the same periods for the
prior year. The Company's financial statements and the notes thereto contain
detailed information that should be referred to in conjunction with the
following discussion.
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain qualifying forward-looking statements. Certain information included
in this report and other materials filed or to be filed by the Company with the
Securities and Exchange Commission (as well as certain information included in
oral statements or the written statements made or to be made by the Company)
contains statements that are forward-looking, such as statements relating to
projected financial items and results, plans for future expansion and other
business development activities, capital spending or financing sources, capital
structure and the effects of regulation and competition. Such forward-looking
information involves important risks and uncertainties that could significantly
impact anticipated results in the future and, accordingly, such results may
materially differ from those expressed in any forward-looking statements by or
on behalf of the Company.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED NOVEMBER 30, 1996
NET SALES - The Company generated net sales of $5,849,000 for the nine months
ended November 30, 1996 compared to $12,134,000 for the same period last
year, which represents a decrease of 52%. Several separate factors have
contributed to this reduction in net sales. First, the Company is currently
operating with approximately a third less independent sales representatives
compared to the corresponding period of the prior year and has a new group of
in-house salesmen, both of which unfavorably affected our sales levels. The
Company combined the distribution of its lower priced Cougar product line
with its higher end Bullet product line which is primarily sold though
independent sales representatives and a staff of in-house salesmen.
Previously, the Cougar product line was primarily sold to large accounts by a
separate sales force. This strategy contributed to the loss of significant
sales and therefore the Company is returning to a separate sales force in an
attempt to build back these sales. The Company has operated under a
restriction in working capital which has restricted the Company's ability to
make certain purchases of products which has impacted sales and has limited
funds available for the desired level of marketing. In addition, the Company
experienced a significant reduction in revenue from a large customer who
introduced its own in-house product line. Finally, the Company believes that
demand for the Company's products has decreased as certain customers were
unsure of the Company's ability to continue as a going concern.
GROSS PROFIT ON SALES - The gross profit decreased in the nine months ended
November 30, 1996 by $2,482,000 or 71% to $733,000 from $3,215,000 for the
same period in 1995 and the gross profit percentage decreased significantly
in the current nine month period to 12.5% compared to 26.5% in the
corresponding period of the prior year. The decrease in gross profit
resulted from the decrease in sales volumes, higher relative production cost
due to lower sales and production volumes, an inability to increase unit
sales prices to offset higher cost of purchased products and raw
materials, increased sales of discontinued products at lower unit sales prices
and an increase in the reserve for obsolete inventory.
PRODUCT DEVELOPMENT EXPENSES - Product development expenses for the nine
months ended November 30, 1996 were $112,000. In the prior year product
development expenses were minor and therefor not separately set out from
operating expenses. The expenses for the current nine months were primarily
incurred to evaluate the introduction of a clothing line carrying the Bullet
name as a marketing tool.
-12-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
SELLING, GENERAL & ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses increased by $588,000 or 12.6% to $5,272,000 in the
first nine months of the current fiscal year compared to $4,684,000 for the
corresponding period in 1995. The increase resulted from an expense of
$1,276,000 during the nine months ended November 30, 1996 as the Company did
not meet certain deadlines with respect to filing and gaining effectiveness
of a "shelf" registration statement with the Securities and Exchange
Commission covering the shares of Common Stock underlying the convertible
preferred stock (see Note 4 to the financial statements). Decreases in
expenses resulted from several separate factors. The largest decrease was due
to the elimination of amortization expense this fiscal year compared to
$371,000 during the first nine months of the prior fiscal year. The decrease
is a result of the Company writing-off its investments in goodwill,
trademarks and patents on February 29, 1996. The Company also experienced a
decrease in advertising, endorsement and trade show expenses to $641,000 for
the nine months ended November 30, 1996 from $698,000 for the corresponding
period of the prior year which represents a $57,000 or 8% decrease.
Commission and other expenses that related directly to sales decreased as
sales decreased.
INTEREST INCOME - Interest income increased from $4,000 in the nine months ended
November 30, 1995 to $58,000 in the nine months ended November 30, 1996, as a
result of the Company's investment in a restricted certificate of
deposit.
INTEREST EXPENSE - Interest expense for the nine months ended November 30, 1996
decreased by $121,000 or 39% to $199,000, from $320,000 for the same period last
year, principally due to a lower average principal balance on the Company's
revolving line of credit during the current reporting period.
OTHER EXPENSE - The principal other expense during the nine months ended
November 30, 1996, resulted from the Company's write off of its carrying value
in certain previously used computer software following its conversion to new
software.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 1996
NET SALES - Net revenues decreased to $1,674,000 for the three months ended
November 30, 1996 compared to $3,240,000 for the corresponding period of the
prior year, a decrease of $1,566,000 or 48%. Several factors contributed to
this reduction. First, the Company combined the distribution of its lower
priced Cougar product line with its higher end Bullet product line which is
primarily sold though independent sales representatives and a staff of in-house
salesmen. Previously, the Cougar product line was primarily sold to large
accounts by a separate sales force. This strategy has resulted in the loss of
significant sales and therefore the Company is returning to a separate sales
force in an attempt to build back these sales. In addition, the Company has
operated under a restriction in working capital which has restricted the
Company's ability to make certain purchases of products which has impacted sales
and has limited funds available for the desired level of marketing. Further,
the Company experienced a significant reduction in revenue from a large customer
who introduced its own in-house product line. Finally, the Company believes
that demand for the Company's products has decreased as certain customers were
unsure of the Company's ability to continue as a going concern.
GROSS PROFIT ON SALES - The gross profit decreased in the three months ended
November 30, 1996 by $748,000 or 98% to $14,000 from $762,000 in the three
months ended November 30, 1995, and the gross profit percentage decreased
significantly in the current period to 0.8% compared to 23.5% in the
corresponding period of the prior year. The decrease in gross profit
resulted from the decrease in sales volumes, higher relative production cost
due to lower sales and production volumes, an inability to increase unit
sales prices to offset higher cost of purchased products and raw
materials, increased sales of discontinued products at lower unit sales prices
and an increase in the reserve for obsolete inventory.
-13-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
SELLING, GENERAL & ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses were $2,452,000 and $1,591,000 for the three months
ended November 30, 1996 and 1995, respectively, representing 146% and 49% of
related net sales. The increase primarily resulted from an expense of
$778,000 during the three months ended November 30, 1996 as the Company did
not meet certain deadlines with respect to filing and gaining effectiveness
of a "shelf" registration statement with the Securities and Exchange
Commission covering the shares of Common Stock underlying the convertible
preferred stock (see Note 4 to the financial statements). The Company also
experienced an increase in advertising, endorsement and trade show expenses
to $361,000 for the three months ended November 30, 1996 from $319,000 during
the corresponding period of the prior year which represents a $42,000 or 13%
increase. Finally, the Company engaged a professional marketing firm and a
public relations firm at a combined cost of $69,000 during the current
quarter in an attempt to increase sales. There was a decrease in expenses
due to the elimination of amortization expense during the three month period
ended November 30, 1996 compared to $128,000 during the comparable three
months of the prior fiscal year. This decrease was a result of the Company
writing-off its investments in goodwill, trademarks and patents on February
29, 1996. Finally, commission and other expenses that related directly to
sales decreased as sales decreased.
INTEREST INCOME - Interest income increased to $18,000 in the three months
ended November 30, 1996 from $1,000 in the comparable three month period of
the prior year, as a result of the Company's investment in a restricted
certificate of deposit.
INTEREST EXPENSE - Interest expense for the three months ended November 30, 1996
decreased by $57,000 to $58,000, principally due to a lower average principal
balance on the Company's revolving line of credit during the reporting period
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital deficit at November 30, 1996, was $135,000
which represents a $58,000 change from the deficit of $193,000 at the
beginning of the fiscal year. Cash and cash equivalents decreased by $17,000
to $50,000 at November 30, 1996, with the increase in equity capital raised
through the issuance of Convertible Preferred and Common Stock offset by
operating losses. Accounts receivable increased by $177,000 or 11% to
$1,737,000 at November 30, 1996 with the increase primarily related to
increased sales for the three months ended November 30, 1996 compared to the
sales for the three months prior to the beginning of the fiscal year offset
by an increase in collection of accounts. Inventories decreased by
$1,122,000 or 32% to $2,345,000 at November 30, 1996, due to reduced buying.
Accounts payable decreased by $1,531,000 or 47% to $1,731,000 at November 30,
1996 as a result of the use of new equity capital reducing payables and
because of lower product and raw material purchasing.
In the prior fiscal year, the Company fell out of compliance with certain
financial covenants, causing the lender to lower the borrowing limit to
$3,000,000 and to increase the securing letter of credit to $1,500,000
($1,000,000 on February 14, 1996 and $1,500,000 on April 2, 1996). The letter
of credit is secured by a certificate of deposit which matures March 26, 1997
and is shown on the November 30, 1996 Balance Sheet as a restricted certificate
of deposit. The letter of credit and securing certificate of deposit adversely
effect the Company's liquidity and have the effect of substantially lowering the
effective borrowings under the revolving credit facility and, also, effectively
increasing the cost of funds. At November 30, 1996, borrowings under the credit
facility totaled $2,019,000.
For the nine months ended November 30, 1996, the Company utilized cash flows
from operations and investing activities of $3,840,000 and $637,000
respectively. The cash requirements of the Company in the nine months ended
November 30, 1996 were principally met by funds received from financing
activities as outlined below.
-14-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
On February 29, 1996, the Company entered into a subscription agreement with
two significant stockholders for the purchase of 2,000 shares of Series B
Preferred Stock for $1,000 per share and a total value of $2,000,000. Prior
to the Series B Convertible Preferred Stock subscription, the Company had
$500,000 in notes payable to these stockholders. As a result, $500,000 of
the Series B Convertible Preferred Stock subscription was used to retire the
notes on February 29, 1996. The $1,500,000 remainder of the subscription
agreement, net of issuance costs, were received on March 6, 1996.
During March, April and May 1996, the Company issued 2,000 shares of Series B
and Series C Convertible Preferred Stock for net cash proceeds of $1,812,000,
after offering costs of $188,000. In addition, on May 23, 1996, the Company
issued 250 shares of Series C Convertible Preferred Stock in exchange for
four short-term promissory notes, related accrued interest and less exchange
costs for a net total of $224,000.
On July 19, the Company issued 11,475 shares of Series D Convertible
Preferred Stock for net cash proceeds of $792,000 and in a related
transaction issued 200,000 shares of Common Stock for proceeds of $590,000.
For the nine months ended November 30, 1996, the Company received net proceeds
of $193,000 from the exercise of options to purchase 235,000 shares of Common
Stock.
Bullet-Cougar was out of compliance on it revolving line of credit and as a
result, on January 9, 1997, the lender called the letter of credit in the
amount of $1,500,000 and offset that amount against the borrowings under the
credit facility reducing the balance then outstanding to approximately
$223,000. On January 17, 1997 Clearwater Fund IV, LLC purchased the existing
credit facility and modified the terms and conditions to Bullet Cougar as
more fully described in Note 3 to the financial statements.
BANKRUPTCY OF BULLET-COUGAR
On January 17, 1996, BSI's wholly-owned subsidiary and principal operating
entity, Bullet-Cougar, filed for protection under Chapter 11 of the
Bankruptcy Code in the United States Bankruptcy Court for the Central
District of California.
The Board of Directors of Bullet-Cougar decided to seek bankruptcy protection
after extensive efforts to obtain necessary working capital through the
issuance of additional equity and/or debt securities and discussions with
numerous potential lenders proved unsuccessful. These efforts were hindered
by BSI's capital structure and the unwillingness of the holders of certain
classes of BSI's equity securities and of Bullet-Cougar's principal lender to
accept modifications to the terms of those equity securities and the lending
agreement, respectively. The Board of Bullet-Cougar determined that filing
the Chapter 11 Petition might provide Bullet-Cougar the needed time and
flexibility to restructure its operations and obtain additional working
capital.
The consolidated financial statements as of November 30, 1996 have been
presented on the basis that the Company is a going concern, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As a result of the Chapter 11 filing and
circumstances relating to this event, realization of assets and satisfaction
of liabilities is subject to uncertainty. A plan of reorganization could
materially change the amounts reported in the accompanying consolidated
financial statements, which do not give effect to all adjustments to the
carrying values of assets and liabilities which may be necessay as a
consequence of the confirmation and consummation of a plan of reorganization.
The ability of Bullet-Cougar to continue as a going concern is dependent on,
among other things, confirmation of an acceptable plan of reorganization,
future profitable operations and the ability to generate sufficient cash from
operations and obtain financing sources to meet future obligations.
-15-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
PART II
OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On January 17, 1997, Bullet-Cougar filed a voluntary petition
in the United States Bankruptcy Court, Central District of
California, for reorganization of its affairs under Chapter 11
of the Bankruptcy Code. Refer to the Going Concern section of
Note 1 and the Bankruptcy section of Management's Discussion
and Analysis of Financial Condition and Results of Operations to
the November 30, 1996 financial statement for additional infor-
mation.
In March 1996, W. O. Crisman, III, individually, and W. O.
Crisman, III, d/b/a Otey Crisman Golf Company, a sole
proprietorship, filed an action in the United States District
Court for the Southern District of Alabama against BSI
seeking declaratory relief and damages for claimed breaches of
contract and fraud arising out of BSI's June 13, 1995
acquisition of the business and assets of the Otey Crisman Golf
Company. The Company disputed these claims. The Otey Crisman
Golf Company was a supplier to the Company prior to the
initiation of the lawsuit. Discovery in this case is ongoing.
The parties are engaged in settlement discussions. However, to
date no settlement has been reached by the parties and there can
be no assurances that any such agreement can be reached in the
future.
In March 1996, KZ-Golf, Inc. filed an action in the Orange County
Superior Court (California) against the BSI and Bullet-Cougar
seeking damages for breach of contract. The complaint alleges
that the plaintiff contracted on behalf of itself and as agent
for two Taiwanese manufacturers to supply Bullet-Cougar with
titanium and zirconium insert golf club heads. Plaintiff filed
the action on its own behalf and on behalf of the Taiwanese
manufacturers, Wonderswing Development Corp. and Performax Golf
and Composite, Inc.(collectively with KZ Golf, Inc. "KZ") and
seeks approximately $337,000 in lost profit damages based on
Bullet-Cougar's purported anticipatory repudiation of the
purported contract. Bullet-Cougar denies the existence of any
such contract. Furthermore, it is management's position that
even if a contract is found to have existed, several conditions
precedent did not occur and/or were not performed by plaintiff.
Discovery in this case is ongoing. As a result of
Bullet-Cougar's voluntary petition for reorganization of its
affairs under the Bankruptcy Code, KZ's actions will be subject
to the automatic stay provided for under the Bankruptcy Code.
The Company has become subject to various other lawsuits, claims
and other legal matters in the ordinary course of conducting its
business. The Company believes, based on experience to date,
that the ultimate resolution of such items, individually or in
the aggregate, will not have a material adverse effect on the
Company's financial position or results of operations.
ITEM 2: CHANGES IN SECURITIES
(a) NOT APPLICABLE
(b) NOT APPLICABLE
-16-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
PART II
OTHER INFORMATION (CONTINUED)
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Under the terms for the private offerings of the Company's Series
B, C and D Convertible Preferred Stock, the Company was required
(within 120 day of funding) to file and gain effectiveness of a
"shelf" registration statement with the Securities and Exchange
Commission covering shares of Common Stock underlying 6,950
shares of Series B, 2,000 shares of Series C and 11,475 shares of
Series D Convertible Preferred Stock or else pay additional
charges to the preferred shareholders. As of November 30, the
Company had not obtained registration within 120 days of funding
for these securities having a total face value of $10,097,500.
As a result, the Company is obligated to pay 3% of the net
proceeds of $8,871,440 or $266,143 to the preferred shareholders.
In addition, the Company is required to pay an additional 3% to
the preferred shareholder for each additional 30 day period with
proration of the 3% for periods of less than 30 days. As of
November 30, 1996, the Company was obligated for $1,009,770 for
the additional 30 day periods resulting in total additional costs
of $1,275,913 as of November 30, 1996. Subsequent to November
30, 1996, the Company must pay an additional $8,871 per day until
the registration statement becomes effective.
The Company was out of compliance on its revolving line of credit
and as a result, on January 9, 1997, the lender called the
letter of credit in the amount of $1,600,000 and offset that
amount against the borrowings under the credit facility reducing
the balance then outstanding to approximately $233,000. On
January 17, 1997, Clearwater Fund IV, LLC purchased the existing
credit facility and modified the terms and conditions to the
Bullet-Cougar as more fully described in Note 3 to the financial
statements.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
BSI held its annual meeting on October 17, 1996. At the annual
meeting the stockholders of BSI voted to:
(1) Elect Richard P. Crane, Jr., Mark A. Green, Joseph Daniel
Chandler and Leonard K. Nave as directors of BSI with 2,432,683
votes in favor and 8,200 votes abstaining. Elect John A. Haas
and Douglas L. Hawthorne as directors of BSI with 2,432,883
votes in favor and 8,000 votes abstaining. Elect
Robert E. Courtney a director of BSI with 2,425,992 votes
in favor and 14,891 abstaining.
(2) Increase the authorized Common Shares of BSI's Common Stock
to 25,000,000 shares from 10,000,000 shares with 2,355,437 votes
in favor, 77,046 against and 8,400 abstaining.
(3) Amend BSI's Certificate of Incorporation, as amended, and
BSI's By-laws to update and restate them to:
(a) Provide for the classification of the Board of
Directors into three classes of Directors, each with
three-year staggered terms of office with 689,323 votes in
favor, 64,716 against and 10,264 abstaining.
(b) Provide that the Directors may be removed only for
cause with 619,475 votes in favor, 123,753 against and
21,075 abstaining.
-17-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
PART II
OTHER INFORMATION (CONTINUED)
(c) Provide that any stockholder amendments to the
BSI's Bylaws, and any amendments to either of the above
two provisions of the Certificate of Incorporation, if
adopted, may be made only pursuant to a two-thirds vote of
the stockholders. This matter was approved with 624,295
votes in favor, 115,444 against and 24,564 abstaining.
(4) Approve the 1996 Long-Term Incentive Stock Plan with 580,545
votes in favor, 98,811 against and 47,688 abstaining.
(5) Ratify the selection of Arthur Andersen LLP as independent
public accountants for BSI for its 1997 fiscal year with
2,424,141 votes in favor, 4,424 against and 12,318 abstaining.
ITEM 5: OTHER INFORMATION
NOT APPLICABLE
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.1 - Clearwater Fund IV, LLC Loan Agreement and
General Security Agreement
(b) Reports on Form 8-K
On October 11, 1996, the Company announced its results of
operations for the second quarter and six months ended August 31,
1996, the anticipated filling of a registration with the SEC
covering shares of Common Stock underlying Convertible Preferred
Stock and the introduction at the Las Vegas International PGA
trade show of a new golf product incorporating an advanced
technology graphite shaft.
On January 8, 1997, the Company announced that its continuing
efforts to obtain outside financing for its golf equipment
business, previously disclosed by the Company as critical to its
business, had not been successful, and that the Board of
Directors of its wholly-owned and principal operating subsidiary,
Bullet-Cougar, in a special meeting held January 8, 1997, had
authorized management of Bullet-Cougar to seek relief by filing
a voluntary petition for reorganization Bullet-Cougar's affairs
under Chapter 11 of the Bankruptcy Code.
Subsequent to this announcement, on January 17, 1997,
Bullet-Cougar filed a voluntary petition in bankruptcy under
Chapter 11 of the Bankruptcy Code.
-18-
<PAGE>
BULLET SPORTS INTERNATIONAL, INC. AND SUBSIDIARY
SIGNATURES
In accordance with the requirements of the Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BULLET SPORTS INTERNATIONAL, INC.
Registrant
Date: January 20, 1997
/S/ John A. Haas
--------------------------------------
John A. Haas
President and Chief Executive Officer
-19-
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ 1, 000,000
LOAN AGREEMENT
between
Clearwater Fund IV, LLC
and
Bullet-Cougar Golf Corporation
Dated as of January 16, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.01 Advance of Loan . . . . . . . . . . . . . . . . . . . . . . . . 11
2.02 Repayment of Loan . . . . . . . . . . . . . . . . . . . . . . . 11
2.03 Notices Relating to Loan. . . . . . . . . . . . . . . . . . . . 12
2.04 Mandatory and Voluntary Prepayments . . . . . . . . . . . . . . 12
2.05 Use of Proceeds of Loan . . . . . . . . . . . . . . . . . . . . 12
2.06 Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.07 The Term Note . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.08 Payments; Application of Payments . . . . . . . . . . . . . . . 13
2.09 Computations. . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.10 Net Payments. . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 3. Conditions Precedent. . . . . . . . . . . . . . . . . . . . . . 15
3.01 Conditions Precedent to the Loan. . . . . . . . . . . . . . . . 15
SECTION 4. Representations and Warranties. . . . . . . . . . . . . . . . . 17
4.01 Organizational Status . . . . . . . . . . . . . . . . . . . . . 17
4.02 Organizational Power and Authority, Capital,
etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.03 No Violation. . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.04 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
4.05 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . 18
4.06 Governmental Approvals, etc . . . . . . . . . . . . . . . . . . 18
4.07 Investment Company Act. . . . . . . . . . . . . . . . . . . . . 18
4.08 Financial Condition; Financial Statements,
Projections . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.09 Security Interests. . . . . . . . . . . . . . . . . . . . . . . 19
4.10 Tax Returns and Payments. . . . . . . . . . . . . . . . . . . . 19
4.11 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.12 Subsidiaries, etc . . . . . . . . . . . . . . . . . . . . . . . 20
4.13 Patents, Copyrights, Trademarks, etc. . . . . . . . . . . . . . 20
4.14 Compliance with Laws, etc . . . . . . . . . . . . . . . . . . . 20
4.15 Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
4.16 Collective Bargaining Agreements. . . . . . . . . . . . . . . . 20
4.17 Indebtedness Outstanding. . . . . . . . . . . . . . . . . . . . 21
4.18 Environmental Matters . . . . . . . . . . . . . . . . . . . . . 21
4.19 Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.20 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 22
4.21 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.22 Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 5. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . . 23
5.01 Information Covenants . . . . . . . . . . . . . . . . . . . . . 23
5.02 Books, Records and Inspections. . . . . . . . . . . . . . . . . 26
5.03 Maintenance of Property; Licenses; Insurance. . . . . . . . . . 26
5.04 Payment of Taxes. . . . . . . . . . . . . . . . . . . . . . . . 27
5.05 Maintain Existence. . . . . . . . . . . . . . . . . . . . . . . 27
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<PAGE>
5.06 Compliance with Statutes, etc . . . . . . . . . . . . . . . . . 27
5.07 Performance of Obligations. . . . . . . . . . . . . . . . . . . 27
5.08 End of Fiscal Years; Fiscal Quarters. . . . . . . . . . . . . . 23
5.09 Notice of Litigation. . . . . . . . . . . . . . . . . . . . . . 28
5.10 Environmental Compliance. . . . . . . . . . . . . . . . . . . . 28
SECTION 6. Negative Covenants. . . . . . . . . . . . . . . . . . . . . . . 29
6.01 Changes in Business . . . . . . . . . . . . . . . . . . . . . . 29
6.02 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.03 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.04 Advances, Investments and Notes . . . . . . . . . . . . . . . . 29
6.05 Prepayments of Indebtedness; Modification of
Organizational Documents. . . . . . . . . . . . . . . . . . . . 30
6.06 Dividends, etc. . . . . . . . . . . . . . . . . . . . . . . . . 30
6.07 Transactions with Affiliates. . . . . . . . . . . . . . . . . . 30
6.08 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.09 Disposition of Assets . . . . . . . . . . . . . . . . . . . . . 30
6.10 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
6.11 Mergers and Acquisitions. . . . . . . . . . . . . . . . . . . . 31
SECTION 7. Events of Default . . . . . . . . . . . . . . . . . . . . . . . 31
7.01 Payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.02 Representations, etc. . . . . . . . . . . . . . . . . . . . . . 31
7.03 Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.04 Default Under Other Agreements. . . . . . . . . . . . . . . . . 31
7.05 Bankruptcy, etc . . . . . . . . . . . . . . . . . . . . . . . . 32
7.06 Security Documents. . . . . . . . . . . . . . . . . . . . . . . 32
7.07 Judgments . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 8. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 33
8.01 Payment of Expenses, etc. . . . . . . . . . . . . . . . . . . . 33
8.02 Right of Set-Off. . . . . . . . . . . . . . . . . . . . . . . . 34
8.03 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
8.04 Benefit of Agreement. . . . . . . . . . . . . . . . . . . . . . 35
8.05 No Waiver; Remedies Cumulative. . . . . . . . . . . . . . . . . 35
8.06 Governing Law; Submission to Jurisdiction; Venue . . . . . . . 35
8.07 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.08 Headings Descriptive. . . . . . . . . . . . . . . . . . . . . . 36
8.09 Amendment or Waiver . . . . . . . . . . . . . . . . . . . . . . 36
8.10 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
8.11 Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . . . 36
8.12 Independence of Covenants . . . . . . . . . . . . . . . . . . . 36
8.13 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . 36
8.14 Execution by Facsimile Transmission . . . . . . . . . . . . . . 36
EXHIBITS
Exhibit A - Form of Borrowing Notice
Exhibit B - Form of Coverage Ratio Certificate
Exhibit C - Form of Term Note
Exhibit D - Form of Security Agreement
ii
<PAGE>
LOAN AGREEMENT dated as of January 16, 1997, between Bullet-Cougar Golf
Corporation, a Nevada corporation (the "BORROWER") and Clearwater Fund IV, LLC,
a Delaware limited liability company (the "LENDER").
WITNESSETH:
WHEREAS, the Borrower desires to borrow a principal amount (the
"Principal Amount") of (a) One Million Dollars ($1,000,000) less (b) the DFS
Claims Purchase Amount.
WHEREAS, Borrower had advised Lender that it is about to file a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C.
Section 101 et seq. (as now or hereinafter in effect, or any successor thereto,
the "BANKRUPTCY CODE") on or before January 31, 1997;
WHEREAS, Borrower has requested that Lender make a loan to Borrower
prior to the filing of such petition in the Principal Amount, subject to the
terms and conditions of this Agreement; and
WREREAS, Lender is prepared to a loan in the Principal Amount to
Borrower, subject to the terms and conditions of this Agreement;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall
have the meanings herein specified unless the context otherwise requires.
Defined terms in this Agreement shall include in the singular, the plural, and
in the plural, the singular:
"Accounts" means all accounts, accounts receivable, leases, contract
rights, chattel paper, choses in action and instruments, and other rights to
receive payment, including any lien or other security interest that secures or
may secure any of the foregoing, plus all books, invoices, documents and other
records in any form evidencing or relating to any of the foregoing, now owned or
hereafter acquired by Borrower.
"Affiliate," means, with respect to any Person, any other Person
which, directly or indirectly, controls, including but not limited to, all
directors, executive officers and general partners (and directors and executive
officers of such general partner) or is under common control with, or is
controlled by, such Person. As used in this definition, "control" (including
with its correlative meanings, "controlled by" and "under common control with")
shall mean possession, directly or indirectly, of power to direct or cause the
direction of management or policies (whether through ownership of securities or
partnership or other interests, by contract or otherwise) provided, that in any
event any Person who owns, directly or indirectly ten (10%) percent or more of
the securities having ordinary voting power for the election of directors
<PAGE>
or other governing body of a corporation or ten (10%) percent or more of the
partnership or other interests of any other Person will be deemed to control
such corporation or other Person.
"Agreement" means this Loan Agreement, as the same may after its
execution be amended, supplemented or otherwise modified from time to time in
accordance with the terms hereof.
"Asset Sale" means the sale, transfer, assignment, lease or other
disposition by Borrower of any asset of Borrower to any Person.
"Bankruptcy Code" has the meaning provided in the Preamble.
"Bankruptcy Court" means the United States Bankruptcy Court having
jurisdiction over Borrower's case under the Bankruptcy Code to the extent such
case is filed on or before January 31, 1997.
"Borrower's Common Stock" has the meaning provided in Section 4.02(b).
"Borrowing Date" means the Business Day specified in a Borrowing
Notice as the date on which Borrower requests Lender to make the Loan.
"Borrowing Notice" has the meaning provided in Section 2.03.
"Borrowing Rate" has the meaning provided in Section 2.06.
"Business Day" means any day excluding Saturday, Sunday and any day
which shall be in the City of New York a legal holiday or a day on which banking
institutions are authorized by law or other governmental actions to close.
"Capital Lease" of any Person means any lease of or other agreement
conveying the right to use any property (whether real, personal or mixed) by
that Person as lessee or other like user which, in conformity with GAAP, is, or
is required to be, accounted for as a capital lease on the balance sheet of that
Person, together with any renewals of such leases (or entry into new leases) on
substantially similar terms.
"Capitalized Lease Obligations" of any Person means all obligations
under Capital Leases of such Person, in each case taken at the amount thereof
accounted for as liabilities in accordance with GAAP.
"Cash" means money, currency or a credit balance in a Deposit
Account.
2
<PAGE>
"Cash Equivalents" means (i) securities issued, or directly and
fully guaranteed, or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the
United States of America is pledged in support thereof) having maturities of
not more than three years from the date of acquisition, (ii) marketable
direct obligations issued by any State of the United States of America, or
any local government, or other political subdivision thereof rated (at the
time of acquisition of such security) at least AA by Standard & Poor's
Corporation ("S&P") or the equivalent thereof by Moody's Investors Service,
Inc. ("Moody's"), having maturities of not more than one year from the date
of acquisition, (iii) U.S. dollar denominated time deposits, certificates of
deposit and bankers' acceptances of any domestic commercial bank of
recognized standing having capital and surplus in excess of $250,000,000 or
any bank whose short-term commercial paper rating (at the time of acquisition
of such security) by S&P is at least A-1 or the equivalent thereof or by
Moody's is at least P-1 or the equivalent thereof (any such bank, an
"Approved Bank"), in each case with maturities of not more than six months
from the date of acquisition, (iv) commercial paper and variable or fixed
rate notes issued by any Approved Bank or by the parent company of any
Approved Bank and (v) commercial paper and variable rate notes issued by, or
guaranteed by, any industrial or financial company with a short-term
commercial paper rating (at the time of acquisition of such security) of at
least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent
thereof by Moody's, or guaranteed by any industrial company with a long-term
unsecured debt rating (at the time of acquisition of such security) of at
least AA or the equivalent thereof by S&P or at least the equivalent thereof
by Moody's, and in each case maturing within one year after the date of
acquisition.
"CERCLA" has the meaning ascribed to such term in Section 4.18(b).
"Code" means the Internal Revenue Code of 1986, as
amended from time to time, and the regulations promulgated thereunder.
"Collateral" means all of the Collateral as defined in the Security
Documents.
"Contingent Obligations" means, as to any Person, without duplication,
any obligation of such Person guaranteeing or intended to guarantee any
Indebtedness, leases, dividends or other obligations ("primary obligations") of
any other Person (the "primary obligor") in any manner, whether directly or
indirectly, including, without limitation, any obligation of such Person,
whether or not contingent, (a) to purchase any such primary obligation or any
property constituting direct or indirect security therefor, (b) to advance or
supply funds (i) for the purchase or
3
<PAGE>
payment of any such primary obligation or (ii) to maintain working capital or
equity capital of the primary obligor or otherwise to maintain the net worth or
solvency of the primary obligor, (c) to purchase property, securities or
services primarily for the purpose of assuring the owner of any such primary
obligation of the ability of the primary obligor to make payment of such primary
obligation or (d) otherwise to assure or hold harmless the owner of such primary
obligation against loss in respect thereof; provided, however, that the term
Contingent Obligation shall not include endorsements of instruments for deposit
or collection in the ordinary course of business. The amount of any Contingent
Obligation shall be deemed to be an amount equal to the maximum amount that such
Person may be obligated to expend pursuant to the terms of such Contingent
Obligation or, if such Contingent Obligation is not so limited, the stated or
determinable amount of the primary obligation in respect of which such
Contingent Obligation is made or, if not stated or determinable, the maximum
reasonably anticipated liability in respect thereof (assuming such Person is
required to perform thereunder) as determined by such Person in good faith.
"Coverage Ratio" means, as of the date of determination thereof, the
ratio of (x) all Eligible Collateral to (y) the sum of (i) the then outstanding
principal amount of the Loan and (ii) the DFS Claims Purchase Amount.
"Default" means any event, act or condition which with notice or lapse
of time, or both, would constitute an Event of Default.
"DFS" means Deutsche Financial Services Corporation, a secured
creditor of the Borrower pursuant to the Business Financing Agreement between
DFS and the Borrower, dated August 25, 1995 (the "DFS Financing Agreement"),
pursuant to which the Borrower is obligated to DFS in the amount of
approximately $225,000 (the "DFS Debt").
"DFS Assigned Claim" means the claim held by DFS against Borrower
represented by the DFS Debt that remains outstanding after application of the
value of the CD (as defined below), which claim DFS may sell and assign to
Lender in exchange for the DFS Claims Purchase Amount.
"DFS Claims Purchase Amount" means the amount by which the DFS Debt
exceeds the value of that certain certificate of deposit (the "CD") owned by the
Borrower and held by the Bank of Orange in the amount of approximately
$222,938.39 plus if the purchase by Lender of DFS Assigned Claim is not
consummated by January 16, 1997, $54.62 for each day during the period from and
including January 17, 1996 through and including the date, if any, that the
purchase by Lender of the DFS Assigned Claims is consummated.
4
<PAGE>
"Dollar(s)" and "$" means lawful money of the United States of
America.
"Eligible Accounts" means, on any date of determination, all Accounts
of Borrower deemed eligible by the Lender for inclusion in the calculation of
"Coverage Ratio". In determining the amount of any "Eligible Account" the face
amount thereof shall be included in the calculation, reduced by the amount of
all returns, discounts, deductions, claims, charges, credits or other
allowances. Unless otherwise approved by Lender in writing, for purposes of
this Agreement, an Account shall not be deemed an "Eligible Account" if it
satisfies any of the following conditions: (i) is created from the sale of goods
or services on non-standard terms or allows for payment to be made more than one
hundred twenty (120) days from the date of sale; (ii) has remained unpaid for a
period in excess of sixty (60) days from the due date specified in the invoice;
(iii) is an Account of an obligor with fifty percent (50%) or more of the
outstanding balances of such obligor's Account unpaid for more than ninety (90)
days from the date of invoice; (iv) is an Account of an obligor who is an
Affiliate of the Borrower, or who has common shareholders, officers, directors,
owners, partners or members with the Borrower; (v) is for a sale on a bill-and-
hold, sale-and-return, sale on approval or consignment basis; (vi) is an Account
for which the payment is or may be conditional; (vii) is an Account for which
the obligor is not a commercial or institutional entity; (viii) is not genuine;
(ix) is evidenced by a judgment or promissory note or similar instrument or
agreement; (x) does not represent an undisputed bona fide transaction completed
in accordance with the terms of the invoices and purchase orders relating
thereto; (xi) does not represent goods sold or services rendered which have been
delivered or rendered to and accepted by the obligor; (xii) is not in amounts
accurately represented on the schedules, books, records and all invoices
provided to Lender with respect thereto or payment of any amount owing to
Borrower on such Account is contingent; (xiii) is subject to offset,
counterclaim or dispute existing or asserted with respect thereto, or Borrower
has made any agreement with any obligor for any deduction or discount of the sum
payable thereunder except regular discounts allowed by Borrower in the ordinary
course of its business for prompt payment; (xiv) is, with respect to the
validity or enforceability thereof, impaired in any way by any facts or events
or the amount payable thereunder has been reduced from the amount shown on the
schedules, books and records and the invoices and statements delivered to Lender
with respect thereto; (xv) is created or authorized by any Person acting on
behalf of the obligor thereon who lacks the authority to bind the obligor; (xvi)
is in respect of goods sold and transferred that are subject to any Lien other
than a Permitted Encumbrance; (xvii) is in respect of goods sold and transferred
to an obligor with respect to whom there are proceedings or actions known to
Borrower which are threatened or pending against such obligor and which might
have a material adverse effect on such obligor's financial condition; (xviii)
5
<PAGE>
represents goods or services sold to a consumer for a personal, family or
household purpose; (xix) represents goods used for demonstration purposes or
loaned by the Borrower to another Person; (xx) is a progress payment, barter or
contra account; (xxi) the obligor is (or its assets are) the subject of any
insolvency, bankruptcy, receivership, trusteeship, custodianship, liquidation or
other similar plan or arrangement with its creditors, voluntary or involuntary;
and (xxii) is an Account in excess of $50,000 and has been determined by Lender
in its reasonable discretion to be ineligible to inclusion in the calculation of
"Eligible Account".
"Eligible Collateral" means at any time, the sum of Eligible Accounts
plus Inventory Value.
"Environment" means soil, surface waters, ground waters, land, stream,
sediments, surface or subsurface strata and ambient air.
"Environmental Condition" means any condition, with respect to the
Environment, whether or not yet discovered, which could or does result in any
damage, loss, cost, expense, claim, demand, order or liability, to or against
Borrower or Lender, by any third party (including, without limitation, any
government entity) , including, without limitation, any condition resulting from
the operation of Borrower's business and/or the operation of the business of any
other property owner or operator in the vicinity of any Facilities and/or any
activity or operation formerly conducted by any person or entity on or off any
Facilities.
"Environmental Laws" means all applicable present and future statutes,
regulations, rules, ordinances, codes, licenses, permits, orders, approvals,
plans, authorizations, concessions, franchises, agreements and similar items, of
or with any and all governmental agencies, departments, commissions, boards,
bureaus or instrumentalities of the United States, states and political
subdivisions thereof and all applicable judicial and administrative and
regulatory decrees, judgments and orders relating to the protection of human
health or the environment, including, without limitation:
(a) the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended, 42 U.S.C. Section 9061 et seq.; the
Hazardous Materials Transportation Act, as amended, 49 U.S.C. Section 1801, et
seq.; the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section
6901, et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C.
Section 1251, et seq.; and analogous state laws and regulations;
(b) any requirement, including, but not limited to, those pertaining
to reporting, licensing, permitting, investigation and remediation of any
emission, discharge, Release or Threatened
6
<PAGE>
Release of Hazardous Substances into the Environment or relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Substances; and
(c) all requirements pertaining to the protection of the health and
safety of employees or the public.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations promulgated thereunder. Section
references to ERISA are to ERISA, as in effect at the date of this Agreement,
and any subsequent provisions of ERISA, amendatory thereof, supplemental thereto
or substituted therefor.
"ERISA Affiliate", means any entity, whether or not incorporated,
which is under common control or would he considered a single employer with
Borrower within the meaning of Section 414(b), (c), (m), (n) or (o) of the Code
and regulations promulgated under those sections or within the meaning of
section 4001(b) of ERISA and regulations promulgated under that section.
"Event of Default" has the meaning ascribed to such term in Section 7.
"Facilities" means the premises, owned or occupied by Borrower and the
business, operations and activities conducted thereon or in connection therewith
and includes both the land and the physical structures.
"GAAP" means generally accepted accounting principles in the United
States of America, as in effect from time to time.
"Governmental Authority" means any federal, state, local or other
governmental or administrative body, instrumentality, department or agency or
any court, tribunal, administrative hearing body, arbitration panel, commission,
or other similar dispute-resolving panel or body or any subdivision thereof.
"Hazardous Substances" means (a) any toxic substance or hazardous
waste substance or related material, or any pollutant or contaminant; (b) radon
gas, asbestos in any form which is or could become friable, urea formaldehyde
foam insulation, transformers or other equipment which contain dielectric fluid
containing levels of polychlorinated biphenyls in excess of federal, state or
local safety guidelines, whichever are more stringent; (c) any substance, gas,
vapor, energy, radiation, material or chemical which is or may be defined as or
included in the definition of "hazardous substances," "toxic substances,"
"hazardous materials," "hazardous wastes" or words of similar import under any
Environmental Laws and (d) any other chemical, material, gas, vapor, energy
radiation, or substance, the exposure to or release of which is or may he
prohibited, limited or regulated by any governmental or
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quasi-governmental entity or authority that asserts or may assert jurisdiction
over any of the locations at which Borrower has heretofore engaged in any
activities, or will engage in any activities, or the operations or activity at
the Facilities, or any chemical, material, gas, vapor, energy, radiation, or
substance that does or may pose a hazard to the health and/or safety of the
occupants of the Facilities or the owners and/or occupants of property adjacent
to or surrounding the Facilities.
"Indebtedness" of any Person means, without duplication, (i) all
indebtedness of such Person for borrowed money, (ii) the deferred purchase price
of assets or services which in accordance with GAAP would be shown on the
liability side of the balance sheet of such Person, (iii) the face amount of all
letters of credit issued for the account of such Person and, without
duplication, all drafts drawn thereunder, (iv) all Indebtedness of a second
Person secured by any Lien on any property owned by such first Person, whether
or not such Indebtedness has been assumed by such first Person, (v) all
Capitalized Lease Obligations of such Person, (vi) all obligations of such
Person to pay a specified purchase price for goods or services whether or not
delivered or accepted, i.e., take-or-pay and similar obligations, and (viii) all
Contingent Obligations of such Person; provided that Indebtedness shall not
include trade payables, accrued expenses, deferred taxes and accrued income
taxes, in each case arising in the ordinary course of business. For purposes of
clause (iv) above (where the relevant Indebtedness has not been assumed by such
first Person), the amount of Indebtedness is equal to the lesser of the amount
of Indebtedness secured or the fair market value of the property subject to the
Lien.
"Intellectual Property" has the meaning ascribed to such term in
Section 4.13.
"Inventory" means Borrower's presently owned and hereafter acquired
goods which are held for sale or lease.
"Inventory Value" means the lower of cost or market value of
Borrower's Inventory, calculated on a first in, first out basis in accordance
with GAAP.
"Knowledge" means with respect to the Borrower, what the principal
officers of any of them know or should have known given diligent inquiry.
"Lender" has the meaning ascribed to such term in the recitals hereof.
"Lender's Office" means 611 Druid Road East #200, Clearwater, Florida
34616.
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"Lien" means any mortgage, pledge, security interest, encumbrance,
lien, claim, hypothecation, assignment for security or charge of any kind
(including any agreement to give any of the foregoing, any conditional sale or
other title retention agreement or any lease in the nature thereof).
"Loan Documents" means this Agreement, the Security Documents and
the Term Note.
"Material Agreement" has the meaning ascribed to such term in Section
4.19 hereof.
"Material Adverse Effect" means, (i) any material adverse effect
(both before and after giving effect to the transactions contemplated hereby and
by the other Loan Documents) with respect to the operations, business,
properties, assets, nature of assets, liabilities (contingent or otherwise),
financial condition or prospects of Borrower, or (ii) any fact or circumstance
(whether or not the result thereof would be covered by insurance) as to which,
singly or in the aggregate, there is a reasonable likelihood of (x) a material
adverse change described in clause with respect to Borrower, (y) the inability
of Borrower to perform in any material respect its Obligations hereunder or
under any of the other Loan Documents or the inability of Lender to enforce in
any material respect their rights purported to be granted hereunder or under any
of the other Loan Documents or the Obligations (including realizing on the
Collateral) , or (z) a material adverse effect on the ability to effect
(including hindering or unduly delaying) the other transactions contemplated
hereby and by the Loan Documents on the terms contemplated hereby and thereby.
"Maturity Date" means July 31, 1997 unless Borrower fails to file a
voluntary petition for relief under chapter 11 of the Bankruptcy Code on or
before January 31, 1997, in which event the Maturity Date shall be January 31,
1997.
"Multiemployer Plan" means a "multiemployer plan" as defined in
Section 4001(a) (3) of ERISA with respect to which Borrower or any of its ERISA
Affiliates is or has been required to contribute.
"Obligations" means all amounts, direct or indirect, contingent or
absolute, of every type or description, and at any time existing, owing to
Lender pursuant to the terms of this Agreement or any other Loan Document,
including without limitation, all obligations pursuant to Section 8.01 hereof
and Sections 9 and 13 of the Security Agreement or secured by any of the
Security Documents and pursuant to the DFS Assigned Claim.
"Pension Plan" means any employee benefit pension plan as defined in
Section 3 (2) of ERISA (other than a Multiemployer Plan) that is subject to
Title IV of ERISA and that is or has been
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maintained by or to which contributions are or have been made by Borrower or any
of its ERISA Affiliates.
"Permitted Encumbrances" has the meaning provided in Section 6.02.
"Person" means any individual, partnership, joint venture, firm,
corporation, limited liability company, association, trust or other enterprise
or any governmental or political subdivision or any agency, department or
instrumentality thereof.
"Petition Date" means the date, if any, that the Borrower shall file a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code.
"Post-Default Rate" means in respect of any amount payable under this
Agreement or any other Loan Document which is not paid when due (whether at
stated maturity, by acceleration or otherwise), a rate per annum during the
period commencing on the due date until such amount is paid in full equal to a
rate which is two (2%) percent per annum in excess of the Borrowing Rate.
"Real Property" means all right, title and interest of Borrower
(including, without limitation, any leasehold estate) in and to a parcel of real
property owned or operated by the Borrower together with, in each case, all
improvements and appurtenant fixtures, equipment, personal property, easements
and other property and rights incidental to the ownership, lease or operation
thereof.
"Regulation G" means Regulation G of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor to all
or a portion thereof establishing margin requirements.
"Regulations T" means Regulation T of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor to all
or a portion thereof establishing margin requirements.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor to all
or a portion thereof establishing margin requirements.
"Regulation X" means Regulation X of the Board of Governors of the
Federal Reserve System as from time to time in effect and any successor to all
or a portion thereof establishing margin requirements.
"Release" means any releasing, spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting,
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escaping, leaching, disposing or dumping of Hazardous Substances on, under, from
or around any Facilities.
"Security Agreement" means the General Security Agreement to be
executed by Borrower in favor of Lender substantially in the form of Exhibit D,
as the same may be amended, supplemented or otherwise modified from time to
time.
"Security Documents" means the Security Agreement and any other
documents, agreements or instruments utilized to pledge as Collateral for the
Obligations any property or assets of whatever kind or nature.
"Subsidiary" of any Person means and includes (i) any corporation more
than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person, directly or
indirectly through Subsidiaries, and (ii) any partnership, association, joint
venture or other entity in which such Person, directly or indirectly through
Subsidiaries, has more than a 50% equity interest at the time.
"Taxes" has the meaning ascribed to such term Section 2.10.
"Term Loan" has the meaning ascribed to such term in Section 2.01.
"Term Note" has the meaning ascribed to such term in Section 2.07(a).
"Threatened Release" means a substantial likelihood of a Release which
requires action to prevent or mitigate damage to the Environment which may
result from such Release.
"UCC" means the Uniform Commercial Code as in effect in any applicable
jurisdiction.
SECTION 2. Term Loan.
2.01 Advance of Term Loan.
(a) subject to the terms and conditions of this Agreement, Lender
agrees to make a loan (the "Term Loan") to Borrower in the Principal Amount at
any time during the period from the date hereof to the Petition Date.
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(b) On the Borrowing Date, Lender will deliver the amount of the Term
Loan in immediately available funds to an account specified by Borrower in the
Borrowing Notice.
2.02 REPAYMENT OF TERM LOAN. The outstanding principal amount of the
Term Loan shall be repaid in full, together with accrued and unpaid interest
thereon, on the Maturity Date.
2.03 NOTICES RELATING TO TERM LOAN.
(a) Borrower shall give Lender written notice, substantially in the
form of Exhibit A (a "BORROWING NOTICE") of borrowing of the Term Loan, which
Borrowing Notice shall be irrevocable, and shall be effective only if received
by Lender no later than 1:00 p.m. New York City time, one (1) Business Day prior
to the date of such requested borrowing.
(b) The Borrowing Notice from Borrower shall be accompanied by a
report of Borrower in the form of Exhibit B, certified on behalf of Borrower by
its Chief Financial Officer, Treasurer or another executive officer, setting
forth a calculation of the Coverage Ratio for Borrower (a "COVERAGE RATIO
CERTIFICATE") as of a date no more than three (3) days prior to such Borrowing
Date.
2.04 MANDATORY AND VOLUNTARY PREPAYMENTS.
(a) In the event that the Coverage Ratio for Borrower at any time is
less than 2.00 to 1.00, Borrower shall, within three (3) Business Days of such
occurrence, prepay the Term Loan in the amount necessary to increase the
Coverage Ratio to 2.00 to 1.00.
(b) Borrower shall have the right to prepay the Term Loan from time
to time, in whole or in part, provided that (i) Borrower shall give Lender
notice of each such prepayment as provided in Section 2.03(a) and (ii) each such
voluntary partial prepayment shall be in an aggregate principal amount of at
least $100,000, or such lesser amount which repays the Term Loan in full.
(c) All prepayments of the Term Loan, shall be made together with all
interest accrued on the amount prepaid through the date of prepayment.
2.05 USE OF PROCEEDS OF TERM LOAN. The proceeds of the Term Loan
shall be used by the Borrower to pay for the expenses described in Schedule 2.05
hereto.
2.06 INTEREST.
(a) Borrower shall pay interest on the unpaid principal amount of the
Term Loan, for the period commencing on the date such
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Term Loan is made, until the Term Loan shall be paid in full, at the rate of
9.5% per annum (the "BORROWING RATE").
(b) Notwithstanding the foregoing, Borrower shall pay interest on the
Term Loan or any installment thereof, and on any other amount payable by the
Borrower hereunder (to the extent permitted by law) , which shall not be paid in
full when due (whether at stated maturity, by acceleration or otherwise) for the
period commencing on the due date thereof until the same is paid in full at the
Post-Default Rate.
(c) Except as provided in the next sentence, accrued interest on the
Term Loan shall be payable on the following dates (each, an "INTEREST PAYMENT
DATE"): (i) monthly in arrears on the tenth day of each new calendar month
commencing on the tenth day of the first full calendar month following the
Borrowing Date, (ii) on the Maturity Date and (iii) on the date of each
prepayment of the Term Loan. Interest which is payable at the Post-Default Rate
shall be payable from time to time on demand of Lender.
(d) Anything in this Agreement or the Term Note to the contrary
notwithstanding, the obligation of Borrower to make payments of interest shall
be subject to the limitation that payments of interest shall not be required to
be made to Lender to the extent that Lender's receipt thereof would not be
permissible under the law or laws applicable to Lender limiting rates of
interest which may he charged or collected by Lender. Any such payments of
interest which are not made by the Borrower as a result of the limitation
referred to in the preceding sentence shall be made by Borrower to Lender on the
earliest interest payment date or dates on which the receipt thereof would be
permissible under the laws applicable to Lender limiting rates of interest which
may be charged or collected by Lender. Such deferred interest shall not bear
interest.
2.07 THE TERM NOTE.
(a) The Term Loan shall be evidenced by a single promissory note (the
"TERM NOTE") made by Borrower and payable to Lender in the, substantially in the
form of Exhibit C hereto, dated the date hereof, in the Principal Amount, and
otherwise duly completed. Lender shall be permitted to endorse on the schedule
attached to the Term Note (or any continuation thereof) the amount of all
payments on account of the Term Loan. All entries shall be presumed correct,
absent manifest error. Notwithstanding the foregoing, the failure by Lender to
make such entries shall not affect the rights of Lender or the Obligations of
Borrower hereunder or thereunder.
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2.08 PAYMENTS; APPLICATION OF PAYMENTS.
(a) All payments of principal, interest, fees and other amounts
payable by Borrower hereunder shall be made in Dollars, in immediately available
funds, to Lender at Lender's Office no later than 1:00 p.m. , New York City
time, on the dates on which such payments shall become due or by wire transfer
into an account designated by Lender from time to time.
(b) All payments received by Lender hereunder shall be applied FIRST,
to pay all fees, costs and expenses of Lender then due and payable hereunder,
SECOND, to pay accrued and unpaid interest on the Term Loan, and THIRD, to repay
the outstanding principal balance of the Term Loan.
(c) If any payment hereunder or under any other Loan Document falls
due on a day which is not a Business Day, such due date shall be extended to the
next succeeding Business Day and interest shall be payable for any principal so
extended for the period of such extension.
2.09 COMPUTATIONS. Interest on the Term Loan and fees payable
pursuant to this Agreement and the other Loan Documents shall be computed, for
actual days elapsed, as if each full calendar year consisted of 360 days.
2.10 NET PAYMENTS.
(a) All payments by Borrower under this Agreement or under any other
Loan Document shall be made without set-off or counterclaim and in such amounts
as may be necessary in order that all such payments (after deduction or
withholding for or on account of any present or future taxes, levies, imposts,
duties or other charges of whatsoever nature imposed by any government or any
political subdivision or taxing authority thereof, other than any tax on or
measured by the income of Lender pursuant to the income tax laws of the United
States or of any other jurisdiction (collectively, "TAXES")) shall not be less
than the amounts otherwise specified to be paid under this Agreement and/or any
other Loan Document. A certificate as to the calculation of any additional
amounts payable to Lender under this Section 2.10 submitted to Borrower by
Lender shall, absent manifest error, be final, conclusive and binding for all
purposes upon all parties hereto. With respect to each deduction or withholding
for or on account of any Taxes, Borrower shall promptly furnish to Lender such
certificates, receipts and other documents as may be required (in the reasonable
judgment of Lender) to establish any tax credit to which Lender may be entitled.
(b) Without prejudice to the provisions of paragraph (a) of this
Section 2.10, if Borrower is required by law to make any payment on account of
Taxes on or in relation to any sum received
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or receivable under this Agreement and/or the other Loan Documents by Lender or
any liability for Tax in respect of any such payment is imposed, levied or
assessed against Lender, Borrower will promptly indemnify such Person against
such Tax payment or liability, together with any interest, penalties and
reasonable expenses (including counsel fees and expenses) payable or incurred in
connection therewith, including any tax arising by virtue of payments under this
Section 2.10(b), computed in a manner consistent with paragraph (a) of this
Section 2.10. A certificate by Lender as to the calculation and amount of such
payments shall, absent manifest error, be final, conclusive and binding upon all
parties hereto for all purposes.
SECTION 3. CONDITIONS PRECEDENT.
3.01 CONDITIONS PRECEDENT TO THE TERM LOAN. The obligation of Lender
to make the Term Loan hereunder is subject to the satisfaction of each of the
following conditions precedent:
(a) REPRESENTATIONS AND WARRANTIES. The representations and
warranties of Borrower made in this Agreement and the other Loan Documents, and
each of the representations and warranties of Borrower or any officer of
Borrower contained in any certificate, document or financial or other statement
furnished at any time under or in connection with this Agreement, shall be true
and correct when made and on the Borrowing Date of the Term Loan (unless such
representations and warranties expressly relate to an earlier date).
(b) PERFORMANCE; NO DEFAULT. Borrower shall have performed and
complied with all agreements and conditions contained in the Loan Documents
required to be performed or complied with by it and after giving effect to the
Term Loan (and the application of the proceeds thereof as contemplated by this
Agreement) no Default or Event of Default shall have occurred and be continuing.
(c) OFFICER'S CERTIFICATE. Lender shall have received certificates
dated such date executed by the Chief Executive officer of Borrower stating that
all of the applicable conditions set forth in paragraphs (a) and (b) of this
section 3.01 have been satisfied or waived as of such date.
(d) BORROWING NOTICE; COVERAGE RATIO CERTIFICATE. Lender shall have
received (i) the Borrowing Notice related to the Term Loan and (ii) a Coverage
Ratio Certificate which certifies that the Coverage Ratio of Borrower, after
giving effect to the Term Loan and the DFS Claims Purchase Amount, if any, shall
not be less than 2.00 to 1.00.
(e) CORPORATE PROCEEDINGS AND DOCUMENTS. Lender shall have received
a certificate executed by the Secretary of Borrower, certifying as to: (i)
evidence of all corporate action taken by
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Borrower to authorize the borrowing of the Term Loan and the execution, delivery
and performance of each of the Loan Documents, as appropriate; and (ii) an
incumbency certificate (with specimen signatures) with respect to each of the
officers of Borrower.
(f) ORGANIZATIONAL DOCUMENTS; GOOD STANDING. Lender shall have
received copies of (i) the Certificate of Incorporation of Borrower certified by
the Secretary of State of the State of Nevada as of a recent date, (ii) the
bylaws (the "Bylaws") of Borrower certified as of such date by the Secretary of
Borrower, and (iii) a certificate of good standing from the State of Nevada, as
of a recent date, indicating that Borrower is in good standing in such state.
(g) TERM NOTE. Lender shall have received the Term Note, duly
executed and completed by Borrower.
(h) SECURITY DOCUMENTS. The Security Documents shall have been duly
executed and delivered by the respective parties thereto, and there shall have
been delivered to Lender (i) evidence of the filing of appropriate financing
statements or comparable documents under the provisions of the UCC in each of
the offices where such filing is necessary or appropriate to grant to Lender a
perfected first priority Lien on the Collateral superior to and prior to the
rights of all third persons and subject to no other Liens, (ii) certified copies
of Requests for Information (Form UCC-11 or the equivalent) , or equivalent
reports or lien search reports listing all effective financing statements or
comparable documents which name Borrower as debtor and which are filed in those
jurisdictions in which any of the Collateral is located and the jurisdictions in
which Borrower's principal place of business is located, none of which shall
encumber the Collateral covered or intended or purported to be covered by the
Security Documents and (iii) delivery of such other security and other documents
as may be necessary or, in the opinion of Lender, desirable to perfect the Liens
created, or purported or intended to be created, by the Security Documents.
(i) CONSENTS ETC. All material Governmental Authority and third
party approvals and consents, if any, in connection with the transactions
contemplated by the Loan Documents shall have been obtained and remain in
effect, and all applicable waiting periods shall have expired without any action
being taken by any competent authority, and evidence thereof shall be delivered
to Lender. There shall not exist any judgment, order, injunction or other
restraint issued or filed with respect to the making of the Term Loan.
(j) LEGAL MATTERS. All legal matters incident to the making of the
Term Loan shall be satisfactory to counsel to Lender.
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(k) INSURANCE. Lender shall have received evidence that Borrower is
in compliance with Section 5.03 and that Lender is named as loss payee or co-
insured, as applicable, under all such insurance policies.
(l) DFS DEBT. The DFS Debt shall have been purchased and the DFS
Financing Agreement and all collateral therefor shall have been assigned to or
acquired by Lender.
(m) TERMINATION OF FINANCING STATEMENTS. Lender shall have received
copies of stamped, filed Form UCC-2'S evidencing that the following financing
statements filed by Bank of Orange with the Secretary of State of the State of
California on Form UCC-1 have been terminated: #9518647; #9602770; #9605503;
#961036057; #9606060421 and 9536360672.
(n) OTHER ITEMS. Borrower shall provide such other certificates,
approvals, documents, opinions and agreements as Lender shall reasonably
request.
All of the certificates, other documents and papers referred to in this Section
3.01, unless otherwise specified, shall be satisfactory in form and substance to
Lender.
SECTION 4. REPRESENTATIONS AND WARRANTIES. In order to induce Lender
to enter into this Agreement and make the Term Loan provided for herein,
Borrower makes the following representations and warranties to Lender, all of
which shall survive the execution and delivery of this Agreement and the making
of the Term Loan.
4.01 ORGANIZATIONAL STATUS. Borrower (i) is a duly organized and
validly existing corporation under the laws of the State of Nevada and has the
power and authority to own its property and assets and to transact the business
in which it is engaged and presently proposes to engage and (ii) is in good
standing in its jurisdiction of organization and is duly qualified or authorized
to do business and is in good standing in all jurisdictions where it is required
to be so qualified or authorized except where the failure to be so qualified or
authorized would not have a Material Adverse Effect.
4.02 ORGANIZATIONAL POWER AND AUTHORITY, CAPITAL, ETC. (a) Borrower
has the requisite power and authority to execute, deliver and carry out the
terms and provisions of the Loan Documents and has taken all necessary action to
authorize the execution, delivery and performance of the Loan Documents. This
Agreement constitutes, and each other Loan Document (when executed and delivered
by Borrower) will constitute, the legal, valid and binding obligation of
Borrower enforceable against Borrower in accordance with its terms.
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(b) The authorized capital stock of the Borrower consists of 1,000
shares of common stock (the "BORROWER'S COMMON STOCK"), no par value, of which,
as of the date hereof, 1,000 shares have been issued and are outstanding. All
of such issued shares have been duly and validly authorized, and are fully paid
and nonassessable. No shares of Borrower's Common Stock are entitled to
preemptive rights under the Certificate of Incorporation or any Material
Agreement. There are no outstanding warrants, scrip, rights to subscribe to,
call, or commitments of any character whatsoever relating to, or securities or
rights convertible into, shares of the Borrower's Common Stock, or contracts,
commitments, understandings, or arrangements by which the Borrower is or may
become bound to issue additional shares of Borrower's Common Stock or any other
capital stock.
4.03 NO VIOLATION. Neither the execution, delivery and performance by
Borrower of any of the Loan Documents, nor compliance with the terms and
provisions thereof, nor the consummation of the transactions contemplated herein
or therein (i) will contravene any applicable provision of any law, statute,
rule, regulation, order, writ, injunction or decree of any court or Governmental
Authority, (ii) will conflict or be inconsistent with or result in any breach of
any of the terms, covenants, conditions or provisions of, or constitute a
default under, or result in the creation or imposition of (or the obligation to
create or impose) any Lien upon any of the property or assets of Borrower (or
the Liens created by the Security Documents) pursuant to the terms of any
indenture, mortgage, deed of trust, agreement or other instrument to which
Borrower is a party or by which the property or assets are bound or to which
they may be subject, or (iii) will violate any provision of the Bylaws or the
Certificate of Incorporation of Borrower.
4.04 LITIGATION. Except as set forth in Schedule 4.04, there are no
actions, judgments, suits or proceedings pending or, to Borrower's Knowledge,
threatened as to which there is a reasonable possibility of a Material Adverse
Effect.
4.05 USE OF PROCEEDS. The use of the proceeds of the Term Loan will
not violate or be inconsistent with the provisions of Regulation G, T, U or X of
the Board of Governors of the Federal Reserve System.
4.09 GOVERNMENTAL APPROVALS, ETC. No order, consent, approval,
license, authorization, or validation of, or filing, recording or registration
with, or exemption by, any third party or any Governmental Authority (other
than those orders, consents, approvals, licenses, authorizations or validations
which have previously been obtained (including, without limitation, the
Financing Order) and except for filings to perfect security interests granted
pursuant to the Security Documents), is required to authorize or is required in
connection with (i) the execution,
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delivery and performance of any Loan Document or the transactions contemplated
therein or (ii) the legality, validity, binding effect or enforceability of any
Loan Document. Except as set forth on Schedule 4.06, there does not exist any
judgment, order, injunction or other restraint issued or filed with respect to
the performance by Borrower of its obligations under the Loan Documents.
4.07 INVESTMENT COMPANY ACT. Borrower is not, and after giving effect
to the transactions contemplated hereby will not be, an "investment company" or
a company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended.
4.08 FINANCIAL CONDITION; FINANCIAL STATEMENTS; PROJECTIONS.
Borrower has furnished to Lender complete and accurate copies of (i) the
audited balance sheet of Borrower at February 29, 1996 and February 28, 1995
and the audited statements of operations, shareholders' equity and cash
flows for the years ended February 29, 1996 and February 28, 1995, together
with the opinion thereon of Arthur Andersen LLP and (ii) the unaudited
balance sheet of borrower at November 30, 1996, and the unaudited statements
of operations, shareholders' equity and cash flows for the nine month period
ended November 30, 1996 (collectively, the "FINANCIAL STATEMENTS"). The
Financial Statements have been prepared in accordance with GAAP, applied on a
consistent basis, during the respective periods, except as therein noted.
The Financial Statements present fairly the financial position of Borrower as
of such dates and the results of operations and changes in cash flows and
shareholders' equity for such periods. Borrower does not have any material
obligation or liability, individually or in the aggregate, of the nature
required to be disclosed in financial statements prepared in accordance with
GAAP that is not disclosed in the Financial Statements. Except as set forth
in Schedule 4.08, subsequent to November 30, 1996, there has been no material
adverse change in the financial position or operations of Borrower.
4.09 SECURITY INTERESTS. The Security Documents will create, in favor
of Lender, as security for the Obligations purported to be secured thereby, a
valid and enforceable perfected first priority Lien upon all of the Collateral,
superior to and prior to the rights of all third persons and subject to no other
Liens except as provided in Section 6.02. No filings or recordings are required
in order to perfect the security interests created under any Security Document
except for filings or recordings required in connection with any such Security
Document which shall have been made prior to or contemporaneously with the
execution and delivery thereof, except as provided in Section 3.01 (h) hereof.
4.10 TAX RETURNS AND PAYMENTS. Borrower has filed all tax returns
required to be filed by it. Borrower has paid all federal, state, local and
foreign income taxes (including, without
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limitation, franchise taxes based upon income) which have become due. Borrower
knows of no proposed tax assessment against it that could reasonably be expected
to have a Material Adverse Effect.
4.11 ERISA. (a) Borrower and each of its ERISA affiliates, if any, are
in compliance in all material respects with all applicable provisions of ERISA
and the regulations and published interpretations thereunder with respect to all
employee benefit plans. Neither Borrower nor any of its ERISA Affiliates, if
any, maintains, contributes to or is obligated to contribute to, or during the
last five years has maintained, contributed to or was obligated to contribute
to, any Pension Plan or Multiemployer Plan.
(b) The execution, performance and delivery of the Loan Documents by
any party thereto will not involve any prohibited transaction within the meaning
of Section 406 of ERISA or Section 4975 of the Code for which an exemption
therefrom is not available.
4.12 SUBSIDIARIES ETC. Since its formation, Borrower has not had or
formed any Subsidiaries and Borrower currently has no Subsidiaries and is not a
partner in any partnership. Schedule 4.12 sets forth all fictitious and trade
names used by Borrower during the past two (2) years. Schedule 4.12 sets forth
all fictitious and trade names used by Borrower during the past two (2) years.
4.13 PATENTS, COPYRIGHTS, TRADEMARKS, ETC. Schedule 4.13 sets forth
all patents, copyrights, trademarks and service marks owned or possessed by
Borrower. Borrower owns or possesses adequate licenses or other rights to use
all patents, patent applications, trademarks, trademark applications, service
marks, service mark applications, trade names, copyrights, trade secrets and
know-how (collectively, the "INTELLECTUAL PROPERTY"), that are necessary for
the operation of its respective businesses as proposed to be conducted. No
claim is pending, or to Borrower's Knowledge threatened, to the effect that
Borrower infringes upon or conflicts with the asserted rights of any other
person under any Intellectual Property, which, if adversely determined, would
have a Material Adverse Effect, and there is no basis for any such claim
(whether or not pending or threatened). No claim is pending, or to Borrower's
Knowledge threatened, to the effect that any such Intellectual Property owned or
licensed by Borrower or which Borrower otherwise has the right to use is invalid
or unenforceable by Borrower, which, it adversely determined, would have a
Material Adverse Effect, and there is no basis for any such claim (whether or
not pending or threatened).
4.14 COMPLIANCE WITH LAWS, ETC. Borrower is in compliance with all
material laws and regulations of all Governmental Authorities.
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4.15 PROPERTIES. Borrower does not own any Real Property. Borrower
owns or has valid leasehold interests in all of its properties and assets, free
and clear of all Liens except for Permitted Encumbrances. Borrower holds all
material licenses, permits, leases, certificates of occupancy or operation and
similar certificates and clearances of municipal and other authorities necessary
to own and operate its properties.
4.16 COLLECTIVE BARGAINING AGREEMENTS. There are not currently any
collective bargaining or similar agreements applicable to Borrower.
4.17 INDEBTEDNESS OUTSTANDING. No Indebtedness of Borrower (other
than the Term Loan, the Term Note, the DFS Assigned Claim and certain
intercompany payables) will be outstanding immediately after the Borrowing Date.
4.18 ENVIRONMENTAL MATTERS.
(a) Borrower is fully familiar with the present, and, after due
inquiry, it is familiar with the prior uses of all Real Property which it owns
or has previously owned, and from which it has operated its business
("FACILITIES") , it has no knowledge that there have ever been any Hazardous
Substances used, handled, manufactured, generated, produced, stored, treated,
processed, transferred, or disposed of at, on or from the Facilities, except in
compliance with all applicable Environmental Laws and that no Release or
Threatened Release has occurred at, on or from the Facilities.
(b) The activities, operations and business carried out at or on the
Facilities, including, but not limited to, any past or ongoing alterations or
improvements at the Facilities is, and at all times has been in compliance with
all Environmental Laws, that no further action is required to remedy any
Environmental Condition or violation of any Environmental Laws, or to be in full
compliance with any Environmental Laws, and that no Lien has been imposed on the
Facilities by any federal, state or local governmental or quasi-governmental
entity in connection with any Environmental Condition, the violation or
threatened violation of any Environmental Laws or the presence of any Hazardous
Substances on or off the Facilities.
(c) Borrower has not received notice of any pending or threatened
litigation or proceedings before any administrative agency in which any Person
alleges the violation or threatened violation of any Environmental Laws or the
presence, Release, Threatened Release or placement on, at or from the Facilities
of any Hazardous Substances, or of any facts which would give rise to any such
action, nor has Borrower (a) received any notice (and Borrower has no actual or
constructive knowledge) that any Governmental Authority has determined,
threatens to determine or
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any Hazardous Substances, or of any facts which would give rise to any such
action, nor has Borrower (a) received any notice (and Borrower has no actual
or constructive knowledge) that any Governmental Authority has determined,
threatens to determine or requires an investigation to determine that there
has been a violation of any Environmental Laws at, on, or in connection with
the Facilities or that there exists a presence, Release, Threatened Release
or placement of any Hazardous Substances on or at the Facilities, or the use,
handling, manufacturing, generation, production, storage, treatment,
processing, transportation or disposal of any Hazardous Substances at, on or
from the Facilities; (b) received any notice under the citizen suit provision
of any Environmental Law in connection with the Facilities; or (c) received
any request for inspection, request for information, notice, demand,
administrative inquiry or any formal or informal complaint or claim with
respect to or in connection with the violation or threatened violation of any
Environmental Laws or existence of Hazardous Substances relating to the
Facilities.
(d) No Facility used, owned or leased by Borrower is (i) listed or
proposed for listing on the National Priorities List under CERCLA or is (ii)
listed in the Comprehensive Environmental Response, Compensation, Liability
Information System List promulgated pursuant to CERCLA, or on any comparable
list maintained under any Environmental Law by any Governmental Authority.
4.19 AGREEMENTS.
(a) Set forth on Schedule 4.19 hereto is a description of each material
agreement to which Borrower is a party or by which it or its assets or
properties may be bound (the "MATERIAL AGREEMENTS"). Unless otherwise noted
on Schedule 4.19, each Material Agreement is in full force and effect and
Borrower has performed all obligations required to be performed by it
thereunder and no event of default has occurred thereunder which would
entitle the other party thereto to terminate such Material Agreement or
accelerate Borrower's obligations thereunder, and no event has occurred
which, with the lapse of time or the giving of notice or both, would
constitute an event of default by Borrower thereunder, or to the Knowledge of
Borrower, by any other party to any Material Agreement.
(b) Unless listed Schedule 4.19, Borrower is not a party to or bound by,
nor are any of its assets or properties bound by, any agreement, order or
judgment which has the reasonable possibility of having a Material Adverse
Effect.
(c) Borrower has the exclusive authority and right to purchase the Aldila
springloaded tip graphite golf club shafts made exclusively for Borrower
and to incorporate such golf club shafts into Borrower's products.
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on behalf of Borrower in connection with this Agreement or the transactions
contemplated herein, contains (in each case, as of its date) any untrue
statement of a material fact, or omits to state a material fact necessary in
order to make the statements contained therein or herein not misleading.
4.21 LIENS. There are no Liens affecting any of the Borrower's assets
or properties, including the Collateral, other than the Permitted Encumbrances.
4.22 ASSETS. Borrower has good and marketable title to all of its
assets, including without limitation, all Inventory included in the Collateral.
All Inventory of Borrower is kept at the location (s) specified in the Security
Agreement. All books and records pertaining to the Collateral are kept at the
location(s) specified in the Security Agreement.
SECTION 5. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that
until payment in full of the Term Note and full and complete performance of the
Obligations:
5.01 INFORMATION COVENANTS. Borrower will furnish or cause to be
furnished to Lender:
(a) As soon as available and in any event within 120 days after the
close of each fiscal year of Borrower, the balance sheet of Borrower as at
the end of such fiscal year and the related statements of operations, of
shareholder's equity and of cash flows for such fiscal year, setting forth
comparative figures for the preceding fiscal year and a report on such
balance sheets and financial statements by Arthur Andersen or other
independent certified public accountants reasonably acceptable to Lender;
which report shall not be qualified as to the scope of audit or as to the
status of Borrower as a going concern and shall state that such financial
statements present fairly the financial position of the Borrower as at the
dates indicated and the results of its operations and its cash flows for
the periods indicated in conformity with GAAP applied on a basis
consistent with prior years (except for such changes with which the
independent certified public accountants concur), and the examination by
such accountants was conducted in accordance with generally accepted
auditing standards.
(b) As soon as available after the close of each monthly accounting
period in each fiscal year of Borrower, the balance sheet of Borrower as at
the end of such monthly period and the related statements of operations, of
shareholders' equity and of cash flows for such monthly period and for the
elapsed portion of the fiscal year ended with the last day of such monthly
period, each such statement to be certified by an appropriate officer of
Borrower, which certificate shall state
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that such statements present fairly the balance sheet and related income, equity
interests and cash flows of Borrower as of the dates and for the periods
indicated, in conformity with GAAP applied on a basis consistent with prior
years (except for such changes with which the independent certified accountants
concur) and in each case setting forth comparative figures for the fiscal year
budget, subject to normal year-end audit adjustments.
(c) Together with each delivery of financial statements of Borrower
pursuant to Section 5.01(a), a written statement by the independent public
accountants giving the report thereon (i) stating that their audit examination
has included a review of the terms of Sections 5, 6 and 7 of this Agreement as
they relate to accounting matters but without having conducted any special
auditing procedures in connection therewith, (ii) stating whether, in connection
with their audit examination, any condition or event which constitutes a Default
or Event of Default has come to their attention, and if such a condition or
event has come to their attention, specifying the nature and period of existence
thereof; provided that such accountants shall not be liable by reason of any
failure to obtain knowledge of any such Default or Event of Default that would
not be disclosed in the course of their audit examination, and (iii) stating
that based on their audit examination nothing has come to their attention which
causes them to believe that as of the end of such fiscal year there existed a
Default or an Event of Default related to the breach of any covenant set forth
in Section 5 or 6 as they relate to accounting matters, and if such a condition
or event has come to their attention, specifying the nature and period of
existence thereof and what action Borrower has taken, is taking and proposes
to take with respect thereto.
(d) As soon as available, and in any event on the commencement of each
fiscal year, a budget of Borrower in reasonable detail for each month of such
fiscal year, as customarily prepared by management for its internal use, setting
forth, with appropriate discussion, the principal assumptions upon which such
budgets are based. Together with each delivery of financial statements pursuant
to Sections 5.01 (a) and (b), a comparison of the current year to date financial
results against the budgets required to be submitted pursuant to this Section
5.01(d) shall be presented
(e) At the time of the delivery of the financial statements provided for
in Sections 5.01 (a) and (b), a certificate of an appropriate officer of each
of Borrower to the effect that no Default or Event of Default exists, or, if any
Default or Event of Default does exist, specifying the nature and extent
thereof;
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(f) Promptly upon receipt thereof, a copy of each annual "management
letter" submitted to Borrower by its independent accountants in connection with
any annual audit made by them of the books of Borrower.
(g) Promptly upon their becoming available, copies of all financial
statements, reports, notices and proxy statements sent or made available
generally by Borrower to its securityholders of all regular and periodic
reports and all registration statements and prospectuses, if any, filed by
Borrower with any securities exchange or with the SEC and of all press releases
and other statements made available generally by Borrower to the public
concerning material developments in the business of Borrower.
(h) Prompt written notice (x) of any condition or event which constitutes
a Default or Event of Default, (y) that any holder of any note or other evidence
of Indebtedness of Borrower has given any notice to Borrower or taken any other
action with respect to a claimed default or event or condition of the type
referred to in Section 7.04, or (z) of a Material Adverse Effect.
(i) Prompt written notice of the institution of, or written threat of, any
action, suit, proceeding, governmental investigation or arbitration against or
affecting Borrower or any property of any of Borrower not previously disclosed
to Lender, which action, suit, proceeding, governmental investigation or
arbitration which seeks (or in the case of multiple actions, suits, proceedings,
governmental investigations or arbitrations arising out of the same general
allegations or circumstances which seek) recovery from Borrower aggregating
$100,000 or more. In addition to the requirements set forth in the previous
sentence, Borrower upon request shall promptly give notice of the status of any
action, suit, proceeding, governmental investigation or arbitration covered by a
report delivered to Lender pursuant to this Section 5.01(i) and provide such
other information as may be reasonably available to it (exclusive of privileged
documents) to enable Lender and its counsel to evaluate such matters.
(j) On or before the fifteenth (15th) day of each calendar month, a
Coverage Ratio Certificate, as of the last day of the previous month, and on or
before the last day of each calendar month, a Coverage Ratio Certificate as of
the fifteenth (15th) day of such calendar month, in each case, which certifies
that the Coverage Ratio of Borrower, after giving effect to all amounts
outstanding in respect of the Term Loan and the DFS Assigned Claim, is not less
than 2.00 to 1.00.
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(k) Prompt written notice of any condition, event, action or
occurrence which has impacted, or with the mere passage of time will
impact, the value of the Eligible Collateral by an amount greater than ten
percent (10%).
(l) On or before the fifteenth (15th) day of each calendar month, a
report containing a summary aged accounts receivable balance showing all
Eligible Accounts of Borrower as of the last day of the immediately
preceding month and on or before the last day of each calendar month, a
report containing a summary aged accounts receivable balance showing all
Eligible Accounts of Borrower, as of the fifteenth (15th) day of such
calendar month, in each case in the following categories: 0-30 days; 31-
60 days; 61-90 days; 91-120 days; and 121 days and over.
(m) On the fifteenth (15th) day and last day of each calendar month,
an inventory ledger of Borrower, including all Inventory held by Borrower.
(n) On demand, such other information, including without limitation,
Coverage Ratio Certificates, that Lender shall reasonably request.
5.02 BOOKS, RECORDS AND INSPECTIONS. Borrower will keep true books of
records and accounts in which full and correct entries will be made of all of
its business transactions and will reflect in its financial statements adequate
accruals and appropriations to reserves, all in accordance with GAAP. Borrower
will permit officers and designated representatives of Lender to visit and
inspect any of the properties or assets of Borrower in whomsoever possession,
and to examine the books of account of Borrower (and to make copies thereof at
Borrower's expense) and discuss the affairs, finances and accounts of Borrower
with, and be advised as to the same by, appropriate officers of Borrower, all at
such reasonable times and intervals and to such reasonable extent as Lender may
reasonably request.
5.03 MAINTENANCE OF PROPERTY; LICENSES; INSURANCE.
(a) Borrower will exercise commercially reasonable efforts to
maintain or cause to be maintained in good repair, working order and condition
(subject to normal wear and tear) all properties used in its businesses and from
time to time will make or cause to be made all appropriate repairs, renewals and
replacements thereof.
(b) Borrower will maintain in full force and effect all of its
rights, franchises, licenses and permits and other rights in or to use any
licenses, patents, processes, trademarks, trade names or copyrights owned or
possessed by it, except where such failure to keep in full force and effect such
rights, franchises, licenses
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or permits could not reasonably be expected to have a Material Adverse Effect.
(c) Borrower will maintain or cause to be maintained, with
financially sound and reputable insurers, insurance with respect to their
properties and business against loss or damage of the kinds customarily insured
against by Persons of established reputation engaged in the same or similar
businesses and similarly situated, of such types and in such amounts as are
customarily carried under similar circumstances by such other Persons to the
extent that such types and such amounts of insurance are available at
commercially reasonable rates. Borrower will furnish to Lender, upon reasonable
request, information as to the insurance carried, and will not cancel, without
replacement, any such insurance without the reasonable consent of Lender.
5.04 PAYMENT OF TAXES. Borrower will pay and discharge all material
taxes, assessments and governmental charges or levies imposed upon it or upon
their income or profits, or upon any properties belonging to it, prior to the
date on which material penalties attach thereto, and Borrower will promptly pay
and discharge all other taxes, assessments and governmental charges or levies
imposed upon each of them or upon their income or profits, or upon any
properties belonging to it, and all lawful claims which, if unpaid, might become
a Lien or charge upon any properties of Borrower or cause a failure or
forfeiture of title thereto, prior to the date on which material penalties
attach thereto; PROVIDED that Borrower shall not be required to pay any such
tax, assessment, charge, levy or claim that is being contested in good faith and
by proper proceedings promptly instituted and diligently conducted, which
proceedings have the effect of preventing the forfeiture or sale of the property
or asset that may become subject to such Lien, if it has maintained adequate
reserves with respect thereto in accordance with and to the extent required
under GAAP.
5.05 MAINTAIN EXISTENCE. Borrower will do or cause to be done all
things necessary to preserve and keep in full force and effect its corporate
existence rights and authority.
5.06 COMPLIANCE WITH STATUTES, ETC. Borrower will comply with all
applicable statutes, including, without limitation, the Bankruptcy Code,
regulations and orders of, and all applicable restrictions imposed by, all
Governmental Authorities.
5.07 PERFORMANCE OF OBLIGATIONS. Borrower will perform in all
material respects all of their obligations under the terms of each mortgage,
indenture, security agreement, other debt instrument and material contract by
which it is bound or to which it is a party, including, without limitation, the
Financing Order, except where such nonperformance would not reasonably be
expected to have a Material Adverse Effect.
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5.08 END OF FISCAL YEARS; FISCAL QUARTERS. Borrower will, for
financial reporting purposes, have each of their (i) fiscal years end on
February 28 or 29, and (ii) fiscal quarters end on May 31, August 31, November
30, and February 28 or 29.
5.09 NOTICE OF LITIGATION. Borrower will promptly notify Lender if it
receives: (i) any notice of any violation or administrative or judicial
complaint or order having been filed or about to be filed against it, including
without limitation, all complaints or orders alleging violations of any law
material to its business, including, without limitation, any Environmental Law
or (ii) any notice from any Governmental Authority or any other Person alleging
that it is or may be subject to any liability under any law material to its
business, including, without limitation, or any Environmental Law; and promptly
upon receipt thereof, provide the Lender with a copy of such notice together
with a statement of the action it has or intends to take with respect thereto.
Borrower shall promptly deliver to Lender and its counsel copies of all notices
and papers served in connection with the Borrower's chapter 11 case.
5.10 ENVIRONMENTAL COMPLIANCE. Borrower will:
(a) Ensure that the uses of the Facilities and the users of the
Facilities are in full compliance with Environmental Laws;
(b) Ensure that there are no underground storage tanks or surface
impoundments at, on or beneath any of the Facilities;
(c) Ensure that there shall be no Release or Threatened Release of
any Hazardous Substances on, under, to, from or around the Facilities; provided,
however, that such use, storage and handling of Hazardous Substances customarily
engaged in by Borrower in the ordinary the course of business shall not
constitute a breach of this provision provided that such use, storage and
handling of Hazardous Substances is in full compliance with applicable
Environmental Laws;
(d) In the event of any actual or threatened use, generation,
manufacture, refining, transportation, treatment, storage, handling, Release or
Threatened Release of Hazardous Substances on, under, to, from or around the
Facilities, or in the event of any violation of any Environmental Law:
(i) immediately take all action and incur all costs, necessary to
cure the actual or threatened use, generation, manufacture, refining,
transportation, treatment, storage, handling, Release or Threatened Release
of Hazardous Substances on, under, to, from or around the Facilities;
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(ii) immediately take all action and incur all costs necessary to
cure any violation of Environmental Law and prevent the imposition of any
Lien;
(iii) immediately notify Lender by telephone and confirm immediately
in writing, the nature of the actual or threatened use, generation,
manufacture, refining, transportation, treatment, storage, handling,
Release or Threatened Release of Hazardous Substances on, under, to, from
or around the Facilities, or other violation of any Environmental Law, and
the detailed response plan of Borrower, and notifications to appropriate
Governmental Authorities;
(iv) thereafter maintain steady oral and written communication with
Lender as to the status of the Borrower's actions and costs incurred; and
(v) post all financial assurances and security required by Lender in
its sole and absolute discretion, to secure Borrower's obligations under
this paragraph (d).
SECTION 6. NEGATIVE COVENANTS. Borrower covenants and agrees that
while the Term Loan is outstanding, until payment in full of the Term Note and
the DFS Assigned Claim, and until full and complete performance of the
Obligations:
6.01 CHANGES IN BUSINESS. Borrower will not engage in any business
other than the manufacture and distribution of golf equipment and accessories.
6.02 LIENS. Borrower will not directly or indirectly create, incur,
assume or permit or suffer to exist any Lien upon or with respect to any item
constituting Collateral, whether now owned or hereafter acquired, or sell any
such Collateral subject to an understanding or agreement, contingent or
otherwise, to repurchase such Collateral or assign any right to receive income,
or file or permit the filing of any financing statement under the UCC or any
other similar notice of Lien under any similar recording or notice statute,
except for (i) the Lien of the Security Document relating thereto, (ii) Liens
expressly permitted by any Security Document, and (iii) Liens set forth on
Schedule 6.02 to this Agreement, which are herein collectively referred to as
"PERMITTED ENCUMBRANCES".
6.03 INDEBTEDNESS. Borrower will not contract, create, incur, assume
or suffer to exist any Indebtedness, except the Indebtedness incurred pursuant
to this Agreement, the Term Note and relating to, arising from, or in connection
with the DFS Assigned Claim.
6.04 ADVANCES, INVESTMENTS AND NOTES. Borrower will not lend money or
credit or make advances to any Person, or purchase or acquire any stock,
obligations or securities of, or any other
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interest in, or make any capital contribution to any Person, except:
(a) investments in Cash and Cash Equivalents;
(b) receivables owing to it and advances to customers and suppliers,
in each case if created, acquired or made in the ordinary course of business and
payable or dischargeable in accordance with customary trade terms; and
(c) investments (including debt obligations) received in
connection with the bankruptcy or reorganization of suppliers and customers and
in settlement of delinquent obligations of, and other disputes with, customers
and suppliers arising in the ordinary course of business.
6.05 PREPAYMENTS OF INDEBTEDNESS; MODIFICATION OF ORGANIZATIONAL
DOCUMENTS. Borrower will not: (a) make (or give any notice in respect of) any
voluntary or optional payment or prepayment or redemption or acquisition for
value of (including, without limitation, by way of depositing with any trustee
with respect thereto money or securities before such Indebtedness is due for the
purpose of paying such Indebtedness when due) or exchange of any such
Indebtedness other than as permitted pursuant to Section 2, or (b) amend, modify
or change any of its organizational documents including, without limitation, its
Certificate of Incorporation, or any agreement entered into by Borrower with
respect to its capital stock or enter into any new agreement with respect to its
capital stock, the result of which is reasonably likely to be adverse to the
interests of Lender.
6.06 DIVIDENDS, ETC. Borrower will not declare or pay or authorize
any dividend, distribution, payment or delivery of property or cash to its
stockholders as such, or redeem, retire, purchase or otherwise acquire, directly
or indirectly, for any consideration, any of the capital stock or other equity
interests of Borrower now or hereafter outstanding (or any warrants or options
in respect of such equity interests), or set aside any funds for any of the
foregoing purposes.
6.07 TRANSACTIONS WITH AFFILIATES. Except as otherwise set forth in
this Agreement, Borrower will not enter into any transaction or series of
transactions, whether or not in the ordinary course of business, with any
Affiliate.
6.08 SUBSIDIARIES. Borrower shall not form, acquire or permit any
Person to become its Subsidiary.
6.09 DISPOSITION OF ASSETS. Borrower will not engage in any Asset
Sale, except that Borrower may sell, assign, transfer, convey, or otherwise
dispose of or lease all or any part of its
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Inventory, acquired and disposed of in the ordinary course of business.
6.10 ERISA. Borrower will not adopt, or become obligated to
contribute to, or allow any of its ERISA Affiliates to adopt, maintain, or
contribute to, a Pension Plan, and Borrower will not become obligated to
contribute to, or allow any of its ERISA affiliates to become obligated to
contribute to, any Multi-employer Plan.
6.11 MERGERS AND ACQUISITIONS. Borrower will not acquire any Person
(including through the purchase of all of the capital stock or other ownership
interests of such Person or through merger or consolidation) or merge with any
other Person.
SECTION 7. EVENTS OF DEFAULT. Each of the following upon its
occurrence and during its continuance shall constitute an event of default
("EVENT OF DEFAULT") :
7.01 PAYMENTS. Borrower shall fail to pay when due any principal of,
or interest on, the Term Loan or any fee payable under this Agreement or any of
the other Loan Documents and such failure shall continue unremedied for two (2)
or more Business Days.
7.02 REPRESENTATIONS, ETC. Any representation, warranty or statement
made or deemed made by Borrower herein, or in any other Loan Document, or in any
statement or certificate delivered or required to be delivered pursuant hereto
or thereto shall prove to be untrue in any material respect on the date as of
which made or deemed made.
7.03 COVENANTS. Borrower shall (a) default in the due performance or
observance by it of any term, covenant or agreement contained in Section 6, or
(b) default in the due performance or observance by it of any other term,
covenant or agreement contained in this Agreement or any Loan Document and such
default shall continue unremedied for a period of at least fifteen (15) days
after the date of such default.
7.04 DEFAULT UNDER OTHER AGREEMENTS. (a) Borrower shall (i) default in
any payment with respect to any Indebtedness (other than the Obligations) beyond
the period of grace, if any, provided in the instrument or agreement under which
such Indebtedness was created or (ii) default in the observance or performance
of any agreement or condition relating to any such Indebtedness or contained in
any instrument or agreement evidencing, securing or relating thereto, or any
other event shall occur or condition exist, the effect of which default or other
event or condition is to cause, or to permit the holder or holders of such
Indebtedness (or a trustee or agent on behalf of such holder or holders) to
cause, any such Indebtedness to become due
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prior to its stated maturity, or (b) any such Indebtedness of Borrower shall be
declared to be due and payable, or required to be prepaid other than by a
regularly scheduled required prepayment, prior to the stated maturity thereof.
7.05 BANKRUPTCY, ETC. Other than as set forth below, Borrower shall
commence a voluntary case concerning itself under the Bankruptcy Code; or an
involuntary case is commenced against Borrower and the petition is not
controverted within 10 days, or is not dismissed or stayed within 60 days, after
commencement of the case; or a custodian (as defined in the Bankruptcy Code) is
appointed for, or takes charge of, all or substantially all of the property of
Borrower; or Borrower commences any other proceeding under any reorganization,
arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or
liquidation or similar law of any jurisdiction whether now or hereafter in
effect relating to Borrower; or there is commenced against Borrower any such
proceeding which remains undismissed and unstayed for a period of 60 days; or
Borrower is adjudicated insolvent or bankrupt; or any order of relief or other
order approving any such case or proceeding is entered; or Borrower suffers any
appointment of any custodian or the like for it or any substantial part of its
property to continue undischarged or unstayed for a period of 60 days; or
Borrower makes a general assignment for the benefit of creditors; or any
corporate action is authorized by Borrower for the purpose of effecting any of
the foregoing provided, however, that the filing by Borrower with the Bankruptcy
Court of a voluntary petition for relief under Chapter 11 of the Bankruptcy Code
on or before January 31, 1997 shall not be deemed to be an Event of Default
under this Agreement provided that an interim or emergency order for financing
by Lender is entered in such case on or before February 14, 1997.
7.06 SECURITY DOCUMENTS. Any Security Document shall cease to be in
full force and effect, or shall cease to give Lender the Liens, rights, powers
and privileges purported to be created thereby, in favor of Lender, superior to
and prior to the rights of all third Persons and subject to no Liens other than
Liens expressly permitted by this Agreement and the applicable Security
Document.
7.07 JUDGMENTS. One or more judgments or decrees shall be entered
against Borrower involving a liability of $100,000 or more in the case of any
one such judgment or decree and $100,000 or more in the aggregate for all such
judgments and decrees (in either case in excess of the amount covered by
insurance as to which the insurance company has acknowledged coverage) and (i)
any such judgments or decrees shall not have been vacated, discharged, bonded or
enforcement thereof stayed pending appeal within 60 days from the entry thereof
or (ii) any enforcement proceeding therefor shall have been commenced.
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<PAGE>
Then, and in any such event, and at any time thereafter, if any Event
of Default shall then be continuing, Lender shall, by written notice to
Borrower, take any or all of the following actions, without prejudice to the
rights of Lender, to enforce its claims against Borrower, except as otherwise
specifically provided for in this Agreement provided, however, that, if an Event
of Default specified in Section 7.05 shall occur, the result which would occur
upon the giving of written notice by Lender as specified in clauses (i) and (ii)
below shall occur automatically without the giving of any such notice): (i)
terminate the Commitment and/or accelerate the Maturity Date and declare the
principal of and accrued interest in respect of the Term Note and all
Obligations owing hereunder and thereunder to be, whereupon the same shall
become, forthwith due and payable without presentment, demand, protest or other
notice of any kind, all of which are hereby waived by Borrower, and/or (ii)
enforce any or all of the remedies created pursuant to the Security Documents.
SECTION 8. MISCELLANEOUS.
8.01 PAYMENT OF EXPENSES, ETC. Borrower agrees to: (i) pay all
reasonable out-of-pocket costs and expenses of Lender (including, without
limitation, the reasonable fees and disbursements of counsel to Lender,
including Rosenman & Colin LLP) in connection with the negotiation, preparation,
execution and delivery of the Loan Documents, in connection with the Borrower's
chapter 11 case pending in the Bankruptcy Court, and in connection with the
negotiation, documentation and enforcement relating to the DFS Assigned Claim;
(ii) pay all reasonable out-of-pocket costs and expenses of Lender (including,
without limitation, the reasonable attorneys' fees and disbursements in
connection with the enforcement of, or the preservation of rights under, this
Agreement and any of the other Loan Documents (including, without limitation, in
any bankruptcy, insolvency, reorganization or similar proceedings) and in
connection with the Borrower's chapter 11 case pending in the Bankruptcy Court,
and in connection with the negotiation, documentation and enforcement relating
to the DFS Assigned Claim); (iii) pay and hold Lender harmless from and against
any and all present and future stamp and other similar taxes with respect to
this Agreement and the other Loan Documents and save Lender harmless from and
against any and all liabilities with respect to or resulting from any delay or
omission (other than to the extent attributable to Lender) to pay such taxes;
(iv) pay all filing and recording fees relating to, and taxes and other charges
incurred in connection with, perfecting, maintaining and protecting the Liens
created or contemplated to be created pursuant to the Security Documents, and
(v) indemnify Lender, its officers, directors, employees, representatives and
agents from and hold each of them harmless against any and all losses,
liabilities, claims, damages, costs or expenses (including, without limitation,
any and all losses, liabilities, claims, damages, costs or expenses arising out
of or relating to any Environmental Laws or Environmental
33
<PAGE>
Condition) incurred by any of them as a result of, or arising out of, or in
any way related to, or by reason of, any investigation, litigation or other
proceeding (including, without limitation, the Borrower's chapter 11 case
pending in the Bankruptcy Court) (whether or not Lender is a party thereto)
related to the entering into and/or performance of any Loan Document or the
use of the proceeds of any Term Note hereunder or the consummation of any
other transactions contemplated in any Loan Document or with respect to the
DFS Assigned Claim and the Lender's negotiation, documentation and
enforcement thereof, including, without limitation, the reasonable fees and
disbursements of counsel incurred in connection with any such investigation,
litigation or other proceeding (but excluding any such losses, liabilities,
claims, damages or expenses to the extent incurred by reason of the gross
negligence or willful misconduct of the Person to be indemnified).
8.02 RIGHT OF SET-OFF. In addition to any rights now or hereafter
granted under applicable law or otherwise, and not by way of limitation of any
such rights, upon the occurrence and during the continuance of an Event of
Default, Lender is hereby authorized at any time or from time to time
thereafter, without presentment, demand, protest or other notice of any kind to
Borrower or to any other Person, any such notice being hereby expressly waived,
to set off and to appropriate and apply any and all deposits (general or
special) and any other Indebtedness at any time held or owing by Lender to or
for the credit or the account of Borrower against and on account of the
Obligations of Borrower to Lender under this Agreement or under any of the other
Loan Documents, and all other claims of any nature or description arising out of
or connected with this Agreement or any other Loan Document, irrespective of
whether or not Lender shall have made any demand hereunder and although said
Obligations, liabilities or claims, or any of them, shall be contingent or
unmatured.
8.03 NOTICES. Except as otherwise expressly provided herein, all
notices and other communications provided for hereunder shall be in writing
(including telegraphic, telex, telecopier or cable communication) and mailed,
telegraphed, telexed, telecopied, cabled or delivered, if to Borrower to:
Bullet-Cougar Golf Corporation, 2803 S. Yale Street, Santa Ana, California
92704, Attention: Jack Forrest with a copy to: Cox, Castle & Nicholson, LLP,
19800 MacArthur Blvd., Suite 600, Irvine, California 92715, Attention:
Jess Bressi, Esq.; if to Lender, at Lender's Office with a copy to: Rosenman &
Colin LLP, 575 Madison Avenue, New York, New York 10022, Attention: Jeff J.
Friedman, Esq. and Pachulski, Stang, Ziehl & Young, 10100 Santa Monica
Boulevard, Los Angeles, California 90067, Attention: James Stang, Esq.; or, at
such other address as shall be designated by any party in a written notice to
the other parties hereto. All such notices and communications shall, when
mailed, be effective upon receipt, or when telegraphed, telexed, telecopied, or
cabled or sent by overnight courier, be
34
<PAGE>
effective when delivered to the telegraph company, cable company or overnight
courier, as the case may be, or when sent by telex or telecopier.
8.04 BENEFIT OF AGREEMENT. (a) This Agreement shall be binding upon
and inure to the benefit of and be enforceable by the parties hereto, all future
holders of the Term Note, and their respective successors and assigns. Borrower
may not assign or delegate any of its rights and obligations hereunder without
the prior written consent of Lender.
(b) Lender shall have the right to transfer or assign all or any part
of the Term Note. Lender may furnish any information concerning Borrower in the
possession of Lender from time to time to assignees (including prospective
assignees).
8.05 NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on the part
of Lender in exercising any right, power or privilege under this Agreement or
under any other Loan Document and no course of dealing between Borrower and
Lender shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power, or privilege hereunder or under any other Loan
Document preclude any other or further exercise thereof or the exercise of any
other right, power or privilege hereunder or thereunder. The rights and
remedies herein expressly provided are cumulative and not exclusive of any
rights or remedies which Lender would otherwise have. No notice to or demand on
Borrower in any case shall entitle Borrower to any other or further notice or
demand in similar or other circumstances or constitute a waiver of the rights of
Lender to any other or further action in any circumstances without notice or
demand.
8.06 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE.
(a) This Agreement and the rights and obligations of the parties
hereunder shall be construed and enforced in accordance with and be governed by
the laws of the State of California without regard to principles of conflict of
laws and to the extent applicable, the Bankruptcy code. Any legal action or
proceeding with respect to this Agreement or any other Loan Document may be
brought in the courts of the State of California or of the United States for
the Central District of California, and, by execution and delivery of this
Agreement, Borrower and Lender hereby irrevocably accept for themselves and in
respect of their property, generally and unconditionally, the non-exclusive
jurisdiction of the aforesaid courts.
(b) Borrower and Lender hereby irrevocably waive any objection which
it may now or hereafter have to the laying of venue of any of the aforesaid
actions or proceedings arising out of or in connection with this Agreement or
any other Loan Document brought in the courts referred to in clause (a) above
and hereby further
35
<PAGE>
irrevocably waives and agrees not to plead or claim in any such court that any
such action or proceeding brought in any such court has been brought in an
inconvenient forum.
8.07 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A set of counterparts
executed by all the parties hereto shall be lodged with Borrower and Lender.
8.08 HEADINGS DESCRIPTIVE. The headings of the several sections and
subsections of this Agreement are inserted for convenience only and shall not in
any way affect the meaning or construction of any provision of this Agreement.
8.09 AMENDMENT OR WAIVER. Neither this Agreement nor any other Loan
Document nor any terms hereof or thereof may be changed, waived, discharged or
terminated unless such change, waiver, discharge or termination is in writing
signed by the parties hereto.
8.10 SURVIVAL. The provisions of Section 8.02 shall survive the
execution and delivery of this Agreement and the issuance and sale of the Term
Note and the repayment of the Obligations.
8.11 WAIVER OF JURY TRIAL. EACH OF THE PARTIES TO THIS AGREEMENT
HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING
OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE LOAN DOCUMENTS
OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
8.12 INDEPENDENCE OF COVENANTS. All covenants hereunder shall be
given independent effect so that if a particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or be otherwise within the limitation of, another covenant shall
not avoid the occurrence of a Default or an Event of Default if such action is
taken or condition exists.
8.13 ENTIRE AGREEMENT. This Agreement together with the other Loan
Documents embodies the entire agreement and understanding among the parties
hereto and supersedes all prior agreements and understandings relating to the
subject matter hereof.
8.14 EXECUTION BY FACSIMILE TRANSMISSION. This Agreement may be
validly executed and delivered by exchange of executed signature pages by
facsimile transmission, provided that original executed signature pages are
promptly delivered to each party thereafter by overnight courier.
36
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Agreement to be duly executed and delivered as of the date
first above written.
CLEARWATER FUND IV, LLC
By:
--------------------------------------
Name:
Title:
BULLET-COUGAR GOLF CORPORATION
By: /s/ John A Haas
--------------------------------------
Name: John A. Haas
Title: Pres.
37
<PAGE>
Schedule 2.05
Use of Proceeds of the Loan
Maximum Loan Amount $ 1,000,000
Less: Outstanding Balance Acquired 225,000
Add: Receipts Held for Collection 75,000
-----------
Loan Proceeds Available $ 850,000
-----------
Planned Purchases:
Aldila (Shafts) 250,000
U.S. Composites (Shafts) 50,000
True Temper (Shafts) 50,000
Advantage Bag Corporation (Golf Bags) 225,000
-----------
Total Planned Inventory Purchases 575,000
Estimated PGA Expenses 150,000
Working Capital (including professional fees) 125,000
----------
Total Planned Uses of Funds $ 850,000
----------
(All amounts are estimates rounded to nearest $ 5,000)
<PAGE>
SCHEDULE 4.04 LITIGATION INVOLVING
BULLET-COUGAR GOLF CORPORATION
<TABLE>
<CAPTION>
CAPTION OF NATURE OF COURT OR STATUS OF
SUIT; PROCEEDING AGENCY AND DISPOSITION
INDIVIDUAL LOCATION
CASE NO.
<S> <C> <C> <C> <C>
1. Stephen Gould Trade Creditor Orange Settled.
of California, Dispute. County Dismissal
Inc. v. Debtor superior entered
Case No. Court 10-15-96.
762763
2. William P. Services Same as Settled.
Jacoby. Case Contract above.
No. 759825 Dispute.
3. John King, Trade Creditor Los Angeles Settled.
Inc. v. Dispute. Municipal Dismissal
Debtor, et al. Court - entered
Case No. East Los 7-5-96.
96CO00170 Angeles
Judicial
District
4. KZ Golf, Inc. Purchase Order Orange Pending.
v. Debtor, et Dispute. County
al. Case No. Superior
760637 Court
5. Milton Samuels Trade Creditor Supreme Settled.
Advertising Dispute. Court of
Agency, Inc. the State
Case No. of New
600374/96 York,
County of
New York
6. Charles J. Wrongful Superior Pending suit
Losito v. Termination Court of filed
Debtor et al., Dispute. the State 12/18/96.
Case No. of
773112 California,
County of
Orange.
</TABLE>
<PAGE>
SCHEDULE 4.06
Governmental Approvals
None
<PAGE>
SCHEDULE 4.08
Material Financial Disclosure
1. On or about December 18, 1996, KZ Golf, Inc., levied a $100,500 writ of
attachment against Borrowers assets.
2. Continuing substantial operating losses.
3. Decision by Borrower on January 8, 1997 to file a Petition under Title 11,
United States Code, Chapter 11.
<PAGE>
SCHEDULE 4.12
Fictitious and Trade Names
1. Cougar Golf
2. Bullet Golf
3. Bullet Golf Ball, Inc.
4. Quazar Golf
5. Bullet-Cougar Golf Corporation
<PAGE>
SCHEDULE 4.13
Patents, Tradenames, Copyrights, etc.
- --------------------------------------------------------------------------------
TRADEMARKS
- --------------------------------------------------------------------------------
Bullet
- --------------------------------------------------------------------------------
Country Registration No. Renewal
- --------------------------------------------------------------------------------
United States Reg. No. 1,731,294 Renewal due November 10, 1998
Canada Reg. No. 409646 Renewal Due March 19, 2008
Canada - Precision Mult. Reg. No. 220,772 Renewal Due May 27, 2007
Denmark Reg. No. 6262/1990 Renewal Due September 21, 2000
France Reg. No. 1,533,233 Granted October 24, 1989
Hong Kong Reg. No. 2925 of 1991 Renewal Due March 10, 2010
Republic of Korea Reg. No. 187,566 Renewal on January 23, 2000
New Zealand Trademark No. 189192 Granted November 24, 1988
Singapore Reg. No. S/1502/89 Renewal Due March 13, 2010
South Africa Reg. No. 89/1786 Renewal Due March 2, 1999
Spain Reg. No. 1245703 Renewal Due 2002
Sweden Reg. No. 881725
United Kingdom Reg. No. 1310481 Renewal May 20, 2008
West Germany Reg. No. 1150709 Renewal Due January 26, 1999
- --------------------------------------------------------------------------------
Cougar
- --------------------------------------------------------------------------------
United States Reg. No. 1,238,582 Renewal Due May 17, 2003
Canada Reg. No. 296,777 Renewal Due November 2, 1999
Hong Kong Reg. No. 1512 of 1982 Renewal Due November 30, 2002
Philippines Reg. No. 40420 Renewal Due August 12, 1999
Singapore Reg. No. S2811/89 Renewal Due May 5, 2010
South Africa Reg. No. 89/4024 Renewal Due May 8, 1999
Taiwan Reg. No. 188685 Renewal Due August 31, 2002
- --------------------------------------------------------------------------------
Page 1 of 2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Cartridge Container
- --------------------------------------------------------------------------------
United States Reg. No. 1,614,012 Renewal Due September 18, 1996
- --------------------------------------------------------------------------------
Japan Reg. No. 2520328 Renewal Due March 31, 2003
- --------------------------------------------------------------------------------
United Kingdom Reg. No. 1447514 Renewal Due October 18, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
PATENTS
- ----------------------------------------------------------------------------------------------------------------
Name Country Patent No. Expiration Date
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Double Diamond Grip United States 5,348,303 September 20, 2014
- ----------------------------------------------------------------------------------------------------------------
Easy Roller Golf Bag United States DES 348,567 July 12, 2014
- ----------------------------------------------------------------------------------------------------------------
High Roller Travel Cover United States 5,265,894 November 30, 2013
- ----------------------------------------------------------------------------------------------------------------
Hollow Point Golf Head United States DES 352,324 November 8, 2014
United Kingdom Reg. 2032317 February 12, 2018
Australia Reg. 119128 Renewal: June 8, 1999
- ----------------------------------------------------------------------------------------------------------------
Powerlock Glove United States DES 323,911 February 11, 2009
- ----------------------------------------------------------------------------------------------------------------
GA Putter United States 5,135,229 August 4, 2009
- ----------------------------------------------------------------------------------------------------------------
DFS Square Dimple Golf United States 5,106,096 April 21, 2009
Ball
- ----------------------------------------------------------------------------------------------------------------
Retractable Towel System United States Applied for & Not Yet Applicable
received Serial
No. 08/162,264
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Page 2 of 2
<PAGE>
SCHEDULE 4.19
Material Agreements
- --------------------------------------------------------------------------------
Parties Date of Status Termination Key Terms
Agreement Date of
Agreement
- --------------------------------------------------------------------------------
Aldila and 6-17-96 Pending Assuming 1- Exclusive
Borrower 31-97 supply
purchase agreement
obligations for Uni-
met, 12-31- Hoop
97 spring-
loaded
tip,
graphite
golf club
shaft
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE 6.02
PERMITTED ENCUMBRANCES
1. Xerox Corporation - Copier Machine Lease
2. Advanta Business Services - Telephone Equipment
<PAGE>
Exhibit A
FORM OF BORROWING NOTICE
_____________, 199__
Clearwater Fund IV, LLC
611 Druid Road East #200
Clearwater, Florida 34616
This Borrowing Notice is delivered to you under Section 2.04 of the Loan
Agreement dated as of January 16, 1997 (as such Loan Agreement may be
amended, modified or supplemented, the "Loan Agreement") between
Bullet-Cougar Golf Corporation (the "Borrower") and Clearwater Fund IV, LLC
(the "Lender").
Unless otherwise defined herein, capitalized terms used herein have the
meanings ascribed to such terms in the Loan Agreement.
The Borrower hereby requests that a Loan be made to it in the aggregate
principal amount or $____________________on ___________,199__. Please wire the
proceeds of the Loan into the following account:
____________________________________.
IN WITNESS WHEREOF, the Borrower has authorized this request to be executed
and delivered, as of this ___ day of __________, 199__.
BULLET-COUGAR GOLF CORPORATION
By:
---------------------------------
Name:
Title:
<PAGE>
FORM OF BORROWING NOTICE
_______________, 199__
Clearwater Fund IV, LLC
611 Druid Road East #200
Clearwater, Florida 34616
This Borrowing Notice is delivered to you under Section 2.04 of the
Loan Agreement dated as of January 16, 1997 (as such Loan Agreement may be
amended, modified or supplemented, the "Loan Agreement") between Bullet-Cougar
Golf Corporation (the "Borrower") and Clearwater Fund IV, LLC (the "Lender").
Unless otherwise defined herein, capitalized terms used herein have
the meanings ascribed to such terms in the Loan Agreement.
The Borrower hereby requests that a Loan be made to it in the
aggregate principal amount of $___________________ on _______________, 199__.
Please wire the proceeds of the Loan into the following account:
______________________________.
IN WITNESS WHEREOF, the Borrower has authorized this request to be
executed and delivered, as of this ____ day of ______________, 199__.
BULLET-COUGAR GOLF CORPORATION
By:
--------------------------------
Name:
Title:
<PAGE>
FORM OF COVERAGE RATIO CERTIFICATE Exhibit B
____________, 199__
TO: Clearwater Fund IV, LLC
This Coverage Ratio Certificate is made by the undersigned, Bullet-Cougar
Golf Corporation (the "Borrower"), pursuant to the Loan Agreement dated as of
January 16, 1997 (as such Loan Agreement may be amended, modified or
supplemented, the "Loan Agreement"), between Borrower and Clearwater Fund IV,
LLC.
Unless otherwise defined herein, capitalized terms used herein have the
meanings ascribed thereto in the Loan Agreement.
As of Date:________________, 199__
1. Eligible Collateral
a. Eligible Accounts $_______________________
b . Inventory Value $_______________________
c. Total Eligible Collateral (Item $_______________________
la+Item lb)
2. Outstanding Principal Amount of
Loans $_______________________
3. DFS Claims Purchase Amount $_______________________
4. Coverage Ratio
a. Total Eligible Collateral (Item
lc)
b. Outstanding Principal Amount of $_______________________
Loans plus DFS Claims Purchase
Amount (Item 2 + Item 3)
c. Coverage Ratio (Item 1c to $_______________________
Item 4b)
<PAGE>
4. CERTIFICATION
The undersigned Borrower hereby certifies as follows:
1. The above computation and information is correct;
2. Each Eligible Account and the Inventory Value included in the Coverage
Ratio for the computation set forth above satisfy the requirements of
an Eligible Account and Inventory Value, respectively;
BULLET-COUGAR GOLF CORPORATION
By:
----------------------------
Name:
Title:
2
<PAGE>
Exhibit C
PROMISSORY NOTE
U.S. $777,061.61 New York, New York
January 16, 1997
FOR VALUE RECEIVED, Bullet-Cougar Golf Corporation, a Nevada
corporation (the "Borrower"), hereby promises to pay to the order of
Clearwater Fund IV, LLC a Delaware limited liability company (the "Lender"),
in lawful money of the United States of America in immediately available
funds, at the location and in the manner designated in the Loan Agreement
(described below) on the Maturity Date, the principal sum of SEVEN HUNDRED
SEVENTY-SEVEN THOUSAND SIXTY ONE DOLLARS AND SIXTY ONE CENTS (777,061.61)
pursuant to the terms and on the conditions set forth in the Loan Agreement.
The Company also promises to pay interest on the unpaid principal balance
hereof and other amounts payable under the Loan Agreement from the date
hereof until paid at the rates, in the manner and at the times provided in
the Loan Agreement.
This is the Term Note referred to in the Loan Agreement dated as of
January 16, 1997 between the Borrower and the Lender (as amended or modified
in accordance with its terms, the "Loan Agreement; capitalized terms used
herein but not otherwise defind have the meaning ascribed to such terms in
the Loan Agreement), evidences the Term Loan made by the Lender thereunder,
shall be subject to the provisions thereof and is entitled to the benefits
thereof and of the Loan Documents. As provided in the Loan Agreement, this
Term Note is subject to mandatory and voluntary prepayment, in whole or in
part.
In case an Event of Default shall occur and be continuing, the
principal of and accrued interest on this Term Note may be declared to be due
and payable in the manner and with the effect provided in the Loan Agreement.
The Borrower hereby waives presentment, demand, protest or notice of
any kind in connection with this Term Note.
THIS TERM NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF CALIFORNIA WITHOUT REGARD TO ANY PRINCIPLES OF
CONFLICTS OF LAW.
BULLET-COUGAR GOLF CORPORATION
By:
-----------------------------
Name:
Title:
1
<PAGE>
SCHEDULE TO NOTE
Amount of Outstanding
Principal or Principal
Interest Paid Balance Notation
Date This Date This Date Made By
---- ------------- --------- -------
2
<PAGE>
GENERAL SECURITY AGREEMENT Exhibit D
GENERAL SECURITY AGREEMENT dated as of January 16, 1997, made by Bullet-
Cougar Golf Corporation, a Nevada corporation (the "Borrower") in favor of
Clearwater Fund IV, LLC, a Delaware limited liability company (the "Secured
Party").
W I T N E S S E T H:
WHEREAS, simultaneously herewith, Borrower and the Secured Party are
entering into a Loan Agreement dated the date hereof (hereinafter as at any time
amended or supplemented called the "Loan Agreement"); and
WHEREAS, the obligations of the Secured Party to consummate the
transactions described in the Loan Agreement are subject to the condition, among
others, that the Borrower execute and deliver this Security Agreement and grant
the security interest hereinafter described; and
WHEREAS, the Borrower has agreed to grant the Secured Party a perfected
first Lien and security interest in the assets and properties of the Borrower as
set forth below in order to secure the payment in full and performance of all
Obligations of the Borrower under the Loan Documents.
NOW, THEREFORE, for good and valuable consideration, the Borrower and the
Secured Party agree as follows:
1. Definitions. All capitalized terms used herein and not otherwise
defined herein shall have the meaning ascribed to such terms in the Loan
Agreement.
2. Security Interest. To secure payment and performance as and when due of
the Obligations of the Borrower under each and any Loan Document, the Borrower
hereby assigns, mortgages, pledges, hypothecates, transfers and sets over to the
Secured Party and grants to the Security Party a perfected first Lien on and
security interest in all the tangible and intangible personal property of the
Borrower, whether now owned or hereafter acquired, including, but not limited
to:
(i) all inventory, including, without limitation (x) all raw
materials, work in process, parts, components, assemblies, supplies and
materials used or consumed in the Borrower's business, wherever located and
whether in the possession of the Borrower or any other Person, (y) all
goods, wares and merchandise, finished or unfinished, held for sale or
lease or leased or furnished or to be furnished under contracts of
<PAGE>
service, wherever located and whether in the possession of Borrower or any
other Person, and (z) all goods returned to or repossessed by the Borrower
("Inventory");
(ii) all Real Property;
(iii) all of Borrower's general intangibles, instruments, securities,
credits, claims, demands, documents, letters of credit and letter of credit
proceeds, chattel paper, documents of title, certificates of title,
certificates of deposit, warehouse receipts, bills of lading, books and
records, leases which are permitted to be assigned or pledged, deposit
accounts, money, tax refund claims, contract rights which are permitted to
be assigned or pledged, and other rights (including all rights to the
payment of money) (hereinafter "Intangibles");
(iv) all of Borrower's intellectual property, including, without
limitation, patents, patent applications, trademarks, trademark
applications, service marks, service mark applications, tradenames,
technical knowledge and processes, formal or informal licensing
arrangements which are permitted to be assigned or pledged, blueprints,
technical specifications, computer software (including proprietary
software), copyrights, copyright applications and other trade secrets and
all embodiments thereof, and rights thereto including, without limitation,
all of the trademarks, trademark applications, service marks and service
mark applications listed on Schedule I hereto and all of the Borrower's
rights to use the patents, trademarks, service marks, or other property of
the aforesaid nature of other Persons now or hereafter license to the
Borrower, together with the goodwill of the business symbolized by or
connected with the Borrower's trademarks, service marks, licenses and the
other rights under this subsection (hereinafter "Intellectual Property");
(v) all of Borrower's equipment, including, without limitation,
machinery, equipment, office equipment and supplies, computers (including
mainframe processors and remote terminals) and related equipment,
furniture, furnishings, tools, tooling, jigs, dies, fixtures,
manufacturing, implements, fork lifts, trucks, trailers, motor vehicles,
and other equipment (hereinafter "Equipment"); and
(vi) any and all additions and accessions and the replacements,
proceeds, and products thereof, including all accounts receivable,
insurance proceeds, claims for losses and claims for damages arising from
any Inventory, Intangibles, Real Property, Intellectual Property or
Equipment (all of the foregoing are hereinafter collectively referred to as
the "Collateral").
2
<PAGE>
3. Borrower's Title; Liens and Encumbrances.
The Borrower represents and warrants that the Borrower is, or to the extent
that this Agreement states that the Collateral is to be acquired after the date
hereof, will be, the owner of the Collateral, having good and marketable title
thereto, free from any and all Liens other than Permitted Encumbrances. The
Borrower will not create or assume or permit to exist any Lien on or against the
Collateral except as created by this Security Agreement and as permitted by the
Loan Agreement, and the Borrower will promptly notify the Secured Party of any
such Lien on or against the Collateral and will defend the Collateral against
any Lien.
4. Representations, Warranties and Covenants.
The Borrower hereby represents, warrants and covenants that:
(a) (i) The Borrower has no place of business or offices where its
books of account and records are kept, or places where the Collateral is used,
stored or located, except as set forth in Schedule II annexed hereto, and (ii)
it will provide the Secured Party with at least thirty (30) days prior written
notice of any change in the foregoing representation. The Borrower shall at all
times maintain its records as to the Collateral at its chief place of business
as indicated in Schedule II hereto. Except for Collateral delivered to the
Secured Party, the Borrower will not store, use or locate any of the Collateral
at any place other than those listed in Schedule II annexed hereto;
(b) The Borrower currently uses no business or trade names. The
Borrower shall not change its name, identity, taxpayer identification number or
organizational structure in any manner or add or create any business or trade
names unless the Borrower shall have given the Secured Party at least thirty
(30) days prior written notice thereof;
(c) The Borrower is the sole owner of, and has good and marketable
title to the Collateral. The Borrower has not granted and will not grant any
Liens with respect to the Collateral except as permitted by this Agreement and
the Loan Agreement;
(d) The Collateral shall not be misused or abused, wasted, or allowed
to deteriorate except for ordinary wear and tear occasioned by its intended
primary use and loss or damage due to unavoidable casualty;
(e) The Borrower shall pay or cause to be paid when due all rents,
royalties, or other amounts payable, and perform or cause to be performed each
of its obligations when performable, under all agreements and other instruments
affecting the Collateral or any part thereof, and will do all things necessary
to keep unimpaired the Borrower's rights thereunder;
3
<PAGE>
(f) The Collateral shall be kept only at the facilities of the
Borrower designated on Schedule I hereto unless the Borrower notifies Secured
Party in writing and Secured Party consents in advance to its removal to another
location. The Collateral may be inspected by Secured Party at any reasonable
time;
(g) The Collateral shall be used by the Borrower only for the purpose
of operating and conducting the business of the Borrower and will remain in the
Borrower's possession or control at all times except that the Borrower may sell,
lease, transfer or otherwise dispose of portions of the Collateral as permitted
by the Loan Agreement.
(h) The Borrower shall pay all taxes on the Collateral promptly and
when due; provided, however, that the Borrower may contest any taxes in good
faith and through proper proceedings if adequate reserves therefor have been
established in accordance with generally accepted accounting principles and are
being maintained by the Borrower;
(i) The Borrower will not create, incur, assume or permit to exist
any Indebtedness to any Person or entity except as permitted by the Loan
Agreement;
(j) The Borrower will not violate any law, statute, ordinance, rule
or regulation of any government, governmental body, agency or authority
(federal, state or local) in any material respect in connection with its use of
the Collateral and conduct of the business of the Borrower, including, but not
limited to, Environmental Laws.
5. Perfection of Security Interest; Release of Collateral.
(a) The Borrower will from time to time join with the Secured Party
in executing one or more financing statements pursuant to the UCC or other
notices appropriate under applicable law in form satisfactory to the Secured
Party and will pay all filing or recording costs with respect thereto, and all
costs of filing or recording this Agreement or any other instrument, agreement
or document executed and delivered pursuant hereto or to the Loan Agreement
(including the cost of all federal, state or local mortgage, documentary, stamp
or other taxes). The Borrower shall take all action necessary or appropriate to
maintain such filings in full force and effect. The Borrower hereby authorizes
the Secured Party to take all action (including, without limitation, the filing
of any UCC Financing Statements or amendments thereto without the signature of
the Borrower) which the secured Party may deem necessary or desirable to perfect
or otherwise protect the Liens created hereunder and to obtain the benefits of
this Agreement.
4
<PAGE>
6. General Covenants.
The Borrower shall:
(a) furnish the Secured Party from time to time written statements
and schedules further identifying and describing the Collateral in such detail
as the Secured Party may reasonably require and giving the location of such
Collateral;
(b) advise the Secured Party promptly, in sufficient detail, of any
substantial change in the Collateral, and of the occurrence of any event which
would have a material effect on the value of the Collateral or on the Secured
Party's security interest therein;
(c) comply with all acts, rules, regulations and orders of any
legislative, administrative or judicial body or official applicable to the
Collateral or any part thereof or to the operation of the Borrower's business,
provided that the Borrower may contest any acts, rules, regulations, orders and
directions or such bodies or officials in any reasonable manner which will not,
in the reasonable opinion of the Secured Party, adversely affect the rights or
the priority of the Secured Party's Lien on the Collateral;
(d) perform and observe all covenants, restrictions and conditions
contained in the Loan Documents providing for payment of taxes, maintenance of
insurance and otherwise relating to the Collateral, as though such covenants,
restrictions and conditions were fully set forth in this Agreement;
(e) promptly notify the Secured Party of all disputes involving
amounts in excess of $100,000; and
(f) promptly execute and deliver to the Secured Party such further
deeds, mortgages, assignments, security agreements or other instruments,
documents, certificates and assurances and take such further action as the
Secured Party may from time to time in its sole discretion deem necessary to
perfect, protect or enforce the Secured Party's security interest in the
Collateral or otherwise to effectuate the intent or this Agreement and the Loan
Documents.
7. Fixtures.
It is the intent of the Borrower and the Secured Party that none of the
Collateral is or shall be regarded as fixtures, as that term is used or defined
in Article 9 of the UCC, and the Borrower represents and warrants that it has
not made and is not bound by any lease or other agreement which is inconsistent
with such intent. Nevertheless, if the Collateral or any part thereof is or is
to become attached or affixed to any real estate, the Borrower
5
<PAGE>
will furnish the Secured Party with a disclaimer or subordination in form
satisfactory to the Secured Party of their interests in the Collateral from all
persons having an interest in the real estate to which the Collateral is
attached or affixed, together with the names and addresses of the record owners
of, and all other persons having interest in, and a general description of, such
real estate.
8. Rights and Remedies on Default.
In the event of the occurrence of and during the continuation of any Event
of Default, the Secured Party shall at any time thereafter have the right, to
exercise any and all rights afforded to a secured party under the Uniform
Commercial Code or other applicable law, with or without notice to the Borrower,
as to any or all of the Collateral, including, but not limited to:
(a) by any available judicial procedure or without judicial process,
to take possession of the Collateral and without liability for trespass to enter
any premises where the Collateral may be located for the purpose of taking
possession of or removing the Collateral;
(b) instruct the obligor or obligors on any agreement, instrument or
other obligation (including, without limitation the Intangibles) constituting
Collateral to make any payment required by the terms of such instrument or
agreement directly to Secured Party PROVIDED, HOWEVER, that in the event that
any such payments are made directly to Borrower prior to the receipt by any such
obligor of such instruction, Borrower shall segregate all amounts received
pursuant thereto in a separate account and pay the same promptly to Secured
Party;
(c) to sell, lease, or otherwise dispose of all or any part of the
Collateral, whether in its then condition or after further preparation or
processing, either at public or private sale or at any broker's board, in lots
or in bulk, for cash or for credit, with or without warranties or
representations, and upon such terms and conditions, all as the Secured Party
may deem advisable, and it shall have the right with funds advanced by the
Secured Party, to purchase at any such sale; and, if any Collateral shall
require rebuilding, repairing, maintenance, preparation, or is in process or
other unfinished state, the Secured Party shall have the right to do such
rebuilding, repairing, preparation, processing or completion of manufacturing,
for the purpose of putting the Collateral in such saleable or disposable form as
the Secured Party shall deem appropriate;
(d) apply for and have a receiver appointed by a court of competent
jurisdiction in order to manage, protect and preserve the Collateral, continue
the operation of the Borrower and collect all revenues and profits thereof and
apply the same to the payment of all expenses and other charges of such
receivership, including
6
<PAGE>
the compensation of the receiver, and to the payments due Secured Party until a
sale or other disposition of such Collateral shall be finally made and
consummated.
At the request of the Secured Party the Borrower shall assemble the
Collateral and make it available to the Secured Party at places which the
Secured Party shall select, whether at the Borrower's premises or elsewhere, and
make available to the Secured Party, without rent, all of the Borrower's
premises and facilities for the purpose of the Secured Party's taking possession
of, removing or putting the Collateral in saleable or disposable form.
The Borrower hereby irrevocably appoints the Secured Party, its successors
and assigns, the Borrower's true and lawful attorney to execute in the name of
the Borrower, to the extent permissible, the applications, certificates,
instruments and other documents referred to in Paragraph 2(b) and this Section
8, should the Borrower, after request from Secured Party, fail to do so.
The proceeds of any such sale, lease or other disposition of the Collateral
shall be applied first, to the expenses of retaking, holding, storing,
processing and preparing for sale, selling, and the like, and to the reasonable
attorneys' fees and legal expenses incurred by the Secured Party, the balance
shall be applied by the Secured Party to (i) the payment of the balance of
principal and interest on the Note and (ii) to the payment of any remaining
Obligations under the Loan Documents. If, upon the sale, lease or other
disposition of the Collateral, the proceeds thereof are insufficient to pay all
amounts to which the Secured Party is legally entitled, the Borrower will be
liable for the deficiency, and the reasonable fees of any attorneys employed by
the Secured Party and to collect such deficiency. To the extent permitted by
applicable law, the Borrower waives all claims, damages and demands against the
Secured Party arising out of the repossession, removal, retention or sale of the
Collateral.
9. COSTS AND EXPENSES.
Any and all fees, costs and expenses, of whatever kind or nature, including
the reasonable attorneys' fees and legal expenses incurred by the Secured Party,
in connection with the filing or recording of financing statements and other
documents (including all taxes in connection therewith) in public offices, the
payment or discharge of any taxes, insurance premiums, encumbrances or otherwise
protecting, maintaining or preserving the Collateral, or the enforcing,
foreclosure, retaking, holding, storing, processing, selling or otherwise
realizing upon the Collateral and the Secured Party's security interest therein,
whether through judicial proceedings or otherwise, or in defending or
prosecuting any actions or proceedings arising out of or related to the
transaction to which this Agreement relates, shall be borne and paid by the
Borrower on demand by the Secured Party.
7
<PAGE>
10. POWER OF ATTORNEY.
In the event of the occurrence of and during the continuation of any Event
of Default, the Borrower authorizes the Secured Party and does hereby make,
constitute and appoint the Secured Party, and any officer or agent of the
Secured Party, with full power of substitution, as the Borrower's true and
lawful attorney-in-fact, with power, in its own name or in the name of the
Borrower: (a) to endorse any notes, checks, drafts, money orders, or other
instruments of payment (including payments payable under or in respect of any
policy of insurance) in respect of the Collateral that may come into possession
of the Secured Party; (b) to sign and endorse any invoice, freight or express
bill, bill of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications and notices in connection with accounts, and other
documents relating to Collateral; (c) to pay or discharge any taxes or Liens, at
any time levied or placed on or threatened against the Collateral; (d) to
demand, collect, receipt for, compromise, settle and sue for monies due in
respect of the Collateral; and (e) generally, to do, at the Secured Party's
option and at the Borrower's expense, at any time, or from time to time, all
acts and things which the Secured Party deems necessary to protect, preserve and
realize upon the Collateral and the Secured Party's security interest therein in
order to effect the intent of this Agreement and the other Loan Documents all as
fully and effectually as the Borrower might or could do; and the Borrower hereby
ratifies all that said attorney shall lawfully do or cause to be done by virtue
hereof. This power of attorney shall be irrevocable for the term of this
Agreement and thereafter as long as any of the Obligations shall be outstanding.
11. NOTICES.
Except as otherwise provided herein, all notices, requests, reports and
other communications provided for hereunder shall be in writing (including
telegraphic, telex, telecopier or cable communications) and mailed, telegraphed,
telexed, telecopied, cabled or delivered, if to Borrower to: Bullet-Cougar Golf
Corporation, 2803 S. Yale Street, Santa Ana, California 92704, Attn: Jack
Forrest, Telecopier: (714) 966-1535 with a copy to: Cox, Castle & Nicholson,
LLP 19800 MacArthur Blvd.; Suite 600, Irvine, California 92715, Attn: Jess
Bressi, Esq., Telecopier: (714) 476-0256; if to the Secured Party: Clearwater
Funds IV, LLC, 611 Druid Road East #200, Clearwater, Florida 34616, Attn: Gerard
Melia, Telecopier: (813) 443-0143, with a copy to: Rosenman & Colin LLP, 575
Madison Avenue, New York, New York 10022, Attn: Jeff J. Friedman, Telecopier:
(212) 940-8776; or, at such other address as shall be designated by any party in
a written notice to the other parties hereto. All such notices and
communications shall, when mailed, be effective upon receipt, or when
telegraphed, telexed, telecopied, or cabled or sent by overnight courier, be
effective when delivered to the telegraph
8
<PAGE>
company, cable company ir overnight courier, as the case may he, or
when sent by telex or telecopier.
12. OTHER SECURITY
To the extent that the Obligations are now or hereafter secured by
property other than the Collateral or by the guarantee, endorsement or property
of any other Person, then the Secured Party shall have the right in its sole
discretion to pursue, relinquish, subordinate, modify or take any other action
with respect thereto, without in any way modifying or affecting any of the
rights and remedies of the Secured Party hereunder.
13. INDEMNITY.
The Borrower covenants and agrees to indemnify the Secured Party
against any and all claims, suits, losses, penalties, demands, causes of action
and judgments of any nature whatsoever and all liabilities and indebtedness of
any and every kind and nature now or hereafter owing arising, due or payable,
including all costs and expenses (including reasonable attorneys' fees and
expenses) (all of the foregoing being herein collectively called "LIABILITIES"),
which may be imposed on, incurred by or asserted against any of them as a result
of any investigation, litigation or proceeding brought or threatened by any
Person and which arise out of or are connected with the security interest in the
Collateral held by the Secured Party. The Borrower shall defend and pay all
costs, expenses and judgments incurred by it or the Secured Party in any action
brought by the Secured Party pursuant to this Agreement whether under or
pursuant to any Purchase Documents, and the Borrower will save, indemnify and
keep the Secured Party harmless from and against all expenses, loss or damage
suffered by reason of any defense, set-off, counterclaim or recoupment
whosoever, except if solely due to the gross negligence or willful misconduct of
the Secured Party. The Borrower shall pay, indemnify, and hold the Secured
Party, and its authorized agents, officer, employees and attorneys-in-fact
harmless on demand from and against any and all liabilities, with respect to the
execution, delivery, consummation waiver, consent, amendment, enforcement,
performance and administration of this Agreement, the Loan Agreement and the
other Loan Documents and the use by the Borrower of the proceeds; provided,
however, that the Borrower shall not have any obligation with respect to
Liabilities arising solely and directly from the gross negligence or willful
misconduct of the Secured Party. The obligations of the Borrower under this
Section 13 shall survive the termination of this Agreement.
14. MISCELLANEOUS.
(a) Beyond the safe custody thereof, the Secured Party shall have no
duty as to the collection of any Collateral in its possession or control or in
the possession or control of any agent
9
<PAGE>
or nominee of the Secured Party, or any income thereon or as to the preservation
of rights against prior parties or any other rights pertaining thereto.
(b) No course of dealing between the Borrower and the Secured Party,
nor any failure to exercise, nor any delay in exercising, on the part of the
Secured Party, any right, power or privilege hereunder shall operate as a waiver
thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege.
(c) All of the Secured Party's rights and remedies with respect to
the Collateral, whether established hereby or by any other agreements,
instruments or documents or by law, shall be cumulative and may be exercised
singly or concurrently.
(d) The provisions of this Agreement are severable, and if any clause
or provision shall be held invalid or unenforceable in whole or in part in any
jurisdiction, then such invalidity or unenforceability shall affect only such
clause or provision, or part thereof, in such jurisdiction and shall not in any
manner affect such clause or provision in any other jurisdiction, or any other
clause or provision of this Agreement in any jurisdiction.
(e) Any provision of this Agreement may be amended only by an
instrument in writing signed by the Borrower and the Secured Party and any
provision of this Agreement may be waived by the Secured Party.
(f) The benefits and burdens of this Agreement shall inure to the
benefit of and be binding upon the respective successors and assigns of the
parties; PROVIDED, HOWEVER, that the rights and obligations of the Borrower
under this Agreement shall not be assigned or delegated without the prior
written consent of the Secured Party and any purported assignment or
delegation without such consent shall be void.
15. TERM OF AGREEMENT.
The term of this Agreement shall commence an the date hereof and this
Agreement shall continue in full force and effect, and be binding upon the
Borrower, until all of the Obligations have been fully paid and performed.
16. COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by the
different parties hereto on separate counterparts, each of which when so
executed and delivered shall be an original, but all of which shall together
constitute one and the same instrument. A set of counterparts executed by all
the parties hereto shall be
10
<PAGE>
lodged with Borrower and Secured Party.
17. EXECUTION BY FACSIMILE TRANSMISSION. This Agreement may be validly
executed and delivered by exchange of executed signature pages by facsimile
transmission, provided that original executed signature pages are promptly
delivered to each party thereafter by overnight courier.
WITNESS the execution hereof as of the day and year first above written.
BULLET-COUGAR GOLF CORPORATION
By:
---------------------------------
Name:
Title:
11
<PAGE>
WITNESS the execution hereof as of the day and year first above written.
BULLET-COUGAR GOLF CORPORATION
By:
--------------------------------
Name:
Title:
CLEARWATER FUND IV, LLC
By:
--------------------------------
Name:
Title:
12
<PAGE>
SCHEDULE I
13
<PAGE>
SCHEDULE II
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NOVEMBER 30,
1996 FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANICAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-START> MAR-01-1996
<PERIOD-END> NOV-30-1996
<CASH> 49,938
<SECURITIES> 0
<RECEIVABLES> 1,736,861
<ALLOWANCES> 132,302
<INVENTORY> 2,344,570
<CURRENT-ASSETS> 5,855,271
<PP&E> 692,828
<DEPRECIATION> 205,290
<TOTAL-ASSETS> 6,364,383
<CURRENT-LIABILITIES> 5,989,815
<BONDS> 0
0
7,990,161
<COMMON> 4,429
<OTHER-SE> (7,690,359)
<TOTAL-LIABILITY-AND-EQUITY> 6,364,383
<SALES> 5,848,768
<TOTAL-REVENUES> 5,848,768
<CGS> 5,115,291
<TOTAL-COSTS> 10,499,593
<OTHER-EXPENSES> 11,818
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 198,623
<INCOME-PRETAX> (4,803,544)
<INCOME-TAX> 1,650
<INCOME-CONTINUING> (4,805,194)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,805,194)
<EPS-PRIMARY> (1.32)
<EPS-DILUTED> (1.32)
</TABLE>
